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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number 1-5721
LEUCADIA NATIONAL CORPORATION
(Exact name of registrant as specified in its Charter)
New York 13-2615557
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
315 Park Avenue South, New York, New York 10010-3607
(Address of principal executive offices) (Zip Code)
(212) 460-1900
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------- -------
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES NO
------- -------
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, at August 5, 2002: 55,346,343.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2002 and December 31, 2001
(Dollars in thousands, except par value)
June 30, December 31,
2002 2001
----------- ----------
(Unaudited)
ASSETS
Investments:
Available for sale (aggregate cost of $662,213 and $579,342) $ 716,931 $ 626,584
Trading securities (aggregate cost of $36,587 and $68,547) 32,367 63,850
Held to maturity (aggregate fair value of $359 and $1,665) 359 1,666
Other investments, including accrued interest income 7,729 14,949
---------- ----------
Total investments 757,386 707,049
Cash and cash equivalents 483,853 373,222
Trade, notes and other receivables, net 505,301 596,229
Prepaids and other assets 213,330 227,709
Property, equipment and leasehold improvements, net 170,605 162,158
Investments in associated companies 348,228 358,761
Net assets of discontinued operations -- 43,959
---------- ----------
Total $2,478,703 $2,469,087
========== ==========
LIABILITIES
Customer banking deposits $ 468,025 $ 476,495
Trade payables and expense accruals 74,537 74,988
Other liabilities 198,992 215,689
Income taxes payable 98,248 124,692
Deferred tax liability 25,470 17,051
Debt, including current maturities 250,777 252,279
-------- ----------
Total liabilities 1,116,049 1,161,194
---------- ----------
Commitments and contingencies
Minority interest 11,068 14,240
---------- ----------
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;
55,343,843 and 55,318,257 shares issued and outstanding, after
deducting 63,120,448 and 63,117,584 shares held in treasury 55,344 55,318
Additional paid-in capital 55,311 54,791
Accumulated other comprehensive income 32,225 14,662
Retained earnings 1,110,506 1,070,682
---------- ----------
Total shareholders' equity 1,253,386 1,195,453
---------- ----------
Total $2,478,703 $2,469,087
========== ==========
See notes to interim consolidated financial statements.
2
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
For the periods ended June 30, 2002 and 2001
(In thousands, except per share amounts)
(Unaudited)
For the Three Month For the Six Month
Period Ended June 30, Period Ended June 30,
--------------------- ---------------------
2002 2001 2002 2001
---- ---- ---- ----
Revenues:
Manufacturing $ 13,915 $ 12,613 $ 26,303 $ 26,261
Finance 23,002 28,898 47,706 56,610
Investment and other income 36,692 47,387 66,173 87,586
Equity in income of associated companies 25,055 18,509 55,585 26,824
Net securities gains (losses) (3,292) 10,415 (12,298) 13,034
--------- --------- --------- ---------
95,372 117,822 183,469 210,315
--------- --------- --------- ---------
Expenses:
Manufacturing cost of goods sold 9,140 8,346 17,432 18,034
Interest 8,922 12,436 17,510 24,647
Salaries 9,660 11,240 20,228 23,833
Selling, general and other expenses 35,439 38,896 76,338 76,371
--------- --------- --------- ---------
63,161 70,918 131,508 142,885
--------- --------- --------- ---------
Income from continuing operations before income taxes, minority
expense of trust preferred securities and cumulative effect
of a change in accounting principle 32,211 46,904 51,961 67,430
Income taxes 11,402 15,046 18,468 22,404
--------- --------- --------- ---------
Income from continuing operations before minority expense of trust
preferred securities and cumulative effect of a change
in accounting principle 20,809 31,858 33,493 45,026
Minority expense of trust preferred securities, net of taxes 1,380 1,380 2,761 2,761
--------- --------- --------- ---------
Income from continuing operations before cumulative effect
of a change in accounting principle 19,429 30,478 30,732 42,265
Income (loss) from discontinued operations, net of taxes 3,140 (4,604) 4,580 (36,289)
Gain on disposal of discontinued operations, net of taxes 4,512 -- 4,512 --
--------- --------- --------- ---------
Income before cumulative effect of a change in accounting principle 27,081 25,874 39,824 5,976
Cumulative effect of a change in accounting principle -- -- -- 411
--------- --------- --------- ---------
Net income $ 27,081 $ 25,874 $ 39,824 $ 6,387
========= ========= ========= =========
Basic earnings (loss) per common share:
Income from continuing operations before cumulative effect of a
change in accounting principle $ .35 $ .55 $ .56 $ .76
Income (loss) from discontinued operations .06 (.08) .08 (.65)
Gain on disposal of discontinued operations .08 -- .08 --
Cumulative effect of a change in accounting principle -- -- -- .01
--------- --------- --------- ---------
Net income $ .49 $ .47 $ .72 $ .12
========= ========= ========= =========
Diluted earnings (loss) per common share:
Income from continuing operations before cumulative effect of a
change in accounting principle $ .35 $ .55 $ .56 $ .76
Income (loss) from discontinued operations .06 (.08) .08 (.65)
Gain on disposal of discontinued operations .08 -- .08 --
Cumulative effect of a change in accounting principle -- -- -- .01
--------- --------- --------- ---------
Net income $ .49 $ .47 $ .72 $ .12
========= ========= ========= =========
See notes to interim consolidated financial statements.
3
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the six months ended June 30, 2002 and 2001
(In thousands)
(Unaudited)
2002 2001
---- ----
Net cash flows from operating activities:
Net income $ 39,824 $ 6,387
Adjustments to reconcile net income to net cash provided by operations:
Cumulative effect of a change in accounting principle -- (411)
Provision (benefit) for deferred income taxes 6,316 (3,438)
Depreciation and amortization of property, equipment and leasehold improvements 9,350 7,741
Other amortization (primarily related to investments) (474) (7,000)
Provision for doubtful accounts 11,440 16,448
Net securities (gains) losses 12,298 (13,034)
Equity in income of associated companies (55,585) (26,824)
Gain on disposal of real estate, property and equipment, and other assets (11,859) (16,172)
Gain on disposal of discontinued operations (4,512) --
Investments classified as trading, net 56,177 (3,687)
Net change in:
Trade and other receivables 3,676 (793)
Prepaids and other assets 546 (3,454)
Trade payables and expense accruals (2,065) (30,821)
Other liabilities (106) 31,661
Income taxes payable (26,808) (5,091)
Other 1,489 2,882
Net change in net assets of discontinued operations (5,384) 54,654
-------- ---------
Net cash provided by operating activities 34,323 9,048
-------- ---------
Net cash flows from investing activities:
Acquisition of real estate, property and equipment, and other assets (19,789) (24,196)
Proceeds from disposals of real estate, property and equipment, and other assets 44,875 45,551
Proceeds from sale of discontinued operations 66,241 --
Advances on loan receivables (48,381) (164,129)
Principal collections on loan receivables 93,734 95,908
Advances on notes receivables (650) (2,584)
Collections on notes receivables 74 38,622
Investments in associated companies (1,506) (5,714)
Distributions from associated companies 36,470 50,709
Purchases of investments (other than short-term) (478,784) (638,801)
Proceeds from maturities of investments 324,449 158,966
Proceeds from sales of investments 69,333 124,516
--------- ---------
Net cash provided by (used for) investing activities 86,066 (321,152)
--------- ---------
Net cash flows from financing activities:
Net change in customer banking deposits (7,794) 29,681
Issuance of long-term debt, net of issuance costs 6,145 53,979
Reduction of long-term debt (8,163) (4,048)
Purchase of common shares for treasury (98) (34)
--------- ---------
Net cash provided by (used for) financing activities (9,910) 79,578
--------- ---------
Effect of foreign exchange rate changes on cash 152 (457)
--------- ---------
Net increase (decrease) in cash and cash equivalents 110,631 (232,983)
Cash and cash equivalents at January 1, 373,222 475,367
--------- ---------
Cash and cash equivalents at June 30, $ 483,853 $ 242,384
========= =========
See notes to interim consolidated financial statements.
4
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
For the six months ended June 30, 2002 and 2001
(In thousands, except par value)
(Unaudited)
Common Accumulated
Shares Additional Other
$1 Par Paid-In Comprehensive Retained
Value Capital Income (Loss) Earnings Total
----- ---------- ------------- -------- -----
Balance, January 1, 2001 $ 55,297 $ 54,340 $ 2,585 $1,092,019 $1,204,241
----------
Comprehensive loss:
Net change in unrealized gain (loss) on investments (7,632) (7,632)
Net change in unrealized foreign exchange gain (loss) (10,286) (10,286)
Net change in unrealized gain (loss) on derivative
instruments (including the cumulative effect of a
change in accounting principle of $1,371) (139) (139)
Net income 6,387 6,387
---------
Comprehensive loss (11,670)
---------
Exercise of options to purchase common shares 17 376 393
Purchase of stock for treasury (1) (33) (34)
-------- -------- --------- ---------- ---------
Balance, June 30, 2001 $ 55,313 $ 54,683 $ (15,472) $1,098,406 $1,192,930
======== ======== ========= ========== ==========
Balance, January 1, 2002 $ 55,318 $ 54,791 $ 14,662 $1,070,682 $1,195,453
----------
Comprehensive income:
Net change in unrealized gain (loss) on investments 4,315 4,315
Net change in unrealized foreign exchange gain (loss) 14,209 14,209
Net change in unrealized gain (loss) on derivative
instruments (961) (961)
Net income 39,824 39,824
----------
Comprehensive income 57,387
----------
Exercise of options to purchase common shares 29 615 644
Purchase of stock for treasury (3) (95) (98)
-------- --------- --------- ---------- ----------
Balance, June 30, 2002 $ 55,344 $ 55,311 $ 32,225 $1,110,506 $1,253,386
======== ========= ========= ========== ==========
See notes to interim consolidated financial statements.
5
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
1. The unaudited interim consolidated financial statements, which reflect all
adjustments (consisting only of normal recurring items) that management
believes necessary to present fairly results of interim operations, should
be read in conjunction with the Notes to Consolidated Financial Statements
(including the Summary of Significant Accounting Policies) included in the
Company's audited consolidated financial statements for the year ended
December 31, 2001, which are included in the Company's Annual Report filed
on Form 10-K for such year (the "2001 10-K"). Results of operations for
interim periods are not necessarily indicative of annual results of
operations. The consolidated balance sheet at December 31, 2001 was
extracted from the audited annual financial statements and does not include
all disclosures required by generally accepted accounting principles for
annual financial statements.
Certain amounts for prior periods have been reclassified to be consistent
with the 2002 presentation.
2. During the second quarter of 2002, the Company sold its interest in Fidei,
its foreign real estate subsidiary, to an unrelated third party for total
proceeds of 70,400,000 Euros ($66,200,000), which resulted in an after tax
gain on the sale reflected in results of operations of $4,500,000 for the
six and three month periods ended June 30, 2002, and an increase to
shareholders' equity of $12,100,000 as of June 30, 2002. In connection with
this transaction, the Company classified its foreign real estate operations
as discontinued operations and, accordingly, prior period financial
statements have been reclassified to conform with this presentation.
Prior to the sale, the Company had recorded an unrealized loss in
accumulated other comprehensive income of $7,600,000, relating to currency
translation adjustments and a deferred gain resulting from the early
termination of a currency swap agreement. Upon the sale, this unrealized
loss was recognized in results of operations, reducing the after tax gain
on the sale for the six and three month periods ended June 30, 2002, while
increasing shareholders' equity as of June 30, 2002.
In connection with receiving the sale proceeds in Euros, the Company
entered into a participating currency derivative that upon expiration
provides for the Company to receive a minimum of $65,100,000 in exchange
for 70,000,000 Euros. If the Euro should appreciate in value relative to
the dollar above $.93, the derivative contract provides that the Company
will receive 75% of such appreciation. Included in investment and other
income for the periods ended June 30, 2002, is a net gain of $2,100,000,
representing the translation gain on the Euros held by the Company,
partially offset by the mark-to-market loss on the derivative contract and
the premium paid to purchase the contract.
3. Certain information concerning the Company's segments for the six and three
month periods ended June 30, 2002 and 2001 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.
For the Three Month For the Six Month
Period Ended June 30, Period Ended June 30,
--------------------- ---------------------
2002 2001 2002 2001
---- ---- ---- ----
(In thousands)
Revenues:
Banking and lending $ 24,723 $ 32,886 $ 53,400 $ 61,954
Domestic real estate 17,063 16,840 25,442 26,581
Manufacturing 13,931 12,657 26,339 26,356
Other operations 10,723 12,117 18,301 25,560
Equity in associated companies 25,055 18,509 55,585 26,824
Corporate (a) 3,877 24,813 4,402 43,040
-------- -------- --------- ---------
Total consolidated revenues $ 95,372 $117,822 $ 183,469 $ 210,315
======== ======== ========= =========
(continued)
6
Notes to Interim Consolidated Financial Statements, continued
For the Three Month For the Six Month
Period Ended June 30, Period Ended June 30,
--------------------- ---------------------
2002 2001 2002 2001
---- ---- ---- ----
(In thousands)
Income (loss) from continuing operations before income taxes,
minority expense of trust preferred securities and cumulative
effect of a change in accounting principle:
Banking and lending $ 6,445 $ 5,789 $ 10,510 $ 5,070
Domestic real estate 8,854 9,200 9,097 12,244
Manufacturing 2,064 900 3,294 1,642
Other operations 2,514 2,969 2,806 8,615
Equity in associated companies 25,055 18,509 55,585 26,824
Corporate (a) (12,721) 9,537 (29,331) 13,035
------- -------- --------- --------
Total consolidated income from continuing operations before
income taxes, minority expense of trust preferred securities
and cumulative effect of a change in accounting principle $32,211 $ 46,904 $ 51,961 $ 67,430
======= ======== ========= ========
(a) Includes provisions that reduce net security gains (losses) by $19,700,000
and $14,700,000 for the six and three month periods ended June 30, 2002,
respectively, to write down investments in certain available for sale
securities and an equity investment in a non-public fund.
4. The Company accounts for its investment in Berkadia under the equity method
of accounting. At June 30, 2002, the book value of the Company's equity
investment in Berkadia was negative $98,800,000, which is included in other
liabilities in the consolidated balance sheet. As more fully described in
the 2001 10-K, the negative carrying amount results from Berkadia's
distribution of loan fees received and the Company's recognition in 2001 of
its share of The FINOVA Group Inc.'s ("FINOVA") non-cash losses recorded by
Berkadia, partially offset by the Company's share of Berkadia's income
related to Berkadia's loan to FINOVA. The Company has guaranteed 10% of
Berkadia's debt and, although the Company has no cash investment in
Berkadia, it records its share of any losses recorded by Berkadia up to the
amount of the guarantee. In 2001, Berkadia suspended its recognition of its
share of FINOVA's losses, since the carrying amount of Berkadia's
investment in FINOVA's common stock was reduced to zero. As of July 31,
2002, the outstanding amount of the guarantee was $265,000,000.
For the six and three month periods ended June 30, 2002, the Company's
equity in the income of Berkadia consists of the following (in thousands):
For the Three For the Six
Month Period Month Period
Ended June 30, 2002 Ended June 30, 2002
------------------- --------------------
Net interest spread on the Berkadia loan - 10% of total $ 1,500 $ 3,600
Amortization of Berkadia loan discount related to cash fees -
50% of total 5,100 12,200
Amortization of Berkadia loan discount related to FINOVA
stock - 50% of total 8,100 19,300
--------- ---------
Equity in income of associated companies - Berkadia $ 14,700 $ 35,100
========= =========
7
Notes to Interim Consolidated Financial Statements, continued
The amortization of the Berkadia loan discount has been accelerated as a
result of principal payments on the Berkadia loan that were greater than
expected at the time the loan was made. For the six and three month periods
ended June 30, 2002, the effect of this acceleration was to increase the
Company's equity in income of Berkadia by approximately $16,900,000 and
$3,500,000, respectively. Loan repayments from FINOVA are unlikely to
continue at the pace experienced to date.
5. A summary of accumulated other comprehensive income (loss) at June 30, 2002
and December 31, 2001 is as follows (in thousands):
June 30, December 31,
2002 2001
------ ----------
Net unrealized gains on investments $35,996 $ 31,681
Net unrealized foreign exchange losses (2,403) (16,612)
Net unrealized losses on derivative instruments (1,368) (407)
------- --------
$32,225 $ 14,662
======= ========
6. Included in investment and other income for the six and three month periods
ended June 30, 2002 are charges of $1,000,000 and $3,700,000, respectively,
as a result of accounting for its derivative financial instruments in
accordance with Statement of Financial Accounting Standards No. 133 ("SFAS
133"). Amounts for the six and three month periods ended June 30, 2001 were
not material.
7. Per share amounts were calculated by dividing net income by the sum of the
weighted average number of common shares outstanding and, for diluted
earnings (loss) per share, the incremental weighted average number of
shares issuable upon exercise of outstanding options and warrants for the
periods they were outstanding. The number of shares used to calculate basic
earnings (loss) per share amounts was 55,328,000 and 55,304,000 for the six
month periods ended June 30, 2002 and 2001, respectively, and 55,336,000
and 55,309,000 for the three month periods ended June 30, 2002 and 2001,
respectively. The number of shares used to calculate diluted earnings
(loss) per share amounts was 55,642,000 and 55,640,000 for the six month
periods ended June 30, 2002 and 2001, respectively, and 55,694,000 and
55,635,000 for the three month periods ended June 30, 2002 and 2001,
respectively.
8. Cash paid for interest and income taxes (net of refunds) was $17,800,000
and $37,300,000, respectively, for the six month period ended June 30, 2002
and $24,500,000 and $11,700,000, respectively, for the six month period
ended June 30, 2001.
9. As disclosed in the 2001 10-K, in connection with its audit of the
Company's consolidated federal income tax returns for the years 1996
through 1999, the Internal Revenue Service ("IRS") had issued Notices of
Proposed Adjustments that, if sustained, would have resulted in
approximately $80,000,000 of tax, plus interest. The Company believes that
it is adequately reserved for this exposure. In April 2002, the IRS revised
these Notices of Proposed Adjustments. The Company has agreed to these
revised Notices of Proposed Adjustments, as well as other adjustments
proposed by the IRS, which in total resulted in the payment of $326,000.
Although the Company has agreed to the IRS adjustments, until the statute
of limitations expires on December 31, 2002, the IRS has the right to
propose additional adjustments.
10. In July 2002, the Company agreed to sell its equity interest in certain
thoroughbred racetrack businesses to a third party for net proceeds of
approximately $28,000,000 and form a joint venture with the buyer and the
other sellers to pursue the potential development of gaming ventures in
Maryland (if authorized by state law). The transaction is subject to
regulatory approvals, legislative review and customary closing conditions,
and is expected to close in the fall of 2002; however, there can be no
assurance that it will ultimately be consummated or that, if consummated,
the joint venture will have any significant value to the Company. At June
30, 2002, the Company's equity investment in the businesses was
$11,400,000.
8
Notes to Interim Consolidated Financial Statements, continued
In July 2002, the Company agreed to acquire approximately 45% of the common
stock of Williams Communications Group, Inc. ("WCG") to be outstanding upon
WCG's emergence from chapter 11 proceedings. These shares would be acquired
pursuant to a claims purchase agreement with The Williams Companies, Inc.
and an investment agreement with WCG, which filed for bankruptcy protection
on April 22, 2002. Under the agreements, which will be part of a
comprehensive restructuring of WCG, the Company's aggregate investment in
the WCG stock will be $330,000,000. The restructuring will be implemented
through a plan of reorganization under chapter 11. Consummation of this
transaction is subject to bankruptcy court approval of the agreements, the
chapter 11 plan and related disclosure statement and consummation of the
restructuring plan, as well as normal closing conditions (including receipt
of third party consents), other regulatory approvals, and negotiation of a
WCG restructured credit agreement on terms acceptable to the Company. Under
certain conditions, The Williams Companies, Inc. and a non-debtor
subsidiary of WCG would each be obligated to pay the Company a termination
fee of $5,000,000. There can be no assurance that this transaction will
ultimately be consummated.
On July 11, 2002, options to purchase an aggregate of 308,500 shares of
Common Stock were granted to employees under the Company's 1999 Stock
Option Plan at an exercise price of $30.74 per share, the then current
market price per share.
9
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Interim Operations
The following should be read in conjunction with the Management's Discussion and
Analysis of Financial Condition and Results of Operations included in the 2001
10-K.
Liquidity and Capital Resources
For the six month periods ended June 30, 2002 and 2001, net cash was provided by
operations.
As of June 30, 2002, the Company's readily available cash, cash equivalents and
marketable securities, excluding those amounts held by its regulated
subsidiaries, totaled $892,200,000. This amount is comprised of cash and
short-term bonds and notes of the United States Government and its agencies of
$650,300,000 (73%), the equity investment in White Mountains Insurance Group,
Ltd. of $118,700,000 (13%) and other publicly traded debt and equity securities
aggregating $123,200,000 (14%). Additional sources of liquidity as of June 30,
2002 include $163,600,000 of cash and marketable securities collateralizing
letters of credit.
As a result of principal payments, as of July 31, 2002, the Company's guarantee
of Berkadia's financing has been reduced to $265,000,000.
During the second quarter of 2002, the Company sold its interest in Fidei, its
foreign real estate subsidiary, to an unrelated third party for total proceeds
of 70,400,000 Euros ($66,200,000). Such amount is included in the Company's
readily available cash and cash equivalents referred to above.
In July 2002, the Company agreed to sell its equity interest in certain
thoroughbred racetrack businesses to a third party for net proceeds of
approximately $28,000,000 and form a joint venture with the buyer and the other
sellers to pursue the potential development of gaming ventures in Maryland (if
authorized by state law). The transaction is subject to regulatory approvals,
legislative review and customary closing conditions, and is expected to close in
the fall of 2002; however, there can be no assurance that it will ultimately be
consummated or that, if consummated, the joint venture will have any significant
value to the Company. At June 30, 2002, the Company's equity investment in the
businesses was $11,400,000.
In July 2002, the Company agreed to acquire approximately 45% of the common
stock of Williams Communications Group, Inc. ("WCG") to be outstanding upon
WCG's emergence from chapter 11 proceedings. These shares would be acquired
pursuant to a claims purchase agreement with The Williams Companies, Inc. and an
investment agreement with WCG, which filed for bankruptcy protection on April
22, 2002. Under the agreements, which will be part of a comprehensive
restructuring of WCG, the Company's aggregate investment in the WCG stock will
be $330,000,000. The restructuring will be implemented through a plan of
reorganization under chapter 11. Consummation of this transaction is subject to
bankruptcy court approval of the agreements, the chapter 11 plan and related
disclosure statement and consummation of the restructuring plan, as well as
normal closing conditions (including receipt of third party consents), other
regulatory approvals, and negotiation of a WCG restructured credit agreement on
terms acceptable to the Company. Under certain conditions, The Williams
Companies, Inc. and a non-debtor subsidiary of WCG would each be obligated to
pay the Company a termination fee of $5,000,000. There can be no assurance that
this transaction will ultimately be consummated.
Results of Operations
The 2002 Periods Compared to the 2001 Periods
Finance revenues, which reflect the level and mix of consumer instalment loans,
decreased in the six and three month periods ended June 30, 2002 as compared to
the similar periods in 2001 due to fewer average loans outstanding. Average
loans outstanding during the six and three month periods ended June 30, 2002
were $474,300,000 and $457,800,000, respectively, as compared to $536,600,000
and $548,700,000, respectively, during the six and three month periods ended
June 30, 2001. Pre-tax results for the banking and lending segment improved for
the six month and three month periods ended June 30, 2002 as compared to the
prior year, principally due to lower interest expense of $7,200,000 and
$3,700,000, respectively, a lower provision for loan losses of $5,100,000 and
$3,300,000, respectively, and less salaries expense of $3,100,000 and
$1,500,000, respectively, partially offset by greater net interest paid on
interest rate swaps of $2,900,000 and $1,200,000, respectively, and less
investment income of $2,300,000 and $900,000, respectively.
10
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Interim Operations, continued
The reduction in loans, the lower provision for loan losses and the reduced
salaries expense resulted from the Company's decision in September 2001 to stop
originating subprime automobile loans and subsequently to consolidate its
operations, as more fully described in the 2001 10-K. The reduction in interest
expense resulted from reduced customer banking deposits and lower interest rates
on these deposits, and the reduction in investment income also was due to lower
interest rates. In addition, pre-tax results for the banking and lending segment
reflect $1,300,000 and $(3,100,000), respectively, of income (charges) primarily
resulting from marking-to-market its interest rate swaps for the six month
periods ended June 30, 2002 and 2001 and $(500,000) for the three month period
ended June 30, 2002. Such amount was not material for the three month period
ended June 30, 2001. The Company uses interest rate swaps to manage the impact
of interest rate changes on its customer banking deposits. Although the Company
believes that these derivative financial instruments serve as economic hedges,
they do not meet certain effectiveness criteria under SFAS 133, and therefore
are not accounted for as hedges.
Revenues from domestic real estate did not change significantly in the six and
three month periods ended June 30, 2002 as compared to the same periods in 2001
as a result of less rent income, largely due to the sale of one of the Company's
shopping centers in the fourth quarter of 2001 and two shopping centers during
2002, lower gains from property sales and increased revenues from the Company's
Hawaiian hotel, which the Company began operating in the third quarter of 2001.
The decline in pre-tax income from domestic real estate in the 2002 periods as
compared to the similar periods in 2001 also reflects greater operating costs,
principally related to the Hawaiian hotel.
Manufacturing revenues increased in the second quarter of 2002 as compared to
the same period in 2001 primarily due to increased demand in the construction
and home furnishings markets aggregating $1,500,000, partially offset by
reductions in the consumer products market. Manufacturing revenues for the six
month period ended June 30, 2002 were largely unchanged as compared to the same
period in 2001 as the increased sales in the construction and home furnishings
markets aggregating $2,600,000 were offset by reductions in the consumer
products market of $2,300,000 and reductions in the agricultural market. The
reductions in the consumer products market resulted from the loss of a customer
for the Asian market and reduced demand for one of the Company's healthcare
products. Gross profit for the 2002 periods increased as compared to the 2001
periods principally due to lower raw material costs and plant personnel
reductions partially offset by higher fixed costs relating to the Belgium
manufacturing facility, and for the three month period due to the increased
sales. Pre-tax results also increased in the 2002 periods due to cost reduction
initiatives that resulted in lower operating expenses.
Investment and other income declined in the six and three month periods ended
June 30, 2002 as compared to the same periods in 2001 principally due to a
reduction in investment income of $13,800,000 and $6,800,000, respectively,
resulting from a decline in interest rates, a decline of $7,700,000 and
$2,200,000, respectively, in revenues from the Company's gas operations due to
lower production and prices, reduced rent income and reduced gains from domestic
property sales as discussed above and, for the three month period ended June 30,
2002, changes in market values related to its derivative financial instruments.
Such decreases were partially offset by increased revenues from the Company's
Hawaiian hotel and increased foreign exchange gains.
The increase in equity in income of associated companies in the six and three
month periods ended June 30, 2002 as compared to the same periods in 2001 was
primarily due to income from the Company's equity investment in Berkadia LLC. As
more fully described in Note 4 of Notes to Interim Consolidated Financial
Statements, the Company recognized $35,100,000 and $14,700,000, respectively, of
income from this investment in the six and three month periods ended June 30,
2002, of which $31,500,000 and $13,200,000, respectively, related to the
amortization of discount from the Berkadia loan. Equity in income of associated
companies for the six and three month periods ended June 30, 2002 also included
$9,400,000 and $6,500,000, respectively, of income from the Company's equity
investment in Olympus Re Holdings, Ltd., an investment the Company made in
December 2001. Such increases were partially offset by $11,500,000 and
$6,000,000 less income from the Company's equity investment in Jefferies
Partners Opportunity Fund II, LLC for the six and three month periods ended June
30, 2002, respectively. In addition, income from the Company's equity
investments in real estate businesses for the six and three month periods ended
June 30, 2002 declined by $6,000,000 and $9,000,000, respectively.
11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Interim Operations, continued
Net securities gains (losses) for the six and three month periods ended June 30,
2002 include a provision of $19,700,000 and $14,700,000, respectively, to write
down the Company's investments in certain available for sale securities and its
equity investment in a non-public fund.
The decline in interest expense in the six and three month periods ended June
30, 2002 as compared to the same periods in 2001 was principally due to lower
interest expense at the banking and lending segment due to reduced customer
banking deposits and lower interest rates thereon.
The decline in selling, general and other expenses for the three month period
ended June 30, 2002 as compared to the same period in 2001 primarily resulted
from lower provisions for loan losses at the banking and lending segment, and
lower expenses related to MK Gold Company of $2,800,000. This decrease was
partially offset by greater net interest paid on the Company's derivative
financial instruments of $1,900,000 and increased operating costs related to the
Hawaiian hotel of $2,800,000.
Cautionary Statement for Forward-Looking Information
Statements included in this Management's Discussion and Analysis of Financial
Condition and Results of Interim Operations may contain forward-looking
statements. Such forward-looking statements are made pursuant to the safe-harbor
provisions of the Private Securities Litigation Reform Act of 1995. Such
statements may relate, but are not limited, to projections of revenues, income
or loss, capital expenditures, fluctuations in insurance reserves, plans for
growth and future operations, competition and regulation, as well as assumptions
relating to the foregoing.
Forward-looking statements are inherently subject to risks and uncertainties,
many of which cannot be predicted or quantified. When used in this Management's
Discussion and Analysis of Financial Condition and Results of Interim
Operations, the words "estimates", "expects", "anticipates", "believes",
"plans", "intends" and variations of such words and similar expressions are
intended to identify forward-looking statements that involve risks and
uncertainties. Future events and actual results could differ materially from
those set forth in, contemplated by or underlying the forward-looking
statements.
The factors that could cause actual results to differ materially from those
suggested by any such statements include, but are not limited to, those
discussed or identified from time to time in the Company's public filings,
including:
o general economic and market conditions or prevailing interest rate levels,
o changes in foreign and domestic laws, regulations and taxes,
o changes in competition and pricing environments,
o regional or general changes in asset valuation,
o the occurrence of significant natural disasters, the inability to reinsure
certain risks economically, increased competition in the reinsurance
markets, the adequacy of loss and loss adjustment expense reserves,
o weather related conditions that may affect the Company's operations or
investments,
o changes in U.S. real estate markets, including the residential market in
Southern California and the commercial market in Hawaii,
12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Interim Operations, continued
o increased competition in the super premium wine industry,
o adverse economic, political or environmental developments in Spain that
could delay or preclude the issuance of permits necessary to obtain 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 the project, decreases in world wide copper prices,
o increased competition in the international and domestic plastics market and
increased raw material costs,
o increased default rates and decreased value of assets pledged to the
Company, the Company's ability to generate new loan products,
o any deterioration in the business and operations of FINOVA, in 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
o changes in the composition of the Company's assets and liabilities through
acquisitions or divestitures.
Undue reliance should not be placed on these forward-looking statements, which
are applicable only as of the date hereof. The Company undertakes no obligation
to revise or update these forward-looking statements to reflect events or
circumstances that arise after the date of this Management's Discussion and
Analysis of Financial Condition and Results of Interim Operations or to reflect
the occurrence of unanticipated events.
13
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The following matters were submitted to a vote of shareholders at the
Company's 2002 Annual Meeting of Shareholders held on May 14, 2002.
a) Election of directors.
Number of Shares
For Withheld
--- --------
Ian M. Cumming 49,563,886 132,067
Paul M. Dougan 49,563,794 132,159
Lawrence D. Glaubinger 49,563,794 132,159
James E. Jordan 49,563,894 132,059
Jesse Clyde Nichols, III 49,563,866 132,087
Joseph S. Steinberg 49,563,876 132,077
b) Ratification of PricewaterhouseCoopers LLP, as independent
auditors for the year ended December 31, 2002.
For 49,006,239
Against 539,742
Abstentions 149,972
Broker non votes -
c) Approval of an amendment to the Company's charter to reduce from
two-thirds to a majority the number of outstanding shares
necessary to authorize any merger, consolidation or dissolution
of the Company, or any sale, lease, exchange or other disposition
of all or substantially all of the Company's assets.
For 37,768,217
Against 5,061,509
Abstentions 389,363
Broker non votes 6,476,864
d) Approval of proposed corporate reorganization whereby the
Company's domicile will change from New York to Bermuda.
For 37,496,855
Against 5,519,400
Abstentions 202,834
Broker non votes 6,476,864
14
PART II - OTHER INFORMATION, continued
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits.
Item 601(a) of
Regulation S-K
Exhibit No. Description
10.1 Settlement Agreement dated as of July 26, 2002, by and among The
Williams Companies Inc., Williams Communications Group, Inc., CG
Austria, Inc., the official committee of unsecured creditors and
Leucadia National Corporation (filed as Exhibit 99.2 to the July 31,
2002 8-K).*
10.2 Investment Agreement dated as of July 26, 2002, by and among Leucadia
National Corporation, Williams Communications Group, Inc. and, for
purposes of Section 7.4 (thereto) only, Williams Communications, LLC
(filed as Exhibit 99.4 to the July 31, 2002 8-K).*
10.3 Purchase and Sale Agreement dated as of July 26, 2002, by and between
The Williams Companies, Inc. and Leucadia National Corporation (filed
as Exhibit 99.5 to the July 31, 2002 8-K).*
99.1 Certification of Chairman of the Board and Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of President pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.3 Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
- ----------------------------------
* Incorporated herein by reference.
b) Reports on Form 8-K.
The Company filed a current report on Form 8-K dated July 31, 2002,
which sets forth information under Item 5. Other Events and Item 7.
Financial Statements and Exhibits.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEUCADIA NATIONAL CORPORATION
(Registrant)
Date: August 14, 2002 By: /s/ Barbara L. Lowenthal
------------------------
Barbara L. Lowenthal
Vice President and Comptroller
(Chief Accounting Officer)
16
EXHIBIT INDEX
Exhibit No. Description
10.1 Settlement Agreement dated as of July 26, 2002, by and among The
Williams Companies Inc., Williams Communications Group, Inc., CG
Austria, Inc., the official committee of unsecured creditors and
Leucadia National Corporation (filed as Exhibit 99.2 to the July 31,
2002 8-K).*
10.2 Investment Agreement dated as of July 26, 2002, by and among Leucadia
National Corporation, Williams Communications Group, Inc. and, for
purposes of Section 7.4 (thereto) only, Williams Communications, LLC
(filed as Exhibit 99.4 to the July 31, 2002 8-K).*
10.3 Purchase and Sale Agreement dated as of July 26, 2002, by and between
The Williams Companies, Inc. and Leucadia National Corporation (filed
as Exhibit 99.5 to the July 31, 2002 8-K).*
99.1 Certification of Chairman of the Board and Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification of President pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
99.3 Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
-----------------
* Incorporated herein by reference.
17