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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, 2004
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 April 30, 2004: 70,872,502.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, 2004 and December 31, 2003
(Dollars in thousands, except par value)
March 31, December 31,
2004 2003
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 345,796 $ 214,390
Investments 660,342 714,363
Trade, notes and other receivables, net 468,819 372,104
Prepaids and other current assets 49,164 49,506
----------- -----------
Total current assets 1,524,121 1,350,363
Non-current investments 647,925 673,742
Notes and other receivables, net 16,356 193,459
Other assets 309,310 298,589
Property, equipment and leasehold improvements, net 1,388,667 1,450,099
Investments in associated companies 475,678 430,912
----------- -----------
Total $ 4,362,057 $ 4,397,164
=========== ===========
LIABILITIES
Current liabilities:
Trade payables and expense accruals $ 343,226 $ 377,473
Deferred revenue 44,978 47,311
Other current liabilities 112,286 89,390
Customer banking deposits due within one year 85,146 103,331
Long-term debt due within one year 23,033 23,956
Income taxes payable 18,528 15,867
----------- -----------
Total current liabilities 627,197 657,328
Long-term deferred revenue 152,353 156,582
Other non-current liabilities 228,178 234,446
Non-current customer banking deposits 33,943 42,201
Long-term debt 1,158,725 1,154,878
----------- -----------
Total liabilities 2,200,396 2,245,435
----------- -----------
Commitments and contingencies
Minority interest 16,434 17,568
----------- -----------
SHAREHOLDERS' EQUITY
Common shares, par value $1 per share, authorized 150,000,000 shares;
70,871,502 and 70,823,502 shares issued and outstanding, after deducting
47,710,719 shares held in treasury 70,872 70,824
Additional paid-in capital 614,450 613,274
Accumulated other comprehensive income 174,045 152,251
Retained earnings 1,285,860 1,297,812
----------- -----------
Total shareholders' equity 2,145,227 2,134,161
----------- -----------
Total $ 4,362,057 $ 4,397,164
=========== ===========
See notes to interim consolidated financial statements.
2
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the three months ended March 31, 2004 and 2003
(In thousands, except per share amounts)
(Unaudited)
2004 2003
---- ----
Revenues:
Telecommunications $ 380,979 $ --
Healthcare 63,227 --
Manufacturing 13,382 12,147
Finance 8,485 17,144
Investment and other income 36,430 25,303
Net securities gains 9,272 2,305
--------- ---------
511,775 56,899
--------- ---------
Expenses:
Cost of sales:
Telecommunications 286,777 --
Healthcare 51,786 --
Manufacturing 9,696 8,949
Interest 21,003 6,799
Salaries 43,140 9,072
Depreciation and amortization 63,125 4,591
Selling, general and other expenses 71,908 31,689
--------- ---------
547,435 61,100
--------- ---------
Loss before income taxes, minority expense of trust preferred
securities and equity in income (losses) of associated companies (35,660) (4,201)
Income taxes 273 (1,486)
--------- ---------
Loss before minority expense of trust preferred securities and
equity in income (losses) of associated companies (35,933) (2,715)
Minority expense of trust preferred securities, net of taxes -- (1,381)
Equity in income (losses) of associated companies, net of taxes 23,981 (9,690)
--------- ---------
Net loss $ (11,952) $ (13,786)
========= =========
Basic loss per common share $ (.17) $ (.23)
====== ======
Diluted loss per common share $ (.17) $ (.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, 2004 and 2003
(In thousands)
(Unaudited)
2004 2003
--------- ---------
Net cash flows from operating activities:
Net loss $ (11,952) $ (13,786)
Adjustments to reconcile net loss to net cash provided by (used for) operations:
Deferred income tax benefit -- (219)
Depreciation and amortization of property, equipment and leasehold improvements 64,434 4,968
Other amortization 683 857
Provision for doubtful accounts 982 4,472
Net securities gains (9,272) (2,305)
Equity in (income) losses of associated companies (23,981) 9,690
Distributions from associated companies 20,382 18,072
Gain on disposal of real estate, property and equipment, and other assets (10,429) (2,745)
Investments classified as trading, net 8,371 (5,654)
Net change in:
Trade, notes and other receivables 29,610 1,781
Prepaids and other assets (4,689) (4,267)
Trade payables and expense accruals (27,432) (9,399)
Other liabilities 21,878 (4,055)
Deferred revenue (6,562) --
Income taxes payable 2,661 (2,462)
Other 672 (1,677)
--------- ---------
Net cash provided by (used for) operating activities 55,356 (6,729)
--------- ---------
Net cash flows from investing activities:
Acquisition of property, equipment and leasehold improvements (18,182) (1,323)
Acquisitions of and capital expenditures for real estate investments (2,839) (1,654)
Proceeds from disposals of real estate, property and equipment, and other assets 17,055 5,303
Advances on loan receivables -- (2,906)
Principal collections on loan receivables 29,093 37,580
Advances on notes receivables -- (100)
Collections on notes receivables 26,462 3,111
Investments in associated companies (51,000) (1,853)
Purchases of investments (other than short-term) (287,498) (76,833)
Proceeds from maturities of investments 185,060 36,949
Proceeds from sales of investments 205,730 64,313
--------- ---------
Net cash provided by investing activities 103,881 62,587
--------- ---------
Net cash flows from financing activities:
Net change in customer banking deposits (26,342) (85,792)
Issuance of long-term debt, net of issuance costs -- 3,961
Reduction of long-term debt (2,682) (901)
Issuance of common shares 1,224 182
--------- ---------
Net cash used for financing activities (27,800) (82,550)
--------- ---------
Effect of foreign exchange rate changes on cash (31) 34
--------- ---------
Net increase (decrease) in cash and cash equivalents 131,406 (26,658)
Cash and cash equivalents at January 1, 214,390 418,600
--------- ---------
Cash and cash equivalents at March 31, $ 345,796 $ 391,942
========= =========
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, 2004 and 2003
(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, 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
======= ======== ======== ======== =========== ==========
Balance, January 1, 2004 $ -- $ 70,824 $613,274 $152,251 $ 1,297,812 $2,134,161
----------
Comprehensive income:
Net change in unrealized gain (loss) on
investments 22,235 22,235
Net change in unrealized foreign exchange
gain (loss) (1,029) (1,029)
Net change in unrealized gain (loss) on
derivative instruments 588 588
Net loss (11,952) (11,952)
----------
Comprehensive income 9,842
----------
Exercise of options to purchase common shares 48 1,176 1,224
------- -------- -------- -------- ----------- ----------
Balance, March 31, 2004 $ -- $ 70,872 $614,450 $174,045 $ 1,285,860 $2,145,227
======= ======== ======== ======== =========== ==========
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, 2003, 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 "2003 10-K").
Results of operations for interim periods are not necessarily indicative of
annual results of operations. The consolidated balance sheet at December
31, 2003 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 2004 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 loss would not have been materially different from that
reported.
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. In December 2003, the FASB issued a
revision ("FIN 46R") to FIN 46 to clarify certain provisions and exempt
certain entities from its requirements. In addition, FIN 46R deferred to
the first quarter of 2004 application of its provisions to certain entities
in which a variable interest was acquired prior to February 1, 2003. The
implementation of FIN 46 and FIN 46R did not have a material effect on the
Company's consolidated results of operations or financial condition.
2. Results of operations for the Company's segments are reflected from the
date of acquisition. As more fully described in the 2003 10-K, WilTel
Communications Group, Inc. ("WilTel") became a consolidated subsidiary of
the Company in November 2003, and Symphony Health Services, LLC
("Symphony") became a consolidated subsidiary of the Company in September
2003.
Except for the telecommunications segments of WilTel, the primary measure
of segment operating results and profitability used by the Company is
income (loss) from continuing operations before income taxes, minority
expense of trust preferred securities and equity in income (losses) of
associated companies. For WilTel's segments, segment profit from operations
is the primary performance measure of segment operating results and
profitability. WilTel defines segment profit from operations as income
before income taxes, interest expense, investment income, depreciation and
amortization expense and other non-operating income and expense.
The following information reconciles segment profit from operations of the
Network and Vyvx segments to the most comparable measure under generally
accepted accounting principles ("GAAP"), which is used for all other
reportable segments, for the first quarter of 2004 (in thousands):
6
Notes to Interim Consolidated Financial Statements, continued
Network Vyvx
--------- ---------
Segment profit from operations (1) $ 14,459 $ 6,351
Depreciation and amortization expense (54,545) (2,288)
Interest expense, net of investment income (2) (6,555) (556)
Other non-operating income (expense), net (2) 3,004 20
--------- --------
Income (loss) from continuing operations before income taxes,
minority expense of trust preferred securities and equity in
income (losses) of associated companies $ (43,637) $ 3,527
========= ========
(1) See note (c) to segment information below.
(2) These items have been allocated to each segment based upon a formula
that considers each segment's revenues, property and equipment and
headcount.
Certain information concerning the Company's segments for the three month
periods ended March 31, 2004 and 2003 is presented in the following table.
2004 2003
---- ----
(In thousands)
Revenues (a):
Network (b) $ 362,175 $ --
Vyvx 27,963 --
Healthcare Services 63,247 --
Banking and Lending 8,707 20,468
Manufacturing 13,401 12,166
Domestic Real Estate 17,391 10,122
Other Operations 8,650 7,070
Corporate 14,732 7,073
Intersegment elimination (c) (4,491) --
--------- --------
Total consolidated revenues $ 511,775 $ 56,899
========= ========
Income (loss) from continuing operations before income taxes,
minority expense of trust preferred securities and equity in
income (losses) of associated companies:
Network (c) $ (43,637) $ --
Vyvx (c) 3,527 --
Healthcare Services 2,383 --
Banking and Lending 5,314 4,840
Manufacturing 926 262
Domestic Real Estate 7,960 1,532
Other Operations (378) (1,074)
Corporate (11,755) (9,761)
--------- --------
Total consolidated loss from continuing operations
before income taxes, minority expense of trust
preferred securities and equity in income (losses)
of associated companies $ (35,660) $ (4,201)
========= ========
(a) Revenues for each segment include amounts for services rendered and
products sold, as well as segment reported amounts classified as
investment and other income and net securities gains (losses) on the
Company's consolidated statements of operations.
(b) Includes services provided to SBC Communications Inc. ("SBC") of
$238,400,000 pursuant to long-term preferred provider agreements as
described in the 2003 10-K.
7
Notes to Interim Consolidated Financial Statements, continued
(c) Eliminates intersegment revenues billed from Network to Vyvx. However,
the intersegment revenues are included in the calculation to determine
the income (loss) from continuing operations for each of Network and
Vyvx.
3. 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
and, with respect to WilTel, for the period prior to it becoming a
consolidated subsidiary of the Company. The information is provided for
those investments (other than WilTel) whose relative significance to the
Company could 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, 2004 (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)
March 31, March 31,
2004 2003
---- ----
Investment in Berkadia:
Total revenues $ 2,400 $ 60,300
Income from continuing operations before extraordinary items 2,200 53,200
Net income 2,200 53,200
The Company's equity in net income 800 22,800
Investment in Olympus Re Holdings, Ltd.:
Total revenues $ 134,100 $ 91,600
Income from continuing operations before extraordinary items 50,300 49,100
Net income 50,300 49,100
The Company's equity in net income 8,300 12,300
Investment in EagleRock Capital Partners (QP), LP:
Total revenues $ 5,300 $ 700
Income from continuing operations before extraordinary items 5,100 100
Net income 5,100 100
The Company's equity in net income 4,300 100
Investment in Jefferies Partners Opportunity Fund II, LLC:
Total revenues $ 7,000 $ 5,800
Income from continuing operations before extraordinary items 6,400 5,000
Net income 6,400 5,000
The Company's equity in net income 4,400 3,500
For the three month periods ended March 31, 2004 and 2003, the Company's
equity in the income of Berkadia consists of the following (in thousands):
2004 2003
---- ----
Net interest spread on the Berkadia loan - 10% of total $ -- $ 900
Net interest savings 300 400
Amortization of Berkadia loan discount related to cash fees - 50% of total 200 8,400
Amortization of Berkadia loan discount related to FINOVA stock - 50% of total 300 13,100
--------- ---------
Equity in income of associated companies - Berkadia $ 800 $ 22,800
========= =========
8
Notes to Interim Consolidated Financial Statements, continued
Since the Berkadia loan was fully repaid during the first quarter of 2004,
the Company will no longer have any income related to the Berkadia loan in
future periods.
4. A summary of investments at March 31, 2004 and December 31, 2003 is as
follows (in thousands):
March 31, 2004 December 31, 2003
----------------------------- -------------------------------
Carrying Value Carrying Value
Amortized and Estimated Amortized and Estimated
Cost Fair Value Cost Fair Value
---------- ------------- --------- --------------
Current Investments:
Investments available for sale $ 563,577 $ 580,488 $ 606,387 $ 623,570
Trading securities 63,287 75,600 74,923 86,392
Other investments, including accrued interest income 4,254 4,254 4,401 4,401
--------- --------- --------- ---------
Total current investments $ 631,118 $ 660,342 $ 685,711 $ 714,363
========= ========= ========= ==========
Non-current Investments:
Investments available for sale $ 373,752 $ 629,354 $ 420,947 $ 655,178
Other investments 18,571 18,571 18,564 18,564
--------- --------- --------- ---------
Total non-current investments $ 392,323 $ 647,925 $ 439,511 $ 673,742
========= ========= ========= =========
5. A summary of intangible assets (which are included in other assets in the
consolidated balance sheets) at March 31, 2004 and December 31, 2003 is as
follows (in thousands):
March 31, December 31,
2004 2003
-------- -----------
Mineral rights $ 47,639 $ 48,404
Tradename, net of accumulated amortization of $172 and $85 5,049 3,427
Customer relationships, net of accumulated amortization of $716 and $351 20,134 12,459
-------- --------
$ 72,822 $ 64,290
======== ========
As more fully described in the 2003 10-K, tradename and customer
relationship intangible assets were recognized in connection with the
acquisition of WilTel. The net carrying amount of these intangible assets
increased approximately $8,200,000 during the first quarter of 2004, due to
the completion of certain, but not all of the analyses used to allocate the
purchase price to the individual assets acquired, which also resulted in a
reduction to the amount initially allocated to property and equipment.
During the three months ended March 31, 2004, the Company recorded
approximately $1,500,000 of customer relationship intangible assets in
connection with an acquisition made by its manufacturing segment. The
manufacturing segment's customer relationship intangible assets will be
amortized on a straight-line basis over an average useful life of
approximately three years.
Amortization expense on intangible assets was $500,000 for the three month
period ended March 31, 2004. The estimated aggregate future amortization
expense for the tradename and customer relationship intangible assets for
each of the next five years is approximately $2,200,000. As previously
disclosed in the 2003 10-K, the intangible asset associated with mineral
rights relates to the Las Cruces mineral rights of MK Gold. These mineral
rights will be amortized once production at the Las Cruces project
commences.
9
Notes to Interim Consolidated Financial Statements, continued
6. A summary of accumulated other comprehensive income (loss) at March 31,
2004 and December 31, 2003 is as follows (in thousands):
March 31, December 31,
2004 2003
----------- ----------
Net unrealized gains on investments $ 184,023 $ 161,788
Net unrealized foreign exchange gains 6,473 7,502
Net unrealized losses on derivative instruments (2,812) (3,400)
Net minimum pension liability (13,639) (13,639)
--------- ---------
$ 174,045 $ 152,251
========= =========
7. Included in investment and other income for the three month periods ended
March 31, 2004 and 2003 is income (charges) of $(1,200,000) and $1,600,000,
respectively, as a result of accounting for its derivative financial
instruments in accordance with Statement of Financial Accounting Standards
No. 133 ("SFAS 133").
8. Pension expense for the three month periods ended March 31, 2004 and 2003
related to the defined benefit pension plan (other than WilTel's plan)
charged to operations included the following components (in thousands):
2004 2003
---- ----
Interest cost $ 532 $ 581
Expected return on plan assets (448) (445)
Actuarial loss 144 60
Amortization of prior service cost 1 1
------ ------
Net pension expense $ 229 $ 197
====== ======
WilTel's pension expense for the three month period ended March 31, 2004
related to the defined benefit pension plan charged to operations included
the following components (in thousands):
Interest cost $ 1,612
Service cost 863
Expected return on plan assets (960)
-------
Net pension expense $ 1,515
=======
Employer contributions to WilTel's defined benefit pension plan were not
material during the first quarter of 2004.
Several subsidiaries provide certain healthcare and other benefits to
certain retired employees under plans which are currently unfunded. The
Company pays the cost of postretirement benefits as they are incurred.
Amounts charged to expense were not material in each of the three month
periods ended March 31, 2004 and 2003.
9. Income tax expense for the three months ended March 31, 2004 relates to
state income taxes. The Company has not recorded a federal income tax
benefit for its loss from operations due to the uncertainty of future
taxable income required to recognize a federal income tax benefit.
10
Notes to Interim Consolidated Financial Statements, continued
10. Per share amounts were calculated by dividing net loss by the sum of the
weighted average number of common shares outstanding. The number of shares
used to calculate basic and diluted loss per share amounts was 70,848,000
and 59,618,000 for the three month periods ended March 31, 2004 and 2003,
respectively. For 2004 and 2003, options and warrants to purchase
approximately 621,000 and 373,000 weighted average shares of common stock,
respectively, were outstanding but were not included in the computation of
diluted 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.
11. Cash paid for interest and net income taxes paid (refunded) was $27,600,000
and $(28,000,000), respectively for the three month period ended March 31,
2004 and $8,500,000 and $400,000, respectively, for the three month period
ended March 31, 2003.
12. In March 2004, the Company entered into agreements to sell its subprime
automobile and collateralized consumer loan portfolios, which represent 97%
of banking and lending's total outstanding loans (net of unearned finance
charges) as of March 31, 2004. The sales closed during the second quarter
of 2004, and the Company received aggregate cash proceeds of approximately
$149,000,000 and will report a pre-tax gain of approximately $8,000,000.
The remaining activities at the banking and lending segment primarily
consist of the collection or sale of its remaining loans (including
pursuing recoveries for previously written-off loans) and the retirement or
sale of its customer banking deposits using the segment's available cash.
The Company expects to complete these activities during 2004, and will then
surrender its national bank charter. Once the liquidation of this segment
is complete, it will be reclassified as a discontinued operation.
13. Effective March 2004, the Company amended its unsecured bank credit
facility to extend its maturity to March 2007. As of March 31, 2004, no
amounts were outstanding under this $110,000,000 bank credit facility.
14. In April 2004, the Company sold $100,000,000 principal amount of its 7%
Senior Notes due 2013 in a private placement transaction at 102.191% of the
principal amount. The net cash proceeds from the sale of the notes are
being used for general corporate purposes. The Company is obligated to
complete a registered exchange offer pursuant to which each holder of the
privately placed senior notes will have the opportunity to exchange those
notes for publicly registered notes.
In April 2004, the Company sold $350,000,000 principal amount of its 3 3/4%
Convertible Senior Subordinated Notes due 2014 in a private placement
transaction. The notes are convertible into the Company's common shares at
any time before their maturity, subject to certain restrictions contained
in the notes, at a conversion rate of 14.5138 shares per each $1,000
principal amount of notes (an aggregate of 5,079,830 shares), subject to
adjustment. The net cash proceeds from the sale of the notes are being used
for general corporate purposes. The Company is obligated to file a shelf
registration statement in respect of the notes and the common shares
issuable upon conversion of the notes.
11
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 2003
10-K.
Liquidity and Capital Resources
For the three month period ended March 31, 2004, net cash was provided by
operations principally as a result of distributions from associated companies,
the pre-funding by SBC of certain of WilTel's capital expenditures, as described
below, and the refund of excess federal income tax payments. 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.
As of March 31, 2004, the Company's readily available cash, cash equivalents and
marketable securities, excluding amounts held by its regulated subsidiaries and
non-regulated subsidiaries that are parties to agreements which restrict the
payment of dividends, totaled $1,216,600,000. This amount is comprised of cash
and short-term bonds and notes of the United States Government and its agencies
of $627,300,000 (52%), the equity investment in White Mountains Insurance Group,
Ltd. of $196,700,000 (16%) (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 $392,600,000 (32%).
In January 2004 the Company invested $50,000,000 for a limited partnership
interest in Pershing Square, L.P. ("Pershing"), a partnership that is authorized
to engage in a variety of investing activities. The Company has the right to
receive an annual distribution equal to its share of Pershing's profits, if any,
but cannot otherwise redeem its investment prior to December 31, 2005. The
Company recorded $2,900,000 of pre-tax income from this investment under the
equity method of accounting for the first quarter of 2004.
As of March 31, 2004, WilTel had aggregate cash and investments of $220,900,000
(excluding investments pledged as collateral), an increase of $35,100,000 from
December 31, 2003. During the first quarter of 2004, net cash was generated by
WilTel's operating activities, and WilTel's capital expenditures were
$15,200,000. In addition, in conjunction with a pricing agreement for certain
voice services, WilTel received $25,000,000 from SBC for pre-funding of certain
capital expenditures. If WilTel and SBC enter into another pricing agreement for
certain voice services by January 2005, WilTel will be required to refund this
amount to SBC. If WilTel and SBC do not enter into another pricing agreement by
such date, to the extent the $25,000,000 is not spent as outlined in the
agreement, the unspent portion is to be returned to SBC. The Company has
reflected the amount received as a liability in its consolidated balance sheet.
WilTel is a party to various legal actions and claims, and has reserved
$37,900,000 for the satisfaction of all litigation. Certain of these actions
relate to the rights of way licensed to WilTel in connection with the
installation of its fiber-optic cable and seek damages from WilTel for failure
to obtain all necessary landowner consents. Additional right of way claims may
be asserted against WilTel. The Company does not believe that the ultimate
resolution of all claims, legal actions and complaints will have a material
adverse effect upon WilTel's results of operations, although unfavorable
outcomes could significantly impact WilTel's liquidity.
In a recent ruling, the Federal Communications Commission ("FCC") clarified that
whenever traffic originates and terminates on the public switched telephone
network, long distance carriers (such as WilTel) that carry such traffic must
pay access charges. Regional Bell Operating Companies have attempted to recover
unpaid access charges from long distance carriers who were following business
practices not consistent with the recent FCC ruling. Although WilTel had been
actively seeking clarification from the FCC concerning this matter, WilTel's
policy has been to accrue access charges in a manner that it believes is
consistent with the FCC's ruling. The FCC's ruling is not expected to have any
material impact on WilTel; however, certain of WilTel's customers may be
adversely affected.
As of December 31, 2003, Symphony was not in compliance with a financial
covenant contained in its $50,000,000 credit facility but had obtained a waiver
from the lender that suspended application of the covenant until March 31, 2004.
Symphony was in compliance with the covenant as of March 31, 2004, and expects
it will continue to be in compliance in the future.
12
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
The Company's consolidated banking and lending operations had outstanding loans
(net of unearned finance charges) of $168,900,000 and $205,500,000 at March 31,
2004 and December 31, 2003, respectively. At March 31, 2004, 45% were loans to
individuals generally collateralized by automobiles; 51% were loans to
consumers, substantially all of which were collateralized by real or personal
property; 2% were loans to small businesses; and 2% were unsecured loans. The
banking and lending segment is no longer making consumer loans; operating
activities at this segment have been limited to maximizing the amount collected
from its loan portfolios (including pursuing recoveries for previously
written-off loans) and liquidating the business in an orderly and cost efficient
manner. These loans were primarily funded by deposits generated by the Company's
deposit-taking facilities and by brokers, which totaled $119,100,000 and
$145,500,000 at March 31, 2004 and December 31, 2003, respectively. The cash
flows generated from the collections on its loan portfolios have been used to
retire these deposits as they matured.
In March 2004, the Company entered into agreements to sell its subprime
automobile and collateralized consumer loan portfolios. These portfolios are
classified as current assets as of March 31, 2004. The sales closed during the
second quarter of 2004, and the Company received aggregate cash proceeds of
approximately $149,000,000. The Company expects to complete the liquidation of
this segment during 2004, and will reclassify the segment as a discontinued
operation at that time.
Effective March 2004, the Company amended its unsecured bank credit facility to
extend its maturity to March 2007. As of March 31, 2004, no amounts were
outstanding under this $110,000,000 bank credit facility.
In April 2004, the Company sold $100,000,000 principal amount of its 7% Senior
Notes due 2013 in a private placement transaction at 102.191% of the principal
amount. In April 2004, the Company sold $350,000,000 principal amount of its 3
3/4% Convertible Senior Subordinated Notes due 2014 in a private placement
transaction. The net cash proceeds from the sales of the 7% Senior Notes and the
3 3/4% Convertible Senior Subordinated Notes are being used for general
corporate purposes.
Results of Operations
Three Months Ended March 31, 2004 Compared to the Three Months
Ended March 31, 2003
Telecommunications
The following table reconciles WilTel's segment profit from operations to
pre-tax income (loss) for the first quarter of 2004. For WilTel's segments,
segment profit from operations is the primary performance measure of segment
operating results and profitability. WilTel defines segment profit from
operations as income before income taxes, interest expense, investment income,
depreciation and amortization expense and other non-operating income and
expense.
Network Vyvx Total
------- ---- -----
(In thousands)
Operating revenues (1) $ 353,100 $ 27,800 $ 380,900
========== ========= ==========
Segment profit from operations $ 14,500 $ 6,400 $ 20,900
Depreciation and amortization expense (54,500) (2,300) (56,800)
Interest expense, net of investment income (2) (6,600) (600) (7,200)
Other non-operating income (expense), net (2) 3,000 -- 3,000
---------- --------- ----------
Pre-tax income (loss) $ (43,600) $ 3,500 $ (40,100)
========== ========= ==========
(1) Excludes intersegment revenues from amounts billed by Network to Vyvx of
$4,500,000.
(2) These items have been allocated to each segment based upon a formula that
considers each segment's revenues, property and equipment and headcount.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
As more fully discussed in the 2003 10-K, prior to November 2003 the Company
accounted for its 47.4% share of WilTel's losses under the equity method of
accounting, and recorded losses related to its investment in WilTel of
$34,800,000 for the first quarter of 2003.
SBC, a major communications provider in the U.S., is WilTel's largest customer.
As more fully described in the 2003 10-K, WilTel and SBC have entered into
preferred provider agreements that extend until 2019, which govern the manner in
which pricing for individual services is determined. Network's revenues include
services provided to SBC of $238,400,000 during 2004, representing approximately
66% of total Network revenues. Network's revenues from SBC have continued to
grow, principally related to voice products, for which SBC and WilTel have
agreed to use a fixed price through January 2005. The growth in voice revenue
resulted from, in part, SBC's continued growth in long distance services in
various states, including California, Michigan, Indiana, Ohio, Illinois and
Wisconsin. Revenues and gross margins for non-SBC related business continue to
reflect the excess telecommunications capacity in the marketplace, which has
resulted in lower prices for WilTel and others in the industry, and created a
very competitive environment for acquiring new business.
Network cost of sales reflects the level of revenues, primarily due to traffic
related access and egress costs. The Company's consolidated statement of
operations includes salaries expense of $27,600,000 and selling, general and
other expenses of $38,300,000 for Network during the first quarter of 2004.
Other income includes a gain of $2,800,000 related to cash and securities
received in excess of the book value of a secured claim in a customer's
bankruptcy.
Vyvx revenues and profitability reflect the typical seasonality of the
advertising distribution business, with lower volumes in the early part of the
year as compared to higher volumes during the holiday movie season later in the
year. Cost of sales reflects the level of revenue. The Company's consolidated
statement of operations includes salaries expense of $4,200,000 and selling,
general and other expenses of $3,600,000 for Vyvx during the first quarter of
2004.
Healthcare Services
For the three month period ended March 31, 2004, the pre-tax income of the
healthcare services segment was $2,400,000. During this period, healthcare
services revenues were $63,200,000 and cost of sales, which primarily consist of
salaries and employee benefits, were $51,800,000. Legislative caps on Part B
Medicare therapy, which negatively impacted Symphony's revenues in 2003, have
been removed for 2004 and 2005, and the fee schedule for such services has also
been increased by 1.5%. As a result, Symphony's revenues for these therapy
services increased 39% in the first quarter of 2004 compared to the fourth
quarter of 2003, comparing only those locations that were operating during both
quarters. Symphony also added new customers during 2004; however, certain low
margin and non-profitable accounts were cancelled resulting in a slight decrease
in total locations serviced. For the first quarter of 2004, one customer
accounted for approximately 16% of Symphony's revenues.
The ability of Symphony to continue to grow its business depends heavily upon
its ability to attract, develop and retain qualified therapists. There is a
current shortage of qualified therapists industry-wide, and Symphony has open
positions for both full-time and part-time professionals. The inability to fully
staff these positions in-house causes Symphony and others in its industry to
hire independent contractors to perform required services, which increases
costs, thereby reducing margins, and can also result in lost revenue
opportunities.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
Banking and Lending
As stated previously, the current activities of the banking and lending segment
are limited to liquidating its business in an orderly and cost efficient manner.
As a result, revenues and expenses for this segment included in the Company's
consolidated statements of operations are reflective of the continuing decrease
in the size of the loan portfolio. Pre-tax income for the banking and lending
segment was $5,300,000 and $4,800,000 for the three months ended March 31, 2004
and 2003, respectively.
Finance revenues, which reflect both the level and mix of consumer instalment
loans, decreased in the three month period ended March 31, 2004 as compared to
the similar period in 2003 due to fewer average loans outstanding. Average loans
outstanding were $185,900,000 and $348,500,000 for the three month periods ended
March 31, 2004 and 2003, respectively. Although finance revenues decreased in
the 2004 period as compared to the same period in 2003, pre-tax results
increased primarily due to a $1,800,000 reduction in interest expense,
principally resulting from reduced customer banking deposits, a decline in the
provision for loan losses, less interest paid on interest rate swaps and lower
salaries expense resulting from the segment's restructuring efforts. Pre-tax
results for the banking and lending segment in the 2003 period also includes
gains related to the mark-to-market values of interest rate swaps of $1,700,000.
In the three month period ended March 31, 2004, the banking and lending
segment's provision for loan losses decreased as compared to the same period in
2003 primarily due to the decline in loans outstanding and lower net
charge-offs. At March 31, 2004, the allowance for loan losses for the Company's
entire loan portfolio was $17,300,000 or 10.2% of the outstanding loans, as
compared to $24,200,000 or 11.8% of the outstanding loans at December 31, 2003.
Manufacturing
Manufacturing revenues increased approximately 10% in the first quarter of 2004
as compared to the same period in 2003 primarily due to increases in the
construction, carpet padding and agricultural markets, although revenues in the
consumer products and packaging markets declined. Although raw material costs
have increased in 2004, the Company has increased selling prices in most
markets, which has enabled it to maintain its gross profit margins. The increase
in pre-tax results for 2004 reflects the revenue and gross margin increase and
lower operating expenses than in 2003, primarily due to workforce reductions and
other cost reduction initiatives.
Domestic Real Estate
Revenues and pre-tax income from domestic real estate increased in the first
quarter of 2004 as compared to the same period in 2003 principally as a result
of increased gains from property sales of $6,100,000. In January 2004, the
Company closed on the sale of appropriately 2,400 acres of unimproved land in
Utah which it had owned since 1997 for cash proceeds of $8,800,000, and
recognized a gain of $7,600,000. Pre-tax income for 2004 also reflects increased
operating profits at the Company's Hawaiian hotel.
The Company has begun a lot sales program with respect to its proposed 95-lot
development project in South Walton County, Florida, which had a book value of
$10,600,000 at March 31, 2004. The Company has entered into agreements to sell
73 lots at a total sales price of approximately $39,000,000, subject to the
buyers approval of certain project documents and customary closing conditions.
The Company began marketing the remaining lots for sale during May 2004. All of
the lot sale agreements will require the Company to complete certain
improvements to the lots as a condition to closing, which improvements the
Company expects to complete during 2004.
15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
Corporate and Other Operations
Net security gains for the three month period ended March 31, 2004 include gains
on the sale of a portion of the investment in Carmike Cinemas, Inc., which
reduced the common stock interest in Carmike to 6%. 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.
The increase in investment and other income in the three month period ended
March 31, 2004 as compared to the same period in 2003 principally reflects
greater revenues from the Company's gas operations and other miscellaneous
income, although revenues from the Company's wineries declined. Corporate
investment and other income also reflects a decline related to the accounting
for mark-to-market values of Corporate derivatives.
The increase in interest expense in 2004 as compared to 2003 primarily reflects
interest expense relating to the $275,000,000 aggregate principal amount of the
7% Senior Notes that the Company issued subsequent to the first quarter of 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 Statement of Financial
Accounting Standards No. 150.
Income tax expense for the three months ended March 31, 2004 relates to state
income taxes. The Company has not recorded a federal income tax benefit for its
loss from operations due to the uncertainty of future taxable income required to
recognize a federal income tax benefit.
Associated Companies
Equity in income (losses) of associated companies for the three month periods
ended March 31, 2004 and 2003 includes the following (in thousands):
2004 2003
---- ----
Berkadia $ 800 $ 22,800
Olympus Re Holdings, Ltd. 8,300 12,300
WilTel -- (34,800)
EagleRock Capital Partners (QP), LP 4,300 100
Jefferies Partners Opportunity Fund II, LLC 4,400 3,500
HomeFed Corporation 2,000 (700)
Pershing 2,900 --
Other 1,300 900
-------- ---------
Pre-tax 24,000 4,100
Income tax expense -- 13,800
-------- ---------
Equity in income (losses), net of taxes $ 24,000 $ (9,700)
======== =========
Since the Berkadia loan was fully repaid during the first quarter of 2004, the
Company will no longer have any income related to the Berkadia loan in the
future.
The reduction in the Company's equity in income of Olympus reflects the
reduction in the Company's ownership interest as discussed in the 2003 10-K.
As more fully discussed in the 2003 10-K, WilTel became a consolidated
subsidiary in November 2003 and the Company ceased applying the equity method of
accounting at that time.
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
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, 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:
A worsening of general economic and market conditions or increases in
prevailing interest rate levels, which may result in reduced sales of our
products and services, lower valuations for our associated companies and
investments or a negative impact on the credit quality of our assets;
Changes in foreign and domestic laws, regulations and taxes, which may
result in higher costs and lower revenue for our businesses, including as a
result of unfavorable political and diplomatic developments, currency
fluctuations, changes in governmental policies, expropriation,
nationalization, confiscation of assets and changes in legislation relating
to non-U.S. ownership;
Increased competition and changes in pricing environments, which may result
in decreasing revenues and/or margins, increased raw materials costs for
our plastics business, loss of market share or significant price erosion;
Continued instability and uncertainty in the telecommunications industry,
associated with increased competition, aggressive pricing and overcapacity;
Dependence on key personnel, the loss of which would severely affect our
ability to develop and implement our business strategy;
Inability to attract and retain highly skilled personnel, which would make
it difficult to conduct the businesses of certain of our subsidiaries,
including WilTel and Symphony;
Adverse legal and regulatory developments that may affect particular
businesses, such as regulatory developments in the telecommunications and
healthcare industries, or in the environmental area, which could affect the
Company's real estate development activities and telecommunications
business, as well as the Company's other operations;
Weather related conditions and significant natural disasters, including
hurricanes, tornadoes, windstorms, earthquakes and hailstorms, which may
impact our wineries, real estate holdings and reinsurance operations;
The inability to reinsure certain risks economically, which could result in
the Company having to self-insure business risks;
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
Changes in U.S. real estate markets, including the residential market in
Southern California and the commercial market in Washington D.C., which are
sensitive to mortgage interest rate levels, and the vacation market in
Hawaii;
Adverse economic, political or environmental developments in Spain, which
could delay or preclude the issuance of permits necessary to develop the
Company's copper mineral rights or which could result in increased costs of
bringing the project to completion and increased costs in financing the
development of the project;
Decreases in world wide copper prices, which could adversely affect the
commercial viability of the Company's mineral rights in Spain;
The inability to obtain the necessary financing for the Las Cruces copper
mining project, which could delay or prevent completion of the project;
WilTel's dependence on a small number of suppliers and high-volume
customers (including SBC), the loss of any of which could adversely affect
WilTel's ability to generate operating profits and positive cash flows;
Changes in telecommunications laws and regulations, which could adversely
affect WilTel and its customers through, for example, higher costs,
increased competition and a loss of revenue;
WilTel's ability to adapt to technological developments or continued or
increased pricing competition in the telecommunications industry, which
could adversely affect WilTel's ability to generate operating profits and
positive cash flows;
WilTel's inability to generate operating profits and positive cash flows,
which could result in a default under WilTel's credit agreement, pursuant
to which substantially all of its assets are pledged;
Current and future legal and administrative claims and proceedings against
WilTel, which may result in increased costs and diversion of management's
attention;
WilTel's ability to acquire or maintain rights of way necessary for the
operation of its network, which could require WilTel to find alternate
routes or increase WilTel's costs to provide services to its customers;
Changes in economic conditions including those affecting real estate and
other collateral values, the continued financial stability of the Company's
borrowers and their ability to make loan principal and interest payments;
Regional or general increases in the cost of living, particularly in the
regions in which the Company has operations or sells its products or
services, which may result in lower sales of such products and service; and
Risks associated with future acquisitions and investments, including
changes in the composition of the Company's assets and liabilities through
such acquisitions, diversion of management's attention from normal daily
operations of the business and insufficient revenues to offset increased
expenses associated with acquisitions.
18
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
This list of factors that may affect future performance and the accuracy of
forward-looking statements is illustrative, but is not intended to be
exhaustive. Therefore, all forward-looking statements should be evaluated with
the understanding of their inherent uncertainty. Undue reliance should not be
placed on these forward-looking statements. The Company does not undertake any
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, 2003, and is
incorporated by reference herein.
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 March 31, 2004. 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 March 31, 2004.
(b) There were no significant changes in the Company's internal controls 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 March
31, 2004, that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
19
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 March 5,
2004, March 12, 2004, March 19, 2004 and March 26, 2004, which
set forth information under Item 5. Other Events and Item 7.
Financial Statements and Exhibits.
20
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 7, 2004 By: /s/ Barbara L. Lowenthal
------------------------------
Barbara L. Lowenthal
Vice President and Comptroller
(Chief Accounting Officer)
21
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.