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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 September 30, 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 November 12, 2003:
69,644,109.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2003 and December 31, 2002
(Dollars in thousands, except par value)
September 30, December 31,
2003 2002
------------ -----------
(Unaudited)
Assets
Investments:
Available for sale (aggregate cost of $799,256 and $484,571) $ 966,648 $ 569,861
Trading securities (aggregate cost of $70,246 and $49,888) 76,960 48,036
Held to maturity (aggregate fair value of $249 and $766) 249 768
Other investments, including accrued interest income 8,653 6,206
---------- ----------
Total investments 1,052,510 624,871
Cash and cash equivalents 195,028 418,600
Trade, notes and other receivables, net 317,723 407,422
Prepaids and other assets 289,493 187,046
Property, equipment and leasehold improvements, net 221,053 166,207
Investments in associated companies:
WilTel Communications Group, Inc. 288,392 340,551
Other associated companies 407,094 397,081
---------- ----------
Total $2,771,293 $2,541,778
========== ==========
Liabilities
Customer banking deposits $ 184,200 $ 392,904
Trade payables and expense accruals 107,460 77,394
Other liabilities 81,700 140,586
Income taxes payable 24,899 38,231
Deferred tax liability 98,473 16,556
Debt, including current maturities 613,573 233,073
---------- ----------
Total liabilities 1,110,305 898,744
---------- ----------
Commitments and contingencies
Minority interest 12,063 10,309
---------- ----------
Company-obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely subordinated debt securities of the Company -- 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;
59,655,292 and 58,268,572 shares issued and outstanding, after deducting
58,867,179 and 60,213,299 shares held in treasury 59,655 58,269
Additional paid-in capital 201,318 154,260
Accumulated other comprehensive income 111,767 56,025
Retained earnings 1,276,185 1,218,464
---------- ----------
Total shareholders' equity 1,648,925 1,534,525
---------- ----------
Total $2,771,293 $2,541,778
========== ==========
See notes to interim consolidated financial statements.
2
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the periods ended September 30, 2003 and 2002
(In thousands, except per share amounts)
(Unaudited)
For the Three Month For the Nine Month
Period Ended September 30, Period Ended September 30,
-------------------------- --------------------------
2003 2002 2003 2002
---- ---- ---- ----
Revenues:
Manufacturing $ 14,569 $ 13,691 $ 40,794 $ 39,994
Wireless messaging revenues 25,417 -- 45,509 --
Finance 12,795 21,269 44,673 68,975
Investment and other income 48,613 31,225 114,561 97,398
Net securities gains (losses) 332 (13,812) 546 (26,110)
--------- -------- --------- ----------
101,726 52,373 246,083 180,257
--------- -------- --------- ---------
Expenses:
Manufacturing cost of goods sold 10,181 9,103 29,331 26,535
Wireless messaging network operating expenses 14,485 -- 24,449 --
Interest 11,916 8,299 26,188 25,809
Salaries 25,632 9,463 45,110 29,691
Selling, general and other expenses 44,208 51,481 114,962 127,819
--------- -------- --------- ---------
106,422 78,346 240,040 209,854
--------- -------- --------- ---------
Income (loss) from continuing operations before income taxes,
minority expense of trust preferred securities and equity
in income of associated companies (4,696) (25,973) 6,043 (29,597)
Income taxes (10,696) (10,694) (9,689) (11,681)
--------- -------- --------- ---------
Income (loss) from continuing operations before minority
expense of trust preferred securities and equity in
income of associated companies 6,000 (15,279) 15,732 (17,916)
Minority expense of trust preferred securities, net of taxes -- (1,380) (2,761) (4,141)
Equity in income of associated companies, net of taxes 50,090 14,175 42,942 50,305
--------- -------- --------- ---------
Income (loss) from continuing operations 56,090 (2,484) 55,913 28,248
Income from discontinued operations, net of taxes of $2,571 for 2002 -- -- 1,808 4,580
Gain on disposal of discontinued operations, net of taxes of $2,430 -- -- -- 4,512
--------- -------- --------- ---------
Net income (loss) $ 56,090 $ (2,484) $ 57,721 $ 37,340
========= ======== ========= =========
Basic earnings (loss) per common share:
Income (loss) from continuing operations $ .94 $ (.04) $ .94 $ .51
Income from discontinued operations -- -- .03 .08
Gain on disposal of discontinued operations -- -- -- .08
--------- -------- --------- ---------
Net income (loss) $ .94 $ (.04) $ .97 $ .67
========= ======== ========= =========
Diluted earnings (loss) per common share:
Income (loss) from continuing operations $ .93 $ (.04) $ .93 $ .51
Income from discontinued operations -- -- .03 .08
Gain on disposal of discontinued operations -- -- -- .08
--------- -------- --------- ---------
Net income (loss) $ .93 $ (.04) $ .96 $ .67
========= ======== ========= =========
See notes to interim consolidated financial statements.
3
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the nine months ended September 30, 2003 and 2002
(In thousands)
(Unaudited)
2003 2002
------ ------
Net cash flows from operating activities:
Net income $ 57,721 $ 37,340
Adjustments to reconcile net income to net cash provided by (used for) operations:
Provision (benefit) for deferred income taxes 19,153 (2,521)
Depreciation and amortization of property, equipment and leasehold improvements 17,360 13,904
Other amortization 384 (1,507)
Provision for doubtful accounts 12,977 28,619
Net securities (gains) losses (546) 26,110
Equity in income of associated companies (42,942) (50,305)
Distributions from associated companies 22,764 38,761
Gain on disposal of real estate, property and equipment, and other assets (18,604) (19,722)
Gain on disposal of discontinued operations -- (4,512)
Investments classified as trading, net (9,259) 47,897
Net change in:
Trade and other receivables 361 9,190
Prepaids and other assets (18,986) (2,856)
Trade payables and expense accruals (20,196) (2,518)
Other liabilities (4,768) (1,099)
Income taxes payable (30,567) (49,005)
Other (2,037) 3,478
Net change in net assets of discontinued operations -- (5,384)
----------- -----------
Net cash provided by (used for) operating activities (17,185) 65,870
----------- -----------
Net cash flows from investing activities:
Acquisition of real estate, property and equipment, and other assets (127,234) (29,210)
Proceeds from disposals of real estate, property and equipment, and other assets 103,481 72,108
Proceeds from sale of discontinued operations -- 66,241
Investment in WebLink and Symphony, net of cash acquired 19,165 --
Advances on loan receivables (2,966) (70,008)
Principal collections on loan receivables 109,160 138,853
Advances on notes receivables (2,079) (715)
Collections on notes receivables 13,883 213
Investments in associated companies (34,298) (9,721)
Return of investment in associated companies 7,174 --
Purchases of investments (other than short-term) (1,031,142) (614,653)
Proceeds from maturities of investments 252,611 567,529
Proceeds from sales of investments 452,439 159,596
----------- -----------
Net cash provided by (used for) investing activities (239,806) 280,233
----------- -----------
Net cash flows from financing activities:
Net change in customer banking deposits (207,415) (32,515)
Issuance of long-term debt, net of issuance costs 249,845 6,145
Reduction of long-term debt (9,428) (12,543)
Purchase of common shares for treasury (61) (98)
----------- -----------
Net cash provided by (used for) financing activities 32,941 (39,011)
----------- -----------
Effect of foreign exchange rate changes on cash 478 150
----------- -----------
Net increase (decrease) in cash and cash equivalents (223,572) 307,242
Cash and cash equivalents at January 1, 418,600 373,222
----------- -----------
Cash and cash equivalents at September 30, $ 195,028 $ 680,464
=========== ===========
See notes to interim consolidated financial statements.
4
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
For the nine months ended September 30, 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 (12,520) (12,520)
Net change in unrealized foreign exchange
gain (loss) 13,854 13,854
Net change in unrealized gain (loss) on
derivative instruments (742) (742)
Net income 37,340 37,340
----------
Comprehensive income 37,932
----------
Exercise of options to purchase common shares 32 691 723
Purchase of stock for treasury (3) (95) (98)
-------- -------- -------- -------- ----------- ----------
Balance, September 30, 2002 $ -- $ 55,347 $ 55,387 $ 15,254 $ 1,108,022 $1,234,010
======== ======== ======== ======== =========== ==========
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 52,277 52,277
Net change in unrealized foreign exchange
gain (loss) 4,316 4,316
Net change in unrealized gain (loss) on
derivative instruments (851) (851)
Net income 57,721 57,721
----------
Comprehensive income 113,463
----------
Conversion of convertible preferred shares into
common shares (47,507) 1,348 46,159 --
Exercise of options to purchase common shares 40 958 998
Purchase of stock for treasury (2) (59) (61)
-------- -------- -------- -------- ----------- ----------
Balance, September 30, 2003 $ -- $ 59,655 $201,318 $111,767 $ 1,276,185 $1,648,925
======== ======== ======== ======== =========== ==========
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, as amended by Form 10-K/A, 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 would not have been materially different from that
reported.
2. Certain information concerning the Company's segments for the three and
nine month periods ended September 30, 2003 and 2002 is presented in the
following table. Prior period amounts have been reclassified to exclude
equity in income of associated companies from these captions.
For the Three Month For the Nine Month
Period Ended September 30, Period Ended September 30,
-------------------------- --------------------------
2003 2002 2003 2002
---- ---- ---- ----
(In thousands)
Revenues:
Banking and lending $ 14,157 $ 23,447 $ 51,345 $ 76,847
Domestic real estate 15,054 17,336 41,280 42,778
Manufacturing 14,557 13,930 41,160 40,269
Wireless messaging 25,633 -- 45,761 --
Other operations 25,832 6,785 41,007 25,086
Corporate (a) 6,493 (9,125) 25,530 (4,723)
--------- --------- --------- ---------
Total consolidated revenues $ 101,726 $ 52,373 $ 246,083 $ 180,257
========= ========= ========= =========
Income (loss) from continuing operations before income taxes,
minority expense of trust preferred securities and equity in income
of associated companies:
Banking and lending $ (1,240) $ (7,812) $ 10,680 $ 2,698
Domestic real estate 6,108 7,535 14,798 16,632
Manufacturing 1,769 1,497 3,546 4,791
Wireless messaging 2,089 -- 5,271 --
Other operations 671 (1,634) (454) 1,172
Corporate (a) (14,093) (25,559) (27,798) (54,890)
--------- --------- --------- ---------
Total consolidated income (loss) from continuing operations
before income taxes, minority expense of trust preferred
securities and equity in income of associated companies $ (4,696) $ (25,973) $ 6,043 $ (29,597)
========= ========= ========= =========
(a) Corporate net securities gains (losses) for the nine month period
ended September 30, 2003 include a provision of ($5,100,000) to write
down the Company's investments in certain available for sale
securities and its investment in a non-public security, and for the
nine and three month periods ended September 30, 2002, a provision of
($22,500,000) and ($2,400,000), respectively, to write down the
Company's investments in certain available for sale securities and its
equity investment in a non-public fund.
6
Notes to Interim Consolidated Financial Statements, continued
3. A summary of accumulated other comprehensive income (loss) (net of income
taxes) at September 30, 2003 and December 31, 2002 is as follows (in
thousands):
September 30, December 31,
2003 2002
------------ -----------
Net unrealized gains on investments $ 110,289 $ 58,012
Net unrealized foreign exchange gains (losses) 4,079 (237)
Net unrealized losses on derivative instruments (2,601) (1,750)
--------- --------
$ 111,767 $ 56,025
========= ========
4. Included in investment and other income is income of $2,600,000 and
$2,000,000, for the nine and three month periods ended September 30, 2003,
respectively, and charges of $3,000,000 and $2,000,000 for the nine and
three month periods ended September 30, 2002, respectively, as a result of
accounting for its derivative financial instruments in accordance with
Statement of Financial Accounting Standards No. 133 ("SFAS 133").
5. 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 59,630,000 and 55,334,000 for
the nine month periods ended September 30, 2003 and 2002, respectively, and
59,642,000 and 55,346,000 for the three month periods ended September 30,
2003 and 2002, respectively. The number of shares used to calculate diluted
earnings (loss) per share amounts was 60,044,000 and 55,649,000 for the
nine month periods ended September 30, 2003 and 2002, respectively, and
60,072,000 and 55,346,000 for the three month periods ended September 30,
2003 and 2002, respectively. For the three month period ended September 30,
2002, options and warrants to purchase approximately 323,000 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.
6. Cash paid for interest and income taxes (net of refunds) was $24,600,000
and $3,500,000, respectively, for the nine month period ended September 30,
2003 and $27,500,000 and $37,400,000, respectively, for the nine month
period ended September 30, 2002.
7. As more fully discussed in the Company's 2002 10-K, during 2002 the Company
acquired 47.4% of the outstanding common shares of WilTel Communications
Group, Inc. ("WilTel"). For the nine and three month periods ended
September 30, 2003, the Company recorded a pre-tax loss of $52,200,000 and
pre-tax income of $5,000,000, respectively, 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. During the
three month period ended September 30, 2003, WilTel generated positive net
income due to the recognition of non-recurring, non-operating settlement
gains related to the termination of various agreements that released WilTel
from previously accrued obligations, recoveries of previously written off
receivables and a gain on the sale of a subsidiary. The Company's share of
these gains was approximately $25,800,000, for which no tax provision was
recorded.
In August 2003, the Company and WilTel announced a merger agreement that
provided for an exchange offer pursuant to which tendering WilTel
stockholders will receive .4242 of a Leucadia common share for each share
of WilTel common stock to be followed by a back-end merger for the same
consideration as offered in the exchange offer. The merger agreement also
provides that WilTel stockholders receive contingent sale rights which
entitle WilTel stockholders to additional Leucadia common shares if the
Company sells substantially all of WilTel's assets or outstanding shares of
capital stock prior to October 15, 2004, or consummates such a sale at a
later date if the sale agreement was entered into prior to August 21, 2004,
and in either case the net proceeds exceed the valuation ascribed to
WilTel's equity in this transaction.
7
Notes to Interim Consolidated Financial Statements, continued
As of November 5, 2003, the WilTel stockholders had tendered 23,547,423
shares of WilTel common stock, representing approximately 89.5% of the
WilTel shares not owned by Leucadia, which when added to the WilTel common
stock already owned by Leucadia represent approximately 94.5% of the total
outstanding WilTel common stock. The Company accepted all of the WilTel
common stock tendered in exchange for Leucadia common shares, and has
acquired the balance of the WilTel stock not tendered in a back-end merger.
Holders of common stock acquired pursuant to the back-end merger have
appraisal rights under Nevada law, which could result in those stockholders
receiving cash consideration from WilTel rather than Leucadia common
shares. Leucadia issued 9,988,817 of its common shares for the WilTel
common stock tendered in the exchange offer, and if no appraisal rights are
appropriately exercised, will issue an aggregate of 11,156,460 Leucadia
common shares (including the shares issued pursuant to the offer) for all
of the WilTel common stock not previously owned by Leucadia. The Company
will not know the number of shares of common stock, if any, as to which
appraisal rights will be exercised until December 2003.
The aggregate purchase price for the acquisition of all the WilTel common
stock not already owned by the Company is approximately $424,800,000,
consisting of $422,800,000 of Leucadia common shares and estimated cash
expenses of $2,000,000. The purchase price does not include any amounts
related to the contingent sale rights, which would be accounted for as
additional purchase price consideration if, and when, they result in the
issuance of additional Leucadia common shares (up to an aggregate maximum
of 11,000,000 additional Leucadia common shares). The execution of the
merger agreement on August 21, 2003 created a measurement date for
accounting purposes which is used to determine the per share value of the
Leucadia common shares issued. The Company averaged the closing prices of
its common shares for the five-business day period commencing two business
days before and ending two business days after the merger agreement was
executed. That average, $37.90 per share, was used to calculate the
aggregate value of the Leucadia common shares issued.
Following completion of the offer, the Company will consolidate the
financial condition and results of operations of WilTel, and will no longer
account for its initial investment in WilTel under the equity method of
accounting. Under generally accepted accounting principles, the Company is
required to allocate the purchase price for WilTel to its specific tangible
and intangible assets and liabilities based upon their relative fair values
at the date of acquisition. The Company intends to obtain independent
appraisals and employ other valuation techniques to determine these fair
values. Although the Company has only begun the process to determine these
fair values, a preliminary allocation of the purchase price to the assets
and liabilities of WilTel is presented below. Differences between the
preliminary allocation and the actual allocation are expected to primarily
result in increases or decreases to the amounts allocated to property,
plant and equipment and deferred revenue, although no amounts have been or
are expected to be allocated to goodwill.
The condensed WilTel balance sheet presented below reflects amounts for
both the acquisition of the additional WilTel common shares in 2003 and the
historical amounts related to the Company's acquisition of 47.4% of
WilTel's common shares in 2002. It represents, on a preliminary basis, the
amounts which would have been consolidated by the Company if the
acquisition had occurred as of September 30, 2003, including the
reclassification of the Company's existing equity method investment in
WilTel. The carrying amount of the Company's initial 2002 cash investment
in WilTel of $353,900,000, including expenses, has been subsequently
reduced by $65,500,000, representing the Company's share of WilTel's losses
under the equity method of accounting. The aggregate net investment in
WilTel shown below of $713,200,000 includes the September 30, 2003
historical carrying amount of the Company's equity investment in WilTel
($288,400,000), and the aggregate purchase price of the acquisition
pursuant to the exchange offer and merger ($424,800,000). All amounts are
in thousands.
8
Notes to Interim Consolidated Financial Statements, continued
Assets:
Current assets:
Cash and cash equivalents $ 215,300
Receivables 233,100
Prepaids and other current assets 57,000
-----------
Total current assets 505,400
Property, plant and equipment 1,341,200
Other 57,400
-----------
Total assets 1,904,000
-----------
Liabilities:
Current liabilities:
Accounts payable 178,500
Deferred revenue 48,100
Other current liabilities 211,800
-----------
Total current liabilities 438,400
Long-term debt 502,900
Long-term deferred revenue 158,200
Other liabilities 136,200
-----------
Total liabilities 1,235,700
-----------
668,300
Allocation to consolidated deferred income taxes 44,900
-----------
Net investment in WilTel $ 713,200
===========
Presented below are WilTel's historical consolidated statements of
operations for the three and nine month periods ended September 30, 2003.
For the Three For the Nine
Month Period Ended Month Period Ended
September 30, 2003 September 30, 2003
------------------ ------------------
(In thousands)
Revenues $ 360,400 $ 971,800
----------- -----------
Operating expenses
Cost of sales 294,900 789,300
Selling, general and administrative 40,400 132,100
Provision for doubtful accounts 200 4,300
Depreciation and amortization 61,400 186,300
Other expense (income), net (100) (1,200)
----------- -----------
Total operating expenses 396,800 1,110,800
----------- -----------
Loss from operations (36,400) (139,000)
Net interest expense (9,600) (31,100)
Investing income 2,000 3,900
Minority interest in loss of consolidated subsidiary 400 2,400
Gain on sale of consolidated subsidiary (a) 21,100 21,100
Other income, net (b) 33,400 33,700
----------- -----------
Income (loss) before income taxes 10,900 (109,000)
Provision for income taxes -- --
----------- -----------
Net income (loss) $ 10,900 $ (109,000)
=========== ===========
(a) The consideration received for the sale and the gain reflected
above was all cash, including $13,100,000 which has been placed
in a restricted account to secure certain of WilTel's debt
obligations.
(b) For the three month period ended September 30, 2003, includes
settlement gains resulting from the termination of various
agreements and recoveries of certain receivables previously
written off, which in the aggregate generated $5,300,000 of
additional cash.
9
Notes to Interim Consolidated Financial Statements, continued
8. The Company accounts for its investment in Berkadia under the equity method
of accounting. At September 30, 2003, the book value of the Company's
equity investment in Berkadia was negative $13,000,000, 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 $52,500,000 as of November 12, 2003.
For the three and nine month periods ended September 30, 2003 and 2002, the
Company's equity in the income of Berkadia consists of the following (in
thousands):
For the Three Month For the Nine Month
Period Ended September 30, Period Ended September 30,
-------------------------- --------------------------
2003 2002 2003 2002
---- ---- ---- ----
Net interest spread on the Berkadia loan - 10% of total $ 1,100 $ 1,300 $ 3,500 $ 4,900
Amortization of Berkadia loan discount related to cash fees -
50% of total 14,300 6,000 24,000 18,200
Amortization of Berkadia loan discount related to FINOVA
stock - 50% of total 22,500 9,300 37,700 28,600
--------- --------- --------- ---------
Equity in income of associated companies - Berkadia $ 37,900 $ 16,600 $ 65,200 $ 51,700
========= ========= ========= =========
During the three month period ended September 30, 2003, the amortization of
the discount on the Berkadia Loan increased significantly as a result of
greater than expected loan payments during the third quarter.
9. 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 could result in the Company including separate
financial statements for such investments in its Annual Report on Form 10-K
for the year ended December 31, 2003 (in thousands).
September 30,
2003
------------
Investment in WilTel:
Total revenues $ 971,800
Loss from continuing operations before extraordinary items $ (109,000)
Net loss $ (109,000)
The Company's equity in net loss $ (52,200)
10
Notes to Interim Consolidated Financial Statements, continued
September 30, September 30,
2003 2002
------------ -----------
Investment in Berkadia:
Total revenues $ 165,200 $ 196,500
Income from continuing operations before extraordinary items $ 148,900 $ 143,200
Net income $ 148,900 $ 143,200
The Company's equity in net income $ 65,200 $ 51,700
Investment in Olympus Re Holdings, Ltd.:
Total revenues $ 338,300 $ 163,900
Income from continuing operations before extraordinary items $ 139,100 $ 64,500
Net income $ 139,100 $ 64,500
The Company's equity in net income $ 30,400 $ 14,000
Investment in FINOVA:
Total revenues $ 251,000 $ 295,800
Income from continuing operations before extraordinary items $ 160,100 $ 16,100
Net income $ 160,100 $ 16,100
The Company's equity in net income (a) $ -- $ --
Investment in Jefferies Partners Opportunity Fund II, LLC:
Total revenues $ 16,500 $ 22,700
Income from continuing operations before extraordinary items $ 14,000 $ 19,800
Net income $ 14,000 $ 19,800
The Company's equity in net income $ 9,900 $ 11,600
Investment in EagleRock Capital Partners (QP), LP:
Total revenues (losses) $ 41,200 $ (4,100)
Income (loss) from continuing operations before extraordinary items $ 38,100 $ (6,800)
Net income (loss) $ 38,100 $ (6,800)
The Company's equity in net income (loss) $ 33,900 $ (6,600)
(a) As more fully described in the 2002 10-K, the Company has an indirect
equity interest in FINOVA through its joint venture, Berkadia. In
September 2001, Berkadia recorded its share of FINOVA's losses in an
amount that reduced Berkadia's investment in FINOVA's common stock to
zero. Accordingly, no amounts are shown for the Company's equity in
FINOVA's net results of operations.
In June 2003, the Company sold 567,574 common shares of Olympus Re to
Olympus Re for total proceeds of $79,500,000, which were received in July
2003. The Company recognized a $1,500,000 gain on the sale which is
reflected in other income for the nine month period ended September 30,
2003. The shares were tendered to Olympus Re as part of a tender offer
available to all of its shareholders. After completion of the tender, the
Company's interest in Olympus Re declined from 25% to 16.1%. The Company
will continue to account for this investment under the equity method of
accounting based upon the Company's ability to exercise significant
influence.
10. 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.
11
Notes to Interim Consolidated Financial Statements, continued
11. 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 bank-issued $100,000,000 non-cancelable letter of credit
to collateralize certain indemnification obligations. In May 2003, the
Company was released from its indemnification obligation (without any
payment) and the letter of credit was returned and cancelled. Accordingly,
the bank released cash and marketable securities of $167,100,000, which had
been left on deposit to collateralize the letter of credit.
In an unrelated matter, the Company also settled certain other tax payment
responsibilities during the second quarter of 2003 with the purchaser of
Colonial Penn Insurance Company. Income from discontinued operations for
the nine month period ended September 30, 2003 consists of a payment from
the purchaser to reimburse the Company for tax payments previously made.
12. In June 2003, the Company sold $200,000,000 principal amount of its newly
authorized 7% Senior Notes due 2013 in a private placement at 99.612% of
the principal amount. On July 15, 2003, the Company filed a registration
statement with the Securities and Exchange Commission pursuant to which
each holder of privately placed senior notes will have the opportunity to
exchange those notes for registered 7% Senior Notes due 2013 having
substantially identical terms. The registration statement has not yet been
declared effective. In each of August and November 2003, the Company sold
$25,000,000 principal amount ($50,000,000 in the aggregate) of its newly
authorized 7% Senior Notes due 2013 in a private placement at 99.612% of
the principal amount. These notes have substantially identical terms as the
notes sold in June.
13. 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 94% 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
has consolidated WebLink's financial condition and results of operations
from the date FCC approval was received.
14. In September 2003, the Company acquired certain businesses primarily
engaged in the provision of physical, occupational, speech and respiratory
therapy services that are operated by subsidiaries of Symphony Health
Services, LLC ("Symphony"). The purchase price was approximately
$36,700,000, including expenses, of which approximately $29,200,000 was
provided by financing that is non-recourse to the Company but is fully
collateralized by Symphony's assets. In addition, at acquisition, the
lender provided an additional $5,000,000 of working capital financing to
Symphony. The Company has consolidated Symphony's financial condition and
results of operations since acquisition.
15. In September 2003, the Company acquired a 90% interest in 8 acres of
unimproved land in Washington, D.C. for cash of $53,800,000. Immediately
following the acquisition, mortgage financing of $15,000,000 was obtained,
which is non-recourse to the Company, which reduced the net cash investment
in the property to $38,800,000. In October 2003, the mortgage lender
provided an additional $5,000,000 of such non-recourse financing, which
further reduced the Company's net cash investment. The land is zoned for a
minimum of 2,000,000 square feet of commercial office space, which the
Company intends to develop in phases, once acceptable tenants or purchasers
are identified.
16. In May 2003, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity" ("SFAS 150"), which is effective for financial instruments entered
into and modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. SFAS
150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
As a result of the implementation of SFAS 150, the Company began
classifying its $98,200,000 of trust issued preferred securities as
liabilities beginning July 1, 2003, and classifies dividends accrued for
these securities as interest expense. SFAS 150 does not permit restatement
of prior period amounts to reflect the new classification.
12
Notes to Interim Consolidated Financial Statements, continued
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 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. In October 2003, the FASB
deferred to the fourth quarter of 2003 from the third quarter of 2003 the
implementation date of FIN 46 with respect to variable interest entities in
which an enterprise holds a variable interest that it acquired before
February 1, 2003. The Company does not believe that the implementation of
FIN 46 will have a material effect on its financial position or results of
operations. However, FIN 46 may impact how the Company accounts for new
investments in the future or how the Company accounts for changes in
contractual relationships among parties with an interest in the Company's
existing investments.
13
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 nine month period ended September 30, 2003, net cash was used for
operations principally as a result of an increase in the Company's investment in
the trading portfolio, income tax payments and payment of corporate interest and
overhead expenses. For the nine month period ended September 30, 2002, net cash
was provided by operations principally as a result of a reduction to the
Company's investment in the trading portfolio and distributions from associated
companies partially offset by the payment of income taxes.
As of September 30, 2003, the Company's readily available cash, cash equivalents
and marketable securities, excluding those amounts held by its regulated
subsidiaries, totaled $1,107,300,000. This amount is comprised of cash and
short-term bonds and notes of the United States Government and its agencies of
$667,300,000 (60%), the equity investment in White Mountains Insurance Group,
Ltd. of $148,900,000 (14%) (that can be sold privately or otherwise in
compliance with the securities laws and have the benefit of a registration
rights agreement) and other publicly traded debt and equity securities
aggregating $291,100,000 (26%). For investments carried at fair value, the
unrealized gain on the Company's investment portfolio increased from $83,400,000
at December 31, 2002 to $174,100,000 at September 30, 2003.
As a result of principal payments by FINOVA to Berkadia, as of November 12,
2003, the Company's guarantee of Berkadia's financing has been reduced to
$52,500,000.
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.
In June 2003, the Company sold $200,000,000 principal amount of its newly
authorized 7% Senior Notes due 2013 in a private placement at 99.612% of the
principal amount. The net cash proceeds from the sale of the notes will be used
for general corporate purposes. On July 15, 2003, the Company filed a
registration statement with the Securities and Exchange Commission pursuant to
which each holder of privately placed senior notes will have the opportunity to
exchange those notes for registered 7% Senior Notes due 2013 having
substantially identical terms. The registration statement has not yet been
declared effective. In each of August and November 2003, the Company sold
$25,000,000 principal amount ($50,000,000 in the aggregate) of its newly
authorized 7% Senior Notes due 2013 in a private placement at 99.612% of the
principal amount. These notes have substantially identical terms as the notes
sold in June.
The Company's consolidated banking and lending operations had outstanding loans
(net of unearned finance charges) of $240,900,000 and $373,600,000 at September
30, 2003 and December 31, 2002, respectively. At September 30, 2003, 50% were
loans to individuals generally collateralized by automobiles; 44% were loans to
consumers, substantially all of which were collateralized by real or personal
property; 2% were loans to small businesses; and 4% 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 $184,200,000 and $392,900,000 as of September 30, 2003
and December 31, 2002, respectively.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
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. In May 2003, the OCC approved AIB's strategic plan. 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.
In June 2003, the Company sold 567,574 common shares of Olympus Re to Olympus Re
for total proceeds of $79,500,000, which were received in July 2003. The shares
were tendered to Olympus Re as part of a tender offer available to all of its
shareholders. After completion of the tender, the Company's interest in Olympus
Re declined from 25% to 16.1%.
In August 2003, the Company entered into an agreement to purchase in 2003 two
new corporate aircraft, and received an option to sell its existing corporate
aircraft, for an after tax net cash investment of approximately $22,000,000 in
the aggregate. Pursuant to the terms of the agreement, the aggregate purchase
price for the new aircraft is $80,000,000. As of September 30, 2003, $52,500,000
was expended towards the purchase of both aircraft, one of which was delivered
in September, with the balance to be substantially paid by March 2004. The
Company expects that the second aircraft will be delivered in December 2003. The
option to sell its existing corporate aircraft is exercisable by Leucadia in
January 2004 for $38,700,000. Purchase of the new aircraft will enable the
Company to reduce its estimated 2003 federal income tax liability by
approximately $16,800,000.
In September 2003, the Company acquired certain businesses primarily engaged in
the provision of physical, occupational, speech and respiratory therapy services
that are operated by subsidiaries of Symphony Health Services, LLC ("Symphony").
The purchase price was approximately $36,700,000, including expenses, of which
approximately $29,200,000 was provided by financing that is non-recourse to the
Company but is fully collateralized by Symphony's assets. In addition, at
acquisition, the lender provided an additional $5,000,000 of working capital
financing to Symphony. The Company has consolidated Symphony's financial
condition and results of operations since acquisition.
In September 2003, the Company acquired a 90% interest in 8 acres of unimproved
land in Washington, D.C. for cash of $53,800,000. Immediately following the
acquisition, mortgage financing of $15,000,000 was obtained, which is
non-recourse to the Company, which reduced the net cash investment in the
property to $38,800,000. In October 2003, the mortgage lender provided an
additional $5,000,000 of such non-recourse financing, which further reduced the
Company's net cash investment. The land is zoned for a minimum of 2,000,000
square feet of commercial office space, which the Company intends to develop in
phases, once acceptable tenants or purchasers are identified.
15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
As more fully discussed in the Company's 2002 10-K, during 2002 the Company
acquired 47.4% of the outstanding common shares of WilTel Communications Group,
Inc. ("WilTel"). In August 2003, the Company and WilTel announced a merger
agreement that provided for an exchange offer pursuant to which tendering WilTel
stockholders will receive .4242 of a Leucadia common share for each share of
WilTel common stock to be followed by a back-end merger for the same
consideration as offered in the exchange offer. The merger agreement also
provides that WilTel stockholders receive contingent sale rights which entitle
WilTel stockholders to additional Leucadia common shares if the Company sells
substantially all of WilTel's assets or outstanding shares of capital stock
prior to October 15, 2004, or consummates such a sale at a later date if the
sale agreement was entered into prior to August 21, 2004, and in either case the
net proceeds exceed the valuation ascribed to WilTel's equity in this
transaction.
As of November 5, 2003, the WilTel stockholders had tendered 23,547,423 shares
of WilTel common stock, representing approximately 89.5% of the WilTel shares
not owned by Leucadia, which when added to the WilTel common stock already owned
by Leucadia represent approximately 94.5% of the total outstanding WilTel common
stock. The Company accepted all of the WilTel common stock tendered in exchange
for Leucadia common shares, and has acquired the balance of the WilTel stock not
tendered in a back-end merger. Holders of common stock acquired pursuant to the
back-end merger have appraisal rights under Nevada law, which could result in
those stockholders receiving cash consideration from WilTel rather than Leucadia
common shares. Leucadia issued 9,988,817 of its common shares for the WilTel
common stock tendered in the exchange offer, and if no appraisal rights are
appropriately exercised, will issue an aggregate of 11,156,460 Leucadia common
shares (including the shares issued pursuant to the offer) for all of the WilTel
common stock not previously owned by Leucadia. The Company will not know the
number of shares of common stock, if any, as to which appraisal rights will be
exercised until December 2003.
The aggregate purchase price for the acquisition of all the WilTel common stock
not already owned by the Company is approximately $424,800,000, consisting of
$422,800,000 of Leucadia common shares and estimated cash expenses of
$2,000,000. The purchase price does not include any amounts related to the
contingent sale rights, which would be accounted for as additional purchase
price consideration if, and when, they result in the issuance of additional
Leucadia common shares (up to an aggregate maximum of 11,000,000 additional
Leucadia common shares). The Company will consolidate the financial condition
and results of operations of WilTel from the date the tender offer was
consummated, and it will no longer account for its earlier investment in WilTel
under the equity method of accounting. As of September 30, 2003, WilTel had
total liabilities of approximately $1,235,700,000, including long-term
indebtedness of approximately $500,000,000, which will be reflected in the
Company's consolidated balance sheet from the date of acquisition. However, the
Company has not guaranteed or otherwise assumed any of WilTel's liabilities.
Results of Operations
The 2003 Periods Compared to the 2002 Periods
Finance revenues, which reflect the level and mix of consumer instalment loans,
decreased in the nine and three month periods ended September 30, 2003 as
compared to the similar periods in 2002 due to fewer average loans outstanding.
Average loans outstanding were $303,800,000 and $247,400,000 for the nine and
three month periods ended September 30, 2003, respectively, as compared to
$458,600,000 and $427,600,000, respectively, during the nine and three month
periods ended September 30, 2002. 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 periods as compared to
the same periods in 2002, pre-tax results for the nine and three month periods
ended September 30, 2003 increased primarily due to a reduction in interest
expense of $7,000,000 and $2,400,000, respectively, resulting from reduced
customer banking deposits and lower interest rates thereon, a decline in the
provision for loan losses of $16,600,000 and $10,400,000, respectively, less
interest paid on interest rate swaps and lower salaries expense and operating
and other costs resulting from the segment's restructuring efforts.
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
In the nine and three month periods ended September 30, 2003, the banking and
lending segment's provision for loan losses decreased as compared to the same
periods in 2002 primarily due to the decline in loans outstanding and lower net
charge-offs. At September 30, 2003, the allowance for loan losses for the
Company's entire loan portfolio was $25,900,000 or 10.8% of the net outstanding
loans, as compared to $31,800,000 or 8.5% of the net outstanding loans at
December 31, 2002. On September 1, 2003, the banking and lending segment
outsourced substantially all of its consumer loan collection functions.
Historically, the service provider normally experiences an increase in
delinquent accounts for all of its customers during the initial month of
processing with delinquency statistics returning to more normal levels within 30
to 60 days thereafter. However, based on delinquency statistics received as of
the end of October, the Company's accounts have not returned to normal levels,
and its over 60 day delinquency statistics have worsened. While the service
provider is increasing its efforts to keep non-delinquent customer accounts
current, it has been the Company's experience that once accounts reach certain
delinquency levels, a high percentage are eventually charged off. As a result,
the banking and lending segment recorded an additional provision of $4,000,000
in September 2003.
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.
Pre-tax results for the banking and lending segment include income of $3,000,000
and $2,000,000 for the nine month periods ended September 30, 2003 and 2002,
respectively, and $700,000 and $600,000 for the three month periods ended
September 30, 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 from domestic real estate declined in the 2003 periods as compared to
the 2002 periods principally due to lower gains from property sales and for the
nine month 2003 period, lower rent income, largely due to the sale of two
shopping centers during 2002. Revenues from domestic real estate in the 2003
periods also reflect increased revenues from the Company's Hawaiian hotel. The
reduced gains on property sales is primarily due to fewer sales at one of the
Company's residential development projects located in Florida, which is nearing
completion. The decline in pre-tax income for the 2003 periods results from the
changes in revenues as well as greater operating and other costs principally
related to the Hawaiian hotel; however, the decline is not as great as it
otherwise would have been due to a write down of a mortgage receivable reflected
in the 2002 periods.
Manufacturing revenues increased slightly in the nine and three month periods
ended September 30, 2003 as compared to the same periods in 2002 as increases in
the construction and consumer products markets were largely offset by declines
principally in the carpet padding and agricultural markets. Gross profit for the
2003 periods declined as compared to the 2002 periods primarily due to higher
raw material costs. Pre-tax results for the 2003 periods also reflected lower
operating expenses than for the 2002 periods primarily due to workforce
reductions and other cost reduction initiatives.
In April 2003, upon receipt of approval from the FCC, the Company acquired
approximately 80% of the outstanding common stock of WebLink Wireless, Inc.
("WebLink"), a private company engaged in the wireless messaging industry. The
Company has consolidated WebLink's financial condition and results of operations
from the date FCC approval was received.
The wireless messaging industry has been in decline for the last several years,
with units in service for traditional paging services experiencing steady
declines and growth in telemetry applications and 2-way messaging not meeting
expectations. WebLink has continued to experience erosion in revenues since the
Company's acquisition; however, cost reduction programs have enabled the company
to maintain profitability. While there appears to be a base level of demand for
products offered by WebLink and its competitors, it does not appear to be
sufficient to support all of the industry's participants, and the Company
believes that an industry consolidation is likely. From the date of acquisition
through September 30, 2003, WebLink's revenues totaled $45,800,000, gross profit
was $21,100,000 or 46.3% and pre-tax income was $5,300,000. For the three month
period ended September 30, 2003, WebLink's revenues totaled $25,600,000, gross
profit was $10,900,000 or 43.0% and pre-tax income was $2,100,000.
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations,continued.
Investment and other income for the 2003 periods includes revenues from Symphony
of $16,600,000 since its acquisition in September 2003. Investment and other
income also reflects greater income related to accounting for the market values
of the Company's derivative financial instruments, increased revenues from the
Company's Hawaiian hotel, as discussed above, and for the nine month period
ended September 30, 2003, includes a refund of foreign taxes not based on income
in the amount of $4,900,000. The 2003 periods also reflect lower gains from
property sales and a reduction in investment income.
Equity in income (losses) of associated companies includes the following (in
thousands):
For the Three Month For the Nine Month
Period Ended September 30, Period Ended September 30,
-------------------------- --------------------------
2003 2002 2003 2002
---- ---- ---- ----
Berkadia $ 37,900 $ 16,600 $ 65,200 $ 51,700
Olympus Re Holdings, Ltd. 7,900 4,600 30,400 14,000
WilTel 5,000 -- (52,200) --
EagleRock Capital Partners (QP), LP 19,600 (8,700) 33,900 (6,600)
HomeFed Corporation 1,000 -- 8,100 --
Jefferies Partners Opportunity Fund II, LLC 3,100 3,200 9,900 11,600
Other 100 6,100 (700) 6,700
--------- -------- --------- --------
Pre-tax 74,600 21,800 94,600 77,400
Income tax expense 24,500 7,600 51,700 27,100
--------- -------- --------- --------
Equity in income, net of taxes $ 50,100 $ 14,200 $ 42,900 $ 50,300
========= ======== ========= ========
The increase in income from Berkadia results from greater than expected loan
payments during the third quarter, causing an increase in the amortization of
the discount on the Berkadia loan. The book value of the Company's equity
investment in Berkadia was negative $13,000,000 and negative $72,100,000 at
September 30, 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 Re was made in December 2001, when Olympus
Re 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 Re's premium revenues during its second year of operation.
As discussed above, subsequent to a tender offer for its shares in June 2003,
the Company's interest in Olympus Re has declined from 25% to 16.1%.
Since its acquisition in the fourth quarter of 2002, the Company has recorded
its share of WilTel's results of operations under the equity method of
accounting. During the three month period ended September 30, 2003, WilTel
generated positive net income due to the recognition of non-recurring,
non-operating settlement gains related to the termination of various agreements
that released WilTel from previously accrued obligations, recoveries of
previously written off receivables and a gain on the sale of a subsidiary. The
Company's share of these gains was approximately $25,800,000, for which no tax
provision was recorded. In addition, the Company has not recorded a deferred tax
benefit for its share of WilTel's losses for the nine month period as its
ability to use the capital loss to reduce the taxes due on capital gains in the
future is uncertain.
18
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
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. Although WilTel has reported positive segment
profits from operations throughout 2003 (which represents earnings before
interest, income taxes, depreciation and amortization and other unusual,
non-recurring or non-cash items), substantial depreciation and amortization
charges will still result in losses from continuing operations over the next
several years. Subsequent to the acquisition of the shares of WilTel common
stock not already owned by the Company discussed above, the Company will
consolidate WilTel in its results of operations and will no longer account for
its initial investment in WilTel under the equity method of accounting.
The equity in income (losses) of EagleRock Capital Partners (QP), LP relates to
the Company's investment in a limited partnership that invests primarily in
securities and other obligations of highly leveraged, distressed and out of
favor companies. The income reported by the partnership during the 2003 periods
results from both realized and unrealized gains in its portfolio, and no cash
was distributed by the partnership during 2003. As more fully described in the
2002 10-K, the Company acquired its investment in HomeFed Corporation, a
California residential real estate development company, in the fourth quarter of
2002. The decrease in equity in income from other associated companies relates
to less income from certain real estate businesses and investment interests, and
from the Company's equity interest in certain thoroughbred racetrack businesses
that it sold in the fourth quarter of 2002.
Net securities gains (losses) for the nine month period ended September 30, 2003
include a provision of ($5,100,000) to write down the Company's investments in
certain available for sale securities and its investment in a non-public
security, and for the nine and three month periods ended September 30, 2002, a
provision of ($22,500,000) and ($2,400,000), respectively, to write down the
Company's investments in certain available for sale securities and its equity
investment in a non-public fund.
The increase in interest expense in the nine and three month periods ended
September 30, 2003 as compared to the same periods in 2002 primarily reflects
interest expense relating to the 7% Senior Notes that the Company issued in June
and August 2003 and dividends accrued on its trust issued preferred securities,
which commencing July 1, 2003 are classified as interest expense (shown as
minority interest in prior periods) as a result of the implementation of SFAS
150. These increases were partially offset by lower interest expense at the
banking and lending segment due to reduced customer banking deposits and lower
interest rates thereon.
The increase in salaries expense for the 2003 periods as compared to the same
periods in 2002 primarily relates to salaries expense of Symphony and WebLink,
which the Company acquired in September and April 2003, respectively. Salaries
expense for the 2003 periods includes $13,200,000 related to Symphony, and
$7,900,000 and $4,400,000 for the nine and three month periods ended September
30, 2003, respectively, related to WebLink. Salaries expense also reflects
reduced costs at the Company's banking and lending segment, which has ceased
lending activity as discussed above, and decreased expenses related to certain
executive incentive plans.
The decrease in selling, general and other expenses for the 2003 periods as
compared to the same periods in 2002 primarily results from lower provisions for
loan losses and operating and other costs relating to the banking and lending
operations and charges recorded in 2002 to write down a mortgage receivable, as
discussed above. However, selling, general and other expenses for the 2003
periods also include $4,100,000 related to Symphony, and $7,900,000 and
$4,500,000 for the nine and three month periods ended September 30, 2003,
respectively, related to WebLink, both of which were acquired during 2003.
Income taxes for the 2003 periods differ from the expected statutory federal
rate principally due to the favorable resolution of certain federal income tax
contingencies. In addition, for the nine month period ended September 30, 2003,
income taxes differ from the expected statutory federal rate due to the receipt
of a refund of foreign taxes which is not based on income and which is not
subject to income tax in the United States.
19
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 Corporation to repay the Berkadia Loan, further
deterioration in the value of the assets pledged by FINOVA and FINOVA
Capital Corporation 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.
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.
20
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
At September 30, 2003, the Company's market risk exposure with respect to its
investment portfolio and borrowing activities had changed as compared to
December 31, 2002. During the nine months ended September 30, 2003, the Company
sold $225,000,000 of newly authorized 7% Senior Notes due 2013 in a private
placement at 99.612% of the principal amount. The Company has invested the net
cash proceeds from the sale and other cash and cash equivalents primarily in
available for sale, fixed income securities that are rated "investment grade" or
are U.S. governmental agency issued or guaranteed obligations, and which have an
estimated weighted average remaining life that is shorter than those which the
Company owned at December 31, 2002. In addition, the Company's banking and
lending operations have reduced amounts of rate sensitive assets and liabilities
as they have stopped originating all consumer loans. For additional information,
see Item 2, Management's Discussion and Analysis of Financial Condition and
Results of Interim Operations, as well as Item 7A of the Company's Annual Report
on Form 10-K for the year ended December 31, 2002.
Item 4. Controls and Procedures.
(a) The Company's management evaluated, with the participation of the Company's
principal executive and principal financial officers, the effectiveness of
the Company's disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")), as of September 30, 2003. Based on their
evaluation, the Company's principal executive and principal financial
officers concluded that the Company's disclosure controls and procedures
were effective as of September 30, 2003.
(b) There has been no change in the Company's internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) that occurred during the Company's fiscal quarter ended September 30,
2003, that has materially affected, or is reasonably likely to materially
affect, the Company's internal control over financial reporting.
21
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits.
31.1 Certification of Chairman of the Board and Chief Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification of President pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.3 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chairman of the Board and Chief Executive
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of President pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.3 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 current reports on Form 8-K dated July 29,
2003, August 7, 2003, August 12, 2003, August 13, 2003, and
August 21, 2003 which set forth information under Item 5. Other
Events and Item 7. Financial Statements and Exhibits.
22
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: November 14, 2003 By: /s/ Barbara L. Lowenthal
----------------------------
Barbara L. Lowenthal
Vice President and Comptroller
(Chief Accounting Officer)
23
Exhibit Index
31.1 Certification of Chairman of the Board and Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of President pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.3 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chairman of the Board and Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of President pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.3 Certification of Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
24