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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-5721
LEUCADIA NATIONAL CORPORATION
(Exact name of registrant as specified in its Charter)
New York 13-2615557
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
315 Park Avenue South, New York, New York 10010-3607
(Address of principal executive offices) (Zip Code)
(212) 460-1900
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
----------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
-------- --------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
YES X NO
-------- --------
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, at May 8, 2003: 59,628,442.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 2003 and December 31, 2002
(Dollars in thousands, except par value)
March 31, December 31,
2003 2002
------------ ------------
(Unaudited)
ASSETS
Investments:
Available for sale (aggregate cost of $463,485 and $484,571) $ 569,134 $ 569,861
Trading securities (aggregate cost of $56,120 and $49,888) 56,782 48,036
Held to maturity (aggregate fair value of $262 and $766) 262 768
Other investments, including accrued interest income 8,379 6,206
---------- ----------
Total investments 634,557 624,871
Cash and cash equivalents 391,942 418,600
Trade, notes and other receivables, net 359,428 407,422
Prepaids and other assets 192,942 187,046
Property, equipment and leasehold improvements, net 163,680 166,207
Investments in associated companies:
WilTel Communications Group, Inc. 305,725 340,551
Other associated companies 397,879 397,081
---------- ----------
Total $2,446,153 $2,541,778
========== ==========
LIABILITIES
Customer banking deposits $ 306,514 $ 392,904
Trade payables and expense accruals 72,313 77,394
Other liabilities 115,715 140,586
Income taxes payable 48,345 38,231
Deferred tax liability 24,451 16,556
Debt, including current maturities 236,150 233,073
---------- ----------
Total liabilities 803,488 898,744
---------- ----------
Commitments and contingencies
Minority interest 9,383 10,309
---------- ----------
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;
59,623,292 and 58,268,572 shares issued and outstanding, after deducting
58,865,579 and 60,213,299 shares held in treasury 59,623 58,269
Additional paid-in capital 200,595 154,260
Accumulated other comprehensive income 70,186 56,025
Retained earnings 1,204,678 1,218,464
---------- ----------
Total shareholders' equity 1,535,082 1,534,525
---------- ----------
Total $2,446,153 $2,541,778
========== ==========
See notes to interim consolidated financial statements.
2
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the three months ended March 31, 2003 and 2002
(In thousands,except per share amounts)
(Unaudited)
2003 2002
---- ----
Revenues:
Manufacturing $ 12,147 $ 12,388
Finance 17,144 24,704
Investment and other income 25,303 29,481
Net securities gains (losses) 2,305 (9,006)
-------- --------
56,899 57,567
-------- --------
Expenses:
Manufacturing cost of goods sold 8,949 8,292
Interest 6,799 8,588
Salaries 9,072 10,568
Selling, general and other expenses 36,280 40,899
-------- --------
61,100 68,347
-------- --------
Loss from continuing operations before income taxes, minority expense of
trust preferred securities and equity in income (losses) of associated companies (4,201) (10,780)
Income taxes (1,486) (3,619)
-------- --------
Loss from continuing operations before minority expense of trust
preferred securities and equity in income (losses) of associated companies (2,715) (7,161)
Minority expense of trust preferred securities, net of taxes (1,381) (1,381)
Equity in income (losses) of associated companies, net of taxes of $13,758 and $10,685 (9,690) 19,845
-------- --------
Income (loss) from continuing operations (13,786) 11,303
Income from discontinued operations, net of taxes of $712 -- 1,440
-------- --------
Net income (loss) $(13,786) $ 12,743
======== ========
Basic earnings (loss) per common share:
Income (loss) from continuing operations $ (.23) $ .20
Income from discontinued operations -- .03
-------- --------
Net income (loss) $ (.23) $ .23
======== ========
Diluted earnings (loss) per common share:
Income (loss) from continuing operations $ (.23) $ .20
Income from discontinued operations -- .03
-------- --------
Net income (loss) $ (.23) $ .23
======== ========
See notes to interim consolidated financial statements.
3
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the three months ended March 31, 2003 and 2002
(In thousands)
(Unaudited)
2003 2002
---- ----
Net cash flows from operating activities:
Net income (loss) $ (13,786) $ 12,743
Adjustments to reconcile net income (loss) to net cash provided by (used for) operations:
Benefit for deferred income taxes (219) (609)
Depreciation and amortization of property, equipment and leasehold improvements 4,968 4,911
Other amortization 857 (695)
Provision for doubtful accounts 4,472 7,313
Net securities (gains) losses (2,305) 9,006
Equity in (income) losses of associated companies 9,690 (19,845)
Distributions from associated companies 18,072 31,948
Gain on disposal of real estate, property and equipment, and other assets (2,745) (1,406)
Investments classified as trading, net (5,654) 1,190
Net change in:
Trade and other receivables 1,781 4,833
Prepaids and other assets (4,267) (211)
Trade payables and expense accruals (9,399) (7,221)
Other liabilities (4,055) 1,690
Income taxes payable (2,462) (17,871)
Other (1,495) (2,456)
Net change in net assets of discontinued operations -- (1,266)
--------- ---------
Net cash provided by (used for) operating activities (6,547) 22,054
--------- ---------
Net cash flows from investing activities:
Acquisition of real estate, property and equipment, and other assets (2,977) (15,677)
Proceeds from disposals of real estate, property and equipment, and other assets 5,303 8,314
Advances on loan receivables (2,906) (18,471)
Principal collections on loan receivables 37,580 46,541
Advances on notes receivables (100) (450)
Collections on notes receivables 3,111 71
Investments in associated companies (1,853) (25)
Purchases of investments (other than short-term) (76,833) (117,903)
Proceeds from maturities of investments 36,949 233,432
Proceeds from sales of investments 64,313 34,699
--------- ---------
Net cash provided by investing activities 62,587 170,531
--------- ---------
Net cash flows from financing activities:
Net change in customer banking deposits (85,792) (41,108)
Issuance of long-term debt, net of issuance costs 3,961 4,825
Reduction of long-term debt (901) (8,732)
Purchase of common shares for treasury -- (51)
--------- ---------
Net cash used for financing activities (82,732) (45,066)
--------- ---------
Effect of foreign exchange rate changes on cash 34 9
--------- ---------
Net increase (decrease) in cash and cash equivalents (26,658) 147,528
Cash and cash equivalents at January 1, 418,600 373,222
--------- ---------
Cash and cash equivalents at March 31, $ 391,942 $ 520,750
========= =========
See notes to interim consolidated financial statements.
4
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
For the three months ended March 31, 2003 and 2002
(In thousands, except par value)
(Unaudited)
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, 2002 $ -- $55,318 $ 54,791 $14,662 $1,070,682 $1,195,453
----------
Comprehensive income:
Net change in unrealized gain (loss) on
investments 7,263 7,263
Net change in unrealized foreign exchange
gain (loss) (1,467) (1,467)
Net change in unrealized gain (loss) on
derivative instruments 353 353
Net income 12,743 12,743
----------
Comprehensive income 18,892
----------
Exercise of options to purchase common shares 6 142 148
Purchase of stock for treasury (1) (50) (51)
------ ------- -------- ------- ---------- ----------
Balance, March 31, 2002 $ -- $55,323 $ 54,883 $20,811 $1,083,425 $1,214,442
======= ======= ======== ======= ========== ==========
Balance, January 1, 2003 $47,507 $58,269 $154,260 $56,025 $1,218,464 $1,534,525
----------
Comprehensive income:
Net change in unrealized gain (loss) on
investments 13,364 13,364
Net change in unrealized foreign exchange
gain (loss) 994 994
Net change in unrealized gain (loss) on
derivative instruments (197) (197)
Net loss (13,786) (13,786)
----------
Comprehensive income 375
----------
Conversion of convertible preferred shares into
common shares (47,507) 1,348 46,159 --
Exercise of options to purchase common shares 6 176 182
------- ------- -------- ------- ---------- ----------
Balance, March 31, 2003 $ -- $59,623 $200,595 $70,186 $1,204,678 $1,535,082
======= ======= ======== ======= ========== ==========
See notes to interim consolidated financial statements.
5
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
1. The unaudited interim consolidated financial statements, which reflect all
adjustments (consisting only of normal recurring items) that management
believes necessary to present fairly results of interim operations, should
be read in conjunction with the Notes to Consolidated Financial Statements
(including the Summary of Significant Accounting Policies) included in the
Company's audited consolidated financial statements for the year ended
December 31, 2002, which are included in the Company's Annual Report filed
on Form 10-K for such year (the "2002 10-K"). Results of operations for
interim periods are not necessarily indicative of annual results of
operations. The consolidated balance sheet at December 31, 2002 was
extracted from the audited annual financial statements and does not include
all disclosures required by generally accepted accounting principles for
annual financial statements.
Certain amounts for prior periods have been reclassified to be consistent
with the 2003 presentation.
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.
2. Certain information concerning the Company's segments for the three month
periods ended March 31, 2003 and 2002 is presented in the following table.
Prior period amounts have been reclassified to reflect the Company's
foreign real estate segment as a discontinued operation and to exclude
equity in income (losses) of associated companies from these captions.
2003 2002
------- --------
(In thousands)
Revenues:
Banking and lending $20,468 $ 28,677
Domestic real estate 10,122 8,379
Manufacturing 12,166 12,408
Other operations 7,070 7,578
Corporate 7,073 525
------- --------
Total consolidated revenues $56,899 $ 57,567
======= ========
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 $ 4,840 $ 4,065
Domestic real estate 1,532 243
Manufacturing 262 1,230
Other operations (1,074) 292
Corporate (9,761) (16,610)
------- --------
Total consolidated loss from continuing operations
before income taxes, minority expense of trust
preferred securities and equity in income (losses)
of associated companies $(4,201) $(10,780)
======= ========
6
Notes to Interim Consolidated Financial Statements, continued
3. The Company accounts for its investment in Berkadia under the equity method
of accounting. At March 31, 2003, the book value of the Company's equity
investment in Berkadia was negative $51,700,000, which is included in other
liabilities in the consolidated balance sheet. As more fully described in
the 2002 10-K, the negative carrying amount results from Berkadia's
distribution of loan related fees received and the Company's recognition in
2001 of its share of The FINOVA Group Inc.'s ("FINOVA") non-cash losses
recorded by Berkadia, partially offset by the Company's share of Berkadia's
income related to Berkadia's loan to FINOVA. The Company has guaranteed 10%
of Berkadia's debt and, although the Company has no cash investment in
Berkadia, it records its share of any losses recorded by Berkadia up to the
amount of the guarantee. The total amount of the Company's guarantee was
$130,000,000 as of May 8, 2003.
For the three month periods ended March 31, 2003 and 2002, the Company's
equity in the income of Berkadia consists of the following (in thousands):
2003 2002
------- ------
Net interest spread on the Berkadia loan - 10% of total $ 1,300 $ 2,100
Amortization of Berkadia loan discount related to cash fees - 50% of total 8,400 7,100
Amortization of Berkadia loan discount related to FINOVA stock - 50% of total 13,100 11,200
------- -------
Equity in income of associated companies - Berkadia $22,800 $20,400
======= =======
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. Loan repayments from FINOVA are
unlikely to continue at the pace experienced to date.
4. As more fully discussed in the Company's 2002 10-K, the Company owns 47.4%
of the outstanding common shares of WilTel Communications Group, Inc.
("WilTel"). For the three month period ended March 31, 2003, the Company
recorded $34,800,000 of pre-tax losses from its investment in WilTel under
the equity method of accounting. The Company has not recorded a related
deferred tax benefit as its ability to use the capital loss to reduce taxes
due on capital gains in the future is uncertain.
5. The following tables provide summarized data with respect to significant
investments in Associated Companies accounted for under the equity method
of accounting for the periods the investments were owned by the Company.
The information is provided for those investments whose relative
significance to the Company is expected to result in the Company including
separate audited financial statements for such investments in its Annual
Report on Form 10-K for the year ended December 31, 2003 (in thousands).
March 31,
2003
---------
Investment in WilTel:
Total revenues $ 288,000
Loss from continuing operations before extraordinary items $ (73,200)
Net loss $ (73,200)
The Company's equity in net loss $ (34,800)
7
March 31, March 31,
2003 2002
--------- --------
Investment in Berkadia:
Total revenues $ 60,300 $ 79,400
Income from continuing operations before extraordinary items $ 53,200 $ 57,100
Net income $ 53,200 $ 57,100
The Company's equity in net income $ 22,800 $ 20,400
March 31, March 31,
2003 2002
--------- ---------
Investment in Olympus Re Holdings, Ltd.:
Total revenues $ 91,600 $ 36,800
Income from continuing operations before extraordinaitems $ 49,100 $ 20,200
Net income $ 49,100 $ 20,200
The Company's equity in net income $ 12,300 $ 2,900
6. 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 mandatorily
convertible into 1,347,720 common shares within 90 days of issuance. Such
shares were converted into common shares in March 2003.
7. A summary of accumulated other comprehensive income (loss) at March 31,
2003 and December 31, 2002 is as follows (in thousands):
March 31, December 31,
2003 2002
--------- -----------
Net unrealized gains on investments $ 71,376 $ 58,012
Net unrealized foreign exchange gains (losses) 757 (237)
Net unrealized losses on derivative instruments (1,947) (1,750)
-------- --------
$ 70,186 $ 56,025
======== ========
8. Included in investment and other income for the three month periods ended
March 31, 2003 and 2002 is income of $1,600,000 and $2,700,000,
respectively, as a result of accounting for its derivative financial
instruments in accordance with Statement of Financial Accounting Standards
No. 133 ("SFAS 133").
9. Per share amounts were calculated by dividing net income (loss) by the sum
of the weighted average number of common shares outstanding and, for
diluted earnings (loss) per share, the incremental weighted average number
of shares issuable upon exercise of outstanding options and warrants for
the periods they were outstanding. The number of shares used to calculate
basic earnings (loss) per share amounts was 59,618,000 and 55,320,000 for
the three month periods ended March 31, 2003 and 2002, respectively. The
number of shares used to calculate diluted earnings (loss) per share
amounts was 59,618,000 and 55,588,000 for the three month periods ended
March 31, 2003 and 2002, respectively. For 2003, options and warrants to
purchase approximately 373,000 weighted average shares of common stock were
outstanding but were not included in the computation of diluted earnings
(loss) per share, as those options and warrants were antidilutive. 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 weighted average share calculations for basic and
diluted per share computations for 2003.
8
Notes to Interim Consolidated Financial Statements, continued
10. Cash paid for interest and income taxes (net of refunds) was $8,500,000 and
$400,000, respectively, for the three month period ended March 31, 2003 and
$10,000,000 and $14,100,000, respectively, for the three month period ended
March 31, 2002.
11. 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. WebLink, a privately held company,
is in the wireless messaging industry, providing wireless data services and
traditional paging services. 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). In April
2003, upon receipt of approval from the FCC, the Company acquired
approximately 80% of the outstanding common stock of WebLink. The Company
will consolidate WebLink's financial condition and results of operations
from the date FCC approval was received.
12. In April 2003, the Company entered into an agreement with a third party
(the "Seller") to acquire certain businesses of Integrated Health Services,
Inc. ("IHS"), a company undergoing reorganization proceedings under Chapter
11 of the Bankruptcy Code. The businesses to be acquired are primarily
engaged in the provision of physical, occupational, speech and respiratory
therapy services, and are operated by subsidiaries of Symphony Health
Services, Inc. ("Symphony"). The purchase price is approximately
$50,000,000, including expenses, and is subject to certain working capital
and other adjustments. Closing of the transaction is subject to acquisition
by the Seller of the Symphony businesses from IHS, which is subject to
bankruptcy court approval.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations.
The following should be read in conjunction with the Management's Discussion and
Analysis of Financial Condition and Results of Operations included in the 2002
10-K.
Liquidity and Capital Resources
For the three month period ended March 31, 2003, net cash was used for
operations principally as a result of an increase in the Company's investment in
the trading portfolio, lower investment income on corporate investments, and
payment of corporate interest and overhead expenses. For the three month period
ended March 31, 2002, net cash was provided by operations principally as a
result of distributions from associated companies partially offset by the
payment of income taxes.
As of March 31, 2003, the Company's readily available cash, cash equivalents and
marketable securities, excluding those amounts held by its regulated
subsidiaries, totaled $685,000,000. This amount is comprised of cash and
short-term bonds and notes of the United States Government and its agencies of
$360,000,000 (52%), the equity investment in White Mountains Insurance Group,
Ltd. of $127,500,000 (19%) (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
$197,500,000 (29%). Additional sources of liquidity as of March 31, 2003 include
$175,200,000 of cash and marketable securities primarily collateralizing letters
of credit.
As a result of principal payments by FINOVA to Berkadia, as of May 8, 2003, the
Company's guarantee of Berkadia's financing has been reduced to $130,000,000.
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 private placement included
2,907,599 common shares and newly authorized Series A Non-Voting Convertible
Preferred Stock, that were mandatorily convertible into 1,347,720 common shares
within 90 days of issuance. Such shares were converted into common shares in
March 2003.
The Company's consolidated banking and lending operations had outstanding loans
(net of unearned finance charges) of $327,900,000 and $373,600,000 at March 31,
2003 and December 31, 2002, respectively. At March 31, 2003, 52% were loans to
individuals generally collateralized by automobiles; 41% 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 $306,500,000 and $392,900,000 as of March 31, 2003 and
December 31, 2002, respectively.
As disclosed in the 2002 10-K, the Company's national bank subsidiary, American
Investment Bank, ("AIB") stopped originating new sub-prime automobile loans in
September 2001, and the Company's banking and lending segment ceased originating
all other consumer loans in January 2003. The FDIC and Office of the Comptroller
of the Currency ("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.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
In April 2003, the Company entered into an agreement with a third party (the
"Seller") to acquire certain businesses of Integrated Health Services, Inc.
("IHS"), a company undergoing reorganization proceedings under Chapter 11 of the
Bankruptcy Code. The businesses to be acquired are primarily engaged in the
provision of physical, occupational, speech and respiratory therapy services,
and are operated by subsidiaries of Symphony Health Services, Inc. ("Symphony").
The purchase price is approximately $50,000,000, including expenses, and is
subject to certain working capital and other adjustments. Closing of the
transaction is subject to acquisition by the Seller of the Symphony businesses
from IHS, which is subject to bankruptcy court approval.
Results of Operations
Three Months Ended March 31, 2003
Compared to the Three Months Ended March 31, 2002
Finance revenues, which reflect the level and mix of consumer instalment loans,
decreased in the three month period ended March 31, 2003 as compared to the
similar period in 2002 due to fewer average loans outstanding. Average loans
outstanding were $348,500,000 and $491,000,000 for the three month periods ended
March 31, 2003 and 2002, 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 the 2003 period as compared to the
same period in 2002, pre-tax results increased primarily due to a $2,200,000
reduction in interest expense, resulting from reduced customer banking deposits
and lower interest rates thereon, a decline in the provision for loan losses of
$2,800,000, and lower salaries expense and operating and other costs resulting
from the segment's restructuring efforts.
In the three month period ended March 31, 2003, the banking and lending
segment's provision for loan losses decreased as compared to the same period in
2002 primarily due to the decline in loans outstanding and lower net
charge-offs. At March 31, 2003, the allowance for loan losses for the Company's
entire loan portfolio was $28,800,000 or 8.8% of the net outstanding loans, as
compared to $31,800,000 or 8.5% of the net outstanding loans at December 31,
2002. The Company believes its loss experience reflects the difficulties
experienced by subprime borrowers in the current economy.
The Company's remaining consumer lending programs have primarily consisted of
marine, recreational vehicle, motorcycle and elective surgery loans. Due to
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.
Pre-tax results for the banking and lending segment include income of $1,700,000
and $1,900,000 for the three month periods ended March 31, 2003 and 2002,
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.
Revenues and pre-tax income from domestic real estate increased in the first
quarter of 2003 as compared to the same period in 2002 as a result of increased
revenues from the Company's Hawaiian hotel of $1,700,000 and increased gains
from property sales of $1,400,000, partially offset by lower rent income of
$1,000,000 largely due to the sale of two shopping centers during 2002. Pre-tax
income for 2003 also reflects greater operating and other costs principally
related to the Hawaiian hotel.
11
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
Manufacturing revenues were largely unchanged for the first quarter of 2003 as
compared to the same period in 2002 as declines principally in the carpet
padding and agricultural markets were largely offset by increases in the
construction and consumer products markets. Gross profit and pre-tax results for
the first quarter of 2003 declined as compared to the same period in 2002
primarily due to higher raw material costs.
Investment and other income declined in the three month period ended March 31,
2003 as compared to the same period in 2002 principally due to a reduction of
$4,000,000 in investment income resulting from a decline in interest rates and a
lower amount of invested assets, a reduction in rent income as discussed above
and reduced income related to accounting for the market values of its derivative
financial instruments. These decreases were partially offset by gains from
domestic property sales and increased revenues from the Company's Hawaiian
hotel, as discussed above.
Equity in income (losses) of associated companies includes the following (in
thousands):
March 31, March 31,
2003 2002
---------- --------
Berkadia $ 22,800 $ 20,400
Olympus Re Holdings, Ltd. 12,300 2,900
WilTel (34,800) --
Jefferies Partners Opportunity Fund II, LLC 3,500 4,600
Other 300 2,600
-------- --------
Pre-tax 4,100 30,500
Income tax expense 13,800 10,700
-------- --------
Equity in income (losses) , net of taxes $ (9,700) $ 19,800
======== ========
The increase in income from Berkadia relates to the amortization of the discount
on the Berkadia Loan to FINOVA, which 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. Loan repayments from FINOVA are unlikely to continue at
the pace experienced to date. The book value of the Company's equity investment
in Berkadia was negative $51,700,000 and negative $72,100,000 at March 31, 2003
and December 31, 2002, respectively. The negative carrying amount principally
results from Berkadia's distribution of loan related 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.
The Company's investment in Olympus was made in December 2001, when Olympus
commenced its operations as a newly formed Bermuda reinsurance company primarily
engaged in the property excess, marine and aviation reinsurance business. The
Company's share of its earnings has increased in 2003, reflecting the growth in
Olympus' premium revenues during its second year of operation.
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 and amortization charges will still result
in losses from continuing operations over the next several years. During the
first quarter of 2003, WilTel's depreciation and amortization expenses were over
90% of their reported loss. 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. The Company has not recorded a deferred tax benefit for its share
of the WilTel loss as its ability to use the capital loss to reduce the taxes
due on capital gains in the future is uncertain.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
Net securities gains (losses) for the three month period ended March 31, 2003
include a provision of $2,700,000 to write down the Company's investments in
certain available for sale securities, and for the three months ended March 31,
2002, a provision of $5,000,000 to write down the Company's equity investment in
a non-public fund.
The decline in interest expense in the first quarter of 2003 as compared to the
same period in 2002 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 2003 primarily reflects decreased expenses related to the
Company's banking and lending segment, as discussed above.
Selling, general and other expenses decreased in the first quarter of 2003 as
compared to the first quarter of 2002 primarily due to lower provisions for loan
losses and operating and other costs relating to the banking and lending
operations, partially offset by greater operating expenses related to the
Hawaiian hotel.
Cautionary Statement for Forward-Looking Information
Statements included in this Management's Discussion and Analysis of Financial
Condition and Results of Interim Operations may contain forward-looking
statements. Such forward-looking statements are made pursuant to the safe-harbor
provisions of the Private Securities Litigation Reform Act of 1995. Such
statements may relate, but are not limited, to projections of revenues, income
or loss, capital expenditures, fluctuations in insurance reserves, plans for
growth and future operations, competition and regulation, as well as assumptions
relating to the foregoing. Forward-looking statements are inherently subject to
risks and uncertainties, many of which cannot be predicted or quantified. When
used in this Management's Discussion and Analysis of Financial Condition and
Results of Interim Operations, the words "estimates", "expects", "anticipates",
"believes", "plans", "intends" and variations of such words and similar
expressions are intended to identify forward-looking statements that involve
risks and uncertainties. Future events and actual results could differ
materially from those set forth in, contemplated by or underlying the
forward-looking statements. The factors that could cause actual results to
differ materially from those suggested by any such statements include, but are
not limited to, those discussed or identified from time to time in the Company's
public filings, including:
o general economic and market conditions, prevailing interest rate
levels or foreign currency fluctuations;
o reliance on key management personnel;
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 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 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;
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
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.
Undue reliance should not be placed on these forward-looking statements, which
are applicable only as of the date hereof. The Company undertakes no obligation
to revise or update these forward-looking statements to reflect events or
circumstances that arise after the date of this Management's Discussion and
Analysis of Financial Condition and Results of Interim Operations or to reflect
the occurrence of unanticipated events.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Information required under this Item is contained in Item 7A of the Company's
Annual Report on Form 10-K for the year ended December 31, 2002, and is
incorporated by reference herein.
Item 4. Controls and Procedures.
(a) Based on their evaluation as of a date within 90 days of the filing date of
this quarterly report on Form 10-Q, 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.
14
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits.
10.1 Amended and Restated Revolving Credit Agreement dated as of
March 11, 2003 between the Company, Fleet National Bank as
Administrative Agent, JPMorgan Chase Bank as Syndication
Agent, and the Banks signatory thereto, with Fleet
Securities, Inc., as Arranger.
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.
b) Reports on Form 8-K.
The Company filed a current report on Form 8-K dated February 7,
2003, which sets forth information under Item 2. Acquisition or
Disposition of Assets and Item 7. Financial Statements and
Exhibits.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEUCADIA NATIONAL CORPORATION
(Registrant)
Date: May 12, 2003 By: /s/ Barbara L. Lowenthal
------------------------
Barbara L. Lowenthal
Vice President and Comptroller
(Chief Accounting Officer)
16
CERTIFICATIONS
I, Ian M. Cumming, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Leucadia National
Corporation;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 quarterly
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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly 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: May 12, 2003
By: /s/ Ian M. Cumming
--------------------------
Ian M. Cumming
Chairman of the Board and
Chief Executive Officer
17
CERTIFICATIONS
I, Joseph S. Steinberg, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Leucadia National
Corporation;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 quarterly
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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly 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: May 12, 2003
By: /s/ Joseph S. Steinberg
-----------------------
Joseph S. Steinberg
President
18
CERTIFICATIONS
I, Joseph A. Orlando, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Leucadia National
Corporation;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly 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 quarterly
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 quarterly report (the "Evaluation Date"); and
c) presented in this quarterly 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
quarterly 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: May 12, 2003
By: /s/ Joseph A. Orlando
-----------------------
Joseph A. Orlando
Chief Financial Officer
19
Exhibit Index
10.1 Amended and Restated Revolving Credit Agreement dated as of March 11, 2003
between the Company, Fleet National Bank as Administrative Agent, JPMorgan
Chase Bank as Syndication Agent, and the Banks signatory thereto, with
Fleet Securities, Inc., as Arranger.
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.
20