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, 2000
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 3, 2000:
55,296,728.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2000 and December 31, 1999
(Dollars in thousands, except par value)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- -----------
(Unaudited)
<S> <C> <C>
ASSETS
Investments:
Available for sale (aggregate cost of $925,983 and $945,227) $ 999,619 $ 944,667
Trading securities (aggregate cost of $154,442 and $138,679) 150,287 168,285
Held to maturity (aggregate fair value of $18,279 and $23,983) 18,482 24,403
Other investments, including accrued interest income 28,035 33,138
----------- -----------
Total investments 1,196,423 1,170,493
Cash and cash equivalents 246,342 296,058
Reinsurance receivables, net 33,189 38,086
Trade, notes and other receivables, net 800,247 876,411
Prepaids and other assets 440,296 418,447
Property, equipment and leasehold improvements, net 189,521 184,850
Deferred policy acquisition costs 11,905 11,845
Investments in associated companies 192,344 74,037
----------- -----------
Total $ 3,110,267 $ 3,070,227
=========== ===========
LIABILITIES
Customer banking deposits $ 481,876 $ 329,301
Trade payables and expense accruals 222,603 292,677
Other liabilities 90,076 79,076
Income taxes payable 119,298 113,391
Deferred tax liability 73,377 30,423
Policy reserves 366,722 443,042
Unearned premiums 62,558 61,916
Debt, including current maturities 382,240 483,309
----------- -----------
Total liabilities 1,798,750 1,833,135
----------- -----------
Minority interest 15,578 16,904
----------- -----------
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; 55,296,728
and 56,801,728 shares issued and outstanding, after deducting 63,116,263
and 61,611,263 shares held in treasury 55,297 56,802
Additional paid-in capital 54,340 84,929
Accumulated other comprehensive income (loss) 34,375 (9,578)
Retained earnings 1,053,727 989,835
----------- -----------
Total shareholders' equity 1,197,739 1,121,988
----------- -----------
Total $ 3,110,267 $ 3,070,227
=========== ===========
</TABLE>
See notes to interim consolidated financial statements.
-1-
<PAGE>
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
For the periods ended September 30, 2000 and 1999
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
For the Three Month For the Nine Month
Period Ended Period Ended
September 30, September 30,
---------------------- ----------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES:
Insurance revenues and commissions $ 26,582 $ 32,411 $ 82,756 $ 117,813
Manufacturing 17,434 18,183 52,506 48,520
Finance 23,536 12,611 62,678 33,064
Investment and other income 86,162 66,278 206,081 365,918
Equity in income (losses) of associated companies 14,655 1,160 24,490 (2,430)
Net securities gains 5,186 693 38,934 6,433
--------- --------- --------- ---------
173,555 131,336 467,445 569,318
--------- --------- --------- ---------
EXPENSES:
Provision for insurance losses and policy benefits 38,820 31,039 90,482 106,216
Amortization of deferred policy acquisition costs 6,404 7,076 19,419 25,610
Manufacturing cost of goods sold 11,076 10,493 32,515 29,560
Interest 15,368 10,743 43,665 38,649
Salaries 14,381 11,190 45,066 32,332
Selling, general and other expenses 42,778 30,141 134,575 100,996
--------- --------- --------- ---------
128,827 100,682 365,722 333,363
--------- --------- --------- ---------
Income from continuing operations before income taxes, minority expense
of trust preferred securities and extraordinary gain (loss) 44,728 30,654 101,723 235,955
--------- --------- --------- ---------
Income taxes:
Current 9,065 (2,121) 22,610 17,933
Deferred 5,492 9,949 11,642 28,903
--------- --------- --------- ---------
14,557 7,828 34,252 46,836
--------- --------- --------- ---------
Income from continuing operations before minority expense
of trust preferred securities and extraordinary gain (loss) 30,171 22,826 67,471 189,119
Minority expense of trust preferred securities, net of taxes 1,380 1,380 4,141 4,141
--------- --------- --------- ---------
Income from continuing operations before extraordinary gain (loss) 28,791 21,446 63,330 184,978
Income from discontinued operations, net of taxes -- 15,582 -- 24,201
--------- --------- --------- ---------
Income before extraordinary gain (loss) 28,791 37,028 63,330 209,179
Extraordinary gain (loss) from early extinguishment of debt,
net of income tax expense (benefit) of $316 and ($1,394) -- -- 562 (2,588)
--------- --------- --------- ---------
Net income $ 28,791 $ 37,028 $ 63,892 $ 206,591
========= ========= ========= =========
Basic earnings (loss) per common share:
Income from continuing operations before extraordinary gain (loss) $ .52 $ .36 $ 1.14 $ 3.08
Income from discontinued operations -- .27 -- .40
Extraordinary gain (loss) -- -- .01 (.04)
--------- --------- --------- ---------
Net income $ .52 $ .63 $ 1.15 $ 3.44
========= ========= ========= =========
Diluted earnings (loss) per common share:
Income from continuing operations before extraordinary gain (loss) $ .52 $ .36 $ 1.14 $ 3.08
Income from discontinued operations -- .27 -- .40
Extraordinary gain (loss) -- -- .01 (.04)
--------- --------- --------- ---------
Net income $ .52 $ .63 $ 1.15 $ 3.44
========= ========= ========= =========
</TABLE>
See notes to interim consolidated financial statements.
-2-
<PAGE>
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the nine months ended September 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
2000 1999
---- ----
(In Thousands)
<S> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 63,892 $ 206,591
Adjustments to reconcile net income to net cash provided by (used for) operations:
Extraordinary (gain) loss, net of taxes (562) 2,588
Provision for deferred income taxes 11,642 28,903
Depreciation and amortization of property, equipment and leasehold improvements 14,543 11,044
Other amortization 22,706 25,096
Provision for doubtful accounts 22,229 8,652
Net securities (gains) (38,934) (6,433)
Equity in (income) losses of associated companies (24,490) 2,430
(Gain) on disposal of real estate, property and equipment (53,454) (39,202)
(Gain) on sales of PIB, Caja, S&H and Charter -- (193,820)
Investments classified as trading, net (17,905) (12,689)
Deferred policy acquisition costs incurred and deferred (19,479) (20,777)
Net change in:
Reinsurance receivables 4,897 2,392
Trade, notes and other receivables (7,797) 22,176
Prepaids and other assets (860) 7,657
Net assets of discontinued operations -- 17,616
Trade payables and expense accruals (41,759) 19,892
Other liabilities 2,122 (6,354)
Income taxes payable 5,907 31,942
Policy reserves (76,320) (81,347)
Unearned premiums 642 (20,573)
Other 5,451 8,133
----------- -----------
Net cash provided by (used for) operating activities (127,529) 13,917
----------- -----------
NET CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of real estate, property, equipment and leasehold improvements (63,771) (109,235)
Proceeds from disposals of real estate, property and equipment 97,447 111,348
Proceeds from sales of PIB, Caja, S&H and Charter -- 226,539
Advances on loan receivables (285,778) (181,613)
Principal collections on loan receivables 106,957 73,494
Advances on notes receivables (30,586) (84,912)
Collections on notes receivables 264,194 167,743
Investments in associated companies (108,142) (25,413)
Distributions from associated companies 14,642 7,976
Purchases of investments (other than short-term) (832,882) (1,447,685)
Proceeds from maturities of investments 74,487 967,209
Proceeds from sales of investments 812,544 1,205,972
----------- -----------
Net cash provided by investing activities 49,112 911,423
----------- -----------
NET CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in short-term borrowings (56,608) (19,798)
Net change in customer banking deposits 148,408 36,852
Issuance of long-term debt 100,000 --
Reduction of long-term debt (120,899) (200,321)
Purchase of common shares for treasury (32,094) (115,965)
Dividends paid -- (722,178)
----------- -----------
Net cash provided by (used for) financing activities 38,807 (1,021,410)
----------- -----------
Effect of foreign exchange rate changes on cash (10,106) (3,398)
----------- -----------
Net (decrease) in cash and cash equivalents (49,716) (99,468)
Cash and cash equivalents at January 1, 296,058 459,690
----------- -----------
Cash and cash equivalents at September 30, $ 246,342 $ 360,222
=========== ===========
</TABLE>
See notes to interim consolidated financial statements.
-3-
<PAGE>
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
For the nine months ended September 30, 2000 and 1999
(Unaudited)
<TABLE>
<CAPTION>
Common Accumulated
Shares Additional Other
$1 Par Paid-In Comprehensive Retained
Value Capital Income (Loss) Earnings Total
---------- ----------- -------------- -------- -----
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1999 $ 61,985 $ 205,227 $ (771) $1,586,718 $1,853,159
----------
Comprehensive income:
Net change in unrealized gain (loss)
on investments 2,201 2,201
Net change in unrealized foreign
exchange gain (loss) (1,116) (1,116)
Net income 206,591 206,591
----------
Comprehensive income 207,676
----------
Purchase of stock for treasury (4,869) (114,045) (118,914)
Dividends (722,178) (722,178)
---------- ---------- ---------- ---------- ----------
Balance, September 30, 1999 $ 57,116 $ 91,182 $ 314 $1,071,131 $1,219,743
========== ========== ========== ========== ==========
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 52,618 52,618
Net change in unrealized foreign
exchange gain (loss) (8,665) (8,665)
Net income 63,892 63,892
----------
Comprehensive income 107,845
----------
Purchase of stock for treasury (1,505) (30,589) (32,094)
---------- ---------- ---------- ---------- ----------
Balance, September 30, 2000 $ 55,297 $ 54,340 $ 34,375 $1,053,727 $1,197,739
========== ========== ========== ========== ==========
</TABLE>
See notes to interim consolidated financial statements.
-4-
<PAGE>
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, 1999, which are included in the Company's Annual Report filed
on Form 10-K for such year (the "1999 10-K"). Results of operations for
interim periods are not necessarily indicative of annual results of
operations. The consolidated balance sheet at December 31, 1999 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 2000 presentation.
2. Certain information concerning the Company's segments for the nine and
three month periods ended September 30, 2000 and 1999 is as follows (in
thousands):
<TABLE>
<CAPTION>
For the For the
Three Month Period Nine Month Period
Ended September 30, Ended September 30,
-------------------- -------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Property and casualty insurance $ 37,675 $ 41,622 $113,029 $149,171
Banking and lending 28,546 14,320 77,174 37,133
Foreign real estate 8,354 6,065 23,793 41,759
Manufacturing 17,450 18,184 52,524 48,522
Other operations (a) 35,689 24,861 85,998 218,269
-------- -------- -------- --------
Total revenue for reportable segments 127,714 105,052 352,518 494,854
Equity in associated companies 14,655 1,160 24,490 (2,430)
Corporate (b) 31,186 25,124 90,437 76,894
-------- -------- -------- --------
Total consolidated revenues $173,555 $131,336 $467,445 $569,318
======== ======== ======== ========
Income (loss) from continuing operations before income taxes, minority
expense of trust preferred securities and extraordinary gain (loss):
Property and casualty insurance $(14,167) $ (4,092) $(18,687) $ (7,055)
Banking and lending 3,538 4,834 8,192 10,679
Foreign real estate 3,342 (466) 6,627 17,159
Manufacturing 3,083 4,549 9,982 9,646
Other operations (a) 21,675 16,103 43,060 193,891
-------- -------- -------- --------
Total income from continuing operations before income taxes,
minority expense of trust preferred securities and extraordinary
gain (loss) for reportable segments 17,471 20,928 49,174 224,320
Equity in associated companies 14,655 1,160 24,490 (2,430)
Corporate (b) 12,602 8,566 28,059 14,065
-------- -------- -------- --------
Total consolidated income from continuing operations before income
taxes, minority expense of trust preferred securities and
extraordinary gain (loss) $ 44,728 $ 30,654 $101,723 $235,955
======== ======== ======== ========
</TABLE>
-5-
<PAGE>
Notes to Interim Consolidated Financial Statements, continued
(a) Includes pre-tax gains on sale of Caja de Ahorro y Seguro S.A.
("Caja") ($120,793,000), The Sperry and Hutchinson Company, Inc.
("S&H") ($18,725,000), Pepsi International Bottlers ("PIB")
($29,545,000) and an equity interest in an associated company
($8,667,000) for the nine month period ended September 30, 1999, as
more fully discussed in the 1999 10-K.
(b) Includes a pre-tax gain of approximately $24,800,000 on the sale of
Jordan Telecommunication Products, Inc. for the nine month period
ended September 30, 2000.
3. In January 2000, the Company sold its 10% equity interest in Jordan
Telecommunication Products, Inc. for $27,000,000. The Company recorded a
pre-tax gain of approximately $24,800,000 in the nine month period ended
September 30, 2000. Further consideration of approximately $7,500,000 may
be received upon the favorable resolution of certain contingencies.
4. The Company repurchased 1,505,000 Common Shares for an aggregate cost of
approximately $32,094,000 from January 1, 2000 through November 3, 2000.
The Company is currently authorized to repurchase an additional 4,495,000
Common Shares, after considering all repurchases through November 3, 2000.
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.
5. During the nine months ended September 30, 2000, Compagnie Fonciere FIDEI
("Fidei"), the Company's foreign real estate subsidiary, repurchased
approximately $10,200,000 (approximately 10,700,000 Euros) principal amount
of its Euro denominated debt and recognized an extraordinary gain on its
extinguishment of $562,000, net of taxes.
6. In June 2000, the Company replaced its $100,000,000 unsecured bank credit
facility with a new unsecured bank credit facility of $152,500,000, which
bears interest based on the Eurocurrency Rate or the prime rate and matures
in June 2003. As of September 30, 2000, no amounts were outstanding under
this bank credit facility.
7. During the second quarter of 2000, pursuant to shareholder approval,
warrants to purchase 400,000 Common Shares were issued to each of the
Company's Chairman and President. The warrants are exercisable through May
15, 2005 at an exercise price of $23.95 per Common Share (105% of the
closing price of a Common Share on the date of grant). In addition,
pursuant to a shareholder approved stock option plan, the Company granted
409,250 options to certain employees and non-employee directors at the fair
market value of the underlying stock at the date of grant (a weighted
average price of $22.64 per share).
8. At December 31, 1999, the Company had outstanding promissory notes from
Conseco, Inc. (which were fully collateralized by non-cancelable letters of
credit) in the principal amount of $250,000,000 (the "Conseco Notes").
During the third quarter of 2000, the Company received a notice that the
letters of credit would not be renewed for an additional one year period.
As a result, the Company exercised its rights under the existing letters of
credit and received funds to repay the entire principal amount and accrued
interest then outstanding. In addition, the Company received $7,500,000
directly from Conseco, Inc., which constituted a prepayment penalty due
under the terms of the Conseco Notes. The prepayment penalty has been
recorded as other income for the nine and three month periods ended
September 30, 2000. Approximately $100,000,000 of the proceeds received
were used to terminate a total return swap agreement the Company had
entered into with one of its banks which had been accounted for as a
collateralized borrowing.
9. During the third quarter of 2000, the Company received approximately
$7,700,000 upon the sale of one of its corporate owned aircraft and
recorded a pre-tax gain of $7,700,000.
-6-
<PAGE>
Notes to Interim Consolidated Financial Statements, continued
10. Net unrealized gains (losses) on investments were $50,063,000 and
($2,555,000) at September 30, 2000 and December 31, 1999, respectively. Net
unrealized foreign exchange losses were $15,688,000 and $7,023,000 at
September 30, 2000 and December 31, 1999, respectively. The increase in the
unrealized gains (losses) on investments primarily related to the Company's
interest in the common stock of Fidelity National Financial, Inc. ("FNF").
11. Results of discontinued operations include revenues of $13,561,000 and
income before income taxes of $13,282,000 for the nine month period ended
September 30, 1999. Results for the nine month period ended September 30,
1999 include the recognition of a pre-tax gain of approximately
$10,300,000, as a result of the partial conversion to assumption
reinsurance of a prior reinsurance transaction for which the gain was
previously deferred.
In July 1999, the Company sold its life insurance subsidiaries, Charter
National Life Insurance Company and Intramerica Life Insurance Company to
Allstate Life Insurance Company for statutory surplus, as adjusted, at the
date of sale (approximately $39,560,000) plus $3,575,000. The Company
recorded a net gain of $15,582,000 in the third quarter of 1999, which
includes recognition of deferred gains from prior reinsurance transactions.
12. Earnings (loss) per share amounts were calculated by dividing net income by
the sum of the weighted average number of common shares outstanding and,
for diluted earnings (loss) per share, the incremental weighted average
number of shares issuable upon exercise of outstanding options and warrants
for the periods they were outstanding. The number of shares used to
calculate basic earnings (loss) per share amounts was 55,599,000 and
60,098,000 for the nine month periods ended September 30, 2000 and 1999,
respectively, and 55,297,000 and 58,865,000 for the three month periods
ended September 30, 2000 and 1999, respectively. The number of shares used
to calculate diluted earnings (loss) per share amounts was 55,635,000 and
60,117,000 for the nine month periods ended September 30, 2000 and 1999,
respectively, and 55,390,000 and 58,865,000 for the three month periods
ended September 30, 2000 and 1999, respectively.
13. Cash paid for interest and income taxes (net of refunds) was $43,858,000
and $14,474,000, respectively, for the nine month period ended September
30, 2000 and $44,134,000 and ($15,280,000), respectively, for the nine
month period ended September 30, 1999.
14. In June 1999, the Financial Accounting Standards Board issued Financial
Accounting Standards No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133 ("SFAS 133")", which will be effective for fiscal years beginning after
June 15, 2000. The Company has reviewed the impact of the implementation of
SFAS 133, and does not expect it to have a material effect on the Company's
financial position or results of operations.
15. In October 2000, the Company entered into a subscription agreement to
purchase $75,000,000 of a new issue of convertible preference shares of
White Mountains Insurance Group, Ltd. ("WMIG"), representing approximately
18% of the preference shares. This investment is subject to the closing of
an acquisition by WMIG of CGU Corporation, the U.S. property and casualty
operations of CGNU plc. There can be no assurance that this transaction
ultimately will be consummated.
16. In November 2000, the Company entered into a letter agreement with The
FINOVA Group Inc. ("Finova") pursuant to which the Company would invest up
to $350 million in Finova. The agreement is subject to reaching a mutually
satisfactory arrangement with Finova's bank group and certain other
customary conditions, including regulatory approvals. The agreement
provides for the purchase of Finova securities for $250 million, consisting
of 10 million shares of a 14% Payment in Kind Convertible Preferred Stock
("PIK Convertible Preferred"), which are convertible into 100 million
shares of Finova common stock and a warrant to purchase up to 20% of the
outstanding common stock of Finova, subject to anti-dilution adjustments.
The warrant will have an exercise price of $125 million. The agreement also
provides that the Company will act
-7-
<PAGE>
Notes to Interim Consolidated Financial Statements, continued
as a standby purchaser for $100 million of additional PIK Convertible
Preferred, which will be offered to existing shareholders in a $150 million
rights offering promptly following consummation of the Company's
investment. Upon consummation of the investment, the Company would have the
right to appoint a majority of the Finova Board of Directors. There can be
no assurance that this transaction ultimately will be consummated.
-8-
<PAGE>
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 1999
10-K.
Liquidity and Capital Resources
During each of the nine month periods ended September 30, 2000 and 1999, the
Company operated profitably. For the nine month period ended September 30, 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. For the nine
month period ended September 30, 1999, net cash was provided by operations.
As of September 30, 2000, the Company's readily available cash, cash equivalents
and marketable securities, excluding those amounts held by its regulated
subsidiaries and the Company's investment in FNF, totaled $348,000,000.
Additional sources of liquidity as of September 30, 2000 include $154,400,000 of
cash and marketable securities collateralizing letters of credit and
$112,500,000 of cash, cash equivalents and marketable securities held by Fidei.
At December 31, 1999, the Company had outstanding promissory notes from Conseco,
Inc. (which were fully collateralized by non-cancelable letters of credit) in
the principal amount of $250,000,000 (the "Conseco Notes"). During the third
quarter of 2000, the Company received a notice that the letters of credit would
not be renewed for an additional one year period. As a result, the Company
exercised its rights under the existing letters of credit and received funds to
repay the entire principal amount and accrued interest then outstanding. In
addition, the Company received $7,500,000 directly from Conseco, Inc., which
constituted a prepayment penalty due under the terms of the Conseco Notes.
Approximately $100,000,000 of the proceeds received were used to terminate a
total return swap agreement the Company had entered into with one of its banks
which had been accounted for as a collateralized borrowing.
In June 2000, the Company replaced its $100,000,000 unsecured bank credit
facility with a new unsecured bank credit facility of $152,500,000, which bears
interest based on the Eurocurrency Rate or the prime rate and matures in June
2003. As of September 30, 2000, no amounts were outstanding under this bank
credit facility.
At September 30, 2000, the Company had a 9.6% interest in the common stock of
FNF, a publicly traded title insurance holding company, with a cost of
approximately $86,400,000, substantially all of which was acquired during 2000.
At September 30, 2000, the investment in FNF had a market value of $159,400,000.
In January 2000, the Company sold its 10% equity interest in Jordan
Telecommunication Products, Inc. for $27,000,000. The Company recorded a pre-tax
gain of approximately $24,800,000 in the nine month period ended September 30,
2000, which is reflected in net securities gains. Further consideration of
approximately $7,500,000 may be received upon the favorable resolution of
certain contingencies.
During the nine month period ended September 30, 2000, the Company invested
$100,000,000 in the equity of a limited liability company (the "LLC"). The LLC,
which is a registered broker-dealer managed and controlled by a third party
investment manager, invests in high yield securities. The Company may redeem its
interest in the LLC annually beginning on December 31, 2001, or otherwise in
certain specified circumstances. For the nine and three month periods ended
September 30, 2000, the Company recorded $13,217,000 and $5,535,000,
respectively, of income from this investment under the equity method of
accounting.
During the third quarter of 2000, the Company received approximately $7,700,000
upon the sale of one of its corporate owned aircraft and recorded a pre-tax gain
of $7,700,000.
-9-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued
In December 1999, the Company's Board of Directors increased to 6,000,000 the
maximum number of its Common Shares that the Company 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 nine month period ended September 30, 2000, the Company repurchased
1,505,000 Common Shares for an aggregate cost of approximately $32,094,000.
In October 2000, the Company entered into a subscription agreement to purchase
$75,000,000 of a new issue of convertible preference shares of White Mountains
Insurance Group, Ltd. ("WMIG"), representing approximately 18% of the preference
shares. This investment is subject to the closing of an acquisition by WMIG of
CGU Corporation, the U.S. property and casualty operations of CGNU plc. There
can be no assurance that this transaction ultimately will be consummated.
In November 2000, the Company entered into a letter agreement with The FINOVA
Group Inc. ("Finova") pursuant to which the Company would invest up to $350
million in Finova. The agreement is subject to reaching a mutually satisfactory
arrangement with Finova's bank group and certain other customary conditions,
including regulatory approvals. The agreement provides for the purchase of
Finova securities for $250 million, consisting of 10 million shares of a 14%
Payment in Kind Convertible Preferred Stock ("PIK Convertible Preferred"), which
are convertible into 100 million shares of Finova common stock and a warrant to
purchase up to 20% of the outstanding common stock of Finova, subject to
anti-dilution adjustments. The warrant will have an exercise price of $125
million. The agreement also provides that the Company will act as a standby
purchaser for $100 million of additional PIK Convertible Preferred, which will
be offered to existing shareholders in a $150 million rights offering promptly
following consummation of the Company's investment. Upon consummation of the
investment, the Company would have the right to appoint a majority of the Finova
Board of Directors. There can be no assurance that this transaction ultimately
will be consummated.
Results of Operations
The 2000 Periods Compared to the 1999 Periods
Net earned premium revenues of the Empire Group were $82,756,000 and
$117,813,000 for the nine month periods ended September 30, 2000 and 1999,
respectively, and $26,582,000 and $32,411,000 for the three month periods ended
September 30, 2000 and 1999, respectively. While earned premiums declined in
almost all lines of business, the most significant reductions were in assigned
risk automobile, voluntary private passenger automobile, commercial package
policies, homeowners and workers' compensation. As discussed in the 1999 10-K,
as a result of poor operating results, the Empire Group is no longer entering
into new assigned risk contracts. Effective January 1, 2000, all policy renewal
obligations have been assigned to another insurance company. However, the Empire
Group remains liable for the claim settlement costs for assigned risk claims
that occurred during the policy term. The decline in voluntary private passenger
automobile resulted from tighter underwriting standards, increased competition
and the Empire Group's decision to no longer accept new policies from those
agents who historically have had poor underwriting results. The Empire Group's
termination of certain unprofitable agents has also adversely affected premium
volume in other lines of business.
-10-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued
The Empire Group's loss ratios were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------- ----------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Loss Ratio:
GAAP 146.1% 95.9% 109.6% 90.4%
SAP 146.1% 95.9% 109.6% 90.4%
Expense Ratio:
GAAP 49.0% 40.2% 48.1% 37.5%
SAP 51.7% 48.3% 46.4% 40.7%
Combined Ratio:
GAAP 195.1% 136.1% 157.7% 127.9%
SAP 197.8% 144.2% 156.0% 131.1%
</TABLE>
During the three months ended September 30, 2000, the Empire Group updated its
actuarial estimates and strengthened reserves by approximately $13,000,000. The
increase primarily resulted from adverse development for accident years 1997 to
1999 in the assigned risk automobile and voluntary private passenger automobile
lines, and an increase for estimated loss adjustment expenses. Claim files were
reviewed and settlements were accelerated, due to efforts by both in house claim
personnel and recently employed third party claim servicers. The Empire Group is
outsourcing claim handling functions for lines of business it is discontinuing
(commercial and personal assigned risk automobile), as well as reducing the
level of claims handled in house to better match current premium volumes. The
Empire Group reestimated its total liability for loss adjustment expenses based
on the substantial increase in claims handled by third parties during the third
quarter and concluded an increase was needed.
Expense ratios for the 2000 periods increased as compared to the 1999 periods
due to reduced service fees, higher severance costs and overhead costs which,
although lower, have not declined proportionally with premiums. This high
overhead cost structure, which must be further reduced, and the continued
decline in premiums and higher than expected loss ratios in certain business
lines, is requiring management to reevaluate which lines of business it can
profitably pursue. This evaluation is expected to be completed in the fourth
quarter of 2000.
Manufacturing revenues, gross profit and pre-tax results for this segment
increased in the nine month period ended September 30, 2000 as compared to the
nine month period ended September 30, 1999, principally due to strong demand and
price increases, which offset higher raw material costs. However, for the three
month period ended September 30, 2000, results declined as compared to the same
period in 1999 reflecting higher raw material costs and a reduction in sales in
certain market segments.
Finance revenues, which reflect the level and mix of consumer instalment loans,
increased due to greater average loans outstanding. Average loans outstanding
during the nine and three month periods ended September 30, 2000 were
$396,187,000 and $463,841,000, respectively, as compared to $210,732,000 and
$261,435,000, respectively, during the nine and three month periods ended
September 30, 1999. This increase was primarily due to the acquisition in 1999
of Tranex Credit Corp. and increased new loan originations. Pre-tax results for
the nine month period ended September 30, 2000 as compared to the same period in
1999 declined primarily due to an increase in the provision for loan losses,
higher interest rates on customer banking deposits and higher salaries expense.
The higher loan losses primarily resulted from the Tranex portfolio, a larger
amount of loans outstanding that are reaching the age of peak losses, generally
twelve to eighteen months after origination, and an increase in new loan
originations. Salaries expense as a percentage of outstandings has increased as
the Company has yet to fully integrate the Tranex operations acquired last year.
-11-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued
Investment and other income declined in the nine month period ended September
30, 2000 as compared to the nine month period ended September 30, 1999 primarily
due to gains recognized in 1999 from the sale of Caja de Ahorro y Seguro S.A.,
The Sperry and Hutchinson Company, Inc., Pepsi International Bottlers and an
equity interest in an associated company aggregating $177,730,000, as discussed
more fully in the 1999 10-K. Investment and other income also decreased in the
2000 periods as compared to the same periods in 1999 due to a reduction in
investment income, resulting primarily from the payment of dividends and debt
repurchases in 1999 and reduced investment assets held by the Empire Group, and
decreased rent income (due to a smaller base of remaining real estate
properties) and decreased gains from sales of real estate properties related to
Fidei. This decrease was partially offset by increased gains from sales and
foreclosures of various domestic real estate properties, the prepayment penalty
related to the Conseco Notes and revenues relating to MK Gold Company, which the
Company began consolidating in the fourth quarter of 1999. During the nine month
period ended September 30, 2000, Fidei sold 23 properties; 65 properties remain
at September 30, 2000, all of which are currently being marketed for sale. The
increase in investment and other income in the three month period ended
September 30, 2000 as compared to the three month period ended September 30,
1999 principally reflects increased gains from sales and foreclosures of various
real estate properties, the prepayment penalty related to the Conseco Notes and
revenues relating to MK Gold, partially offset by a gain on sale of an equity
interest in an associated company in the third quarter of 1999.
Interest expense for the 2000 periods reflects increased customer banking
deposits and higher interest rates thereon, partially offset for the nine month
period ended September 30, 2000 by a reduction in interest related to debt
repurchases in 1999.
Salaries expense in the 2000 periods reflects an increase in employees,
primarily at the banking and lending segment.
The increase in selling, general and other expenses in the 2000 periods as
compared to the 1999 periods principally reflects higher provisions for loan
losses, as described above, and expenses relating to MK Gold Company.
Income taxes for the nine month period ended September 30, 1999 reflects a
benefit of approximately $33,300,000 from the utilization of capital loss
carryforwards which had previously been fully reserved. Income taxes for the
1999 periods reflect a benefit of approximately $3,400,000 for a change in the
Company's estimated 1998 federal income tax liability and the favorable
resolution of certain federal income tax contingencies.
The number of shares used to calculate basic earnings (loss) per share amounts
was 55,599,000 and 60,098,000 for the nine month periods ended September 30,
2000 and 1999, respectively, and 55,297,000 and 58,865,000 for the three month
periods ended September 30, 2000 and 1999, respectively. The number of shares
used to calculate diluted earnings (loss) per share was 55,635,000 and
60,117,000 for the nine month periods ended September 30, 2000 and 1999,
respectively, and 55,390,000 and 58,865,000 for the three month periods ended
September 30, 2000 and 1999, respectively.
-12-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued
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, adverse environmental developments in Spain that could
delay or preclude the issuance of permits necessary to develop the Company's
Spanish mining rights 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.
-13-
<PAGE>
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 July 18, 2000,
which sets forth information under Item 5. Other Events.
-14-
<PAGE>
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, 2000 By /s/ Barbara L. Lowenthal
---------------------------
Barbara L. Lowenthal
Vice President and Comptroller
(Chief Accounting Officer)
-15-
<PAGE>
EXHIBIT INDEX
Exhibit Exemption
Number Description Indication
------ ----------- ------------
27 Financial Data Schedule.
-16-
