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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, 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
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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 EXCHANGE, INC.
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].
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [x] No [_]
Aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant at June 30, 2002 (computed by reference to the
last reported closing sale price of the Common Shares on the New York Stock
Exchange on such date): $1,114,008,000.
On March 25, 2003, the registrant had outstanding 59,617,292 Common Shares.
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
2003 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 telecommunications, banking and lending, manufacturing,
real estate activities, winery operations, development of a copper mine and
property and casualty 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
$1,534,525,000 at December 31, 2002, equal to a book value per common share of
the Company (a "common share") of negative $.11 at December 31, 1978 and $25.74
at December 31, 2002. The December 31, 2002 shareholders' equity and book value
per share amounts have been reduced by the $811,900,000 special cash dividend
paid in 1999.
In December 2002, the Company completed a private placement of
approximately $150,000,000 of equity securities, based on a common share price
of $35.25, to mutual fund clients of Franklin Mutual Advisers, LLC, including
the funds comprising the Franklin Mutual Series Funds. The private placement
included 2,907,599 common shares and newly authorized Series A Non-Voting
Convertible Preferred Stock, that were converted into 1,347,720 common shares in
March 2003. The securities sold in the private placement represent 7.1% of the
Company's outstanding common shares at March 25, 2003.
In the fourth quarter of 2002, the Company completed the acquisition of 44%
of the outstanding common stock of WilTel Communications Group, Inc. ("WilTel")
for an aggregate purchase price of $330,000,000, excluding expenses. The WilTel
stock was acquired by the Company under the chapter 11 restructuring plan of
Williams Communications Group, Inc. In October 2002, in a private transaction,
the Company purchased 1,700,000 shares of WilTel common stock, on a when issued
basis, for $20,400,000. Together, these transactions resulted in the Company
acquiring 47.4% of the outstanding common stock of WilTel for an aggregate
purchase price of $350,400,000, excluding expenses. WilTel is a publicly traded
telecommunications company that owns or leases and operates a nationwide
inter-city fiber-optic network, extended locally and globally, to provide
Internet, data, voice and video services. WilTel's common stock is traded on the
Nasdaq National Market (Symbol: WTEL).
During 2002, the Internal Revenue Service completed the audit of the
Company's consolidated federal income tax returns for the years 1996 through
1999, without any material tax payment required from the Company. As a result of
this favorable resolution of various federal income tax contingencies, the
income tax provision for 2002 reflects a benefit of approximately $120,000,000.
2
The Company's banking and lending operations have historically consisted of
making instalment loans to niche markets primarily funded by customer banking
deposits insured by the Federal Deposit Insurance Corporation (the "FDIC").
However, as a result of increased loss experience and declining profitability in
its automobile lending program, the segment's largest program, the Company
stopped originating new automobile loans in September 2001. In 2003, the Company
ceased originating all other lending programs. The Company is considering its
alternatives for its banking and lending operations, which could include selling
or liquidating some or all of its loan portfolios, and outsourcing certain
functions.
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 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. During 2002, the Company sold its interest in Compagnie Fonciere FIDEI
("Fidei"), its foreign real estate subsidiary, for total proceeds of 70,400,000
Euros ($66,200,000) and recorded an increase to shareholders' equity of
$12,100,000.
The Company's winery operations consist of Pine Ridge Winery in Napa
Valley, California and Archery Summit in the Willamette Valley of Oregon. These
wineries primarily produce and sell wines in the luxury segment of the premium
table wine market.
The Company's copper mine development operations consist of its 72.8%
interest in MK Gold Company ("MK Gold"), a publicly traded company listed on the
NASD OTC Bulletin Board (Symbol: MKAU).
The Company's property and casualty reinsurance business is conducted
through its 25% common stock interest in Olympus Re Holdings, Ltd. ("Olympus"),
a Bermuda reinsurance company primarily engaged in the property excess, marine
and aviation reinsurance business.
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.
Investor Information
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act"). Accordingly, the Company files
periodic reports, proxy statements and other information with the Securities and
Exchange Commission (the "SEC"). Such reports, proxy statements and other
information may be obtained by visiting the Public Reference Room of the SEC at
450 Fifth Street, NW, Washington, D.C. 20549 or by calling the SEC at
1-800-SEC-0330. In addition, the SEC maintains an Internet site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding the Company and other issuers that file
electronically. In addition, material filed by the Company can be inspected at
the offices of the New York Stock Exchange, Inc. (the "NYSE"), 20 Broad Street,
New York, NY 10005 and the Pacific Exchange, Inc., 115 Sansome Street, San
Francisco, CA 94104, on which the Company's common shares are listed.
The Company does not maintain a website. The Company will provide without
charge upon request copies of its annual report on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K and amendments to those reports filed
or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. Requests
for such copies should be directed to: Leucadia National Corporation, 315 Park
Avenue South, New York, NY 10010 (telephone number (212) 460-1900), Attention:
Corporate Secretary.
3
Financial Information about 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, manufacturing and domestic real
estate. 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. Manufacturing
operations manufacture and market proprietary lightweight plastic netting used
for a variety of purposes. 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. Other operations primarily consist of winery operations and
development of a copper mine.
Associated companies include equity interests in entities that the Company
does not control and that are accounted for on the equity method of accounting.
WilTel, a public telecommunications company that owns or leases and operates a
nationwide fiber optic network over which it provides a variety of
telecommunications services is an associated company, as is Olympus, a
Bermuda-based reinsurance company.
The information in the following table for Corporate assets primarily
consists of investments 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. The Company has a
manufacturing facility located in Belgium and an interest, through MK Gold, in a
copper deposit in Spain. The Company does not have any other material foreign
operations or investments.
4
Certain information concerning the Company's segments for 2002, 2001 and
2000 is presented in the following table. Associated Companies are only
reflected in the table below under Identifiable assets employed. Prior period
amounts have been reclassified to reflect the Company's Foreign Real Estate
segment as a discontinued operation.
2002 2001 2000
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(In millions)
Revenues:
Banking and Lending $ 95.9 $ 122.4 $ 108.8
Manufacturing 51.0 57.4 65.1
Domestic Real Estate 51.3 65.3 83.1
Other Operations 48.3 39.3 44.9
Corporate (a) (b) (4.7) 89.8 191.5
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Total consolidated revenues (c) $ 241.8 $ 374.2 $ 493.4
========== ========= =========
Income (loss) from continuing operations before income taxes,
minority expense of trust preferred securities and equity in income
(losses) of associated companies:
Banking and Lending $ 1.9 $ (6.1) $ 11.0
Manufacturing 3.1 7.8 11.3
Domestic Real Estate 16.7 30.4 58.8
Other Operations 11.7 8.2 5.2
Corporate (a) (b) (74.9) 32.8 115.0
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Total consolidated income (loss) from continuing operations
before income taxes, minority expense of trust preferred
securities and equity in income (losses) of associated
companies (c) $ (41.5) $ 73.1 $ 201.3
========== ========= =========
Identifiable assets employed:
Banking and Lending $ 481.5 $ 595.7 $ 664.2
Manufacturing 51.5 59.3 63.4
Domestic Real Estate 106.8 176.4 218.1
Other Operations 193.7 171.2 177.1
Investment in Associated Companies:
WilTel 340.6 -- --
Other Associated Companies 397.1 358.8 192.5
Net Assets of Discontinued Operations -- 44.0 156.9
Corporate 970.6 1,063.7 945.6
--------- --------- ---------
Total consolidated assets $ 2,541.8 $ 2,469.1 $ 2,417.8
========= ========= =========
(a) For 2002, includes a provision of $37,100,000 to write down investments
in certain available for sale securities and an equity investment in a
non-public fund. The write down of the available for sale securities
resulted from a decline in market value determined to be other than
temporary.
(b) 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
12 to the Consolidated Financial Statements.
(c) Prior period amounts have been reclassified to exclude equity in income
(losses) of associated companies from these captions.
At December 31, 2002, the Company and its consolidated subsidiaries had
785 full-time employees.
5
TELECOMMUNICATIONS
In December 2002, the Company completed the acquisition of 44% of the
outstanding common stock of WilTel, for an aggregate purchase price, excluding
expenses, of $330,000,000. The WilTel stock was acquired by the Company under
the chapter 11 restructuring plan of Williams Communications Group, Inc.
("WCG"), the predecessor of WilTel pursuant to a claims purchase agreement with
The Williams Companies, Inc. and an investment agreement with WCG. In October
2002, in a private transaction, the Company purchased 1,700,000 shares of WilTel
common stock, on a when issued basis, for $20,400,000. Together, these
transactions resulted in the Company acquiring 47.4% of the outstanding common
stock of WilTel. The Company has appointed four members (including the Company's
Chairman and President) to the newly constituted nine member board of directors
of WilTel and has entered into a stockholders agreement with WilTel pursuant to
which the Company has agreed to certain restrictions on its ability to acquire
or sell WilTel stock.
WilTel owns or leases and operates a nationwide inter-city fiber-optic
network, extended locally and globally. WilTel has two reportable operating
segments, Network and Vyvx. Network provides Internet, data, voice, and video
services to companies that use high capacity communications in their businesses.
These companies include regional Bell operating companies, cable television
companies, Internet service providers, application service providers, data
storage service providers, managed network service providers, digital subscriber
line service providers, long distance carriers, local service providers,
utilities, governmental entities, educational institutions, international
carriers, and other companies who desire high-speed communications services.
WilTel also offers rights of use in dark fiber, which is fiber that it installs
but for which it does not provide communications transmission services. Network
has built networks and entered into strategic relationships to provide services
in the United States with connections to Asia, Australia, New Zealand, Canada,
Mexico, and Europe.
Vyvx transmits media for its customers regardless of format (analog or
digital), method (fiber-optics or satellite), or geographic reach (domestic or
international). In 1990, Vyvx provided the first video transmission over a
terrestrial network and carried the first of fourteen consecutive Super Bowls
for the NFL and its broadcasters. Vyvx provides quality, reliable, network-based
methods for aggregating, managing, and distributing content for content owners
and rights holders. Vyvx also offers a fully integrated hybrid
satellite/terrestrial service to support dedicated and occasional requirements
for the distribution of live content for customers like broadcasters CNN and Fox
in their coverage of breaking news events in remote locations.
WilTel's global network is used to provide services to the customers of
both Network and Vyvx and includes ownership interests in or rights to use:
- nearly 30,000 miles of fiber optic cable, of which 28,554 is currently
in service;
- local fiber optic cable networks within 20 of the largest U.S. cities;
- 120 network centers located in 107 U.S. cities;
- operational border crossings between the U.S. and Mexico in California
and Texas, and between the U.S. and Canada in Washington, Michigan,
and New York; and
- capacity on five major undersea cable systems connecting the
continental U.S. with Europe, Asia, Australia, New Zealand, and
Hawaii.
The telecommunications industry has experienced a great deal of instability
during the past several years. During the 1990s, forecasts of very high levels
of future demand brought a significant number of new entrants and new capital
investments into the industry. However, many industry participants have gone
through bankruptcy and those forecasts have not materialized. Telecommunications
capacity now far exceeds actual demand, and the resulting marketplace is
characterized by fierce price competition as traditional and next generation
carriers compete to secure market share. Resulting lower prices have eroded
margins and have kept many carriers--including WilTel--from attaining positive
cash flow from operations. Many network providers, and their customers, have and
are undergoing reorganizations through bankruptcy, contemplating bankruptcy, or
experiencing significant operating losses while consuming much of their
remaining liquidity.
6
WilTel does not know if and when the current state of aggressive pricing
will end, or whether the current instability in the sector will lead to industry
consolidation. If industry consolidation does occur, it would not necessarily
benefit WilTel or assure that pricing rationality will return to the industry.
However, if consolidation does not occur and new investment capital continues to
flow into telecommunications carriers, pricing pressures could continue and
supply may continue to outpace demand for the foreseeable future. While WilTel
will examine opportunities to acquire other carriers or large blocks of business
if such opportunities are presented to WilTel, even if such transactions could
be consummated at prices deemed to be attractive, no assurance can be given that
WilTel could successfully complete such acquisitions or that WilTel could obtain
the necessary capital or lender approvals to do so.
WilTel's current focus is to retain its existing business by providing a
high quality of service, to obtain new business if it can be done on a
profitable basis, to reduce its operating expenses to the greatest extent
possible, and to conserve liquidity. At December 31, 2002, WilTel had
$291,300,000 of cash and cash equivalents to meet its cash requirements, and
believes that it has sufficient liquidity to meet its needs through 2004. WilTel
has $375,000,000 of senior debt outstanding under its credit facility, of which
approximately $157,000,000 matures during 2005. Unless WilTel is able to
generate significant cash flows from operations through revenue growth, expense
reductions or some combination of both, it is likely that new capital will have
to be raised to meet its maturing debt obligations in 2005.
Upon its emergence from bankruptcy proceedings, WilTel adopted fresh start
accounting, resulting in a new reporting entity for accounting purposes as of
October 31, 2002. Accordingly, WilTel's consolidated financial statements for
periods prior to emergence from bankruptcy are not comparable and not combined
with its consolidated financial statements subsequent to emergence. For the two
months ended December 31, 2002, after its emergence from bankruptcy, WilTel
generated revenues of approximately $191,700,000, of which approximately
$168,600,000 were generated from the network segment and approximately
$23,100,000 were generated by Vyvx. For this period, approximately 37% of
WilTel's consolidated revenues were attributed to its single largest customer,
SBC Communications Inc. WilTel's net loss for the two months ended December 31,
2002 was $61,000,000.
For the period from acquisition through December 31, 2002, the Company
recorded $13,400,000 of pre-tax losses from its investment in WilTel under the
equity method of accounting. As a result of its emergence from bankruptcy
proceedings and its continued restructuring of its operations, WilTel has
reduced its headcount, operating costs and interest expense. However, despite
these cost reductions, the Company believes that WilTel will continue to report
losses from continuing operations for the foreseeable future. Even if WilTel is
able to generate breakeven cash flow from operations, substantial depreciation
charges will still result in losses from continuing operations over the next
several years. The Company will record its 47.4% share of these losses in its
statements of operations, and the recognition of these losses could reduce the
carrying amount of its investment in WilTel to zero. The Company will not record
any further losses in WilTel if and when its investment is reduced to zero,
unless the Company has guaranteed any of WilTel's obligations, or otherwise has
committed or intends to commit to provide further financial support. The Company
has not provided any such guarantees or commitments.
WilTel is subject to federal, state, local, and foreign laws, regulations,
and orders that affect the rates, terms, and conditions of certain of its
service offerings, its costs, and other aspects of its operations. WilTel's
primary federal regulator is the Federal Communications Commission ("FCC").
Regulation of the telecommunications industry varies from state to state and
from country to country, and it changes regularly (sometimes in unpredictable
ways) in response to regulatory proceedings, judicial rulings, technological
developments, competition, and government policies. WilTel's operations also are
subject to a variety of environmental, building, safety, health, and other
governmental laws and regulations. WilTel cannot predict what impact, if any,
regulatory changes may have on its business or results of operations, nor can it
guarantee that domestic or international regulatory authorities will not raise
material issues regarding its compliance with applicable regulations.
7
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
$392,900,000 and $476,500,000 at December 31, 2002 and 2001, respectively. AIB
and AIF currently have three deposit-taking branches 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 $373,600,000 and $521,200,000 at
December 31, 2002 and 2001, respectively. At December 31, 2002, 55% were loans
to individuals generally collateralized by automobiles; 38% were loans to
consumers, substantially all of which were collateralized by real or personal
property; 4% were loans to small businesses; and 3% were unsecured loans.
Historically, collateralized personal automobile instalment loans were
primarily made through automobile dealerships to individuals who have difficulty
obtaining credit, at interest rates above those charged to individuals with good
credit histories. These loans were made to consumers principally to purchase
used, moderately priced automobiles. In September 2001, the Company decided to
stop originating subprime automobile loans as a result of increasing loss
experience and the increasingly difficult competitive environment. The Company
continues to service and closely monitor these loans, and takes prompt
possession of the collateral in the event of a default. During 2001 and 2000,
the Company generated $434,700,000 of these loans, which typically had an
initial loan balance of $12,200, an average contractual maturity of 58 months
and an anticipated average life of 26 months.
The Company's remaining consumer lending programs have primarily consisted
of marine, recreational vehicle, motorcycle and elective surgery loans. Due to
current economic conditions, portfolio performance and the relatively small size
of these loan portfolios and target markets, in January 2003 the Company stopped
originating all consumer loans. The Company is considering alternatives for its
banking and lending operations, which could include selling or liquidating some
or all of its loan portfolios, and outsourcing certain functions. The Company
anticipates that it will close its remaining satellite branch in 2003, and
reduce its operating and overhead expenses.
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, 2002, the allowance for loan losses for the Company's
entire loan portfolio was $31,800,000 or 8.5% of the net outstanding loans,
compared to $35,700,000 or 6.8% of net outstanding loans at December 31, 2001.
The Company's policy is to charge-off an account when the property 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 property and the amount of the delinquent loan,
including accrued interest.
8
Certain information with respect to the Company's banking and lending
segment is as follows for the years ended December 31, 2002, 2001 and 2000
(dollars in thousands):
2002 2001 2000
---- ---- ----
Average loans outstanding $440,810 $545,036 $423,030
Interest income earned on loans $ 86,018 $111,849 $ 87,865
Average loan yield 19.5% 20.5% 20.8%
Average deposits outstanding $454,497 $536,020 $422,607
Interest expense on non-demand deposits $ 18,035 $ 31,499 $ 26,421
Average rate on non-demand deposits 3.9% 5.9% 6.3%
Net yield on interest-bearing assets 11.5% 13.3% 13.1%
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 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 and the Board of Governors of the
Federal Reserve System. 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.
As previously stated, AIB stopped originating new sub-prime automobile
loans in September 2001, and both AIB and AIF ceased originating all other
consumer loans in January 2003. The FDIC and OCC have supported these actions
taken with respect to the sub-prime portfolio. However, effective February 2003,
AIB entered into a formal agreement with the OCC, agreeing to develop a written
strategic plan subject to prior OCC approval for the continued operations of
AIB, to continue to maintain certain risk-weighted capital levels, to obtain
prior approval before paying any dividends, to provide certain monthly reports
and to comply with certain other criteria. AIB will also be unable to accept
brokered deposits during the period the agreement remains in effect. In the
event AIB fails to comply with the agreement, the OCC would have the authority
to assert formal charges and seek other statutory remedies and AIB may also be
subject to civil monetary penalties. AIB is complying with the agreement and,
given that it has ceased all lending activities, the agreement is not expected
to have a significant impact on its operations. However, no assurance can be
given that other regulatory actions will not be taken.
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.
9
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. This division is a market leader in netting products
used in carpet cushion, turf reinforcement, erosion control, nonwoven
reinforcement and crop protection. It markets its products both domestically and
internationally, with approximately 16% of its 2002 revenues generated by
customers in Europe, Latin America, Japan and Australia. Products are sold
primarily through an employee sales force, located in the United States and
Europe. Manufacturing revenues were $50,700,000, $53,700,000 and $65,000,000 for
the years ended December 31, 2002, 2001 and 2000, respectively.
New product development focuses on niches where the division's proprietary
technology and expertise can lead to sustainable competitive economic
advantages. Historically, this targeted product development generally has been
carried out in partnership with a prospective customer or industry where the
value of the product has been recognized. The plastics division has also begun
focusing on developing products for which it does not yet have a customer. Over
the last several years, the plastics division has spent approximately 2% to 4%
of annual sales on the development and marketing of new products and new
applications of existing products.
Primarily as a result of a general downturn in the economy, revenues for
the plastics division declined in each of the last two years and the division
currently has excess manufacturing capacity. The plastics division is attempting
to develop new products, applications and markets to replace its lost business
and utilize its excess capacity. In addition, the Company has been focusing on
managing costs and improving service levels by reducing 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.
DOMESTIC REAL ESTATE
At December 31, 2002, the Company's domestic real estate assets had a book
value of $85,200,000. 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 investment is a fully-renovated 719-room hotel
located on Waikiki Beach in Hawaii. The Company also owns a shopping center on
Long Island, New York that has 60,000 square feet of retail space. During the
fourth quarter of 2002, the Company sold one of its real estate subsidiaries,
CDS Holding Corporation ("CDS"), to HomeFed Corporation ("HomeFed"),
approximately 9.5% and 8.8% of which is owned by the Company's Chairman and
President, respectively. The purchase price for this transaction was
$25,000,000, consisting of $1,000,000 in cash and 24,742,268 shares of HomeFed's
common stock, which represents approximately 30.3% of the outstanding HomeFed
stock. CDS's principal asset is the master-planned community located in San
Diego County, California known as San Elijo Hills. Since 1998, HomeFed has
served as the development manager for this project, for which it was entitled to
certain fees based upon the project's revenues and a success fee, which
represented a substantial portion of the project's future cash flows. HomeFed is
engaged, directly and through subsidiaries, in the investment in and development
of residential real estate projects in the State of California. HomeFed is a
publicly traded company listed on the NASD OTC Bulletin Board (Symbol: HFDC.OB).
OTHER OPERATIONS
The Company owns 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 1978, while the Company
started Archery Summit in 1993. These wineries primarily produce and sell wines
in the luxury segment of the premium table wine market. During 2002, the
wineries sold approximately 77,700 9-liter equivalent cases of wine generating
wine revenues of $15,700,000. Approximately 8% of the revenues of the wineries
and 24% of case sales were derived from a wine that is not in the luxury segment
and is made from purchased grapes. 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 three years after grape harvest before the wine can be sold. For
the 2002 harvest, approximately 94% of the Company's vineyards were producing
grapes and the balance was under development. At December 31, 2002, the
Company's combined investment in these wineries was $60,900,000.
10
The Company's 72.8% interest in MK Gold, a company that is traded on the
NASD OTC Bulletin Board, had a net carrying value of $49,200,000 at December 31,
2002. 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. An independent feasibility study of this project was completed by
Bechtel International, Inc. in 2001. 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. Based on the feasibility
study, cash operating costs are estimated to average $.33 per pound of copper
and the estimated capital cost to bring the mine into production is
approximately $290,000,000, excluding interest and other financing costs. These
estimates are subject to a number of risks and uncertainties, including
fluctuations in the value of the euro relative to the U.S. dollar. Since the
feasibility study was completed, the value of the euro has appreciated against
the U.S. dollar, which if sustained, or if it appreciates further, will increase
the actual operating and capital costs.
Mining will be subject to obtaining required permits, obtaining both debt
and equity financing for the project, engineering and construction. The market
price of copper has been depressed over the past couple of years, reflecting
generally weak global economic conditions. The amount of financing that 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. Environmental approval of the project has been obtained from
the Spanish and Andalusian government agencies. Mining and water concession
applications have been submitted to the applicable governmental agencies, but
approval has not yet been received. MK Gold currently anticipates that these
operating permits will be received in the second half of 2003, that final
design, construction and mine development will begin in 2004 and copper
production will begin in 2006. Although MK Gold believes the necessary
permitting and financing will be obtained, no assurances can be given that they
will be successful. Further, there may be other political and economic
circumstances that could prevent or delay development of Las Cruces.
OTHER INVESTMENTS
In December 2002, the Company entered into an agreement to purchase certain
debt and equity securities of WebLink Wireless, Inc. ("WebLink"), for an
aggregate purchase price of $19,000,000. Pursuant to the agreement, the Company
acquired outstanding secured notes of WebLink with a principal amount of
$36,500,000 (representing 91% of the total outstanding debt) and, upon receipt
of approval from the FCC, will acquire approximately 80% of the outstanding
common stock of WebLink. WebLink, a privately held company, is in the wireless
messaging industry, providing wireless data services and traditional paging
services.
The Company has an investment in Berkadia LLC, an entity jointly owned by
the Company and Berkshire Hathaway Inc. ("Berkshire"). In 2001, Berkadia 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. In 2001, the Company entered into a
ten-year management agreement with FINOVA, for which it receives an $8,000,000
annual fee that it shares equally with Berkshire. 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.
11
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 March 7, 2003, principal payments
have reduced the outstanding amount of Leucadia's guarantee to $152,500,000. All
income related to the Berkadia Loan, after payment of financing costs, is shared
90% to Berkshire and 10% to the Company.
At December 31, 2002, the book value of the Company's equity investment in
Berkadia was negative $72,100,000. The negative carrying amount principally
results from Berkadia's distribution of loan fees received and the Company's
recognition in 2001 of its share of FINOVA's losses under the equity method of
accounting. This negative carrying amount is being amortized into income over
the term of the Berkadia Loan, and effectively represents an unamortized
discount on the Berkadia Loan. For the year ended December 31, 2002, the Company
recorded $65,600,000 of pre-tax income from this investment, of which
$59,000,000 related to the amortization of the discount on the Berkadia loan.
At December 31, 2002, the book value of the Company's investment in Olympus
was $155,700,000. For the year ended December 31, 2002, the Company recorded
$24,100,000 of pre-tax income from this investment under the equity method of
accounting. Olympus was formed in 2001 to take advantage of the 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. ("WMIG"), 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.
At December 31, 2002, the book value of the Company's equity investment in
Jefferies Partners Opportunity Fund II, LLC ("JPOF II"), a registered
broker-dealer, was $115,200,000. 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, 2002, the Company recorded $15,200,000
of pre-tax income from this investment under the equity method of accounting;
this amount was distributed to the Company in February 2003.
The Company owns 375,000 common shares that represent approximately 4.5% 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, 2002, the Company's
investment had a market value of $121,100,000.
The Company owns approximately 36% of the common stock of Light & Power
Holdings Ltd., the parent company of The Barbados Light and Power Company
Limited, the primary generator and distributor of electricity in Barbados. As of
December 31, 2002, the Company's investment of $12,100,000 was accounted for on
the cost method of accounting, due to currency exchange restrictions and stock
transfer restrictions.
The Company owns equity interests representing more than 5% of the
outstanding capital stock of each of the following domestic public companies at
March 25, 2003: AmeriKing, Inc. ("AmeriKing") (6.8%), Carmike Cinemas, Inc.
("Carmike") (11.1%), GFSI Holdings, Inc. ("GFSI") (6.9%), HomeFed (30.3%),
Jackson Products, Inc. ("Jackson") (8.8%), Jordan Industries, Inc. ("JII")
(10.1%), and WilTel (47.4%).
Since 1982, a subsidiary of the Company has had a partnership interest in
The Jordan Company LLC and Jordan/Zalaznick Capital Company, entities that have
specialized in structuring leveraged buyouts in which the owners are given the
opportunity to become equity participants. However, in the fourth quarter of
2002, members of The Jordan Company raised a new $1.5 billion fund through which
they will conduct their investment activities. As a result, the Company's
partnership participation arrangement with The Jordan Company ended. The Company
has committed to invest $10,000,000 in the general partner of the new fund, and
will retain the investments obtained through its prior partnership interest.
These investments include 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 34 other private
companies. These investments are carried in the Company's consolidated financial
statements at $62,000,000, of which $43,700,000 relates to public companies
carried at market value.
12
For further information about the Company's business, including the
Company's investments, 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 410,300 square feet) and facilities
and land in California and Oregon used for winery operations (totaling
approximately 107,100 square feet and 457 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.
Item 10. Executive Officers of the Registrant.
- ------- ------------------------------------
All executive officers of the Company are elected at the organizational
meeting of the Board of Directors of the Company held annually and serve at the
pleasure of the Board of Directors. As of March 25, 2003, 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 62 Chairman of the Board June 1978
Joseph S. Steinberg 59 President January 1979
Thomas E. Mara 57 Executive Vice President May 1980;
and Treasurer January 1993
Joseph A. Orlando 47 Vice President and January 1994;
Chief Financial Officer April 1996
Barbara L. Lowenthal 48 Vice President and April 1996
Comptroller
Mark Hornstein 55 Vice President July 1983
H.E. Scruggs 46 Vice President August 2002
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,
MK Gold since June 1995 and WilTel since October 2002. Mr. Cumming has also been
a director of Skywest, Inc., a Utah-based regional air carrier, since June 1986,
a director of HomeFed since May 1999 and a director of Carmike since January
2002.
13
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, MK Gold since June 1995, JII since
June 1988, HomeFed since August 1998, FINOVA since August 2001, WMIG since June
2001 and WilTel since October 2002.
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, MK Gold
since February 2000 and FINOVA since September 2002.
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.
Mr. Scruggs joined the Company in 1995, served as Vice President from March
2000 through December 2001, and from August 2002 until the present. Mr. Scruggs
has been Chairman of AIB since 1997, Chairman and President of the Empire Group
since October 2000, Chairman of Conwed Plastics since January 2000 and a Senior
Vice President of WilTel since October 2002. In addition, he has served as a
director of MK Gold since March 2001.
14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
- ------ ---------------------------------------------------------------------
The common shares of the Company are traded on the New York Stock Exchange
and Pacific Exchange, Inc. 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
---- ---
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 $36.04 $28.00
Second Quarter 38.16 30.95
Third Quarter 36.37 27.62
Fourth Quarter 40.27 32.85
2003
First Quarter (through March 25, 2003) $38.60 $32.59
As of March 25, 2003, there were approximately 2,976 record holders of the
common shares.
In 2002 and 2001, 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.
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 five percent or more of the common shares and
the ability of persons or entities now owning five percent or more of the common
shares from acquiring additional common shares. The restrictions will remain in
effect until the earliest of (a) December 31, 2005, (b) the repeal of Section
382 of the Internal Revenue Code (or any comparable successor provision) and (c)
the beginning of a taxable year of the Company to which certain tax benefits may
no longer be carried forward.
15
In December 2002, the Company completed a private placement of
approximately $150,000,000 of equity securities, based on a common share price
of $35.25, to mutual fund clients of Franklin Mutual Advisers, LLC, including
the funds comprising the Franklin Mutual Series Funds. The private placement
included 2,907,599 common shares and newly authorized Series A Non-Voting
Convertible Preferred Stock, that were converted into 1,347,720 common shares in
March 2003. The private placement was exempt from registration under Section
4(2) of the Securities Act of 1933 as a transaction not involving a public
offering.
On May 14, 2002, shareholders approved the Company's reorganization from
New York, its current state of incorporation, to Bermuda. The Company continues
to evaluate the possibility of reorganizing as a Bermuda company and would not
implement the reorganization unless the estimated cost of the reorganization is
acceptable given the anticipated benefits. If the Board of Directors has not
determined to implement the reorganization before the 2005 annual meeting of
shareholders, management will either abandon the reorganization or resubmit it
for shareholder approval at the 2005 annual meeting of shareholders. In
addition, the Board of Directors may determine to abandon the reorganization for
other reasons deemed to be in the Company's best interests and/or the best
interest of its shareholders.
16
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. Prior period
amounts have been reclassified to reflect the Company's Foreign Real Estate
segment as a discontinued operation.
Year Ended December 31,
-----------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(In thousands, except per share amounts)
SELECTED INCOME STATEMENT DATA:
Revenues (a) $241,805 $374,161 $493,408 $460,814 $199,070
Expenses 283,330 301,079 292,105 226,171 183,968
Income (loss) from continuing operations before
income taxes, minority expense of trust
preferred securities and equity in income
(losses) of associated companies (41,525) 73,082 201,303 234,643 15,102
Income from continuing operations before minority
expense of trust preferred securities and
equity in income (losses) of associated
companies (b) 103,340 84,423 133,087 195,175 45,814
Minority expense of trust preferred securities,
net of taxes (5,521) (5,521) (5,521) (5,521) (8,248)
Equity in income (losses) of associated
companies, net of taxes 54,712 (15,974) 19,040 (1,906) 15,138
Income from continuing operations 152,531 62,928 146,606 187,748 52,704
Income (loss) from discontinued operations,
including gain (loss) on disposal, net of taxes 9,092 (70,847) (30,598) 27,294 1,639
Cumulative effect of a change in accounting
principle -- 411 -- -- --
Net income (loss) 161,623 (7,508) 116,008 215,042 54,343
Per share:
Basic earnings (loss) per common share:
Income from continuing operations $ 2.74 $ 1.13 $ 2.64 $ 3.16 $ .83
Income (loss) from discontinued operations,
including gain (loss) on disposal .16 (1.28) (.55) .46 .03
Cumulative effect of a change in accounting
principle -- .01 -- -- --
------- -------- ------- --------- --------
Net income (loss) $ 2.90 $ (.14) $ 2.09 $ 3.62 $ .86
======= ======== ======= ========= ========
Diluted earnings (loss) per common share:
Income from continuing operations $ 2.72 $ 1.13 $2.64 $ 3.16 $ .83
Income (loss) from discontinued operations,
including gain (loss) on disposal .16 (1.28) (.55) .46 .03
Cumulative effect of a change in accounting
principle -- .01 -- -- --
------- -------- ------- --------- --------
Net income (loss) $ 2.88 $ (.14) $ 2.09 $ 3.62 $ .86
======= ======== ======= ========= ========
17
At December 31,
---------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(In thousands, except per share amounts)
SELECTED BALANCE SHEET DATA:
Cash and investments $1,043,471 $1,080,271 $ 998,892 $ 759,089 $1,485,107
Total assets 2,541,778 2,469,087 2,417,783 2,255,239 2,920,916
Debt, including current maturities 233,073 252,279 190,486 268,736 473,226
Customer banking deposits 392,904 476,495 526,172 329,301 189,782
Shareholders' equity 1,534,525 1,195,453 1,204,241 1,121,988 1,853,159
Book value per common share $25.74 $21.61 $21.78 $19.75 $29.90
Cash dividends per common share $ .25 $ .25 $ .25 $13.58 $ --
(a) Prior period amounts have been changed to reclassify equity in income
(loss) of associated companies such that it is no longer classified as
revenues. Includes net securities gains (losses) of $(37,066,000),
$28,450,000, $124,964,000, $16,268,000 and $(66,159,000) for the years
ended December 31, 2002, 2001, 2000, 1999 and 1998, respectively.
(b) During 2002, the Internal Revenue Service completed the audit of the
Company's consolidated federal income tax returns for the years 1996
through 1999, without any material tax payment required from the Company.
As a result of this favorable resolution of various federal income tax
contingencies, the income tax provision for 2002 reflects a benefit of
approximately $120,000,000.
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, 2002, the Company's readily available cash, cash
equivalents and marketable securities, excluding those amounts held by its
regulated subsidiaries, totaled $680,000,000. This amount is comprised of cash
and short-term bonds and notes of the United States Government and its agencies
of $375,600,000 (55%), the equity investment in WMIG of $121,100,000 (18%)
(which can be sold privately or otherwise in compliance with the securities laws
and is subject to a registration rights agreement), and other publicly traded
debt and equity securities aggregating $183,300,000 (27%). Additional sources of
liquidity as of December 31, 2002 include $170,100,000 of cash and marketable
securities primarily collateralizing letters of credit.
18
During 2002, the Internal Revenue Service completed the audit of the
Company's consolidated federal income tax returns for the years 1996 through
1999, without any material tax payment required from the Company. As a result of
this favorable resolution of various federal income tax contingencies, the
income tax provision for 2002 reflects a benefit from the reversal of tax
reserves aggregating approximately $120,000,000.
In December 2002, the Company completed a private placement of
approximately $150,000,000 of equity securities, based on a common share price
of $35.25, to mutual fund clients of Franklin Mutual Advisers, LLC, including
the funds comprising the Franklin Mutual Series Funds. The Company issued
2,907,599 common shares and newly authorized Series A Non-Voting Convertible
Preferred Stock, that were converted into 1,347,720 common shares in March 2003.
The securities sold in the private placement represent 7.1% of the Company's
outstanding common shares at March 25, 2003.
In December 2002, the Company completed the acquisition of 44% of the
outstanding common stock of WilTel, for an aggregate purchase price, excluding
expenses, of $330,000,000. The WilTel stock was acquired by the Company under
the chapter 11 restructuring plan of WCG pursuant to a claims purchase agreement
with The Williams Companies, Inc. and an investment agreement with WCG. In
October 2002, in a private transaction, the Company purchased 1,700,000 shares
of WilTel common stock, on a when issued basis, for $20,400,000. Together, these
transactions resulted in the Company acquiring 47.4% of the outstanding common
stock of WilTel.
The Company entered into a stockholders agreement with WilTel pursuant to
which the Company designated four members of WilTel's newly constituted nine
member board of directors. As long as the Company maintains an ownership
interest in WilTel of at least 20%, WilTel agreed to use its best efforts to
cause WilTel's board to nominate four Leucadia nominees in the future. In
addition, the Company agreed to certain restrictions on its ability to increase
its ownership in WilTel above 49% during the first two years after its
acquisition, and certain other restrictions on its ability to increase its
ownership during the first five years after its acquisition. While the
stockholders agreement and WilTel's charter restrict the transferability of
WilTel's securities, the Company does have the ability to sell an amount of
WilTel shares equal to 15% of the total outstanding WilTel shares. The Company
has no current intention to sell its WilTel stock, and although it has a
registration rights agreement with respect to its interest in WilTel, the
Company does not consider this investment to be liquid.
WilTel's current focus is to retain its existing business by providing a
high quality of service, to obtain new business if it can be done on a
profitable basis, to reduce its operating expenses to the greatest extent
possible, and to conserve liquidity. At December 31, 2002, WilTel had
$291,300,000 of cash and cash equivalents to meet its cash requirements, and
believes that it has sufficient liquidity to meet its needs through 2004. WilTel
has $375,000,000 of senior debt outstanding under its credit facility, of which
approximately $157,000,000 matures during 2005. Unless WilTel is able to
generate significant cash flows from operations through revenue growth, expense
reductions or some combination of both, it is likely that new capital will have
to be raised to meet its maturing debt obligations in 2005.
In December 2002, the Company entered into an agreement to purchase certain
debt and equity securities of WebLink, for an aggregate purchase price of
$19,000,000. Pursuant to the agreement, the Company acquired outstanding secured
notes of WebLink with a principal amount of $36,500,000 and, upon receipt of
approval from the FCC, will acquire approximately 80% of the outstanding common
stock of WebLink.
19
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), and recorded an increase to
shareholders' equity of $12,100,000. Although the Euro denominated sale proceeds
were not converted into US dollars immediately upon receipt, the Company did
enter into a participating currency derivative, which expired in September 2002.
Upon expiration, net of the premium paid to purchase the contract, the Company
received $67,900,000 in exchange for 70,000,000 Euros and recognized a foreign
exchange gain of $2,000,000. In connection with the sale, the Company classified
its foreign real estate operations as discontinued operations.
In November 2002, the Company sold its 40% equity interest in certain
thoroughbred racetrack businesses for net proceeds of approximately $28,000,000,
and recorded a pre-tax gain of $14,300,000. As part of this transaction, the
Company has an approximately 15% profits interest in a joint venture formed with
the buyer of the businesses to pursue the potential development and management
of gaming ventures in Maryland, including slot machines and video lottery
terminals (if authorized by state law). The Company has no funding obligations
for this joint venture. The Company is unable to currently determine the value,
if any, of this profits interest.
The Parent maintains the principal borrowings for the Company and its
non-banking subsidiaries and has provided working capital to certain of its
subsidiaries. These borrowings have primarily been made from banks through the
Company's credit agreement facility and through public financings. In March
2003, the Company entered into a new $110,000,000 unsecured bank credit facility
that matures in three years and bears interest based on the Eurocurrency Rate or
the prime rate.
As of March 25, 2003, the Company is authorized to repurchase an additional
4,490,000 common shares. Such purchases may be made from time to time in the
open market, through block trades or otherwise. Depending on market conditions
and other factors, such purchases may be commenced or suspended at any time
without prior notice.
At December 31, 2002, a maximum of $10,200,000 was available to the Parent
as dividends from its regulated subsidiaries without regulatory approval. 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 and tax sharing payments
totaled $7,100,000 for the year ended December 31, 2002.
Based on discussions with commercial and investment bankers, the Company
believes that it has the ability to raise additional funds under acceptable
conditions for use in its existing businesses or for appropriate investment
opportunities. 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 2002, net cash was provided by operating activities, principally as a
result of a reduction to the Company's investment in the trading portfolio. In
2001 and 2000, net cash was used for operations, reflecting lower investment
income on corporate investments as a result of the special dividend payment of
$811,900,000 in 1999, payment of the Parent's interest and overhead expenses and
a reduction of payables related to the trading portfolio.
20
The Company's consolidated banking and lending operations had outstanding
loans (net of unearned finance charges) of $373,600,000 and $521,200,000 at
December 31, 2002 and 2001, respectively. At December 31, 2002, 55% were loans
to individuals generally collateralized by automobiles; 38% were loans to
consumers, substantially all of which were collateralized by real or personal
property; 4% were loans to small businesses; and 3% were unsecured loans. The
banking and lending segment is no longer making consumer loans and is in the
process of liquidating its remaining portfolio. These loans were primarily
funded by deposits generated by the Company's deposit-taking facilities and by
brokers. The Company intends to use the cash flows generated from its loan
portfolios to retire these deposits as they mature, which the Company expects
will be substantially complete by the end of 2005. The Company's customer
banking deposits totaled $392,900,000 and $476,500,000 as of December 31, 2002
and 2001, respectively.
As previously stated, AIB stopped originating new sub-prime automobile
loans in September 2001, and both AIB and AIF ceased originating all other
consumer loans in January 2003. The FDIC and OCC have supported these actions
taken with respect to the sub-prime portfolio. However, effective February 2003,
AIB entered into a formal agreement with the OCC, agreeing to develop a written
strategic plan subject to prior OCC approval for the continued operations of
AIB, to continue to maintain certain risk-weighted capital levels, to obtain
prior approval before paying any dividends, to provide certain monthly reports
and to comply with certain other criteria. AIB will also be unable to accept
brokered deposits during the period the agreement remains in effect. In the
event AIB fails to comply with the agreement, the OCC would have the authority
to assert formal charges and seek other statutory remedies and AIB may also be
subject to civil monetary penalties. AIB is complying with the agreement and,
given that it has ceased all lending activities, the agreement is not expected
to have a significant impact on its operations. However, no assurance can be
given that other regulatory actions will not be taken.
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 five percent or more of the common shares and
the ability of persons or entities now owning five percent or more of the common
shares from acquiring additional common shares. The restrictions will remain in
effect until the earliest of (a) December 31, 2005, (b) the repeal of Section
382 of the Internal Revenue Code (or any comparable successor provision) and (c)
the beginning of a taxable year of the Company to which certain tax benefits may
no longer be carried forward.
As shown below, at December 31, 2002, the Company's contractual cash
obligations totaled $807,472,000. 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 additional indebtedness
or make distributions to its shareholders and still remain in compliance with
these restrictions.
Payments Due by Period (in thousands)
-----------------------------------------------------------------------
Less than 1
Contractual Cash Obligations Total Year 1-3 Years 4-5 Years After 5 Years
- ---------------------------- ----- ----------- --------- --------- -------------
Customer Banking Deposits $392,904 $283,613 $ 89,959 $ 19,332 $ --
Long-Term Debt 233,073 3,647 27,124 39,815 162,487
Operating Leases, net of Sublease Income 83,295 4,946 7,770 6,829 63,750
Preferred Securities of Subsidiary Trust 98,200 -- -- -- 98,200
-------- -------- -------- -------- --------
Total Contractual Cash Obligations $807,472 $292,206 $124,853 $ 65,976 $324,437
======== ======== ======== ======== ========
21
Off-Balance Sheet Arrangements
At December 31, 2002, the Company's off-balance sheet arrangements consist
of guarantees aggregating $265,500,000. The Company's guarantee of 10% of
Berkadia's financing incurred in connection with the Berkadia Loan represents
$217,500,000 of that total, $65,000,000 of which expired in connection with
payments of principal on the Berkadia Loan in the first quarter of 2003. 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 $152,500,000 guarantee will expire proportionally at such times. The
Berkadia Loan matures in August 2006.
Prior to the sale of CDS, the Company had agreed to provide project
improvement bonds primarily for the benefit of the City of San Marcos for the
San Elijo Hills project, which are required prior to the commencement of any
project development. These bonds provide funds primarily to the City in the
event that CDS is unable or unwilling to complete certain infrastructure
improvements in the San Elijo Hills project. CDS is responsible for paying all
third party fees related to obtaining the bonds. Should the City or others draw
on the bonds for any reason, CDS and one of its subsidiaries would be obligated
to reimburse the Company for the amount drawn. At December 31, 2002, the amount
of outstanding bonds was $30,000,000, of which $25,400,000 expires in less than
one year. The Company's remaining guarantee at December 31, 2002 is an
$18,000,000 indemnification in connection with the financing of a real estate
property.
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, 2002, the Company's allowance for loan
losses was $31,800,000 or 8.5% of the related outstanding loan receivable
balance of $373,600,000. The allowance for loan losses is an amount that the
Company believes will be adequate to absorb probable losses inherent in its
portfolio 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 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 actual loss experience may be different.
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. The Company also records
reserves for contingent tax liabilities related to potential exposure.
22
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 $152,500,000 as of March 7, 2003. Since the Company does not expect
that Berkadia will suffer losses resulting in the Company having to fund its
guarantee obligation, no reserve has been recorded.
As of December 31, 2002, the carrying amount of the Company's investment in
the mining properties of MK Gold was approximately $59,300,000. 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, obtaining both debt and
equity financing for the project, engineering and construction. The market price
of copper has been depressed over the past couple of years, reflecting generally
weak global economic conditions. The amount of financing that 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, the operating cost of the
mine and the capital cost to bring the mine into production 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.
Banking and Lending
Finance revenues, which reflect the level and mix of consumer instalment
loans, decreased in 2002 as compared to 2001 due to fewer average loans
outstanding. Average loans outstanding were $440,800,000, $545,000,000 and
$423,000,000 for 2002, 2001 and 2000, respectively. This decline was primarily
due to the Company's decision in September 2001 to stop originating subprime
automobile loans. Although finance revenues decreased in 2002 as compared to
2001, pre-tax results increased primarily due to a $13,700,000 reduction in
interest expense, due to reduced customer banking deposits and lower interest
rates thereon, a net change of $10,000,000 in the accounting for the market
values of interest rate swaps (discussed below), a decline in the provision for
loan losses of $7,100,000, and lower salaries expense and operating costs
resulting from the segment's restructuring efforts. These changes were partially
offset by higher interest paid on interest rate swaps of $4,100,000.
In 2002, the banking and lending segment's provision for loan losses
decreased as compared to the prior year primarily due to the decline in loans
outstanding, although as a percent of outstanding loans it increased due to
increased loss experience, particularly in the subprime automobile portfolio.
The Company believes this loss experience reflects the difficulties experienced
by subprime borrowers in the current economy. At December 31, 2002, the
allowance for loan losses for the Company's entire loan portfolio was
$31,800,000 or 8.5% of the net outstanding loans, compared to $35,700,000 or
6.8% of net outstanding loans at December 31, 2001.
The Company's remaining consumer lending programs have primarily consisted
of marine, recreational vehicle, motorcycle and elective surgery loans. Due to
current economic conditions, portfolio performance and the relatively small size
of these loan portfolios and target markets, in January 2003 the Company stopped
originating all consumer loans. The Company is considering its alternatives for
its banking and lending operations, which could include selling or liquidating
some or all of its loan portfolios, and outsourcing certain functions.
23
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 reflected 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. Pre-tax results for the banking and lending segment for 2001 also
included $7,100,000 of charges related to consolidating all operations in Salt
Lake City.
Pre-tax results for the banking and lending segment include income
(expense) of $3,500,000 and ($6,500,000) for the years ended December 31, 2002
and 2001, respectively, resulting from mark-to-market changes 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.
Manufacturing
Manufacturing revenues for the plastics division declined approximately 5%
in 2002 as compared to 2001 primarily due to reductions in the consumer products
market of $3,800,000, partially offset by increases in the construction market
of $1,200,000. The reductions in the consumer products market resulted from the
loss of a customer for the Asian market and for its consumer dust wipe products,
and reduced demand for one of the Company's healthcare products. Gross profit
was largely unchanged for 2002 as compared to 2001, reflecting cost reduction
initiatives that reduced labor costs, improved material utilization and reduced
non-resin raw material costs.
For the year ended December 31, 2002, the division recorded an impairment
charge of approximately $1,250,000 to write down the book value of certain
production lines that the division does not expect will be utilized over the
next several years. These lines were initially purchased to provide additional
capacity to produce a specific product for a specific customer; however, the
customer discontinued the product in 2001 and the Company no longer believes
that the cost of these lines are currently recoverable from other business. When
the division's customer discontinued the product and terminated their contract
in 2001, they were required to pay the division a termination payment of
$3,500,000, which was recognized as other income in 2001. The division did not
record an impairment charge in 2001 since its expected production volume for
these lines would have resulted in future cash flows that did not support an
impairment charge at that time.
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 reduction was 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 decline in sales and higher
fixed costs related to the Belgium manufacturing facility. The decline in
pre-tax income in 2001 was partially offset by the contract termination gain
referred to above.
24
Domestic Real Estate
Revenues from domestic real estate declined in 2002 as compared to 2001 as
a result of lower gains from property sales of $16,400,000, and less rent income
of $7,300,000 largely due to the sale of one of the Company's shopping centers
in 2001 and two shopping centers during 2002, partially offset by 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 also reflects greater
operating costs, principally related to the Hawaiian hotel and a $1,300,000
write-down of a mortgage receivable.
During the fourth quarter of 2002, the Company sold one of its real estate
subsidiaries, CDS, to HomeFed for a purchase price of $25,000,000, consisting of
$1,000,000 in cash and 24,742,268 shares of HomeFed's common stock, which
represents approximately 30.3% of the outstanding HomeFed stock. CDS's principal
asset is the master-planned community located in San Diego County, California
known as San Elijo Hills, for which HomeFed has served as the development
manager since 1998. The deferred gain on this sale of approximately $12,100,000
at December 31, 2002, will be recognized into income as the San Elijo Hills
project is developed and sold. The Company is accounting for its investment in
HomeFed under the equity method of accounting. Income recognized representing
its share of HomeFed's earnings in 2002 was not material. Prior to the sale to
HomeFed, the Company recognized pre-tax gains of $7,800,000 from sales of
residential sites at San Elijo Hills during 2002.
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 lower gains from property sales, net of costs. During 2001,
the Company sold 691 residential sites and a school site resulting in pre-tax
gains of $18,100,000 at San Elijo Hills.
Other
Investment and other income declined in 2002 as compared to 2001
principally due to reductions in gains from domestic property sales and rent
income as discussed above, a reduction of $20,600,000 in investment income
resulting from a decline in interest rates and a lower amount of invested
assets, a decline of $9,200,000 in revenues from the Company's gas operations
principally due to lower production and prices, and the gain recognized in 2001
of $6,300,000 from the sale of the Company's investment in two inactive
insurance companies. The decreases were partially offset by a $14,300,000 gain
from the sale of certain thoroughbred racetrack businesses and increased
revenues from the Company's Hawaiian hotel of $8,200,000.
Investment and other income declined in 2001 as compared to 2000 in part
from non-recurring income recognized in 2000 totaling $25,900,000, primarily
consisting of foreclosure gains from certain domestic real estate properties of
$10,700,000, a prepayment penalty related to certain promissory notes of
$7,500,000 and a gain from the sale of a corporate owned aircraft of $7,700,000.
In addition, investment and other income declined in 2001 due to decreased gains
from sales of various domestic real estate properties of $8,500,000 and a
reduction in revenues related to MK Gold of $10,100,000. Such decreases were
partially offset by the 2001 gain from the sale of the Company's investment in
two inactive insurance companies referred to above and increased revenues from
the Company's oil and gas operations of $6,200,000.
Net securities gains (losses) for 2002 include a provision of $37,100,000
to write down the Company's investments in certain available for sale securities
and its equity investment in a non-public fund. The write down of the available
for sale securities resulted from a decline in market value determined to be
other than temporary. 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).
25
For 2002, the Company recognized $91,400,000 of pre-tax income from its
equity investments in associated companies as compared to $24,600,000 of pre-tax
losses for 2001. The increase in 2002 was primarily due to income from the
Company's equity investment in Berkadia of $65,600,000 as compared to a loss
from this investment of $70,400,000 in 2001, and $24,100,000 of income from the
Company's equity investment in Olympus, an investment the Company made in
December 2001. These increases were partially offset by a $11,900,000 decline in
income from its investment in JPOF II, from which the Company recorded
$15,200,000 of income in 2002, and a loss of $13,400,000 from the Company's
equity investment in WilTel, representing the Company's share of WilTel's losses
under the equity method of accounting.
For 2002, the Company's equity in the income of Berkadia consisted of
pre-tax income of $59,000,000 related to the amortization of the discount on the
Berkadia Loan and $6,600,000 from its share of the net interest spread on the
Berkadia Loan. For 2001, the Company's equity in the loss of Berkadia consisted
of a pre-tax loss of $94,400,000 for its share of FINOVA's losses under the
equity method of accounting, $20,100,000 of pre-tax income related to the
amortization of the discount on the Berkadia Loan and $3,900,000 of pre-tax
income from its share of the net interest spread on the Berkadia Loan. As more
fully described in Note 3 to the Company's consolidated financial statements,
Berkadia's initial investment in the FINOVA stock 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
FINOVA stock was based upon the trading price of FINOVA's common stock on the
day the FINOVA stock was received, was far in excess of FINOVA's net worth and
was 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 in 2001.
The book value of the Company's equity investment in Berkadia was negative
$72,100,000 and negative $129,000,000 at December 31, 2002 and 2001,
respectively. The negative carrying amount principally results from Berkadia's
distribution of loan fees received and the Company's recognition in 2001 of its
share of FINOVA's losses under the equity method of accounting. This negative
carrying amount is being amortized into income over the term of the Berkadia
Loan, and effectively represents an unamortized discount on the Berkadia Loan.
Since its acquisition in the fourth quarter of 2002, the Company has
recorded its share of WilTel's losses under the equity method of accounting. As
a result of its emergence from bankruptcy proceedings and its continued
restructuring of its operations, WilTel has reduced its headcount, operating
costs and interest expense. However, despite these cost reductions, the Company
believes that WilTel will continue to report losses from continuing operations
for the foreseeable future. Even if WilTel is able to generate breakeven cash
flow from operations, substantial depreciation charges will still result in
losses from continuing operations over the next several years. The Company will
record its 47.4% share of these losses in its statements of operations, and the
recognition of these losses could reduce the carrying amount of its investment
in WilTel to zero. The Company will not record any further losses in WilTel if
and when its investment is reduced to zero, unless the Company has guaranteed
any of WilTel's obligations, or otherwise has committed or intends to commit to
provide further financial support. The Company has not provided any such
guarantees or commitments.
For 2001, the Company recognized $24,600,000 of pre-tax losses from its
equity investments in associated companies as compared to $29,300,000 of pre-tax
income for 2000. The loss in 2001 was primarily due to a loss of $70,400,000,
representing the Company's share of the loss recorded by Berkadia, as described
above. 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.
26
The decline in interest expense for 2002 as compared to 2001 primarily
reflects lower interest expense at the banking and lending segment due to
reduced customer banking deposits and lower interest rates thereon.
Salaries expense in 2001 primarily reflects decreased expenses related to
lower bonus expense.
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
referred to above, partially offset by lower expenses related to MK Gold.
Income taxes for 2002 reflect the reversal of tax reserves aggregating
$120,000,000, as a result of the favorable resolution of certain federal income
tax contingencies discussed above. Income taxes for 2001 reflect a benefit of
$36,200,000 for the favorable resolution of federal and state income tax
contingencies, and in 2000, the Company's effective income tax rate did not vary
materially from the expected statutory federal rate.
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 only accepts new business that it is
obligated to accept by contract or New York insurance law; it does not engage in
any other business activities except for its claims runoff operations. The
voluntary liquidation is expected to be substantially complete by 2005. In
December 2001, the Company wrote 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 indicated that the Company is
unlikely to realize any value once the liquidation is complete. Accordingly, the
Company recorded a $31,100,000 after-tax charge (net of taxes of $16,800,000) as
a 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.
Recently Issued Accounting Standards
In July 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"), which is effective
for exit or disposal activities initiated after December 31, 2002. SFAS 146
addresses issues regarding the recognition, measurement and reporting of costs
associated with exit and disposal activities, including restructuring
activities. SFAS 146 requires a liability be recognized at fair value for costs
associated with exit or disposal activities only when the liability is incurred
as opposed to at the time the Company commits to an exit plan as permitted under
Emerging Issues Task Force Issue No. 94-3. In November 2002, the FASB issued
FASB Interpretation No. 45 ("FIN 45"), which requires a guarantor for certain
guarantees to recognize, at the inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The initial
recognition and initial measurement provisions of FIN 45 are applied on a
prospective basis to guarantees issued or modified after December 31, 2002. In
addition, FIN 45 modified the disclosure requirements for such guarantees
effective for interim or annual periods ending after December 15, 2002; the
Company has adopted these disclosure requirements. In January 2003, the FASB
issued FASB Interpretation No. 46 ("FIN 46"), which addresses consolidation of
variable interest entities, which are entities in which equity investors do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
27
additional subordinated financial support from other parties. FIN 46 is
effective immediately to variable interest entities created after January 31,
2003, and to variable interest entities in which an enterprise obtains an
interest after that date. FIN 46 applies in the first fiscal year or interim
period beginning after June 15, 2003, to variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
FIN 46 may be applied prospectively with a cumulative effect adjustment as of
the date on which it is first applied or by restating previously issued
financial statements with a cumulative effect adjustment as of the beginning of
the first year restated. The Company is reviewing the impact of the
implementation of SFAS 146, the initial recognition and measurement provisions
of FIN 45, and the implementation of FIN 46.
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, 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:
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 and vacation markets in
Hawaii;
o increased competition in the luxury segment of the premium table wine
market;
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 and 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;
o further adverse regulatory action by the OCC;
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;
o deterioration in the business and operations of WilTel and the ability
of WilTel to generate operating profits and positive cash flows,
WilTel's ability to retain key customers and suppliers, regulatory
changes in the telecommunications markets and increased competition
from reorganized telecommunication companies; and
o changes in the composition of the Company's assets and liabilities
through acquisitions or divestitures.
28
Undue reliance should not be placed on these forward-looking statements,
which are applicable only as of the date hereof. The Company undertakes no
obligation to revise or update these forward-looking statements to reflect
events or circumstances that arise after the date of this Report or to reflect
the occurrence of unanticipated events.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
- ------- ----------------------------------------------------------
The following includes "forward-looking statements" that involve risk and
uncertainties. Actual results could differ materially from those projected in
the forward-looking statements.
The Company's market risk arises principally from interest rate risk
related to its investment portfolio, its borrowing activities and the banking
and lending activities of certain subsidiaries.
The Company'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 69% of the Company's total investment portfolio at December 31,
2002. 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 4.6 years at December 31, 2002. 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 $121,100,000. This investment is approximately 19% 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, 2001, fixed
income securities comprised approximately 68% of the Company's total investment
portfolio and had an estimated weighted average remaining life of 2.0 years. At
December 31, 2002 and 2001, 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.
29
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 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 5, 9 and 19 to Consolidated Financial
Statements.
30
Expected Maturity Date
----------------------
2003 2004 2005 2006 2007 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 $ 98,763 $16,536 $ -- $ 1,621 $ -- $ -- $116,920 $116,920
Weighted Average
Interest Rate 1.64% 3.95% -- 4.14% -- --
Other Fixed Maturities:
Rated Investment Grade $ 10,783 $13,785 $ 1,567 $ 1,699 $ -- $ -- $ 27,834 $ 27,834
Weighted Average
Interest Rate 6.43% 7.25% 5.96% 6.75% -- --
Rated Less Than
Investment Grade/Not
Rated $ 15,298 $26,518 $ 9,045 $ 10,394 $ 15,404 $ 52,804 $129,463 $129,463
Weighted Average
Interest Rate 7.43% 6.88% 5.32% 8.03% 9.17% 8.57%
Rate Sensitive Liabilities:
Fixed Interest Rate Borrowings $ 1,515 $ 1,631 $21,265 $23,539 $ 2,233 $123,268 $173,451 $179,290
Weighted Average
Interest Rate 7.92% 7.92% 7.92% 7.88% 7.88% 7.86%
Variable Interest Rate
Borrowings $ 2,114 $ 2,114 $ 2,114 $ 2,114 $ 11,929 $ 39,219 $ 59,604 $ 59,604
Weighted Average
Interest Rate 2.20% 2.84% 3.50% 3.94% 4.32% 5.33%
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%
31
Expected Maturity Date
----------------------
2003 2004 2005 2006 2007 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
(Dollars in thousands)
Rate Sensitive Derivative
Financial Instruments:
Euro currency swap $ 2,085 $ 2,085 $ 2,085 $ 2,085 $ 2,085 $ 4,693 $ 15,118 $ (1,566)
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 $ 2,114 $ 2,114 $ 2,114 $ 2,114 $ 2,114 $ 39,219 $ 49,789 $ (4,251)
Average Pay Rate 5.01% 5.01% 5.01% 5.01% 5.01% 5.01%
Average Receive Rate 1.70% 2.39% 3.09% 3.55% 3.95% 4.67%
Off-Balance Sheet Items:
Unused Lines of Credit $152,500 $ -- $ -- $ -- $ -- $ -- $152,500 $152,500
Weighted Average
Interest Rate 1.45% -- -- -- -- --
Banking and Lending:
Rate Sensitive Assets:
Certificates of Deposit $ 697 $ -- $ -- $ -- $ -- $ -- $ 697 $ 697
Weighted Average
Interest Rate 2.06% -- -- -- -- -- 2.06%
Fixed Interest Rate
Securities $ 9,725 $ 2,757 $ 1,651 $ 414 $ 1 $ 8,146 $ 22,694 $ 22,694
Weighted Average
Interest Rate 9.06% 9.10% 9.12% 9.12% 10.93% 5.12% 7.62%
Variable Interest Rate
Securities $ 29,843 $16,895 $12,839 $ 9,819 $ 2,993 $ 18,753 $ 91,142 $ 91,140
Weighted Average
Interest Rate 3.22% 1.77% 1.78% 1.78% 1.83% 3.32% 2.57%
Fixed Interest Rate Loans $ 72,558 $73,017 $52,444 $21,427 $ 4,525 $ 82,039 $306,010 $280,351
Weighted Average
Interest Rate 21.09% 21.00% 21.62% 21.35% 19.28% 18.66% 20.50%
Variable Interest Rate
Loans $ 7,651 $ 2,896 $ 3,342 $ 3,930 $ 4,560 $ 45,215 $ 67,594 $ 67,287
Weighted Average
Interest Rate 17.28% 19.00% 18.92% 18.61% 17.85% 15.24% 16.19%
Rate Sensitive Liabilities:
Money Market Deposits $ 36,004 $ 350 $ 350 $ -- $ -- $ -- $ 36,704 $ 36,704
Weighted Average
Interest Rate .30% .25% .25% -- -- -- .30%
Time Deposits $247,609 $61,004 $28,255 $ 7,574 $ 11,758 $ -- $356,200 $362,863
Weighted Average
Interest Rate 3.30% 3.90% 3.53% 5.33% 4.58% -- 3.50%
Fixed Interest Rate
Borrowings $ 18 $ -- $ -- $ -- $ -- $ -- $ 18 $ 18
Weighted Average
Interest Rate 7.38% -- -- -- -- -- 7.38%
Rate Sensitive Derivative
Financial Instruments:
Pay Fixed/Receive Variable
Interest Rate Swap $160,000 $ -- $ -- -- $ -- $ -- $160,000 $ (3,135)
Average Pay Rate 6.22% -- -- -- -- -- 6.22%
Average Receive Rate 1.76% -- -- -- -- -- 1.76%
Off-Balance Sheet Items:
Commitments to Extend Credit $ 5,503 $ -- $ -- $ -- $ -- $ -- $ 5,503 $ 5,503
Weighted Average
Interest Rate 17.44% -- -- -- -- -- 17.44%
Unused Lines of Credit $ 3,000 $ -- $ -- $ -- $ -- $ 17,192 $ 20,192 $ 20,192
Weighted Average
Interest Rate 4.75% -- -- -- -- 1.25% 1.77%
32
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 15(a) below.
Item 9. Changes in and Disagreements with Accountants 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
2003 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.
33
Item 12. Security Ownership of Certain Beneficial Owners and Management.
- ------- --------------------------------------------------------------
Equity Compensation Plan Information
The following table summarizes information regarding the Company's equity
compensation plans as of December 31, 2002. All outstanding awards relate to the
Company's common stock.
Number of securities
remaining available
for future issuance
Number of securities Weighted-average under equity
to be issued upon exercise price of compensation plans
exercise of outstanding options, outstanding options, (excluding securities
warrants and rights warrants and rights reflected in column (a))
Plan Category (a) (b) (c)
- ------------- ------------------------------- -------------------- -----------------------
Equity compensation
plans approved by
security holders 1,353,070 $ 25.29 578,050
Equity compensation
plans not approved
by security holders -- -- --
----------- ------- -------
Total 1,353,070 $ 25.29 578,050
=========== ======= =======
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.
Item 14. Controls and Procedures.
- ------- -----------------------
(a) Based on their evaluation as of a date within 90 days of the filing
date of this Annual Report on Form 10-K, the Company's chief executive officer
and chief financial officer have concluded that the Company's disclosure
controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the
Exchange Act) are effective to ensure that information required to be disclosed
by the Company in reports that it files or submits under the Exchange Act are
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.
(b) There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
34
PART IV
Item 15. 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, 2002 and 2001.................................F-2
Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and
2000....................................................................................F-3
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and
2000....................................................................................F-4
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 2002, 2001 and 2000........................................................F-6
Notes to Consolidated Financial Statements................................................F-7
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts...........................................F-36
(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
(filed as Exhibit 10.19 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2001 (the "2001 10-K")).
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).
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 (filed as Exhibit 10.21 to the 2001 10-K).
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 2001
10-K).
35
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 (filed as Exhibit 10.28 the 2001 10-K).
Deferred Compensation Agreement between the Company and Mark Hornstein
dated as of December 27, 2001 (filed as Exhibit 10.29 to the 2001
10-K).
Deferred Compensation Agreement between the Company and Mark Hornstein
dated as of December 16, 2002.
(b) Reports on Form 8-K.
The Company filed current reports on Form 8-K dated October 15, 2002,
October 16, 2002 and December 24, 2002 which set forth information under
Item 5. Other Events and Item 7. Financial Statements and Exhibits.
The Company filed current reports on Form 8-K dated November 27, 2002 which
set forth information under Item 2. Acquisition or Disposition of Assets,
Item 5. Other Events and Item 7. Financial Statements and Exhibits.
(c) Exhibits.
3.1 Restated Certificate of Incorporation (filed as Exhibit 5.1 to the
Company's Current Report on Form 8-K dated July 14, 1993). *
3.2 Certificate of Amendment of the Certificate of Incorporation dated
as of December 23, 2002.
3.3 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).*
- ------------------------------------------
* Incorporated by reference
36
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 (filed as Exhibit 10.8 to the Company's 2001 10-K).*
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).*
- ------------------------------------------
* Incorporated by reference
37
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 Company's 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
Company's 1993 Form 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 (filed as Exhibit 10.19 to the 2001 10-K).*
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 (filed as Exhibit 10.21 to the 2001 10-K).*
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 Company's Current Report on
Form 8-K dated August 27, 2001).*
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).*
- ------------------------------------------
* Incorporated by reference
38
10.28 Deferred Compensation Agreement between the Company and Thomas E.
Mara dated as of December 20, 2001 (filed as Exhibit 10.28 to the
2001 10-K).*
10.29 Deferred Compensation Agreement between the Company and Mark
Hornstein dated as of December 27, 2001 (filed as Exhibit 10.29 to
the 2001 10-K).*
10.30 Settlement Agreement dated as of July 26, 2002, by and among The
Williams Companies Inc. ("TWC"), Williams Communications Group,
Inc. ("WCG"), CG Austria, Inc., the official committee of
unsecured creditors and the Company (filed as Exhibit 99.2 to the
Current Report on Form 8-K of WCG dated July 31, 2002 (the "WCG
July 31, 2002 8-K")).*
10.31 Investment Agreement, dated as of July 26, 2002, by and among the
Company, WCG and, for purposes of Section 7.4 only, Williams
Communications, LLC ("WCL") (filed as Exhibit 99.4 to the WCG July
31, 2002 8-K). *
10.32 First Amendment, made as of September 30, 2002, to the Investment
Agreement, dated as of July 26, 2002, by and among the Company,
WCG and WCL (filed as Exhibit 99.4 to the Current Report on Form
8-K of WCG dated October 24, 2002 (the "WilTel October 24, 2002
8-K")). *
10.33 Second Amendment, made as of October 15, 2002, to the Investment
Agreement, dated as of July 26, 2002, as amended on September 30,
2002, by and among the Company, WCG and WCL (filed as Exhibit 99.5
to the WilTel October 24, 2002 8-K).*
10.34 Purchase and Sale Agreement, dated as of July 26, 2002, by and
between TWC and the Company (filed as Exhibit 99.5 to the
Company's Current Report on Form 8-K dated July 31, 2002).*
10.35 Amendment, made as of October 15, 2002, to the Purchase and Sale
Agreement, dated as of July 26, 2002, by and among the Company and
TWC (filed as Exhibit 99.2 to the WilTel October 24, 2002 8-K). *
10.36 Escrow Agreement, dated as of October 15, 2002, among the Company,
TWC, WilTel and The Bank of New York, as Escrow Agent (filed as
Exhibit 99.3 to the WilTel October 24, 2002 8-K). *
10.37 Share Purchase Agreement, dated April 17, 2002, between LUK Fidei
L.L.C and Hampton Trust PLC.
10.38 Reiterative Share Purchase Agreement, dated June 4, 2002, among
Savits AB Private, Hampton Trust Holding (Europe) SA, John C.
Jones and Herald Centruy Consolidated SA.
10.39 Stock Purchase Agreement, dated as of October 21, 2002, between
HomeFed Corporation ("HomeFed") and the Company (filed as Exhibit
10.1 to the Current Report on Form 8-K of HomeFed dated October
22, 2002). *
10.40 Second Amended and Restated Berkadia LLC Operating Agreement
dated December 2, 2002, by and among BH Finance LLC and WMAC
Investment Corporation.
10.41 Subscription Agreement made and entered into as of December 23,
2002 by and among the Company and each of the entities named in
Schedule I thereto.
10.42 Deferred Compensation Agreement between the Company and Mark
Hornstein dated as of December 26, 2002.
21 Subsidiaries of the registrant.
- ------------------------------------------
* Incorporated by reference
39
23.1 Consent of PricewaterhouseCoopers LLP 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), Form S-8 (File No. 333-51494) and Form S-4
(File No. 333-86018).
23.2 Independent Auditors' Consent from PricewaterhouseCoopers,
with respect to the inclusion in this Annual Report on Form 10-K
the financial statements of Olympus Re Holdings, Ltd. 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), Form S-8 (No. 333-51494) and Form S-4 (No.333-86018).
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), Form
S-8 (No. 333-51494) and Form S-4 (No. 333-86018).
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.
(d) Financial statement schedules.
-----------------------------
(1) Berkadia LLC financial statements as of December 31, 2002
and 2001 and for the year ended December 31, 2002 and for
the period from inception, February 26, 2001, to December
31, 2001.
(2) Olympus Re Holdings, Ltd. combined financial statements as
of December 31, 2002 and 2001 and for the year ended
December 31, 2002 and for the period from date of
incorporation, December 3, 2001 to December 31, 2001.
40
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 28, 2003 By: /s/ Barbara L. Lowenthal
-----------------------------
Barbara L. Lowenthal
Vice President and Comptroller
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated, on the date set forth above.
Signature Title
--------- -----
/s/ Ian M. Cumming Chairman of the Board
- ----------------------------- (Principal Executive Officer)
Ian M. Cumming
/s/ Joseph S. Steinberg President and Director
- ----------------------------- (Principal Executive Officer)
Joseph S. Steinberg
/s/ Joseph A. Orlando Vice President and Chief Financial Officer
- ----------------------------- (Principal Financial Officer)
Joseph A. Orlando
/s/ Barbara L. Lowenthal Vice President and Comptroller
- ----------------------------- (Principal Accounting Officer)
Barbara L. Lowenthal
/s/ Paul M. Dougan Director
- -----------------------------
Paul M. Dougan
/s/ Lawrence D. Glaubinger Director
- -----------------------------
Lawrence D. Glaubinger
/s/ James E. Jordan Director
- -----------------------------
James E. Jordan
/s/ Jesse Clyde Nichols, III Director
----------------------------
Jesse Clyde Nichols, III
41
CERTIFICATIONS
I, Ian M. Cumming, certify that:
1. I have reviewed this annual report on Form 10-K of Leucadia National
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a- 14 and 15d- 14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
By: /s/ Ian M. Cumming
--------------------------
Ian M. Cumming
Chairman of the Board and
Chief Executive Officer
42
CERTIFICATIONS
I, Joseph S. Steinberg, certify that:
1. I have reviewed this annual report on Form 10-K of Leucadia National
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a- 14 and 15d- 14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
By:/s/ Joseph S. Steinberg
-----------------------
Joseph S. Steinberg
President
43
CERTIFICATIONS
I, Joseph A. Orlando, certify that:
1. I have reviewed this annual report on Form 10-K of Leucadia National
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a- 14 and 15d- 14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 28, 2003
By: /s/ Joseph A. Orlando
---------------------
Joseph A. Orlando
Chief Financial Officer
44
EXHIBIT INDEX
3.1 Restated Certificate of Incorporation (filed as Exhibit 5.1 to the
Company's Current Report on Form 8-K dated July 14, 1993). *
3.2 Certificate of Amendment of the Certificate of Incorporation dated
as of December 23, 2002.
3.3 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 (filed as Exhibit 10.8 to the Company's 2001 10-K).*
- ------------------------------------------
* Incorporated by reference
45
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 Company's 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
Company's 1993 Form 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 (filed as Exhibit 10.19 to the 2001 10-K).*
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 (filed as Exhibit 10.21 to the 2001 10-K).*
- ------------------------------------------
* Incorporated by reference
46
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).*
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 Company's Current Report on
Form 8-K dated August 27, 2001).*
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 (filed as Exhibit 10.28 to the
2001 10-K).*
10.29 Deferred Compensation Agreement between the Company and Mark
Hornstein dated as of December 27, 2001 (filed as Exhibit 10.29 to
the 2001 10-K).*
10.30 Settlement Agreement dated as of July 26, 2002, by and among The
Williams Companies Inc. ("TWC"), Williams Communications Group,
Inc. ("WCG"), CG Austria, Inc., the official committee of
unsecured creditors and the Company (filed as Exhibit 99.2 to the
WCG July 31, 2002 8-K).*
10.31 Investment Agreement, dated as of July 26, 2002, by and among the
Company, WCG and, for purposes of Section 7.4 only, Williams
Communications, LLC ("WCL") (filed as Exhibit 99.4 to the WCG July
31, 2002 8-K). *
10.32 First Amendment, made as of September 30, 2002, to the Investment
Agreement, dated as of July 26, 2002, by and among the Company,
WCG and WCL (filed as Exhibit 99.4 to the WilTel October 24, 2002
8-K). *
10.33 Second Amendment, made as of October 15, 2002, to the Investment
Agreement, dated as of July 26, 2002, as amended on September 30,
2002, by and among the Company, WCG and WCL (filed as Exhibit 99.5
to the WilTel October 24, 2002 8-K). *
- ------------------------------------------
* Incorporated by reference
47
10.34 Purchase and Sale Agreement, dated as of July 26, 2002, by and
between TWC and the Company (filed as Exhibit 99.5 to the
Company's Current Report on Form 8-K dated July 31, 2002).*
10.35 Amendment, made as of October 15, 2002, to the Purchase and Sale
Agreement, dated as of July 26, 2002, by and among the Company and
TWC (filed as Exhibit 99.2 to the WilTel October 24, 2002 8-K). *
10.36 Escrow Agreement, dated as of October 15, 2002, among the Company,
TWC, WilTel and The Bank of New York, as Escrow Agent (filed as
Exhibit 99.3 to the WilTel October 24, 2002 8-K). *
10.37 Share Purchase Agreement, dated April 17, 2002, between LUK Fidei
L.L.C and Hampton Trust PLC.
10.38 Reiterative Share Purchase Agreement, dated June 4, 2002, among
Savits AB Private, Hampton Trust Holding (Europe) SA, John C.
Jones and Herald Centruy Consolidated SA.
10.39 Stock Purchase Agreement, dated as of October 21, 2002, between
HomeFed Corporation ("HomeFed") and the Company (filed as Exhibit
10.1 to the Current Report on Form 8-K of HomeFed dated October
22, 2002). *
10.40 Second Amended and Restated Berkadia LLC Operating Agreement
dated December 2, 2002, by and among BH Finance LLC and WMAC
Investment Corporation.
10.41 Subscription Agreement made and entered into as of December 23,
2002 by and among the Company and each of the entities named in
Schedule I thereto.
10.42 Deferred Compensation Agreement between the Company and Mark
Hornstein dated as of December 26, 2002.
21 Subsidiaries of the registrant.
23.1 Consent of PricewaterhouseCoopers LLP 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), Form S-8 (File No. 333-51494) and Form S-4
(File No. 333-86018).
23.2 Independent Auditors' Consent from PricewaterhouseCoopers,
with respect to the inclusion in this Annual Report on Form 10-K
the financial statements of Olympus Re Holdings, Ltd. 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), Form S-8 (No. 333-51494) and Form S-4 (No.333-86018).
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), Form
S-8 (No. 333-51494) and Form S-4 (No. 333-86018).
- ------------------------------------------
* Incorporated by reference
48
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.
(d) Financial statement schedules.
-----------------------------
(1) Berkadia LLC financial statements as of December 31, 2002
and 2001 and for the year ended December 31, 2002 and for
the period from inception, February 26, 2001, to December
31, 2001.
(2) Olympus Re Holdings, Ltd. combined financial statements as
of December 31, 2002 and 2001 and for the year ended
December 31, 2002 and for the period from date of
incorporation, December 3, 2001 to December 31, 2001.
49
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 15(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, 2002 and 2001, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2002, 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 15(a)(1)(2) of this Form 10-K,
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
These financial statements and financial statement schedule are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatements. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
New York, New York
March 12, 2003
F-1
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
(Dollars in thousands, except par value)
2002 2001
---- ----
ASSETS
- ------
Investments:
Available for sale (aggregate cost of $484,571 and $579,342) $ 569,861 $ 626,584
Trading securities (aggregate cost of $49,888 and $68,547) 48,036 63,850
Held to maturity (aggregate fair value of $766 and $1,665) 768 1,666
Other investments, including accrued interest income 6,206 14,949
---------- ----------
Total investments 624,871 707,049
Cash and cash equivalents 418,600 373,222
Trade, notes and other receivables, net 407,422 596,229
Prepaids and other assets 187,046 227,709
Property, equipment and leasehold improvements, net 166,207 162,158
Investments in associated companies:
WilTel Communications Group, Inc. 340,551 --
Other associated companies 397,081 358,761
Net assets of discontinued operations -- 43,959
---------- ----------
Total $2,541,778 $2,469,087
========== ==========
LIABILITIES
- -----------
Customer banking deposits $ 392,904 $ 476,495
Trade payables and expense accruals 77,394 74,988
Other liabilities 140,586 215,689
Income taxes payable 38,231 124,692
Deferred tax liability 16,556 17,051
Debt, including current maturities 233,073 252,279
---------- ----------
Total liabilities 898,744 1,161,194
---------- ----------
Commitments and contingencies
Minority interest 10,309 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
- --------------------
Series A Non-Voting Convertible Preferred Stock 47,507 --
Common shares, par value $1 per share, authorized 150,000,000 shares;
58,268,572 and 55,318,257 shares issued and outstanding, after deducting
60,213,299 and 63,117,584 shares held in treasury 58,269 55,318
Additional paid-in capital 154,260 54,791
Accumulated other comprehensive income 56,025 14,662
Retained earnings 1,218,464 1,070,682
---------- ----------
Total shareholders' equity 1,534,525 1,195,453
---------- ----------
Total $2,541,778 $2,469,087
========== ==========
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, 2002, 2001 and 2000
(In thousands, except per share amounts)
2002 2001 2000
---- ---- ----
REVENUES:
- ---------
Manufacturing $ 50,744 $ 53,667 $ 65,019
Finance 87,812 113,422 89,007
Investment and other income 140,315 178,622 214,418
Net securities gains (losses) (37,066) 28,450 124,964
--------- --------- ---------
241,805 374,161 493,408
--------- --------- ---------
EXPENSES:
- ---------
Manufacturing cost of goods sold 33,963 36,803 40,650
Interest 33,547 47,763 48,109
Salaries 41,814 42,611 48,815
Selling, general and other expenses 174,006 173,902 154,531
--------- --------- ---------
283,330 301,079 292,105
--------- --------- ---------
Income (loss) from continuing operations before income taxes, minority
expense of trust preferred securities and equity in income (losses) of
associated companies (41,525) 73,082 201,303
--------- --------- ---------
Income tax (benefit) provision:
Current (116,817) 30,362 39,898
Deferred (28,048) (41,703) 28,318
--------- --------- ---------
(144,865) (11,341) 68,216
--------- --------- ---------
Income from continuing operations before minority expense of trust preferred
securities and equity in income (losses) of associated companies 103,340 84,423 133,087
Minority expense of trust preferred securities, net of taxes (5,521) (5,521) (5,521)
Equity in income (losses) of associated companies, net of taxes 54,712 (15,974) 19,040
--------- --------- ---------
Income from continuing operations 152,531 62,928 146,606
Income (loss) from discontinued operations, net of taxes 4,580 (39,742) (30,598)
Gain (loss) on disposal of discontinued operations, net of taxes 4,512 (31,105) --
--------- --------- ---------
Income (loss) before cumulative effect of a change in accounting principle 161,623 (7,919) 116,008
Cumulative effect of a change in accounting principle -- 411 --
--------- --------- ---------
Net income (loss) $ 161,623 $ (7,508) $ 116,008
========= ========= =========
Basic earnings (loss) per common share:
Income from continuing operations $ 2.74 $ 1.13 $ 2.64
Income (loss) from discontinued operations .08 (.72) (.55)
Gain (loss) on disposal of discontinued operations .08 (.56) --
Cumulative effect of a change in accounting principle -- .01 --
--------- --------- ---------
Net income (loss) $ 2.90 $ (.14) $ 2.09
========= ========= =========
Diluted earnings (loss) per common share:
Income from continuing operations $ 2.72 $ 1.13 $ 2.64
Income (loss) from discontinued operations .08 (.72) (.55)
Gain (loss) on disposal of discontinued operations .08 (.56) --
Cumulative effect of a change in accounting principle -- .01 --
--------- --------- ---------
Net income (loss) $ 2.88 $ (.14) $ 2.09
========= ========= =========
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, 2002, 2001 and 2000
(In thousands)
2002 2001 2000
---- ---- ----
Net cash flows from operating activities:
- -----------------------------------------
Net income (loss) $ 161,623 $ (7,508) $ 116,008
Adjustments to reconcile net income (loss) to net cash provided by (used for)
operations:
Cumulative effect of a change in accounting principle -- (411) --
(Benefit) provision for deferred income taxes (28,048) (35,291) 28,318
Depreciation and amortization of property, equipment and leasehold improvements 18,714 17,476 15,903
Other amortization (primarily related to investments) (2,517) (14,108) (2,838)
Provision for doubtful accounts 36,248 43,263 30,320
Net securities (gains) losses 37,066 (28,450) (124,964)
Equity in (income) losses of associated companies (54,712) 15,974 (19,040)
(Gain) on disposal of real estate, property and equipment, and other assets (35,051) (48,407) (65,154)
(Gain) loss on disposal of discontinued operations (4,512) 31,105 --
Investments classified as trading, net 48,990 (6,675) (3,978)
Net change in:
Trade and other receivables 10,681 574 (10,617)
Prepaids and other assets (1,021) (3,055) (3,039)
Trade payables and expense accruals 11,936 (34,940) (54,111)
Other liabilities (4,243) (1,925) 12,824
Income taxes payable (137,327) (13,180) (8,908)
Other 2,934 6,941 9,753
Net change in net assets of discontinued operations (5,384) 63,982 53,039
------------- ----------- ----------
Net cash provided by (used for) operating activities 55,377 (14,635) (26,484)
------------- ----------- ----------
Net cash flows from investing activities:
- -----------------------------------------
Acquisition of real estate, property, equipment and leasehold improvements (37,854) (51,920) (83,119)
Proceeds from disposals of real estate, property and equipment, and other assets 108,146 187,629 221,909
Proceeds from disposal of discontinued operations, net of expenses 66,241 -- --
Reduction in cash related to sale of subsidiary, net of cash proceeds from sale (18,979) -- --
Advances on loan receivables (81,650) (262,388) (355,604)
Principal collections on loan receivables 174,718 186,626 148,259
Advances on notes receivables (2,390) (9,593) (30,864)
Collections on notes receivables 4,373 39,790 266,954
Investments in associated companies (375,307) (186,782) (108,600)
Distributions from associated companies 43,807 123,871 19,784
Purchases of investments (other than short-term) (1,143,361) (1,014,015) (769,194)
Proceeds from maturities of investments 657,487 696,340 68,688
Proceeds from sales of investments 548,249 201,840 898,842
------------- ----------- ----------
Net cash (used for) provided by investing activities (56,520) (88,602) 277,055
------------- ----------- ----------
(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, 2002, 2001 and 2000
(In thousands)
2002 2001 2000
---- ---- ----
Net cash flows from financing activities:
- -----------------------------------------
Net change in short-term borrowings $ -- $ -- $ (75,500)
Net change in customer banking deposits (82,351) (45,928) 192,512
Issuance of long-term debt, net of issuance costs 6,145 71,496 105,850
Reduction of long-term debt (13,265) (10,555) (113,114)
Issuance of convertible preferred shares 47,507 -- --
Issuance of common shares 102,535 517 --
Purchase of common shares for treasury (115) (45) (32,094)
Dividends paid (13,841) (13,829) (13,824)
---------- ---------- ---------
Net cash provided by financing activities 46,615 1,656 63,830
---------- ---------- ---------
Effect of foreign exchange rate changes on cash (94) (564) (51)
---------- ---------- ---------
Net increase (decrease) in cash and cash equivalents 45,378 (102,145) 314,350
Cash and cash equivalents at January 1, 373,222 475,367 161,017
---------- ---------- ---------
Cash and cash equivalents at December 31, $ 418,600 $ 373,222 $ 475,367
========== ========== =========
Supplemental disclosures of cash flow information:
- --------------------------------------------------
Cash paid during the year for:
Interest $ 34,681 $ 51,232 $ 44,213
Income tax payments, net of refunds $ 17,314 $ 11,885 $ 24,774
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, 2002, 2001 and 2000
(In thousands, except par value and per share amounts)
Series A
Non-Voting Common Accumulated
Convertible Shares Additional Other
Preferred $1 Par Paid-In Comprehensive Retained
Stock Value Capital Income (Loss) Earnings Total
---------- -------- ---------- ------------- -------- -----
Balance, January 1, 2000 $ -- $56,802 $ 84,929 $(9,578) $ 989,835 $1,121,988
----------
Comprehensive income:
Net change in unrealized gain (loss)
on investments, 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
----------
Comprehensive income:
Net change in unrealized gain (loss)
on investments, net of taxes of $14,215 26,331 26,331
Net change in unrealized foreign exchange
gain (loss), net of taxes of $1,691 16,375 16,375
Net change in unrealized gain (loss) on
derivative instruments, net of taxes of $724 (1,343) (1,343)
Net income 161,623 161,623
----------
Comprehensive income 202,986
----------
Issuance of convertible preferred shares 47,507 47,507
Issuance of common shares 2,908 98,585 101,493
Exercise of options to purchase common shares 46 996 1,042
Purchase of stock for treasury (3) (112) (115)
Dividends ($.25 per common share) (13,841) (13,841)
------- ------- ------- ------- ---------- ----------
Balance, December 31, 2002 $47,507 $58,269 $154,260 $56,025 $1,218,464 $1,534,525
======= ======= ======== ======= ========== ==========
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 telecommunications, banking and lending, manufacturing, real estate
activities, winery operations, and property and casualty reinsurance,
principally in markets in the United States, and development of a copper mine in
Spain.
The Company's telecommunications operations are conducted through its 47.4%
interest in WilTel Communications Group, Inc. ("WilTel"), a public company
(traded on the Nasdaq National Market, Symbol: WTEL) that owns or leases and
operates a nationwide inter-city fiber-optic network, extended locally and
globally, to provide Internet, data, voice and video services.
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. As a result of increased loss experience and declining profitability
in its auto lending program, the Company stopped originating new subprime
automobile loans in September 2001. Due to current economic conditions,
portfolio performance and the relatively small size of the Company's other
consumer loan portfolios and target markets, in January 2003 the Company decided
to stop originating all consumer loans. The Company is considering its
alternatives for its banking and lending operations, which could include selling
or liquidating some or all of its loan portfolios, and outsourcing certain
functions.
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 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 two wineries, which produce and sell
wines in the luxury segment of the premium table wine market.
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.
During the second quarter of 2002, the Company sold its interest in Compagnie
Fonciere FIDEI ("Fidei"), a French real estate company and, accordingly, has
classified its foreign real estate 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.
F-7
2. Significant Accounting Policies, continued:
-------------------------------
The allowance for loan losses is established through a provision for loan losses
charged to expense. The allowance for loan losses is an amount that the Company
believes will be adequate to absorb probable losses inherent in its portfolio
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 cars
affect the supply of used cars and the value the Company may realize upon sale
of repossessed automobiles. The allowance for loan losses is based on numerous
judgments and assumptions and actual loss experience may be different.
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. The Company also records
reserves for contingent tax liabilities related to potential 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. Since the Company does not expect that
Berkadia will suffer losses resulting in the Company having to fund its
guarantee obligation, no reserve has been recorded.
As of December 31, 2002, the carrying amount of the Company's investment in the
mining properties of MK Gold was approximately $59,300,000. 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, obtaining both debt and equity financing
for the project, engineering and construction. The market price of copper has
been depressed over the past couple of years, reflecting generally weak global
economic conditions. The amount of financing that 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, the operating cost of the mine and the
capital cost to bring the mine into production 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.
(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 2002 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
$267,900,000 and $286,100,000 at December 31, 2002 and 2001, respectively.
F-8
2. Significant Accounting Policies, continued:
-------------------------------
(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.
Held to maturity investments are made with the intention of holding such
securities to maturity, which the Company has the ability to do. Estimated fair
values are principally based on quoted market prices.
Investments with an impairment in value considered to be other than temporary
are written down to estimated net realizable values. The writedowns are included
in "Net securities gains (losses)" in the Consolidated Statements of Operations.
The cost of securities sold is based on average cost.
(e) Property, Equipment and Leasehold Improvements: Property, equipment and
----------------------------------------------
leasehold improvements are stated at cost, net of accumulated depreciation and
amortization ($117,500,000 and $112,600,000 at December 31, 2002 and 2001,
respectively). Depreciation and amortization are provided principally on the
straight-line method over the estimated useful lives of the assets or, if less,
the term of the underlying lease.
(f) 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.
(g) 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 to be more likely than not to be
realized.
(h) 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 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 net
pre-tax charge that the Company expects to reclassify during the next twelve
months to investment and other income from the transition adjustment that was
recorded in accumulated other comprehensive income is not material. 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 $1,700,000
and $2,300,000 for the years ended December 31, 2002 and 2001, respectively. Net
unrealized losses on derivative instruments were $1,800,000 and $400,000 at
December 31, 2002 and 2001, respectively.
F-9
2. Significant Accounting Policies, continued:
-------------------------------
(i) Translation of Foreign Currency: Foreign currency denominated investments
-------------------------------
and financial statements are translated into U.S. dollars at current exchange
rates, except that revenues and expenses are translated at average exchange
rates during each reporting period; resulting translation adjustments are
reported as a component of shareholders' equity. Net foreign exchange gains were
$2,500,000 for 2002, $2,100,000 for 2000 and not material for 2001. Net
unrealized foreign exchange losses were $200,000 and $16,600,000 at December 31,
2002 and 2001, respectively.
(j) Stock-Based Compensation: 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 2002, 2001 and 2000.
(k) Recently Issued Accounting Standards: In July 2002, the Financial Accounting
------------------------------------
Standards Board ("FASB") issued Statement of Financial Accounting Standards No.
146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS
146"), which is effective for exit or disposal activities initiated after
December 31, 2002. SFAS 146 addresses issues regarding the recognition,
measurement and reporting of costs associated with exit and disposal activities,
including restructuring activities. SFAS 146 requires a liability be recognized
at fair value for costs associated with exit or disposal activities only when
the liability is incurred as opposed to at the time the Company commits to an
exit plan as permitted under Emerging Issues Task Force Issue No. 94-3. In
November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), which
requires a guarantor for certain guarantees to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and initial measurement
provisions of FIN 45 are applied on a prospective basis to guarantees issued or
modified after December 31, 2002. In addition, FIN 45 modified the disclosure
requirements for such guarantees effective for interim or annual periods ending
after December 15, 2002; the Company has adopted these disclosure requirements.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), which
addresses consolidation of variable interest entities, which are entities in
which equity investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. FIN 46 is effective immediately to variable interest entities
created after January 31, 2003, and to variable interest entities in which an
enterprise obtains an interest after that date. FIN 46 applies in the first
fiscal year or interim period beginning after June 15, 2003, to variable
interest entities in which an enterprise holds a variable interest that it
acquired before February 1, 2003. FIN 46 may be applied prospectively with a
cumulative effect adjustment as of the date on which it is first applied or by
restating previously issued financial statements with a cumulative effect
adjustment as of the beginning of the first year restated. The Company is
reviewing the impact of the implementation of SFAS 146, the initial recognition
and measurement provisions of FIN 45, and the implementation of FIN 46.
3. Investments in Associated Companies:
-----------------------------------
The Company has investments in several Associated Companies. The Company records
its portion of the earnings of certain companies based on fiscal periods ended
up to three months prior to the end of the Company's reporting period. The
amounts reflected as equity in income (losses) of associated companies in the
consolidated statements of operations are net of income tax provisions
(benefits) of $36,700,000, $(8,600,000) and $10,300,000 for the years ended
December 31, 2002, 2001 and 2000, respectively.
F-10
3. 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 results
of operations for the three years ended December 31, 2002, except for Berkadia
and WilTel which are separately summarized below. (Amounts are in thousands.)
2002 2001
---- ----
Assets $1,597,400 $1,317,200
Liabilities 584,500 429,400
---------- ----------
Net assets $1,012,900 $ 887,800
========== ==========
The Company's portion of the reported net assets $ 387,600 $ 340,400
========== ==========
2002 2001 2000
---- ---- ----
Total revenues $ 479,200 $ 277,700 $ 233,500
Income from continuing operations before extraordinary items $ 133,400 $ 79,900 $ 42,900
Net income $ 136,600 $ 96,700 $ 42,900
The Company's equity in net income $ 39,200 $ 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 aggregate net investment
of $397,100,000.
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, 2002, 2001 and 2000, the Company
recorded $15,200,000, $27,100,000 and $17,300,000, respectively, of pre-tax
income from this investment under the equity method of accounting. These
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. ("Olympus"), a newly formed
Bermuda reinsurance company primarily engaged in the property excess, marine and
aviation reinsurance business. For the year ended December 31, 2002, the Company
recorded $24,100,000 of pre-tax income from this investment under the equity
method of accounting.
In December 2001, the Company invested $50,000,000 in a limited partnership that
invests primarily in securities and other obligations of highly leveraged,
distressed and out of favor companies. For the year ended December 31, 2002, the
Company recorded $4,500,000 of pre-tax losses from this investment under the
equity method of accounting.
In October 2002, the Company sold one of its real estate subsidiaries, CDS
Holding Corporation ("CDS"), to HomeFed Corporation ("HomeFed") for a purchase
price of $25,000,000, consisting of $1,000,000 in cash and 24,742,268 shares of
HomeFed's common stock, which represents approximately 30.3% of HomeFed's
outstanding common stock. At December 31, 2002, the deferred gain on this sale
was $12,100,000 which will be recognized into income as CDS's principal asset,
the real estate project known as San Elijo Hills, is developed and sold. The
Company is accounting for its investment in HomeFed under the equity method of
accounting.
F-11
3. Investments in Associated Companies, continued:
-----------------------------------
In November 2002, the Company sold its approximately 40% equity interest in
certain thoroughbred racetrack businesses to a third party for net proceeds of
$28,000,000. The sale resulted in a pre-tax gain of $14,300,000. As part of the
transaction, the Company has an approximately 15% profits interest in a joint
venture formed with the buyer of the businesses to pursue the potential
development and management of gaming ventures in Maryland, including slot
machines and video lottery terminals (if authorized by state law). The Company
has no funding obligations for this joint venture.
In August 2001, Berkadia LLC, an entity jointly owned by the Company and
Berkshire Hathaway Inc. loaned $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 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. 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 March 7, 2003, principal
payments have reduced the amount outstanding under the Berkadia Loan and
Berkadia's financing to $1,525,000,000.
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, for which the Company receives an annual fee of
$8,000,000.
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. For 2002 and the
2001 period, the Company recorded income of $6,600,000 and $3,900,000,
respectively, representing 10% of the net interest spread on the Berkadia Loan.
All of this income has been distributed to the Company.
In August 2001, 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 was 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 was 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 was far in excess
of the $17,600,000 aggregate book net worth of FINOVA on the effective date of
the Plan, and was 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.
F-12
3. Investments in Associated Companies, continued:
-----------------------------------
The allocation of $188,800,000 to the investment in the common stock of FINOVA,
plus the $120,000,000 of cash fees received, were recorded and reflected as a
discount from the face amount of the Berkadia Loan. The discount is being
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 was suspended once the carrying amount of
Berkadia's equity interest in FINOVA was reduced to zero during 2001.
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. This non-cash loss recorded by
Berkadia is being 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 $152,500,000 as of March 7, 2003. For the
year ended December 31, 2002 and for the period from the effective date of the
Plan to December 31, 2001, the Company's equity in the income (loss) of Berkadia
consists of the following (in thousands):
2002 2001
---- ----
Net interest spread on the Berkadia Loan - 10% of total $ 6,600 $ 3,900
Amortization of Berkadia Loan discount related to cash fees -
50% of total 22,900 7,800
Amortization of Berkadia Loan discount related to FINOVA stock -
50% of total 36,100 12,300
Share of FINOVA loss under equity method - 50% of total -- (94,400)
------- --------
Equity in income (loss) of associated companies - Berkadia $65,600 $(70,400)
======= ========
The loss recorded by the Company related to its share of Berkadia's equity
method loss in FINOVA in 2001 is a non-cash loss that is being 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 was
negative $72,100,000 and $129,000,000, as of December 31, 2002 and 2001,
respectively, which is included in "Other liabilities" in the consolidated
balance sheets. The negative carrying amounts are 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, partially offset by the Company's
share of Berkadia's income related to 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 is being amortized to income over the term of the
loan.
F-13
3. Investments in Associated Companies, continued:
-----------------------------------
The following table provides certain summarized data with respect to Berkadia at
December 31, 2002 and 2001 and for the year ended December 31, 2002 and for the
period from the effective date of the Plan through December 31, 2001. (Amounts
are in thousands.)
2002 2001
---- ----
Assets $2,030,700 $4,646,700
Liabilities 2,177,700 4,908,500
---------- ----------
Net assets $ (147,000) $ (261,800)
========== ==========
Total revenues $ 245,200 $ (52,100)
Income (loss) from continuing operations before extraordinary items
and cumulative effect of a change in accounting principle $ 180,900 $ (110,100)
Net income (loss) $ 180,900 $ (110,100)
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 year ended December 31, 2002, the effect of
this acceleration was to increase the Company's equity in income of Berkadia by
approximately $23,300,000. Loan repayments from FINOVA are unlikely to continue
at the pace experienced to date.
In December 2002, the Company completed the acquisition of 44% of the
outstanding equity of WilTel for an aggregate purchase price of $333,500,000,
including expenses. The WilTel stock was acquired by the Company under the
chapter 11 restructuring plan of Williams Communications Group, Inc. In October
2002, in a private transaction, the Company purchased 1,700,000 shares of WilTel
common stock, on a when issued basis, for $20,400,000. Together, these
transactions resulted in the Company acquiring 47.4% of the outstanding common
stock of WilTel. For the period from acquisition through December 31, 2002, the
Company recorded $13,400,000 of pre-tax losses from this investment under the
equity method of accounting. The book value of the Company's investment in
WilTel was $340,600,000 at December 31, 2002. The Company has appointed four
members (including the Company's Chairman and President) to the newly
constituted nine member board of directors of WilTel and has entered into a
stockholders agreement with WilTel pursuant to which the Company has agreed to
certain restrictions on its ability to acquire or sell WilTel stock. During the
two years subsequent to the effective date of the chapter 11 restructuring plan,
the Company may not sell an amount of WilTel shares greater than 15% of the
total outstanding WilTel common shares.
The following table provides certain summarized data with respect to WilTel at
December 31, 2002 and for the period from acquisition through December 31, 2002.
(Amounts are in thousands.)
Assets $2,062,300
Liabilities 1,372,600
----------
Net assets $ 689,700
==========
Total revenues $ 191,700
Loss from continuing operations before extraordinary items $ (61,000)
Net loss $ (61,000)
The Company's equity in net loss $ (13,400)
4. 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 only accepts new business that it is
obligated to accept by contract or New York insurance law; it does not engage in
F-14
4. Discontinued Operations, continued:
-----------------------
any other business activities except for its claims runoff operations. The
voluntary liquidation is expected to be substantially complete by 2005. In
December 2001, the Company wrote 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 indicated that the Company is
unlikely to realize any value once the liquidation is complete. Accordingly, the
Company recorded a $31,100,000 after-tax charge (net of taxes of $16,800,000) as
a 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.
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 (net of income tax expense
of $2,400,000) for the year ended December 31, 2002, and an increase to
shareholders' equity of $12,100,000 as of December 31, 2002. The Euro
denominated sale proceeds were not converted into U.S. dollars immediately upon
receipt. The Company entered into a participating currency derivative, which
expired in September 2002. Upon expiration, net of the premium paid to purchase
the contract, the Company received $67,900,000 in exchange for 70,000,000 Euros
and recognized a foreign exchange gain of $2,000,000, which is included in
investment and other income for the year ended December 31, 2002.
At December 31, 2001, the components of net assets of discontinued operations
are as follows (in thousands):
Investments $ 296,215
Cash and cash equivalents 129,163
Reinsurance and other receivables, net 106,573
Prepaids and other assets 43,831
Property, equipment and leasehold improvements, net 15,472
----------
Total assets 591,254
----------
Trade payables and expense accruals 20,044
Other liabilities 24,474
Policy reserves 345,989
Unearned premiums 16,124
Debt, including current maturities 90,997
----------
Total liabilities 497,628
----------
Minority interest 1,813
----------
91,813
Reserve for anticipated loss on liquidation (47,854)
----------
Net assets of discontinued operations $ 43,959
==========
F-15
4. Discontinued Operations, continued:
-----------------------
A summary of the results of discontinued operations is as follows for the three
year period ended December 31, 2002 (in thousands):
2002 2001 2000
---- ---- ----
Revenues:
Insurance revenues and commissions $ -- $ 64,078 $108,494
Investment and other income 12,904 46,921 87,566
Net securities gains (losses) (364) 12,419 (1,739)
-------- --------- --------
12,540 123,418 194,321
-------- --------- --------
Expenses:
Provision for insurance losses and policy benefits -- 125,984 150,066
Amortization of deferred policy acquisition costs -- 16,965 26,289
Interest 2,163 7,437 9,604
Salaries 505 6,744 10,167
Selling, general and other expenses 2,721 24,743 33,954
-------- --------- --------
5,389 181,873 230,080
-------- --------- --------
Income (loss) before income taxes 7,151 (58,455) (35,759)
Income tax provision (benefit) 2,571 (18,713) (5,161)
-------- --------- --------
Income (loss) from discontinued operations, net of taxes $ 4,580 $ (39,742) $(30,598)
======== ========= ========
5. 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, 2002 and 2001 are as follows (in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ----------- ---------- --------
Held to maturity:
2002
- ----
Bonds and notes:
United States Government agencies and authorities $ 66 $ -- $ 2 $ 64
States, municipalities and political subdivisions 7 -- -- 7
Other fixed maturities 695 -- -- 695
------- ----- ---- ------
$ 768 $ -- $ 2 $ 766
======= ===== ==== ======
2001
- ----
Bonds and notes - States, municipalities and political
subdivisions $ 501 $ -- $ 1 $ 500
Other fixed maturities 1,165 -- -- 1,165
------- ----- ---- ------
$ 1,666 $ -- $ 1 $1,665
======= ===== ==== ======
F-16
5. Investments, continued:
-----------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- --------- ----------
Available for sale:
2002
- ----
Bonds and notes:
United States Government agencies and authorities $195,285 $ 837 $ 206 $195,916
States, municipalities and political subdivisions 8,530 21 388 8,163
Foreign governments 4,492 248 -- 4,740
All other corporates 146,175 23,618 7,336 162,457
Other fixed maturities 14,129 -- -- 14,129
-------- -------- ------- --------
Total fixed maturities 368,611 24,724 7,930 385,405
-------- -------- ------- --------
Equity securities:
Preferred stocks 4,103 304 -- 4,407
Common stocks:
Banks, trusts and insurance companies 93,373 60,745 10,192 143,926
Industrial, miscellaneous and all other 18,484 18,878 1,239 36,123
-------- -------- ------- --------
Total equity securities 115,960 79,927 11,431 184,456
-------- -------- ------- --------
$484,571 $104,651 $19,361 $569,861
======== ======== ======= ========
2001
- ----
Bonds and notes:
United States Government agencies and authorities $285,272 $ 1,210 $ 24 $286,458
States, municipalities and political subdivisions 11,862 13 48 11,827
Foreign governments 4,475 238 -- 4,713
Public utilities 660 2 -- 662
All other corporates 118,281 13,073 21,266 110,088
Other fixed maturities 25,171 -- -- 25,171
-------- -------- ------- --------
Total fixed maturities 445,721 14,536 21,338 438,919
-------- -------- ------- --------
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
-------- -------- ------- --------
$579,342 $ 81,285 $34,043 $626,584
======== ======== ======= ========
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 4.5% 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, 2002 and 2001, the Company's
investment in WMIG, which is reflected in investments available for sale, had a
market value of $121,100,000 and $130,500,000, respectively.
F-17
5. Investments, continued:
-----------
At December 31, 2002, investments also included a publicly traded common stock
equity interest of 11.1% in Carmike Cinemas, Inc.
Net unrealized gains on investments were $58,000,000, $31,700,000 and
$13,800,000 at December 31, 2002, 2001 and 2000, respectively. Reclassification
adjustments included in comprehensive income for the three year period ended
December 31, 2002 are as follows (in thousands):
2002 2001 2000
---- ---- ----
Unrealized holding gains arising during the period, net of
tax provision of $12,558, $12,665 and $8,735 $ 23,253 $ 23,653 $ 15,748
Less: reclassification adjustment for (gains) losses included in net
income, net of tax provision (benefit) of $(1,657), $3,128 and $(343) 3,078 (5,803) 638
--------- --------- --------
Net change in unrealized gain on investments, net of tax
provision of $14,215, $9,537 and $9,078 $ 26,331 $ 17,850 $ 16,386
========= ========= ========
The amortized cost and estimated fair value of investments classified as held to
maturity and as available for sale at December 31, 2002, 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 $ 695 $ 695 $134,728 $134,246
Due after one year through five years 66 64 91,349 101,537
Due after five years through ten years 7 7 42,876 47,272
Due after ten years -- -- 21,915 24,670
-------- -------- -------- --------
768 766 290,868 307,725
Mortgage-backed securities -- -- 77,743 77,680
-------- -------- -------- --------
$ 768 $ 766 $368,611 $385,405
======== ======== ======== ========
At December 31, 2002 and 2001, securities with book values aggregating
$1,400,000 and $1,500,000, respectively, were on deposit with various regulatory
authorities. Additionally, at December 31, 2002 and 2001, securities with book
values of $165,300,000 and $163,500,000, respectively, collateralized a letter
of credit issued in connection with the sale of the Colonial Penn Insurance
Company and securities with a book value of $4,800,000 at December 31, 2002
collateralized certain swap agreements.
F-18
5. Investments, continued:
-----------
Certain information with respect to trading securities at December 31, 2002 and
2001 is as follows (in thousands):
Amortized Estimated Carrying
Cost Fair Value Value
--------- ---------- --------
2002
- ----
Fixed maturities - corporate bonds and notes $ 45,225 $ 44,204 $ 44,204
Equity securities:
Preferred stocks 2,382 2,076 2,076
Common stocks - industrial, miscellaneous and all other 259 344 344
Other investments 2,022 1,412 1,412
-------- -------- ---------
Total trading securities $ 49,888 $ 48,036 $ 48,036
======== ======== =========
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
======== ======== =========
6. Trade, Notes and Other Receivables, Net:
---------------------------------------
A summary of trade, notes and other receivables, net at December 31, 2002 and
2001 is as follows (in thousands):
2002 2001
---- ----
Instalment loan receivables, net of unearned finance charges of
$1,614 and $3,748 (a) $ 373,604 $ 521,242
Receivables related to securities 4,430 30,835
Receivables relating to real estate activities 32,720 35,431
Other 29,399 45,039
--------- ---------
440,153 632,547
Allowance for doubtful accounts (32,731) (36,318)
--------- ---------
$ 407,422 $ 596,229
========= =========
(a) Contractual maturities of instalment loan receivables at December 31, 2002
were as follows (in thousands): 2003 - $80,200; 2004 - $75,900; 2005 - $55,800;
2006 - $25,400; and 2007 and thereafter - $136,300. 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.
7. Prepaids and Other Assets:
--------------------------
At December 31, 2002 and 2001, prepaids and other assets included real estate
assets, net, of $85,200,000 and $145,800,000, respectively. Prepaids and other
assets at December 31, 2002 and 2001 also included $59,300,000 and $51,100,000,
respectively, of mining properties, net, related to MK Gold.
F-19
8. Trade Payables, Expense Accruals and Other Liabilities:
-------------------------------------------------------
A summary of trade payables and expense accruals and other liabilities at
December 31, 2002 and 2001 is as follows (in thousands):
2002 2001
---- ----
Trade Payables and Expense Accruals:
Payables related to securities $ 26,379 $ 20,548
Trade payables 9,043 14,697
Accrued compensation, severance and other employee benefits 21,684 16,621
Accrued interest payable 3,652 3,620
Other 16,636 19,502
--------- ---------
$ 77,394 $ 74,988
========= =========
Other Liabilities:
Investment in Berkadia $ 72,106 $ 129,043
Postretirement and postemployment benefits 9,228 9,857
Liabilities related to real estate activities 18,948 36,441
Other 40,304 40,348
--------- ---------
$ 140,586 $ 215,689
========= =========
9. Indebtedness:
------------
The principal amount, stated interest rate and maturity of debt outstanding at
December 31, 2002 and 2001 are as follows (dollars in thousands):
2002 2001
---- ----
Senior Notes:
Bank credit facility $ -- $ --
7 3/4% Senior Notes due 2013, less debt discount of $531 and $581 99,469 99,419
Industrial Revenue Bonds (with variable interest) 9,815 9,815
Aircraft financing 49,789 51,902
Other due 2003 through 2016 with a weighted average interest
rate of 7.97% 33,265 50,419
--------- ---------
192,338 211,555
--------- ---------
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
$42 and $53 21,634 21,623
--------- ---------
40,735 40,724
--------- ---------
$ 233,073 $ 252,279
========= =========
At December 31, 2002, the Company had an unsecured bank credit facility of
$152,500,000. In March 2003, the Company entered into a new $110,000,000
unsecured bank credit facility which bears interest based on the Eurocurrency
Rate or the prime rate and matures in 2006. At December 31, 2002, no amounts
were outstanding under this bank credit facility.
F-20
9. Indebtedness, continued:
------------
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 interest rate at December
31, 2002 was 2.6%. 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 (paid) received $(4,300,000) and $1,100,000 at December 31,
2002 and 2001, respectively, if the swap were terminated. 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 has financed the renovation of its Hawaiian hotel and has obtained
loan commitments totaling $25,000,000. At December 31, 2002 and 2001,
$24,900,000 and $18,900,000, respectively, was outstanding under this
non-recourse borrowing. This borrowing bears interest at a rate of 8.05% through
September 1, 2005, at which time the rate is adjusted based on the three year
treasury index to a new fixed rate through maturity. The borrowing matures in
six 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, 2002, cash dividends of approximately $534,500,000 would be
eligible to be paid under the most restrictive covenants.
Property, equipment and leasehold improvements of the manufacturing division
with a net book value of $7,100,000 are pledged as collateral for the Industrial
Revenue Bonds; and $99,100,000 of other assets (primarily property) are pledged
for other indebtedness aggregating $83,100,000.
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 $3,100,000 and
$7,300,000 at December 31, 2002 and 2001, respectively, on retirement of these
agreements. The LIBOR rate at December 31, 2002 was 1.4%. Changes in LIBOR
interest rates in the future will change the amounts to be received under the
agreements, as well as interest to be paid under the related variable debt
obligations.
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, 2007 are as follows (in thousands): 2003 - $3,600; 2004 -
$3,700; 2005 - $23,400; 2006 - $25,700; and 2007 - $14,200.
At December 31, 2002, customer banking deposits include $138,200,000 aggregate
amount of time deposits in denominations of $100,000 or more.
The weighted average interest rate on short-term borrowings (primarily customer
banking deposits) was 3.5% and 4.8% at December 31, 2002 and 2001, respectively.
F-21
10. 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.
11. 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 the three year period ended December 31, 2002,
the Company acquired 1,509,635 Common Shares at an average price of $21.37 per
Common Share. As a result, as of December 31, 2002, the Company is authorized to
repurchase 4,490,365 Common Shares.
In December 2002, the Company completed a private placement of approximately
$150,000,000 of equity securities, based on a common share price of $35.25, to
mutual fund clients of Franklin Mutual Advisers, LLC, including the funds
comprising the Franklin Mutual Series Funds. The Company issued 2,907,599 of the
Company's Common Shares and newly authorized Series A Non-Voting Convertible
Preferred Stock, that were converted into 1,347,720 Common Shares in March 2003.
The securities sold in the private placement represent 7.1% of the Company's
outstanding Common Shares at March 25, 2003.
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).
F-22
11. 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, 2002 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, 2000 -- $ -- -- 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
========= =========
Granted 312,500 $ 30.80
Exercised (46,030) $ 22.63
Cancelled (39,800) $ 24.15
---------
Balance at December 31, 2002 553,070 $ 27.22 81,545 578,050
========= ========= =========
The weighted-average fair value of the options granted was $7.91 per share for
2002, $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 30.3% for 2002, 29.7% for 2001 and 25.4%
for 2000; (2) risk-free interest rates of 3.5% for 2002, 4.9% for 2001 and 6.8%
for 2000; (3) expected lives of 3.7 years for 2002, 4.0 years for 2001 and 3.7
years for 2000; and (4) dividend yields of .8% for 2002 and 2001, and 1.1% for
2000.
The following table summarizes information about fixed stock options outstanding
at December 31, 2002:
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 - $22.81 244,070 3.3 years $22.64 77,545 $22.66
$30.74 301,000 5.5 years $30.74 3,000 $30.74
$33.14 4,000 3.4 years $33.14 1,000 $33.14
$35.23 4,000 4.4 years $35.23 -- $ --
At December 31, 2002 and 2001, 578,050 and 850,750, 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.
F-23
11. Common Shares, Stock Options and Preferred Shares, continued:
-------------------------------------------------
At December 31, 2002 and 2001, 5,999,990 and 6,000,000, respectively, of
preferred shares (redeemable and non-redeemable), par value $1 per share, were
authorized and not issued.
12. Net Securities Gains (Losses):
-----------------------------
The following summarizes net securities gains (losses) for each of the three
years in the period ended December 31, 2002 (in thousands):
2002 2001 2000
---- ---- ----
Net realized gains (losses) on securities $ (1,126) $ 28,138 $ 134,552
Writedown of investments (37,053) (a) (1,907) --
Net unrealized gains (losses) on trading securities 1,113 2,219 (9,588)
--------- -------- --------
$ (37,066) $ 28,450 $124,964
========= ======== ========
(a) Consists of a provision to write down investments in certain available for
sale securities and an equity investment in a non-public fund.
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
$649,000,000, $186,000,000 and $883,000,000 during 2002, 2001 and 2000,
respectively. Gross gains of $20,500,000, $15,100,000 and $123,700,000 and gross
losses of $52,600,000, $4,800,000 and $11,300,000 were realized on these sales
during 2002, 2001 and 2000, respectively.
13. Other Results of Operations Information:
---------------------------------------
Investment and other income for each of the three years in the period ended
December 31, 2002 consists of the following (in thousands):
2002 2001 2000
---- ---- ----
Interest on short-term investments $ 7,647 $ 14,187 $ 13,201
Interest on fixed maturities 17,604 28,075 19,184
Interest on notes receivable 5,903 3,005 16,462
Other investment income 8,300 14,817 19,481
Gains on sale and foreclosure of real estate and other assets,
net of costs 39,320 48,559 68,401
Rental income 7,635 14,891 12,685
MK Gold product and service income 4,841 7,299 17,402
Winery revenues 16,433 13,736 15,337
Prepayment penalty on promissory notes -- -- 7,500
Other 32,632 34,053 24,765
-------- -------- --------
$140,315 $178,622 $214,418
======== ======== ========
F-24
13. Other Results of Operations Information, continued:
---------------------------------------
Taxes, other than income or payroll, amounted to $3,900,000 for the year ended
December 31, 2002, $5,800,000 for the year ended December 31, 2001 and
$2,600,000 for the year ended December 31, 2000.
Advertising costs amounted to $1,400,000, $2,500,000 and $3,000,000 for the
years ended December 31, 2002, 2001 and 2000, respectively.
14. Income Taxes:
-------------
The principal components of the deferred tax liability at December 31, 2002 and
2001 are as follows (in thousands):
2002 2001
---- ----
Deferred Tax Asset:
Insurance reserves and unearned premiums $ 10,839 $ 16,731
Securities valuation reserves 45,714 48,490
Investment in WilTel 4,681 --
Other accrued liabilities 38,962 45,801
---------- ----------
100,196 111,022
Valuation allowance (54,232) (49,103)
---------- ----------
45,964 61,919
---------- ----------
Deferred Tax Liability:
Unrealized gains on investments (29,701) (17,585)
Depreciation (15,864) (7,209)
Intangible drilling costs (5,627) (5,615)
Other, net (11,328) (48,561)
---------- ----------
(62,520) (78,970)
---------- ----------
Net deferred tax liability $ (16,556) $ (17,051)
========== ==========
The valuation allowance principally relates to uncertainty as to the realization
of unrealized capital losses.
The provision (benefit) for income taxes for each of the three years in the
period ended December 31, 2002 was as follows (in thousands):
2002 2001 2000
---- ---- ----
State income taxes (currently payable) $ 750 $ 500 $ 1,113
Federal income taxes:
Current (117,617) 29,812 38,747
Deferred (28,048) (41,703) 28,318
Foreign income taxes (currently payable) 50 50 38
--------- --------- ---------
$(144,865) $ (11,341) $ 68,216
========= ========= =========
F-25
14. Income Taxes, continued:
------------
The table below reconciles the expected statutory federal income tax to the
actual income tax provision (benefit) (in thousands):
2002 2001 2000
---- ---- ----
Expected federal income tax $ (14,534) $ 25,579 $ 70,456
State income taxes, net of federal income tax benefit 488 325 723
Resolution of tax contingency (119,778) -- --
Recognition of additional tax benefits (9,360) (36,234) (1,597)
Other (1,681) (1,011) (1,366)
-------- -------- --------
Actual income tax provision (benefit) $(144,865) $(11,341) $ 68,216
========= ======== ========
Reflected above as recognition of additional tax benefits and resolution of tax
contingency are reductions to the Company's income tax provision for the
favorable resolution of certain federal income tax contingencies. The Internal
Revenue Service has completed its audit of the Company's consolidated federal
income tax returns for the years 1996 through 1999, without any material payment
required from the Company. The statue of limitations with respect to the years
1996, 1997 and 1998 expired on December 31, 2002, and the Company made the
adjustments reflected above.
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.
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.
15. 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 $1,600,000, $1,800,000 and
$1,600,000 for the years ended December 31, 2002, 2001 and 2000, 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
15. Pension Plan and Postretirement Benefits, continued:
-----------------------------------------
pension plans. A summary of activity with respect to the Company's defined
benefit pension plans for 2002 and 2001 is as follows (in thousands):
2002 2001
---- ----
Projected Benefit Obligation:
Projected benefit obligation at January 1, $ 52,705 $ 52,815
Interest cost (a) 3,548 3,726
Actuarial (gain) loss 2,672 1,895
Benefits paid (6,443) (5,731)
-------- --------
Projected benefit obligation at December 31, $ 52,482 $ 52,705
======== ========
Change in Plan Assets:
Fair value of plan assets at January 1, $ 48,760 $ 49,011
Actual return on plan assets 2,976 3,614
Employer contributions 728 1,987
Benefits paid (6,443) (5,731)
Administrative expenses (116) (121)
-------- --------
Fair value of plan assets at December 31, $ 45,905 $ 48,760
======== ========
Funded Status $ (6,577) $ (3,945)
Unrecognized prior service cost 56 58
Unrecognized net loss from experience differences and
assumption changes 9,813 6,824
-------- --------
Accrued pension asset $ 3,292 $ 2,937
======== ========
(a) Includes charges to expense of $1,200,000 and $1,300,000 for 2002 and 2001,
respectively, relating to discontinued operations obligations.
Pension expense related to the defined benefit pension plans charged to
operations included the following components (in thousands):
2002 2001 2000
---- ---- ----
Interest cost $ 2,361 $ 2,459 $2,517
Expected return on plan assets (1,947) (2,153) (2,218)
Actuarial loss 76 -- --
Amortization of prior service cost 3 3 3
------- ------- ------
Net pension expense $ 493 $ 309 $ 302
======= ======= ======
F-27
15. Pension Plan and Postretirement Benefits, continued:
----------------------------------------
The projected benefit obligation at December 31, 2002 and 2001 was determined
using an assumed discount rate of 6.5% and 7.0%, respectively, and the assumed
long-term rate of return on plan assets was 6.5% and 7.5% at December 31, 2002
and 2001, respectively.
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, 2002.
A summary of activity with respect to the Company's postretirement plans for
2002 and 2001 is as follows (in thousands):
2002 2001
---- ----
Accumulated postretirement benefit obligation at January 1, $ 5,536 $ 5,566
Interest cost 345 389
Contributions by plan participants 180 175
Actuarial loss 176 172
Benefits paid (796) (766)
Plan amendments (191) --
------- -------
Accumulated postretirement benefit obligation at December 31, 5,250 5,536
Unrecognized prior service cost 316 197
Unrecognized net actuarial gain 1,923 2,276
------- -------
Accrued postretirement benefit obligation $ 7,489 $ 8,009
======= =======
The discount rate used in determining the accumulated postretirement benefit
obligation was 6.5% and 7.0% at December 31, 2002 and 2001, respectively. The
assumed health care cost trend rates used in measuring the accumulated
postretirement benefit obligation were between 5.0% and 9.0% for 2002 and 5.0%
and 9.5% for 2001, 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, 2002 would have
increased or decreased by $400,000 and $300,000, respectively. The effect of
these changes on the aggregate of service and interest cost for 2002 would be
immaterial.
16. 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
$5,200,000 in 2002, $4,700,000 in 2001 and $6,400,000 in 2000. Aggregate minimum
annual rentals (exclusive of real estate taxes, maintenance and certain other
charges) relating to facilities under lease in effect at December 31, 2002 are
as follows (in thousands): 2003 - $6,600; 2004 - $6,000; 2005 - $5,600; 2006 -
$5,400; 2007 - $5,300; and thereafter - $65,200. Future minimum sublease rental
income relating to facilities under lease in effect at December 31, 2002 are as
follows (in thousands): 2003 - $1,600; 2004 - $1,900; 2005 - $1,900; 2006 -
$1,900; 2007 - $1,900; and thereafter - $1,400.
F-28
16. Commitments, continued:
-----------
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, which expires in 2003, is
collateralized by certain deposits of the Company aggregating $165,300,000,
consisting of investments of $110,100,000 and cash and cash equivalents of
$55,200,000.
Prior to the sale of CDS, the Company had agreed to continue to provide project
improvement bonds, primarily for the benefit of the City of San Marcos for the
San Elijo Hills project, which are required prior to the commencement of any
project development. The bonds provide funds in the event CDS is unable or
unwilling to complete certain infrastructure improvement in the San Elijo Hills
project. Should the City or others draw on the bonds for any reason, CDS and one
of its subsidiaries would be obligated to reimburse the Company for the amount
drawn. At December 31, 2002, $30,000,000 was outstanding under these bonds,
$25,400,000 of which expires in 2003 and the remainder expires in 2004.
At December 31, 2002, the Company also had an $18,000,000 indemnification
guarantee in connection with the financing of a real estate property.
See Note 3 for information concerning the Company's guarantee of Berkadia's
financing.
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 $77,400,000 at December 31, 2002.
17. 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 is not likely to have any material adverse effect on the
consolidated financial position of the Company, its consolidated results of
operations or liquidity.
18. Earnings (Loss) Per Common Share:
---------------------------------
For each of the three years in the period ended December 31, 2002, there were no
differences in the numerators for the basic and diluted per share computations
for income from continuing operations. These numerators were $152,500,000,
$62,900,000 and $146,600,000 for 2002, 2001 and 2000, respectively. The
denominators for basic per share computations were 55,667,000, 55,309,000 and
55,529,000 for 2002, 2001 and 2000, respectively. There were no differences for
the denominators for diluted per share computations except for the dilutive
effect of 349,000, 295,000 and 69,000 options and warrants for 2002, 2001 and
2000, respectively. Due to the nature of their rights and their nominal
liquidation value, the Series A Non-Voting Convertible Preferred shares are
treated as common shares and are included in the denominator for basic and
diluted per share computations for 2002.
F-29
19. 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. These 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 5.
(b) Cash and cash equivalents: For cash equivalents, the carrying amount
approximates fair value.
(c) Notes receivables: 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 for which a quoted market price is
available: The fair values are based upon quoted market prices.
(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.
F-30
19. Fair Value of Financial Instruments, continued:
-----------------------------------
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 2002 and 2001 are as follows (in thousands):
2002 2001
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- ------
Financial Assets:
Investments $ 624,871 $ 624,869 $ 707,049 $ 707,048
Cash and cash equivalents 418,600 418,600 373,222 373,222
Notes receivable 30,240 30,240 41,659 41,659
Loan receivables of banking and lending
subsidiaries, net of allowance 341,756 347,638 485,547 517,128
Investments in associated companies for
which a quoted market price is available:
WilTel 340,551 374,223 -- --
Other associated companies 36,527 59,045 2,033 13,893
Financial Liabilities:
Customer banking deposits 392,904 399,567 476,495 486,830
Debt 233,073 238,912 252,279 258,578
Securities sold not owned 26,379 26,379 19,344 19,344
Company-obligated mandatorily redeemable
preferred securities of subsidiary trust
holding solely subordinated debt securities
of the Company 98,200 98,200 98,200 98,200
Derivative Instruments:
Interest rate swaps (7,386) (7,386) (6,292) (6,292)
Foreign currency swaps (1,679) (1,679) 990 990
20. 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, manufacturing and domestic real estate.
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. Manufacturing
operations manufacture and market proprietary lightweight plastic netting used
for a variety of purposes. 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. Other operations primarily consist of winery operations and
development of a copper mine.
Associated companies include equity interests in entities that the Company does
not control and that are accounted for on the equity method of accounting.
WilTel, a public telecommunications company that owns or leases and operates a
nationwide fiber optic network over which it provides a variety of
telecommunications services is an associated company, as is Olympus, a
Bermuda-based reinsurance company.
F-31
20. Segment Information, continued:
--------------------
The information in the following table for Corporate assets primarily consists
of investments 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. The Company has a
manufacturing facility located in Belgium and an interest, through MK Gold, in a
copper deposit in Spain. The Company does not have any other material foreign
operations or investments.
Certain information concerning the Company's segments for 2002, 2001 and 2000 is
presented in the following table. Associated Companies are only reflected in the
table below under Identifiable assets employed. Prior period amounts have been
reclassified to reflect the Company's Foreign Real Estate segment as a
discontinued operation.
F-32
20. Segment Information, continued:
-------------------
2002 2001 2000
---- ---- ----
(In millions)
Revenues:
Banking and Lending $ 95.9 $ 122.4 $ 108.8
Manufacturing 51.0 57.4 65.1
Domestic Real Estate 51.3 65.3 83.1
Other Operations 48.3 39.3 44.9
Corporate (a) (b) (4.7) 89.8 191.5
---------- --------- ---------
Total consolidated revenues (c) $ 241.8 $ 374.2 $ 493.4
========== ========= =========
Income (loss) from continuing operations before income taxes,
minority expense of trust preferred securities and equity in income
(losses) of associated companies:
Banking and Lending $ 1.9 $ (6.1) $ 11.0
Manufacturing 3.1 7.8 11.3
Domestic Real Estate 16.7 30.4 58.8
Other Operations 11.7 8.2 5.2
Corporate (a) (b) (74.9) 32.8 115.0
---------- --------- ---------
Total consolidated income (loss) from continuing operations
before income taxes, minority expense of trust preferred
securities and equity in income (losses) of associated
companies (c) $ (41.5) $ 73.1 $ 201.3
========== ========= =========
Identifiable assets employed:
Banking and Lending $ 481.5 $ 595.7 $ 664.2
Manufacturing 51.5 59.3 63.4
Domestic Real Estate 106.8 176.4 218.1
Other Operations 193.7 171.2 177.1
Investment in Associated Companies:
WilTel 340.6 -- --
Other Associated Companies 397.1 358.8 192.5
Net Assets of Discontinued Operations -- 44.0 156.9
Corporate 970.6 1,063.7 945.6
--------- --------- ---------
Total consolidated assets $ 2,541.8 $ 2,469.1 $ 2,417.8
========= ========= =========
(a) For 2002, includes a provision of $37,100,000 to write down investments in
certain available for sale securities and an equity investment in a
non-public fund. The write down of the available for sale securities
resulted from a decline in market value determined to be other than
temporary.
(b) 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 12.
(c) Prior period amounts have been reclassified to exclude equity in income
(losses) of associated companies from these captions.
F-33
21. Selected Quarterly Financial Data (Unaudited):
---------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands, except per share amounts)
2002:
- -----
Revenues $ 57,567 $ 70,317 $ 52,373 $ 61,548
=========== =========== ========= ==========
Income (loss) from continuing operations $ 11,303 $ 19,429 $ (2,484) $ 124,283
=========== =========== ========= ==========
Income from discontinued operations, net of taxes $ 1,440 $ 3,140 $ -- $ --
=========== =========== ========= ==========
Gain on disposal of discontinued operations, net of taxes $ -- $ 4,512 $ -- $ --
=========== =========== ========= ==========
Net income (loss) $ 12,743 $ 27,081 $ (2,484) $ 124,283
=========== =========== ========= ==========
Basic earnings (loss) per common share:
Income (loss) from continuing operations $ .20 $ .35 $ (.04) $ 2.20
Income from discontinued operations .03 .06 -- --
Gain on disposal of discontinued operations -- .08 -- --
----------- ----------- --------- ----------
Net income (loss) $ .23 $ .49 $ (.04) $ 2.20
=========== =========== ========= ==========
Number of shares used in calculation 55,320 55,336 55,346 56,420
=========== =========== ========= ==========
Diluted earnings (loss) per common share:
Income (loss) from continuing operations $ .20 $ .35 $ (.04) $ 2.19
Income from discontinued operations .03 .06 -- --
Gain on disposal of discontinued operations -- .08 -- --
----------- ----------- --------- ----------
Net income (loss) $ .23 $ .49 $ (.04) $ 2.19
=========== =========== ========= ==========
Number of shares used in calculation 55,558 55,694 55,346 56,871
=========== =========== ========= ==========
2001:
- -----
Revenues $ 84,178 $ 99,313 $ 113,743 $ 76,927
=========== =========== ========= ==========
Income (loss) from continuing operations $ 11,787 $ 30,478 $ (24,987) $ 45,650
=========== =========== ========= ==========
Income (loss) from discontinued operations, net of taxes $ (31,685) $ (4,604) $ (6,973) $ 3,520
=========== =========== ========= ==========
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 $ .21 $ .55 $ (.45) $ .83
Income (loss) from discontinued operations (.57) (.08) (.13) .06
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 $ .21 $ .55 $ (.45) $ .83
Income (loss) from discontinued operations (.57) (.08) (.13) .06
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
=========== =========== ========= ==========
F-34
21. Selected Quarterly Financial Data (Unaudited), continued:
---------------------------------------------
During 2002, the Internal Revenue Service completed the audit of the Company's
consolidated federal income tax returns for the years 1996 through 1999, without
any material tax payment required from the Company. As a result of this
favorable resolution of various federal income tax contingencies, the income tax
provision for the fourth quarter of 2002 reflects a benefit of approximately
$120,000,000.
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.
In 2002 and 2001, the totals of quarterly per share amounts do not necessarily
equal annual per share amounts.
F-35
Schedule II - Valuation and Qualifying Accounts
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
For the years ended December 31, 2002, 2001 and 2000
(In thousands)
Additions Deductions
------------------------ ----------
Charged
Balance at to Costs Balance
Beginning and Write at End
Description of Period Expenses Recoveries Offs of Period
----------- --------- -------- ---------- --------- -----------
2002
----
Loan receivables of
banking and lending
subsidiaries $ 35,695 $ 36,027 $ 9,646 $ 49,520 $ 31,848
Trade, notes and other
receivables 623 221 179 140 883
--------- --------- -------- --------- ---------
Total allowance for
doubtful accounts $ 36,318 $ 36,248 $ 9,825 $ 49,660 $ 32,731
========= ========= ======== ========= ========
2001
----
Loan receivables of
banking and lending
subsidiaries $ 27,364 $ 43,125 $ 8,519 $ 43,313 $ 35,695
Trade, notes and other
receivables 663 138 16 194 623
--------- --------- -------- --------- --------
Total allowance for
doubtful accounts $ 28,027 $ 43,263 $ 8,535 $ 43,507 $ 36,318
========= ========= ======== ========= ========
2000
----
Loan receivables of
banking and lending
subsidiaries $ 16,975 $ 30,169 $ 5,681 $ 25,461 $ 27,364
Trade, notes and other
receivables 565 151 14 67 663
-------- --------- -------- --------- --------
Total allowance for
doubtful accounts $ 17,540 $ 30,320 $ 5,695 $ 25,528 $ 28,027
======== ========= ======== ========= ========
F-36
FINANCIAL STATEMENTS
Berkadia LLC (a joint venture between Berkshire
Hathaway Inc. and Leucadia National Corporation)
Years ended December 31, 2002 and 2001
Berkadia LLC
Financial Statements
Years ended December 31, 2002 and 2001
Contents
Report of Independent Auditors................................................2
Audited Financial Statements
Balance Sheets................................................................3
Statements of Operations and Changes in Members' Deficit......................4
Statement of Cash Flows.......................................................5
Notes to Financial Statements.................................................6
Report of Independent Auditors
The Members of Berkadia LLC
We have audited the accompanying balance sheets of Berkadia LLC (the "Company")
as of December 31, 2002 and 2001, and the related statements of operations and
changes in members' equity and cash flows for the year ended December 31, 2002
and for the period from February 26, 2001 to December 31, 2001. These financial
statements are the responsibility of the Company'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. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. 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 Berkadia LLC at December 31,
2002 and 2001 and the results of its operations and its cash flows for the year
ended December 31, 2002 and for the period from February 26, 2001 to December
31, 2001, in conformity with accounting principles generally accepted in the
United States.
Ernst & Young, LLP
Phoenix, Arizona
February 28, 2003
2
Berkadia LLC
Balance Sheets
December 31
2002 2001
----------- -------------
(In thousands)
Assets
Cash $ -- $ 1
Loan receivable due from FINOVA, net of discount 2,024,503 4,631,476
Interest and facility fee receivable 6,155 15,244
----------- -----------
Total assets $ 2,030,658 $ 4,646,721
=========== ===========
Liabilities and members' accumulated deficit
Liabilities:
Long-term debt $ 2,175,000 $ 4,900,000
Interest and facility fee payable 2,693 8,486
----------- -----------
Total liabilities 2,177,693 4,908,486
Members' accumulated deficit (147,035) (261,765)
----------- -----------
Total liabilities and members' accumulated deficit $ 2,030,658 $ 4,646,721
=========== ===========
See accompanying notes to financial statements.
3
Berkadia LLC
Statements of Operations and Changes in Members' Accumulated Deficit
Ten-month period
Year ended ended
December 31, 2002 December 31, 2001
----------------- -----------------
(In thousands)
Revenue
Interest income and amortization of loan discount $ 245,167 $ 136,734
--------- ---------
Total revenue 245,167 136,734
Expenses
Equity loss in FINOVA -- 188,800
Interest expense 64,287 57,990
--------- ---------
Total expenses 64,287 246,790
--------- ---------
Net income 180,880 (110,056)
Members' accumulated deficit, beginning of period (261,765) --
Distributions to members (66,150) (151,709)
--------- ---------
Members' accumulated deficit, end of period $(147,035) $(261,765)
========= =========
See accompanying notes to financial statements.
4
Berkadia LLC
Statement of Cash Flows
Ten-month period
Year ended ended
December 31, 2002 December 31, 2001
----------------- -----------------
(In thousands)
Net cash flows from operating activities
Net income (loss) $ 180,880 $ (110,056)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Equity loss in FINOVA -- 188,800
Amortization of loan discount (118,028) (40,276)
Net change in:
Receivables 9,090 (15,244)
Payables (5,793) 8,486
----------- ------------
Net cash provided by operating activities 66,149 31,710
----------- ------------
Net cash flows from investing activities
Loan to FINOVA, net -- (5,480,000)
Loan repayment from FINOVA 2,725,000 700,000
----------- -----------
Net cash provided by (used in) investing activities 2,725,000 (4,780,000)
----------- -----------
Net cash flows from financing activities
Issuance of long-term debt -- 5,600,000
Repayment of long-term debt (2,725,000) (700,000)
Distributions to members (66,150) (151,709)
----------- -----------
Net cash provided by (used in) financing activities (2,791,150) 4,748,291
----------- -----------
Net increase (decrease) in cash (1) 1
Cash and cash equivalents at beginning of period 1 --
----------- -----------
Cash and cash equivalents at end of period $ -- $ 1
=========== ===========
Supplemental disclosure of noncash investing activities
Allocation of loan receivable due from FINOVA to equity
investment in FINOVA shares $ -- $ 188,800
=========== ===========
See accompanying notes to financial statements.
5
Berkadia LLC
Notes to the Financial Statements
December 31, 2002 and 2001
1. Formation and Nature of Operations
Berkadia LLC (the "Company" or "Berkadia") was formed on February 26, 2001 as a
joint venture between Berkshire Hathaway Inc. ("Berkshire") and Leucadia
National Corporation ("Leucadia"). Berkshire and Leucadia through their
respective wholly owned affiliates hold the interests in the Company and are
referred to as the "Members".
The principal business purpose of the Company was to lend up to $6,000,000,000
on a senior secured basis to FINOVA Capital Corporation ("FINOVA Capital"), 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, the Company loaned $5,600,000,000 par
amount on a senior secured basis to FINOVA Capital (the "Berkadia Loan").
Concurrent with the loan, the Company received 61,020,581 newly issued shares of
common stock of FINOVA (the "Shares"), representing 50 percent of the
outstanding stock of FINOVA.
The Berkadia Loan is collateralized by substantially all of the assets of FINOVA
and its subsidiaries and guaranteed by FINOVA and substantially all of the
subsidiaries of FINOVA. The Company borrowed the entire amount required to
finance the Berkadia Loan from a consortium of lenders led by Fleet Bank (the
"Fleet Loan"). The Fleet Loan is guaranteed, 90 percent by Berkshire Hathaway
and 10 percent by Leucadia (with Leucadia's guarantee being secondarily
guaranteed by Berkshire), and is also secured by the Company's pledge of the
Berkadia Loan.
The Company was paid a $60,000,000 commitment fee by FINOVA Capital upon
execution of the loan commitment in February 2001, and a $60,000,000 fee upon
funding of the Berkadia Loan on August 21, 2001. Under the operating agreement
governing the Company, Berkshire and Leucadia share equally in the commitment
fee, funding fee and any proceeds realized from the Shares. Interest on the
Berkadia Loan, after payment of interest on the Fleet Loan, is allocated 90
percent to Berkshire and 10 percent to Leucadia. To date, all cash received by
the Company, after payment of any financing costs, has been distributed to the
Members. In addition, FINOVA Capital has reimbursed the Company and the Members,
for all fees and expenses incurred in connection with their commitments. Fees
reimbursed to the Company aggregated $11,950,000 during 2001. There were no such
fees in 2002.
6
Berkadia LLC
Notes to the Financial Statements
December 31, 2002 and 2001
1. Formation and Nature of Operations (continued)
The Members have not contributed any equity capital to the Company, and the
Company does not currently anticipate that any capital contributions will be
required in the future. Decisions concerning the management of the business and
affairs of the Company generally require the consent of all Members. However,
Berkshire makes any and all decisions with respect to the Berkadia Loan in its
sole and absolute discretion.
Upon FINOVA's emergence from bankruptcy in 2001, each of Berkshire and Leucadia
designated two persons to serve on FINOVA's reconstituted board of directors.
From and after the effective date of the Plan, the Company, Berkshire and
Leucadia are not entitled to designate FINOVA board members.
During 2002, several structural changes to the Company were executed, which were
intended to simplify the ownership structure of the Company and to provide a
debt-free vehicle for the Berkadia members to use to pursue other investments.
These changes did not alter the ownership interests in the Company, ultimately
held by Berkshire and Leucadia, and resulted in no gains or losses or other
changes to member's accumulated deficit. Among the changes, the Company
effectively distributed all of its right, title and interest in and to the
Shares to an entity formed by the Members (Berkadia Equity Holdings LLC). As a
result, the Company no longer has a financial interest in the FINOVA Shares.
2. Significant Accounting Policies
(a) Use of Estimates in Preparing Financial Statements: The preparation of
-----------------------------------------------------
financial statements in conformity with accounting principles generally accepted
in the United States ("GAAP") requires management to make estimates and
assumptions that affect (i) the reported amounts of assets and liabilities, (ii)
the disclosure of contingent assets and liabilities at the date of the financial
statements and (iii) the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(b) Loan Receivable from FINOVA: The Berkadia Loan is carried net of
---------------------------
unamortized discount related to the commitment fee, the funding fee and the
amount of the Berkadia Loan allocated to Berkadia's investment in the Shares.
The discount is accreted into investment income over the life of the Berkadia
Loan through the effective interest method. FINOVA is current with respect to
all amounts due to the Company under the Berkadia Loan. As of December 31, 2002,
there was no allowance for losses on the Berkadia Loan.
7
Berkadia LLC
Notes to the Financial Statements
December 31, 2002 and 2001
2. Significant Accounting Policies (continued)
(c) Investment in FINOVA Shares: Berkadia accounted for its investment in the
---------------------------
Shares under the equity method. Under the equity method, Berkadia recognized its
proportionate share of FINOVA's net income or loss. For the period August 21
through September 30, 2001, FINOVA incurred significant operating losses
primarily as a result of the September 11 terrorist attack. Berkadia's share of
such losses far exceeded the cost allocated to the Shares, which was based upon
the relative fair values of the Shares and the Berkadia Loan as of August 21,
2001. The application of the equity method was suspended once the carrying
amount of Shares was reduced to zero. As a result of the structural changes to
the Company in 2002 discussed in Note 1, Berkadia possessed no financial
interests in the Shares as of December 31, 2002.
(d) Income taxes: The Company does not file an income tax return. Each Member is
------------
responsible for the tax liability, if any, deriving from the taxable income
allocated to such Member. Accordingly, no provision for income taxes has been
reflected in these financial statements.
3. Berkadia Loan
The Berkadia Loan bears interest payable monthly, at the Eurodollar Rate plus
2.25 percent. All unpaid principal and accrued interest is due at maturity on
August 20, 2006. For the year ended December 31, 2002, the weighted-average
interest rate was 4.14 percent. For the ten-month period from February 26, 2001
to December 31, 2001, the weighted average interest rate was 5.06%. FINOVA and
substantially all of its direct and indirect subsidiaries (except those that are
contractually prohibited from acting as a guarantor) have guaranteed FINOVA
Capital's repayment of the Berkadia Loan. The guarantees are secured by
substantially all of the assets of FINOVA and its subsidiaries.
On August 21, 2001, the Company 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, the Company
received a $5,600,000,000 note from FINOVA Capital and the Shares. The Company
allocated the $5,540,000,000 cash transferred, reduced further by the
$60,000,000 commitment fee received in February 2001, between its investment in
the Berkadia Loan and the Shares, based upon the respective relative fair values
of the Berkadia Loan and the Shares. As a result, the Berkadia Loan was recorded
at an initial value of $5,291,200,000, which is net of a discount related to the
commitment and funding fees of $120,000,000 and the cost allocated to the Shares
of $188,800,000.
8
Berkadia LLC
Notes to the Financial Statements
December 31, 2002 and 2001
3. Berkadia Loan (continued)
The terms of the Berkadia Loan permit FINOVA to retain a reserve of cash and
cash equivalents in an amount not to exceed the sum of (a) 125 percent of the
projected operating expenses for the next fiscal quarter, (b) unfunded customer
commitments expected to be funded over the next two fiscal quarters, (c) taxes
payable during the next fiscal quarter, (d) interest, loan fees and other
amounts due on the Berkadia Loan during the next fiscal quarter, (e) an amount
equal to all payments of principal, interest or fees relating to other permitted
indebtedness that will, by their terms, become due and payable in cash during
the next fiscal quarter, and (f) such other reserves as are necessary in
FINOVA's good faith judgment and as approved in advance by the Company for the
operations of FINOVA. Any amount in excess of the cash reserve is paid to the
Company to reduce the principal amount of the loan on a quarterly basis.
During 2002, the Company gave its consent to FINOVA to use up to $300 million of
cash to repurchase certain subordinated notes rather than make mandatory
prepayments of the Berkadia Loan. In consideration for its consent, FINOVA and
the Company agreed that they would share equally in the net interest savings
resulting from any repurchase. As a result of repurchases made by FINOVA during
2002, the Company recognized approximately $1.6 million in interest income
related to the net interest savings.
For the years ended December 31, 2002 and 2001, the Company received $2.725
billion and $700 million in loan repayments from FINOVA. During the first two
months of 2003, the Company has received $450 million in loan repayments. The
pace of the repayments depends on numerous factors, such as the rate of FINOVA's
collections from borrowers and asset sales. As such, there can be no assurance
that the Berkadia Loan will continue to be repaid at this pace.
The terms of the Berkadia Loan agreement require FINOVA to maintain at all
times, a ratio of Collateral Value (as defined in the Berkadia Loan agreement)
to the loan balance of not less than 1.25 to 1. As of December 31, 2002,
FINOVA's collateral value to loan balance ratio was 1.70 to 1, and thereby, in
compliance with this covenant.
9
Berkadia LLC
Notes to the Financial Statements
December 31, 2002 and 2001
4. Fleet Loan
The Fleet Loan bears interest payable monthly, at a rate generally equal to the
cost of funds for the lenders' conduit facilities plus 0.25 percent. The
lenders' cost of funds rate is expected to be substantially equal to the
Eurodollar Rate that is used to determine the interest rate on the Berkadia
Loan. For the year ended December 31, 2002, the weighted-average interest rate
was 2.11 percent. For the ten-month period from February 26, 2001 to December
31, 2001, the weighted average interest rate was 3.04%. All unpaid principal and
accrued interest is due at maturity on August 20, 2006.
Pursuant to the Fleet Loan agreement, any principal payments received by the
Company on the Berkadia Loan must be used to make principal payments on the
Fleet Loan. The Fleet Loan agreement restricts the Company's ability to incur
additional indebtedness, liens or to make other investments, which restrictions
are consistent with the business purpose and operations of the Company. The
Berkadia Loan is pledged as collateral to secure the Fleet Loan. In addition, if
the asset value of FINOVA (as defined in the Fleet Loan agreement) is not equal
to at least 1.2 times the Fleet Loan balance as of the end of any month, then
the Company is required to pay principal on the Fleet Loan in an amount that is
sufficient to comply with this ratio. As of December 31, 2002, the asset value
of FINOVA was greater than 1.2 times the Fleet Loan balance.
5. Members' Capital
For the year ended December 31, 2002, the Company distributed substantially all
of its available cash to its Members, aggregating $66.2 million. Of this amount,
$59.4 million was distributed to Berkshire Members and $6.8 million to Leucadia
Members.
10
Olympus Re Holdings, Ltd.
(Incorporated in Bermuda)
Combined Financial Statements
December 31, 2002 and 2001
(expressed in U.S. dollars)
February 18, 2003
Report of Independent Accountants
To the Shareholders of
Olympus Re Holdings, Ltd.
In our opinion, the accompanying combined balance sheets and the related
combined statements of income and retained earnings, comprehensive income and
cash flows present fairly, in all material respects, the financial position of
Olympus Re Holdings, Ltd. at December 31, 2002 and 2001, and the results of its
operations and its cash flows for the year ended December 31, 2002 and the
period from December 3, 2001, (date of incorporation) to December 31, 2001 in
conformity with accounting principles generally accepted in the United States of
America. These combined financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
combined financial 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 combined financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the combined
financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall combined financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
Chartered Accountants
Olympus Re Holdings, Ltd.
Combined Balance Sheets
As of December 31, 2002 and 2001
- --------------------------------------------------------------------------------
(expressed in U.S. dollars)
2002 2001
$ $
----------- ------------
ASSETS
Cash and cash equivalents 64,156,759 509,312,866
Investments (amortized cost - 2002 - $583,018,489; 2001 - $Nil) (note 3) 599,123,769 --
Investment income due and accrued 6,684,911 20,049
Common voting shares, subscription receivable (Note 7b) -- 150,000
Premiums receivable 76,489,609 --
Deferred acquisition costs 23,318,087 --
Other assets 158,188 --
----------- -----------
769,931,323 509,482,915
=========== ===========
LIABILITIES
Incorporation cost payable -- 7,883,231
Loss and loss adjustment expense reserves (note 4) 44,707,594 --
Unearned premiums 74,365,214 --
Accounts payable and accrued expenses 581,289 30,000
Investment trades pending 2,455,041 --
Reinsurance balances payable (note 5) 25,170,228 --
----------- ----------
147,279,366 7,913,231
----------- ----------
SHAREHOLDERS' EQUITY
Common voting shares (5,100,000 shares issued and outstanding) (note 7) 51,000 51,000
Additional paid-in capital (note 7) 509,949,000 509,949,000
Accumulated other comprehensive income 16,105,280 --
Retained earnings (deficit) 96,546,677 (8,430,316)
----------- -----------
622,651,957 501,569,684
----------- -----------
769,931,323 509,482,915
=========== ===========
Approved by the Board of Directors
- ------------------------- Director --------------------------Director
The accompanying notes are an integral part of these combined
financial statements
OLYMPUS RE HOLDINGS, LTD.
Combined Statements of Income and Retained Earnings
For the year ended December 31, 2002 and for the period from December 3, 2001,
(date of incorporation) to December 31, 2001
- -------------------------------------------------------------------------------
(expressed in U.S. dollars)
2002 2001
$ $
----------- ----------
Revenues
Gross premiums written 298,522,087 --
----------- ----------
Net premiums written 298,522,087 --
Change in unearned premiums (74,365,214) --
------------ ----------
Net premiums earned 224,156,873 --
----------- ----------
Net Investment income 18,002,285 232,594
Net Realized gains (losses) on investments 2,969,859 --
----------- ----------
Total Revenues 245,129,017 232,594
----------- ----------
Expenses
Losses and loss expenses (note 4) 57,901,965 --
Commissions 78,078,362 --
Premium taxes and fees 2,184,366 --
Other underwriting expenses 750,726 --
Incorporation costs -- 8,632,780
General and administrative expenses 1,236,605 30,130
----------- ----------
Total Expenses 140,152,024 8,662,910
----------- ----------
Net Income (loss) 104,976,993 (8,430,316)
Retained earnings (deficit) - Beginning of year (8,430,316) --
----------- ----------
Retained earnings - End of year 96,546,677 (8,430,316)
=========== ==========
The accompanying notes are an integral part of these
combined financial statements.
Olympus Re Holdings, Ltd.
Combined Statements of Comprehensive Income
For the year ended December 31, 2002 and for the period from December 3, 2001,
(date of incorporation) to December 31, 2001
- ------------------------------------------------------------------------------
(expressed in U.S. dollars)
2002 2001
$ $
----------- ----------
Net income (loss) for the year 104,976,993 (8,430,316)
Other comprehensive income
Change in unrealized appreciation on marketable investments 16,105,280 --
----------- ----------
Comprehensive income (loss) for the year 121,082,273 (8,430,316)
=========== ==========
The accompanying notes are an integral part of these
combined financial statements.
Olympus Re Holdings, Ltd.
Combined Statement of Cash Flows
For the year ended December 31, 2002 and for the period from December 3, 2001,
(date of incorporation) to December 31, 2001
- ------------------------------------------------------------------------------
(expressed in U.S. dollars)
2002 2001
$ $
------------ -----------
Cash flows from operating activities
Net income for the year 104,976,993 (8,430,316)
Adjustments to reconcile net income to net cash provided by operating activities
Gains on sales of investments (2,969,859) --
Amortization of discount / premium 3,087,459 --
Investment income due and accrued (6,664,862) (20,049)
Incorporation cost payable (7,883,231) 7,883,231
Premiums receivable (76,489,609) --
Deferred acquisition costs (23,318,087) --
Other assets (158,188) --
Loss and loss adjustment expense reserves 44,707,594 --
Unearned premiums 74,365,214 --
Accounts payable and accrued expenses 551,289 30,000
Investment trades pending 2,455,041 --
Reinsurance balances payable 25,170,228 --
------------- ------------
Cash provided by (used in) operating activities 137,829,982 (537,134)
------------- ------------
Cash flows from investing activities
Purchase of investments (1,066,976,281) --
Proceeds from sales of investments 483,840,192 --
-------------- ------------
Cash used in investing activities (583,136,089) --
-------------- ------------
Cash flows from financing activity
Proceeds from issuance of common shares 150,000 509,850,000
-------------- ------------
Cash provided by financing activity 150,000 509,850,000
-------------- ------------
Increase (decrease) in cash and cash equivalents (445,156,107) 509,312,866
Cash and cash equivalents - Beginning of year 509,312,866 --
-------------- ------------
Cash and cash equivalents - End of year 64,156,759 509,312,866
============== ============
The accompanying notes are an integral part of these
combined financial statements.
Olympus Re Holdings, Ltd.
Notes to Combined Financial Statements
December 31, 2002 and 2001
- --------------------------------------
(expressed in U.S. dollars)
1. Nature of the business
Olympus Re Holdings, Ltd. and its subsidiaries (the "Company") were
incorporated under the laws of Bermuda on December 3, 2001. The Company's
principal operating subsidiary is Olympus Reinsurance Company, Ltd.
("Olympus Re"). Olympus Re is registered as a Class 4 insurer under The
Insurance Act 1978, amendments thereto and related regulations ("The Act").
The Company's bye-laws provide that the Board of Directors of Olympus Re
shall consist of persons who first have been elected as designated
directors by a resolution in a general meeting of the shareholders of the
Company. The Board of Directors of the Company must then vote all shares of
Olympus Re owned by the Company to elect such designated directors as
Olympus Re directors. The bye-law provisions with respect to the removal of
directors of Olympus Re operate similarly.
The Company, through Olympus Re, writes a diversified range of reinsurance
business on a global basis with an emphasis on property excess business.
During the year ended December 31, 2002, this was through a quota share
reinsurance agreement with a U.S. reinsurance company (see note 6). The
purpose of this quota share agreement is to produce primarily property
excess reinsurance. In addition, Olympus Re has a contract with a non-U.S.
advisor (see note 5) to recommend business and consult on the quota share
agreement. The non-U.S. advisor is related to the previously mentioned U.S.
reinsurance company through common ownership.
2. Significant accounting policies
Olympus Re's Board of Directors, who are elected as described above, have
unilateral authority, except for certain actions that require approval by
the Company as sole shareholder, to manage the affairs of Olympus Re.
Accordingly, the accompanying financial statements have been prepared on a
combined basis, rather than on a consolidated basis. The combined financial
statements include the financial statements of Olympus Re Holdings Ltd. and
its wholly-owned subsidiary Olympus Re. All significant inter-company
balances have been eliminated on combination.
These financial statements have been prepared in accordance with accounting
principles generally accepted in the United States of America. The
preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions
that affect reported amounts of assets and liabilities, as well as
disclosure of contingent assets and liabilities as at the balance sheet
date. Estimates also affect the reported amounts of income and expenses for
the reporting period. Actual results could differ from those estimates.
The following is a summary of the significant accounting policies adopted
by the Company
(a) Premiums and unearned premiums
The Company records premiums based on cession statements received.
These cession statements earn premium income evenly over the term of
the underlying reinsurance contract, in proportion to the risk
assumed. The portion of the premium related to the unexpired portion
of the contract at the end of the fiscal year is reflected in unearned
premiums.
Olympus Re Holdings, Ltd.
Notes to Combined Financial Statements
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
(expressed in U.S. dollars)
Certain reinsurance premiums assumed are estimated based on
information provided by the underlying ceding companies. The
information used in establishing these estimates is reviewed and
subsequent adjustments are taken into income in the period in which
they are determined. These premiums are earned over the terms of the
related reinsurance contracts.
(b) Deferred acquisition costs
The Company records acquisition costs based on cessions statements
received, in addition to its own direct acquisition costs.
Policy acquisition costs are comprised of ceding commissions,
brokerage, premium taxes and other expenses that relate directly to
the acquisition of premiums. These costs are deferred and amortized
over the terms of the related contracts. Deferred policy acquisition
costs are reviewed to determine if they are recoverable from future
underwriting profits, including investment income. If such costs are
estimated to be unrecoverable, they are expensed.
(c) Loss and loss adjustment expense reserves
The Company records loss and loss adjustment expenses based on
cessions statements received. The reported amounts for incurred but
not reported losses are also separately reviewed by the Company. Loss
and loss adjustment expense reserves, including losses incurred but
not reported and provisions for settlement expenses, includes amounts
determined from losses reported to the Company, and management
estimates. Due to limited historical experience, industry data is
relied upon in the reserving process.
A significant portion of the Company's business is in the property
catastrophe market and programs with higher layers of risks. Reserving
for losses in such programs is inherently complicated in that losses
in excess of the attachment level of the underlying policies are
characterized by high severity and low frequency. This limits the
volume of industry claims experience available from which to reliably
predict ultimate losses following a loss event.
The ceding company uses industry data and professional judgment to
estimate the ultimate loss to the Company from reinsurance contracts
exposed to a loss event. Delays in reporting losses to the Company
together with the potential for unforeseen adverse developments, may
result in losses and loss expenses significantly greater or less than
the reserve provided at the time of the loss event.
Loss and loss adjustment reserve estimates are regularly reviewed and
updated, as new information becomes known to the Company. Any
resulting adjustments are included in income in the period in which
they become known.
(d) Cash and cash equivalents
Cash and cash equivalents include debt securities and time deposits
with a maturity of three months or less from the date of purchase.
Olympus Re Holdings, Ltd.
Notes to Combined Financial Statements
December 31, 2002 and 2001
- --------------------------------------
(expressed in U.S. dollars)
(e) Investments
The Company's investments are currently in fixed maturities which are
classified as "available-for-sale" and are carried at fair value,
based on quoted market prices. Unrealized gains and losses are
included within accumulated other comprehensive income in
shareholders' equity.
Net investment income is stated net of investment management and
custody fees. Interest income is recognized on the accrual basis and
includes the amortization of premium or discount on fixed interest
securities purchased at amounts different from their par value.
Gains and losses on investments are included in investment income when
realized. Investments are recorded on a trade date basis and the cost
of securities sold is determined on the first-in, first-out basis.
Investments are reviewed periodically to determine if they have
sustained an impairment of value that is considered to be other than
temporary. The identification of potentially impaired investments
involves significant management judgment, which includes the
determination of their fair value and the assessment of whether any
decline in value is other than temporary. If investments are
determined to be impaired, a loss is charged to the income statement
in that period.
(f) Incorporation costs
Incorporation costs are expensed as incurred.
(g) New accounting pronouncements
In January 2003 the FASB issued FASB Interpretation No. 46,
Consolidation of variable interest entities - an interpretation of ARB
No. 51 ("FIN 46"). FIN 46 clarifies the accounting and reporting for
certain entities in which equity investors do not have the
characteristics of a controlling financial interest. As disclosed in
notes 1 and 2 these financial statements are prepared on a combined
rather than consolidated basis based on the fact that Olympus Re's and
the Company's Bye-laws provide certain restrictions relating to the
election of directors of Olympus Re. FIN 46 is effective in the first
quarter of fiscal 2003. The impact of adopting this interpretation
will be to present the financial statements as consolidated beginning
in period ending March 31, 2003. This is not expected to have any
impact on the Company's net income or net shareholders' equity as
presented in these financial statements.
3. Investments
Amortized Unrealized Unrealized 2002
Cost gain loss Fair value
$ $ $ $
---------- ------------ ----------- -----------
U.S. government and agency 351,457,556 9,286,371 -- 360,743,927
Corporate 143,334,311 6,499,571 -- 149,833,882
Mortgage-backed securities 88,226,622 333,785 14,447 88,545,960
----------- ---------- ------ -----------
583,018,489 16,119,727 14,447 599,123,769
=========== ========== ====== ===========
Olympus Re Holdings, Ltd.
Notes to Combined Financial Statements
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
(expressed in U.S. dollars)
The estimated fair value of investments in fixed interest securities is
based on quoted market values.
The Company does not have any investment in a single corporate security
which exceeds 2.1% of total fixed interest securities.
The following table sets forth certain information regarding the investment
ratings of the Company's fixed interest securities portfolio as at December
31, 2002.
Amortized cost
Ratings $ %
------- ------------- -----
U.S. government and agency 353,912,597 60
AAA 65,367,410 11
AA 67,472,319 12
A 93,134,771 16
BBB 3,131,392 1
------------- -----
583,018,489 100
============= =====
The amortized cost and estimated fair value amounts for fixed interest
securities held at December 31, 2002 are shown by contractual maturity.
Actual maturity may differ from contractual maturity because certain
borrowers have the right to call or prepay certain obligations with or
without call or prepayment penalties.
Amortized cost Fair Value
$ $
------------- -----------
Due within one year 25,125,281 25,390,750
Due after one year through five years 410,631,034 425,245,759
Due after five years through ten years 59,035,552 59,941,300
------------- ------------
494,791,867 510,577,809
Mortgage-backed securities 88,226,622 88,545,960
------------- ------------
583,018,489 599,123,769
============= ============
Olympus Re Holdings, Ltd.
Notes to Combined Financial Statements
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
(expressed in U.S. dollars)
The components of net investment income are as follows:
Period from
December 3, 2001
Year end (date of incorporation)
December 31, 2002 to December 31, 2001
$ $
----------------- ----------------------
Interest on fixed maturities 20,691,286 --
Net amortization of premium/discount on fixed maturities (3,087,459) --
Interest on cash and cash equivalents 1,592,238 232,594
---------- ---------
19,196,065 232,594
Net investment expenses (1,193,780) --
---------- ---------
18,002,285 232,594
========== =========
During 2002, proceeds from sales of available-for-sale securities were
$483,840,192. Gross realized gains were $3,361,350 and gross realized
losses were $391,491.
OneBeacon Asset Management receives a management fee at an annual rate of
0.2% of net invested assets.
In the normal course of business, the Company provides collateral to the
reinsured in accordance with the quota share agreement in the form of a
trust agreement. The Company has cash equivalents of $10,339,521 and
investments of $65,214,300 in a Trust, as of December 31, 2002, held as
collateral for the reinsured.
4. Loss and loss adjustment expense reserve
Loss and loss adjustment expense reserves are estimates subject to
variability, and the variability could be material in the near term. The
variability arises because all events affecting the ultimate settlement of
claims have not taken place and may not take place for some time.
Variability can be caused by receipt of additional claim information,
changes in judicial interpretation of contracts or significant changes in
the severity or frequency of claims from historical trends. Loss and loss
adjustment expenses estimates are based on all relevant information
available to the Company. Methods of estimation are used which the Company
believes produce reasonable results given current information.
Olympus Re Holdings, Ltd.
Notes to Combined Financial Statements
December 31, 2002 and 2001
- --------------------------------------------------------------------------------
(expressed in U.S. dollars)
Reserve activity for loss and loss expenses is summarized below:
$
---------
Balance - Beginning of year --
Less: Amounts recoverable from reinsurers --
---------
Net balance - Beginning of year --
---------
Net loss and loss expenses incurred for the year related to:
Current year 57,901,965
Net paid loss and loss expenses for the year related to:
Current year 13,194,371
Net balance - End of year 44,707,594
Plus: Amounts recoverable from reinsurers --
----------
Balance - End of year 44,707,594
==========
The year-end balance comprises provisions for reported claims of
$10,536,402 and provisions for claims incurred but not reported of
$34,171,192.
5. Reinsurance balances payable
Reinsurance balances payable represents profit commissions payable,
including a 20% profit commission payable to the non-U.S. advisors, White
Mountains Underwriting Limited, for all business on which they advise.
6. Major customers
During the year ended December 31, 2002, the Company derived 99% of its
premiums written from Folksamerica Reinsurance Company ("Folksamerica") for
which the Company pays a 12% override commission. Folksamerica is a
wholly-owned subsidiary of White Mountains Insurance Group Ltd., which is a
minority shareholder of the Company through a 50% joint venture, and is
also the parent of the Company's investment advisors and the Company's
non-U.S. advisors noted in notes 1, 3 and 5. It is not expected that this
customer concentration with Folksamerica will be as extensive in 2003.
Olympus Re Holdings, Ltd.
Notes to Combined Financial Statements
December 31, 2002 and 2001
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(expressed in U.S. dollars)
7. Capital stock
(a) Authorized shares
The Company's authorized share capital is 20,000,000 common shares of
the par value $0.01 each.
(b) Common stock
At December 31, 2002, the total issued and outstanding shares of the
Company were 5,100,000 with a par value of $0.01. The holders of the
ordinary shares are entitled to receive dividends and are allocated
one vote per share, provided that, if the controlled shares of any
shareholder (excluding Leucadia National Corporation) constitute 9.5
percent or more of the outstanding common shares of the Company, only
a fraction of the vote will be allowed so as not to exceed 9.5
percent. There are various restrictions on the ability of shareholders
to dispose of their shares.
In the period to December 31, 2001, the Company received cash of
$509,850,000 in respect of subscriptions of common shares. On January
2, 2002, payment of the remaining outstanding subscriptions totaling
$150,000 was received from shareholders. Following receipt of the
outstanding subscriptions payments, all issued and outstanding common
voting shares were fully paid.
8. Taxation
Bermuda
The Company has received an undertaking from the Bermuda government
exempting it from all local income, withholding and capital gains taxes
until March 28, 2016. At the present time no such taxes are levied in
Bermuda.
United States
The Company does not consider itself to be engaged in trade or business in
the United States and, accordingly, does not expect to be subject to United
States income tax.
9. Statutory requirements
Under The Act, Olympus Re is required to prepare Statutory Financial
Statements and to file a Statutory Financial Return. The Act also requires
Olympus Re to meet certain minimum capital and surplus requirements. To
satisfy these requirements, the Company was required to maintain a minimum
level of statutory capital and surplus of $149,261,044 and $100,000,000 at
December 31, 2002 and 2001 respectively. Olympus Re's statutory capital and
surplus was $593,312,822 and $494,999,111 at December 31, 2002 and 2001
respectively.
Statutory capital and surplus as reported under The Act is different from
shareholders' equity as determined in conformity with accounting principles
generally accepted in the United States of America ("GAAP") due to certain
items that are capitalized under GAAP but expensed under The Act.
Olympus Re is also required to maintain a minimum liquidity ratio, which
was met for the year ended December 31, 2002.