SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 2001
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from ___________ to
___________
Commission file number: 1-5721
LEUCADIA NATIONAL CORPORATION
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(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
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(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
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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.
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(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 February 22, 2002 (computed by reference to
the last reported closing sale price of the Common Stock on the New York Stock
Exchange on such date): $1,077,155,000.
On February 22, 2002, the registrant had outstanding 55,318,257 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
2002 annual meeting of shareholders of the registrant are incorporated by
reference into Part III of this Report.
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1
PART I
Item 1. Business.
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THE COMPANY
The Company is a diversified holding company engaged in a variety of
businesses, including banking and lending, manufacturing, winery operations,
real estate activities, development of a copper mine and property and casualty
insurance and reinsurance. 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. In
identifying possible acquisitions, the Company tends to seek assets and
companies that are troubled or out of favor and, as a result, are selling
substantially below the values the Company believes to be present.
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
$1,195,500,000 at December 31, 2001, equal to a book value per common share of
the Company (a "Common Share") of negative $.11 at December 31, 1978 and $21.61
at December 31, 2001. The December 31, 2001 shareholders' equity and book value
per share amounts have been reduced by the $811,900,000 cash dividend (the
"Dividend") paid in 1999.
In August 2001, Berkadia LLC, an entity jointly owned by the Company and
Berkshire Hathaway Inc., lent $5,600,000,000 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 paid certain fees in connection
with the transaction and Berkadia also received newly issued shares of common
stock of FINOVA representing 50% of the stock of FINOVA outstanding on a fully
diluted basis. For additional information, see Item 1, "Business - Other
Investments" and Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" of this Report.
In May 2001, the Company invested $75,000,000 in a new issue of restricted
convertible preference shares of White Mountains Insurance Group, Ltd. ("WMIG"),
which was subsequently converted into 375,000 common shares that represent
approximately 4% of WMIG. WMIG is a publicly traded, Bermuda-domiciled,
financial services holding company, principally engaged through its subsidiaries
and affiliates in property and casualty insurance and reinsurance. At December
31, 2001, the Company's investment had a market value of $130,500,000.
In December 2001, the Company invested $127,500,000 for an approximate 25%
common stock interest in Olympus Re Holdings, Ltd., a newly formed Bermuda
reinsurance company primarily engaged in the property excess, marine and
aviation reinsurance business.
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"). Historically,
the Company's principal lending activities have consisted of providing
collateralized personal automobile loans to individuals with poor credit
histories. As a result of increased loss experience and declining profitability
in its automobile lending program, the Company stopped originating new
automobile loans in 2001.
2
The Company's manufacturing operations manufacture and market proprietary
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 include
a mixture of commercial properties, residential land development projects and
other unimproved land, all in various stages of development and all 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 copper mine development operations consist of its 72.8%
interest in MK Gold Company ("MK Gold"), a public company traded on the NASD OTC
Bulletin Board (Symbol: MKAU).
The Company's insurance operations consist of commercial and personal
property and casualty insurance primarily in the New York metropolitan area
conducted through the Empire Group, which consists of Empire Insurance Company
("Empire") and Allcity Insurance Company ("Allcity"). In December 2001, the
Company determined to commence an orderly, voluntary liquidation of the Empire
Group and has classified the Empire Group as a discontinued operation.
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.
3
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: banking and lending, foreign real estate, domestic real
estate and manufacturing. Banking and lending operations historically made
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 were primarily funded by
deposits insured by the FDIC. Foreign real estate consists of the operations of
Fidei in France. The Company's domestic real estate operations consist of a
variety of commercial properties, residential land development projects and
other unimproved land, all in various stages of development and all available
for sale. Manufacturing operations manufacture and market proprietary
lightweight plastic netting used for a variety of purposes. Other operations
primarily consist of winery operations and development of a copper mine.
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. Olympus Re Holdings, Ltd., one of the Company's investments in
associated companies, is a Bermuda-based reinsurance company. 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 a manufacturing facility located in Belgium and an interest,
through MK Gold, in a copper deposit in Spain. Except as disclosed above, the
Company does not have any other material foreign operations and investments.
4
Certain information concerning the Company's segments for 2001, 2000 and
1999 is presented in the following table. Prior period amounts have been
reclassified for the domestic real estate operations, which were previously
included in Other Operations.
2001 2000 1999
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(In millions)
Revenues:
Banking and Lending $ 122.4 $ 108.8 $ 59.0
Foreign Real Estate 25.7 49.2 65.0
Domestic Real Estate 65.3 83.1 26.6
Manufacturing 57.4 65.1 64.0
Other Operations (a) 39.3 44.9 213.4
Equity in Associated Companies (b) (24.6) 29.3 (2.9)
Corporate (c) 89.8 191.5 97.8
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Total consolidated revenues $ 375.3 $ 571.9 $ 522.9
========== ========== ==========
Income (loss) from continuing operations before income taxes,
minority expense of trust preferred securities, extraordinary
gain (loss) and cumulative effect of a change in accounting principle:
Banking and Lending $ (6.1) $ 11.0 $ 12.7
Foreign Real Estate 5.2 22.9 31.8
Domestic Real Estate 30.4 58.8 13.4
Manufacturing 7.8 11.3 11.9
Other Operations (a) 8.2 5.2 187.0
Equity in Associated Companies (b) (24.6) 29.3 (2.9)
Corporate (c) 32.8 115.0 13.6
Total consolidated income from continuing operations ---------- ---------- ----------
before income taxes, minority expense of trust preferred
securities, extraordinary gain (loss) and cumulative effect of
a change in accounting principle $ 53.7 $ 253.5 $ 267.5
========== ========== ==========
Identifiable assets employed:
Banking and Lending $ 595.7 $ 664.2 $ 467.1
Foreign Real Estate 152.1 254.7 276.7
Domestic Real Estate 176.4 218.1 253.5
Manufacturing 59.3 63.4 42.9
Other Operations 171.2 177.1 178.2
Investments in Associated Companies 358.8 192.5 74.0
Net Assets of Discontinued Operations -- 112.1 208.7
Corporate 1,063.7 944.1 987.0
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Total consolidated assets $ 2,577.2 $ 2,626.2 $ 2,488.1
========== ========== ==========
(a) For 1999, includes, among other items, pre-tax gains on sale of Caja de
Ahorro y Seguro S.A., The Sperry & Hutchinson Company, Inc. and its
Russian joint venture with PepsiCo, Inc., aggregating $169,000,000, as
described in Notes 4 and 14 to the Consolidated Financial Statements.
5
(b) For 2001, includes, among other items, equity in loss of Berkadia
totaling $70,400,000, as described in Item 1, "Business-Other
Investments" and Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of this Report.
(c) For 2000, includes, among other items, pre-tax securities gains on sale
of Fidelity National Financial, Inc. ($90,900,000) and Jordan
Telecommunication Products, Inc., ($24,800,000), as described in Note 13
to the Consolidated Financial Statements.
At December 31, 2001, the Company and its consolidated subsidiaries had
1,066 full-time employees.
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 aggregate deposits of
$476,500,000 and $526,200,000 at December 31, 2001 and 2000, respectively. AIB
and AIF currently have several deposit-taking and lending facilities in the Salt
Lake City area, which have generated approximately three-quarters of their
deposit balances. Various brokers generated the remainder of the Company's
deposits. Deposits have primarily been used to fund consumer instalment loans.
The Company's consolidated banking and lending operations had outstanding
loans (net of unearned finance charges) of $521,200,000 and $515,800,000 at
December 31, 2001 and 2000, respectively. At December 31, 2001, 73% were loans
to individuals generally collateralized by automobiles; 23% were loans to
consumers, substantially all of which were collateralized by real or personal
property; 3% were loans to small businesses; and 1% were unsecured loans.
Collateralized personal automobile instalment loans have primarily been
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 have been made to consumers principally to purchase used,
moderately priced automobiles. In 2001, the average initial loan balance was
$12,250 and provided the Company with a yield of 21.5%. The average contractual
maturity for automobile loans originated in 2001 was 58 months, with an
anticipated average life of 26 months. In determining which individuals
qualified for these loans, the Company considered a number of highly selective
criteria with respect to the individual, as well as the collateral, to attempt
to minimize the amount of losses. 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, 2001, the Company generated $579,300,000 of
these loans ($162,800,000 during 2001). Such amounts exclude purchased
portfolios of $69,900,000 in the aggregate during the three year period ended
December 31, 2001.
Starting in 2000, the Company began to experience an increase in loan
losses. The Company believes that a weaker economy and increased bankruptcies
contributed to this increase. In an effort to reduce losses, the Company exited
certain states and automobile dealer relationships with historically higher loan
losses, but losses continued to increase during 2001. This loss experience,
combined with the increasingly difficult competitive environment, resulted in
the Company's decision in September 2001 to stop originating any new subprime
automobile loans. The Company will continue to service its remaining automobile
portfolio, as well as originate other loan products, although it is anticipated
that new loan originations will be substantially less than originations
previously generated in the subprime automobile portfolio. The Company will also
seek to acquire loan portfolios that meet its credit criteria if these
portfolios can be purchased on attractive terms.
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, historical loss experience and
collateral value, is deemed adequate to cover probable losses on outstanding
loans. At December 31, 2001, the allowance for loan losses for the Company's
entire loan portfolio was
6
$35,700,000 or 6.8% of the net outstanding loans, compared to $27,400,000 or
5.3% of net outstanding loans at December 31, 2000.
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.
Certain information with respect to the Company's banking and lending
segment is as follows for the years ended December 31, 2001, 2000 and 1999
(dollars in thousands):
2001 2000 1999
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Average loans outstanding $545,036 $423,030 $238,561
Interest income earned on loans $111,849 $ 87,865 $ 49,891
Average loan yield 20.5% 20.8% 20.9%
Average deposits outstanding $536,020 $422,607 $239,786
Interest expense on non-demand deposits $ 31,499 $ 26,421 $ 12,688
Average rate on non-demand deposits 5.9% 6.3% 5.3%
Net yield on interest-bearing assets 13.3% 13.1% 13.4%
Investments held by the banking and lending segment are primarily
short-term bonds and notes of the United States Government and its agencies.
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. In addition, major brokerage firms, insurance companies,
retailers and bank holding companies have formed substantial national financial
services networks that compete with the Company. 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. In an effort to increase operating efficiencies, the Company
has filed an application with the OCC to merge AIB and AIF. Although the Company
anticipates that the merger will be approved during the first quarter of 2002,
no assurance can be given that it will be approved.
7
FOREIGN REAL ESTATE
Through its French subsidiary, Fidei, the Company owns foreign commercial
real estate properties with a book value of $28,700,000 at December 31, 2001.
After considering Fidei's other assets and non-recourse liabilities, the
Company's net investment in this segment was $44,800,000 at December 31, 2001.
During 2001, Fidei sold 26 properties resulting in aggregate pre-tax gains of
$8,200,000; at December 31, 2001, a total of 27 properties aggregating
approximately 858,000 square feet remain. The Company expects to complete the
sale of Fidei's real estate holdings during 2002, and is exploring the
possibility of selling the stock of the corporate shell and/or liquidating Fidei
once the real estate sales are complete. The gain realized from the Company's
investment in Fidei will not be subject to material amounts of income taxes.
DOMESTIC REAL ESTATE
At December 31, 2001, the Company's domestic real estate investments had a
book value of $145,800,000. The real estate operations include a mixture of
commercial properties, residential land development projects and other
unimproved land, all in various stages of development and all available for
sale. The Company's largest domestic real estate investments are described
below. The Company owns a master-planned community located in San Diego County,
California that will include approximately 3,400 homes and apartments as well as
commercial properties when it is completed over the next seven years. In this
project, the Company converts the raw land into building lots that are sold to
homebuilders in phases. The Company expects to earn a preferred return of 15% on
its investment in this project; 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 1998. Also included in the Company's domestic real
estate is an investment in a 719-room hotel located on Waikiki Beach in Hawaii.
The hotel remains open to the public while it is being renovated, which the
Company expects to complete during 2002. The Company also owns two shopping
centers on Long Island, New York and one shopping center in upstate New York,
that in the aggregate have 341,000 square feet of retail space, substantially
all of which is leased.
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 products are primarily used to
add strength to other materials or act as barriers, such as warning fences and
crop protection from birds. 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 13% of its 2001 sales
exported to Europe, Latin America, Japan and Australia. The Company primarily
sells its products through its employee sales force, which is located in the
United States and Europe. For the years ended December 31, 2001, 2000 and 1999,
manufacturing revenues were $53,700,000, $65,000,000 and $64,000,000,
respectively.
New product development focuses on niches where the division's proprietary
technology and expertise can lead to sustainable competitive economic
advantages. This targeted product development has generally been carried out in
partnership with a prospective customer or industry where the value of the
product has been recognized. Currently, the plastics division is also focusing
on developing products for which it does not yet have a customer. Over the last
several years, the plastics division has committed approximately 3% to 5% of
annual sales to the development and marketing of new products and new
applications of existing products.
In 2001, the plastics division completed the construction of its
manufacturing facility in Belgium, which became operational in the third
quarter. The Belgium facility will service customers in the European and Asian
markets, which were previously supplied by the Company's domestic manufacturing
facilities. Primarily as a result of a general downturn in the economy, revenues
for the plastics division declined in 2001 and the division currently has excess
capacity. The plastics division is attempting to develop new
8
products, applications and markets to replace its lost business. In addition,
the Company has been focusing on managing costs and improving service levels
through shorter lead times.
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 the Company started Archery Summit in 1993. These wineries produce and
sell super-ultra-premium wines. During 2001, the wineries sold approximately
68,900 9-liter equivalent cases of wine generating wine revenues of $12,800,000.
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. For the 2001 harvest, approximately 90% of
the Company's vineyards were producing grapes and the balance is under
development. At December 31, 2001, the Company's combined investment in these
wineries was $57,300,000.
The Company has a 72.8% interest in MK Gold, a company that is traded on
the NASD OTC Bulletin Board. MK Gold's subsidiary Cobre Las Cruces, S.A., a
Spanish company, holds the exploration and mineral rights to the Las Cruces
copper deposit in the Pyrite Belt of Spain. A feasibility study of this project
by Bechtel International, Inc. has been completed. This study is based on proven
and probable reserves of 15,800,000 metric tonnes grading 5.94% copper overlain
by a gold-bearing gossan (which has not been evaluated) and by 150 meters of
unconsolidated overburden. Independent Mining Consultants, Inc. performed the
reserve calculations used in the feasibility study. Cash operating costs are
estimated to average $.33 per pound of copper. The estimated capital cost to
bring the mine into production is approximately $290,000,000. Mining will be
subject to obtaining required permits (currently underway), obtaining both debt
and equity financing for the project, engineering and construction. Mining and
water concession applications have been submitted to the applicable Spanish and
Andalusian governmental agencies. Recently, the market price of copper has been
depressed, reflecting generally weak global economic conditions. The amount of
financing which can be obtained for the project and its related cost will be
significantly affected by the assessment of potential lenders of the current and
expected future market price of copper. MK Gold currently anticipates that
commercial production at Las Cruces will begin in the second half of 2004.
Although MK Gold believes the necessary permitting and financing will be
obtained, no such assurances can be given. Further, there may be other political
and economic circumstances that could prevent or delay development of Las
Cruces.
OTHER INVESTMENTS
In August 2001, Berkadia LLC, an entity jointly owned by the Company and
Berkshire Hathaway Inc. ("Berkshire"), lent $5,600,000,000 on a senior secured
basis to FINOVA Capital Corporation (the "Berkadia Loan"), 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. Berkadia also received newly issued shares of common stock of
FINOVA representing 50% of the stock of FINOVA outstanding on a fully diluted
basis. FINOVA is a financial services holding company that, prior to its filing
for bankruptcy, provided a broad range of financing and capital markets
products, primarily to mid-size businesses. Since its chapter 11 restructuring,
FINOVA's business activities have been limited to the orderly collection and
liquidation of its assets and FINOVA has not engaged in any new lending
activities, except to honor previously existing customer commitments. As
required by the terms of FINOVA's
9
existing public debt securities and the Berkadia Loan, any available cash
generated from these activities is used to pay down FINOVA's obligations to its
creditors.
Berkadia financed the Berkadia Loan with bank financing that is guaranteed,
90% by Berkshire and 10% by the Company (with the Company's guarantee being
secondarily guaranteed by Berkshire). As of February 22, 2002, principal
payments have reduced the amounts outstanding under the Berkadia Loan and
Berkadia's financing to $3,900,000,000. In addition, in 2001 Berkadia was paid
$120,000,000 in fees in connection with the Berkadia Loan, and the Company
entered into a ten-year management agreement with FINOVA, for which it receives
an $8,000,000 annual fee. Under the agreement governing Berkadia, the Company
and Berkshire have agreed to equally share the Berkadia Loan fees and the annual
management fees. All income related to the Berkadia Loan, after payment of
financing costs, will be shared 90% to Berkshire and 10% to the Company. During
the period the Berkadia Loan was outstanding during 2001, the Company recorded
income of $3,900,000 representing 10% of the net interest spread on the Berkadia
Loan. All of this income has been distributed to the Company.
At December 31, 2001, the book value of the Company's equity investment in
Berkadia was negative $129,000,000. The negative carrying amount was due to
Berkadia's distribution of the Berkadia Loan fees and its recognition of its
share of FINOVA's losses under the equity method of accounting ($94,400,000).
This loss recognized by Berkadia is a non-cash loss that will be reversed over
the term of the Berkadia Loan. As a result of the application of these
accounting rules, the negative carrying amount of the Company's investment in
Berkadia effectively represents an unamortized discount on the Berkadia Loan,
which will be amortized to income over the term of the loan.
At December 31, 2001, the book value of the Company's equity investment in
Jefferies Partners Opportunity Fund II, LLC ("JPOF II"), a registered
broker-dealer, was $127,100,000. 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, 2001, the Company recorded $27,100,000
of pre-tax income from this investment under the equity method of accounting;
this amount was distributed to the Company in February 2002.
In December 2001, the Company invested $127,500,000 for an approximate 25%
common stock interest in Olympus Re Holdings, Ltd. ("Olympus"), a newly formed
Bermuda reinsurance company primarily engaged in the property excess, marine and
aviation reinsurance business. Olympus was formed to take advantage of the
current lack of capacity and favorable pricing in the reinsurance market. It has
entered into a quota share reinsurance agreement with Folksamerica Reinsurance
Company, an affiliate of White Mountains Insurance Group, Ltd., and will also
seek to obtain reinsurance business from other sources as well. When the market
opportunity to underwrite reinsurance business on favorable terms recedes, the
by-laws of Olympus include mechanisms to return its capital to its investors,
subject to Bermuda insurance regulations and other laws restricting the return
of capital.
The Company owns equity interests representing more than 5% of the
outstanding capital stock of each of the following domestic public companies at
February 22, 2002: AmeriKing, Inc. ("AmeriKing") (6.8%), Carmike Cinemas, Inc.
("Carmike") (11.0%), GFSI Holdings, Inc. ("GFSI") (6.6%), Jackson Products, Inc.
("Jackson") (8.8%), 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 $105,000,000
in these entities and related companies and, through December 31, 2001, has
received $166,100,000 relating to the disposition of investments, dividends,
interest and management and other fees. At December 31, 2001, through these
entities, the Company had interests in AmeriKing, Carmike, GFSI, Jackson, JII,
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 39 other
companies. These investments are
10
carried in the Company's consolidated financial statements at $59,000,000, of
which $43,800,000 relates to public companies carried at market value.
For further information about the Company's business, including the
Company's investments in Berkadia and Olympus, 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 square feet). Subsidiaries of
the Company own facilities primarily used for manufacturing located in Georgia
and Genk, Belgium (totaling approximately 373,800 square feet) and facilities
and land in California and Oregon used for winery operations (totaling
approximately 107,100 square feet and 404 acres, respectively).
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, consolidated
results of operations or liquidity.
11
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 February 22, 2002, 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 61 Chairman of the Board June 1978
Joseph S. Steinberg 58 President January 1979
Thomas E. Mara 56 Executive Vice President May 1980;
and Treasurer January 1993
Joseph A. Orlando 46 Vice President and January 1994;
Chief Financial Officer April 1996
Barbara L. Lowenthal 47 Vice President and April 1996
Comptroller
Mark Hornstein 54 Vice President July 1983
Mr. Cumming has served as a director and Chairman of the Board of the
Company since June 1978 and as Chairman of the Board of FINOVA since August
2001. 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, a director of HomeFed,
a California real estate developer, since May 1999 and a director of Carmike
since January 2002.
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, as a director of HomeFed since
August 1998, as a director of FINOVA since August 2001 and as a director of WMIG
since June 2001.
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 and as a
director of MK Gold since February 2000.
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. In addition, he has 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.
Mr. Hornstein joined the Company as Vice President in July 1983.
12
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
---- ---
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 $35.70 $30.50
Second Quarter 34.90 30.58
Third Quarter 33.65 28.25
Fourth Quarter 31.96 26.31
2002
----
First Quarter (through February 22, 2002) $30.75 $28.00
(b) Holders.
-------
As of February 22, 2002, there were approximately 3,148 record holders of
the Common Shares.
(c) Dividends.
---------
In 2001 and 2000, the Company paid cash dividends of $.25 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.
13
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,
-----------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(In thousands, except per share amounts)
SELECTED INCOME STATEMENT DATA:
Revenues (a) $ 375,298 $ 571,865 $ 522,908 $ 233,367 $ 270,392
Interest expense (b) 55,200 57,713 50,665 45,139 46,007
Income (loss) from continuing operations before
income taxes, minority expense of trust preferred
securities, extraordinary gain (loss) and cumulative
effect of a change in accounting principle 53,673 253,466 267,458 39,580 (25,945)
Income (loss) from continuing operations before
minority expense of trust preferred securities,
extraordinary gain (loss) and cumulative effect
of a change in accounting principle 70,321 160,152 215,295 62,140 (15,401)
Minority expense of trust preferred securities,
net of taxes (5,521) (5,521) (5,521) (8,248) (7,942)
Income (loss) from continuing operations before
extraordinary gain (loss) and cumulative effect
of a change in accounting principle 64,800 154,631 209,774 53,892 (23,343)
Income (loss) from discontinued operations,
including gain (loss) on disposal, net of taxes (72,719) (39,606) 7,856 451 687,215
Extraordinary gain (loss) from early
extinguishment of debt, net of taxes -- 983 (2,588) -- (2,057)
Cumulative effect of a change in accounting
principle 411 -- -- -- --
Net income (loss) (7,508) 116,008 215,042 54,343 661,815
Per share:
Basic earnings (loss) per common share:
Income (loss) from continuing operations
before extraordinary gain (loss) and
cumulative effect of a change in accounting
principle $ 1.17 $ 2.78 $ 3.53 $ .85 $ (.38)
Income (loss) from discontinued operations,
including gain (loss) on disposal (1.32) (.71) .13 .01 11.05
Extraordinary gain (loss) -- .02 (.04) -- (.03)
Cumulative effect of a change in accounting
principle .01 -- -- -- --
------- ------- ------ ------ -------
Net income (loss) $ (.14) $ 2.09 $ 3.62 $ .86 $ 10.64
======= ======= ====== ====== =======
(continued)
14
Year Ended December 31,
-----------------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(In thousands, except per share amounts)
Diluted earnings (loss) per common share:
Income (loss) from continuing operations
before extraordinary gain (loss) and
cumulative effect of a change in accounting
principle $ 1.17 $2.78 $ 3.53 $ .85 $ (.38)
Income (loss) from discontinued operations,
including gain (loss) on disposal (1.32) (.71) .13 .01 11.05
Extraordinary gain (loss) -- .02 (.04) -- (.03)
Cumulative effect of a change in accounting
principle .01 -- -- -- --
------- ------ ------ ----- ------
Net income (loss) $ (.14) $ 2.09 $ 3.62 $ .86 $10.64
======= ====== ====== ===== ======
At December 31,
---------------
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
(In thousands, except per share amounts)
SELECTED BALANCE SHEET DATA:
Cash and investments $1,182,874 $1,182,014 $ 884,687 $1,520,868 $1,596,430
Total assets 2,577,239 2,626,156 2,488,130 3,222,286 2,980,418
Debt, including current maturities 343,276 374,523 483,309 722,601 352,872
Customer banking deposits 476,495 526,172 329,301 189,782 198,582
Common shareholders' equity 1,195,453 1,204,241 1,121,988 1,853,159 1,863,531
Book value per common share $21.61 $21.78 $19.75 $29.90 $29.17
Cash dividends per common share $ .25 $ .25 $13.58 $ -- $ .25
(a) Includes net securities gains (losses) of $29,624,000, $124,479,000,
$16,268,000, $(66,159,000) and $3,943,000 for the years ended December 31,
2001, 2000, 1999, 1998 and 1997, respectively.
(b) Includes interest on customer banking deposits.
15
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 direct subsidiaries, cash and
cash equivalents and other 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, 2001, the Company's readily available cash, cash
equivalents and marketable securities, excluding those amounts held by its
regulated subsidiaries, totaled $805,000,000. This amount is comprised of cash
and short-term bonds and notes of the United States Government and its agencies
of $495,800,000 (62%), the equity investment in WMIG of $130,500,000 (16%)
described below, and other publicly traded debt and equity securities
aggregating $178,700,000 (22%). Additional sources of liquidity as of December
31, 2001 include $163,800,000 of cash and marketable securities collateralizing
letters of credit and $102,600,000 of cash, cash equivalents and marketable
securities held by Fidei.
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. During the
year ended December 31, 2001, the Company did not use its $152,500,000 unsecured
bank credit facility. This facility bears interest based on the Eurocurrency
Rate or the prime rate and matures in June 2003.
During 2001, the Company borrowed $53,100,000 secured by its corporate
aircraft. This debt bears interest based on a floating rate, requires monthly
payments of principal and interest and matures in ten years. The Company has
entered into an interest rate swap agreement for this financing, which fixed the
interest rate at approximately 5.7%.
The Company is financing the renovation of its Hawaiian hotel and has
obtained loan commitments totaling $25,000,000. At December 31, 2001, the amount
outstanding under this borrowing was $18,900,000. The borrowing matures in seven
years and is collateralized by the hotel.
As of February 22, 2002, the Company is authorized to repurchase an
additional 4,494,000 Common Shares. Such purchases may be made from time to time
in the open market, through block trades or
16
otherwise. Depending on market conditions and other factors, such purchases may
be commenced or suspended at any time without prior notice.
At December 31, 2001, a maximum of $8,100,000 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, 2001 or borrowed to date in 2002. 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. Payments from regulated
subsidiaries for dividends, tax sharing payments and other services totaled
$9,400,000 for the year ended December 31, 2001.
In August 2001, Berkadia LLC, an entity jointly owned by the Company and
Berkshire lent $5,600,000,000 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. Berkadia also received 61,020,581 newly issued shares of common
stock of FINOVA (the "FNV Shares"), representing 50% of the stock of FINOVA
outstanding on a fully diluted basis. Berkadia financed the Berkadia Loan with
bank financing that is guaranteed, 90% by Berkshire and 10% by the Company (with
the Company's guarantee being secondarily guaranteed by Berkshire), and that is
also secured by Berkadia's pledge of the $5,600,000,000 five year senior secured
promissory note from FINOVA Capital to Berkadia issued pursuant to the Berkadia
Loan. The financing provided to Berkadia matures on the same date as the
Berkadia Loan; principal payments prior to maturity are required only to the
extent principal payments are received on the Berkadia Loan. In 2001, Berkadia
was paid $120,000,000 in fees in connection with the Berkadia Loan, of which the
Company received its $60,000,000 share in 2001. All income related to the
Berkadia Loan, after payment of financing costs, will be shared 90% to Berkshire
and 10% to the Company. As a result of principal payments made by FINOVA in 2001
and 2002, the balance due under the Berkadia Loan and the balance payable to
Berkadia's lenders is $3,900,000,000 as of February 22, 2002. During 2001, the
Company also entered into a ten-year management agreement with FINOVA, for which
it will receive an $8,000,000 annual fee, the first of which was paid when the
agreement was signed. Under the agreement governing Berkadia, the Company and
Berkshire have agreed to equally share the management fees.
In May 2001, the Company invested $75,000,000 in a new issue of restricted
convertible preference shares of WMIG, which was subsequently converted into
375,000 common shares that represent approximately 4% of WMIG. At December 31,
2001, the investment is carried at its aggregate market value of $130,500,000 in
the Company's consolidated balance sheet.
In December 2001, the Company invested $127,500,000 for an approximate 25%
common stock interest in Olympus. The Company cannot redeem its interest in
Olympus prior to December 31, 2003. Beginning at that date, the Company has the
right to request a redemption annually; however, the granting of any such
request will be at the discretion of Olympus' Board of Directors based on the
company's need for capital and be subject to Bermuda insurance laws and
regulations. The Company will account for this investment under the equity
method of accounting.
In December 2001, the Company invested $50,000,000 in a limited partnership
that will invest primarily in securities and other obligations of highly
leveraged, distressed and out of favor companies. The Company may redeem up to
50% of its investment annually beginning in June 2003 and up to 100% of its
investment in December 2004, or otherwise in certain specified circumstances.
The Company will account for this investment under the equity method of
accounting.
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
17
appropriate investment opportunities. Standard & Poor's and Duff & Phelps Inc.
have rated the Company's senior debt obligations as investment grade since 1993,
while Moody's Investors Services, Inc. rates the Company's senior debt
obligations below investment grade. Ratings issued by bond rating agencies are
subject to change at any time.
Consolidated Liquidity
In 2001 and 2000, net cash was used for operations, reflecting lower
investment income on corporate investments as a result of the Dividend payment
in 1999, payment of the Parent's interest and overhead expenses and a reduction
of payables related to the trading portfolio. The Company's continuing business
segments generated cash from operating activities, except for certain of the
Company's real estate operations that required a net use of cash to fund
operating expenses and working capital.
The Company historically provided collateralized automobile loans to
individuals with poor credit histories. The Company's investment in automobile
loans was $379,800,000 and $410,300,000 at December 31, 2001 and 2000,
respectively. Deposits generated by the Company's deposit-taking facilities and
by brokers primarily fund these loans. Deposits raised in 2001 totaled
$175,200,000 and had an average maturity of 12 months and a weighted average
interest rate of 5.3%.
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, 2001, the Company has $9,800,000 principal amount outstanding for
such financing. The Company used $18,300,000 of its available cash resources to
construct the plastics division's Belgium facility, which was completed in 2001.
During 2001, Fidei's debt declined by $83,400,000 (94,600,000 Euros) due
to the maturity and early extinguishment of certain debt. The pre-tax gain on
this early extinguishment was not material. As of December 31, 2001, the
principal amount of Fidei's remaining Euro denominated outstanding debt, all of
which is non-recourse to the Company, was $91,000,000 (103,200,000 Euros).
Inasmuch as Fidei's Euro denominated cash, cash equivalents and marketable
securities approximate its Euro denominated debt, the Company does not believe
there is currently a need to acquire a currency hedge for Fidei's debt.
As shown below, at December 31, 2001, the Company's contractual cash
obligations and commercial commitments totaled $937,100,000 and $619,000,000,
respectively. 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. The Company is in compliance with all of these restrictions, and the
Company has the ability to incur substantial additional indebtedness or make
substantial distributions to its shareholders and still remain in compliance
with these restrictions.
Payments Due by Period (in thousands)
------------------------------------
Less than 1 After 5
Contractual Obligations Total Year 1-3 Years 4-5 Years Years
- ----------------------- ----- ---------- --------- --------- --------
Customer Banking Deposits $476,495 $346,431 $ 84,299 $ 38,215 $ 7,550
Long-Term Debt 343,276 17,224 89,748 49,634 186,670
Operating Leases, net of Sublease Income 19,137 3,524 6,184 5,485 3,944
Preferred Securities of Subsidiary Trust 98,200 -- -- -- 98,200
-------- -------- -------- -------- --------
Total Contractual Cash Obligations $937,108 $367,179 $180,231 $ 93,334 $296,364
======== ======== ======== ======== ========
18
Amount of Commitment
Expiration Per Period (in thousands)
------------------------------------
Total
Amounts Less Than 1 After 5
Other Commercial Commitments Committed Year 1-3 Years 4-5 Years Years
- ----------------------------- -------- ----------- -------- ---------- --------
Standby Letters of Credit $100,643 $ 643 $100,000 $ -- $ --
Guarantees (a) 508,000 100,000 -- 390,000 18,000
Other Commercial Commitments 10,309 10,309 -- -- --
-------- -------- -------- -------- --------
Total Commercial Commitments $618,952 $110,952 $100,000 $390,000 $ 18,000
======== ======== ======== ======== ========
(a) Of the total amount, $490,000,000 represents the Company's guarantee of 10%
of Berkadia's financing incurred in connection with the Berkadia Loan, as
more fully described above. The $100,000,000 commitment expiration in the
less than one year period results from actual principal payments received
under the Berkadia Loan that were used to reduce the balance due under
Berkadia's financing. To the extent that future principal payments are
received under the Berkadia Loan prior to maturity, such amounts will be
used to paydown the Berkadia financing and the remaining $390,000,000
guarantee will expire at an earlier date than reflected above.
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
Critical Accounting Policies and Estimates
The Company's discussion and analysis of its financial condition and
results of operations are based upon its consolidated financial statements,
which have been prepared in accordance with generally accepted accounting
principles. The preparation of these financial statements requires the Company
to make estimates and assumptions that affect the reported amounts in the
financial statements and disclosures of contingent assets and liabilities. On an
on-going basis, the Company evaluates all of these estimates and assumptions.
Actual results could differ from those estimates.
The allowance for loan losses is established through a provision that is
charged to expense. As of December 31, 2001, the Company's allowance for loan
losses was $35,700,000 or 6.8% of the related outstanding loan receivable
balance of $521,200,000. The allowance for loan losses is an amount that the
Company believes will be adequate to absorb probable losses inherent in its
portfolio of existing loans based on the Company's evaluations of the
collectibility of loans and prior loan loss experience. Factors considered by
the Company include actual experience, current economic trends, aging of the
loan portfolio and collateral value. During periods of economic weakness,
delinquencies, defaults, repossessions and losses generally increase. These
periods may also be accompanied by decreased demand and declining values of
automobiles securing outstanding loans, which weakens collateral coverage and
increases the amount of a loss in the event of default. In addition, incentives
offered by the automobile industry on new
19
cars affect the supply of used cars and the value the Company may realize upon
sale of repossessed automobiles. The allowance is based on judgments and
assumptions and the ultimate loss may differ.
The Company records a valuation allowance to reduce its deferred taxes to
the amount that is more likely than not to be realized. If the Company were to
determine that it would be able to realize its deferred tax assets in the future
in excess of its net recorded amount, an adjustment would increase income in
such period. Similarly, if the Company were to determine that it would not be
able to realize all or part of its net deferred taxes in the future, an
adjustment would be charged to income in such period. In addition, the Internal
Revenue Service ("IRS") is in the process of concluding its audit of the
Company's consolidated federal income tax returns for the years 1996 through
1999. The IRS has issued Notices of Proposed Adjustments that, if sustained,
would result in approximately $80,000,000 of tax, plus interest. The Company is
contesting these proposed adjustments. The Company believes that it is
adequately reserved for this exposure.
The Company accounts for its investment in Berkadia under the equity method
of accounting. Although the Company has no cash investment in Berkadia, the
Company has a contingent liability resulting from its guarantee of 10% of the
third party financing provided to Berkadia. The total amount of the Company's
guarantee is $390,000,000 as of February 22, 2002. While the Company does not
expect that Berkadia will suffer losses resulting in the Company having to fund
its guarantee obligation, actual results could differ.
As of December 31, 2001, the carrying amount of the Company's investment in
the mining properties of MK Gold was approximately $51,100,000. The
recoverability of this asset is entirely dependent upon the success of MK Gold's
mining project at the Las Cruces copper deposit in the Pyrite Belt of Spain.
Mining will be subject to obtaining required permits (currently underway),
obtaining both debt and equity financing for the project, engineering and
construction. Recently, the market price of copper has been depressed,
reflecting generally weak global economic conditions. The amount of financing
which can be obtained for the project and its related cost will be significantly
affected by the assessment of potential lenders of the current and expected
future market price of copper. In addition, the actual price of copper and the
operating cost of the mine will affect the recoverability of this asset. Based
on the current status of the project and MK Gold's estimate of future financing
costs and future cash flows, the Company believes the asset is recoverable.
Actual results could differ.
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 $545,000,000, $423,000,000 and
$238,600,000 for 2001, 2000 and 1999, respectively. Although finance revenues
increased in 2001 as compared to 2000, pre-tax results declined primarily due to
a larger provision for loan losses, changes in market values of interest rate
swaps, higher interest paid on interest rate swaps, charges recorded in
connection with the Company's decision to stop originating new subprime
automobile loans and to consolidate all operations in Salt Lake City, and higher
interest expense due to the increased customer banking deposits through
September of 2001.
In 2001, the banking and lending segment's provision for loan losses
increased $13,000,000 as compared to the prior year. This increase primarily
reflects higher net charge-offs, for which the Company believes a weaker economy
and increased bankruptcies were contributing factors, and an increase in the
rates used by the Company to establish the allowance for loan losses in
recognition of its increased loss experience. In an effort to reduce losses, the
Company exited certain states and automobile dealer relationships with
historically higher loan losses, but losses continued to increase throughout
2001. This loss experience, combined with the increasingly difficult competitive
environment, resulted in the Company's decision in September 2001 to stop
originating any new subprime automobile loans. The
20
Company will continue to service the remaining automobile portfolio as well as
originate other products, although it is anticipated that new loan originations
will be substantially less than originations previously generated in the
subprime automobile portfolio. The Company will also seek to acquire loan
portfolios that meet its credit criteria if these portfolios can be purchased on
attractive terms.
Pre-tax results for the banking and lending segment for 2001 also reflect
$6,500,000 of charges primarily resulting from a mark-to-market loss on its
interest rate swaps. The Company uses interest rate swaps to manage the impact
of interest rate changes on its customer banking deposits. Although the Company
believes that these derivative financial instruments serve as economic hedges,
they do not meet certain effectiveness criteria under SFAS 133, and therefore
are not accounted for as hedges.
In an effort to increase operating efficiencies, the Company has filed an
application with the OCC to merge AIB and AIF. Although the Company anticipates
that the merger will be approved during the first quarter of 2002, no assurance
can be given that it will be approved. As a result of its decision to stop
originating new subprime automobile loans and this planned merger, the Company
has been consolidating all operations in Salt Lake City. Pre-tax results for the
banking and lending segment include $7,100,000 of charges related to this
consolidation, primarily resulting from the closing of AIB's Indianapolis
office.
The increase in finance revenues in 2000 as compared to 1999 was primarily
due to the 1999 acquisition of the operations of a subprime lender 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 as a result of the 1999 acquisition. The
higher loan losses were principally caused by the poor performance of the
subprime automobile portfolio acquired in 1999, for which the actual collection
experience was less than expected, a larger amount of loans outstanding,
including the 1999 purchased portfolio, that were reaching the age of peak
losses, generally twelve to eighteen months after origination, the increased
loan originations and a weaker economy.
Foreign Real Estate
Fidei's revenues and pre-tax income declined in 2001 as compared to 2000
principally due to decreased rent income (due to a smaller base of remaining
real estate properties) and decreased gains from sales of real estate
properties. During 2001, Fidei sold 26 real estate properties, resulting in
pre-tax gains of $8,200,000; 27 properties remain at December 31, 2001. The
Company expects to complete the sale of Fidei's real estate holdings during
2002. Pre-tax results for 2001 also reflected lower interest expense as a result
of the maturity and early extinguishment of certain debt, lower depreciation
expense due to the reduction in real estate properties and lower selling,
general and other expenses, which were partially offset by a charge of
$4,600,000 related to value added taxes assessed for a sold property.
Fidei's revenues declined in 2000 as compared to 1999 primarily due to
decreased rent income from the smaller base of remaining real estate properties
and decreased gains from sales of real estate properties, partially offset by
increased investment income. During 2000, Fidei sold 38 real estate properties
resulting in pre-tax gains of $27,100,000. Pre-tax results for 2000 also
reflected lower depreciation expense due to the reduction in real estate
properties and lower selling, general and other expenses.
Domestic Real Estate
The reduction in revenues and pre-tax income from domestic real estate in
2001 as compared to the prior year was principally due to the foreclosure gains
recorded in 2000 and less gains from property sales, net of costs. During 2001,
the Company sold 696 residential sites and a school site resulting in pre-tax
gains of $18,100,000 at its largest domestic real estate investment, a
master-planned community project located in San Diego County.
21
The increase in revenues and pre-tax income relating to domestic real
estate in 2000 as compared to 1999 primarily resulted from greater net gains
from sales of various properties and $10,700,000 of gains recorded upon the
foreclosure of certain shopping centers. During 2000, the first residential lot
sales occurred at the Company's project located in San Diego County; 528
residential sites were sold resulting in pre-tax gains of $25,500,000.
Manufacturing
Manufacturing revenues, gross profit and pre-tax results for the plastics
division declined in 2001 as compared to 2000. Of the $11,400,000 decline in
manufacturing revenues in 2001, the most significant reductions were in the
consumer products market, which declined by $7,300,000. This decline was
primarily due to a customer for the Asian market no longer using one of the
Company's products and a lower than anticipated demand for consumer dust wipe
products. In addition, increased competition in the agriculture, home furnishing
and packaging markets and customer inventory reductions in the construction and
certain industrial markets also contributed to the reduction in sales in 2001.
Gross profit for 2001 declined primarily due to the aforementioned reduction in
sales and higher fixed costs related to the Belgium manufacturing facility. The
decline in pre-tax income in 2001 was partially offset by a $3,500,000 gain
resulting from a contract termination payment received from a customer. For
2000, manufacturing 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.
Other
Investment and other income declined in 2001 as compared to 2000 in part
from income recognized in 2000 totaling $25,900,000, consisting of foreclosure
gains from certain domestic real estate properties, a prepayment penalty related
to certain promissory notes and a gain from the sale of a corporate owned
aircraft. In addition, investment and other income declined in 2001 due to
decreased gains from sales of real estate properties and rental income related
to Fidei ($26,000,000), decreased gains from sales of various domestic real
estate properties ($8,500,000) and a reduction in revenues related to MK Gold
($10,100,000). Such decreases were partially offset by a gain of $6,300,000 from
the sale of the Company's investment in two inactive insurance companies and
increased revenues from the Company's oil and gas operations ($6,200,000).
Investment and other income declined in 2000 as compared to 1999 primarily
due to gains recognized in 1999 from the sale of Caja de Ahorro y Seguro S.A.
($120,800,000), The Sperry & Hutchinson Company, Inc. ($18,700,000), its Russian
joint venture with PepsiCo, Inc. ($29,500,000), and an equity interest in an
associated company ($8,700,000). 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 and gains from sales of real estate properties related to Fidei
($18,500,000). This decrease was partially offset by increased net gains from
sales and foreclosures of various domestic real estate properties ($50,800,000),
a prepayment penalty related to certain promissory notes ($7,500,000) and
revenues relating to MK Gold ($12,300,000), which the Company began
consolidating in the fourth quarter of 1999.
Net securities gains (losses) for 2000 include pre-tax security gains
related to the Company's investments in Fidelity National Financial, Inc.
($90,900,000) and Jordan Telecommunication Products, Inc. ($24,800,000).
For 2001, the Company recognized $24,600,000 of losses from its equity
investments in associated companies as compared to $29,300,000 of income for
2000. The loss in 2001 was primarily due to a loss
22
of $70,400,000, representing the Company's share of the loss recorded by
Berkadia. The Company's share of Berkadia's loss consists of the following (in
thousands):
Net interest spread on the Berkadia loan - 10% of total $ 3,900
Amortization of Berkadia Loan discount related to cash fees - 50% of total 7,800
Amortization of Berkadia Loan discount related to FINOVA stock - 50% of total 12,300
Share of FINOVA loss under equity method - 50% of total (94,400)
--------
Equity in loss of associated companies - Berkadia $(70,400)
========
As more fully described in Note 4 to the Company's consolidated financial
statements, Berkadia's initial investment in the FNV Shares and the Berkadia
Loan are determined based upon the relative fair values of the securities
received in exchange for the funds transferred to FINOVA. The fair value
assigned to the FNV Shares is based upon the trading price of FINOVA's common
stock on the day the FNV Shares were received, was far in excess of FINOVA's net
worth and is inconsistent with the Company's view that the FINOVA common stock
has a very limited value. Subsequent to acquisition, and principally as a result
of the terrorist attacks on September 11, 2001, Berkadia recorded its share of
FINOVA's losses in an amount that reduced Berkadia's investment in FINOVA's
common stock to zero.
At December 31, 2001, the book value of the Company's equity investment
in Berkadia was negative $129,000,000. The negative carrying amount was due to
Berkadia's distribution of the Berkadia Loan fees and its recognition of its
share of FINOVA's losses under the equity method of accounting ($94,400,000).
This loss recognized by Berkadia is a non-cash loss that will be reversed over
the term of the Berkadia Loan. As a result of the application of these
accounting rules, the negative carrying amount of the Company's investment in
Berkadia effectively represents an unamortized discount on the Berkadia Loan,
which will be amortized to income over the term of the loan.
The Company's loss related to Berkadia was partially offset by income from
other equity investments, the most significant of which related to JPOF II. The
Company recognized income from its investment in JPOF II of $27,100,000 and
$17,300,000 in 2001 and 2000, respectively. Equity in income (losses) of
associated companies increased in 2000 as compared to 1999 primarily due to
income related to JPOF II.
The increase in interest expense for 2000 as compared to 1999 primarily
reflects increased customer banking deposits and higher interest rates thereon,
partially offset by a reduction in interest expense related to debt repurchases
in 1999.
Salaries expense in 2001 primarily reflects decreased expenses related to
lower bonus expense. Salaries expense in 2000 reflects an increase in employees,
primarily at the banking and lending segment.
Selling, general and other expenses increased in 2001 as compared to the
prior year primarily due to higher provisions for loan losses and charges
recorded in connection with consolidating the banking and lending operations,
and the value added taxes assessed on Fidei, all as described above, partially
offset by lower expenses related to MK Gold. The increase in selling, general
and other expenses in 2000 as compared to 1999 principally reflects higher
provisions for loan losses at the banking and lending segment, and expenses
related to MK Gold.
Income taxes for 2001 reflect a benefit of $36,200,000 for the favorable
resolution of income tax contingencies. 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
23
1999 also reflect a benefit of $3,400,000 for the favorable resolution of
certain federal income tax contingencies.
Property and Casualty Insurance--Discontinued Operation
In December 2001, upon approval by the Company's Board of Directors to
commence an orderly liquidation of the Empire Group, the Company classified as
discontinued operations the property and casualty insurance operations of the
Empire Group. The Empire Group had historically engaged in commercial and
personal lines of property and casualty insurance, principally in the New York
metropolitan area. The Empire Group will only accept new business that it is
obligated to accept by contract or New York insurance law; it will not engage in
any other business activities except for its claims runoff operations. The
voluntary liquidation is expected to be substantially complete by 2005. The
Company has written down its investment in the Empire Group to its estimated net
realizable value based on expected operating results and cash flows during the
liquidation period, which indicate that the Company is unlikely to realize any
value once the liquidation is complete. Accordingly, the Company recorded a
$47,900,000 pre-tax charge as loss on disposal of discontinued operations to
fully write-off its investment. While this estimated net realizable value
represents management's best estimate, the amount the Company will ultimately
realize could be, but is not expected to be, greater. The Company has no
obligation to contribute additional capital to the Empire Group.
Excluding the loss on disposal, the Empire Group recorded pre-tax losses
from operations of $63,600,000, $60,200,000 and $24,000,000 for the years ended
December 31, 2001, 2000 and 1999, respectively. The Empire Group's net earned
premiums were $64,100,000, $108,500,000 and $145,200,000 for the years ended
December 31, 2001, 2000 and 1999, respectively; these decreases resulted from
the Empire Group's efforts to exit unprofitable lines of business and to
terminate its relationships with unprofitable agents. The losses recorded by the
Empire Group were significantly impacted by the recognition of adverse reserve
development recorded during each of the last three years as described below.
During 2001, the Empire Group recorded adverse loss reserve development of
$63,900,000. In addition, during 2001, the Empire Group expensed $9,100,000 of
deferred policy acquisition costs, as their recoverability from premiums and
related investment income was no longer anticipated.
During 2001, the Empire Group increased its reserve estimates for its
commercial package policies lines of business, primarily due to increases in
severity of liability claims for accident years 1998 and prior. The Empire Group
has exposure for third party liability claims in many of its lines of insurance.
During 2001, there were several settlements and court decisions on third party
liability cases for amounts that are greater than the industry's or the Empire
Group's historical experience for similar claims, which had formed the basis for
the Empire Group's estimated loss reserves. While many of these decisions are
being appealed, these results may signal a change in the judicial environment in
the Empire Group's marketplace. Accordingly, the Empire Group has increased its
loss reserve estimate by $23,000,000 due to an estimated increase in severity
for these exposures.
Reserve increases in 2001 also resulted from unfavorable development
principally in automobile lines of business for the 1998 through 2000 accident
years, primarily relating to personal injury protection coverage ("PIP") and in
its workers' compensation lines of insurance. The Empire Group believes that the
increased loss estimates for PIP are consistent with recent trends in the
industry, and has increased loss reserves for all automobile lines by
$10,900,000 for 2001. In addition, the Empire Group also increased its reserve
for loss adjustment expenses by $23,300,000 as a result of the increases to its
loss reserves and an increase in future overhead costs which will be allocated
to settle claims currently incurred.
24
During the period between 1984 and 1995, the Empire Group entered into
certain retrospectively rated reinsurance contracts covering substantially all
lines of business, except workers' compensation. Under these contracts, the
Empire Group paid the reinsurer provisional premiums that are subject to
adjustment based on subsequent loss development. Ceded premiums accrued under
these contracts reduce both net written and earned premiums during the period
the retrospective reinsurance premiums are accrued. If additional unfavorable
loss development emerges in future periods, the Empire Group may be required to
accrue additional retrospective reinsurance premiums. As a consequence of its
reserve increases, the Empire Group reduced premiums and pre-tax profits in 2001
by $8,000,000 to recognize reinsurance premiums due for 1995 and prior years
under retrospectively rated reinsurance agreements.
During 2000, the Empire Group recorded adverse loss reserve development
of $53,000,000, principally in the 1996 through 1999 accident years. This
development was attributable to an increase in the severity of PIP claims and an
increase in the frequency of liability claims in the private passenger
automobile line ($9,200,000), an increase in the frequency of liability claims
in the commercial automobile line ($6,200,000), an increase in the frequency and
severity of PIP claims in the assigned risk automobile line ($4,800,000) and an
increase in the severity of certain liability claims in the commercial package
policies lines of business ($15,000,000). The increases in severity and
frequency of claims in automobile lines of business, particularly with respect
to PIP claims, are consistent with emerging industry trends in the New York City
marketplace. 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 also increased its reserve estimate for
claims handled internally.
During 1999, the Empire Group recorded adverse loss reserve development of
$18,300,000, principally 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.
Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141"), which is effective for all business combinations after June 30,
2001, Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142"), which is effective for fiscal years beginning
after December 15, 2001, and Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations" ("SFAS 143"), which is
effective for fiscal years beginning after June 15, 2002. In August 2001, the
FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which is
effective for fiscal years beginning after December 15, 2001. SFAS 141 requires
that companies use the purchase method of accounting for all business
combinations initiated after June 30, 2001 and addresses the initial recognition
and measurement of goodwill and other intangible assets acquired in a business
combination. SFAS 142 addresses the initial recognition and measurement of
intangible assets acquired outside a business combination and the recognition
and measurement of goodwill and other intangible assets subsequent to
acquisition. SFAS 143 requires recognition of the fair value of liabilities
associated with the retirement of long-lived assets when a legal obligation to
incur such costs arises as a result of the acquisition, construction,
development and/or the normal operation of a long-lived asset. Upon recognition
of the liability, a corresponding asset is recorded and depreciated over the
remaining life of the long-lived asset. SFAS 144 requires that one accounting
model be used for the long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired, and broadens the presentation of
discontinued operations to include more disposal transactions and resolves
implementation issues. The Company has
25
reviewed the impact of the implementation of SFAS 142, 143 and 144, and does not
expect them to have a material effect on the Company's financial position or
results of operations.
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, increased competition in the reinsurance markets, the adequacy of
loss reserves, prevailing interest rate levels, weather related conditions that
may affect the Company's operations or investments, developments in property and
casualty claims handling, including adverse litigation developments, that could
adversely affect the liquidation plan of the Empire Group, the Company's ability
to manage the claims runoff of the Empire Group, changes in U.S. real estate
markets, including the residential market in Southern California and the
commercial market in Hawaii, changes in the commercial real estate market in
France, increased competition in the super premium wine industry, adverse
economic, political or environmental developments in Spain that could delay or
preclude the issuance of permits necessary to develop the Company's copper
mining rights or could result in increased costs of bringing the project to
completion, increased costs in financing the development of these mining rights,
decreases in world wide copper prices, increased competition in the
international and domestic plastics market and increased raw material costs,
increased default rates and decreased value of assets pledged to the Company,
the Company's ability to generate new loan products, the impact of the September
11, 2001 terrorist attacks on the U.S. and world economies in general, and on
the business and operations of FINOVA's and the Company's subsidiaries, the
ability of FINOVA Capital to repay the Berkadia Loan, further deterioration in
the value of the assets pledged by FINOVA and FINOVA Capital in connection with
the Berkadia Loan, 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.
26
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 68% of the Company's total investment portfolio at December 31,
2001. These fixed income securities are primarily rated "investment grade" or
are U.S. governmental agency issued or guaranteed obligations. The estimated
weighted average remaining life of these fixed income securities was
approximately 2.0 years at December 31, 2001. 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. The Company's
investment portfolio also includes its investment in WMIG, carried at its
aggregate market value of $130,500,000. This investment is approximately 16% of
the Company's total investment portfolio, and its value is subject to change if
the market value of the WMIG stock rises or falls. At December 31, 2000, fixed
income securities comprised approximately 80% of the Company's total investment
portfolio and had an estimated weighted average remaining life of 3.4 years. At
December 31, 2001 and 2000, the Company's portfolio of trading securities was
not material.
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 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 primarily 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 6, 10 and 20 to Consolidated
Financial Statements.
27
Expected Maturity Date
----------------------
2002 2003 2004 2005 2006 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 $ 240,561 $ 5,109 $ 2,168 $ 103 $ 760 $ -- $ 248,701 $ 248,701
Weighted Average
Interest Rate 3.61% 4.00% 7.88% 6.75% 4.50% --
Other Fixed Maturities:
Rated Investment Grade $ 107,078 $ 9,365 $ 6,264 $ 1,068 $ 1,630 $ 7,051 $ 132,456 $ 132,456
Weighted Average
Interest Rate 5.03% 6.80% 6.67% 7.17% 6.75% 10.22%
Rated Less Than Investment
Grade/Not Rated $ 17,772 $ 17,989 $ 5,494 $ 1,625 $ 2,849 $ 33,022 $ 78,751 $ 78,751
Weighted Average
Interest Rate 8.24% 5.28% 5.09% 5.35% 11.12% 10.16%
Held to Maturity Fixed Income
Securities:
Other Fixed Maturities:
Rated Investment Grade $ 273 $ -- $ -- $ -- $ -- $ -- $ 273 $ 273
Weighted Average
Interest Rate 5.30% -- -- -- -- --
Rate Sensitive Liabilities:
Fixed Interest Rate Borrowings $ 6,778 $ 49,344 $ 36,158 $ 21,588 $23,818 $135,523 $ 273,209 $ 281,187
Weighted Average
Interest Rate 7.05% 7.06% 7.37% 7.88% 7.83% 7.81%
Variable Interest Rate
Borrowings $ 4,414 $ 2,114 $ 2,114 $ 2,114 $ 2,114 $ 51,147 $ 64,017 $ 64,017
Weighted Average
Interest Rate 3.50% 4.30% 5.17% 5.70% 6.05% 6.63%
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 $ 98,200
Weighted Average
Interest Rate 8.65% 8.65% 8.65% 8.65% 8.65% 8.65%
28
Expected Maturity Date
----------------------
2002 2003 2004 2005 2006 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
(Dollars in thousands)
Rate Sensitive Derivative
Financial Instruments:
Euro currency swap $ 1,565 $ 2,085 $ 2,085 $ 2,085 $ 2,085 $ 6,777 $ 16,682 $ 990
Average Pay Rate 5.89% 5.89% 5.89% 5.89% 5.89% 5.89%
Average Receive Rate 7.60% 7.60% 7.60% 7.60% 7.60% 7.60%
Pay Fixed/Receive Variable
Interest Rate Swap $ 92,017 $ -- $ -- $ -- $ -- $ -- $ 92,017 $ (126)
Average Pay Rate .42% -- -- -- -- --
Average Receive Rate .10% -- -- -- -- --
Pay Fixed/Receive Variable
Interest Rate Swap $ 2,114 $ 2,114 $ 2,114 $ 2,114 $ 2,114 $41,332 $ 51,902 $ 1,134
Average Pay Rate 5.01% 5.01% 5.01% 5.01% 5.01% 5.01%
Average Receive Rate 3.00% 3.81% 4.70% 5.25% 5.62% 6.26%
Off-Balance Sheet Items:
Unused Lines of Credit $ -- $152,500 $ -- $ -- $ -- $ -- $ 152,500 $ 152,500
Weighted Average
Interest Rate 3.76% 4.77% -- -- -- --
Banking and Lending:
- --------------------
Rate Sensitive Assets:
Certificates of Deposit $ 892 $ -- $ -- $ -- $ -- $ -- $ 892 $ 892
Weighted Average
Interest Rate 5.04% -- -- -- -- -- 5.04%
Fixed Interest Rate
Securities $ 20,615 $ 5,518 $ 2,681 $ 1,445 $ -- $ 12,152 $ 42,411 $ 42,410
Weighted Average
Interest Rate 12.99% 14.74% 14.96% 13.34% -- 4.68% 11.20%
Variable Interest Rate
Securities $ 13,988 $ 7,266 $ 3,435 $ 1,433 $ 1,009 $ 10,464 $ 37,595 $ 37,595
Weighted Average
Interest Rate 3.15% 2.20% 2.22% 2.28% 2.34% 4.16% 3.11%
Fixed Interest Rate Loans $ 98,461 $101,290 $102,069 $ 77,913 $28,195 $ 93,626 $ 501,554 $ 497,442
Weighted Average
Interest Rate 21.04% 21.26% 21.45% 21.73% 21.38% 18.09% 20.75%
Variable Interest Rate
Loans $ 2,779 $ 11 $ 4 $ 11 $ 201 $ 16,682 $ 19,688 $ 19,686
Weighted Average
Interest Rate 9.88% 5.21% 4.75% 6.97% 8.22% 8.24% 8.47%
Rate Sensitive Liabilities:
Money Market Deposits $ 9,031 $ 6,704 $ 5,959 $ 5,214 $ 4,469 $ 7,450 $ 38,827 $ 38,468
Weighted Average
Interest Rate 2.40% 2.41% 2.41% 2.41% 2.41% 2.41% 2.41%
29
Expected Maturity Date
----------------------
2002 2003 2004 2005 2006 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
(Dollars in thousands)
Time Deposits $ 337,400 $ 58,605 $ 13,031 $ 21,616 $ 6,916 $ 100 $ 437,668 $ 448,362
Weighted Average
Interest Rate 5.38% 5.37% 2.52% 6.87% 5.60% 3.00% 5.37%
Fixed Interest Rate
Borrowings $ 6,032 $ 18 $ -- $ -- $ -- $ -- $ 6,050 $ 6,050
Weighted Average
Interest Rate 2.14% 7.38% -- -- -- -- 2.16%
Rate Sensitive Derivative
Financial Instruments:
Pay Fixed/Receive Variable
Interest Rate Swap $ -- $160,000 $ -- $ -- $ -- $ -- $ 160,000 $ (7,300)
Average Pay Rate 6.22% 6.22% -- -- -- -- 6.22%
Average Receive Rate 2.45% 2.45% -- -- -- -- 2.45%
Off-Balance Sheet Items:
Commitments to Extend Credit $ 1,164 $ -- $ -- $ -- $ -- $ -- $ 1,164 $ 1,164
Weighted Average
Interest Rate 18.12% -- -- -- -- -- 18.12%
Unused Lines of Credit $ 3,000 $ -- $ -- $ -- $ -- $17,535 $ 20,535 $ 20,535
Weighted Average
Interest Rate 5.75% -- -- -- -- 1.75% 2.33%
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
2002 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.
30
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.
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, 2001 and 2000.................................. F-2
Consolidated Statements of Operations for the years ended December 31, 2001,
2000 and 1999........................................................................... F-3
Consolidated Statements of Cash Flows for the years ended December 31, 2001,
2000 and 1999........................................................................... F-4
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 2001, 2000 and 1999........................................................ F-6
Notes to Consolidated Financial Statements................................................. F-7
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts............................................ F-34
(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")).
Employment Agreement made as of December 28, 1993 by and between
the Company and Ian M. Cumming (filed as Exhibit 10.17 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993 (the "1993 10-K")).
Amendment, dated as of May 5, 1999, to the Employment Agreement
made as of December 28, 1993 by and between the Company and Ian
M. Cumming.
Employment Agreement made as of December 28, 1993 by and between
the Company and Joseph S. Steinberg (filed as Exhibit 10.18 to
the 1993 10-K).
31
Amendment, dated as of May 5, 1999, to the Employment Agreement
made as of December 28, 1993 by and between the Company and
Joseph S. Steinberg.
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 (filed as Exhibit 10.17 to the
Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 2000 (the "2000 10-K")).
Deferred Compensation Agreement between the Company and Mark
Hornstein dated as of December 29, 2000 (filed as Exhibit 10.18
to the 2000 10-K).
Leucadia National Corporation Senior Executive Warrant Plan
(filed as Annex B to the 1999 Proxy Statement).
Deferred Compensation Agreement between the Company and Thomas E.
Mara dated as of December 20, 2001.
Deferred Compensation Agreement between the Company and Mark
Hornstein dated as of December 27, 2001.
(b) Reports on Form 8-K.
-------------------
None.
(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).*
- ---------------------------
* Incorporated by reference.
32
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 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 (filed as Exhibit 10.9 to
the 2000 10-K).*
10.8 Form of First Amendment, dated as of August 10, 2001, to 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.
10.9 Purchase Agreement among Conseco, Inc., the Company, Charter
National Life Insurance Company, Colonial Penn Group, Inc.,
Colonial Penn Holdings, Inc., Leucadia Financial Corporation,
Intramerica Life Insurance Company, 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).*
10.10 Purchase Agreement among General Electric Capital Corporation, the
Company, Charter National Life Insurance Company, Colonial Penn
Group Inc. and Colonial Penn Holdings, Inc. dated as of June 30,
1997 (filed as Annex A to the 1997 Proxy Statement).*
10.11 Purchase Agreement by and among Allstate Life Insurance Company,
Allstate Life Insurance Company of New York, Charter National Life
Insurance Company, Intramerica Life Insurance Company and the
Company, dated February 11, 1998 (filed as Exhibit 10.16 to the
1997 10-K).*
10.12 Leucadia National Corporation Senior Executive Annual Incentive
Bonus Plan (filed as Annex D to the 1997 Proxy Statement).*
10.13 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).*
10.14 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).*
10.15 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).*
- ---------------------------
* Incorporated by reference.
33
10.16 Deferred Compensation Agreement between the Company and Thomas E.
Mara dated as of January 10, 2000 (filed as Exhibit 10.17 to the
2000 10-K).*
10.17 Deferred Compensation Agreement between the Company and Mark
Hornstein dated as of December 29, 2000 (filed as Exhibit 10.18 to
the 2000 10-K).*
10.18 Employment Agreement made as of December 28, 1993 by and between
the Company and Ian M. Cumming (filed as Exhibit 10.17 to the 1993
10-K).*
10.19 Amendment, dated as of May 5, 1999, to the Employment Agreement
made as of December 28, 1993 by and between the Company and Ian M.
Cumming.
10.20 Employment Agreement made as of December 28, 1993 by and between
the Company and Joseph S. Steinberg (filed as Exhibit 10.18 to the
1993 10-K).*
10.21 Amendment, dated as of May 5, 1999, to the Employment Agreement
made as of December 28, 1993 by and between the Company and Joseph
S. Steinberg.
10.22 Commitment Letter dated February 26, 2001 among the Company,
Berkshire Hathaway Inc., Berkadia LLC, The FINOVA Group Inc. and
FINOVA Capital Corporation (filed as Exhibit 10.19 to the 2000
10-K).*
10.23 Management Services Agreement dated as of February 26, 2001 among
The FINOVA Group Inc., the Company and Leucadia International
Corporation (filed as Exhibit 10.20 to the 2000 10-K).*
10.24 Leucadia National Corporation Guaranty to Fleet Securities, Inc.,
as administrative agent, and the lenders from time to time party
to the Fleet Facility, dated as of August 21, 2001 (filed as
Exhibit 4 to the Schedule 13D filed with the SEC on August 28,
2001 in respect of Company Common Stock by Berkshire Hathaway Inc.
et al. (the "Berkshire Schedule 13D")).*
10.25 Berkadia Management LLC Operating Agreement, dated August 21,
2001, by and between BH Finance LLC and WMAC Investment
Corporation (filed as Exhibit 8 to the Berkshire Schedule 13D).*
10.26 Voting Agreement, dated August 21, 2001, by and among Berkadia
LLC, Berkshire Hathaway Inc., the Company and The FINOVA Group
Inc. (filed as Exhibit 10.J to the August 27, 2001 8-K).*
10.27 First Amended and Restated Berkadia LLC Operating Agreement, dated
August 21, 2001, by and among BHF Berkadia Member Inc., WMAC
Investment Corporation and Berkadia Management LLC (filed as
Exhibit 11 to the Berkshire Schedule 13D).*
10.28 Deferred Compensation Agreement between the Company and Thomas E.
Mara dated as of December 20, 2001.
10.29 Deferred Compensation Agreement between the Company and Mark
Hornstein dated as of December 27, 2001.
21 Subsidiaries of the registrant.
- ---------------------------
* Incorporated by reference.
34
23.1 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).
23.2 Independent Auditors' Consent from KPMG LLP, with respect to the
inclusion in this Annual Report on Form 10-K of the financial
statements of Jefferies Partners Opportunity Fund II, LLC and with
respect to the incorporation by reference in the Company's
Registration Statements on Form S-8 (No. 2-84303), Form S-8 and
S-3 (No. 33-6054), Form S-8 and S-3 (No. 33-26434), Form S-8 and
S-3 (No. 33-30277), Form S-8 (No. 33-61682), Form S-8 (No.
33-61718) and Form S-8 (No. 333-51494).
23.3 Consent of independent auditors from Ernst & Young LLP with
respect to the inclusion in this Annual Report on Form 10-K of the
financial statements of Berkadia LLC and with respect to the
incorporation by reference in the Company's Registration
Statements on Form S-8 (No. 2-84303), Form S-8 and S-3 (No.
33-6054), Form S-8 and S-3 (No. 33-26434), Form S-8 and S-3 (No.
33-30277), Form S-8 (No. 33-61682), Form S-8 (No. 33-61718) and
Form S-8 (No. 333-51494).**
23.4 Consent of independent auditors from Ernst & Young LLP with
respect to the inclusion in this Annual Report on Form 10-K of the
financial statements of The FINOVA Group Inc. and with respect to
the incorporation by reference in the Company's Registration
Statements on Form S-8 (No. 2-84303), Form S-8 and S-3 (No.
33-6054), Form S-8 and S-3 (No. 33-26434), Form S-8 and S-3 (No.
33-30277), Form S-8 (No. 33-61682), Form S-8 (No. 33-61718) and
Form S-8 (No. 333-51494).**
(d) Financial statements schedules.
------------------------------
(1) Berkadia LLC combined financial statements as of
December 31, 2001 and for the period from inception,
February 26, 2001, to December 31, 2001.**
(2) The FINOVA Group Inc.and subsidiaries consolidated financial
statements as of December 31, 2001 and 2000 and for the years
ended December 31, 2001, 2000 and 1999.**
(3) Jefferies Partners Opportunity Fund II, LLC financial
statements as of December 31, 2001 and 2000 and for the years
ended December 31, 2001 and 2000 and for the period from date
of funding, May 20, 1999 through December 31, 1999.
- ---------------------------------------------------------
** Not currently available and will be filed by amendment.
35
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 6, 2002 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
Joseph A. Orlando (Principal Financial Officer)
/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
36
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, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001, 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
February 28, 2002
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
(Dollars in thousands, except par value)
2001 2000
---- ----
ASSETS
- ------
Investments:
Available for sale (aggregate cost of $675,170 and $548,261) $ 722,544 $ 571,954
Trading securities (aggregate cost of $68,547 and $52,825) 63,850 48,053
Held to maturity (aggregate fair value of $1,665 and $15,173) 1,666 15,043
Other investments, including accrued interest income 18,272 17,152
---------- ----------
Total investments 806,332 652,202
Cash and cash equivalents 376,542 529,812
Trade, notes and other receivables, net 616,507 693,380
Prepaids and other assets 256,937 274,916
Property, equipment and leasehold improvements, net 162,160 171,182
Investments in associated companies 358,761 192,545
Net assets of discontinued operations -- 112,119
---------- ----------
Total $2,577,239 $2,626,156
========== ==========
LIABILITIES
- -----------
Customer banking deposits $ 476,495 $ 526,172
Trade payables and expense accruals 85,296 141,833
Other liabilities 224,997 101,172
Income taxes payable 124,692 113,724
Deferred tax liability 13,766 55,137
Debt, including current maturities 343,276 374,523
---------- ----------
Total liabilities 1,268,522 1,312,561
---------- ----------
Commitments and contingencies
Minority interest 15,064 11,154
---------- ----------
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; 55,318,257
and 55,296,728 shares issued and outstanding, after deducting
63,117,584 and 63,116,263 shares held in treasury 55,318 55,297
Additional paid-in capital 54,791 54,340
Accumulated other comprehensive income 14,662 2,585
Retained earnings 1,070,682 1,092,019
---------- ----------
Total shareholders' equity 1,195,453 1,204,241
---------- ----------
Total $2,577,239 $2,626,156
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 2001, 2000 and 1999
(In thousands, except per share amounts)
2001 2000 1999
---- ---- ----
REVENUES:
- --------
Manufacturing $ 53,667 $ 65,019 $ 64,041
Finance 113,422 89,007 50,254
Investment and other income 203,161 264,067 395,277
Equity in income (losses) of associated companies (24,576) 29,293 (2,932)
Net securities gains 29,624 124,479 16,268
--------- --------- ---------
375,298 571,865 522,908
--------- --------- ---------
EXPENSES:
- ---------
Manufacturing cost of goods sold 36,803 40,650 39,179
Interest 55,200 57,713 50,665
Salaries 42,985 50,117 37,635
Selling, general and other expenses 186,637 169,919 127,971
--------- --------- ---------
321,625 318,399 255,450
--------- --------- ---------
Income from continuing operations before income taxes, minority
expense of trust preferred securities, extraordinary gain (loss)
and cumulative effect of a change in accounting principle 53,673 253,466 267,458
--------- --------- ---------
Income taxes:
Current 53,851 50,184 8,700
Deferred (70,499) 43,130 43,463
--------- --------- ---------
(16,648) 93,314 52,163
--------- --------- ---------
Income from continuing operations before minority expense of trust
preferred securities, extraordinary gain (loss) and cumulative
effect of a change in accounting principle 70,321 160,152 215,295
Minority expense of trust preferred securities, net of taxes 5,521 5,521 5,521
--------- --------- ---------
Income from continuing operations before extraordinary gain
(loss) and cumulative effect of a change in accounting principle 64,800 154,631 209,774
Loss from discontinued operations, net of taxes (41,614) (39,606) (7,726)
Gain (loss) on disposal of discontinued operations, net of income tax
expense (benefit) of ($16,749) and $508 (31,105) -- 15,582
--------- --------- ---------
Income (loss) before extraordinary gain (loss) and cumulative effect
of a change in accounting principle (7,919) 115,025 217,630
Extraordinary gain (loss) from early extinguishment of debt, net of income
tax expense (benefit) of $552 and ($1,394) -- 983 (2,588)
--------- --------- ---------
Income (loss) before cumulative effect of a change in accounting principle (7,919) 116,008 215,042
Cumulative effect of a change in accounting principle 411 -- --
--------- --------- ---------
Net income (loss) $ (7,508) $ 116,008 $ 215,042
========= ========= =========
Basic earnings (loss) per common share:
Income from continuing operations before extraordinary gain (loss)
and cumulative effect of a change in accounting principle $ 1.17 $ 2.78 $ 3.53
Loss from discontinued operations (.76) (.71) (.13)
Gain (loss) on disposal of discontinued operations (.56) -- .26
Extraordinary gain (loss) -- .02 (.04)
Cumulative effect of a change in accounting principle .01 -- --
--------- --------- ---------
Net income (loss) $ (.14) $ 2.09 $ 3.62
========= ========= =========
Diluted earnings (loss) per common share:
Income from continuing operations before extraordinary gain (loss)
and cumulative effect of a change in accounting principle $ 1.17 $ 2.78 $ 3.53
Loss from discontinued operations (.76) (.71) (.13)
Gain (loss) on disposal of discontinued operations (.56) -- .26
Extraordinary gain (loss) -- .02 (.04)
Cumulative effect of a change in accounting principle .01 -- --
--------- --------- ---------
Net income (loss) $ (.14) $ 2.09 $ 3.62
========= ========= =========
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, 2001, 2000 and 1999
(In thousands)
2001 2000 1999
---- ---- ----
Net cash flows from operating activities:
- -----------------------------------------
Net income (loss) $ (7,508) $ 116,008 $ 215,042
Adjustments to reconcile net income (loss) to net cash (used for) provided by
operations:
Extraordinary (gain) loss, net of income taxes -- (983) 2,588
Cumulative effect of a change in accounting principle (411) -- --
(Benefit) provision for deferred income taxes (64,087) 43,130 40,660
Depreciation and amortization of property, equipment and leasehold improvements 17,481 15,909 12,435
Other amortization (primarily related to investments) (12,114) 751 (1,828)
Provision for doubtful accounts 43,561 30,831 11,371
Net securities gains (29,624) (124,479) (16,268)
Equity in (income) losses of associated companies 24,576 (29,293) 2,932
(Gain) on disposal of real estate, property and equipment, and other assets (56,631) (92,276) (64,716)
(Gain) on sales of PIB, Caja and S&H -- -- (169,063)
(Gain) loss on disposal of discontinued operations 31,105 -- (15,582)
Investments classified as trading, net (6,675) (3,978) (3,500)
Net change in:
Trade and other receivables 3,058 (12,884) 7,474
Prepaids and other assets (3,049) 23,201 (29,373)
Trade payables and expense accruals (36,918) (55,766) 30,503
Other liabilities (9,148) 4,988 (7,500)
Income taxes payable 10,309 1,378 16,580
Other 6,929 10,916 4,443
Net change in net assets of discontinued operations 65,653 62,246 50,490
----------- ----------- -----------
Net cash (used for) provided by operating activities (23,493) (10,301) 86,688
----------- ----------- -----------
Net cash flows from investing activities:
- -----------------------------------------
Acquisition of real estate, property, equipment and leasehold improvements (53,337) (90,360) (118,279)
Proceeds from disposals of real estate, property and equipment, and other assets 208,197 289,860 182,128
Proceeds from sales of PIB, Caja and S&H -- -- 165,851
Proceeds from disposal of discontinued operations, net of expenses -- -- 43,132
Investment in Tranex Credit Corp. and MK Gold Company -- -- (133,541)
Advances on loan receivables (262,388) (355,604) (197,891)
Principal collections on loan receivables 186,626 148,259 101,936
Advances on notes receivables (9,593) (30,864) (49,000)
Collections on notes receivables 39,790 266,954 168,829
Investments in associated companies (186,782) (108,600) (32,553)
Distributions from associated companies 123,871 19,784 30,030
Purchases of investments (other than short-term) (1,309,854) (985,447) (1,306,859)
Proceeds from maturities of investments 723,514 68,688 928,368
Proceeds from sales of investments 495,791 989,600 989,735
----------- ----------- -----------
Net cash (used for) provided by investing activities (44,165) 212,270 771,886
----------- ----------- -----------
(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, 2001, 2000 and 1999
(In thousands)
2001 2000 1999
---- ---- ----
Net cash flows from financing activities:
- -----------------------------------------
Net change in short-term borrowings $ -- $ (75,500) $ (9,798)
Net change in customer banking deposits (45,928) 192,512 138,039
Issuance of long-term debt, net of issuance costs 71,496 105,850 --
Reduction of long-term debt (94,557) (126,703) (200,673)
Purchase of common shares for treasury (45) (32,094) (125,481)
Dividends paid (13,829) (13,824) (811,925)
----------- ---------- -----------
Net cash (used for) provided by financing activities (82,863) 50,241 (1,009,838)
----------- ---------- -----------
Effect of foreign exchange rate changes on cash (2,749) (9,013) (11,835)
----------- ---------- -----------
Net increase (decrease) in cash and cash equivalents (153,270) 243,197 (163,099)
Cash and cash equivalents at January 1, 529,812 286,615 449,714
----------- ---------- -----------
Cash and cash equivalents at December 31, $ 376,542 $ 529,812 $ 286,615
=========== ========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 64,707 $ 57,865 $ 55,237
Income tax payments, net of refunds $ 11,885 $ 24,774 $(16,000)
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, 2001, 2000 and 1999
(In thousands, except par value and per share amounts)
Common Accumulated
Shares Additional Other
$1 Par Paid-In Comprehensive Retained
Value Capital Income (Loss) Earnings Total
------ ---------- ---------------- ----------- ------------
Balance, January 1, 1999 $ 61,985 $ 205,227 $ (771) $ 1,586,718 $1,853,159
----------
Comprehensive income:
Net change in unrealized gain (loss) on investments,
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 change 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
----------
Comprehensive income:
Net change in unrealized gain (loss) on investments,
net of taxes of $9,537 17,850 17,850
Net change in unrealized foreign exchange gain (loss),
net of taxes of $882 (5,366) (5,366)
Net change in unrealized gain (loss) on derivative
instruments (including the cumulative effect of a
change in accounting principle of $1,371), net of
taxes of $219 (407) (407)
Net loss (7,508) (7,508)
----------
Comprehensive income 4,569
----------
Exercise of options to purchase common shares 23 494 517
Purchase of stock for treasury (2) (43) (45)
Dividends ($.25 per common share) (13,829) (13,829)
--------- --------- --------- ----------- ----------
Balance, December 31, 2001 $ 55,318 $ 54,791 $ 14,662 $ 1,070,682 $1,195,453
========= ========= ========= =========== ==========
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 holding company engaged in a variety of businesses,
including banking and lending, manufacturing, winery operations, and property
and casualty insurance and reinsurance, principally in markets in the United
States, real estate activities in the United States and France and development
of a copper mine in Spain.
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 ("FDIC"). Historically, the
Company's principal lending activities have consisted of providing
collateralized personal automobile loans to individuals with poor credit
histories. Starting in 2000 and continuing in 2001, the Company began to
experience an increase in loan losses. This loss experience, combined with the
increasingly difficult competitive environment, resulted in the Company's
decision in September 2001 to stop originating any new subprime automobile
loans. The Company will continue to service its remaining automobile portfolio,
as well as originate other loan products, although it is anticipated that new
loan originations will be substantially less than originations previously
generated in the subprime automobile portfolio. The Company will also seek to
acquire loan portfolios that meet its credit criteria if these portfolios can be
purchased on attractive terms.
The Company's manufacturing operations manufacture and market proprietary
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. Since its acquisition in 1998, Fidei
has been liquidating its real estate assets. The Company's domestic real estate
operations include a mixture of commercial properties, residential land
development projects and other unimproved land, all in various stages of
development and all available for sale.
The Company's winery operations consist of its 90% interest in two wineries,
which produce and sell super-ultra-premium wines.
The Company's copper mine development operations consist of its 72.8% interest
in MK Gold Company ("MK Gold"), a company that is traded on the NASD OTC
Bulletin Board.
In December 2001, the Company decided to commence an orderly liquidation of the
property and casualty insurance operations of the Empire Group, which consists
of Empire Insurance Company and Allcity Insurance Company, and accordingly, has
classified its property and casualty operations as discontinued operations.
Prior period financial statements have been reclassified to conform with this
presentation.
2. Significant Accounting Policies:
-------------------------------
(a) Critical Accounting Policies and Estimates: The preparation of financial
------------------------------------------
statements in conformity with generally accepted accounting principles ("GAAP")
requires the Company to make estimates and assumptions that affect the reported
amounts in the financial statements and disclosures of contingent assets and
liabilities. On an on-going basis, the Company evaluates all of these estimates
and assumptions. Actual results could differ from those estimates.
The allowance for loan losses is an amount that the Company believes will be
adequate to absorb probable losses inherent in its portfolio of existing loans
based on the Company's evaluations of the collectibility of loans and prior loan
loss experience. Factors considered by the Company include actual experience,
current economic trends, aging of the loan portfolio and collateral value.
During periods of economic weakness, delinquencies,
F-7
2. Significant Accounting Policies, continued:
-------------------------------
defaults, repossessions and losses generally increase. These periods may also be
accompanied by decreased demand and declining values of automobiles securing
outstanding loans, which weakens collateral coverage and increases the amount of
a loss in the event of default. In addition, incentives offered by the
automobile industry on new cars affect the supply of used cars and the value the
Company may realize upon sale of repossessed automobiles. The allowance is based
on judgments and assumptions and the ultimate loss may differ.
The Company records a valuation allowance to reduce its deferred taxes to the
amount that is more likely than not to be realized. If the Company were to
determine that it would be able to realize its deferred tax assets in the future
in excess of its net recorded amount, an adjustment would increase income in
such period. Similarly, if the Company were to determine that it would not be
able to realize all or part of its net deferred taxes in the future, an
adjustment would be charged to income in such period. In addition, the Internal
Revenue Service ("IRS") is in the process of concluding its audit of the
Company's consolidated federal income tax returns for the years 1996 through
1999. The IRS has issued Notices of Proposed Adjustments that, if sustained,
would result in approximately $80,000,000 of tax, plus interest. The Company is
contesting these proposed adjustments. The Company believes that it is
adequately reserved for this exposure.
The Company accounts for its investment in Berkadia LLC under the equity method
of accounting. Although the Company has no cash investment in Berkadia, the
Company has a contingent liability resulting from its guarantee of 10% of the
third party financing provided to Berkadia . While the Company does not expect
that Berkadia will suffer losses resulting in the Company having to fund its
guarantee obligation, actual results could differ.
As of December 31, 2001, the carrying amount of the Company's investment in the
mining properties of MK Gold was approximately $51,100,000. The recoverability
of this asset is entirely dependent upon the success of MK Gold's mining project
at the Las Cruces copper deposit in the Pyrite Belt of Spain. Mining will be
subject to obtaining required permits (currently underway), obtaining both debt
and equity financing for the project, engineering and construction. Recently,
the market price of copper has been depressed, reflecting generally weak global
economic conditions. The amount of financing which can be obtained for the
project and its related cost will be significantly affected by the assessment of
potential lenders of the current and expected future market price of copper. In
addition, the actual price of copper and the operating cost of the mine will
affect the recoverability of this asset. Based on the current status of the
project and MK Gold's estimate of future financing costs and future cash flows,
the Company believes the asset is recoverable. Actual results could differ.
(b) Consolidation Policy: The consolidated financial statements include the
--------------------
accounts of the Company and all majority-owned entities except for those in
which control does not rest with the Company due to the significant
participating or controlling rights of other parties. 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 2001 presentation and for discontinued operations.
(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
$286,200,000 and $402,500,000 at December 31, 2001 and 2000, 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
loses 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.
F-8
2. Significant Accounting Policies, continued:
-------------------------------
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" in the Consolidated Statements of Operations. The cost
of securities sold is based on average cost.
(e) Allowance for Loan Losses: The allowance for loan losses is established
-------------------------
through a provision for loan losses charged to expense. Loans are charged
against the allowance for loan losses when the Company believes that either
timely collection or the ultimate collectibility of the net loan balance is
unlikely. The allowance is an amount that the Company believes will be adequate
to absorb probable losses inherent in the portfolio of existing loans based on
evaluations of the collectibility of loans and prior loan loss experience.
Factors considered by the Company include actual experience, current economic
trends, aging of the loan portfolio and collateral value. The allowance is based
on judgments and assumptions and the ultimate loss may differ.
(f) Property, Equipment and Leasehold Improvements: Property, equipment and
----------------------------------------------
leasehold improvements are stated at cost, net of accumulated depreciation and
amortization ($112,600,000 and $95,800,000 at December 31, 2001 and 2000,
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.
(g) Revenue Recognition: Revenue from loans made by the banking and lending
-------------------
operations is recognized over the term of the loan to provide a constant yield
on the daily principal balance outstanding. Manufacturing revenues are
recognized when title passes, which is generally upon shipment of goods. Revenue
from the sale of real estate is recognized when title passes.
(h) 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.
(i) Derivative Financial Instruments: On January 1, 2001, the Company adopted
--------------------------------
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities", as amended ("SFAS 133"). Under SFAS 133,
the Company reflects its derivative financial instruments in its balance sheet
at fair value. The Company has utilized derivative financial instruments to
manage the impact of changes in interest rates on its customer banking deposits
and certain debt obligations, hedge net investments in foreign subsidiaries and
manage foreign currency risk on certain available for sale securities. Although
the Company believes that these derivative financial instruments are practical
economic hedges of the Company's risks, except for the hedge of the net
investment in foreign subsidiaries, they do not meet the strict effectiveness
criteria under SFAS 133, and therefore are not accounted for as hedges.
In accordance with the transition provisions of SFAS 133, the Company recorded
income from a cumulative effect of a change in accounting principle of $411,000,
net of taxes, in results of operations for the year ended December 31, 2001 and
recorded a loss of $1,371,000, net of taxes, as a cumulative effect of a change
in accounting principle in accumulated other comprehensive income. The Company
expects to reclassify a net pre-tax charge of approximately $700,000 during the
next twelve months to investment and other income from the transition adjustment
that was recorded in accumulated other comprehensive income. Amounts recorded as
charges to investment and other income as a result of accounting for its
derivative financial instruments in accordance with SFAS 133 were $2,300,000 for
the year ended December 31, 2001. Net unrealized losses on derivative
instruments were $400,000 at December 31, 2001.
(j) 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
F-9
2. Significant Accounting Policies, continued:
-------------------------------
shareholders' equity. Net foreign exchange gains were not material for 2001,
$2,300,000 for 2000 and $4,800,000 for 1999. Net unrealized foreign exchange
losses were $16,600,000 and $11,200,000 at December 31, 2001 and 2000,
respectively.
(k) Recently Issued Accounting Standards: In June 2001, the Financial Accounting
------------------------------------
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
141, "Business Combinations" ("SFAS 141"), which is effective for all business
combinations after June 30, 2001, Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which is effective
for fiscal years beginning after December 15, 2001, and Statement of Financial
Accounting Standards No. 143, "Accounting for Asset Retirement Obligations"
("SFAS 143"), which is effective for fiscal years beginning after June 15, 2002.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS
144"), which is effective for fiscal years beginning after December 15, 2001.
SFAS 141 requires that companies use the purchase method of accounting for all
business combinations initiated after June 30, 2001 and addresses the initial
recognition and measurement of goodwill and other intangible assets acquired in
a business combination. SFAS 142 addresses the initial recognition and
measurement of intangible assets acquired outside a business combination and the
recognition and measurement of goodwill and other intangible assets subsequent
to acquisition. SFAS 143 requires recognition of the fair value of liabilities
associated with the retirement of long-lived assets when a legal obligation to
incur such costs arises as a result of the acquisition, construction,
development and/or the normal operation of a long-lived asset. Upon recognition
of the liability, a corresponding asset is recorded and depreciated over the
remaining life of the long-lived asset. SFAS 144 requires that one accounting
model be used for the long-lived assets to be disposed of by sale, whether
previously held and used or newly acquired, and broadens the presentation of
discontinued operations to include more disposal transactions and resolves
implementation issues. The Company has reviewed the impact of the implementation
of SFAS 142, 143 and 144, and does not expect them to have a material effect on
the Company's financial position or results of operations.
3. Acquisitions:
------------
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 $15,800,000. 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.
F-10
4. Investments in Associated Companies, continued:
-----------------------------------
The following table provides summarized data with respect to the Associated
Companies accounted for on the equity method of accounting included in 2001 and
2000 results of operations, except for Berkadia which is separately summarized
below; data for 1999 is not shown due to immateriality. (Amounts are in
thousands.)
2001 2000
---- ----
Assets $1,317,200 $ 719,500
Liabilities 429,400 452,700
---------- ---------
Net assets $ 887,800 $ 266,800
========== =========
The Company's portion of the reported net assets $ 340,400 $ 123,300
========== =========
Total revenues $ 277,700 $ 233,500
Income from continuing operations before extraordinary items $ 79,900 $ 42,900
Net income $ 96,700 $ 42,900
The Company's equity in net income $ 45,800 $ 29,300
The Company has not provided any guarantees, nor is it contingently liable for
any of the liabilities reflected in the above table. All such liabilities are
non-recourse to the Company. The Company's exposure to adverse events at the
investee companies is limited to the book value of its net investment of
$358,800,000.
In February 1999, the Company sold its interest in its Russian joint venture
with PepsiCo, Inc., Pepsi International Bottlers ("PIB"), for $39,200,000 and
recognized a pre-tax gain of $29,500,000. For years prior to the sale, the
Company had recognized an aggregate loss of $69,900,000 on this investment.
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 $120,800,000 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. For the years ended December 31, 2001 and 2000, the Company recorded
$27,100,000 and $17,300,000, respectively, of pre-tax income from this
investment under the equity method of accounting. Such earnings were distributed
by JPOF II as dividends shortly after the end of each year.
In December 2001, the Company invested $127,500,000 for an approximate 25%
common stock interest in Olympus Re Holdings, Ltd., a newly formed Bermuda
reinsurance company primarily engaged in the property excess, marine and
aviation reinsurance business.
In December 2001, the Company invested $50,000,000 in a limited partnership that
will invest primarily in securities and other obligations of highly leveraged,
distressed and out of favor companies.
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 up to $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. On August 10, 2001, the bankruptcy court
confirmed the chapter 11 reorganization plan for the FINOVA companies (the
"Plan"). On August 21, 2001, the effective date of the Plan, Berkadia lent
$5,600,000,000 on a senior secured basis to FINOVA Capital (the "Berkadia Loan")
and received 61,020,581
F-11
4. Investments in Associated Companies, continued:
-----------------------------------
newly issued shares of common stock of FINOVA (the "FNV Shares"), representing
50% of the stock of FINOVA outstanding on a fully diluted basis. The Berkadia
Loan is collateralized by substantially all of the assets of FINOVA and its
subsidiaries and is guaranteed by FINOVA and substantially all of the
subsidiaries of FINOVA and FINOVA Capital. Berkadia financed the Berkadia Loan
with bank financing that is guaranteed, 90% by Berkshire Hathaway and 10% by the
Company (with the Company's guarantee being secondarily guaranteed by Berkshire
Hathaway), and that is also secured by Berkadia's pledge of the $5,600,000,000
five year senior secured promissory note from FINOVA Capital to Berkadia issued
pursuant to the Berkadia Loan. The financing provided to Berkadia matures on the
same date as the Berkadia Loan; principal payments prior to maturity are
required only to the extent principal payments are received on the Berkadia
Loan. As of February 22, 2002, principal payments have reduced the amount
outstanding under the Berkadia Loan and Berkadia's financing to $3,900,000,000.
During 2001, Berkadia was paid a $60,000,000 commitment fee by FINOVA Capital
upon execution of the commitment, and a $60,000,000 funding fee upon funding of
the Berkadia Loan. The Company's share of these fees, $60,000,000 in the
aggregate, was distributed to the Company shortly after the fees were received.
In addition, FINOVA Capital has reimbursed Berkadia, Berkshire Hathaway and the
Company for all fees and expenses incurred in connection with Berkadia's
financing of its funding obligation under the commitment.
In connection with the funding commitment, in February 2001 FINOVA entered into
a ten-year management agreement with the Company 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 fee and all management fees.
All income related to the Berkadia Loan, after payment of financing costs, will
be shared 90% to Berkshire Hathaway and 10% to the Company. During the period
the Berkadia Loan was outstanding during 2001, the Company recorded income of
$3,900,000 representing 10% of the net interest spread on the Berkadia Loan. All
of this income has been distributed to the Company.
At the effective date of the Plan, Berkadia transferred $5,540,000,000 in cash
to FINOVA Capital, representing the $5,600,000,000 loan reduced by the funding
fee of $60,000,000. As indicated above, in exchange for these funds, Berkadia
received a $5,600,000,000 note from FINOVA Capital and the FNV Shares. Under
generally accepted accounting principles, Berkadia is required to allocate the
$5,540,000,000 cash transferred, reduced by the previously received $60,000,000
commitment fee, between its investment in the Berkadia Loan and the FNV Shares,
based upon the relative fair values of the securities received. Further, the
fair value of the FNV Shares is presumed to be equal to the trading price of the
stock on the day Berkadia received the FNV Shares, with only relatively minor
adjustments allowed for transfer restrictions and the inability of the traded
market price to account for a large block transfer. The requirement to use the
trading price as the basis for the fair value estimate resulted in an initial
book value for the FNV Shares of $188,800,000, which is far in excess of the
$17,600,000 aggregate book net worth of FINOVA on the effective date of the
Plan, and is inconsistent with the Company's view that the FINOVA common stock
has a very limited value. Based on this determination of fair value, Berkadia
recorded an initial investment in the FNV Shares of $188,800,000 and in the
Berkadia Loan of $5,291,200,000.
The allocation of $188,800,000 to the investment in the common stock of FINOVA,
plus the $120,000,000 of cash fees received, together are recorded and reflected
as a discount from the face amount of the Berkadia Loan. The discount will be
amortized to income over the life of the Berkadia Loan under the effective
interest method.
Subsequent to acquisition, Berkadia accounts for its investment in the FINOVA
common stock under the equity method of accounting. Berkadia's recognition of
its share of FINOVA's losses is suspended once the carrying amount of Berkadia's
equity interest in FINOVA is reduced to zero. Principally as a result of the
terrorist attacks on September 11, 2001, Berkadia recorded its share of FINOVA's
losses in an amount that reduced Berkadia's
F-12
4. Investments in Associated Companies, continued:
-----------------------------------
investment in FINOVA's common stock to zero. This non-cash loss recorded by
Berkadia will be reversed by Berkadia's accretion of the non-cash portion of the
discount on the Berkadia Loan discussed above.
The Company accounts for its investment in Berkadia under the equity method of
accounting because it does not control Berkadia. Although the Company has no
cash investment in Berkadia, since it has guaranteed 10% of the third party
financing provided to Berkadia, the Company records its share of any losses
recorded by Berkadia, up to the amount of the Company's guarantee. The total
amount of the Company's guarantee is $390,000,000 as of February 22, 2002. For
the period from the effective date of the Plan to December 31, 2001, the
Company's equity in the loss of Berkadia consists of the following (in
thousands):
Net interest spread on the Berkadia Loan - 10% of total $ 3,900
Amortization of Berkadia Loan discount related to cash fees - 50% of total 7,800
Amortization of Berkadia Loan discount related to FINOVA stock - 50% of total 12,300
Share of FINOVA loss under equity method - 50% of total (94,400)
--------
Equity in loss of associated companies - Berkadia $(70,400)
========
The loss recorded by the Company related to its share of Berkadia's equity
method loss in FINOVA is a non-cash loss that will be reversed over the term of
the Berkadia Loan as Berkadia accretes the discount on the Berkadia Loan into
income. The net carrying amount of the Company's investment in Berkadia is
negative $129,000,000, which is included in "Other liabilities" in the
consolidated balance sheet as of December 31, 2001. The negative carrying amount
is due to Berkadia's distribution of the commitment and funding fees and its
recognition of its share of FINOVA's losses under the equity method of
accounting. As a result of the application of these accounting rules, the
negative carrying amount of the Company's investment in Berkadia effectively
represents an unamortized discount on the Berkadia Loan, which will be amortized
to income over the term of the loan.
The following table provides certain summarized data with respect to Berkadia at
December 31, 2001 and for the period from the effective date of the Plan through
December 31, 2001. (Amounts are in thousands.)
Assets $4,646,700
Liabilities $4,908,500
Net assets $ (261,800)
Total revenues $ (52,100)
Loss from continuing operations before extraordinary
items and cumulative effect of a change in accounting principle $ (110,100)
Net loss $ (110,100)
5. Discontinued Operations:
-----------------------
In December 2001, upon approval by the Company's Board of Directors to commence
an orderly liquidation of the Empire Group, the Company classified as
discontinued operations the property and casualty insurance operations of the
Empire Group. The Empire Group had historically engaged in commercial and
personal lines of property and casualty insurance, principally in the New York
metropolitan area. The Empire Group will only accept new business that it is
obligated to accept by contract or New York insurance law; it will not engage in
any other business activities except for its claims runoff operations. The
voluntary liquidation is expected to be substantially complete by 2005. The
Company has written down its investment in the Empire Group to its estimated net
realizable value based on expected operating results and cash flows during the
liquidation period, which indicate that the Company is unlikely to realize any
value once the liquidation is complete. Accordingly, the Company recorded a
$47,900,000 pre-tax charge as loss on disposal of discontinued operations to
fully write-off its investment. While this estimated net realizable value
represents management's best estimate, the amount
F-13
5. Discontinued Operations, continued:
-----------------------
the Company will ultimately realize could be, but is not expected to be,
greater. The Company has no obligation to contribute additional capital to the
Empire Group.
In July 1999, the Company sold its life insurance subsidiaries, Charter National
Life Insurance Company and Intramerica Life Insurance Company, to Allstate Life
Insurance Company for statutory surplus, as adjusted, at the date of sale
($39,600,000), plus $3,600,000. The Company recorded a net gain of $15,600,000
in 1999, principally resulting from recognition of deferred gains from prior
reinsurance transactions.
At December 31, 2001 and 2000, the components of net assets of discontinued
operations are as follows (in thousands):
2001 2000
---- ----
Investments $ 196,932 $ 408,216
Cash and cash equivalents 125,843 22,346
Reinsurance and other receivables, net 86,295 155,511
Prepaids and other assets 14,603 12,486
Property, equipment and leasehold improvements, net 15,470 21,126
Deferred policy acquisition costs -- 10,785
--------- ---------
Total assets 439,143 630,470
--------- ---------
Trade payables and expense accruals 13,021 75,232
Other liabilities 15,166 16,467
Policy reserves 345,989 365,958
Unearned premiums 16,124 56,936
--------- ---------
Total liabilities 390,300 514,593
--------- ---------
Minority interest 989 3,758
--------- ---------
47,854 112,119
Reserve for anticipated loss on liquidation (47,854) --
--------- ---------
Net assets of discontinued operations $ -- $ 112,119
========= =========
F-14
5. Discontinued Operations, continued:
-----------------------
A summary of the results of discontinued operations is as follows for the three
year period ended December 31, 2001 (in thousands):
2001 2000 1999
---- ---- ----
Revenues:
Insurance revenues and commissions $ 64,078 $108,494 $145,324
Investment and other income 22,382 36,382 57,923
Net securities gains (losses) 11,245 (1,254) (5,962)
--------- -------- --------
97,705 143,622 197,285
--------- -------- --------
Expenses:
Provision for insurance losses and policy benefits 125,984 150,066 142,427
Amortization of deferred policy acquisition costs 16,965 26,289 31,705
Salaries 6,370 8,865 10,778
Selling, general and other expenses 12,008 18,566 23,080
--------- -------- --------
161,327 203,786 207,990
--------- -------- --------
Loss before income taxes (63,622) (60,164) (10,705)
Income tax benefit (22,008) (20,558) (2,979)
--------- -------- --------
Loss from discontinued operations, net of taxes $ (41,614) $(39,606) $ (7,726)
========= ======== ========
Note: 1999 results include revenues of $13,600,000 (primarily investment
income), pre-tax income of $13,300,000 and net income of $8,600,000 related to
its life insurance subsidiaries that were sold in 1999.
6. 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, 2001 and 2000 are as follows (in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------ ------------ --------
Held to maturity:
2001
- ----
Bonds and notes - United States Government agencies and
authorities $ 501 $ -- $ 1 $ 500
Other fixed maturities 1,165 -- -- 1,165
------- ----- ----- -------
$ 1,666 $ -- $ 1 $ 1,665
======= ===== ===== =======
2000
- ----
Bonds and notes:
United States Government agencies and authorities $ 9,640 $ 160 $ 15 $ 9,785
States, municipalities and political subdivisions 3,757 -- 22 3,735
All other corporates 86 -- -- 86
Other fixed maturities 1,560 7 -- 1,567
------- ----- ----- -------
$15,043 $ 167 $ 37 $15,173
======= ===== ===== =======
F-15
6. Investments, continued:
-----------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------- ------------ ------------ --------
Available for sale:
2001
- ----
Bonds and notes:
United States Government agencies and authorities $285,488 $ 1,211 $ 25 $286,674
States, municipalities and political subdivisions 11,862 13 48 11,827
Foreign governments 98,206 263 -- 98,469
Public utilities 660 2 -- 662
All other corporates 120,162 13,181 21,267 112,076
Other fixed maturities 25,171 -- -- 25,171
-------- -------- -------- --------
Total fixed maturities 541,549 14,670 21,340 534,879
-------- -------- -------- --------
Equity securities:
Preferred stocks 4,632 -- -- 4,632
Common stocks:
Banks, trusts and insurance companies 102,468 55,500 7,570 150,398
Industrial, miscellaneous and all other 26,521 11,249 5,135 32,635
-------- -------- -------- --------
Total equity securities 133,621 66,749 12,705 187,665
-------- -------- -------- --------
$675,170 $ 81,419 $ 34,045 $722,544
======== ======== ======== ========
2000
- ----
Bonds and notes:
United States Government agencies and authorities $169,281 $ 992 $ 323 $169,950
States, municipalities and political subdivisions 1,373 11 -- 1,384
Foreign governments 41,815 324 9 42,130
Public utilities 1,293 -- 15 1,278
All other corporates 252,845 6,367 12,178 247,034
Other fixed maturities 35,539 -- -- 35,539
-------- -------- -------- --------
Total fixed maturities 502,146 7,694 12,525 497,315
-------- -------- -------- --------
Equity securities:
Preferred stocks 4,632 -- -- 4,632
Common stocks:
Banks, trusts and insurance companies 15,703 1,676 1 17,378
Industrial, miscellaneous and all other 25,570 29,256 2,410 52,416
-------- -------- -------- --------
Total equity securities 45,905 30,932 2,411 74,426
-------- -------- -------- --------
Other 210 3 -- 213
-------- -------- -------- --------
$548,261 $ 38,629 $ 14,936 $571,954
======== ======== ======== ========
In May 2001, the Company invested $75,000,000 in a new issue of restricted
convertible preference shares of White Mountains Insurance Group, Ltd. ("WMIG").
In August 2001, upon approval by WMIG's shareholders, these securities were
converted into 375,000 common shares which represent approximately 4% of WMIG.
WMIG is a publicly traded, Bermuda-domiciled, financial services holding
company, principally engaged through its subsidiaries and affiliates in property
and casualty insurance and reinsurance. At December 31, 2001, the Company's
investment in WMIG, which is reflected in investments available for sale, had a
market value of $130,500,000.
F-16
6. Investments, continued:
-----------
At December 31, 2001, investments also included a publicly traded common stock
equity interest of 7.1% in PhoneTel Technologies, Inc. and 5.9% in Carmike
Cinemas, Inc.
Net unrealized gains (losses) on investments were $31,700,000, $13,800,000 and
$(2,600,000) at December 31, 2001, 2000 and 1999, respectively. Reclassification
amounts included in comprehensive income for the three year period ended
December 31, 2001 are as follows (in thousands):
2001 2000 1999
---- ---- ----
Unrealized holding gains (losses) arising during the period, net of
tax provision (benefit) of $12,665, $8,735 and $(3,058) $23,653 $15,748 $(5,829)
Less: reclassification adjustment for (gains) losses included in net
income, net of tax provision (benefit) of $3,128, $(343) and $(2,292) (5,803) 638 4,256
------- ------- -------
Net change in unrealized gain (loss) on investments, net of tax
provision (benefit) of $9,537, $9,078 and $(766) $17,850 $16,386 $(1,573)
======= ======= =======
The amortized cost and estimated fair value of investments classified as held to
maturity and as available for sale at December 31, 2001, 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.
Held to Maturity Available for Sale
---------------- ------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
------------ ------------ ---------- ---------
(In thousands)
Due in one year or less $1,165 $1,165 $381,965 $381,347
Due after one year through five years 168 167 68,472 63,308
Due after five years through ten years 333 333 45,162 44,108
Due after ten years -- -- 14,033 13,978
------ ------ -------- --------
1,666 1,665 509,632 502,741
Mortgage-backed securities -- -- 31,917 32,138
------ ------ -------- --------
$1,666 $1,665 $541,549 $534,879
====== ====== ======== ========
At December 31, 2001 and 2000, securities with book values aggregating
$1,500,000 and $4,900,000, respectively, were on deposit with various regulatory
authorities. Additionally, at December 31, 2001 and 2000, securities with book
values of $163,500,000 and $133,100,000, respectively, collateralized a letter
of credit issued in connection with the sale of the Colonial Penn Insurance
Company.
F-17
6. Investments, continued:
-----------
Certain information with respect to trading securities at December 31, 2001 and
2000 is as follows (in thousands):
Amortized Estimated Carrying
Cost Fair Value Value
---------- ---------- ---------
2001
- ----
Fixed maturities - corporate bonds and notes $ 10,781 $ 9,298 $ 9,298
Equity securities:
Preferred stocks 17,043 14,986 14,986
Common stocks - industrial, miscellaneous and all other 832 359 359
Other investments 39,891 39,207 39,207
-------- -------- --------
Total trading securities $ 68,547 $ 63,850 $ 63,850
======== ======== ========
2000
- ----
Fixed maturities - corporate bonds and notes $ 12,487 $ 6,878 $ 6,878
Equity securities:
Preferred stocks 24,319 26,555 26,555
Common stocks - industrial, miscellaneous and all other 58 63 63
Other investments 15,961 14,557 14,557
-------- -------- --------
Total trading securities $ 52,825 $ 48,053 $ 48,053
======== ======== ========
7. Trade, Notes and Other Receivables, Net:
---------------------------------------
A summary of trade, notes and other receivables, net at December 31, 2001 and
2000 is as follows (in thousands):
2001 2000
---- ----
Instalment loan receivables, net of unearned finance charges of
$3,748 and $3,978 (a) $ 521,242 $ 515,766
Receivables related to securities 30,835 45,639
Receivables relating to real estate activities 49,915 81,083
Note receivable from sale of Caja (including accrued interest)(b) -- 35,903
Tenant receivables of Fidei 15,371 31,934
Other 45,092 34,466
--------- ---------
662,455 744,791
Allowance for doubtful accounts (45,948) (51,411)
--------- ---------
$ 616,507 $ 693,380
========= =========
(a) Contractual maturities of instalment loan receivables at December 31, 2001
were as follows (in thousands): 2002 - $101,200; 2003 - $101,300; 2004 -
$102,100; 2005 - $77,900; and 2006 and thereafter - $138,700. 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.
(b) At December 31, 2000, the Company had outstanding collateralized notes
receivable of $35,900,000, resulting from the 1999 sale of its 30% interest in
Caja de Ahorro y Seguro S.A. to Assicurazioni Generali Group, an Italian
insurance company. The receivable was paid in full in January 2001.
F-18
8. Prepaids and Other Assets:
-------------------------
At December 31, 2001 and 2000, prepaids and other assets included real estate
assets, net, of $174,500,000 and $210,000,000, respectively. Such amounts
included $28,700,000 and $43,600,000 of real estate assets held by Fidei as of
December 31, 2001 and 2000, 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, 2001 and
2000 also included $51,100,000 and $50,000,000, respectively, of mining
properties, net, related to MK Gold.
9. Trade Payables, Expense Accruals and Other Liabilities:
------------------------------------------------------
A summary of trade payables and expense accruals and other liabilities at
December 31, 2001 and 2000 is as follows (in thousands):
2001 2000
---- ----
Trade Payables and Expense Accruals:
Payables related to securities $ 20,548 $ 60,788
Trade payables 15,463 21,427
Accrued compensation, severance and other employee benefits 16,833 22,596
Accrued interest payable 7,683 8,922
Other 24,769 28,100
--------- ---------
$ 85,296 $ 141,833
========= =========
Other Liabilities:
Investment in Berkadia $ 129,043 $ --
Postretirement and postemployment benefits 9,857 10,456
Liabilities related to real estate activities 43,005 38,856
Other 43,092 51,860
--------- ---------
$ 224,997 $ 101,172
========= =========
F-19
10. Indebtedness:
------------
The principal amount, stated interest rate and maturity of debt outstanding at
December 31, 2001 and 2000 are as follows (dollars in thousands):
2001 2000
---- ----
Payable in U.S. dollars:
Senior Notes:
Bank credit facility $ -- $ --
7 3/4% Senior Notes due 2013, less debt discount of $581 and $631 99,419 99,369
Industrial Revenue Bonds (with variable interest) 9,815 9,815
Aircraft financing 51,902 --
Other due 2002 through 2016 with a weighted average interest
rate of 7.06% 50,419 40,589
-------- --------
211,555 149,773
-------- --------
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
$53 and $64 21,623 21,612
-------- --------
40,724 40,713
-------- --------
Payable in other currencies:
Euro denominated debt due 2002 through 2009 with a weighted
average effective interest rate of 5.28% 90,997 184,037
-------- --------
$343,276 $374,523
======== ========
At December 31, 2001, the Company had an 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, 2001, no amounts were outstanding
under this bank credit facility.
During 2001, the Company borrowed $53,100,000 secured by its corporate aircraft.
This debt bears interest based on a floating rate, requires monthly payments of
principal and interest and matures in ten years. At December 31, 2001, the
outstanding balance was $51,900,000. The Company has entered into an interest
rate swap agreement on this financing, which fixed the interest rate at
approximately 5.7%. The Company would have received $1,100,000 at December 31,
2001 if the swap were terminated. The interest rate at December 31, 2001 was
2.7%. Changes in interest rates in the future will change the amounts to be
received under the agreement, as well as interest to be paid under the related
variable debt obligation.
The Company is financing the renovation of its Hawaiian hotel and has obtained
loan commitments totaling $25,000,000. At December 31, 2001, the amount
outstanding under this non-recourse borrowing was $18,900,000. The borrowing
matures in seven years and is collateralized by the hotel.
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, 2001, cash dividends of approximately $195,500,000 would be
eligible to be paid under the most restrictive covenants.
F-20
10. Indebtedness, continued:
------------
The Euro denominated debt, which is non-recourse to the Company, is entirely
related to the acquisition of Fidei. During 2001 and 2000, Fidei repurchased
approximately $36,400,000 (approximately 41,300,000 Euros) and $14,700,000
(approximately 15,800,000 Euros), respectively, principal amount of its Euro
denominated debt. The Company recognized an extraordinary gain on early
extinguishment of $1,500,000 ($1,000,000 after taxes or $.02 per share) for the
year ended December 31, 2000. Such gain was not material for the year ended
December 31, 2001.
Property, equipment and leasehold improvements of the manufacturing division
with a net book value of $7,900,000 are pledged as collateral for the Industrial
Revenue Bonds; and $162,700,000 of other assets (primarily investments and
property) are pledged for other indebtedness aggregating $102,300,000.
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. These interest rate swaps expire in 2003 and
require fixed rate payments of 6.2%. The Company would have paid $7,300,000 and
$1,200,000 at December 31, 2001 and 2000, respectively, on retirement of these
agreements. The LIBOR rate at December 31, 2001 was 1.9%. 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 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, 2006 are as follows (in thousands): 2002 - $17,200; 2003 -
$51,500; 2004 - $38,300; 2005 - $23,700; and 2006 - $25,900.
The weighted average interest rate on short-term borrowings (primarily customer
banking deposits) was 4.8% and 6.6% at December 31, 2001 and 2000, respectively.
11. 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 $154,600,000 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.
F-21
12. 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 2001 and 2000, the Company acquired 1,506,321
Common Shares at an average price of $21.34 per Common Share. As a result, as of
December 31, 2001, the Company is authorized to repurchase 4,493,679 Common
Shares.
During 1999, the Company paid aggregate cash dividends of $13.58 per Common
Share, totaling approximately $811,900,000. Pursuant to a ruling from the IRS,
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
operations 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 operations for its
stock-based compensation plans. Had compensation cost for the Company's stock
option plans been recorded in the statements of operations consistent with the
provisions of SFAS 123, the Company's net income (loss) would not have been
materially different from that reported in 2001, 2000 and 1999.
F-22
12. Common Shares, Stock Options and Preferred Shares, continued:
-------------------------------------------------
A summary of activity with respect to the Company's stock options for the three
years ended December 31, 2001 is as follows:
Common Weighted Available
Shares Average Options For Future
Subject Exercise Exercisable Option
to Option Prices at Year-End Grants
--------- --------- ----------- ---------
Balance at January 1, 1999 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
======= =========
Granted 4,000 $ 33.14
Exercised (22,850) $ 22.63
Cancelled (46,500) $ 22.63
--------
Balance at December 31, 2001 326,400 $ 22.77 58,663 850,750
======== ======= =========
The weighted-average fair value of the options granted was $9.46 per share for
2001 and $6.25 per share for 2000 as estimated on the date of grant using the
Black-Scholes option-pricing model with the following assumptions: (1) expected
volatility of 29.7% for 2001 and 25.4% for 2000; (2) risk-free interest rates of
4.9% for 2001 and 6.8% for 2000; (3) expected lives of 4.0 years for 2001 and
3.7 years for 2000; and (4) dividend yields of .8% for 2001 and 1.1% for 2000.
The following table summarizes information about fixed stock options outstanding
at December 31, 2001:
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 - $22.81 322,400 4.3 years $22.64 58,663 $22.65
$33.14 4,000 4.4 years $33.14 -- $ --
At December 31, 2001 and 2000, 850,750 and 808,250, respectively, 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, 2001 and 2000, 6,000,000 preferred shares (redeemable and
non-redeemable), par value $1 per share, were authorized.
F-23
13. Net Securities Gains:
--------------------
The following summarizes net securities gains for each of the three years in the
period ended December 31, 2001 (in thousands):
2001 2000 1999
---- ---- ----
Net realized gains (losses) on fixed maturities $(2,443) $ 5,632 $ 22,916
Writedown related to investments in Polish equity securities -- -- (2,650)
Net unrealized gains (losses) on trading securities 2,219 (9,588) 4,006
Net realized gains (losses) on equity and other securities 29,848 128,435 (8,004)
------- -------- --------
$29,624 $124,479 $ 16,268
======= ======== ========
During 2000, the Company sold its entire equity interest in Fidelity National
Financial, Inc. ("FNF") for proceeds of $179,900,000 and recognized a pre-tax
gain of $90,900,000. Additionally, during 2000, the Company sold its 10% equity
interest in Jordan Telecommunication Products, Inc. ("JTP") for $27,300,000 and
recorded a pre-tax gain of $24,800,000.
Proceeds from sales of investments classified as available for sale were
$483,200,000, $973,800,000 and $1,006,000,000 during 2001, 2000 and 1999,
respectively. Gross gains of $16,800,000, $123,700,000 and $22,400,000 and gross
losses of $5,300,000, $11,800,000 and $4,100,000 were realized on these sales
during 2001, 2000 and 1999, respectively.
14. Other Results of Operations Information:
---------------------------------------
Investment and other income for each of the three years in the period ended
December 31, 2001 consists of the following (in thousands):
2001 2000 1999
---- ---- ----
Interest on short-term investments $ 14,187 $ 13,201 $ 20,942
Interest on fixed maturities 32,202 23,228 28,991
Interest on notes receivable 3,846 17,480 23,989
Other investment income 18,153 20,471 10,976
Gains on sale and foreclosure of real estate and other assets,
net of costs 56,783 95,523 64,896
Rental income 22,895 27,427 35,862
MK Gold product and service income 7,299 17,402 5,148
Winery revenues 13,736 15,337 13,347
Gain on sale of Caja -- -- 120,793
Gain on sale of The Sperry & Hutchinson Company, Inc. -- -- 18,725
Gain on sale of PIB -- -- 29,545
Prepayment penalty on promissory notes -- 7,500 --
Other 34,060 26,498 22,063
-------- -------- --------
$203,161 $264,067 $395,277
======== ======== ========
F-24
14. Other Results of Operations Information, continued:
---------------------------------------
Taxes, other than income or payroll, amounted to $7,400,000 for the year ended
December 31, 2001, $5,100,000 for the year ended December 31, 2000 and
$6,000,000 for the year ended December 31, 1999.
Advertising costs amounted to $2,500,000, $3,000,000 and $1,100,000 for the
years ended December 31, 2001, 2000 and 1999, respectively.
15. Income Taxes:
------------
The principal components of the deferred tax liability at December 31, 2001 and
2000 are as follows (in thousands):
2001 2000
---- ----
Deferred Tax Asset:
Insurance reserves and unearned premiums $ 16,731 $ 17,905
Securities valuation reserves 48,490 36,985
Other accrued liabilities 45,801 15,383
Foreign tax loss carryforwards 36,700 35,000
-------- --------
147,722 105,273
Valuation allowance (85,803) (84,103)
-------- --------
61,919 21,170
-------- --------
Deferred Tax Liability:
Unrealized gains on investments (17,585) (9,464)
Depreciation (7,209) (16,559)
Policy acquisition costs -- (3,775)
Intangible drilling costs (5,615) (4,557)
Other, net (45,276) (41,952)
-------- --------
(75,685) (76,307)
-------- --------
Net deferred tax liability $(13,766) $(55,137)
======== ========
The valuation allowance principally relates to uncertainty as to the realization
of the foreign tax loss carryfowards and unrealized capital losses.
The provision (benefit) for income taxes for each of the three years in the
period ended December 31, 2001 was as follows (in thousands):
2001 2000 1999
---- ---- ----
State income taxes (currently payable) $ 500 $ 1,113 $ 246
Federal income taxes:
Current 53,301 49,033 7,879
Deferred (73,688) 28,285 31,136
Foreign income taxes:
Current 50 38 575
Deferred 3,189 14,845 12,327
-------- -------- --------
$(16,648) $ 93,314 $ 52,163
======== ======== ========
F-25
15. Income Taxes, continued:
------------
The table below reconciles the expected statutory federal income tax to the
actual income tax provision (benefit) (in thousands):
2001 2000 1999
---- ---- ----
Expected federal income tax $ 18,786 $ 88,713 $ 93,610
State income taxes, net of federal income tax benefit 325 723 160
Reduction in valuation allowance -- -- (33,300)
Recognition of additional tax benefits (36,234) (1,597) (10,238)
Reduction of foreign deferred tax asset -- 6,193 --
Other 475 (718) 1,931
-------- -------- --------
Actual income tax provision (benefit) $(16,648) $ 93,314 $ 52,163
======== ======== ========
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, and in 1999, a $6,800,000 tax benefit from the
recognition of additional capital losses. 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.
At December 31, 2001, the Company's foreign subsidiary, Fidei, had tax loss
carryforwards of $102,000,000, of which $50,000,000 expire in 2002 through 2007
and $52,000,000 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 U.S. tax loss carryforwards and other
tax benefits 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.
The IRS is in the process of concluding its audit of the Company's consolidated
federal income tax returns for the years 1996 through 1999. The IRS has issued
Notices of Proposed Adjustments that, if sustained, would result in
approximately $80,000,000 of tax, plus interest. The Company is contesting these
proposed adjustments. The Company believes that it is adequately reserved for
this exposure.
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 obligations will
result in any additional material liability to the Company.
16. Pension Plan 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 $1,800,000, $1,600,000 and
$1,200,000 for the years ended December 31, 2001, 2000 and 1999, 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
F-26
16. Pension Plan and Postretirement Benefits, continued:
----------------------------------------
pension plans. A summary of activity with respect to the Company's defined
benefit pension plans for 2001 and 2000 is as follows (in thousands):
2001 2000
---- ----
Projected Benefit Obligation:
Projected benefit obligation at January 1, $ 52,815 $ 56,756
Interest cost (a) 3,726 3,872
Actuarial (gain) loss 1,895 (1,476)
Benefits paid (5,731) (6,337)
-------- --------
Projected benefit obligation at December 31, $ 52,705 $ 52,815
======== ========
Change in Plan Assets:
Fair value of plan assets at January 1, $ 49,011 $ 52,087
Actual return on plan assets 3,614 3,261
Employer contributions 1,987 --
Benefits paid (5,731) (6,337)
Administrative expenses (121) --
-------- --------
Fair value of plan assets at December 31, $ 48,760 $ 49,011
======== ========
Funded Status $ (3,945) $ (3,804)
Unrecognized prior service cost 58 61
Unrecognized net loss from experience differences and
assumption changes 6,824 4,822
-------- --------
Accrued pension asset $ 2,937 $ 1,079
======== ========
(a) Includes charges to expense of $1,300,000 and $1,400,000 for 2001 and 2000,
respectively, relating to discontinued operations obligations.
Pension expense (income) related to the defined benefit pension plans charged to
operations included the following components (in thousands):
2001 2000 1999
---- ---- ----
Interest cost $ 2,459 $ 2,517 $ 2,688
Expected return on plan assets (2,153) (2,218) (2,708)
Amortization of prior service cost 3 3 3
------- ------- -------
Net pension expense (income) $ 309 $ 302 $ (17)
======= ======= =======
The projected benefit obligation at December 31, 2001 and 2000 was determined
using an assumed discount rate of 7.0% and 7.25%, respectively, and the assumed
long-term rate of return on plan assets was 7.5% at December 31, 2001 and 2000.
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 to expense
were not material in each of the three years ended December 31, 2001.
F-27
16. Pension Plan and Postretirement Benefits, continued:
----------------------------------------
A summary of activity with respect to the Company's postretirement plans for
2001 and 2000 is as follows (in thousands):
2001 2000
---- ----
Accumulated postretirement benefit obligation at January 1, $ 5,566 $ 5,577
Interest cost 389 416
Contributions by plan participants 175 181
Actuarial loss 172 93
Benefits paid (766) (701)
------- -------
Accumulated postretirement benefit obligation at December 31, 5,536 5,566
Unrecognized prior service cost 197 250
Unrecognized net actuarial gain 2,276 2,661
------- -------
Accrued postretirement benefit obligation $ 8,009 $ 8,477
======= =======
The discount rate used in determining the accumulated postretirement benefit
obligation was 7.0% and 7.5% at December 31, 2001 and 2000, respectively. The
assumed health care cost trend rates used in measuring the accumulated
postretirement benefit obligation were between 5.0% and 9.5% for 2001, and 6.0%
and 10.0% for 2000, 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, 2001 would have
increased or decreased by $900,000 and $800,000, respectively. The effect of
these changes on the aggregate of service and interest cost for 2001 would be
immaterial.
17. 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
$4,900,000 in 2001 and $6,600,000 in each of 2000 and 1999. Aggregate minimum
annual rentals (exclusive of real estate taxes, maintenance and certain other
charges) relating to facilities under lease in effect at December 31, 2001 are
as follows (in thousands): 2002 - $4,600; 2003 - $4,200; 2004 - $3,900; 2005 -
$3,500; 2006 - $3,400; and thereafter - $5,700. Future minimum sublease rental
income relating to facilities under lease in effect at December 31, 2001 are as
follows (in thousands): 2002 - $1,100; 2003 - $1,000; 2004 - $900; 2005 - $700;
2006 - $700; and thereafter - $1,800.
In connection with the sale of certain subsidiaries and certain non-recourse
financings, the Company has made or guaranteed the accuracy of certain
representations. No material loss is expected in connection with such matters.
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 $163,500,000, consisting of investments of
$124,800,000 and cash and cash equivalents of $38,700,000.
F-28
17. Commitments, continued:
-----------
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 $80,500,000 at December 31, 2001.
See Note 4 for information concerning the Company's guarantee of Berkadia's
financing.
18. 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, its consolidated results of operations or
liquidity.
19. Earnings (Loss) Per Common Share:
--------------------------------
For each of the three years in the period ended December 31, 2001, there were no
differences in the numerators for the basic and diluted per share computations
for income from continuing operations before extraordinary gain (loss) and
cumulative effect of a change in accounting principle. These numerators were
$64,800,000, $154,600,000 and $209,800,000 for 2001, 2000 and 1999,
respectively. The denominators for basic per share computations were 55,309,000,
55,529,000 and 59,338,000 for 2001, 2000 and 1999, respectively. There were no
differences for the denominators for diluted per share computations except for
the dilutive effect of 295,000, 69,000 and 14,000 options and warrants for 2001,
2000 and 1999, respectively, which had no impact on the per share amounts.
20. Fair Value of Financial Instruments:
-----------------------------------
The following table presents fair value information about certain financial
instruments, whether or not recognized on the balance sheet. Fair values are
determined as described below. 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 6.
(b) Cash and cash equivalents: For cash equivalents, the carrying amount
approximates fair value.
(c) Notes receivables on sale of 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 fair value
of the investment in Berkadia is based on the assumption that Berkadia's loan to
FINOVA will be fully repaid and the FINOVA common stock is assumed to have no
value. The carrying value of the remaining investments in associated companies
approximates fair value.
F-29
20. 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.
(h) Derivative instruments: The fair values of the interest rate swap and
currency rate swap agreements are based on rates currently available for similar
agreements.
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 2001 and 2000 are as follows (in thousands):
2001 2000
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
--------- -------- ----------- --------
Financial Assets:
Investments $ 806,332 $ 806,331 $ 652,202 $ 652,332
Cash and cash equivalents 376,542 376,542 529,812 529,812
Notes receivable on sale of Caja
(including accrued interest) -- -- 35,903 35,903
Other notes receivable 55,453 55,453 78,533 78,533
Loan receivables of banking and lending
subsidiaries, net of allowance 485,547 517,128 488,402 509,076
Investments in associated companies 358,761 370,621 192,545 204,539
Investment in Berkadia (129,043) -- -- --
Financial Liabilities:
Customer banking deposits 476,495 486,830 526,172 529,591
Debt 343,276 351,254 374,523 367,842
Securities sold not owned 19,344 19,344 60,785 60,785
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
subordinated debt securities of the Company 98,200 98,200 98,200 99,182
Derivative Instruments:
Interest rate swaps (6,292) (6,292) -- (1,345)
Foreign currency swaps 990 990 -- (144)
F-30
21. Segment Information:
-------------------
The Company's reportable segments consist of its operating units, which offer
different products and services and are managed separately. These reportable
segments are: banking and lending, foreign real estate, domestic real estate and
manufacturing. Banking and lending operations historically made 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 were primarily funded by deposits insured by the
FDIC. Foreign real estate consists of the operations of Fidei in France. The
Company's domestic real estate operations consist of a variety of commercial
properties, residential land development projects and other unimproved land, all
in various stages of development and all available for sale. Manufacturing
operations manufacture and market proprietary lightweight plastic netting used
for a variety of purposes. Other operations primarily consist of winery
operations and development of a copper mine. 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. Olympus Re Holdings, Ltd.,
one of the Company's investments in associated companies, is a Bermuda-based
reinsurance company. 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 a manufacturing facility located
in Belgium and an interest, through MK Gold, in a copper deposit in Spain.
Except as disclosed above, the Company does not have any other material foreign
operations and investments.
F-31
21. Segment Information, (continued):
-------------------
Certain information concerning the Company's segments for 2001, 2000 and 1999 is
presented in the following table. Prior period amounts have been reclassified
for the domestic real estate operations, which were previously included in Other
Operations.
2001 2000 1999
---- ---- ----
(In millions)
Revenues:
Banking and Lending $ 122.4 $ 108.8 $ 59.0
Foreign Real Estate 25.7 49.2 65.0
Domestic Real Estate 65.3 83.1 26.6
Manufacturing 57.4 65.1 64.0
Other Operations (a) 39.3 44.9 213.4
Equity in Associated Companies (b) (24.6) 29.3 (2.9)
Corporate (c) 89.8 191.5 97.8
--------- --------- ---------
Total consolidated revenues $ 375.3 $ 571.9 $ 522.9
========= ========= =========
Income (loss) from continuing operations before income taxes, minority expense
of trust preferred securities, extraordinary gain (loss) and cumulative effect
of a change in accounting principle:
Banking and Lending $ (6.1) $ 11.0 $ 12.7
Foreign Real Estate 5.2 22.9 31.8
Domestic Real Estate 30.4 58.8 13.4
Manufacturing 7.8 11.3 11.9
Other Operations (a) 8.2 5.2 187.0
Equity in Associated Companies (b) (24.6) 29.3 (2.9)
Corporate (c) 32.8 115.0 13.6
--------- --------- ---------
Total consolidated income from continuing operations before income taxes,
minority expense of trust preferred securities, extraordinary gain
(loss) and cumulative effect of a change in accounting principle $ 53.7 $ 253.5 $ 267.5
========= ========= =========
Identifiable assets employed:
Banking and Lending $ 595.7 $ 664.2 $ 467.1
Foreign Real Estate 152.1 254.7 276.7
Domestic Real Estate 176.4 218.1 253.5
Manufacturing 59.3 63.4 42.9
Other Operations 171.2 177.1 178.2
Investments in Associated Companies 358.8 192.5 74.0
Net Assets of Discontinued Operations -- 112.1 208.7
Corporate 1,063.7 944.1 987.0
--------- --------- ---------
Total consolidated assets $ 2,577.2 $ 2,626.2 $ 2,488.1
========= ========= =========
(a) For 1999, includes, among other items, pre-tax gains on sale of Caja, The
Sperry & Hutchinson Company, Inc. and PIB, aggregating $169,000,000, as
described in Notes 4 and 14.
(b) For 2001, includes, among other items, equity in loss of Berkadia totaling
$70,400,000, as described in Note 4.
(c) For 2000, includes, among other items, pre-tax securities gains on sale of
FNF ($90,900,000) and JTP ($24,800,000), as described in Note 13.
F-32
22. Selected Quarterly Financial Data (Unaudited):
---------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands, except per share amounts)
2001:
- -----
Revenues $ 98,414 $ 124,355 $ 43,432 $ 109,097
========= ========= ======== =========
Income (loss) from continuing operations before cumulative effect
of a change in accounting principle $ 12,771 $ 26,847 $(23,147) $ 48,329
========= ========= ======== =========
Income (loss) from discontinued operations, net of taxes $ (32,669) $ (973) $ (8,813) $ 841
========= ========= ======== =========
Loss on disposal of discontinued operations, net of taxes $ -- $ -- $ -- $ (31,105)
========= ========= ======== =========
Cumulative effect of a change in accounting principle $ 411 $ -- $ -- $ --
========= ========= ======== =========
Net income (loss) $ (19,487) $ 25,874 $(31,960) $ 18,065
========= ========= ======== =========
Basic earnings (loss) per common share:
Income (loss) from continuing operations before cumulative
effect of a change in accounting principle $ .23 $ 49 $ (.42) $ .87
Income (loss) from discontinued operations (.59) (.02) (.16) .02
Loss on disposal of discontinued operations -- -- -- (.56)
Cumulative effect of a change in accounting principle .01 -- -- --
--------- --------- -------- ---------
Net income (loss) $ (.35) $ .47 $ (.58) $ .33
========= ========= ======== =========
Number of shares used in calculation 55,299 55,309 55,314 55,316
========= ========= ======== =========
Diluted earnings (loss) per common share:
Income (loss) from continuing operations before cumulative
effect of a change in accounting principle $ .23 $ 49 $ (.42) $ .87
Income (loss) from discontinued operations (.59) (.02) (.16) .02
Loss on disposal of discontinued operations -- -- -- (.56)
Cumulative effect of a change in accounting principle .01 -- -- --
--------- --------- -------- ---------
Net income (loss) $ (.35) $ .47 $ (.58) $ .33
========= ========= ======== =========
Number of shares used in calculation 55,299 55,635 55,314 55,521
========= ========= ======== =========
2000:
- -----
Revenues $ 119,861 $ 99,131 $136,085 $ 216,788
========= ========= ======== =========
Income from continuing operations before extraordinary gain $ 26,256 $ 11,839 $ 38,387 $ 78,149
========= ========= ======== =========
Loss from discontinued operations, net of taxes $ (1,245) $ (2,311) $ (9,596) $ (26,454)
========= ========= ======== =========
Extraordinary gain from early extinguishment of debt, net of taxes $ 562 $ -- $ -- $ 421
========= ========= ======== =========
Net income $ 25,573 $ 9,528 $ 28,791 $ 52,116
========= ========= ======== =========
Basic earnings (loss) per common share:
Income from continuing operations before extraordinary gain $ .47 $ .21 $ .69 $ 1.41
Loss from discontinued operations (.02) (.04) (.17) (.48)
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 (loss) per common share:
Income from continuing operations before extraordinary gain $ .47 $ .21 $ .69 $ 1.41
Loss from discontinued operations (.02) (.04) (.17) (.48)
Extraordinary gain .01 -- -- .01
Net income --------- --------- -------- ---------
$ .46 $ .17 $ .52 $ .94
========= ========= ======== =========
Number of shares used in calculation 56,052 55,311 55,390 55,464
========= ========= ======== =========
In 2001 and 2000, the totals of quarterly per share amounts do not necessarily
equal annual per share amounts.
Quarterly data for 2001 includes equity losses of $70,400,000 representing the
Company's share of the loss recorded by Berkadia primarily in the third quarter.
Quarterly data for 2000 includes pre-tax gains on the sale of JTP ($24,800,000)
in the first quarter and FNF ($90,900,000) primarily in the fourth quarter.
F-33
Schedule II - Valuation and Qualifying Accounts
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
For the years ended December 31, 2001, 2000 and 1999
(In thousands)
Additions Deductions
----------------------------- -----------------------
Charged
Balance at to Costs Balance
Beginning and Write- Sale of Translation at End
Description of Period Expenses Recoveries Offs Receivables (Gain) Loss of Period
----------- --------- --------- ---------- ------ ----------- ----------- ---------
2001
- ----
Loan receivables of
banking and lending
subsidiaries $ 27,364 $ 43,125 $ 8,519 $ 43,313 $ -- $ -- $ 35,695
Trade, notes and other
receivables 24,047 436 16 13,020 -- (1,226) 10,253
-------- -------- -------- -------- -------- -------- --------
Total allowance for
doubtful accounts $ 51,411 $ 43,561 $ 8,535 $ 56,333 $ -- $ (1,226) $ 45,948
======== ======== ======== ======== ======== ======== ========
2000
- ----
Loan receivables of
banking and lending
subsidiaries $ 16,975 $ 30,169 $ 5,681 $ 25,461 $ -- $ -- $ 27,364
Trade, notes and other
receivables 30,690 662 971 6,054 -- (2,222) 24,047
-------- -------- -------- -------- -------- -------- --------
Total allowance for
doubtful accounts $ 47,665 $ 30,831 $ 6,652 $ 31,515 $ -- $ (2,222) $ 51,411
======== ======== ======== ======== ======== ======== ========
1999
- ----
Loan receivables of
banking and lending
subsidiaries $ 9,398 $ 11,401 $ 5,455 $ 9,279 $ -- $ -- $ 16,975
Trade, notes and other
receivables 41,526 (30) 98 5,067 130 (5,707) 30,690
-------- --------- -------- -------- -------- -------- --------
Total allowance for
doubtful accounts $ 50,924 $ 11,371 $ 5,553 $ 14,346 $ 130 $ (5,707) $ 47,665
======== ========= ======== ======== ======== ======== ========
F-34
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
(SEC Identification No. 8-51771)
Financial Statements
December 31, 2001 and 2000
INDEPENDENT AUDITORS' REPORT
The Members
Jefferies Partners Opportunity Fund II, LLC:
We have audited the accompanying statement of financial condition of Jefferies
Partners Opportunity Fund II, LLC (the Fund) as of December 31, 2001 and 2000,
and the related statements of earnings, changes in members' equity and cash
flows for the years then ended and the period from May 20, 1999 (date of
funding) through December 31, 1999. These financial statements are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Jefferies Partners Opportunity
Fund II, LLC as of December 31, 2001 and 2000, and the results of its operations
and its cash flows for the years then ended and the period from May 20, 1999
through December 31, 1999, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
January 24, 2002, except as to Note 8
of the notes to the financial statements,
which is as of February 15, 2002.
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Statement of Financial Condition
December 31, 2001 and 2000
2001 2000
---- ----
Assets
Cash and cash equivalents $ 49,744,944 37,847,419
Receivable from brokers and dealers 12,149,608 20,683,225
Securities owned 125,074,840 108,547,106
Other assets 1,890,975 3,043,509
------------------ -----------------
Total assets $ 188,860,367 170,121,259
================== =================
Liabilities and Members' Equity
Securities sold, not yet purchased $ 1,652,288 6,764,985
Payable to brokers and dealers 17,893,470 10,552,759
Payable to Jefferies & Company, Inc. 901,859 1,365,589
Accrued expenses and other liabilities 90,162 64,206
------------------ -----------------
Total liabilities 20,537,779 18,747,539
------------------ -----------------
Members' equity:
Members' capital, net 126,255,099 124,275,099
Retained earnings 42,067,489 27,098,621
------------------ -----------------
Total members' equity 168,322,588 151,373,720
------------------ -----------------
Total liabilities and members' equity $ 188,860,367 170,121,259
================== =================
See accompanying notes to financial statements.
2
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Statement of Earnings
Years ended December 31, 2001, 2000, and
for the period from May 20, 1999 (date of funding) through December 31, 1999
May 20, 1999
through
2001 2000 December 31, 1999
---- ---- -----------------
Revenues:
Principal transactions (net of direct trading expenses) $ 33,881,772 21,439,702 --
Interest 9,086,866 7,952,918 --
Dividends -- 10,329 --
---------------- ---------------- ------------------
Total revenues 42,968,638 29,402,949 --
---------------- ---------------- ------------------
Expenses:
General and administrative 1,160,728 1,336,747 139
Management fee 937,384 787,407 --
Interest 388,207 180,035 --
---------------- ---------------- ------------------
Total expenses 2,486,319 2,304,189 139
---------------- ---------------- ------------------
Net earnings (loss) $ 40,482,319 27,098,760 (139)
================ ================ ==================
See accompanying notes to financial statements.
3
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Statement of Changes in Members' Equity
Years ended December 31, 2001, 2000, and
for the period from May 20, 1999 (date of funding) through December 31, 1999
Retained
earnings Total
Members' (accumulated members'
capital, net deficit) equity
-------------------- ------------------- ---------------------
Balance, May 20, 1999 $ -- -- --
Capital contributions from members, net 350,000 -- 350,000
Distributions -- -- --
Net loss -- (139) (139)
-------------------- ------------------- ---------------------
Balance, December 31, 1999 $ 350,000 (139) 349,861
Capital contributions from members, net 123,925,099 -- 123,925,099
Distributions -- -- --
Net earnings -- 27,098,760 27,098,760
-------------------- ------------------- ---------------------
Balance, December 31, 2000 $ 124,275,099 27,098,621 151,373,720
Capital contributions from members, net 1,980,000 -- 1,980,000
Distributions -- (25,513,451) (25,513,451)
Net earnings -- 40,482,319 40,482,319
-------------------- ------------------- ---------------------
Balance, December 31, 2001 $ 126,255,099 42,067,489 168,322,588
==================== =================== =====================
See accompanying notes to financial statements.
4
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Statement of Cash Flows
Years ended December 31, 2001, 2000, and
for the period from May 20, 1999 (date of funding) through December 31, 1999
May 20, 1999
through
2001 2000 December 31, 1999
---- ---- -----------------
Cash flows from operating activities:
Net earnings (loss) $ 40,482,319 $ 27,098,760 $ (139)
------------- ------------- -------------
Changes in assets and liabilities:
Amortization of financing costs 106,463 63,452 --
Decrease (increase) in receivable from brokers and dealers 8,533,617 (20,683,225) --
Increase in securities owned (16,527,734) (108,547,106) --
Decrease (increase) in other assets 1,046,071 (3,106,961) --
(Decrease) increase in securities sold, not yet purchased (5,112,697) 6,764,985 --
Increase in payable to brokers and dealers 7,340,711 10,552,759 --
(Decrease) increase in payable to Jefferies & Company, Inc. (463,730) 1,365,589 --
Increase in accrued expenses and other liabilities 25,956 64,206 --
------------- ------------- -------------
(5,051,343) (113,526,301) --
------------- ------------- -------------
Net cash provided by (used in) operating activities 35,430,976 (86,427,541) (139)
------------- ------------- -------------
Cash flows from financing activities:
Capital contributions from members, net 1,980,000 123,925,099 350,000
Distributions (25,513,451) -- --
------------- ------------- -------------
Net cash (used in) provided by financing activities (23,533,451) 123,925,099 350,000
------------- ------------- -------------
Net increase in cash and cash equivalents 11,897,525 37,497,558 349,861
Cash and cash equivalents at beginning of year 37,847,419 349,861 --
------------- ------------- -------------
Cash and cash equivalents at end of year $ 49,744,944 $ 37,847,419 $ 349,861
============= ============= =============
Supplemental disclosures of cash flow information -
Cash paid during the year for interest $ 348,383 $ 152,943 $ --
See accompanying notes to financial statements.
5
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Notes to Financial Statements
December 31, 2001 and 2000
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Jefferies Partners Opportunity Fund II, LLC (the "Fund") is a Delaware
limited liability company. The Fund was funded with an investment by
Jefferies & Company ("Jefferies") on May 20, 1999 and commenced its
operations on January 19, 2000. The investment objective of the Fund is
to generate returns for its members by making, holding and disposing of
a diverse portfolio of primarily below investment grade debt and equity
investments. The Fund was established to offer members the opportunity
to participate in the trading, investment and brokerage activities of
the High Yield Department of Jefferies. The Fund employs a trading and
investment strategy substantially similar to that historically employed
by Jefferies' High Yield Department. The Fund acquires, actively manages
and trades a diverse portfolio of primarily non-investment grade
investments consisting of the following three asset groups: High Yield
Debt, Special Situation Investments, and, to a lesser extent, Bank
Loans. The Fund has appointed Jefferies to serve as manager to the Fund
(the "Manager"). The Fund participates in the trading and investment
activities of the High Yield Department on an equivalent basis with
Jefferies. To permit such participation, the Fund has been registered as
a broker dealer under the Securities Exchange Act of 1934 and with the
National Association of Securities Dealers.
The Fund will be in effect until January 18, 2007, unless extended for
up to three successive one-year terms by the vote of the Manager and a
majority of the member interests.
The Fund, in connection with its activities as a broker-dealer, does not
hold funds or securities for customers. Accordingly, the computation for
determination of reserve requirements pursuant to Rule 15c3-3 has been
omitted.
(A) SECURITIES TRANSACTIONS
The Fund records its securities transactions on a trade-date
basis.
Securities owned and securities sold, not yet purchased, are
valued at market, and unrealized gains or losses are reflected
in revenues from principal transactions in the statement of
earnings.
(B) FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all of the Fund's financial instruments are
carried at fair value or amounts approximating fair value.
Assets, including cash and cash equivalents, securities borrowed
and certain receivables, are carried at fair value or contracted
amounts which approximate fair value due to the short period to
maturity. Similarly, liabilities, including certain payables,
are carried at amounts approximating fair value. Securities
owned and securities sold, not yet purchased, are valued at
quoted market prices, if available. For securities without
quoted prices, the reported fair value is estimated by using
various sources of information, including quoted prices for
comparable securities.
(C) FEDERAL AND STATE INCOME TAXES
Under current federal and applicable state limited liability
company laws and regulations, limited liability companies are
treated as partnerships for tax reporting purposes and,
accordingly, are not subject to income taxes. Therefore, no
provision for income taxes has been made in the Fund's financial
statements. For tax purposes, income or losses are included in
the tax returns of the members.
(D) CASH AND CASH EQUIVALENTS
Cash equivalents consist of money market funds, which are part
of the cash management activities of the Fund, and generally
mature within 90 days. At December 31, 2001 and 2000, such cash
equivalents amounted to $48,001,486, and $36,701,946,
respectively
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Notes to Financial Statements
December 31, 2001 and 2000
(E) CONTRIBUTIONS
Capital contributions are recorded net of placement fees. Each
member is charged a one-time placement fee of 1% of gross
contributions.
(F) ALLOCATION OF INCOME AND EXPENSE
Income and expense are allocated 100% to the members based on
the pro rata share of their capital contributed to the Fund,
until the total allocation equals the aggregate member preferred
return of 8% of contributed capital. All remaining income and
expense are allocated 80% to the members and 20% to the Manager.
(G) USE OF ESTIMATES
Management of the Fund has made a number of estimates and
assumptions relating to the reporting of assets and liabilities,
the disclosure of contingent assets and liabilities, and the
reported amounts of revenues and expenses to prepare these
financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those
estimates.
(2) RECEIVABLE FROM, AND PAYABLE TO, BROKERS AND DEALERS
The following is a summary of the major categories of receivable from,
and payable to, brokers and dealers as of December 31, 2001 and 2000:
2001 2000
---- ----
Receivable from brokers and dealers:
Securities borrowed $ 2,478,144 $ 1,403,180
Other 9,671,464 19,280,045
-----------------------------------
12,149,608 20,683,225
===================================
Payable to brokers and dealers - other $17,893,470 $10,552,759
===================================
The Fund borrows securities to cover short sales, from which the Fund
derives interest revenue. Receivable from, and payable to, brokers and
dealers are with affiliates. See note 5.
(3) SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED
The following is a summary of the market value of major categories of
securities owned and securities sold, not yet purchased, as of December
31, 2001 and 2000:
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Notes to Financial Statements
December 31, 2001 and 2000
AT DECEMBER 31, 2001: SECURITIES SECURITIES SOLD,
OWNED NOT YET PURCHASED
---------------------- ---------------------
Corporate debt securities $ 107,371,007 1,293,968
Corporate equity securities 17,703,833 358,320
---------------------- ---------------------
$ 125,074,840 1,652,288
====================== =====================
AT DECEMBER 31, 2000: SECURITIES SECURITIES SOLD,
OWNED NOT YET PURCHASED
---------------------- ---------------------
Corporate debt securities $ 95,216,449 6,764,985
Corporate equity securities 13,330,657 --
---------------------- ---------------------
$ 108,547,106 6,764,985
====================== =====================
(4) REVOLVING CREDIT FACILITY
On June 9, 2000, the Fund finalized a revolving credit facility to be
used in connection with the Fund's investing activities. In June 2001,
the Fund renewed this revolving credit facility agreement. At December
31, 2001 and 2000, $85,200,000 and $83,900,000, respectively were
available under the terms of the revolving credit facility agreement.
The revolving credit facility expires June 2002, but provides for annual
extensions. Loans under this facility bear interest at 15 to 25 basis
points plus LIBOR. The Fund incurs a liquidity fee on the total amount
available under the revolving credit facility. For the years ended
December 31, 2001 and 2000, the Fund was charged a liquidity fee of
$321,290 and $180,035, respectively, and a program fee of $66,917 and
$0, respectively, which are included in interest expense. At December
31, 2001 and 2000, there were no outstanding balances under the
revolving credit facility.
The Fund incurred costs in securing the revolving credit facility. These
costs have been capitalized and are being amortized over seven years. At
December 31, 2001 and 2000, the net unamortized costs of $547,192 and
$650,387, respectively, are included in other assets. For the years
ended December 31, 2001 and 2000, amortization expense of $106,463 and
$63,452, respectively, is included in general and administrative
expenses.
(5) RELATED PARTY TRANSACTIONS
At December 31, 2001 and 2000, members' capital included an investment
in the Fund by Jefferies of $27,159,268 and $25,159,268, respectively.
In 2000, Jefferies, in its capacity as Manager, contributed $1,000 of
capital for the right to participate in 20% of the Fund's earnings in
excess of an 8% preferred return paid to the members.
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Notes to Financial Statements
December 31, 2001 and 2000
At December 31, 2001 and 2000, receivable from brokers and dealers
included $9,671,464 and $19,280,045, respectively, due from Jefferies
and $2,478,144 and $1,403,180, respectively, due from Helfant Group,
Inc. (formerly W&D Securities, Inc.), an affiliate of Jefferies.
For the years ended December 31, 2001 and 2000, interest income included
$50,461 and $106,688, respectively, of income received from Helfant
Group, Inc. related to stock borrow transactions.
At December 31, 2001 and 2000, payable to brokers and dealers included
$17,893,470 and $10,552,759, respectively, due to Jefferies.
At December 31, 2001 and 2000, payable to Jefferies of $901,859 and
$1,365,589, respectively, is for amounts due for direct trading expenses
and general and administrative expenses.
For the years ended December 31, 2001 and 2000, principal transactions
revenue is net of $9,916,512 and $7,891,447, respectively, in direct
trading expenses paid to Jefferies.
Jefferies, in its capacity as Manager, receives management fees equal to
1% per annum of the sum of 100% of the average balance of securities
owned and 98% of the average balance of securities sold, not yet
purchased.
Jefferies provides general and administrative services for the Fund and
is reimbursed by the Fund. For the years ended December 31, 2001 and
2000, reimbursed expenses of $929,905 and $1,141,678, respectively, are
included in general and administrative expenses.
Placement fees of 1% of capital contributions are paid to Jefferies. For
the years ended December 31, 2001 and 2000, a placement fee of $20,000
and $1,258,593, respectively, was paid. Additionally, for the year ended
December 31, 2000, Jefferies was reimbursed by the Fund for syndication
costs of $326,576. Capital contributions are recorded net of the
placement fees.
(6) FINANCIAL INSTRUMENTS
(A) OFF-BALANCE SHEET RISK
The Fund has contractual commitments arising in the ordinary
course of business for securities sold, not yet purchased. These
financial instruments contain varying degrees of off-balance
sheet risk whereby the market values of the securities
underlying the financial instruments may be in excess of, or
less than, the contract amount. The settlement of these
transactions is not expected to have a material effect upon the
Fund's financial statements.
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Notes to Financial Statements
December 31, 2001 and 2000
(B) CREDIT RISK
In the normal course of business, the Fund is involved in the
execution, settlement and financing of various principal
securities transactions. Securities transactions are subject to
the risk of counterparty nonperformance. However, transactions
are collateralized by the underlying security, thereby reducing
the associated risk to changes in the market value of the
security through settlement date.
The Fund seeks to control the risk associated with these
transactions by establishing and monitoring collateral and
transaction levels daily.
(C) CONCENTRATION OF CREDIT RISK
The Fund's activities are executed exclusively with Jefferies.
Concentrations of credit risk can be affected by changes in
economic, industry or geographical factors. The Fund seeks to
control its credit risk and the potential risk concentration
through a variety of reporting and control procedures including
those described in the preceding discussion of credit risk.
(7) NET CAPITAL REQUIREMENT
The Fund is subject to the Securities and Exchange Commission (SEC)
Uniform Net Capital Rule (Rule 15c3-1), which requires the maintenance
of minimum net capital. The Fund has elected to use the alternative
method permitted by Rule 15c3-1, which requires that the Fund maintain
minimum net capital, as defined, equal to the greater of $250,000 or 2%
of aggregate debit balances arising from customer transactions, as
defined.
At December 31, 2001, the Fund had net capital of $74,494,304, which was
$74,244,304 in excess of required net capital.
(8) SUBSEQUENT EVENTS
On February 15, 2002, the Fund borrowed $16,400,000 under the revolving
credit facility. Also on February 15, 2002, the Fund made a distribution
of income to the Fund members of $40,462,320.
EXHIBIT INDEX
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 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 (filed as Exhibit 10.9 to the 2000 10-K).*
10.8 Form of First Amendment, dated as of August 10, 2001, to 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.
10.9 Purchase Agreement among Conseco, Inc., the Company, Charter National
Life Insurance Company, Colonial Penn Group, Inc., Colonial Penn
Holdings, Inc., Leucadia Financial Corporation, Intramerica Life
Insurance Company, 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).*
- ---------------------------
* Incorporated by reference.
E-1
10.10 Purchase Agreement among General Electric Capital Corporation, the
Company, Charter National Life Insurance Company, Colonial Penn Group
Inc. and Colonial Penn Holdings, Inc. dated as of June 30, 1997 (filed as
Annex A to the 1997 Proxy Statement).*
10.11 Purchase Agreement by and among Allstate Life Insurance Company, Allstate
Life Insurance Company of New York, Charter National Life Insurance
Company, Intramerica Life Insurance Company and the Company, dated
February 11, 1998 (filed as Exhibit 10.16 to the 1997 10-K).*
10.12 Leucadia National Corporation Senior Executive Annual Incentive Bonus
Plan (filed as Annex D to the 1997 Proxy Statement).*
10.13 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).*
10.14 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).*
10.15 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).*
10.16 Deferred Compensation Agreement between the Company and Thomas E. Mara
dated as of January 10, 2000 (filed as Exhibit 10.17 to the 2000 10-K).*
10.17 Deferred Compensation Agreement between the Company and Mark Hornstein
dated as of December 29, 2000 (filed as Exhibit 10.18 to the 2000 10-K).*
10.18 Employment Agreement made as of December 28, 1993 by and between the
Company and Ian M. Cumming (filed as Exhibit 10.17 to the 1993 10-K).*
10.19 Amendment, dated as of May 5, 1999, to the Employment Agreement made as
of December 28, 1993 by and between the Company and Ian M. Cumming.
10.20 Employment Agreement made as of December 28, 1993 by and between the
Company and Joseph S. Steinberg (filed as Exhibit 10.18 to the 1993
10-K).*
10.21 Amendment, dated as of May 5, 1999, to the Employment Agreement made as
of December 28, 1993 by and between the Company and Joseph S. Steinberg.
10.22 Commitment Letter dated February 26, 2001 among the Company, Berkshire
Hathaway Inc., Berkadia LLC, The FINOVA Group Inc. and FINOVA Capital
Corporation (filed as Exhibit 10.19 to the 2000 10-K).*
10.23 Management Services Agreement dated as of February 26, 2001 among The
FINOVA Group Inc., the Company and Leucadia International Corporation
(filed as Exhibit 10.20 to the 2000 10-K).*
10.24 Leucadia National Corporation Guaranty to Fleet Securities, Inc., as
administrative agent, and the lenders from time to time party to the
Fleet Facility, dated as of August 21, 2001 (filed as Exhibit 4 to the
Berkshire Schedule 13D).*
- ---------------------------
* Incorporated by reference.
E-2
10.25 Berkadia Management LLC Operating Agreement, dated August 21, 2001, by
and between BH Finance LLC and WMAC Investment Corporation (filed as
Exhibit 8 to the Berkshire Schedule 13D).*
10.26 Voting Agreement, dated August 21, 2001, by and among Berkadia LLC,
Berkshire Hathaway Inc., the Company and The FINOVA Group Inc. (filed as
Exhibit 10.J to the August 27, 2001 8-K).*
10.27 First Amended and Restated Berkadia LLC Operating Agreement, dated August
21, 2001, by and among BHF Berkadia Member Inc., WMAC Investment
Corporation and Berkadia Management LLC (filed as Exhibit 11 to the
Berkshire Schedule 13D).*
10.28 Deferred Compensation Agreement between the Company and Thomas E. Mara
dated as of December 20, 2001.
10.29 Deferred Compensation Agreement between the Company and Mark Hornstein
dated as of December 27, 2001.
21 Subsidiaries of the registrant.
23.1 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).
23.2 Independent Auditors' Consent from KPMG LLP, with respect to the
inclusion in this Annual Report on Form 10-K the financial statements
of Jefferies Partners Opportunity Fund II, LLC and with respect to the
incorporation by reference in the Company's Registration Statements on
Form S-8 (No. 2-84303), Form S-8 and S-3 (No. 33-6054), Form S-8 and S-3
(No. 33-26434), Form S-8 and S-3 (No. 33-30277), Form S-8 (No. 33-61682),
Form S-8 (No. 33-61718) and Form S-8 (No. 333-51494).
23.3 Consent of independent auditors from Ernst & Young LLP with respect to
the inclusion in this Annual Report on Form 10-K of the financial
statements of Berkadia LLC and with respect to the incorporation by
reference in the Company's Registration Statements on Form S-8 (No.
2-84303), Form S-8 and S-3 (No. 33-6054), Form S-8 and S-3 (No.
33-26434), Form S-8 and S-3 (No. 33-30277), Form S-8 (No. 33-61682), Form
S-8 (No. 33-61718) and Form S-8 (No. 333-51494).**
23.4 Consent of independent auditors from Ernst & Young LLP with respect to
the inclusion in this Annual Report on Form 10-K of the financial
statements of The FINOVA Group Inc. and with respect to the incorporation
by reference in the Company's Registration Statements on Form S-8 (No.
2-84303), Form S-8 and S-3 (No. 33-6054), Form S-8 and S-3 (No.
33-26434), Form S-8 and S-3 (No. 33-30277), Form S-8 (No. 33-61682), Form
S-8 (No. 33-61718) and Form S-8 (No. 333-51494).**
- ----------------------------------------------------------
* Incorporated by reference.
** Not currently available and will be filed by amendment.
E-3