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, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number 1-5721
LEUCADIA NATIONAL CORPORATION
(Exact name of registrant as specified in its Charter)
New York 13-2615557
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
315 Park Avenue South, New York, New York 10010-3607
(Address of principal executive offices) (Zip Code)
(212) 460-1900
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------- -------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES NO
------- -------
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, at August 6, 2001: 55,313,257.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2001 and December 31, 2000
(Dollars in thousands, except par value)
June 30, December 31,
2001 2000
------------ ------------
(Unaudited)
ASSETS
Investments:
Available for sale (aggregate cost of $1,020,813 and $860,802) $ 1,024,900 $ 877,668
Trading securities (aggregate cost of $186,252 and $150,951) 163,045 137,281
Held to maturity (aggregate fair value of $14,616 and $18,907) 14,447 18,799
Other investments, including accrued interest income 97,936 26,670
----------- -----------
Total investments 1,300,328 1,060,418
Cash and cash equivalents 382,501 552,158
Reinsurance receivables, net 14,696 18,810
Trade, notes and other receivables, net 764,314 799,211
Prepaids and other assets 307,058 328,187
Property, equipment and leasehold improvements, net 188,743 192,308
Investments in associated companies 174,422 192,545
----------- -----------
Total $ 3,132,062 $ 3,143,637
=========== ===========
LIABILITIES
Customer banking deposits $ 555,637 $ 526,172
Trade payables and expense accruals 176,429 215,150
Other liabilities 142,843 117,639
Income taxes payable 109,407 114,769
Deferred tax liability 47,823 55,137
Policy reserves 351,997 365,958
Unearned premiums 37,974 56,936
Debt, including current maturities 405,781 374,523
----------- -----------
Total liabilities 1,827,891 1,826,284
----------- -----------
Minority interest 13,041 14,912
----------- -----------
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; 55,313,107
and 55,296,728 shares issued and outstanding, after deducting
63,117,284 and 63,116,263 shares held in treasury 55,313 55,297
Additional paid-in capital 54,683 54,340
Accumulated other comprehensive income (loss) (15,472) 2,585
Retained earnings 1,098,406 1,092,019
----------- -----------
Total shareholders' equity 1,192,930 1,204,241
----------- -----------
Total $ 3,132,062 $ 3,143,637
=========== ===========
See notes to interim consolidated financial statements.
2
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
For the periods ended June 30, 2001 and 2000
(In thousands, except per share amounts)
(Unaudited)
For the Three Month For the Six Month
Period Ended June 30, Period Ended June 30,
--------------------- ---------------------
2001 2000 2001 2000
---- ---- ---- ----
Revenues:
Insurance revenues and commissions $ 18,625 $ 28,208 $ 41,828 $ 56,174
Manufacturing 12,613 17,477 26,261 35,072
Finance 28,898 20,841 56,610 39,142
Investment and other income 60,291 59,501 113,355 119,919
Equity in income of associated companies 18,509 6,526 26,824 9,835
Net securities gains 12,100 4,382 17,952 33,748
-------- -------- -------- --------
151,036 136,935 282,830 293,890
-------- -------- -------- --------
Expenses:
Provision for insurance losses and policy benefits 19,740 26,063 85,508 51,662
Amortization of deferred policy acquisition costs 3,565 7,079 16,965 13,015
Manufacturing cost of goods sold 8,346 10,492 18,034 21,439
Interest 14,641 15,143 29,221 28,297
Salaries 13,242 15,461 28,010 30,685
Selling, general and other expenses 48,453 46,985 90,253 91,797
-------- -------- -------- --------
107,987 121,223 267,991 236,895
-------- -------- -------- --------
Income before income taxes, minority expense of trust preferred
securities, extraordinary gain and cumulative effect of a change in
accounting principle 43,049 15,712 14,839 56,995
Income taxes 15,795 4,804 6,102 19,695
-------- -------- -------- --------
Income before minority expense of trust preferred securities,
extraordinary gain and cumulative effect of a change
in accounting principle 27,254 10,908 8,737 37,300
Minority expense of trust preferred securities, net of taxes 1,380 1,380 2,761 2,761
-------- -------- -------- --------
Income before extraordinary gain and cumulative effect of a change
in accounting principle 25,874 9,528 5,976 34,539
Extraordinary gain from early extinguishment of debt, net of taxes -- -- -- 562
-------- -------- -------- --------
Income before cumulative effect of a change in accounting principle 25,874 9,528 5,976 35,101
Cumulative effect of a change in accounting principle -- -- 411 --
-------- -------- -------- --------
Net income $ 25,874 $ 9,528 $ 6,387 $ 35,101
======== ======== ======== ========
Basic earnings per common share:
Income before extraordinary gain and cumulative effect of a change
in accounting principle $ .47 $ .17 $ .11 $ .62
Extraordinary gain -- -- -- .01
Cumulative effect of a change in accounting principle -- -- .01 --
-------- -------- -------- --------
Net income $ .47 $ .17 $ .12 $ .63
======== ======== ======== ========
Diluted earnings per common share:
Income before extraordinary gain and cumulative effect of a change
in accounting principle $ .47 $ .17 $ .11 $ .62
Extraordinary gain -- -- -- .01
Cumulative effect of a change in accounting principle -- -- .01 --
-------- -------- -------- --------
Net income $ .47 $ .17 $ .12 $ .63
======== ======== ======== ========
See notes to interim consolidated financial statements.
3
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the six months ended June 30, 2001 and 2000
(Unaudited)
2001 2000
---- ----
(In thousands)
Net cash flows from operating activities:
Net income $ 6,387 $ 35,101
Adjustments to reconcile net income to net cash (used for) operations:
Extraordinary gain, net of taxes -- (562)
Cumulative effect of a change in accounting principle (411) --
(Benefit) provision for deferred income taxes (1,811) 6,150
Depreciation and amortization of property, equipment and leasehold improvements 10,351 9,401
Other amortization 11,188 15,034
Provision for doubtful accounts 16,173 14,157
Net securities gains (17,952) (33,748)
Equity in income of associated companies (26,824) (9,835)
Gain on disposal of real estate, property and equipment (19,827) (22,304)
Investments classified as trading, net (11,803) (10,247)
Deferred policy acquisition costs incurred and deferred (6,180) (14,156)
Net change in:
Reinsurance receivables 4,114 2,488
Trade and other receivables 16,561 (11,083)
Prepaids and other assets (2,051) 4,055
Trade payables and expense accruals (23,175) (28,913)
Other liabilities 26,892 (2,279)
Income taxes payable (5,362) 4,056
Policy reserves (13,961) (69,894)
Unearned premiums (18,962) 4,511
Other 105 6,263
--------- ---------
Net cash (used for) operating activities (56,548) (101,805)
--------- ---------
Net cash flows from investing activities:
Acquisition of real estate, property, equipment and leasehold improvements (25,288) (36,425)
Proceeds from disposals of real estate, property and equipment 53,729 48,814
Advances on loan receivables (164,129) (167,155)
Principal collections on loan receivables 95,908 70,838
Advances on notes receivables (2,584) (30,450)
Collections on notes receivables 38,644 3,897
Investments in associated companies (5,714) (107,520)
Distributions from associated companies 50,709 13,943
Purchases of investments (other than short-term) (825,493) (632,702)
Proceeds from maturities of investments 243,674 39,473
Proceeds from sales of investments 356,310 581,160
--------- ---------
Net cash (used for) investing activities (184,234) (216,127)
--------- ---------
Net cash flows from financing activities:
Net change in short-term borrowings -- 30,350
Net change in customer banking deposits 29,681 85,694
Issuance of long-term debt 53,979 100,000
Reduction of long-term debt (6,249) (17,734)
Purchase of common shares for treasury (34) (32,094)
--------- ---------
Net cash provided by financing activities 77,377 166,216
--------- ---------
Effect of foreign exchange rate changes on cash (6,252) (6,996)
--------- ---------
Net (decrease) in cash and cash equivalents (169,657) (158,712)
Cash and cash equivalents at January 1, 552,158 296,058
--------- ---------
Cash and cash equivalents at June 30, $ 382,501 $ 137,346
========= =========
See notes to interim consolidated financial statements.
4
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
For the six months ended June 30, 2001 and 2000
(In thousands, except par value)
(Unaudited)
Common Accumulated
Shares Additional Other
$1 Par Paid-In Comprehensive Retained
Value Capital Income (Loss) Earnings Total
----- ------- ------------- -------- -----
Balance, January 1, 2000 $ 56,802 $ 84,929 $ (9,578) $ 989,835 $1,121,988
----------
Comprehensive income:
Net change in unrealized gain (loss) on investments 26,736 26,736
Net change in unrealized foreign exchange gain (loss) (3,018) (3,018)
Net income 35,101 35,101
----------
Comprehensive income 58,819
----------
Purchase of stock for treasury (1,505) (30,589) (32,094)
---------- ---------- ---------- ---------- ----------
Balance, June 30, 2000 $ 55,297 $ 54,340 $ 14,140 $1,024,936 $1,148,713
========== ========== ========== ========== ==========
Balance, January 1, 2001 $ 55,297 $ 54,340 $ 2,585 $1,092,019 $1,204,241
----------
Comprehensive loss:
Net change in unrealized gain (loss) on investments (7,632) (7,632)
Net change in unrealized foreign exchange gain (loss) (10,286) (10,286)
Net change in unrealized gain (loss) on derivative
instruments (including the cumulative effect of a
change in accounting principle of $1,371) (139) (139)
Net income 6,387 6,387
----------
Comprehensive loss (11,670)
----------
Exercise of options to purchase common shares 17 376 393
Purchase of stock for treasury (1) (33) (34)
---------- ---------- ---------- ---------- ----------
Balance, June 30, 2001 $ 55,313 $ 54,683 $ (15,472) $1,098,406 $1,192,930
========== ========== ========== ========== ==========
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, 2000, which are included in the Company's Annual Report filed
on Form 10-K for such year (the "2000 10-K"). Results of operations for
interim periods are not necessarily indicative of annual results of
operations. The consolidated balance sheet at December 31, 2000 was
extracted from the audited annual financial statements and does not include
all disclosures required by generally accepted accounting principles for
annual financial statements.
Certain amounts for prior periods have been reclassified to be consistent
with the 2001 presentation.
2. Certain information concerning the Company's segments for the six and three
month periods ended June 30, 2001 and 2000 is as follows (in thousands):
For the Three Month For the Six Month
Period Ended June 30, Period Ended June 30,
--------------------- ---------------------
2001 2000 2001 2000
---- ---- ---- ----
Revenues:
Property and casualty insurance $ 26,902 $ 38,033 $ 60,514 $ 75,354
Banking and lending 32,886 25,496 61,954 48,628
Foreign real estate 6,533 8,408 12,454 15,439
Manufacturing 12,657 17,477 26,356 35,074
Other operations 30,618 24,406 53,570 50,309
--------- --------- --------- ---------
Total revenue for reportable segments 109,596 113,820 214,848 224,804
Equity in associated companies 18,509 6,526 26,824 9,835
Corporate 22,931 16,589 41,158 59,251
--------- --------- --------- ---------
Total consolidated revenues $ 151,036 $ 136,935 $ 282,830 $ 293,890
========= ========= ========= =========
Income (loss) before income taxes, minority expense of trust preferred
securities, extraordinary gain and cumulative effect of a change in accounting
principle:
Property and casualty insurance $ (1,239) $ (3,056) $ (51,142) $ (4,520)
Banking and lending 5,789 3,109 5,070 4,654
Foreign real estate (2,401) 2,518 (1,020) 3,285
Manufacturing 900 3,783 1,642 6,899
Other operations 11,930 9,639 20,391 21,385
--------- --------- --------- ---------
Total income (loss) before income taxes, minority expense of trust
preferred securities, extraordinary gain and cumulative effect of a
change in accounting principle for reportable segments 14,979 15,993 (25,059) 31,703
Equity in associated companies 18,509 6,526 26,824 9,835
Corporate 9,561 (6,807) 13,074 15,457
--------- --------- --------- ---------
Total consolidated income before income taxes, minority expense of
trust preferred securities, extraordinary gain and cumulative
effect of a change in accounting principle $ 43,049 $ 15,712 $ 14,839 $ 56,995
========= ========= ========= =========
6
Notes to Interim Consolidated Financial Statements, continued
3. In February 2001, the Company, Berkshire Hathaway Inc. and Berkadia LLC, an
entity jointly owned by the Company and Berkshire Hathaway, announced a
commitment to lend $6,000,000,000 on a senior secured basis to FINOVA
Capital Corporation, the principal operating subsidiary of The FINOVA Group
Inc. ("FINOVA") to facilitate a chapter 11 restructuring of the outstanding
debt of FINOVA and its principal subsidiaries. Under the commitment,
Berkadia's funding obligations to FINOVA Capital have been guaranteed, 90%
by Berkshire Hathaway and 10% by the Company (with the Company's guarantee
being secondarily guaranteed by Berkshire Hathaway). The parties intend to
finance this commitment; such financing is expected to be similarly
guaranteed. The commitment, which expires on August 31, 2001, or earlier if
certain events occur or conditions are not satisfied, provides that
Berkadia will receive up to $6,000,000,000 principal amount of newly issued
five year senior notes of FINOVA Capital, secured by substantially all of
the assets of FINOVA and its subsidiaries (the "Berkadia Loan"). The loan
will also be guaranteed on a secured basis by FINOVA and substantially all
of the subsidiaries of FINOVA and FINOVA Capital. Berkadia's obligation to
make the loan is subject to a number of conditions, including Berkadia's
satisfaction with the chapter 11 reorganization plan of the FINOVA
companies, bankruptcy court and necessary creditor approvals, the issuance
to Berkadia and/or the Company and Berkshire Hathaway of newly issued
common stock of FINOVA totaling 50% of the stock of FINOVA to be
outstanding on a fully diluted basis, and Berkadia being able to designate
a majority of the Board of Directors of FINOVA.
Upon execution of the commitment, FINOVA Capital paid Berkadia a
non-refundable commitment fee of $60,000,000 and has agreed to pay a
funding fee of $60,000,000 upon funding (or a termination fee of
$60,000,000 if the commitment is not funded except in certain limited
circumstances). In addition, FINOVA Capital has also agreed to reimburse
Berkadia, Berkshire Hathaway and the Company for all fees and expenses
incurred in connection with Berkadia's financing of its funding obligation
under the commitment.
In connection with the commitment, the Company entered into a ten-year
management agreement with FINOVA pursuant to which the Company agreed to
provide general management services, including services with respect to the
formulation of a restructuring plan. For these services, the Company will
receive an annual fee of $8,000,000, the first of which was paid when the
agreement was signed.
Under the agreement governing Berkadia, the Company and Berkshire Hathaway
have agreed to equally share the commitment fee, funding or termination fee
and all management fees. All income related to the Berkadia Loan, after
payment of financing costs, will be shared 90% to Berkshire Hathaway and
10% to the Company. All decisions with respect to the commitment, the
financing of the commitment or the Berkadia Loan, are in the sole control
of Berkshire Hathaway.
The Company's share of the commitment fee, $30,000,000, has been deferred
and was not recognized in income when received. If the funding is
consummated, the Company's share of the non-refundable commitment fee and
the funding fee will be amortized to income over the term of the Berkadia
Loan. If the commitment is not funded, the Company will fully recognize in
income its share of the non-refundable commitment fee and any termination
fee when received.
On August 10, 2001, the bankruptcy court confirmed the chapter 11
reorganization plan for the FINOVA companies. While it is anticipated that
consummation of the reorganization plan and completion of the loan will
occur prior to August 31, 2001, the plan and loan remain subject to certain
conditions and there can be no assurance that they ultimately will be
consummated.
7
Notes to Interim Consolidated Financial Statements, continued
4. On March 1, 2001, the Empire Group announced that, effective immediately,
it would no longer issue any new (as compared to renewal) insurance
policies and that it filed plans of orderly withdrawal with the New York
Insurance Department (the "Department") as required. Commercial lines
policies were non-renewed or canceled in accordance with New York insurance
law or replaced by Tower Insurance Company of New York or Tower Risk
Management (collectively, "Tower") under an agreement for the sale of the
Empire Group's renewal rights. Starting in the second quarter, Tower
purchased the renewal rights for substantially all of the Empire Group's
remaining lines of business, excluding private passenger automobile and
commercial automobile/garage, for a fee based on the direct written premium
actually renewed by Tower. The amount of the fee is not expected to be
material. The Empire Group will continue to be responsible for the
remaining term of its existing policies and all claims incurred prior to
the expiration of these policies. For commercial lines, the Empire Group
will thereafter have no renewal obligations for those policies. Under New
York insurance law, the Empire Group is obligated to offer renewals of
homeowners, dwelling fire, personal insurance coverage and personal
umbrella for a three-year policy period; however, the Tower agreement
provides that Tower must offer replacements for these policies.
The Empire Group increased reserves for loss and loss adjustment expenses
by $39,000,000 and $6,000,000 for the six month periods ended June 30, 2001
and 2000, respectively, and $3,000,000 for the three month period ended
June 30, 2000. The increase during the six month period ended June 30, 2001
reflected adverse development in commercial package lines of business,
primarily due to increases in severity of liability claims, adverse
development in workers' compensation and automobile lines of business and
an increase in estimated loss adjustment expenses related to claims handled
in house. In addition, the Empire Group wrote-off approximately $9,100,000
and $1,300,000 of deferred policy acquisition costs during the six and
three month periods ended June 30, 2001, respectively, as their
recoverability from premiums and related investment income was no longer
anticipated.
In July 2001, the Department informed the Empire Group of its examination
findings concerning the three-year period ended December 31, 1999. The
report on examination has not been filed and the Empire Group is in the
process of reviewing these findings with the Department. Among other
matters, the Department's report indicated a loss reserve deficiency for
the Empire Group. Although this deficiency is less than the combined
surplus of the Empire Group, after it is allocated among the companies
within the Empire Group, this deficiency causes Empire's stand alone
statutory surplus to fall below minimum required levels. In addition, the
Empire Group's current structure causes Empire's surplus to be reduced by a
statutory limitation on the amount that it can invest in its insurance
subsidiaries. Accordingly, the Empire Group is evaluating reorganizing its
current structure to reduce and/or eliminate these statutory limitations.
Additionally, the Empire Group is considering certain other transactions to
increase Empire's surplus above the minimum required level on a stand alone
basis and which will also increase surplus for the Group.
The Empire Group believes that these transactions will serve as a basis for
providing the Department by the end of August 2001 with a plan for
remedying Empire's surplus deficiency. Such a plan is subject to the review
and approval of the Department. No assurance can be given that the Empire
Group's plan will be approved by the Department or that material adverse
regulatory action will not be taken, which could result in the Company
recognizing a partial or total loss on its investment in the Empire Group.
The Company's investment in the Empire Group was approximately $63,600,000
at June 30, 2001.
8
Notes to Interim Consolidated Financial Statements, continued
5. In May 2001, the Company invested $75,000,000 in a new issue of restricted
convertible preference shares of White Mountains Insurance Group, Ltd.
("WMIG"), that is expected to represent approximately 4% of WMIG on an as
converted basis. At June 30, 2001, the Company's investment in WMIG, which
is reflected in other investments, had a market value of $141,000,000 on an
as converted basis. These securities will be automatically converted upon
approval by WMIG's shareholders, which is being sought by WMIG. WMIG is a
Bermuda-domiciled financial services holding company, principally engaged
through its subsidiaries and affiliates in property and casualty insurance
and reinsurance.
6. At December 31, 2000, the Company had outstanding collateralized notes
receivable of $35,903,000, resulting from the 1999 sale of its 30% interest
in Caja de Ahorro y Seguro S.A. to Assicurazioni Generali Group, an Italian
insurance company. The receivable was paid in full in January 2001.
7. On January 1, 2001, the Company adopted Financial Accounting Standards No.
133, "Accounting for Derivative Instruments and Hedging Activities", as
amended ("SFAS 133"). Under SFAS 133, the Company reflects its derivative
financial instruments at fair value. The Company has utilized derivative
financial instruments to manage the impact of changes in interest rates on
its customer banking deposits, hedge net investments in foreign
subsidiaries and manage foreign currency risk on certain available for sale
securities. Although the Company believes that these derivative financial
instruments are practical economic hedges of the Company's risks, except
for the hedge of the net investment in foreign subsidiaries, they do not
meet the strict effectiveness criteria under the SFAS 133, and therefore
are not accounted for as hedges.
In accordance with the transition provisions of SFAS 133, the Company
recorded income from a cumulative effect of a change in accounting
principle of $411,000, net of taxes, in results of operations for the six
month period ended June 30, 2001 and recorded a loss of $1,371,000, net of
taxes, as a cumulative effect of a change in accounting principle in
accumulated other comprehensive income (loss). The Company expects to
reclassify a net pre-tax charge of $705,000 during the next twelve months
to investment and other income from the transition adjustment that was
recorded in accumulated other comprehensive income (loss). Amounts recorded
in investment and other income for the six and three month periods ended
June 30, 2001 as a result of accounting for its derivative financial
instruments in accordance with SFAS 133 were not material.
8. A summary of accumulated other comprehensive income (loss) at June 30, 2001
and December 31, 2000 is as follows (in thousands):
June 30, December 31,
2001 2000
-------- ---------
Net unrealized gains on investments $ 6,199 $ 13,831
Net unrealized foreign exchange losses (21,532) (11,246)
Net unrealized losses on derivative instruments (139) --
-------- --------
$(15,472) $ 2,585
======== ========
9. 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 and warrants for the periods
they were outstanding. The number of shares used to calculate basic
earnings per share amounts was 55,304,000 and 55,728,000 for the six month
periods ended June 30, 2001 and 2000, respectively, and 55,309,000 and
55,297,000 for the three month periods ended June 30, 2001 and 2000,
respectively. The number of shares used to calculate diluted earnings per
share amounts was 55,640,000 and 55,735,000 for the six month periods ended
June 30, 2001 and 2000, respectively, and 55,635,000 and 55,311,000 for the
three month periods ended June 30, 2001 and 2000, respectively.
9
Notes to Interim Consolidated Financial Statements, continued
10. Cash paid for interest and income taxes (net of refunds) was $28,070,000
and $11,786,000, respectively, for the six month period ended June 30, 2001
and $25,472,000 and $8,002,000, respectively, for the six month period
ended June 30, 2000.
10
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 2000
10-K.
Liquidity and Capital Resources
For the six month periods ended June 30, 2001 and 2000 net cash was used for
operations principally as a result of a decrease in premiums written and the
payment of claims at the Empire Group.
As of June 30, 2001, the Company's readily available cash, cash equivalents and
marketable securities, excluding those amounts held by its regulated
subsidiaries, totaled $716,400,000. Additional sources of liquidity as of June
30, 2001 include $163,700,000 of cash and marketable securities collateralizing
letters of credit, $175,200,000 of cash, cash equivalents and marketable
securities held by Fidei and the investment in WMIG described below.
In February 2001, the Company received $30,000,000 representing its share of the
commitment fee paid by FINOVA in connection with a $6,000,000,000 loan
commitment made by Berkadia, an entity jointly owned by the Company and
Berkshire Hathaway. For more information related to the loan commitment and
related agreements, see Note 3 of Notes to Interim Consolidated Financial
Statements.
In May 2001, the Company invested $75,000,000 in a new issue of restricted
convertible preference shares of WMIG, that is expected to represent
approximately 4% of WMIG on an as converted basis. At June 30, 2001, the
Company's investment in WMIG, which is reflected in other investments, had a
market value of $141,000,000 on an as converted basis. These securities will be
automatically converted upon approval by WMIG's shareholders, which is being
sought by WMIG. WMIG is a Bermuda-domiciled financial services holding company,
principally engaged through its subsidiaries and affiliates in property and
casualty insurance and reinsurance.
In May 2001, the Company borrowed $53,135,000 secured by its corporate aircraft.
The promissory notes bear interest based on a floating rate and mature in ten
years.
At December 31, 2000, the Company had outstanding collateralized notes
receivable of $35,903,000 resulting from the 1999 sale of its 30% interest in
Caja de Ahorro y Seguro S.A. to Assicurazioni Generali Group, an Italian
insurance company. The receivable was paid in full in January 2001.
Results of Operations
The 2001 Periods Compared to the 2000 Periods
Net earned premium revenues of the Empire Group were $41,828,000 and $56,174,000
for the six month periods ended June 30, 2001 and 2000, respectively, and
$18,625,000 and $28,208,000 for the three month periods ended June 30, 2001 and
2000, respectively. Earned and written premiums declined in almost all lines of
business. The declines are due, in part, to previously announced decisions not
to issue any new (as compared to renewal) insurance policies in any lines of
business effective March 1, 2001, to non-renew all statutory automobile policies
(public livery vehicles) effective March 1, 2001, and to not accept any new
private passenger automobile policies effective December 2000. Commercial lines
policies were non-renewed or canceled in accordance with New York insurance law
or replaced by Tower. Starting in the second quarter, Tower purchased the
renewal rights for substantially all of the Empire Group's remaining lines of
business, excluding private passenger automobile and commercial
automobile/garage, for a fee based on the direct written premium actually
renewed by Tower. The amount of the fee is not expected to be material. The
Empire Group will continue to be responsible for the remaining term of its
existing policies and all claims incurred prior to the expiration of these
policies. For commercial lines, the Empire Group will thereafter have no renewal
obligations for those policies. Under New
11
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Interim Operations, continued.
York insurance law, the Empire Group is obligated to offer renewals of
homeowners, dwelling fire, personal insurance coverage and personal umbrella for
a three-year policy period; however, the Tower agreement provides that Tower
must offer replacements for these policies.
Pre-tax losses for the Empire Group were $51,571,000 and $4,919,000 for the six
month periods ended June 30, 2001 and 2000, respectively, and $1,454,000 and
$3,261,000 for the three month periods ended June 30, 2001 and 2000,
respectively. The pre-tax losses include increases for loss and loss adjustment
expenses for prior accident years of $39,000,000 and $6,000,000 for the six
month periods ended June 30, 2001 and 2000, respectively, and $3,000,000 for the
three month period ended June 30, 2000. In addition, during the six and three
month periods ended June 30, 2001, the Empire Group wrote-off approximately
$9,100,000 and $1,300,000, respectively, of deferred policy acquisition costs as
their recoverability from premiums and related investment income was no longer
anticipated.
During 2001, the Empire Group increased its reserve estimates for its commercial
package policies lines of business, primarily due to an increase in severity of
liability claims for accident years 1998 and prior. The Empire Group, along with
other carriers that write similar risks in the New York marketplace, has
exposure for third party liability claims in many of its lines of business.
During 2001, there were several settlements and court decisions on third party
liability cases for amounts that are greater than the industry's historical
experience for similar claims, which had formed the basis for the Empire Group's
estimated loss reserves. While many of these decisions are being appealed, these
results may signal a change in the judicial environment in the Empire Group's
marketplace. Accordingly, the Empire Group has increased its loss reserve
estimate for the six month period ended June 30, 2001 by approximately
$18,000,000 due to an estimated increase in severity for certain of these
exposures.
Reserve strengthening in the six month period ended June 30, 2001 also resulted
from unfavorable development principally in its automobile lines of business for
the 1998 through 2000 accident years, primarily relating to personal injury
protection coverage ("PIP") and in its workers' compensation lines of business.
The Empire Group believes that the increased loss estimates for PIP are
consistent with recent trends in the industry, and has strengthened loss
reserves for all automobile lines by $9,000,000 for the six month period ended
June 30, 2001. In addition, during the six month period ended June 30, 2001, the
Empire Group recalculated its estimate of loss adjustment expenses and increased
its reserve by $7,000,000, primarily as a result of increased costs to settle
claims handled in house.
In management's judgment, information currently available has been appropriately
considered in estimating the Empire Group's loss reserves. However, the
reserving process relies on the basic assumption that past experience is an
appropriate basis for predicting future events. As additional experience and
other data become available and are reviewed, the Company's estimates and
judgments may be revised.
In July 2001, the Department informed the Empire Group of its examination
findings concerning the three-year period ended December 31, 1999. The report on
examination has not been filed and the Empire Group is in the process of
reviewing these findings with the Department. Among other matters, the
Department's report indicated a loss reserve deficiency for the Empire Group.
Although this deficiency is less than the combined surplus of the Empire Group,
after it is allocated among the companies within the Empire Group, this
deficiency causes Empire's stand alone statutory surplus to fall below minimum
required levels. In addition, the Empire Group's current structure causes
Empire's surplus to be reduced by a statutory limitation on the amount that it
can invest in its insurance subsidiaries. Accordingly, the Empire Group is
evaluating reorganizing its current structure to reduce and/or eliminate these
statutory limitations. Additionally, the Empire Group is considering certain
other transactions to increase Empire's surplus above the minimum required level
on a stand alone basis and which will also increase surplus for the Group.
12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Interim Operations, continued.
The Empire Group believes that these transactions will serve as a basis for
providing the Department by the end of August 2001 with a plan for remedying
Empire's surplus deficiency. Such a plan is subject to the review and approval
of the Department. No assurance can be given that the Empire Group's plan will
be approved by the Department or that material adverse regulatory action will
not be taken, which could result in the Company recognizing a partial or total
loss on its investment in the Empire Group.
The Company's investment in the Empire Group was approximately $63,600,000 at
June 30, 2001.
Manufacturing revenues, gross profit and pre-tax results declined in the 2001
periods primarily due to increased competition, customer inventory reductions
and economic conditions.
Finance revenues, which reflect the level and mix of consumer instalment loans,
increased in the six and three month periods ended June 30, 2001 as compared to
the similar periods in 2000 due to greater average loans outstanding. Average
loans outstanding during the six and three month periods ended June 30, 2001
were $536,608,000 and $548,727,000, respectively, as compared to $370,814,000
and $393,408,000, respectively, during the six and three month periods ended
June 30, 2000. Operating results also increased, but were negatively affected by
higher interest expense due to the increased customer banking deposits and
higher interest rates thereon, a larger provision for loan losses and, for the
six month period ended June 30, 2001, changes in market values of interest rate
swaps. The Company believes that a weaker economy and increased bankruptcies
have contributed to its loan losses. In an effort to reduce losses, during 2001
the Company began to exit certain states and automobile dealer relationships
with historically higher loan losses. As a result, the volume of new subprime
automobile loans generated has begun to decline.
Pre-tax results for the banking and lending segment for the six month period
ended June 30, 2001 reflect approximately $3,100,000 of charges primarily
resulting from a mark-to-market loss on its interest rate swaps. Such
mark-to-market adjustment was not material for the three month period ended June
30, 2001. The Company uses interest rate swaps to manage the impact of interest
rate changes on its customer banking deposits. Although the Company believes
that these derivative financial instruments serve as economic hedges, they do
not meet certain effectiveness criteria under SFAS 133, and therefore are not
accounted for as hedges.
Investment and other income decreased in the six month period ended June 30,
2001 as compared to the six month period ended June 30, 2000 principally due to
decreased gains from sales of real estate properties, a reduction in investment
income resulting primarily from a reduction in investments held by the Empire
Group, decreased rent income related to Fidei's smaller base of remaining real
estate properties and a reduction in revenues related to MK Gold Company. Such
decreases were partially offset by increased revenues from the Company's oil and
gas operations which totaled $6,300,000 for the six month period ended June 30,
2001.
Equity in income of associated companies increased in the six and three month
periods ended June 30, 2001 primarily due to the Company's equity investment in
Jefferies Partners Opportunity Fund II, LLC and from the Company's equity
investments in real estate businesses.
In the six month period ended June 30, 2000, net securities gains includes a
pre-tax gain of approximately $24,600,000 on the sale of Jordan
Telecommunication Products, Inc.
13
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Interim Operations, continued.
Selling, general and other expenses for the six and three month periods ended
June 30, 2001 includes a charge of $4,600,000 related to value added taxes
assessed against Fidei for a previously sold property.
The number of shares used to calculate basic earnings per share amounts was
55,304,000 and 55,728,000 for the six month periods ended June 30, 2001 and
2000, respectively, and 55,309,000 and 55,297,000 for the three month periods
ended June 30, 2001 and 2000, respectively. The number of shares used to
calculate diluted earnings per share was 55,640,000 and 55,735,000 for the six
month periods ended June 30, 2001 and 2000, respectively, and 55,635,000 and
55,311,000 for the three month periods ended June 30, 2001 and 2000,
respectively.
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, 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 and loss adjustment expense reserves,
prevailing interest rate levels, weather related conditions that may affect the
Company's operations, effectiveness of the Tower agreement, adverse selection
through renewals of the Empire Group's policies, the Company's ability to
develop an alternate business model for the Empire Group, regulatory approval of
the Empire Group's plan in response to the findings of the New York Insurance
Department, adverse regulatory action against the Empire Group, adverse
environmental developments in Spain that could delay or preclude the issuance of
permits necessary to develop the Company's Spanish mining rights, changes in the
commercial real estate market in France, implementation of the FINOVA
restructuring plan 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.
14
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 2001 Annual Meeting of Shareholders held on June 6, 2001.
a) Election of directors.
Number of Shares
----------------
For Withheld
---- --------
Ian M. Cumming 49,691,439 66,652
Paul M. Dougan 49,690,694 67,397
Lawrence D. Glaubinger 49,690,499 67,592
James E. Jordan 49,689,234 68,857
Jesse Clyde Nichols, III 49,691,339 66,752
Joseph S. Steinberg 49,691,429 66,662
b) Ratification of PricewaterhouseCoopers LLP, as independent
auditors for the year ended December 31, 2001.
For 49,691,219
Against 27,414
Abstentions 39,458
Broker non votes -
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits.
None.
b) Reports on Form 8-K.
None.
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 14, 2001 By: /s/ Barbara L. Lowenthal
------------------------
Barbara L. Lowenthal
Vice President and Comptroller
(Chief Accounting Officer)
16