================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
------------------
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 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
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
315 PARK AVENUE SOUTH
NEW YORK, NEW YORK 10010
(212) 460-1900
--------------------------------------------------------------------------------
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
--------------------------------------------------------------------------------
COMMON SHARES, PAR VALUE $1 PER SHARE NEW YORK STOCK EXCHANGE
PACIFIC STOCK EXCHANGE
7-3/4% SENIOR NOTES DUE AUGUST 15, 2013 NEW YORK STOCK EXCHANGE
8-1/4% SENIOR SUBORDINATED NOTES DUE NEW YORK STOCK EXCHANGE
JUNE 15, 2005
7-7/8% SENIOR SUBORDINATED NOTES DUE NEW YORK STOCK EXCHANGE
OCTOBER 15, 2006
Securities registered pursuant to Section 12(g) of the Act:
NONE.
--------------------------------------------------------------------------------
(Title of Class)
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 [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [x].
Aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant at March 19, 2001 (computed by reference to the
last reported closing sale price of the Common Stock on the New York Stock
Exchange on such date): $1,141,411,973.
On March 19, 2001, the registrant had outstanding 55,296,728 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the registrant's definitive proxy statement pursuant to
Regulation 14A of the Securities Exchange Act of 1934 in connection with the
2001 annual meeting of shareholders of the registrant are incorporated by
reference into Part III of this Report.
================================================================================
NY2:\1001884\14\76830.0246
PART I
Item 1. Business.
------ --------
THE COMPANY
The Company is a diversified financial services holding company engaged
through its subsidiaries in a variety of businesses, including commercial and
personal lines of property and casualty insurance, banking and lending,
manufacturing, winery operations, real estate activities and precious metals
mining. The Company concentrates on return on investment and cash flow to build
long-term shareholder value, rather than emphasizing volume or market share.
Additionally, the Company continuously evaluates the retention and disposition
of its existing operations and investigates possible acquisitions of new
businesses in order to maximize shareholder value.
Shareholders' equity has grown from a deficit of $7,700,000 at December
31, 1978 (prior to the acquisition of a controlling interest in the Company by
the Company's Chairman and President), to a positive shareholders' equity of
$1,204,200,000 at December 31, 2000, equal to a book value per common share of
the Company (a "Common Share") of negative $.11 at December 31, 1978 and $21.78
at December 31, 2000. The December 31, 2000 shareholders' equity and book value
per share amounts have been reduced by the $811,900,000 cash dividend (the
"Dividend") paid in 1999.
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. FINOVA will pay certain fees to Berkadia
in connection with this commitment, including a $60,000,000 commitment fee that
was paid at the time of execution. The commitment is subject to, among other
things, Berkadia's satisfaction with the restructuring plan for the FINOVA
companies, and bankruptcy court and necessary creditor approvals. In connection
with the commitment, the Company entered into a ten-year management agreement
with FINOVA. For additional information concerning this possible transaction and
the management agreement, see Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of this Report.
In October 2000, the Company agreed to invest $75,000,000 in a new issue
of convertible preference shares of White Mountains Insurance Group, Ltd.
("WMIG"), that is expected to represent approximately 4% of WMIG on an as
converted basis. 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,
which, although subject to certain contingencies, currently is expected to occur
during 2001. WMIG is a Bermuda-domiciled financial services holding company,
principally engaged through its subsidiaries and affiliates in property and
casualty insurance and reinsurance.
Primarily during 2000, the Company invested an aggregate of $89,000,000
in the common stock of Fidelity National Financial, Inc. ("FNF"), a publicly
traded title insurance holding company. The Company sold its investment in FNF
common stock for $179,900,000, resulting in a pre-tax gain of $90,900,000
primarily in the fourth quarter of 2000.
In January 2000, the Company sold its 10% equity interest in Jordan
Telecommunication Products, Inc. ("JTP") for $27,300,000. The Company recorded a
pre-tax gain of $24,800,000 in the year ended December 31, 2000. Further
consideration of approximately $7,500,000 may be received in the future upon the
favorable resolution of certain contingencies.
During 2000, the Company invested $100,000,000 in the equity of a limited
liability company, Jefferies Partners Opportunity Fund II, LLC ("JPOF II"), that
is a registered broker-dealer. JPOF II is managed and controlled by Jefferies &
Company, Inc., a full service investment bank to middle market companies. JPOF
II invests in high yield securities, special situation investments and
distressed securities and provides trading services to its customers and
clients. For the year ended December 31, 2000, the Company recorded $17,300,000
of pre-tax income from this investment under the equity method of accounting.
At December 31, 1999, the Company had outstanding promissory notes from
Conseco, Inc. in the principal amount of $250,000,000. During the third quarter
of 2000, the entire principal amount and accrued interest then outstanding on
these notes was repaid. In addition, the Company received $7,500,000 directly
from Conseco, which constituted a prepayment penalty due under the terms of
these notes.
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. At December 31, 2000, no amounts were outstanding under this bank credit
facility.
The Company's insurance operations consist of commercial and personal
property and casualty insurance primarily conducted through Empire Insurance
Company ("Empire"), Allcity Insurance Company ("Allcity") and Centurion
Insurance Company ("Centurion"). The Company's insurance operations have a
diversified investment portfolio of securities, of which 71% are issued or
guaranteed by the U.S. Treasury or by U.S. governmental agencies or are rated
"investment grade" by Moody's Investors Service Inc. ("Moody's") and/or Standard
& Poor's Corporation ("S&P").
The Company's banking and lending operations principally consist of
making instalment loans to niche markets primarily funded by customer banking
deposits insured by the Federal Deposit Insurance Corporation (the "FDIC"). The
Company's principal lending activities consist of providing collateralized
personal automobile loans to individuals with poor credit histories.
The Company's manufacturing operations manufacture and market lightweight
plastic netting used for a variety of purposes including, among other things,
construction, agriculture, packaging, carpet padding, filtration and consumer
products.
The Company's foreign real estate operations are conducted through
Compagnie Fonciere FIDEI ("Fidei"), a French company whose bonds are listed on
the Paris Stock Exchange. The Company's domestic real estate operations consist
of office buildings, residential land development projects and other unimproved
land, all in various stages of development and available for sale.
The Company's winery operations consist of its 90% interest in Pine Ridge
Winery in Napa Valley, California and Archery Summit in the Willamette Valley of
Oregon. These wineries produce and sell super-ultra-premium wines.
The Company's precious metals mining operations consist of its 72.9%
interest in MK Gold Company ("MK Gold").
As used herein, the term "Company" refers to Leucadia National
Corporation, a New York corporation organized in 1968, and its subsidiaries,
except as the context otherwise may require.
2
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company's reportable segments consist of its operating units, which
offer different products and services and are managed separately. These
reportable segments are: property and casualty insurance, banking and lending,
foreign real estate, manufacturing and other operations. Property and casualty
insurance operations have historically provided commercial and personal lines of
insurance in the New York metropolitan area. Banking and lending operations
principally make collateralized personal automobile instalment loans to
individuals who have difficulty obtaining credit, at interest rates above those
charged to individuals with good credit histories. Such loans are primarily
funded by deposits insured by the FDIC. Foreign real estate consists of the
operations of Fidei in France. Manufacturing operations manufacture and market
proprietary plastic netting used for a variety of purposes. Other operations
primarily consist of domestic real estate activities, winery operations and
precious metals mining operations. Associated companies primarily include equity
interests in entities that the Company does not control and that are accounted
for on the equity method of accounting. The information in the following table
for Corporate assets primarily consists of investments, notes receivable from
the sale of certain businesses and cash and cash equivalents. Corporate revenues
listed below primarily consist of investment income and securities gains and
losses on Corporate assets. Corporate assets, revenues, overhead expenses and
interest expense are not allocated to the operating units. In addition to the
Company's foreign real estate operations, the Company has an interest, through
MK Gold, in exploration and mining rights in Spain. The Company does not have
any other material foreign operations and investments.
Certain information concerning the Company's segments for 2000, 1999 and
1998 is presented in the following table.
2000 1999 1998
---- ---- ----
(In millions)
REVENUES:
Property and Casualty Insurance $144.5 $185.3 $299.8
Banking and Lending 108.8 59.0 46.0
Foreign Real Estate 49.2 65.0 11.0
Manufacturing 65.1 64.0 56.6
Other Operations (a) 127.1 238.4 58.9
------ ------ ------
Total revenue for reportable segments 494.7 611.7 472.3
Equity in Associated Companies 29.3 (2.9) 23.3
Corporate (b) 191.5 97.8 34.9
------ ------ ------
Total consolidated revenues $715.5 $706.6 $530.5
====== ====== ======
(continued)
3
2000 1999 1998
---- ---- ----
(In millions)
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES, MINORITY EXPENSE OF TRUST
PREFERRED SECURITIES AND EXTRAORDINARY GAIN (LOSS):
Property and Casualty Insurance $ (59.4) $ (22.4) $ (7.9)
Banking and Lending 11.0 12.7 13.9
Foreign Real Estate 22.9 31.8 1.2
Manufacturing 11.3 11.9 10.1
Other Operations (a) 63.4 198.9 21.6
-------- -------- --------
Total income (loss) from continuing
operations before income taxes, minority
expense of trust preferred securities
and extraordinary gain (loss) for reportable segments 49.2 232.9 38.9
Equity in Associated Companies 29.3 (2.9) 23.3
Corporate (b) 114.8 13.5 (32.8)
-------- -------- ---------
Total consolidated income (loss) from continuing
operations before income taxes, minority expense of
trust preferred securities and extraordinary gain (loss) $ 193.3 $ 243.5 $ 29.4
======== ======== ========
IDENTIFIABLE ASSETS EMPLOYED:
Property and Casualty Insurance $ 643.4 $ 803.9 $ 990.1
Banking and Lending 664.1 467.1 269.3
Foreign Real Estate 254.7 276.7 365.1
Manufacturing 63.4 42.9 41.8
Other Operations 380.1 416.5 308.5
-------- -------- --------
Total assets of reportable segments 2,005.7 2,007.1 1,974.8
Investments in Associated Companies 192.5 74.0 172.4
Net Assets of Discontinued Operations - - 45.0
Corporate 945.4 989.1 1,766.8
-------- -------- --------
Total consolidated assets $3,143.6 $3,070.2 $3,959.0
======== ======== ========
----------
(a) For 1999, includes pre-tax gains on sale of Caja de Ahorro y Seguro S.A.
("Caja"), The Sperry & Hutchinson Company, Inc. and its Russian joint
venture with PepsiCo, Inc. ("PIB"), as described in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
of this Report.
(b) For 2000, includes pre-tax securities gains on sale of FNF and JTP, and for
1998, includes pre-tax securities losses relating to the writedown of
investments in Russian and Polish securities, as described in Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of this Report.
At December 31, 2000, the Company and its consolidated subsidiaries had
1,383 full-time employees.
4
PROPERTY AND CASUALTY INSURANCE
General
The Company's principal property and casualty insurance operations are
conducted through the Empire Group, which consists of Empire, Allcity and
Centurion. During the past several years, the Empire Group has experienced poor
underwriting results and adverse reserve development in all of its lines of
business. The Empire Group has responded to these developments by raising
premium rates and reducing the volume of unprofitable business, while at the
same time attempting to reduce its overhead.
Effective January 1, 2000, all assigned risk policy renewal obligations
were assigned to another insurance company. In 1999, a determination was made
not to accept any applications for new private passenger automobile business
from certain agents with the highest loss ratios. During the fourth quarter of
2000, this determination was extended to include the entire agency force.
Existing policies of private passenger automobile insurance will be either sold,
non-renewed or cancelled in accordance with New York insurance law. If this book
of business is not sold, it is expected that the Empire Group will continue to
issue renewal policies over the next several years as required by applicable
insurance law. The Empire Group also announced that all statutory automobile
policies (public livery vehicles) would be non-renewed effective March 1, 2001
due to poor underwriting results.
On March 1, 2001, the Empire Group announced that, effective immediately,
it would no longer issue any new (as compared to renewal) insurance policies in
any lines of business and that it filed plans of orderly withdrawal with the New
York Insurance Department as required. Existing commercial lines policies will
be 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
(the "Tower Agreement"). Under the Tower Agreement, Tower will buy 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 closing of the transaction is
subject to the approval of the New York Insurance Department.
Certain of the lines of business included in the agreement with Tower
historically had acceptable loss ratios. However, despite repeated attempts, the
Empire Group has not been able to reduce its expenses sufficiently to be
profitable with its reduced volume of business. This has been due in part to
information systems and a personnel infrastructure built to service multiple
lines of property and casualty business, where the costs are more fixed than
variable in nature, and a high cost agency distribution channel. An additional
investment of both capital and management would have been required to attempt to
reduce the Empire Group's cost structure to a level commensurate with its book
of business. In weighing the potential returns against the risks inherent in
that strategy, the Empire Group determined not to make the investment.
The Empire Group is currently exploring its options for the future.
Assuming the Tower Agreement is consummated, the Empire Group will only have
renewal obligations for remaining personal lines insurance (primarily
automobile) not replaced by Tower, the remaining policy term of all existing
policies and a claim run-off operation. The Empire Group may commence new
property and casualty insurance operations if a new business model with an
acceptable expense structure can be developed, enter into a joint venture with
another property and casualty insurance operation, explore entering the claim
services business or commence a liquidation. There may be other options that the
Company will explore, but no assurance can be given at this time as to what the
ultimate plan will be.
5
The Empire Group is rated "B+" (very good) by A.M. Best Company ("Best")
and rated "BB-" (marginal) by S&P. Should the Empire Group decide to commence
new property and casualty insurance operations or enter into an insurance joint
venture, its existing ratings may affect its ability to pursue its plans. As
with all ratings, Best and S&P ratings are subject to change at any time.
For the years ended December 31, 2000, 1999 and 1998, net earned premiums
for the Empire Group were $108,500,000, $145,200,000 and $228,600,000,
respectively. During the year ended December 31, 2000, 4% of net earned premiums
of the Empire Group were derived from assigned risk business, 22% from
commercial automobile lines, 39% from other commercial lines and 35% from
personal lines. Substantially all of the Empire Group's policies are written in
New York for a one-year period. The Empire Group is licensed in New York to
write most lines of insurance that may be written by a property and casualty
insurer. The Empire Group is also licensed to write insurance in Connecticut,
Massachusetts, Missouri, New Hampshire and New Jersey.
On a quarterly basis, the Empire Group reviews and adjusts its estimated
loss reserves for any changes in trends and actual loss experience. Included in
the Empire Group's results for 2000 was $53,000,000 related to losses and loss
adjustment expenses ("LAE") from prior accident years. The Empire Group will
continue to evaluate the adequacy of its loss reserves and record future
adjustments to its loss reserves as appropriate.
Set forth below is certain statistical information for the Empire Group
prepared in accordance with generally accepted accounting principles ("GAAP")
and statutory accounting principles ("SAP"). The Loss Ratio is the ratio of net
incurred losses and loss adjustment expenses to net premiums earned. The Expense
Ratio is the ratio of underwriting expenses (policy acquisition costs,
commissions, and a portion of administrative, general and other expenses
attributable to underwriting operations) to net premiums written, if determined
in accordance with SAP, or to net premiums earned, if determined in accordance
with GAAP. A Combined Ratio below 100% indicates an underwriting profit and a
Combined Ratio above 100% indicates an underwriting loss. The Combined Ratio
does not include the effect of investment income.
Year Ended December 31,
----------------------------------------
2000 1999 1998
---- ---- ----
Loss Ratio:
GAAP 138.8% 98.5% 102.6%
SAP 138.8% 98.5% 102.6%
Industry (SAP) (a) N/A 78.8% 76.5%
Expense Ratio:
GAAP 48.4% 39.9% 26.7%
SAP 50.6% 44.8% 31.4%
Industry (SAP) (a) N/A 29.3% 29.5%
Combined Ratio (b):
GAAP 187.2% 138.4% 129.3%
SAP 189.4% 143.3% 134.0%
Industry (SAP) (a) N/A 108.1% 106.0%
----------
(a) Source: Best's Aggregates & Averages, Property/Casualty, 2000 Edition.
Industry Combined Ratios may not be fully comparable as a result of, among
other things, differences in geographical concentration and in the mix of
property and casualty insurance products.
(b) For 1998, the difference in the accounting treatment for curtailment gains
relating to defined benefit pension plans was the principal reason for the
difference between the GAAP Combined Ratio and the SAP Combined Ratio.
Additionally for all three years, the difference relates to the accounting
for certain costs which are treated differently under SAP and GAAP. For
further information about the Empire Group's Combined Ratios, see Item 7,
6
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of this Report.
Losses and Loss Adjustment Expenses
Liabilities for unpaid losses, which are not discounted (except for
certain workers' compensation liabilities), and LAE are determined using
case-basis evaluations, statistical analyses and estimates for salvage and
subrogation recoverable and represent estimates of the ultimate claim costs of
all unpaid losses and LAE. Liabilities include a provision for losses that have
occurred but have not yet been reported. These estimates are subject to the
effect of trends in future claim severity and frequency experience. Adjustments
to such estimates are made from time to time due to changes in such trends as
well as changes in actual loss experience. These adjustments are reflected in
current earnings.
The Empire Group relies upon standard actuarial ultimate loss projection
techniques to obtain estimates of liabilities for losses and LAE. These
projections include the extrapolation of both losses paid and incurred by
business line and accident year and implicitly consider the impact of inflation
and claims settlement patterns upon ultimate claim costs based upon historical
patterns. In addition, methods based upon average loss costs, reported claim
counts and pure premiums are reviewed in order to obtain a range of estimates
for setting the reserve levels. For further input, changes in operations in
pertinent areas including underwriting standards, product mix, claims management
and legal climate are periodically reviewed.
In the following table, the liability for losses and LAE of the Empire
Group is reconciled for each of the three years ended December 31, 2000.
Included therein are current year data and prior year development.
7
RECONCILIATION OF LIABILITY FOR LOSSES AND
LOSS ADJUSTMENT EXPENSES
2000 1999 1998
---- ---- ----
(In thousands)
Net SAP liability for losses and LAE at
beginning of year $381,550 $469,318 $487,116
-------- -------- --------
Provision for losses and LAE for claims
occurring in the current year 97,089 124,172 191,482
Increase in estimated losses and LAE for
claims occurring in prior years 52,977 18,255 42,290
-------- -------- --------
Total incurred losses and LAE 150,066 142,427 233,772
-------- -------- --------
Losses and LAE payments for claims occurring during:
Current year 31,023 41,955 64,739
Prior years 177,607 188,240 186,831
-------- -------- --------
208,630 230,195 251,570
-------- -------- --------
Net SAP liability for losses and LAE
at end of year 322,986 381,550 469,318
Reinsurance recoverable 42,972 61,492 72,956
-------- -------- --------
Liability for losses and LAE at end of year as reported in
financial statements (GAAP) $365,958 $443,042 $542,274
======== ======== ========
The following table presents the development of balance sheet liabilities
from 1990 through 2000 for the Empire Group. The liability line at the top of
the table indicates the estimated liability for unpaid losses and LAE recorded
as of the dates indicated. The middle section of the table shows the
re-estimated amount of the previously recorded liability based on experience as
of the end of each succeeding year. As more information becomes available and
claims are settled, the estimated liabilities are adjusted upward or downward
with the effect of decreasing or increasing net income at the time of
adjustment. The lower section of the table shows the cumulative amount paid with
respect to the previously recorded liability as of the end of each succeeding
year.
The "cumulative deficiency" represents the aggregate change in the
estimates over all prior years. For example, the initial 1990 liability estimate
indicated on the table of $251,401,000 has been re-estimated during the course
of the succeeding ten years, resulting in a re-estimated liability at December
31, 2000 of $282,476,000 or a deficiency of $31,075,000. If the re-estimated
liability were less than the liability initially established, a cumulative
redundancy would be indicated.
In evaluating this information, it should be noted that each amount shown
for "cumulative deficiency" includes the effects of all changes in amounts for
prior periods. For example, the amount of the deficiency related to losses
settled in 1994, but incurred in 1990, will be included in the cumulative
deficiency amount for 1990, 1991, 1992 and 1993. This table is not intended to
and does not present accident or policy year loss and LAE development data.
Conditions and trends that have affected development of the liability in the
past may not necessarily occur in the future. Accordingly, it would not be
appropriate to extrapolate future redundancies or deficiencies based on this
table.
For further discussion of the Empire Group's loss development experience,
see Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" of this Report.
8
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT
Year Ended December 31,
------------------------------------------------------------------------------
1990 1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ---- ----
(In thousands)
Liability for
Unpaid
Losses and Loss
Adjustment
Expenses $ 251,401 $ 280,679 $ 322,516 $ 353,917 $ 406,695 $ 476,692 $ 481,138
Liability
Re-estimated
as of:
One Year Later $ 249,492 $ 280,020 $ 321,954 $ 344,156 $ 441,165 $ 504,875 $ 508,165
Two Years Later 245,141 277,866 324,262 374,158 467,659 537,372 546,724
Three Years Later 243,849 284,052 345,576 394,418 500,286 577,266 599,015
Four Years Later 247,314 296,484 361,903 415,251 534,014 609,425 617,755
Five Years Later 255,045 306,094 377,097 442,696 556,072 613,371
Six Years Later 260,031 316,887 395,291 459,573 555,215
Seven Years Later 265,525 330,866 406,188 458,872
Eight Years Later 277,626 337,660 405,068
Nine Years Later 281,995 336,883
Ten Years Later 282,476
Cumulative
Deficiency $ (31,075) $(56,204) $(82,552) $(104,955) $(148,520) $(136,679) $(136,617)
========= ======== ======= ========= ========= ========= =========
Cumulative Amount
of Liability
Paid Through:
One Year Later $ 78,954 $ 89,559 $ 113,226 $ 116,986 $ 152,904 $ 202,334 $ 189,308
Two Years Later 126,908 150,043 182,250 199,214 270,020 318,693 314,755
Three Years Later 167,330 197,848 239,092 272,513 353,649 407,833 410,631
Four Years Later 196,099 233,244 285,880 326,637 415,919 472,384 490,591
Five Years Later 216,749 259,946 320,044 363,873 456,410 521,689
Six Years Later 231,892 279,682 341,636 390,027 488,197
Seven Years Later 242,275 293,860 357,735 410,323
Eight Years Later 253,104 304,610 370,559
Nine Years Later 260,340 312,924
Ten Years Later 266,193
Net Liability -
End of Year $ 353,917 $ 406,695 $ 476,692 $ 481,138
Reinsurance 37,912 44,747 40,730 51,181
--------- --------- ---------- ---------
Gross Liability -
End of Year $ 391,829 $ 451,442 $ 517,422 $ 532,319
========= ========= ========= =========
Net Re-estimated
Liability - Latest $ 458,872 $ 555,215 $ 613,371 $ 617,755
Re-estimated
Reinsurance - Latest 71,030 72,657 71,479 77,151
--------- --------- --------- ---------
Gross Re-estimated
Liability - Latest $ 529,902 $ 627,872 $ 684,850 $ 694,906
========= ========= ========= =========
Gross Cumulative
Deficiency $(138,073) $(176,430) $(167,428) $(162,587)
========= ========= ========= =========
Table continued....
Year Ended December 31,
---------------------------------------------------------
1997 1998 1999 2000
---- ---- ---- ----
(In thousands)
Liability for
Unpaid
Losses and Loss
Adjustment
Expenses $ 487,116 $ 469,318 $ 381,550 $ 322,986
Liability
Re-estimated
as of:
One Year Later $ 529,406 $ 487,573 $ 434,527 $ -
Two Years Later 546,643 544,219
Three Years Later 591,078
Four Years Later
Five Years Later
Six Years Later
Seven Years Later
Eight Years Later
Nine Years Later
Ten Years Later
Cumulative
Deficiency $(103,962) $ (74,901) $ (52,977) $ -
========= ========= ========= =========
Cumulative Amount
of Liability
Paid Through:
One Year Later $ 186,831 $ 188,240 $ 177,607 $ -
Two Years Later 313,040 327,322
Three Years Later 422,053
Four Years Later
Five Years Later
Six Years Later
Seven Years Later
Eight Years Later
Nine Years Later
Ten Years Later
Net Liability -
End of Year $ 487,116 $ 469,318 $ 381,550 $ 322,986
Reinsurance 58,592 72,956 61,492 42,972
--------- --------- --------- ---------
Gross Liability -
End of Year $ 545,708 $ 542,274 $ 443,042 $ 365,958
========= ========= ========= =========
Net Re-estimated
Liability - Latest $ 591,078 $ 544,219 $ 434,527
Re-estimated
Reinsurance - Latest 63,269 78,954 58,916
--------- --------- ---------
Gross Re-estimated
Liability - Latest $ 654,347 $ 623,173 $ 493,443
========= ========= =========
Gross Cumulative
Deficiency $(108,639) $ (80,899) $ (50,401)
========= ========= =========
9
Investments
Investment activities represent a significant part of the Company's
insurance related revenues and profitability. Investments are managed by the
Company's investment advisors under the direction of, and upon consultation
with, the Company's investment committees.
The Company's insurance subsidiaries have a diversified investment
portfolio of securities, a substantial portion of which is rated "investment
grade" by Moody's and/or S&P or issued or guaranteed by the U.S. Treasury or by
governmental agencies. The Company's insurance subsidiaries do not generally
invest in less than "investment grade" or "non-rated" securities, real estate or
mortgages, although from time to time they may make such investments.
The composition of the Company's insurance subsidiaries' investment
portfolio as of December 31, 2000 and 1999 was as follows:
2000 1999
---- ----
(Dollars in thousands)
Bonds and notes:
U.S. Government and agencies 44% 60%
Rated investment grade 27 15
Non rated - other - 2
Rated less than investment grade 5 3
Equity securities, primarily preferred 15 15
Other 9 5
----- -----
Total 100% 100%
===== =====
Estimated average yield to maturity
of bonds and notes (a) 6.6% 6.8%
Estimated average remaining life
of bonds and notes (a) 2.4 yrs. 2.7 yrs.
Carrying value of investment portfolio $421,114 $584,906
Market value of investment portfolio $421,252 $584,788
----------
(a) Excludes trading securities, which are not significant.
Reinsurance
The Empire Group's maximum retained limit for all lines of business was
$300,000 for 2000 and 1999. The Empire Group's maximum retained limit for 1998
was $500,000 for workers' compensation and $300,000 for other property and
casualty lines. Additionally, the Empire Group has entered into a property
catastrophe excess of loss treaty to protect against certain losses. The Empire
Group's retention of lower level losses in this treaty is $7,500,000 for 2001
and was $7,500,000 for 2000, 1999 and 1998.
Although reinsurance does not legally discharge an insurer from its
primary liability for the full amount of the policy liability, it does make the
assuming reinsurer liable to the insurer to the extent of the reinsurance ceded.
The Company's reinsurance generally has been placed with certain of the largest
reinsurance companies, including (with their respective Best ratings) General
Reinsurance Corporation
10
(A++) and Zurich Reinsurance (NA), Inc. (A+). The Company believes its
reinsurers to be financially capable of meeting their respective obligations.
However, to the extent that any reinsuring company is unable to meet its
obligations, the Company's insurance subsidiaries would be liable for the
reinsured risks. The Company has established reserves, which the Company
believes are adequate, for any nonrecoverable reinsurance.
Competition
The insurance industry is a highly competitive industry, in which many of
the Company's competitors have substantially greater financial resources, larger
sales forces, more widespread agency and broker relationships, endorsements from
affinity groups and more diversified lines of insurance coverage. Additionally,
federal administrative, legislative and judicial activity has resulted in
changes to federal banking laws that increase the ability of national banks to
offer insurance products.
The Company believes that property and casualty insurers generally
compete on the basis of price, customer service, consumer recognition, product
design, product mix and financial stability. The industry has historically been
cyclical in nature, with periods of less intense price competition generating
significant profits, followed by periods of increased price competition
resulting in reduced profitability or loss. The current cycle of intense price
competition has continued for a longer period than in the past, suggesting that
the significant infusion of capital into the industry in recent years, coupled
with larger investment returns has been, and may continue to be, a depressing
influence on policy rates. The profitability of the property and casualty
insurance industry is affected by many factors, including rate competition,
severity and frequency of claims (including catastrophe losses), interest rates,
state regulation, court decisions and judicial climate, all of which are outside
the Company's control.
Government Regulation
Insurance companies are subject to detailed regulation and supervision in
the states in which they transact business. Such regulation pertains to matters
such as approving policy forms and various premium rates, minimum reserves and
loss ratio requirements, the type and amount of investments, minimum capital and
surplus requirements, granting and revoking licenses to transact business,
levels of operations and regulating trade practices. Insurance companies are
required to file detailed annual reports with the supervisory agencies in each
of the states in which they do business, and are subject to examination by such
agencies at any time. Increased regulation of insurance companies at the state
level and new regulation at the federal level is possible, although the Company
cannot predict the nature or extent of any such regulation or what impact it
would have on the Company's operations.
The National Association of Insurance Commissioners ("NAIC") has adopted
model laws incorporating the concept of a "risk based capital" ("RBC")
requirement for insurance companies. Generally, the RBC formula is designed to
measure the adequacy of an insurer's statutory capital in relation to the risks
inherent in its business. The RBC formula is used by the states as an early
warning tool to identify weakly capitalized companies for the purpose of
initiating regulatory action. Although New York State has not adopted the RBC
requirements for property and casualty insurance companies, New York does
require that property and casualty insurers file the RBC information with the
New York Department of Insurance. The NAIC also has adopted various ratios for
insurance companies which, in addition to the RBC ratio, are designed to serve
as a tool to assist state regulators in screening and analyzing the financial
condition of insurance companies operating in their respective states. The
Company's insurance operations had certain NAIC ratios outside of the acceptable
range of results for the year ended December 31, 2000. Although no assurance can
be given, the Company believes that it is unlikely that material adverse
regulatory action will be taken.
The Company's insurance subsidiaries are members of state insurance funds
which provide certain protection to policyholders of insolvent insurers doing
business in those states. Due to insolvencies of certain insurers, the Company's
insurance subsidiaries have been assessed certain amounts which have not been
material and are likely to be assessed additional amounts by state insurance
funds. The Company believes that it has provided for all anticipated assessments
11
and that any additional assessments will not have a material adverse effect on
the Company's financial condition or results of operations.
BANKING AND LENDING
The Company's banking and lending operations principally are conducted
through American Investment Bank, N.A. ("AIB"), a national bank subsidiary, and
American Investment Financial ("AIF"), an industrial loan corporation. AIB and
AIF take money market and other non-demand deposits that are eligible for
insurance provided by the FDIC. AIB and AIF had deposits of $526,200,000 and
$329,300,000 at December 31, 2000 and 1999, respectively. AIB and AIF currently
have several deposit-taking and lending facilities in the Salt Lake City area,
which have generated approximately one-half of their deposit balances. The
remainder of the Company's deposits were generated by various brokers. Deposits
are primarily used to fund consumer instalment loans.
The Company's consolidated banking and lending operations had outstanding
loans (net of unearned finance charges) of $515,800,000 and $339,800,000 at
December 31, 2000 and 1999, respectively. At December 31, 2000, 80% were loans
to individuals generally collateralized by automobiles; 16% were loans to
consumers, substantially all of which were collateralized by real or personal
property; 1% were unsecured loans to executives and professionals, generally
with good credit histories; and 3% were loans to small businesses.
Collateralized personal automobile instalment loans are primarily made
through automobile dealerships to individuals who have difficulty obtaining
credit, at interest rates above those charged to individuals with good credit
histories. These loans are made to consumers principally to purchase used,
moderately priced automobiles. In 2000, the average initial loan balance was
$12,150 and provided the Company with a yield of 21.4%. The contractual maturity
for automobile loans originated in 2000 was 58 months, with an anticipated
average life of 26 months. The Company currently generates automobile loans in
31 states through non-exclusive relationships with dealers, with no individual
state or dealership representing a significant portion of the Company's loan
volume. In determining which individuals qualify for these loans, the Company
takes into account a number of highly selective criteria with respect to the
individual, as well as the collateral, to attempt to minimize the number of
defaults. The Company closely monitors these loans and takes prompt possession
of the collateral in the event of a default. For the three year period ended
December 31, 2000, the Company generated $489,300,000 of these loans
($271,900,000 during 2000). Such amounts exclude purchased portfolios of
$1,000,000 in 2000, $67,900,000 in 1999 and $36,900,000 in 1998. The Company
intends to continue to acquire additional portfolios of loans that meet the
Company's underwriting standards if they can be purchased on attractive terms.
Such purchases would enable the Company to spread its existing infrastructure
and overhead costs over a larger asset base.
It is the Company's policy to charge to income an allowance for losses
which, based upon management's analysis of numerous factors, including current
economic trends, aging of the loan portfolio and historical loss experience, is
deemed adequate to cover reasonably expected losses on outstanding loans. At
December 31, 2000, the allowance for loan losses for the Company's entire loan
portfolio was $27,400,000 or 5.3% of the net outstanding loans, compared to
$17,000,000 or 5.0% of net outstanding loans at December 31, 1999.
The Company's policy is to charge-off an account when the automobile
securing the delinquent loan is repossessed, which generally occurs when the
loan is 60 days delinquent. Otherwise, the Company charges off the account due
to the customer's bankruptcy and in no event later than the month in which it
becomes 120 days delinquent. The charge-off represents the difference between
the net realizable value of the automobile and the amount of the delinquent
loan, including accrued interest. During 2000, and particularly in the latter
half of the year, the Company experienced an increase in loan losses. This
increase primarily is attributable to the subprime automobile portfolio
purchased in 1999 from Tranex Credit Corp. ("Tranex"), for which the actual
collection experience was less than expected, a larger amount of loans
outstanding, including the Tranex purchased portfolio, that are reaching the age
of peak losses, generally twelve to eighteen months after origination, and an
increase in loan originations. In addition, the Company believes that a weaker
economy has contributed to its loan losses. In an effort to reduce losses, the
12
Company plans to exit certain states and dealer relationships with historically
higher losses. Because these actions will reduce the volume of new loans
generated, the Company has closed its underwriting activities in Indianapolis
and consolidated underwriting in Salt Lake City.
The Company's banking and lending operations compete with banks, savings
and loan associations, credit unions, credit card issuers and consumer finance
companies, many of which are able to offer financial services on very
competitive terms. Additionally, substantial national financial services
networks have been formed by major brokerage firms, insurance companies,
retailers and bank holding companies. Some competitors have substantial local
market positions; others are part of large, diversified organizations.
The Company's principal banking and lending operations are subject to
detailed supervision by state authorities, as well as federal regulation
pursuant to the Federal Consumer Credit Protection Act, the Truth in Lending
Act, the Equal Credit Opportunity Act, the Right to Financial Privacy Act, the
Community Reinvestment Act, the Fair Credit Reporting Act and regulations
promulgated by the Federal Trade Commission. The Company's banking operations
are subject to federal and state regulation and supervision by, among others,
the Office of the Comptroller of the Currency (the "OCC"), the FDIC and the
State of Utah. AIB's primary federal regulator is the OCC, while the primary
federal regulator for AIF is the FDIC.
The Competitive Equality Banking Act of 1987 ("CEBA") places certain
restrictions on the operations of AIB and restricts further acquisitions of
banks and savings institutions by the Company. CEBA does not restrict AIF as
currently operated.
FOREIGN REAL ESTATE
Through its French subsidiary, Fidei, the Company owns foreign commercial
real estate properties with a book value of $43,600,000 at December 31, 2000.
After considering Fidei's other assets and non-recourse liabilities, the
Company's net investment in this segment was $46,000,000 at December 31, 2000.
During 2000, Fidei sold 38 properties resulting in pre-tax gains of $27,100,000;
at December 31, 2000, a total of 53 properties aggregating approximately
1,300,000 square feet remain. The Company expects to complete the sale of
Fidei's real estate holdings by the end of 2001. The Company currently is
seeking new investments for Fidei or, in the alternative, may sell Fidei.
MANUFACTURING
Through its plastics division, the Company manufactures and markets
proprietary lightweight plastic netting used for a variety of purposes
including, among other things, construction, agriculture, packaging, carpet
padding, filtration and consumer products. The plastics division is a market
leader in netting products used in carpet cushion, turf reinforcement, erosion
control, nonwoven reinforcement and crop protection. The plastics division
markets its products both domestically and internationally, with approximately
15% of its 2000 sales exported to Europe, Latin America, Japan and Australia.
New product development focuses on niches where the division's proprietary
technology and expertise can lead to sustainable competitive economic
advantages. For the years ended December 31, 2000, 1999 and 1998, the plastics
division's revenues were $65,000,000, $64,000,000 and $56,600,000, respectively.
In order to meet existing and projected product demand, the plastics
division is constructing a manufacturing facility in Belgium, which is expected
to be operational in the third quarter of 2001. The Belgium facility will
service customers in the European and Asian markets, which are currently being
supplied by the Company's domestic manufacturing facilities. The Company expects
that the Belgium facility and equipment will require a capital investment of
approximately $18,500,000. When fully operational, the facility is expected to
increase the division's capacity by approximately 20%.
During 1999, when the Company decided to construct the Belgium facility,
and through the first half of 2000, the plastics division operated near
capacity. During the second half of 2000, the plastics division began to
13
experience a slowdown in business and currently has excess capacity. The Belgium
facility will allow the plastics division to service new customers as well as
provide improved service to existing customers in Europe and Asia. In addition,
the available manufacturing capacity will provide adequate machine time for
product development as well as servicing seasonal peaks. However, the ability to
fully utilize the Belgium facility will depend upon developing new products as
well as expanding sales geographically.
The plastics division is subject to domestic and international
competition, generally on the basis of price, service and quality. Additionally,
certain products are dependent on cyclical industries, including the
construction industry. The Company holds patents on certain improvements to the
basic manufacturing processes and on applications thereof. The Company believes
that the expiration of these patents, individually or in the aggregate, is
unlikely to have a material effect on the plastics division.
OTHER OPERATIONS
The Company has a 90% interest in two wineries, Pine Ridge Winery in Napa
Valley, California and Archery Summit in the Willamette Valley of Oregon. Pine
Ridge, which was acquired in 1991, has been conducting operations since 1981,
while Archery Summit was started by the Company in 1993. These wineries produce
and sell super-ultra-premium wines. During 2000, the wineries sold approximately
79,300 9-liter equivalent cases of wine generating revenues of $15,300,000.
Since acquisition, the Company's investment in winery operations has grown,
principally to fund the Company's acquisition of land for vineyard development
and to increase production capacity and storage facilities at both of the
wineries. It can take up to five years for a new vineyard property to reach full
production and, depending upon the varietal produced, up to an additional two
years before the wine can be sold. The Company expects all of its vineyards will
be in substantially full production for the 2001 harvest, and with normal
farming yields should result in total production of approximately 100,000
9-liter equivalent cases of wine. At December 31, 2000, the Company's combined
investment in these wineries was $54,300,000. During 2000, in response to
certain inquiries, the Company engaged an investment banker to consider possible
offers for the purchase of the wineries. While the Company received many
expressions of interest and some offers to purchase the wineries, the Company
has determined that the prices offered were not adequate and it does not intend
to sell the wineries at this time.
At December 31, 2000, the Company's domestic real estate investments had
a book value of $166,500,000. Such real estate consists of office buildings,
residential land development projects and other unimproved land, all in various
stages of development and available for sale. The Company's largest domestic
real estate investment is a project located in San Diego County, California that
will be a master-planned community of approximately 3,400 homes and apartments
as well as commercial properties expected to be completed over the next nine
years. The Company expects to earn a preferred return of 15% on its investment
in this project (approximately $59,000,000 remains to be paid as of December 31,
2000); any amounts generated above this preferred return will primarily benefit
the project's development manager, HomeFed Corporation, a Delaware corporation
("HomeFed") that was distributed to the Company's shareholders in 1999. Also
included in the Company's domestic real estate is an investment in three
shopping centers on Long Island, New York, one shopping center in upstate New
York, and one shopping center in Louisiana. During 2000, the Company foreclosed
on all of the New York properties and recognized a pre-tax gain of $10,700,000;
the Company is in the process of foreclosing on the property in Louisiana.
During 2000, the Company received proceeds of $94,300,000 from an office complex
located on Capital Hill in Washington, D.C. Such amount was funded by a
non-recourse loan from a third-party lender and, when combined with amounts
previously received from the property, fully repaid the Company's investment
plus a 17-1/2% preferred return.
The Company has a 72.9% interest in MK Gold, a company that is traded on
the NASD OTC Bulletin Board. MK Gold owns Cobre Las Cruces, S.A., a Spanish
company that holds the exploration and mining rights to the Las Cruces copper
deposit in the Pyrite Belt of Spain. A feasibility study indicates the existence
of proven and probable reserves of 15.8 million metric tonnes grading 5.94%
copper that are overlain by a gold-bearing gossan (which has not been evaluated)
and by 150 meters of unconsolidated overburden. This reserve calculation was
based upon the analysis of 280 drill holes totaling over 82,000 meters. This
14
feasibility study estimates the capital cost will be approximately $290,000,000
to bring the mine into production. Mining will be subject to permitting
(currently underway), obtaining both debt and equity financing for the project,
engineering and construction. A mining concession application, accompanied by
the feasibility study and environmental impact studies, was submitted to the
applicable Spanish and Andalusian governmental agencies during the first quarter
of 2001.
OTHER INVESTMENTS
The Company owns equity interests representing more than 5% of the
outstanding capital stock of each of the following domestic public companies at
March 19, 2001: GFSI Holdings, Inc. ("GFSI") (6.4%), Jordan Industries, Inc.
("JII") (10.1%) and PhoneTel Technologies, Inc. (7.1%).
A subsidiary of the Company is an owner in The Jordan Company LLC and
Jordan/Zalaznick Capital Company. These entities each specialize in structuring
leveraged buyouts in which the owners are given the opportunity to become equity
participants. Since 1982, the Company has invested an aggregate of $91,100,000
in these entities and related companies and, through December 31, 2000, has
received $149,000,000 relating to the disposition of investments and management
and other fees. At December 31, 2000, through these entities, the Company had
interests in JII, GFSI, JZ Equity Partners PLC (a British company traded on the
London Stock Exchange in which the Company holds a 6.5% equity interest) and a
total of 41 other companies. These investments are carried in the Company's
consolidated financial statements at $59,200,000, of which $52,400,000 relates
to public companies carried at market value. In January 2000, the Company sold
its 10% equity interest in one of these entities, JTP, for proceeds of
$27,300,000.
For further information about the Company's business, including the
Company's investment in JPOF II, reference is made to Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of
this Report and Notes to Consolidated Financial Statements.
Item 2. Properties.
------ ----------
Through its various subsidiaries, the Company owns and utilizes in its
operations offices in Salt Lake City, Utah used for corporate and banking and
lending activities (totaling approximately 80,200 sq. ft.). Subsidiaries of the
Company own a facility (totaling approximately 158,500 sq. ft.) primarily used
for manufacturing located in Georgia and facilities and land in California and
Oregon (totaling approximately 107,100 square feet and 390 acres, respectively)
used for winery operations.
The Company and its subsidiaries lease numerous manufacturing,
warehousing, office and headquarters facilities. The facilities vary in size and
have leases expiring at various times, subject, in certain instances, to renewal
options. See Notes to Consolidated Financial Statements.
Item 3. Legal Proceedings.
------ -----------------
The Company and its subsidiaries are parties to legal proceedings that
are considered to be either ordinary, routine litigation incidental to their
business or not material to the Company's consolidated financial position.
The Company does not believe that any of the foregoing actions will have
a material adverse effect on its consolidated financial position or consolidated
results of operations.
15
Item 10. Executive Officers of the Registrant.
------- ------------------------------------
All executive officers of the Company are elected at the organizational
meeting of the Board of Directors of the Company held annually and serve at the
pleasure of the Board of Directors. As of March 19, 2001, the executive officers
of the Company, their ages, the positions held by them and the periods during
which they have served in such positions were as follows:
NAME AGE POSITION WITH LEUCADIA OFFICE HELD SINCE
---- --- ---------------------- -----------------
Ian M. Cumming 60 Chairman of the Board June 1978
Joseph S. Steinberg 57 President January 1979
Thomas E. Mara 55 Executive Vice President May 1980;
and Treasurer January 1993
Joseph A. Orlando 45 Vice President and January 1994;
Chief Financial Officer April 1996
Barbara L. Lowenthal 46 Vice President and April 1996
Comptroller
Mark Hornstein 53 Vice President July 1983
H.E. Scruggs 44 Vice President March 2000
Mr. Cumming has served as a director and Chairman of the Board of the
Company since June 1978. In addition, he has served as a director of Allcity
since February 1988 and MK Gold since June 1995. Mr. Cumming has also been a
director of Skywest, Inc., a Utah-based regional air carrier, since June 1986
and a director of HomeFed, a California real estate developer, since May 1999.
Mr. Steinberg has served as a director of the Company since December 1978
and as President of the Company since January 1979. In addition, he has served
as a director of Allcity since February 1988, as a director of MK Gold since
June 1995, as a director of JII since June 1988 and as a director of HomeFed
since August 1998.
Mr. Mara joined the Company in April 1977 and was elected Vice President
of the Company in May 1977. He has served as Executive Vice President of the
Company since May 1980 and as Treasurer of the Company since January 1993. In
addition, he has served as a director of Allcity since October 1994.
Mr. Orlando, a certified public accountant, has served as Chief Financial
Officer of the Company since April 1996 and as Vice President of the Company
since January 1994. Mr. Orlando previously served in a variety of capacities
with the Company and its subsidiaries since 1987, including Comptroller of the
Company from March 1994 to April 1996. In addition, he served as a director of
Allcity since October 1998.
Ms. Lowenthal, a certified public accountant, has served as Vice
President and Comptroller of the Company since April 1996. For the prior four
years, Ms. Lowenthal served as Director of Policies, Systems and Procedures and
Assistant Controller of W.R. Grace & Co., a specialty chemicals company.
Mr. Hornstein joined the Company as Vice President in July 1983 and has
served in a variety of other capacities with the Company and its subsidiaries.
Mr. Scruggs joined the Company in 1995 and became Vice President in March
2000. Since 1997, Mr. Scruggs has been Chairman of AIB and, since September
2000, Chairman and President of the Empire Group. Mr. Scruggs has served as a
director of MK Gold since March 2001 and has been a member of the faculty of
Brigham Young University since 1991.
16
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
------ ---------------------------------------------------------------------
(a) Market Information.
------------------
The Common Shares of the Company are traded on the New York Stock
Exchange and Pacific Stock Exchange under the symbol LUK. The following table
sets forth, for the calendar periods indicated, the high and low sales price per
Common Share on the consolidated transaction reporting system, as reported by
the Bloomberg Professional Service provided by Bloomberg L.P.
COMMON SHARE
------------
HIGH LOW
---- ---
1999
----
First Quarter $19.22 $17.14
Second Quarter 23.58 17.11
Third Quarter 23.22 19.28
Fourth Quarter 23.38 19.39
2000
----
First Quarter $24.19 $20.63
Second Quarter 26.75 22.13
Third Quarter 28.13 23.06
Fourth Quarter 37.50 23.06
2001
----
First Quarter (through March 19, 2001) $35.70 $30.63
(b) Holders.
-------
As of March 19, 2001, there were approximately 3,309 record holders of
the Common Shares.
(c) Dividends.
---------
In 2000, the Company paid cash dividends of $13,800,000 ($.25 per Common
Share). In 1999, the Company paid the Dividend of $811,900,000 ($13.58 per
Common Share). The payment of dividends in the future is subject to the
discretion of the Board of Directors and will depend upon general business
conditions, legal and contractual restrictions on the payment of dividends and
other factors that the Board of Directors may deem to be relevant.
In connection with the declaration of dividends or the making of
distributions on, or the purchase, redemption or other acquisition of Common
Shares, the Company is required to comply with certain restrictions contained in
certain of its debt instruments. The Company's regulated subsidiaries are
restricted in the amount of distributions that can be made to the Company
without regulatory approval. For further information see Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in this Report.
17
Item 6. Selected Financial Data.
------ -----------------------
The following selected financial data have been summarized from the
Company's consolidated financial statements and are qualified in their entirety
by reference to, and should be read in conjunction with, such consolidated
financial statements and Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of this Report.
Year Ended December 31,
-----------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In thousands, except per share amounts)
SELECTED INCOME STATEMENT DATA:
Revenues $715,487 $706,632 $530,506 $630,737 $670,443
Net securities gains (losses) 123,225 10,885 (60,871) 3,249 24,117
Interest expense (a) 57,713 50,665 45,139 46,007 53,599
Insurance losses, policy benefits and
amortization of deferred acquisition costs 176,355 174,132 279,110 327,468 355,148
Income (loss) from continuing operations before
income taxes, minority expense of trust
preferred securities and extraordinary gain
(loss) 193,302 243,471 29,377 (24,238) (48,187)
Income (loss) from continuing operations before
minority expense of trust preferred securities
and extraordinary gain (loss) 120,546 198,950 54,450 (14,347) (28,861)
Minority expense of trust preferred securities,
net of taxes (5,521) (5,521) (8,248) (7,942) -
Income (loss) from continuing operations before
extraordinary gain (loss) 115,025 193,429 46,202 (22,289) (28,861)
Income from discontinued operations, including
gain on sale, net of taxes - 24,201 8,141 686,161 84,376
Extraordinary gain (loss) from early
extinguishment of debt, net of taxes 983 (2,588) - (2,057) (6,838)
Net income 116,008 215,042 54,343 661,815 48,677
Per share:
Basic earnings (loss) per common share:
Income (loss) from continuing operations
before extraordinary gain (loss) $2.07 $3.26 $.73 $ (.36) $(.48)
Income from discontinued operations,
including gain on sale - .40 .13 11.03 1.40
Extraordinary gain (loss) .02 (.04) - (.03) (.11)
----- ----- ---- ------ -----
Net income $2.09 $3.62 $.86 $10.64 $ .81
===== ===== ==== ====== =====
Diluted earnings (loss) per common share:
Income (loss) from continuing operations
before extraordinary gain (loss) $2.07 $3.26 $.73 $ (.36) $(.48)
Income from discontinued operations,
including gain on sale - .40 .13 11.03 1.40
Extraordinary gain (loss) .02 (.04) - (.03) (.11)
----- ----- ---- ------ -----
Net income $2.09 $3.62 $.86 $10.64 $ .81
===== ===== ==== ====== =====
(continued)
18
At December 31,
-------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In thousands, except per share amounts)
SELECTED BALANCE SHEET DATA:
Cash and investments $1,612,576 $1,466,551 $2,229,895 $2,453,555 $1,246,220
Total assets 3,143,637 3,070,227 3,958,951 3,745,336 2,776,591
Debt, including current maturities 374,523 483,309 722,601 352,872 520,263
Customer banking deposits 526,172 329,301 189,782 198,582 209,261
Common shareholders' equity 1,204,241 1,121,988 1,853,159 1,863,531 1,118,107
Book value per common share $21.78 $19.75 $29.90 $29.17 $18.51
Cash dividends per common share $.25 $13.58 $- $.25 $.25
Year Ended December 31,
-------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
SELECTED INFORMATION ON PROPERTY AND CASUALTY
INSURANCE OPERATIONS (Unaudited): (b)
GAAP Combined Ratio 187.2% 138.4% 129.3% 118.5% 114.7%
SAP Combined Ratio 189.4% 143.3% 134.0% 117.8% 107.9%
Industry SAP Combined Ratio (c) N/A 108.1% 106.0% 101.6% 105.8%
Premium to Surplus Ratio (d) 1.3x 0.8x 1.2x 1.4x 1.8x
----------
(a) Includes interest on customer banking deposits.
(b) The Combined Ratio does not reflect the effect of investment income.
For 1998, the difference in the accounting treatment for curtailment
gains relating to the defined benefit pension plans was the principal
reason for the difference between the GAAP Combined Ratio and the SAP
Combined Ratio. For 1996, a change in the statutory accounting
treatment for retrospectively rated reinsurance agreements was the
principal reason for the difference between the GAAP Combined Ratio and
the SAP Combined Ratio. Additionally, for all years presented, the
difference relates to the accounting for certain costs which are
treated differently under SAP and GAAP.
(c) Source: Best's Aggregates & Averages, Property/Casualty, 2000 Edition.
Industry Combined Ratios may not be fully comparable as a result of,
among other things, differences in geographical concentration and in
the mix of property and casualty insurance products.
(d) Premium to Surplus Ratio was calculated by dividing statutory property
and casualty insurance premiums written by statutory capital at the end
of the year.
19
Item 7. Management's Discussion and Analysis of Financial Condition and
------- ---------------------------------------------------------------
Results of Operations.
----------------------
The purpose of this section is to discuss and analyze the Company's
consolidated financial condition, liquidity and capital resources and results of
operations. This analysis should be read in conjunction with the consolidated
financial statements and related notes which appear elsewhere in this Report.
LIQUIDITY AND CAPITAL RESOURCES
Parent Company Liquidity
Leucadia National Corporation (the "Parent") is a holding company whose
assets principally consist of the stock of its several direct subsidiaries, cash
and other liquid investments. The Parent continuously evaluates the retention
and disposition of its existing operations and investigates possible
acquisitions of new businesses in order to maximize shareholder value.
Accordingly, while the Parent does not have any material arrangement, commitment
or understanding with respect thereto (except as disclosed in this Report),
further acquisitions, divestitures, investments and changes in capital structure
are possible. Its principal sources of funds are its available cash resources,
bank borrowings, public and private capital market transactions, repayment of
subsidiary advances, funds distributed from its subsidiaries as tax sharing
payments, management and other fees, and borrowings and dividends from its
regulated and non-regulated subsidiaries. It has no substantial recurring cash
requirements other than payment of interest and principal on its debt, tax
payments and corporate overhead expenses. As of December 31, 2000, the Company's
readily available cash, cash equivalents and marketable securities, excluding
those amounts held by its regulated subsidiaries, totaled $643,400,000.
Additional sources of liquidity as of December 31, 2000 include $156,800,000 of
marketable securities collateralizing letters of credit and $183,100,000 of
cash, cash equivalents and marketable securities held by Fidei.
Primarily during 2000, the Company invested an aggregate of $89,000,000
in the common stock of FNF, a publicly traded title insurance holding company.
The Company sold its investment in FNF common stock for $179,900,000, resulting
in a pre-tax gain of $90,900,000 in 2000.
In January 2000, the Company sold its 10% equity interest in JTP for
$27,300,000, and recorded a pre-tax gain of $24,800,000. Further consideration
of approximately $7,500,000 may be received in the future upon the favorable
resolution of certain contingencies.
At December 31, 1999, the Company had outstanding promissory notes of
Conseco, Inc. in the principal amount of $250,000,000. During the third quarter
of 2000, the entire principal amount and accrued interest then outstanding on
these notes was repaid. In addition, the Company received $7,500,000 directly
from Conseco which constituted a prepayment penalty due under the terms of these
notes.
Except for the Euro denominated debt of Fidei, which is non-recourse to
the Company, the Parent maintains the principal borrowings for the Company and
its non-banking subsidiaries and has provided working capital to certain of its
subsidiaries. These borrowings have primarily been made from banks through the
Company's credit agreement facility and through public financings.
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 December 31, 2000, no amounts were outstanding under this bank
credit facility.
During 2000, the Company invested $100,000,000 in the equity of JPOF II,
a limited liability company that is a registered broker-dealer. JPOF II is
managed and controlled by Jefferies & Company, Inc. JPOF II invests in high
20
yield securities, special situation investments and distressed securities and
provides trading services to its customers and clients. Generally, the Company
may not redeem its interest in JPOF II during 2001. For the year ended December
31, 2000, the Company recorded $17,300,000 of pre-tax income from this
investment under the equity method of accounting.
In October 2000, the Company agreed to invest $75,000,000 in a new issue
of convertible preference shares of WMIG, which is expected to represent
approximately 4% of WMIG on an as converted basis. 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, which, although subject to certain
contingencies, currently is expected to occur during 2001.
During 2000, the Company repurchased 1,505,000 Common Shares for an
aggregate cost of $32,100,000. As of March 19, 2001, the Company is authorized
to repurchase an additional 4,495,000 Common Shares. 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.
At December 31, 2000, a maximum of $20,900,000 was available to the
Parent as dividends from its regulated subsidiaries without regulatory approval.
Additional amounts may be available to the Parent in the form of loans or cash
advances from regulated subsidiaries, although no amounts were outstanding at
December 31, 2000 or borrowed to date in 2001. There are no restrictions on
distributions from non-regulated subsidiaries. The Parent also receives tax
sharing payments from subsidiaries included in its consolidated income tax
return, including certain regulated subsidiaries. Because of the tax loss
carryforwards available to the Parent and certain subsidiaries, together with
current interest deductions and corporate expenses, the amount paid by the
Parent for income taxes has been substantially less than tax sharing payments
received from its subsidiaries. Payments from regulated subsidiaries for
dividends, tax sharing payments and other services totaled $8,300,000 for the
year ended December 31, 2000.
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 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 $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 "Secured Note"). The notes 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, including
bankruptcy court and necessary creditor approvals, the issuance to the Company
and Berkshire Hathaway of newly issued common stock of FINOVA totaling 51% 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 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.
21
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. An annual facility fee to be paid by FINOVA
Capital, equal to .25% of the outstanding amount of the loan, will be shared 70%
to Berkshire Hathaway and 30% to the Company, and all income related to the
Secured Note will be shared 90% to Berkshire Hathaway and 10% to the Company.
All decisions with respect to the management of Berkadia will require the mutual
consent of the Company and Berkshire Hathaway, except for decisions related to
the commitment, the financing of the commitment or the Secured Note, which are
in the sole control of Berkshire Hathaway.
As indicated above, the completion of the loan is subject to a number of
conditions and there can be no assurance that it ultimately will be consummated.
Based on discussions with commercial and investment bankers, the Company
believes that it has the ability to raise additional funds under acceptable
conditions for use in its existing businesses or for appropriate investment
opportunities. Since 1993, the Company's senior debt obligations have been rated
as investment grade by S&P and Duff & Phelps Inc. Ratings issued by bond rating
agencies are subject to change at any time.
Consolidated Liquidity
In 2000 and 1999, 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 discussed above, it is currently anticipated that the premiums of the
Empire Group will continue to decline while the Empire Group runs off its claims
liabilities. This is expected to result in a continued net use of cash for the
Empire Group's operations over the next several years.
The investment portfolio of the Company's insurance subsidiaries
principally consists of fixed maturity investments; the balance of their
portfolio consists largely of preferred securities. Of the fixed maturity
securities, the majority consists of those rated "investment grade" or U.S.
governmental agency issued or guaranteed obligations, although limited
investments in "non-rated" or rated less than investment grade securities have
been made from time to time.
The Company provides collateralized automobile loans to individuals with
poor credit histories. The Company's investment in automobile loans was
$410,300,000 and $277,100,000 at December 31, 2000 and 1999, respectively. These
loans are primarily funded by deposits generated by the Company's deposit-taking
facilities and by brokers. Deposits raised in 2000 totaled $228,000,000 and had
an average maturity of 12 months and a weighted average interest rate of 6.6%.
In the past, the Company has at times funded the construction and/or
expansion of its manufacturing facilities with industrial revenue bonds. At
December 31, 2000, the Company has $9,800,000 principal amount outstanding for
such financing. The Company expects to finance the construction of the plastics
division's Belgium facility, estimated to aggregate $18,500,000, with available
cash resources.
As of December 31, 2000, the principal amount of Fidei's Euro denominated
outstanding debt, all of which is non-recourse to the Company, was $184,000,000
(195,200,000 Euros). Inasmuch as Fidei's Euro denominated cash, cash equivalents
22
and marketable securities approximate its Euro denominated debt, there is
currently no need to acquire a currency hedge for Fidei's debt.
The Company and certain of its subsidiaries have or have had tax loss
carryforwards and other tax attributes, the amount and availability of which are
subject to certain qualifications, limitations and uncertainties. In order to
reduce the possibility that certain changes in ownership could impose
limitations on the use of the tax loss carryforwards, the Company's certificate
of incorporation contains provisions which generally restrict the ability of a
person or entity from accumulating at least five percent of the Common Shares
and the ability of persons or entities now owning at least five percent of the
Common Shares from acquiring additional Common Shares.
RESULTS OF OPERATIONS
Property and Casualty Insurance
For the year ended December 31, 2000, the Company's insurance segment
contributed 20% of total revenues from continuing operations and, at December
31, 2000, constituted 20% of total assets. Historically, the Company's property
and casualty insurance operations have provided commercial and personal lines of
insurance in the New York metropolitan area.
Net earned premium revenues of the Empire Group were $108,500,000,
$145,200,000 and $228,600,000 for the years ended December 31, 2000, 1999 and
1998, respectively. While earned premiums declined in almost all lines of
business during 2000 and 1999, the most significant reductions during 2000 were
in assigned risk automobile ($14,700,000) and voluntary private passenger
automobile ($14,700,000), and during 1999 were in assigned risk automobile
($24,100,000), voluntary private passenger automobile ($26,900,000) and
commercial package policies ($11,600,000). Effective January 1, 2000, all policy
renewal obligations for assigned risk contracts were 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 in
1999 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 also adversely affected premium volume in other lines of
business.
During the fourth quarter of 2000, the Empire Group announced that it
would no longer accept any new private passenger automobile policies from any
agents. Existing policies of private passenger automobile insurance will be
either sold, non-renewed or cancelled in accordance with New York insurance law.
If this book of business is not sold, it is expected that the Empire Group will
continue to issue renewal policies over the next several years as required by
applicable insurance law. The Empire Group also announced that all statutory
automobile policies (public livery vehicles) would be non-renewed effective
March 1, 2001, due to poor underwriting results.
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 has filed plans of orderly withdrawal with the New York Insurance
Department as required. Existing commercial lines policies will be non-renewed
or canceled in accordance with New York insurance law or replaced by Tower. 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.
23
The closing of the transaction is subject to the approval of the New York
Insurance Department.
The Empire Group is currently exploring its options for the future.
Assuming the Tower Agreement is consummated, the Empire Group will only have
renewal obligations for remaining personal lines insurance (primarily
automobile) not replaced by Tower, the remaining policy term of all existing
policies and a claim run-off operation. The Empire Group may commence new
property and casualty insurance operations if a new business model with an
acceptable expense structure can be developed, enter into a joint venture with
another property and casualty insurance operation, explore entering the claim
services business or commence a liquidation. There may be other options that the
Company will explore, but no assurance can be given at this time as to what the
ultimate plan will be.
The Empire Group's combined ratios as determined under GAAP and SAP were
as follows:
Year Ended December 31,
-----------------------
2000 1999 1998
---- ---- ----
GAAP 187.2% 138.4% 129.3%
SAP 189.4% 143.3% 134.0%
The Empire Group's combined ratios increased in 2000 primarily due to
unfavorable loss reserve development from prior accident years, increased loss
adjustment expenses for newly outsourced claims and adverse development in loss
adjustment expenses. In addition, these ratios increased due to reduced service
fees, higher 2000 accident year loss ratios, higher severance costs and overhead
costs which, although lower, have not declined commensurate with the reduced
premium volume. The Empire Group's combined ratios increased in 1999 primarily
due to the reduction in premium volume at a rate greater than the reduction in
net underwriting and other costs. In addition, in 1999, the expense ratios were
adversely affected by the reduction in service fees, increased expenditures
related to the installation of new information systems, providing Internet
access to agents and severance costs. Included in the Empire Group's results for
2000, 1999 and 1998 were $53,000,000, $18,300,000 and $42,300,000, respectively,
for increases in estimated losses and loss adjustment expenses for prior
accident years.
During 2000, the Empire Group experienced unfavorable development
principally in the 1996 through 1999 accident years in the private passenger
automobile line ($9,200,000), the commercial auto line ($6,200,000), the
assigned risk automobile line ($4,800,000) and the commercial package policies
line ($15,000,000). In addition, the Empire Group increased its estimate for
loss adjustment expenses by $11,000,000 as a result of the decision to outsource
a significant amount of claim handling functions in 2000. Claim files for
workers' compensation, automobile no-fault and automobile and other liability
claims were outsourced at a cost greater than the reserves previously recorded
to handle the claims internally. The Empire Group has outsourced almost
two-thirds of its claims. Currently, the Empire Group is primarily handling
complex claims, first party claims and certain automobile liability and general
liability claims internally. Complex claims generally consist of those that have
potentially large settlement exposure and are not expected to settle quickly.
The Empire Group has also increased its reserve estimate for claims handled
internally.
During 1999, the Empire Group experienced unfavorable development due to
an increase in severity of 1998 accident year losses in the assigned risk
automobile and voluntary private passenger automobile lines, and 1996 accident
year losses in certain classes of the commercial automobile line. As a result,
the Empire Group increased its reserves by $7,500,000 for assigned risk
automobile, $5,000,000 for voluntary private passenger automobile and $4,500,000
for commercial automobile lines.
24
During 1998, the Empire Group reviewed the adequacy of the reserves
carried for its open claims' files, focusing on workers' compensation,
commercial auto and other commercial liability lines of business. As part of the
review, substantially all open workers' compensation claim files were reviewed
for every accident year up to and including 1998. Additionally, during 1998, the
Empire Group reorganized the commercial auto claims department. As part of this
realignment, more complex claims files were reviewed by the most experienced
claims examiners and assumptions regarding average claims severity and probable
ultimate losses were revised. Accordingly, reserves were strengthened by
$13,000,000 for workers' compensation, $14,000,000 for commercial automobile and
$14,000,000 for other commercial liability lines of business.
As a consequence of its reserve increases, the Empire Group has reduced
premiums and pre-tax profits to recognize reinsurance premiums due for 1995 and
prior years under retrospectively rated reinsurance agreements. Such amounts
totaled $4,500,000, $4,600,000, and $2,000,000 for the years ended December 31,
2000, 1999 and 1998, respectively. The Empire Group has not entered into
retrospectively rated reinsurance agreements after 1995.
For all lines of property and casualty insurance business, the Company
employs a variety of standard actuarial ultimate loss projection techniques,
statistical analyses and case-basis evaluations to estimate its liability for
unpaid losses. The actuarial projections include an extrapolation of both losses
paid and incurred by business line and accident year and implicitly consider the
impact of inflation and claims settlement patterns upon ultimate claim costs
based upon historical patterns. These estimates are performed quarterly and
consider any changes in trends and actual loss experience. Any resulting change
in the estimate of the liability for unpaid losses, including those discussed
above, is reflected in current year earnings during the quarter the change in
estimate is identified.
The reserving process relies on the basic assumption that past experience
is an appropriate basis for predicting future events. The probable effects of
current developments, trends and other relevant matters are also considered.
Since the establishment of loss reserves is affected by many factors, some of
which are outside the Company's control or are affected by future conditions,
reserving for property and casualty claims is a complex and uncertain process
requiring the use of informed estimates and judgments. As additional experience
and other data become available and are reviewed, the Company's estimates and
judgments may be revised. While the effect of any such changes in estimates
could be material to future results of operations, the Company does not expect
such changes to have a material effect on its liquidity or financial condition.
In management's judgment, information currently available has been
appropriately considered in estimating the Company's loss reserves. The Company
will continue to evaluate the adequacy of its loss reserves on a quarterly
basis, incorporating any future changes in trends and actual loss experience,
and record adjustments to its loss reserves as appropriate.
Banking and Lending
Finance revenues, which reflect the level and mix of consumer instalment
loans, increased in each of the last two years due to greater average loans
outstanding. Average loans outstanding were $423,200,000, $238,600,000 and
$148,700,000 for 2000, 1999 and 1998, respectively. The increase in 2000 was
primarily due to the acquisition in 1999 of Tranex and increased new loan
originations. Pre-tax results declined in 2000 as compared to 1999 primarily due
to an increase in the provision for loan losses, higher interest expense due to
increased customer banking deposits and higher interest rates thereon, and
higher salaries expense.
The higher loan losses were principally caused by the poor performance of
the subprime automobile portfolio purchased from Tranex, for which the actual
collection experience was less than expected, a larger amount of loans
25
outstanding, including the Tranex purchased portfolio, that are reaching the age
of peak losses, generally twelve to eighteen months after origination, and the
increased loan originations. The Company also believes that a weaker economy has
contributed to its loan losses.
For 1999, although finance revenues increased due to greater average
loans outstanding, pre-tax results declined primarily due to an increase in the
provision for loan losses for the larger volume of loans outstanding. In
addition, 1998 results reflected the pre-tax gain of $6,500,000 from the sale of
substantially all of the Company's executive and professional loan portfolio.
The increase in average loans outstanding was primarily due to the purchase of a
subprime automobile portfolio in December 1998, the Tranex acquisition in 1999
and increased new loan originations.
Manufacturing
For 2000, revenues for the plastics division modestly increased to
$65,000,000 as compared to $64,000,000 for 1999. Gross profit and pre-tax income
for the plastics division declined slightly in 2000 primarily due to higher raw
material costs. In 1999, revenues of the plastics division increased 13% over
1998. In addition, despite rising raw material prices, the gross profit
increased 16% to $24,900,000.
Other
Investment and other income declined in 2000 as compared to 1999
primarily due to gains recognized in 1999 from the sale of Caja, The Sperry and
Hutchinson Company, Inc., PIB and an equity interest in an associated company
aggregating $177,700,000. Investment and other income also decreased in 2000 due
to a reduction in investment income ($11,500,000), resulting primarily from the
payment of the Dividend and debt repurchases in 1999 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 ($18,500,000). This
decrease was partially offset by increased gains from sales and foreclosures of
various domestic real estate properties ($50,800,000), the prepayment penalty
related to the Conseco notes ($7,500,000) and revenues relating to MK Gold
($12,300,000), which the Company began consolidating in the fourth quarter of
1999. During 2000, Fidei sold 38 real estate properties; 53 properties remain at
December 31, 2000, all of which are currently being marketed for sale.
Investment and other income in 1999 included the aforementioned gains on
sale of Caja ($120,800,000), The Sperry and Hutchinson Company, Inc.
($18,700,000) and PIB ($29,500,000), and the gain on sale of an equity interest
in an associated company ($8,700,000). Investment and other income also
increased in 1999 due to increased rent income and gains from sales of real
estate properties, of which $49,800,000 related to Fidei. Such increases were
partially offset by a reduction in investment income resulting primarily from
payment of the $811,900,000 dividend in 1999 and debt repurchases in 1999, a
reduction in investments held by the Empire Group and the gain in 1998 on the
sale of the executive and professional loan portfolio.
Payment of the Dividend required the Company to make an offer to purchase
all of its 8-1/4% Notes and its 7-7/8% Notes at a purchase price of 101% of
principal, plus accrued and unpaid interest thereon. Pursuant to such offers, in
1999, the Company repurchased $80,900,000 principal amount of the 8-1/4% Notes
and $113,300,000 principal amount of the 7-7/8% Notes for $198,000,000,
including accrued interest. The Company recorded an extraordinary loss, net of
income tax benefit, of $2,600,000 on this early extinguishment of debt.
Net securities gains (losses) for 2000 include pre-tax security gains
related to the Company's investments in FNF ($90,900,000) and JTP ($24,800,000),
as described above. During 1998, due to declines in values that were deemed
other than temporary, the Company recorded a pre-tax writedown of $75,000,000
related to its investments in Russian and Polish debt and equity securities.
Such writedowns are reflected in the caption "Net securities gains (losses)." At
26
December 31, 2000, the remaining book value of the Company's investments in
these securities was $1,200,000.
Equity in income (losses) of associated companies increased in 2000
primarily due to income of $17,300,000 related to JPOF II, described above.
Equity in income (losses) of associated companies declined in 1999 as compared
to 1998, primarily due to income of $30,800,000 recorded in 1998 from an
investment partnership that was subsequently liquidated.
Interest expense for 2000 reflects increased customer banking deposits
and higher interest rates thereon, partially offset by a reduction in interest
expense related to debt repurchases in 1999. The increase in interest expense in
1999 as compared to 1998 primarily relates to Fidei's outstanding debt,
partially offset by the Company's debt repurchases in 1999.
Salaries expense in 2000 reflects an increase in employees, primarily at
the banking and lending segment.
The increase in selling, general and other expenses in 2000 principally
reflects higher provisions for loan losses, as described above, and expenses
related to MK Gold. The increase in selling, general and other expenses in 1999
as compared to 1998 principally relates to expenses incurred by Fidei, higher
provisions for loan losses, expenses incurred in connection with the Dividend
and the recognition in 1998 of net curtailment gains relating to the Company's
pension plan.
Income taxes for 1999 reflect a benefit of $40,100,000 from the
utilization of capital loss carryforwards, of which $33,300,000 was previously
included in the valuation allowance. Income taxes for 1999 also reflect a
benefit of $3,400,000 for the favorable resolution of certain federal income tax
contingencies. Income taxes for 1998 reflect a benefit of $39,000,000 for a
change in the Company's estimated 1997 federal tax liability and the favorable
resolution of certain contingencies.
The number of shares used to calculate basic earnings (loss) per share
was 55,529,000, 59,338,000 and 63,409,000 for 2000, 1999 and 1998, respectively.
The number of shares used to calculate diluted earnings (loss) per share was
55,598,000, 59,352,000 and 63,510,000 for 2000, 1999 and 1998, respectively.
Cautionary Statement for Forward-Looking Information
Statements included in this Report 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 Report, the words "estimates", "expects", "anticipates",
"believes", "plans", "intends" and variations of such words and similar
expressions are intended to identify forward-looking statements that involve
risks and uncertainties. Future events and actual results could differ
materially from those set forth in, contemplated by or underlying the
forward-looking statements. The factors that could cause actual results to
differ materially from those suggested by any such statements include, but are
not limited to, those discussed or identified from time to time in the Company's
public filings, including general economic and market conditions, changes in
foreign and domestic laws, regulations and taxes, changes in competition and
pricing environments, regional or general changes in asset valuation, the
occurrence of significant natural disasters, the inability to reinsure certain
risks economically, the adequacy of loss reserves, prevailing interest rate
levels, weather related conditions that may affect the Company's operations,
consummation 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, adverse environmental developments in Spain that
27
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, the success of ultimate negotiations with the FINOVA companies and their
creditors, approval of a FINOVA chapter 11 plan having materially different
terms than those set forth in the commitment letter of Berkadia LLC filed as an
exhibit to the Company's Annual Report on Form 10-K for the year ended December
31, 2000, 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 Report or to reflect the occurrence of unanticipated events.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
------- ----------------------------------------------------------
The following includes "forward-looking statements" that involve risk and
uncertainties. Actual results could differ materially from those projected in
the forward-looking statements.
The Company's market risk arises principally from interest rate risk
related to its investment portfolio, its borrowing activities and the banking
and lending activities of certain subsidiaries. The Company does not enter into
material derivative financial instrument transactions.
The Company's investment portfolio is primarily classified as available
for sale, and consequently, is recorded on the balance sheet at fair value with
unrealized gains and losses reflected in shareholders' equity. Included in the
Company's investment portfolio are fixed income securities, which comprised
approximately 78% of the Company's total investment portfolio at December 31,
2000. These fixed income securities are primarily rated "investment grade" or
are U.S. governmental agency issued or guaranteed obligations, although limited
investments in "non-rated" or rated less than investment grade securities have
been made from time to time. The estimated weighted average remaining life of
these fixed income securities was approximately 3.0 years at December 31, 2000.
The Company's fixed income securities, like all fixed income instruments, are
subject to interest rate risk and will fall in value if market interest rates
increase. At December 31, 1999, fixed income securities comprised approximately
77% of the Company's total investment portfolio and had an estimated weighted
average remaining life of 3.5 years. At December 31, 2000 and 1999, the
Company's portfolio of trading securities was not material. The Company manages
the investment portfolio of its insurance subsidiaries to preserve principal,
maintain a high level of quality, comply with applicable insurance industry
regulations and achieve an acceptable rate of return. In addition, the Company
considers the duration of its insurance reserves in comparison with that of its
investments.
The Company is subject to interest rate risk on its long-term fixed
interest rate debt and the Company-obligated mandatorily redeemable preferred
securities of its subsidiary trust holding solely subordinated debt securities
of the Company. Generally, the fair market value of debt and preferred
securities with a fixed interest rate will increase as interest rates fall, and
the fair market value will decrease as interest rates rise.
The Company's banking and lending operations are subject to risk
resulting from interest rate fluctuations to the extent that there is a
difference between the amount of the interest-earning assets and the amount of
interest-bearing liabilities that are prepaid/withdrawn, mature or reprice in
specified periods. The principal objectives of the Company's banking and lending
asset/liability management activities are to provide maximum levels of net
interest income while maintaining acceptable levels of interest rate and
liquidity risk and to facilitate funding needs. The Company utilizes an interest
rate sensitivity model as the primary quantitative tool in measuring the amount
of interest rate risk that is present. The model quantifies the effects of
various interest rate scenarios on the projected net interest margin over the
ensuing twelve-month period. Derivative financial instruments, including
interest rate swaps, may be used to modify the Company's indicated net interest
28
sensitivity to levels deemed to be appropriate based on risk management policies
and the Company's current economic outlook. Counterparties to such agreements
are major financial institutions, which the Company believes are able to fulfill
their obligations; however, if they are not, the Company believes that any
losses are unlikely to be material.
The following table provides information about the Company's financial
instruments used for purposes other than trading that are sensitive to changes
in interest rates. For investment securities and debt obligations, the table
presents principal cash flows by expected maturity dates. For the variable rate
notes receivable and variable rate borrowings, the weighted average interest
rates are based on implied forward rates in the yield curve at the reporting
date. For loans, securities and liabilities with contractual maturities, the
table presents contractual principal cash flows adjusted for the Company's
historical experience of loan prepayments and prepayments of mortgage-backed
securities. For banking and lending's variable rate products, the weighted
average variable rates are based upon the respective pricing index at the
reporting date. For money market deposits that have no contractual maturity, the
table presents principal cash flows based on the Company's historical experience
and management's judgment concerning their most likely withdrawal behaviors. For
interest rate swaps, the table presents notional amounts by contractual maturity
date.
For additional information, see Notes 7, 11 and 21 to Consolidated
Financial Statements.
29
Expected Maturity Date
2001 2002 2003 2004 2005 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
(Dollars in thousands)
THE COMPANY, EXCLUDING
----------------------
BANKING AND LENDING:
--------------------
RATE SENSITIVE ASSETS:
Available for Sale Fixed
Income Securities:
U.S. Government $ 93,678 $ 141,046 $ 1,108 $ 6,429 $ 525 $ 31,361 $ 274,147 $ 274,147
Weighted Average
Interest Rate 5.90% 6.43% 5.51% 6.83% 7.00% 6.66%
Other Fixed Maturities:
Rated Investment Grade $ 58,869 $ 58,202 $ 52,725 $ 44,420 $ 39,941 $ 36,898 $ 291,055 $ 291,055
Weighted Average
Interest Rate 5.98% 5.75% 5.96% 6.73% 6.49% 6.75%
Rated Less Than Investment
Grade/Not Rated $ 9,857 $ 22,997 $ 25,588 $ 9,955 $ 2,385 $ 48,334 $ 119,116 $ 119,116
Weighted Average
Interest Rate 5.00% 6.92% 4.02% 4.45% 5.66% 9.02%
Held to Maturity Fixed Income
Securities:
U.S. Government $ - $ 5,619 $ - $ - $ - $ 2,150 $ 7,769 $ 7,907
Weighted Average
Interest Rate - 6.48% - - - 6.88%
Other Fixed Maturities:
Rated Investment Grade $ 273 $ - $ - $ - $ - $ - $ 273 $ 273
Weighted Average
Interest Rate 5.60% - - - - -
Variable Rate Notes
Receivable $ 35,903 $ - $ - $ - $ - $ - $ 35,903 $ 35,903
Weighted Average
Interest Rate 7.01% - - - - -
RATE SENSITIVE LIABILITIES:
Fixed Interest Rate Borrowings $ 52,354 $ 6,608 $ 78,221 $ 46,528 $ 20,468 $ 146,132 $ 350,311 $ 343,630
Weighted Average
Interest Rate 6.39% 6.73% 6.73% 7.16% 7.83% 7.77%
Variable Rate Borrowings $ 6,886 $ - $ - $ - $ - $ 9,815 $ 16,701 $ 16,701
Weighted Average
Interest Rate 7.15% 5.83% 5.87% 5.92% 5.96% 6.03%
30
Expected Maturity Date
2001 2002 2003 2004 2005 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
(Dollars in thousands)
OTHER RATE SENSITIVE FINANCIAL
INSTRUMENTS:
Company-obligated Mandatorily
Redeemable Preferred
Securities of Subsidiary
Trust Holding Solely
Subordinated Debt Securities
of the Company $ - $ - $ - $ - $ - $ 98,200 $ 98,200 $ 99,182
Weighted Average
Interest Rate 8.65% 8.65% 8.65% 8.65% 8.65% 8.65%
BANKING AND LENDING:
--------------------
RATE SENSITIVE ASSETS:
Certificates of Deposit $ 1,287 $ - $ - $ - $ - $ - $ 1,287 $ 1,294
Weighted Average
Interest Rate 7.01% - - - - - 7.01%
Fixed Interest Rate Securities $ 25,219 $ 12,231 $ 7,197 $ 2,858 $ 1,300 $ 4,643 $ 53,448 $ 53,411
Weighted Average
Interest Rate 11.35% 14.69% 12.86% 14.68% 11.69% 6.58% 12.01%
Variable Interest Rate
Securities $ 20,488 $ 13,498 $ 9,510 $ 3,251 $ 2,524 $ 13,437 $ 62,708 $ 62,708
Weighted Average
Interest Rate 6.76% 6.09% 6.10% 6.89% 7.07% 7.55% 6.70%
Fixed Interest Rate Loans $ 153,465 $ 110,912 $ 88,344 $ 65,269 $ 80,014 $ 1,220 $ 499,224 $ 492,673
Weighted Average
Interest Rate 20.97% 21.28% 21.35% 21.34% 19.53% 20.77% 20.93%
Variable Interest Rate Loans $ 2,677 $ 520 $ 230 $ 108 $ 105 $ 12,902 $ 16,542 $ 16,403
Weighted Average
Interest Rate 12.21% 9.39% 9.57% 9.57% 10.65% 11.65% 11.62%
RATE SENSITIVE LIABILITIES:
Money Market Deposits $ 6,026 $ 4,245 $ 3,774 $ 3,302 $ 2,830 $ 4,717 $ 24,894 $ 24,828
Weighted Average
Interest Rate 4.86% 5.00% 5.00% 5.00% 5.00% 5.00% 4.97%
Time Deposits $ 395,724 $ 60,977 $ 14,302 $ 8,778 $ 21,497 $ - $ 501,278 $ 504,763
Weighted Average
Interest Rate 6.60% 6.81% 3.39% 6.59% 6.93% - 6.55%
Fixed Interest Rate Borrowings $ 1,461 $ 6,032 $ 18 $ - $ - $ - $ 7,511 $ 7,511
Weighted Average
Interest Rate 9.57% 6.72% 7.38% - - - 7.27%
31
Expected Maturity Date
2001 2002 2003 2004 2005 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
(Dollars in thousands)
RATE SENSITIVE DERIVATIVE
FINANCIAL INSTRUMENTS:
Pay Fixed/Receive Variable
Interest Rate Swap $ - $ - $ 160,000 $ - $ - $ - $ 160,000 $ (1,231)
Average Pay Rate 6.22% 6.22% 6.22% - - - 6.22%
Average Receive Rate 6.75% 6.75% 6.75% - - - 6.75%
OFF-BALANCE SHEET ITEMS:
Commitments to Extend Credit $ 29 $ - $ - $ - $ - $ - $ 29 $ 29
Weighted Average
Interest Rate 14.24% - - - - - 14.24%
Unused Lines of Credit $ 3,000 $ - $ - $ - $ - $ 27,000 $ 30,000 $ 30,000
Weighted Average
Interest Rate 8.50% - - - - 6.75% 6.93%
Item 8. Financial Statements and Supplementary Data.
------ -------------------------------------------
Financial Statements and supplementary data required by this Item 8 are
set forth at the pages indicated in Item 14(a) below.
Item 9. Changes in and Disagreements with Accountant on Accounting and
------ --------------------------------------------------------------
Financial Disclosure.
---------------------
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
------- --------------------------------------------------
The information to be included under the caption "Nominees for Election
as Directors" in the Company's definitive proxy statement to be filed with the
Commission pursuant to Regulation 14A of the 1934 Act in connection with the
2001 annual meeting of shareholders of the Company (the "Proxy Statement") is
incorporated herein by reference. In addition, reference is made to Item 10 in
Part I of this Report.
Item 11. Executive Compensation.
------- ----------------------
The information to be included under the caption "Executive Compensation"
in the Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
------- --------------------------------------------------------------
The information to be included under the caption "Present Beneficial
Ownership of Common Shares" in the Proxy Statement is incorporated herein by
reference.
32
Item 13. Certain Relationships and Related Transactions.
------- ----------------------------------------------
The information to be included under the caption "Executive Compensation
- Certain Relationships and Related Transactions" in the Proxy Statement is
incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
------- -----------------------------------------------------------------
(a)(1)(2) Financial Statements and Schedules.
-----------------------------------
Report of Independent Accountants........................................................... F-1
Financial Statements:
Consolidated Balance Sheets at December 31, 2000 and 1999.................................. F-2
Consolidated Statements of Income for the years ended December 31, 2000,
1999 and 1998........................................................................... F-3
Consolidated Statements of Cash Flows for the years ended December 31, 2000,
1999 and 1998........................................................................... F-4
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 2000, 1999 and 1998........................................................ F-6
Notes to Consolidated Financial Statements................................................. F-7
Financial Statement Schedule:
Schedule V - Valuation and Qualifying Accounts............................................. F-30
(3) Executive Compensation Plans and Arrangements.
----------------------------------------------
1999 Stock Option Plan (filed as Annex A to the Company's Proxy
Statement dated April 9, 1999 (the "1999 Proxy Statement")).
Amended and Restated Shareholders Agreement dated as of December
16, 1997 among the Company, Ian M. Cumming and Joseph S.
Steinberg (filed as Exhibit 10.4 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997 (the
"1997 10-K")).
Leucadia National Corporation Senior Executive Annual Incentive
Bonus Plan (filed as Annex D to the Company's Proxy Statement
dated October 3, 1997 (the "1997 Proxy Statement")).
Deferred Compensation Agreement between the Company and Joseph S.
Steinberg dated December 8, 1998 (filed as Exhibit 10.6 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1998 (the "1998 10-K")).
Deferred Compensation Agreement between the Company and Joseph S.
Steinberg dated as of December 30, 1999 (filed as Exhibit 10.16
to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1999 (the "1999 10-K")).
Deferred Compensation Agreement between the Company and Mark
Hornstein dated as of January 10, 2000 (filed as Exhibit 10.17 to
the 1999 10-K).
Deferred Compensation Agreement between the Company and Thomas E.
Mara dated as of January 10, 2000.
Deferred Compensation Agreement between the Company and Mark
Hornstein dated as of December 29, 2000.
33
Leucadia National Corporation Senior Executive Warrant Plan
(filed as Annex B to the 1999 Proxy Statement).
(b) Reports on Form 8-K.
--------------------
The Company filed current reports on Form 8-K dated November 10,
2000 and December 20, 2000, which set forth information under
Item 5. Other Events and Item 7. Financial Statements and
Exhibits.
(c) Exhibits.
--------
3.1 Restated Certificate of Incorporation (filed as Exhibit 5.1 to
the Company's Current Report on Form 8-K dated July 14,
1993).*
3.2 Amended and Restated By-laws as amended through February 23,
1999 (filed as Exhibit 3.2 to the 1998 10-K).*
4.1 The Company undertakes to furnish the Securities and Exchange
Commission, upon request, a copy of all instruments with
respect to long-term debt not filed herewith.
10.1 1999 Stock Option Plan (filed as Annex A to the 1999 Proxy
Statement).*
10.2 Articles and Agreement of General Partnership, effective as of
April 15, 1985, of Jordan/Zalaznick Capital Company (filed as
Exhibit 10.20 to the Company's Registration Statement No.
33-00606).*
10.3 Operating Agreement of The Jordan Company LLC, dated as of
July 23, 1998 (filed as Exhibit 10.3 to the 1998 10-K).*
10.4 Leucadia National Corporation Senior Executive Warrant Plan
(filed as Annex B to the 1999 Proxy Statement).*
10.5 Amended and Restated Shareholders Agreement dated as of
December 16, 1997 among the Company, Ian M. Cumming and Joseph
S. Steinberg (filed as Exhibit 10.4 to the 1997 10-K).*
10.6 Deferred Compensation Agreement between the Company and Joseph
S. Steinberg dated December 8, 1998 (filed as Exhibit 10.6 to
the 1998 10-K).*
10.7 Settlement Agreement between Baldwin-United Corporation and
the United States dated August 27, 1985 concerning tax issues
(filed as Exhibit 10.14 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1992 (the "1992
10-K")).*
10.8 Acquisition Agreement, dated as of December 18, 1992, by and
between Provident Mutual Life and Annuity Company of America
and Colonial Penn Annuity and Life Insurance Company (filed as
Exhibit 10.15 to the 1992 10-K).*
---------------------------------
* Incorporated by reference.
34
10.9 Form of Amended and Restated Revolving Credit Agreement dated
as of June 27, 2000 between the Company, Fleet National Bank
as Administrative Agent, The Chase Manhattan Bank, as
Syndication Agent, and the Banks signatory thereto, with Fleet
Boston Robertson Stephens, Inc., as Arranger.
10.10 Purchase Agreement among Conseco, Inc., the Company, Charter,
Colonial Penn Group, Inc., Colonial Penn Holdings, Inc.,
Leucadia Financial Corporation, Intramerica, Colonial Penn
Franklin Insurance Company and Colonial Penn Insurance Company
dated as of April 30, 1997 (filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1997).*
10.11 Purchase Agreement among General Electric Capital Corporation,
the Company, Charter, Colonial Penn Group Inc. and Colonial
Penn Holdings, Inc. dated as of June 30, 1997 (filed as Annex
A to the 1997 Proxy Statement).*
10.12 Purchase Agreement by and among Allstate Life Insurance
Company, Allstate Life Insurance Company of New York, Charter,
Intramerica and the Company, dated February 11, 1998 (filed as
Exhibit 10.16 to the 1997 10-K).*
10.13 Leucadia National Corporation Senior Executive Annual
Incentive Bonus Plan (filed as Annex D to the 1997 Proxy
Statement).*
10.14 Stock Purchase Agreement by and between the Company and
Allstate Life Insurance Company dated as of December 18, 1998
(filed as Exhibit 10.14 to the 1998 10-K).*
10.15 Deferred Compensation Agreement between the Company and Joseph
S. Steinberg dated as of December 30, 1999 (filed as Exhibit
10.16 to the 1999 10-K).*
10.16 Deferred Compensation Agreement between the Company and Mark
Hornstein dated as of January 10, 2000 (filed as Exhibit 10.17
to the 1999 10-K).*
10.17 Deferred Compensation Agreement between the Company and Thomas
E. Mara dated as of January 10, 2000.
10.18 Deferred Compensation Agreement between the Company and Mark
Hornstein dated as of December 29, 2000.
10.19 Commitment Letter dated February 26, 2001 among the Company,
Berkshire Hathaway Inc., Berkadia LLC, The FINOVA Group Inc.
and FINOVA Capital Corporation.
10.20 Management Services Agreement dated as of February 26, 2001
among The FINOVA Group Inc., the Company and Leucadia
International Corporation.
10.21 Operating Agreement of Berkadia LLC dated February 26, 2001
between Berkshire Hathaway Inc. and the Company.
21 Subsidiaries of the registrant.
---------------------------------
* Incorporated by reference.
35
23 Consent of independent accountants with respect to the
incorporation by reference into the Company's Registration
Statement on Form S-8 (File No. 2-84303), Form S-8 and S-3
(File No. 33-6054), Form S-8 and S-3 (File No. 33-26434), Form
S-8 and S-3 (File No. 33-30277), Form S-8 (File No. 33-61682),
Form S-8 (File No. 33-61718) and Form S-8 (File No.
333-51494).
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
March 29, 2001 By: /s/ Barbara L. Lowenthal
-----------------------------------
Barbara L. Lowenthal
Vice President and Comptroller
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated, on the date set forth above.
Signature Title
--------- -----
/s/ Ian M. Cumming Chairman of the Board
-------------------------------- (Principal Executive Officer)
Ian M. Cumming
/s/ Joseph S. Steinberg President and Director
-------------------------------- (Principal Executive Officer)
Joseph S. Steinberg
/s/ Joseph A. Orlando Vice President and Chief Financial Officer
-------------------------------- (Principal Financial Officer)
Joseph A. Orlando
/s/ Barbara L. Lowenthal Vice President and Comptroller
-------------------------------- (Principal Accounting Officer)
Barbara L. Lowenthal
/s/ Paul M. Dougan Director
--------------------------------
Paul M. Dougan
/s/ Lawrence D. Glaubinger Director
--------------------------------
Lawrence D. Glaubinger
/s/ James E. Jordan Director
--------------------------------
James E. Jordan
/s/ Jesse Clyde Nichols, III Director
--------------------------------
Jesse Clyde Nichols, III
37
Report of Independent Accountants
---------------------------------
To the Board of Directors and
Shareholders of Leucadia National Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under item 14(a)(1)(2) of this Form 10-K, present fairly, in all
material respects, the financial position of Leucadia National Corporation and
Subsidiaries at December 31, 2000 and 1999, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2000, in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement
schedule listed in the index appearing under item 14(a)(1)(2) of this Form
10-K, presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements. These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatements. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
March 14, 2001
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2000 and 1999
(Dollars in thousands, except par value)
2000 1999
---- ----
ASSETS
Investments:
Available for sale (aggregate cost of $860,802
and $945,227) $ 877,668 $ 944,667
Trading securities (aggregate cost of $150,951
and $138,679) 137,281 168,285
Held to maturity (aggregate fair value of $18,907
and $23,983) 18,799 24,403
Other investments, including accrued interest income 26,670 33,138
---------- ----------
Total investments 1,060,418 1,170,493
Cash and cash equivalents 552,158 296,058
Reinsurance receivables, net 18,810 38,086
Trade, notes and other receivables, net 799,211 876,411
Prepaids and other assets 317,402 418,447
Property, equipment and leasehold improvements, net 192,308 184,850
Deferred policy acquisition costs 10,785 11,845
Investments in associated companies 192,545 74,037
---------- ----------
Total $3,143,637 $3,070,227
========== ==========
LIABILITIES
Customer banking deposits $ 526,172 $ 329,301
Trade payables and expense accruals 215,150 292,677
Other liabilities 117,639 79,076
Income taxes payable 114,769 113,391
Deferred tax liability 55,137 30,423
Policy reserves 365,958 443,042
Unearned premiums 56,936 61,916
Debt, including current maturities 374,523 483,309
---------- ----------
Total liabilities 1,826,284 1,833,135
---------- ----------
Minority interest 14,912 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) 2,585 (9,578)
Retained earnings 1,092,019 989,835
---------- ----------
Total shareholders' equity 1,204,241 1,121,988
---------- ----------
Total $3,143,637 $3,070,227
========== ==========
The accompanying notes are an integral part of
these consolidated financial statements.
F-2
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 2000, 1999 and 1998
(In thousands, except per share amounts)
2000 1999 1998
---- ---- ----
Revenues:
Insurance revenues and commissions $108,494 $145,182 $228,576
Manufacturing 65,019 64,041 56,572
Finance 89,007 50,254 31,560
Investment and other income 300,449 439,202 251,379
Equity in income (losses) of associated companies 29,293 (2,932) 23,290
Net securities gains (losses) 123,225 10,885 (60,871)
-------- -------- --------
715,487 706,632 530,506
-------- -------- --------
Expenses:
Provision for insurance losses and policy
benefits 150,066 142,427 233,772
Amortization of deferred policy acquisition costs 26,289 31,705 45,338
Manufacturing cost of goods sold 40,650 39,179 35,201
Interest 57,713 50,665 45,139
Salaries 58,982 48,413 41,413
Selling, general and other expenses 188,485 150,772 100,266
-------- -------- --------
522,185 463,161 501,129
-------- -------- --------
Income from continuing operations before income
taxes, minority expense of trust preferred
securities and extraordinary gain (loss) 193,302 243,471 29,377
-------- -------- --------
Income taxes:
Current 29,626 1,058 (32,649)
Deferred 43,130 43,463 7,576
-------- -------- --------
72,756 44,521 (25,073)
-------- -------- --------
Income from continuing operations before
minority expense of trust preferred
securities and extraordinary gain (loss) 120,546 198,950 54,450
Minority expense of trust preferred securities,
net of taxes 5,521 5,521 8,248
-------- -------- --------
Income from continuing operations before
extraordinary gain (loss) 115,025 193,429 46,202
Income from discontinued operations,
net of taxes - 8,619 8,141
Gain on disposal of discontinued operations,
net of taxes of $508 - 15,582 -
-------- -------- --------
Income before extraordinary gain (loss) 115,025 217,630 54,343
Extraordinary gain (loss) from early extinguishment
of debt, net of income tax expense (benefit) of
$552 and ($1,394) 983 (2,588) -
-------- -------- --------
Net income $116,008 $215,042 $ 54,343
======== ======== ========
Basic earnings (loss) per common share:
Income from continuing operations
before extraordinary gain (loss) $2.07 $3.26 $.73
Income from discontinued operations - .14 .13
Gain on disposal of discontinued operations - .26 -
Extraordinary gain (loss) .02 (.04) -
----- ----- ----
Net income $2.09 $3.62 $.86
===== ===== ====
Diluted earnings (loss) per common share:
Income from continuing operations
before extraordinary gain (loss) $2.07 $3.26 $.73
Income from discontinued operations - .14 .13
Gain on disposal of discontinued operations - .26 -
Extraordinary gain (loss) .02 (.04) -
----- ----- ----
Net income $2.09 $3.62 $.86
===== ===== ====
The accompanying notes are an integral part of
these consolidated financial statements.
F-3
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2000, 1999 and 1998
2000 1999 1998
---- ---- ----
(In thousands)
Net cash flows from operating activities:
Net income $ 116,008 $ 215,042 $ 54,343
Adjustments to reconcile net income to net
cash used for operations:
Extraordinary (gain) loss, net of income taxes (983) 2,588 -
Provision for deferred income taxes 43,130 40,660 7,576
Depreciation and amortization of property,
equipment and leasehold improvements 21,362 15,399 10,250
Other amortization 27,787 32,509 38,098
Provision for doubtful accounts 32,229 15,386 9,473
Net securities (gains) losses (123,225) (10,885) 60,871
Equity in (income) losses of associated companies (29,293) 2,932 (23,290)
(Gain) on disposal of real estate, property
and equipment, and other assets (92,276) (64,716) (33,802)
(Gain) on sales of PIB, Caja and S&H in 1999 and
loan portfolio in 1998 - (169,063) (6,535)
(Gain) on disposal of discontinued operations - (15,582) -
Investments classified as trading, net (13,154) (14,511) (139,715)
Deferred policy acquisition costs incurred and deferred (25,229) (25,295) (39,687)
Net change in:
Reinsurance receivables 19,276 9,984 (16,098)
Trade and other receivables (14,073) 21,643 6,951
Prepaids and other assets 22,025 (29,045) 16,823
Net assets of discontinued operations - 17,616 26,909
Trade payables and expense accruals (58,465) 33,350 24,816
Other liabilities 3,065 (8,530) (43,980)
Income taxes payable 1,378 16,463 (79,191)
Policy reserves (77,084) (99,232) (3,434)
Unearned premiums (4,980) (32,656) (33,094)
Other 6,071 3,977 1,321
--------- ---------- ----------
Net cash used for operating activities (146,431) (41,966) (161,395)
--------- ---------- ----------
Net cash flows from investing activities:
Acquisition of real estate, property, equipment
and leasehold improvements (93,233) (127,898) (79,296)
Proceeds from disposals of real estate, property
and equipment, and other assets 290,011 182,128 59,814
Proceeds from sales of PIB, Caja and S&H in 1999 and
loan portfolio in 1998 - 165,851 89,516
Proceeds from disposal of discontinued operations,
net of expenses - 43,132 -
Investment in Tranex Credit Corp. and MK Gold Company
in 1999 and Fidei in 1998 - (133,541) (62,264)
Advances on loan receivables (355,604) (197,891) (153,920)
Principal collections on loan receivables 148,261 101,938 79,258
Advances on notes receivables (30,864) (49,000) (10,000)
Collections on notes receivables 267,150 168,841 83,009
Investments in associated companies (108,600) (32,553) (65,014)
Distributions from associated companies 19,784 30,030 53,987
Purchases of investments (other than short-term) (1,043,416) (1,794,133) (2,914,024)
Proceeds from maturities of investments 103,833 1,001,003 844,384
Proceeds from sales of investments 1,163,981 1,542,100 2,134,113
---------- ----------- ----------
Net cash provided by investing activities 361,303 900,007 59,563
---------- ----------- ----------
(continued)
The accompanying notes are an integral part of
these consolidated financial statements.
F-4
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
For the years ended December 31, 2000, 1999 and 1998
2000 1999 1998
---- ---- ----
(In thousands)
Net cash flows from financing activities:
Net change in short-term borrowings $ (75,500) $ (9,798) $ 84,911
Net change in customer banking deposits 192,512 138,039 (8,670)
Reduction of Company-obligated mandatorily redeemable
preferred securities of subsidiary trust - - (42,217)
Issuance of long-term debt, net of issuance
costs 105,850 - 14,428
Reduction of long-term debt (126,703) (200,673) (388)
Purchase of common shares for treasury (32,094) (125,481) (59,348)
Dividends paid (13,824) (811,925) (8,380)
--------- ----------- ---------
Net cash provided by (used for)
financing activities 50,241 (1,009,838) (19,664)
--------- ----------- ---------
Effect of foreign exchange rate changes
on cash (9,013) (11,835) -
--------- ----------- ---------
Net increase (decrease) in cash and
cash equivalents 256,100 (163,632) (121,496)
Cash and cash equivalents at January 1, 296,058 459,690 581,186
--------- ----------- ---------
Cash and cash equivalents at December 31, $ 552,158 $ 296,058 $ 459,690
========= =========== =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $57,865 $ 55,237 $46,469
Income tax payments, net of refunds $25,273 $(15,129) $60,266
The accompanying notes are an integral part of
these consolidated financial statements.
F-5
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 2000, 1999 and 1998
(In thousands, except per share amounts)
Common Accumulated
Shares Additional Other
$1 Par Paid-in Comprehensive Retained
Value Capital Income (Loss) Earnings Total
----- ------- ------------- -------- -----
Balance, January 1, 1998 $63,879 $ 253,267 $ 5,630 $1,540,755 $1,863,531
----------
Comprehensive income:
Net changes in unrealized gain
(loss) on investments, net of
taxes of $3,596 (6,612) (6,612)
Net change in unrealized foreign
exchange gain (loss), net of
taxes of $61 211 211
Net income 54,343 54,343
----------
Comprehensive income 47,942
----------
Buyback of trust preferred
securities, net of taxes of $3,354 6,229 6,229
Exercise of options to purchase
common shares 137 3,048 3,185
Purchase of stock for treasury (2,031) (57,317) (59,348)
Dividends (8,380) (8,380)
------- --------- ------- ---------- ----------
Balance, December 31, 1998 61,985 205,227 (771) 1,586,718 1,853,159
----------
Comprehensive income:
Net changes in unrealized gain
(loss) on investments, net of
taxes of $766 (1,573) (1,573)
Net change in unrealized foreign
exchange gain (loss), net of
taxes of $1,967 (7,234) (7,234)
Net income 215,042 215,042
----------
Comprehensive income 206,235
----------
Purchase of stock for treasury (5,183) (120,298) (125,481)
Dividends ($13.58 per common share) (811,925) (811,925)
------- --------- ------- ---------- ----------
Balance, December 31, 1999 56,802 84,929 (9,578) 989,835 1,121,988
----------
Comprehensive income:
Net changes in unrealized gain
(loss) on investments, net of
taxes of $9,078 16,386 16,386
Net change in unrealized foreign
exchange gain (loss), net of
taxes of $47 (4,223) (4,223)
Net income 116,008 116,008
----------
Comprehensive income 128,171
----------
Purchase of stock for treasury (1,505) (30,589) (32,094)
Dividends ($.25 per common share) (13,824) (13,824)
------- --------- ------- ---------- ----------
Balance, December 31, 2000 $55,297 $ 54,340 $ 2,585 $1,092,019 $1,204,241
======= ========= ======= ========== ==========
The accompanying notes are an integral part of
these consolidated financial statements.
F-6
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Operations:
--------------------
The Company is a diversified financial services holding company engaged in a
variety of businesses, including commercial and personal lines of property and
casualty insurance through the Empire Group, principally in the New York
metropolitan area, banking and lending, manufacturing and winery operations,
principally in markets in the United States, and real estate activities and
precious metals mining.
Historically, the Empire Group's principal commercial lines of insurance have
been property and casualty products provided for vehicles (including medallion
and radio-controlled livery vehicles), multi-family residential real estate,
workers' compensation and various other business classes. The Empire Group's
principal personal lines insurance products have been automobile insurance and
homeowners insurance. During the past several years, the Empire Group has
experienced poor underwriting results and adverse reserve development in all of
its lines of business. The Empire Group has recently announced that it will no
longer accept any applications for new insurance policies, has entered into an
agreement to sell its renewal rights to an unaffiliated insurance company and
made arrangements with the unaffiliated insurance company to offer renewal
policies in those lines of business (other than private passenger automobile
insurance) where New York insurance law imposes a renewal obligation. Assuming
this agreement is consummated, the Empire Group will only have renewal
obligations for remaining personal lines insurance (primarily automobile) not
replaced by the third party insurance company, the remaining policy term of all
existing policies and a claim run-off operation.
The Empire Group is currently exploring its options for the future. The Empire
Group may commence new property and casualty insurance operations if a new
business model with an acceptable expense structure can be developed, enter into
a joint venture with another property and casualty insurance operation, explore
entering the claim services business or commence a liquidation. There may be
other options that the Company will explore, but no assurance can be given at
this time as to what the ultimate plan will be.
The Company's banking and lending operations principally consist of making
instalment loans to niche markets primarily funded by deposits insured by the
Federal Deposit Insurance Corporation. The Company's principal lending
activities consist of providing collateralized personal automobile loans to
individuals with poor credit histories. The Company's manufacturing operations
manufacture and market lightweight proprietary plastic netting used for a
variety of purposes including, among other things, construction, agriculture,
packaging, carpet padding, filtration and consumer products. The Company's
winery operations consist of its 90% interest in two wineries, which produce and
sell super-ultra-premium wines.
The Company's domestic real estate operations consist of office buildings,
residential land development projects and other unimproved land, all in various
stages of development and available for sale. The foreign real estate operations
are conducted through Compagnie Fonciere FIDEI ("Fidei"), a French company.
Since its acquisition in 1998, Fidei has been liquidating its real estate
assets. The Company's precious metals mining operations consist of its 72.9%
interest in MK Gold Company ("MK Gold"), a company that is traded on the NASD
OTC Bulletin Board.
F-7
2. Significant Accounting Policies:
-------------------------------
(a) Use of Estimates in Preparing Financial Statements: The preparation of
financial statements in conformity with generally accepted accounting principles
("GAAP") requires management to make estimates and assumptions that affect the
reported amounts in the financial statements and disclosures of contingent
assets and liabilities at the date of the financial statements. Actual results
could differ from those estimates.
(b) Consolidation Policy: The consolidated financial statements include the
accounts of the Company and all controlled entities. All significant
intercompany transactions and balances are eliminated in consolidation.
Associated companies are investments in equity interests of entities that the
Company does not control and that are accounted for on the equity method of
accounting.
Certain amounts for prior periods have been reclassified to be consistent with
the 2000 presentation.
(c) Statements of Cash Flows: The Company considers short-term investments,
which have maturities of less than three months at the time of acquisition, to
be cash equivalents. Cash and cash equivalents include short-term investments of
$424,197,000 and $202,603,000 at December 31, 2000 and 1999, respectively.
(d) Investments: At acquisition, marketable debt and equity securities are
designated as either i) held to maturity, which are carried at amortized cost,
ii) trading, which are carried at estimated fair value with unrealized gains and
losses reflected in results of operations, or iii) available for sale, which are
carried at estimated fair value with unrealized gains and losses reflected as a
separate component of shareholders' equity, net of taxes. Held to maturity
investments are made with the intention of holding such securities to maturity,
which the Company has the ability to do. Estimated fair values are principally
based on quoted market prices.
Investments with an impairment in value considered to be other than temporary
are written down to estimated net realizable values. The writedowns are included
in "Net securities gains (losses)" in the Consolidated Statements of Income. The
cost of securities sold is based on average cost.
The Company's investments in Russian and Polish equity securities ($1,206,000
and $9,981,000 as of December 31, 2000 and 1999, respectively), none of which is
held by the insurance or banking subsidiaries, do not have readily determinable
fair values. Given the uncertainties inherent in investing in the emerging
markets of Russia and Poland, the Company is accounting for these investments
under the cost recovery method, whereby all receipts are applied to reduce the
investment. Quarterly, the Company reviews its investment in Russian and Polish
equity securities to determine that the carrying amount is realizable. In
performing such reviews, the Company considers current market prices, prior sale
transactions, the current political and economic environment and other factors.
These investments are included in "Other investments" in the Consolidated
Balance Sheets. During 1999 and 1998, due to declines in values that were deemed
other than temporary, the Company recorded pre-tax writedowns of $2,650,000 and
$75,371,000, respectively, related to its investments in Russian and Polish debt
and equity securities.
F-8
2. Significant Accounting Policies, continued:
-------------------------------
(e) Property, Equipment and Leasehold Improvements: Property, equipment and
leasehold improvements are stated at cost, net of accumulated depreciation and
amortization ($103,893,000 and $94,513,000 at December 31, 2000 and 1999,
respectively). Depreciation and amortization are provided principally on the
straight-line method over the estimated useful lives of the assets or, if less,
the term of the underlying lease.
(f) Income Recognition from Insurance Operations: Premiums on property and
casualty insurance products are recognized as revenues over the term of the
policy using the daily pro rata method.
(g) Policy Acquisition Costs: Policy acquisition costs principally consist of
commissions, premium taxes and other underwriting expenses (net of reinsurance
allowances). If recoverability of such costs from future premiums and related
investment income is not anticipated, the amounts not considered recoverable are
charged to operations.
Policy acquisition costs are deferred and amortized ratably over the terms of
the related policies.
(h) Reinsurance: In the normal course of business, the Company seeks to reduce
the loss that may arise from catastrophes and to limit losses from large
exposures by reinsuring certain levels of risk with other insurance enterprises.
Catastrophe reinsurance treaties serve to reduce property and casualty insurance
risk in geographic areas where the Company is exposed to natural disasters,
primarily the New York metropolitan area. Reinsurance contracts do not legally
relieve the Company from its obligations to policyholders.
Reinsurance recoverables are reported as assets net of provisions for
uncollectible amounts. Premiums earned and other underwriting expenses are
stated net of reinsurance.
(i) Policy Reserves and Unearned Premiums: Liabilities for unpaid losses and
loss adjustment expenses ("LAE") applicable to the property and casualty
insurance operations are determined using case basis evaluations, statistical
analyses for losses incurred but not reported and estimates for salvage and
subrogation recoverable and represent estimates of ultimate claim costs and loss
adjustment expenses. As more information becomes available and claims are
settled, the estimated liabilities are adjusted upward or downward with the
effect of decreasing or increasing net income at the time of adjustment.
(j) Income Taxes: The Company provides for income taxes using the liability
method. The future benefit of certain tax loss carryforwards and future
deductions is recorded as an asset. A valuation allowance is provided if
deferred tax assets are not considered more likely than not to be realized.
(k) Derivative Financial Instruments: The Company enters into interest rate
agreements to manage the impact of changes in interest rates on its customer
banking deposits. The difference between the amounts paid and received is
accrued and recognized as an adjustment to interest expense. Cash flows related
to the agreements are classified as operating activities in the Consolidated
Statements of Cash Flows, consistent with the interest payments on the
underlying debt. The Company also enters into currency rate swap agreements to
hedge net investments in foreign subsidiaries. Gains and losses
F-9
2. Significant Accounting Policies, continued:
-------------------------------
on such hedges are reported as a component of shareholders' equity. The Company
does not have material derivative financial instruments.
(l) Translation of Foreign Currency: Foreign currency denominated investments
and financial statements are translated into U.S. dollars at current exchange
rates, except that revenues and expenses are translated at average exchange
rates during each reporting period; resulting translation adjustments are
reported as a component of shareholders' equity. Net foreign exchange gains were
$2,308,000 for 2000, $4,825,000 for 1999 and were not material for 1998. Net
unrealized foreign exchange losses were $11,246,000 and $7,023,000 at December
31, 2000 and 1999, respectively.
(m) Recently Issued Accounting Standard: 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. Under SFAS 133, the Company will have to
reflect its derivative financial instruments at fair value. 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.
3. Acquisitions:
------------
In the fourth quarter of 1998, the Company acquired a 95.4% interest in Fidei, a
French company that is engaged directly and through subsidiaries in real estate
activities, for $62,264,000, including expenses. In the second quarter of 1999,
the Company acquired the remainder of Fidei for $4,730,000.
During 1999, the Company acquired substantially all of the assets of Tranex
Credit Corp. ("Tranex"), a subprime automobile lender, for $128,100,000.
Tranex's assets included its $67,900,000 subprime automobile portfolio,
$44,200,000 of residual interests and excess servicing assets of related
securitized trusts and $16,000,000 of certain other assets.
In October 1999, the Company increased its equity interest in MK Gold from 46%
to 72.5% for cash consideration of $15,807,000. During 1999, MK Gold acquired a
company that holds the exploration and mining rights to the Las Cruces copper
deposit in Spain for $42,000,000. MK Gold became a consolidated subsidiary of
the Company in the fourth quarter of 1999.
4. Investments in Associated Companies:
-----------------------------------
The Company has investments in several Associated Companies. The Company records
its portion of the earnings of certain companies based on fiscal periods ended
up to three months prior to the end of the Company's reporting period.
The following table provides certain summarized data with respect to the
Associated Companies accounted for on the equity method of accounting included
in 2000 and 1998 results of operations; data for 1999 is not shown due to
F-10
4. Investments in Associated Companies, continued:
-----------------------------------
immateriality. (Amounts are in thousands.)
2000
----
Assets $719,525
--------
Liabilities 452,698
--------
Minority interest -
--------
Net assets $266,827
========
The Company's portion of the
reported net assets $123,311
========
2000 1998
---- ----
Total revenues $233,503 $790,778
Income from continuing operations
before extraordinary items $ 42,878 $ 79,641
Net income $ 42,878 $ 79,641
The Company's equity in net income $ 29,293 $ 23,290
During 1998, the Company recognized $30,761,000 of income from its limited
partnership interest in an investment partnership. The partnership was
liquidated during 1999 and income realized from this investment in 1999 was not
significant.
In February 1999, the Company sold its interest in its joint venture, Pepsi
International Bottlers ("PIB"), for $39,190,000 and recognized a pre-tax gain of
$29,545,000. In 1998, the Company had discontinued accounting for this
investment under the equity method of accounting as it no longer had any ability
to influence PIB.
In March 1999, the Company sold all of its 30% interest in Caja de Ahorro y
Seguro S.A. ("Caja") to Assicurazioni Generali Group, an Italian insurance
company, for $126,000,000 in cash and a $40,000,000 collateralized note from its
Argentine partner. The note was paid in full in January 2001. The Company
recorded a pre-tax gain of $120,793,000 in 1999 results of operations.
During 2000, the Company invested $100,000,000 in the equity of a limited
liability company, Jefferies Partners Opportunity Fund II, LLC ("JPOF II"), that
is a registered broker-dealer. JPOF II is managed and controlled by Jefferies &
Company, Inc., a full service investment bank to middle market companies. JPOF
II invests in high yield securities, special situation investments and
distressed securities and provides trading services to its customers and
clients. Generally, the Company may not redeem its interest in JPOF II during
2001. For the year ended December 31, 2000, the Company recorded $17,283,000 of
pre-tax income from this investment under the equity method of accounting.
5. Insurance Operations:
--------------------
The changes in deferred policy acquisition costs were as follows (in thousands):
2000 1999 1998
---- ---- ----
Balance, January 1, $ 11,845 $ 18,255 $ 23,906
Policy acquisition costs incurred
and deferred 25,229 25,295 39,687
Amortization of deferred
acquisition costs (26,289) (31,705) (45,338)
-------- -------- --------
Balance, December 31, $ 10,785 $ 11,845 $ 18,255
======== ======== ========
F-11
5. Insurance Operations, continued:
--------------------
The effect of reinsurance on premiums written and earned for the years ended
December 31, 2000, 1999 and 1998 is as follows (in thousands):
2000 1999 1998
---- ---- ----
Premiums Premiums Premiums Premiums Premiums Premiums
Written Earned Written Earned Written Earned
-------- -------- -------- -------- -------- --------
Direct $121,498 $126,877 $132,044 $164,684 $214,878 $247,913
Assumed - - 534 553 93 148
Ceded (18,516) (18,383) (19,317) (20,055) (17,528) (19,485)
-------- -------- -------- -------- -------- --------
Net $102,982 $108,494 $113,261 $145,182 $197,443 $228,576
======== ======== ======== ======== ======== ========
Percentage
of amount
assumed
to net .00% .00% .47% .38% .05% .06%
==== ==== ==== ==== ==== ====
Recoveries recognized on reinsurance contracts were $7,348,000 in 2000,
$8,396,000 in 1999 and $38,958,000 in 1998.
Net loss as determined in accordance with statutory accounting principles
("SAP") as reported to the domiciliary state of the Company's property and
casualty insurance subsidiaries was $62,163,000, $20,474,000 and $9,410,000 for
the years ended December 31, 2000, 1999 and 1998, respectively. The related
statutory surplus was $88,184,000, $149,949,000 and $199,772,000 at December 31,
2000, 1999 and 1998, respectively. As of December 31, 2000, the statutory
surplus of the Empire Insurance Group was $76,888,000.
The insurance subsidiaries are subject to regulatory restrictions which limit
the amount of cash and other distributions available to the Company without
regulatory approval. As of December 31, 2000, no amounts could be distributed to
the Company without regulatory approval.
The Company's insurance subsidiaries are contingently liable for possible
assessments under state regulatory requirements pertaining to potential
insolvencies of unaffiliated insurance companies. Liabilities, which are
established based upon regulatory guidance, have not been material.
The National Association of Insurance Commissioners ("NAIC") has adopted model
laws incorporating the concept of a "risk based capital" ("RBC") requirement for
insurance companies. Generally, the RBC formula is designed to measure the
adequacy of an insurer's statutory capital in relation to the risks inherent in
its business. The RBC formula is used by the states as an early warning tool to
identify weakly capitalized companies for the purpose of initiating regulatory
action. Although New York State has not adopted the RBC requirements for
property and casualty insurance companies, New York does require that property
and casualty insurers file the RBC information with the New York Department of
Insurance. The NAIC also has adopted various ratios for insurance companies
which, in addition to the RBC ratio, are designed to serve as a tool to assist
state regulators in screening and analyzing the financial condition of insurance
companies operating in their respective states. The Company's insurance
operations had certain NAIC ratios outside of the acceptable range of results
for the year ended December 31, 2000. Although no assurance can be given, the
Company believes that it is unlikely that material adverse regulatory action
will be taken.
F-12
5. Insurance Operations, continued:
--------------------
In the following table, the liabilities for unpaid losses and LAE, of the Empire
Insurance Group is reconciled for each of the three years in the period ended
December 31, 2000. The changes in the liabilities include adjustments for the
current year's business and changes in estimates of prior years' liabilities.
2000 1999 1998
---- ---- ----
(In thousands)
Net SAP liability for losses
and LAE at beginning of year $381,550 $469,318 $487,116
-------- -------- --------
Provision for losses and
LAE for claims occurring
in the current year 97,089 124,172 191,482
Increase in estimated losses
and LAE for claims
occurring in prior years 52,977 18,255 42,290
-------- -------- --------
Total incurred losses
and LAE 150,066 142,427 233,772
-------- -------- --------
Losses and LAE payments for claims occurring during:
Current year 31,023 41,955 64,739
Prior years 177,607 188,240 186,831
-------- -------- --------
208,630 230,195 251,570
-------- -------- --------
Net SAP liability for losses
and LAE at end of year 322,986 381,550 469,318
Reinsurance recoverable 42,972 61,492 72,956
-------- -------- --------
Liability for losses and LAE
at end of year as reported
in financial statements (GAAP) $365,958 $443,042 $542,274
======== ======== ========
6. Discontinued Operations:
-----------------------
In September 1998, the Company reinsured, retroactive to January 1, 1998,
substantially all of its life insurance business to Allstate Life Insurance
Company ("Allstate") in an indemnity reinsurance transaction. While the premium
received on this transaction was approximately $28,675,000, the gain on the
reinsurance transaction was deferred and was being amortized into income based
upon actuarial estimates of the premium revenue of the underlying insurance
contracts. In July 1999, the Company sold its life insurance subsidiaries,
Charter National Life Insurance Company and Intramerica Life Insurance Company,
to Allstate for statutory surplus, as adjusted, at the date of sale
($39,557,000), plus $3,575,000. The Company recorded a net gain of $15,582,000
in 1999, principally resulting from recognition of deferred gains from prior
reinsurance transactions, including the reinsurance transaction described above.
Results of discontinued operations include revenues of $13,561,000 and
$10,799,000, respectively, and income before income taxes of $13,282,000 and
$12,524,000, respectively, for the years ended December 31, 1999 and 1998.
F-13
7. Investments:
-----------
The amortized cost, gross unrealized gains and losses and estimated fair value
of investments classified as held to maturity and as available for sale at
December 31, 2000 and 1999 are as follows (in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
Held to maturity:
2000
----
Bonds and notes:
United States Government
agencies and authorities $13,396 $166 $ 43 $13,519
States, municipalities
and political subdivisions 3,757 - 22 3,735
All other corporates 86 - - 86
Other fixed maturities 1,560 7 - 1,567
------- ---- ---- -------
$18,799 $173 $ 65 $18,907
======= ==== ==== =======
1999
----
Bonds and notes:
United States Government
agencies and authorities $14,162 $ 10 $266 $13,906
States, municipalities
and political subdivisions 5,389 - 161 5,228
All other corporates 159 - 3 156
Other fixed maturities 4,693 - - 4,693
------- ---- ---- -------
$24,403 $ 10 $430 $23,983
======= ==== ==== =======
Available for sale:
2000
----
Bonds and notes:
United States Government
agencies and authorities $339,131 $ 1,645 $ 812 $339,964
States, municipalities
and political subdivisions 1,373 11 - 1,384
Foreign governments 53,350 566 9 53,907
Public utilities 5,860 128 15 5,973
All other corporates 359,016 7,099 15,824 350,291
Other fixed maturities 35,539 - - 35,539
-------- ------- ------- --------
Total fixed maturities 794,269 9,449 16,660 787,058
-------- ------- ------- --------
Equity securities:
Preferred stocks 8,180 - 270 7,910
Common stocks:
Banks, trusts and insurance
companies 32,553 1,676 4,758 29,471
Industrial, miscellaneous and
all other 25,590 29,836 2,410 53,016
-------- ------- ------- --------
Total equity securities 66,323 31,512 7,438 90,397
-------- ------- ------- --------
Other 210 3 - 213
-------- ------- ------- --------
$860,802 $40,964 $24,098 $877,668
======== ======= ======= ========
F-14
7. Investments, continued:
-----------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
1999
----
Bonds and notes:
United States Government
agencies and authorities $494,125 $ 113 $ 9,823 $484,415
States, municipalities
and political subdivisions 853 - 20 833
Foreign governments 13,660 32 199 13,493
Public utilities 1,872 - 27 1,845
All other corporates 290,457 10,901 4,654 296,704
Other fixed maturities 52,933 - - 52,933
-------- ------- ------- --------
Total fixed maturities 853,900 11,046 14,723 850,223
-------- ------- ------- --------
Equity securities:
Preferred stocks 5,570 - 3,319 2,251
Common stocks:
Banks, trusts and insurance
companies 67,438 4,745 2,547 69,636
Industrial, miscellaneous and
all other 15,858 5,381 1,142 20,097
-------- ------- ------- --------
Total equity securities 88,866 10,126 7,008 91,984
-------- ------- ------- --------
Other 2,461 - 1 2,460
-------- ------- ------- --------
$945,227 $21,172 $21,732 $944,667
======== ======= ======= ========
At December 31, 2000, investments included a publicly traded common stock equity
interest of 7% in PhoneTel Technologies, Inc.
Net unrealized gains (losses) on investments were $13,831,000, $(2,555,000) and
$(982,000) at December 31, 2000, 1999 and 1998, respectively. Reclassification
amounts included in comprehensive income for the three year period ended
December 31, 2000 are as follows (in thousands):
2000 1999 1998
---- ---- ----
Unrealized holding gains (losses) arising during the
period, net of tax provision (benefit) of $8,735,
$(3,058) and $(1,366) $15,748 $(5,829) $(2,467)
Less: reclassification adjustment for (gains) losses
included in net income, net of tax provision (benefit)
of $343, $2,292 and $(2,230) 638 4,256 (4,145)
------- ------- -------
Net change in unrealized gain (loss) on investments,
net of tax provision (benefit) of $9,078, $(766)
and $(3,596) $16,386 $(1,573) $(6,612)
======= ======= =======
The amortized cost and estimated fair value of investments classified as held to
maturity and as available for sale at December 31, 2000, by contractual maturity
are shown below. Expected maturities are likely to differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
F-15
7. Investments, continued:
-----------
Held to Maturity Available for Sale
---------------- ------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- ---------
(In thousands)
Due in one year or less $ 2,560 $ 2,566 $177,906 $177,185
Due after one year
through five years 10,068 10,042 434,023 428,134
Due after five years
through ten years 3,579 3,708 81,016 78,206
Due after ten years 1,895 1,895 41,388 43,458
------- ------- -------- --------
18,102 18,211 734,333 726,983
Mortgage-backed securities 697 696 59,936 60,075
------- ------- -------- --------
$18,799 $18,907 $794,269 $787,058
======= ======= ======== ========
At December 31, 2000, and 1999 securities with book values aggregating
$8,645,000 and $8,056,000, respectively, were on deposit with various regulatory
authorities. Additionally, at December 31, 2000, and 1999, securities with book
values of $133,147,000 and $105,000,000, respectively, collateralized a letter
of credit issued in connection with the sale of the Colonial Penn Insurance
Company.
Certain information with respect to trading securities at December 31, 2000 and
1999 is as follows (in thousands):
Amortized Estimated Carrying
Cost Fair Value Value
--------- ---------- --------
2000
----
Fixed maturities - corporate bonds
and notes $ 37,563 $ 20,798 $ 20,798
Equity securities:
Preferred stocks 67,947 74,535 74,535
Common stocks - industrial,
miscellaneous and all other 164 178 178
Other investments 45,277 41,770 41,770
-------- -------- --------
Total trading securities $150,951 $137,281 $137,281
======== ======== ========
1999
----
Fixed maturities - corporate bonds
and notes $ 22,248 $ 25,542 $ 25,542
Equity securities:
Preferred stocks 97,668 115,704 115,704
Common stocks - industrial,
miscellaneous and all other 23 34 34
Options and warrants 2,271 1,367 1,367
Other investments 16,469 25,638 25,638
-------- -------- --------
Total trading securities $138,679 $168,285 $168,285
======== ======== ========
F-16
8. Trade, Notes and Other Receivables, Net:
---------------------------------------
A summary of trade, notes and other receivables, net at December 31, 2000 and
1999 is as follows (in thousands):
2000 1999
---- ----
Instalment loan receivables, net of unearned
finance charges of $3,978 and $2,599(a) $515,766 $339,773
Note receivable from Conseco, Inc. from sale
of the Colonial Penn Insurance Company (including
accrued interest) - 253,820
Receivables related to securities 127,816 107,094
Receivables relating to real estate activities 81,083 91,281
Note receivable from sale of Caja (including accrued
interest) (see Note 4) 35,903 41,543
Tenant receivables of Fidei 31,934 38,807
Premiums receivable 25,741 25,368
Other 38,402 32,564
-------- --------
856,645 930,250
Allowance for doubtful accounts (57,434) (53,839)
-------- --------
$799,211 $876,411
======== ========
(a) Contractual maturities of instalment loan receivables at December 31, 2000
were as follows (in thousands): 2001 - $104,080; 2002 - $96,997; 2003 -
$102,621; 2004 - $95,319; and 2005 and thereafter - $116,749. Experience shows
that a substantial portion of such notes will be repaid or renewed prior to
contractual maturity. Accordingly, the foregoing is not to be regarded as a
forecast of future cash collections.
At December 31 1999, the Company had outstanding promissory notes from Conseco,
Inc. in the principal amount of $250,000,000. During 2000, the entire principal
amount and accrued interest then outstanding on these notes was repaid. In
addition, the Company received $7,500,000 directly from Conseco, which
constituted a prepayment penalty due under the terms of these notes.
9. Prepaids and Other Assets:
-------------------------
At December 31, 2000 and 1999, prepaids and other assets included real estate
assets, net, of $210,044,000 and $284,093,000, respectively. Such amounts
included $43,555,000 and $87,566,000 of real estate assets held by Fidei as of
December 31, 2000 and 1999, respectively. These assets consist of commercial
real estate properties located in Paris, France and its environs, which Fidei is
currently marketing for sale. Prepaids and other assets at December 31, 2000 and
1999 also included $50,047,000 and $44,034,000, respectively, of mining
properties, net, related to MK Gold.
10. Trade Payables, Expense Accruals and Other Liabilities:
------------------------------------------------------
A summary of trade payables and expense accruals and other liabilities at
December 31, 2000 and 1999 is as follows (in thousands):
2000 1999
---- ----
Trade Payables and Expense Accruals:
Payables related to securities $108,507 $203,164
Trade and drafts payable 33,118 29,581
Accrued compensation, severance and other
employee benefits 25,140 25,643
Accrued interest payable 8,922 10,552
Other 39,463 23,737
-------- --------
$215,150 $292,677
======== ========
Other Liabilities:
Postretirement and postemployment benefits $ 15,931 $ 16,397
Liabilities related to real estate activities 44,739 21,402
Unearned service fees 724 3,663
Other 56,245 37,614
-------- --------
$117,639 $ 79,076
======== ========
F-17
11. Indebtedness:
------------
The principal amount, stated interest rate and maturity of debt outstanding at
December 31, 2000 and 1999 are as follows (dollars in thousands):
2000 1999
---- ----
Payable in U.S. dollars:
Senior Notes:
Bank credit facility $ - $ 65,500
7 3/4% Senior Notes due 2013, less debt
discount of $631 and $681 99,369 99,319
Industrial Revenue Bonds (with variable interest) 9,815 9,815
Other due 2001 through 2016 with a weighted average
interest rate of 7.94% 40,589 53,401
-------- --------
149,773 228,035
-------- --------
Subordinated Notes:
8 1/4% Senior Subordinated Notes due 2005 19,101 19,101
7 7/8% Senior Subordinated Notes due 2006,
less debt discount of $64 and $76 21,612 21,600
-------- --------
40,713 40,701
-------- --------
Payable in other currencies:
Euro denominated debt due 2001 through 2009 with
a weighted average effective interest rate of 5.1% 184,037 214,573
-------- --------
$374,523 $483,309
======== ========
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. At December 31, 2000, no amounts were outstanding under this bank credit
facility.
The Company's debt instruments require maintenance of minimum Tangible Net
Worth, limit distributions to shareholders and limit Indebtedness, as defined in
the agreements. In addition, the debt instruments contain limitations on
investments, liens, contingent obligations and certain other matters. As of
December 31, 2000, cash dividends of approximately $204,240,000 would be
eligible to be paid under the most restrictive covenants.
The Euro denominated debt, which is non-recourse to the Company, is entirely
related to the acquisition of Fidei. During 2000, Fidei repurchased
approximately $14,700,000 (approximately 15,800,000 Euros) principal amount of
its Euro denominated debt and recognized an extraordinary gain on early
extinguishment of $1,535,000 ($983,000 after taxes or $.02 per share).
Property, equipment and leasehold improvements of the manufacturing division
with a net book value of $8,675,000 are pledged as collateral for the Industrial
Revenue Bonds; and $130,694,000 of other assets (primarily investments and
property) are pledged for other indebtedness aggregating $40,589,000.
Interest rate agreements are used to manage the potential impact of changes in
interest rates on customer banking deposits. Under interest rate swap
agreements, the Company has agreed with other parties to pay fixed rate interest
amounts and receive variable rate interest amounts calculated by reference to an
agreed notional amount. The variable interest rate portion of the swaps is a
specified LIBOR interest rate. At December 31, 2000 and 1999, the notional
amounts of the Company's interest rate swaps were $160,000,000 and $60,000,000,
respectively. These interest rate swaps expire in 2003 and require fixed rate
payments of 6.2%. The Company would have paid $1,231,000 at December 31, 2000
and received $3,651,000 at December 31, 1999 on retirement of these agreements.
The LIBOR rate at December 31, 2000 was 6.4%. Changes in LIBOR interest rates in
the future will change the amounts to be received under the agreements, as well
as interest to be paid under the related variable debt obligations. In
connection with the acquisition of Fidei, the Company
F-18
11. Indebtedness, continued:
------------
borrowed $62,300,000 under its bank credit facility and entered into currency
swap agreements to hedge approximately $55,000,000 of its foreign currency
exposure. The swap agreements were terminated in 1999 and the gain on such
termination (approximately $6,200,000) was deferred as a component of
shareholders' equity.
Counterparties to interest rate and currency swap agreements are major financial
institutions, that management believes are able to fulfill their obligations.
Management believes any losses due to default by the counterparties are likely
to be immaterial.
The aggregate annual mandatory redemptions of debt during the five year period
ending December 31, 2005 are as follows (in thousands): 2001 - $60,701; 2002 -
$12,640; 2003 - $78,239; 2004 - $46,528; and 2005 - $20,468.
The weighted average interest rate on short-term borrowings (primarily customer
banking deposits) was 6.6% and 6.0% at December 31, 2000 and 1999, respectively.
12. Preferred Securities of Subsidiary Trust:
----------------------------------------
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. During 1998, a subsidiary of the
Company repurchased $51,800,000 aggregate liquidation amount of the 8.65% trust
issued preferred securities for $42,200,000, plus accrued interest. The
difference between the purchase price and the book value was credited directly
to shareholders' equity, net of taxes.
13. Common Shares, Stock Options and Preferred Shares:
-------------------------------------------------
The Board of Directors from time to time has authorized acquisitions of the
Company's Common Shares. In December 1999, the Company's Board of Directors
increased to 6,000,000 the maximum number of shares that the Company is
authorized to purchase. During 2000, the Company acquired 1,505,000 Common
Shares at an average price of $21.33 per Common Share. As a result, as of
December 31, 2000, the Company is authorized to repurchase 4,495,000 Common
Shares.
During 1999, the Company paid aggregate cash dividends of $13.58 per Common
Share, totaling $811,925,000. Pursuant to a ruling from the Internal Revenue
Service, any gain realized on these dividends will be treated as capital gain
income for non-corporate shareholders.
The Company has a fixed stock option plan which provides for grants of options
or rights to non-employee directors and certain employees up to a maximum grant
of 300,000 shares to any individual in a given taxable year. The maximum number
of Common Shares which may be acquired through the exercise of options or rights
under this plan cannot exceed, in the aggregate, 1,200,000. The plan provides
for the issuance of stock options and stock appreciation rights at not less than
the fair market value of the underlying stock at the date of grant. Options
generally become exercisable in five equal annual instalments starting one year
from date of grant. No stock appreciation rights have been granted.
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).
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), establishes a fair value method for accounting for
stock-based compensation plans, either through recognition in the statements of
income or disclosure. As permitted, the Company applies APB Opinion No. 25 and
related Interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized in the statements of income for its
stock-based compensation
F-19
13. Common Shares, Stock Options and Preferred Shares, continued:
-------------------------------------------------
plans. Had compensation cost for the Company's stock option plans been recorded
in the statements of income consistent with the provisions of SFAS 123, the
Company's net income would not have been materially different from that reported
in 2000, 1999 and 1998.
A summary of activity with respect to the Company's stock options for the three
years ended December 31, 2000 is as follows:
Available
Common Weighted for
Shares Average Options Future
Subject Exercise Exercisable Option
to Option Prices at Year-End Grants
--------- -------- ----------- ---------
Balance at January 1, 1998 509,760 $24.64 171,980 1,278,770
======= =========
Granted 4,000 $35.38
Exercised (137,922) $23.10
Cancelled (53,800) $25.02
--------
Balance at December 31, 1998 322,038 $25.37 147,378 1,328,570
======= =========
Cancelled (322,038) $25.37
--------
Balance at December 31, 1999 - $ - - 1,200,000
======= =========
Granted 409,250 $22.64
Cancelled (17,500) $22.63
--------
Balance at December 31, 2000 391,750 $22.64 10,000 808,250
======== ======= =========
The weighted-average fair value of the options granted was $6.25 per share for
2000 and $8.50 per share for 1998 as estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: (1) expected
volatility of 25.4% for 2000 and 20.0% for 1998; (2) risk-free interest rates of
6.8% for 2000 and 5.6% for 1998; (3) expected lives of 3.7 years for 2000 and
4.0 years for 1998; and (4) dividend yields of 1.1% for 2000 and .7% for 1998.
The following table summarizes information about fixed stock options outstanding
at December 31, 2000:
Options Outstanding Options Exercisable
--------------------------------------- ----------------------
Common Weighted Weighted Common Weighted
Shares Average Average Shares Average
Range of Subject Remaining Exercise Subject Exercise
Exercise Prices to Option Contractual Life Price To Option Price
--------------- --------- ---------------- -------- --------- --------
$22.63 - $22.81 391,750 5.2 years $22.64 10,000 $22.63
At December 31, 2000, 808,250 of the Company's Common Shares were reserved for
stock options and 800,000 of the Company's Common Shares were reserved for
warrants.
At December 31, 2000 and 1999, 6,000,000 preferred shares (redeemable and non-
redeemable), par value $1 per share, were authorized.
F-20
14. Net Securities Gains (Losses):
-----------------------------
The following summarizes net securities gains (losses) for each of the three
years in the period ended December 31, 2000 (in thousands):
2000 1999 1998
---- ---- ----
Net realized gains on fixed maturities $ 4,155 $ 32,616 $ 13,021
Writedown related to investments in Russian
and Polish debt and equity securities - (2,650) (75,371)
Net unrealized gains (losses) on trading
securities (11,335) 5,878 (1,456)
Net realized gains (losses) on equity and other
securities 130,405 (24,959) 2,935
-------- -------- --------
$123,225 $ 10,885 $(60,871)
======== ======== ========
During 2000, the Company sold its entire equity interest in Fidelity National
Financial, Inc. ("FNF") for proceeds of $179,881,000 and recognized a pre-tax
gain of $90,896,000. Additionally, during 2000, the Company sold its 10% equity
interest in Jordan Telecommunication Products, Inc. ("JTP") for $27,323,000 and
recorded a pre-tax gain of $24,821,000.
Proceeds from sales of investments classified as available for sale were
$1,148,176,000, $1,558,358,000 and $1,687,385,000 during 2000, 1999 and 1998,
respectively. Gross gains of $125,560,000, $24,201,000 and $24,964,000 and gross
losses of $16,441,000, $13,310,000 and $33,784,000 were realized on these sales
during 2000, 1999 and 1998, respectively.
15. Other Results of Operations Information:
---------------------------------------
Investment and other income for each of the three years in the period ended
December 31, 2000 consists of the following (in thousands):
2000 1999 1998
---- ---- ----
Interest on short-term investments $ 14,363 $ 22,789 $ 24,246
Interest on fixed maturities 45,063 55,252 94,547
Interest on notes receivable 17,480 23,989 27,326
Other investment income 32,362 18,749 14,983
Service fee income 4,182 9,143 13,169
Rental income 27,427 35,862 16,864
MK Gold product and service income 17,402 5,148 -
Winery revenues 15,337 13,347 4,139
Gain on sale of Caja - 120,793 -
Gain on sale of The Sperry and Hutchinson
Company, Inc. - 18,725 -
Gain on sale of PIB - 29,545 -
Gains on sale and foreclosure of real estate
and other assets, net of costs 95,523 64,896 34,733
Gain on sale of loan portfolio - - 6,535
Prepayment penalty on Conseco notes 7,500 - -
Other 23,810 20,964 14,837
-------- -------- --------
$300,449 $439,202 $251,379
======== ======== ========
During 1998, the Company's subsidiaries, American Investment Bank, N.A. and
American Investment Financial, sold substantially all of their executive and
professional loan portfolios for aggregate proceeds of $89,500,000. The Company
reported a pre-tax gain on the sales of $6,535,000 for the year ended December
31, 1998.
Taxes, other than income or payroll, included in operations amounted to
$9,412,000 (including $1,714,000 of premium taxes) for the year ended December
31, 2000, $10,819,000 (including $1,868,000 of premium taxes) for the year ended
December 31,
F-21
15. Other Results of Operations Information, continued:
---------------------------------------
1999 and $10,563,000 (including $3,131,000 of premium taxes) for the year ended
December 31, 1998.
Advertising costs amounted to $3,182,000, $1,181,000 and $2,150,000 for the
years ended December 31, 2000, 1999 and 1998, respectively.
16. Income Taxes:
------------
The principal components of the deferred tax liability at December 31, 2000 and
1999 are as follows (in thousands):
2000 1999
---- ----
Deferred Tax Asset:
Insurance reserves and unearned premiums $ 17,905 $ 22,092
Securities valuation reserves 36,985 41,554
Other accrued liabilities 15,383 14,546
Unrealized losses on investments - 1,567
Foreign tax loss carryforwards 35,000 53,000
Tax loss carryforwards, net of tax sharing payments - 21,597
-------- --------
105,273 154,356
Valuation allowance (84,103) (123,506)
-------- --------
21,170 30,850
-------- --------
Deferred Tax Liability:
Unrealized gains on investments (9,464) -
Instalment sale - (7,000)
Depreciation (16,559) (9,515)
Policy acquisition costs (3,775) (4,146)
Intangible drilling costs (4,557) (3,732)
Other, net (41,952) (36,880)
-------- --------
(76,307) (61,273)
-------- --------
Net deferred tax liability $(55,137) $(30,423)
======== ========
The valuation allowance principally relates to uncertainty as to the realization
of the foreign tax loss carryforwards, unrealized capital losses and, in 1999,
certain acquired tax loss carryforwards. During 2000, the valuation allowance
was reduced due to the utilization of tax loss carryforwards.
The provision (benefit) for income taxes for each of the three years in the
period ended December 31, 2000 was as follows (in thousands):
2000 1999 1998
---- ---- ----
State income taxes (currently payable) $ 1,500 $ 1,000 $ (1,500)
Federal income taxes:
Current 27,976 (517) (31,249)
Deferred 28,285 31,136 7,576
Foreign income taxes:
Current 150 575 100
Deferred 14,845 12,327 -
------- ------- --------
$72,756 $44,521 $(25,073)
======= ======= ========
F-22
16. Income Taxes, continued:
------------
The table below reconciles expected statutory federal income tax to actual
income tax provision (benefit) (in thousands):
2000 1999 1998
---- ---- ----
Expected federal income tax $67,656 $ 85,215 $ 10,282
State income taxes, net of federal
income tax benefit 975 650 (975)
Reduction in valuation allowance - (33,300) (8,065)
Recognition of additional tax benefits (1,597) (10,238) (30,870)
Tax on policyholder surplus account - - 5,406
Reduction of foreign deferred tax asset 6,193 - -
Other (471) 2,194 (851)
------- -------- --------
Actual income tax provision (benefit) $72,756 $ 44,521 $(25,073)
======= ======== ========
Reflected above as recognition of additional tax benefits are reductions to the
Company's income tax provision for the favorable resolution of certain federal
income tax contingencies, in 1999, a $6,800,000 tax benefit from the recognition
of additional capital losses, and in 1998, a benefit for a change in the
Company's 1997 estimated federal income tax liability. During 1999, the
valuation allowance was reduced by $33,300,000 due to the availability of
capital loss carryforwards to offset a portion of the capital gain from the sale
of the Company's interest in Caja. During 1998 certain matters were favorably
resolved and the Company reduced the valuation allowance as reflected in the
above reconciliation.
At December 31, 2000, the Company's foreign subsidiary, Fidei, had tax loss
carryforwards of $98,000,000, of which $48,000,000 expire in 2002 through 2007
and $50,000,000 have no expiration date.
Limitations exist under the tax law which may restrict the utilization of the
tax loss carryforwards and capital losses can only be used to offset capital
gains. These limitations are considered in the determination of the valuation
allowance.
Under certain circumstances, the value of tax loss carryforwards could be
substantially reduced if certain changes in ownership were to occur. In order to
reduce this possibility, the Company's certificate of incorporation includes
restrictions which prohibit transfers of the Company's Common Stock under
certain circumstances.
In connection with the sale of certain of the Company's operations in recent
years, the Company has agreed to indemnify the purchasers for certain tax
matters. The Company does not believe that such indemnification obligation will
result in any additional material liability to the Company.
17. Pension Plans and Postretirement Benefits:
-----------------------------------------
The Company has defined contribution pension plans covering certain employees.
Contributions and costs are a percent of each covered employee's salary. Amounts
charged to expense related to such plans were $2,701,000, $2,816,000 and
$1,057,000 for the years ended December 31, 2000, 1999 and 1998, respectively.
Prior to 1999, the Company also maintained defined benefit pension plans
covering employees of certain units who also met age and service requirements.
Effective December 31, 1998, the Company froze its defined benefit pension plans
which resulted in the recognition of $6,524,000 of net curtailment gains.
F-23
17. Pension Plans and Postretirement Benefits, continued:
-----------------------------------------
A summary of activity with respect to the Company's defined benefit pension
plans for 2000 and 1999 is as follows (in thousands):
2000 1999
---- ----
Projected Benefit Obligation:
Projected benefit obligation
at January 1, $56,756 $63,395
Interest cost 3,872 4,237
Actuarial gain (1,476) (2,361)
Benefits paid (6,337) (3,400)
Settlements - (5,115)
------- -------
Projected benefit obligation
at December 31, $52,815 $56,756
======= =======
Change in Plan Assets:
Fair value of plan assets
at January 1, $52,087 $62,482
Actual return of plan assets 3,261 577
Employer contributions - 226
Benefits paid (6,337) (3,400)
Administrative expenses - (220)
Settlements - (7,578)
------- -------
Fair value of plan assets
at December 31, $49,011 $52,087
======= =======
Funded Status $(3,804) $(4,669)
Unrecognized prior service cost 61 63
Unrecognized net loss from experience
differences and assumption changes 4,822 5,802
------- --------
Accrued pension asset $ 1,079 $ 1,196
======= =======
Pension expense related to the defined benefit pension plans charged to
operations included the following components (in thousands):
2000 1999 1998
---- ---- ----
Service cost $ - $ - $ 2,542
Interest cost 3,872 4,237 5,215
Expected return on plan assets (3,758) (4,537) (5,108)
Amortization of prior service cost 2 3 (89)
Amortization of transition obligation - - 121
Recognized net actuarial loss - - 171
------- ------- -------
Net pension (income) expense $ 116 $ (297) $ 2,852
======= ======= =======
The projected benefit obligation at December 31, 2000 and 1999 was determined
using an assumed discount rate of 7.25% and the assumed long-term rate of return
on plan assets was 7.5% at December 31, 2000 and 1999.
F-24
17. Pension Plans and Postretirement Benefits, continued:
-----------------------------------------
Several subsidiaries provide certain health care and other benefits to certain
retired employees under plans which are currently unfunded. The Company pays the
cost of postretirement benefits as they are incurred. Amounts charged (credited)
to expense (principally amortization of a curtailment gain in 1999 and 1998)
related to such benefits were $477,000 in 2000, $(1,369,000) in 1999 and
$(1,990,000) in 1998.
A summary of activity with respect to the Company's postretirement plans for
2000 and 1999 is as follows (in thousands):
2000 1999
---- ----
Accumulated postretirement
benefit obligation at January 1, $10,183 $11,891
Service cost 33 32
Interest cost 771 765
Contributions by plan participants 342 231
Actuarial (gain) loss 332 (1,538)
Benefits paid (1,161) (1,198)
------- -------
Accumulated postretirement benefit
obligation at December 31, 10,500 10,183
Unrecognized prior service cost 250 304
Unrecognized net actuarial gain 3,202 3,807
------- -------
Accrued postretirement benefit obligation $13,952 $14,294
======= =======
The discount rate used in determining the accumulated postretirement benefit
obligation was 7.5% and 8.0% at December 31, 2000 and 1999, respectively. The
assumed health care cost trend rates used in measuring the accumulated
postretirement benefit obligation were between 6.0% and 10.0% for 2000, and 6.0%
and 9.0% for 1999, declining to an ultimate rate of between 5.0% and 6.0% by
2010.
If the health care cost trend rates were increased or decreased by 1%, the
accumulated postretirement obligation as of December 31, 2000 would have
increased or decreased by $869,000 and $773,000, respectively. The effect of
these changes on the aggregate of service and interest cost for 2000 would be
immaterial.
18. Commitments:
-----------
The Company and its subsidiaries rent office space and office equipment under
non-cancelable operating leases with terms generally varying from one to twenty
years. Rental expense (net of sublease rental income) charged to operations was
$11,264,000 in 2000, $10,964,000 in 1999 and $7,680,000 in 1998. Aggregate
minimum annual rentals (exclusive of real estate taxes, maintenance and certain
other charges) relating to facilities under lease in effect at December 31, 2000
are as follows (in thousands): 2001 - $9,215; 2002 - $8,919; 2003 - $8,270; 2004
- $8,548; 2005 - $8,157; and thereafter - $92,722. Future minimum sublease
rental income relating to facilities under lease in effect at December 31, 2000
are as follows (in thousands): 2001 - $3,436; 2002 - $3,781; 2003 - $3,727; 2004
- $3,592; 2005 - $3,435; and thereafter - $39,797.
Included in the amounts shown above are the gross future minimum annual rental
payments relating to a twenty year lease which the Empire Insurance Group
entered into beginning November 1998 for its executive and administrative
offices. These offices are in an office building in which the Company has an
equity interest. The above amounts have not been reduced for the Company's share
of rental income due to its equity participation in this office building.
In connection with the sale of certain subsidiaries, the Company has made or
guaranteed the accuracy of certain representations given to the acquiror. No
material loss is expected in connection with such matters.
F-25
18. Commitments, continued:
-----------
In connection with the 1997 sale of the property and casualty insurance business
of the Colonial Penn Insurance Company, the Company provided the purchaser with
a $100,000,000 non-cancelable letter of credit to collateralize certain
indemnification obligations. This letter of credit is collateralized by certain
deposits of the Company aggregating $156,562,000, consisting of investments of
$133,147,000 and cash and cash equivalents of $23,415,000.
The insurance and the banking and lending subsidiaries are limited by regulatory
requirements and agreements in the amount of dividends and other transfers of
funds that are available to the Company. Principally as a result of such
restrictions, the net assets of subsidiaries which are subject to limitations on
transfer of funds to the Company were approximately $198,900,000 at December 31,
2000.
19. Litigation:
----------
The Company is subject to various litigation which arises in the course of its
business. Based on discussions with counsel, management is of the opinion that
such litigation will have no material adverse effect on the consolidated
financial position of the Company or its consolidated results of operations.
20. Earnings (Loss) Per Common Share:
--------------------------------
For each of the three years in the period ended December 31, 2000, there were no
differences in the numerators for the basic and diluted per share computations
for income from continuing operations before extraordinary gain (loss). These
numerators were $115,025,000, $193,429,000 and $46,202,000 for 2000, 1999 and
1998, respectively. The denominators for basic per share computations were
55,529,000, 59,338,000 and 63,409,000 for 2000, 1999 and 1998, respectively.
There were no differences for the denominators for diluted per share
computations except for the dilutive effect of 69,000, 14,000 and 101,000
options and warrants for 2000, 1999 and 1998, respectively, which had no impact
on the per share amounts.
21. Fair Value of Financial Instruments:
-----------------------------------
The following table presents fair value information about certain financial
instruments, whether or not recognized on the balance sheet. Where quoted market
prices are not available, fair values are based on estimates using present value
or other valuation techniques. Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows. The fair value amounts presented do not purport to represent and should
not be considered representative of the underlying "market" or franchise value
of the Company. The methods and assumptions used to estimate the fair values of
each class of the financial instruments described below are as follows:
(a) Investments: The fair values of marketable equity securities, fixed maturity
securities and investments held for trading purposes (which include securities
sold not owned) are substantially based on quoted market prices, as disclosed in
Note 7.
(b) Cash and cash equivalents: For cash equivalents, the carrying amount
approximates fair value.
(c) Notes receivables on sale of the Colonial Penn Insurance Company and Caja,
and other notes receivable: The fair values of variable rate notes receivable
are estimated to be the carrying amount.
(d) Loan receivables of banking and lending subsidiaries: The fair value of loan
receivables of the banking and lending subsidiaries is estimated by discounting
the future cash flows using the current rates at which similar loans would be
made to borrowers with similar credit ratings for the same remaining maturities.
(e) Investments in associated companies: The fair value of a foreign power
company is principally estimated based upon quoted market prices. The carrying
value of the remaining investments in associated companies approximates fair
value.
F-26
21. Fair Value of Financial Instruments, continued:
-----------------------------------
(f) Customer banking deposits: The fair value of customer banking deposits is
estimated using rates currently offered for deposits of similar remaining
maturities.
(g) Long-term and other indebtedness: The fair values of non-variable rate debt
are estimated using quoted market prices and estimated rates which would be
available to the Company for debt with similar terms. The fair value of variable
rate debt is estimated to be the carrying amount.
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 2000 and 1999 are as follows (in thousands):
2000 1999
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial Assets:
Investments $1,060,418 $1,060,526 $1,170,493 $1,170,073
Cash and cash equivalents 552,158 552,158 296,058 296,058
Notes receivable on sales of the
Colonial Penn Insurance Company and
Caja (including accrued interest) 35,903 35,903 295,363 295,363
Other notes receivable 78,890 78,890 92,620 92,620
Loan receivables of banking and
lending subsidiaries, net of
allowance 488,402 509,076 322,798 335,460
Investments in associated
companies 192,545 204,539 74,037 87,853
Financial Liabilities:
Customer banking deposits 526,172 529,591 329,301 329,469
Debt 374,523 367,842 483,309 488,112
Securities sold not owned 108,504 108,504 188,141 188,141
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust
holding solely subordinated debt
securities of the Company 98,200 99,182 98,200 99,182
22. Segment Information:
-------------------
For information with respect to the Company's segments, see "Financial
Information about Industry Segments" in Item 1, pages 3 and 4, of the Report,
which is incorporated by reference into these consolidated financial statements.
F-27
23. Selected Quarterly Financial Data (Unaudited):
---------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands, except per share amounts)
2000:
-----
Revenues $156,955 $136,935 $173,555 $248,042
======== ======== ======== ========
Income from continuing operations before
extraordinary gain $ 25,011 $ 9,528 $ 28,791 $ 51,695
======== ======== ======== ========
Extraordinary gain from early
extinguishment of debt, net of taxes $ 562 $ - $ - $ 421
======== ======== ======== ========
Net income $ 25,573 $ 9,528 $ 28,791 $ 52,116
======== ======== ======== ========
Basic earnings per common share:
Income from continuing operations before
extraordinary gain $.45 $.17 $.52 $.93
Extraordinary gain .01 - - .01
---- ---- ---- ----
Net income $.46 $.17 $.52 $.94
==== ==== ==== ====
Number of shares used in calculation 56,052 55,297 55,297 55,297
====== ====== ====== ======
Diluted earnings per common share:
Income from continuing operations before
extraordinary gain $.45 $.17 $.52 $.93
Extraordinary gain .01 - - .01
---- ---- ---- ----
Net income $.46 $.17 $.52 $.94
==== ==== ==== ====
Number of shares used in calculation 56,052 55,311 55,390 55,464
====== ====== ====== ======
1999:
-----
Revenues $298,585 $139,397 $131,336 $137,314
======== ======== ======== ========
Income from continuing operations
before extraordinary loss $148,214 $ 15,318 $ 21,446 $ 8,451
======== ======== ======== ========
Income from discontinued operations,
net of taxes $ 8,101 $ 518 $ - $ -
======== ======== ======== ========
Gain on disposal of discontinued
operations, net of taxes $ - $ - $ 15,582 $ -
======== ======== ======== ========
Extraordinary loss from early extinguishment
of debt, net of income tax benefit $ - $ (2,588) $ - $ -
======== ======== ======== ========
Net income $156,315 $ 13,248 $ 37,028 $ 8,451
======== ======== ======== ========
Basic earnings (loss) per common share:
Income from continuing operations
before extraordinary loss $2.42 $ .25 $.36 $.15
Income from discontinued operations .13 .01 - -
Gain on disposal of discontinued operations - - .27 -
Extraordinary loss - (.04) - -
----- ----- ---- ----
Net income $2.55 $ .22 $.63 $.15
===== ===== ==== ====
Number of shares used in calculation 61,338 60,020 58,865 56,882
====== ====== ====== ======
Diluted earnings (loss) per common share:
Income from continuing operations
before extraordinary loss $2.42 $ .25 $.36 $.15
Income from discontinued operations .13 .01 - -
Gain on disposal of discontinued operations - - .27 -
Extraordinary loss - (.04) - -
----- ----- ---- ----
Net income $2.55 $ .22 $.63 $.15
===== ===== ==== ====
Number of shares used in calculation 61,393 60,020 58,865 56,882
====== ====== ====== ======
F-28
23. Selected Quarterly Financial Data (Unaudited), continued:
---------------------------------------------
In 2000 and 1999, the totals of quarterly per share amounts do not necessarily
equal annual per share amounts.
Quarterly data for 2000 includes pre-tax gains on the sale of JTP ($24,821,000)
in the first quarter and FNF ($90,896,000) primarily in the fourth quarter.
First quarter 1999 includes pre-tax gains on the sale of Caja ($120,793,000),
The Sperry and Hutchinson Company, Inc. ($18,725,000) and PIB ($29,545,000).
24. Subsequent Events:
------------------
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. The parties intend that the commitment
will be financed with the Company guaranteeing 10% of the financing and
Berkshire Hathaway guaranteeing 90% of the financing. The commitment, which
expires on August 31, 2001, provides that Berkadia will receive $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.
FINOVA will pay certain fees to Berkadia in connection with this commitment,
including a $60,000,000 non-refundable commitment fee that was paid at the time
of execution 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).
The commitment is subject to, among other things, Berkadia's satisfaction with
the restructuring plan of the FINOVA companies, including bankruptcy court and
necessary creditor approvals, the issuance to the Company and Berkshire Hathaway
of newly issued common stock of FINOVA totaling 51% 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. 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 secured notes will be shared 90% to
Berkshire Hathaway and 10% to the Company.
There can be no assurance that this transaction ultimately will be consummated.
F-29
SCHEDULE V - Valuation and Qualifying Accounts
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
For the years ended December 31, 2000, 1999 and 1998
Additions Deductions
------------------------------------- ----------------------
Charged
Balance at to Costs Balance
Beginning and Write- Sale of Translation at End of
Description of Period Expenses Recoveries Acquisitions Offs Receivables (Gain) Loss Period
----------- --------- -------- ---------- ------------ ------- ----------- ----------- ---------
(In thousands)
2000
----
Loan receivables of
banking and lending
subsidiaries $16,975 $30,169 $5,681 $ - $25,461 $ - $ - $27,364
Trade, notes and other
receivables 36,864 2,060 1,459 - 8,091 - (2,222) 30,070
------- ------- ------ ------- ------- ------ ------- -------
Total allowance for
doubtful accounts $53,839 $32,229 $7,140 $ - $33,552 $ - $(2,222) $57,434
======= ======= ====== ======= ======= ====== ======= =======
1999
----
Loan receivables of
banking and lending
subsidiaries $ 9,398 $11,401 $5,455 $ - $ 9,279 $ - $ - $16,975
Trade, notes and other
receivables 47,624 3,985 2,828 - 11,736 130 (5,707) 36,864
------- ------- ------ ------- ------- ------ ------- -------
Total allowance for
doubtful accounts $57,022 $15,386 $8,283 $ - $21,015 $ 130 $(5,707) $53,839
======= ======= ====== ======= ======= ====== ======= =======
1998
----
Loan receivables of
banking and lending
subsidiaries $10,199 $ 4,900 $4,915 $ - $ 8,996 $1,620 $ - $ 9,398
Trade, notes and other
receivables 6,131 4,573 876 48,307 12,138 125 - 47,624
------- ------- ------ ------- ------- ------ ------- -------
Total allowance for
doubtful accounts $16,330 $ 9,473 $5,791 $48,307 $21,134 $1,745 $ - $57,022
======= ======= ====== ======= ======= ====== ======= =======
F-30
EXHIBIT INDEX
3.1 Restated Certificate of Incorporation (filed as Exhibit 5.1 to
the Company's Current Report on Form 8-K dated July 14,
1993).*
3.2 Amended and Restated By-laws as amended through February 23,
1999 (filed as Exhibit 3.2 to the 1998 10-K).*
4.1 The Company undertakes to furnish the Securities and Exchange
Commission, upon request, a copy of all instruments with
respect to long-term debt not filed herewith.
10.1 1999 Stock Option Plan (filed as Annex A to the 1999 Proxy
Statement).*
10.2 Articles and Agreement of General Partnership, effective as of
April 15, 1985, of Jordan/Zalaznick Capital Company (filed as
Exhibit 10.20 to the Company's Registration Statement No.
33-00606).*
10.3 Operating Agreement of The Jordan Company LLC, dated as of
July 23, 1998 (filed as Exhibit 10.3 to the 1998 10-K).*
10.4 Leucadia National Corporation Senior Executive Warrant Plan
(filed as Annex B to the 1999 Proxy Statement).*
10.5 Amended and Restated Shareholders Agreement dated as of
December 16, 1997 among the Company, Ian M. Cumming and Joseph
S. Steinberg (filed as Exhibit 10.4 to the 1997 10-K).*
10.6 Deferred Compensation Agreement between the Company and Joseph
S. Steinberg dated December 8, 1998 (filed as Exhibit 10.6 to
the 1998 10-K).*
10.7 Settlement Agreement between Baldwin-United Corporation and
the United States dated August 27, 1985 concerning tax issues
(filed as Exhibit 10.14 to the 1992 10-K).*
10.8 Acquisition Agreement, dated as of December 18, 1992, by and
between Provident Mutual Life and Annuity Company of America
and Colonial Penn Annuity and Life Insurance Company (filed as
Exhibit 10.15 to the 1992 10-K).*
10.9 Form of Amended and Restated Revolving Credit Agreement dated
as of June 27, 2000 between the Company, Fleet National Bank
as Administrative Agent, The Chase Manhattan Bank, as
Syndication Agent and the Banks signatory thereto, with Fleet
Boston Robertson Stephens, Inc., as Arranger.
---------------------------------
* Incorporated by reference.
38
10.10 Purchase Agreement among Conseco, Inc., the Company, Charter,
Colonial Penn Group, Inc., Colonial Penn Holdings, Inc.,
Leucadia Financial Corporation, Intramerica, Colonial Penn
Franklin Insurance Company and Colonial Penn Insurance Company
dated as of April 30, 1997 (filed as Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1997).*
10.11 Purchase Agreement among General Electric Capital Corporation,
the Company, Charter, Colonial Penn Group Inc. and Colonial
Penn Holdings, Inc. dated as of June 30, 1997 (filed as Annex
A to the 1997 Proxy Statement).*
10.12 Purchase Agreement by and among Allstate Life Insurance
Company, Allstate Life Insurance Company of New York, Charter,
Intramerica and the Company, dated February 11, 1998 (filed as
Exhibit 10.16 to the 1997 10-K).*
10.13 Leucadia National Corporation Senior Executive Annual
Incentive Bonus Plan (filed as Annex D to the 1997 Proxy
Statement).*
10.14 Stock Purchase Agreement by and between the Company and
Allstate Life Insurance Company dated as of December 18, 1998
(filed as Exhibit 10.14 to the 1998 10-K).*
10.15 Deferred Compensation Agreement between the Company and Joseph
S. Steinberg dated as of December 30, 1999 (filed as Exhibit
10.16 to the 1999 10-K).*
10.16 Deferred Compensation Agreement between the Company and Mark
Hornstein dated as of January 10, 2000 (filed as Exhibit 10.17
to the 1999 10-K).*
10.17 Deferred Compensation Agreement between the Company and Thomas
E. Mara dated as of January 10, 2000.
10.18 Deferred Compensation Agreement between the Company and Mark
Hornstein dated as of December 29, 2000.
10.19 Commitment Letter dated February 26, 2001 among the Company,
Berkshire Hathaway Inc., Berkadia LLC, The FINOVA Group Inc.
and FINOVA Capital Corporation.
10.20 Management Services Agreement dated as of February 26, 2001
among The FINOVA Group Inc., the Company and Leucadia
International Corporation.
10.21 Operating Agreement of Berkadia LLC dated February 26, 2001
between Berkshire Hathaway Inc. and the Company.
21 Subsidiaries of the registrant.
23 Consent of independent accountants with respect to the
incorporation by reference into the Company's Registration
Statement on Form S-8 (File No. 2-84303), Form S-8 and S-3
(File No. 33-6054), Form S-8 and S-3 (File No. 33-26434), Form
S-8 and S-3 (File No. 33-30277), Form S-8 (File No. 33-61682),
Form S-8 (File No. 33-61718) and Form S-8 (File No.
333-51494).
---------------------------------
* Incorporated by reference.
39