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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 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 July 30, 2004: 70,900,502.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2004 and December 31, 2003
(Dollars in thousands, except par value)
June 30, December 31,
2004 2003
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 563,021 $ 214,390
Investments 910,823 714,363
Trade, notes and other receivables, net 331,803 372,104
Prepaids and other current assets 51,301 49,506
----------- -----------
Total current assets 1,856,948 1,350,363
Non-current investments 729,776 673,742
Notes and other receivables, net 18,180 193,459
Other assets 247,946 223,970
Property, equipment and leasehold improvements, net 1,423,714 1,524,718
Investments in associated companies 492,130 430,912
----------- -----------
Total $ 4,768,694 $ 4,397,164
=========== ===========
LIABILITIES
Current liabilities:
Trade payables and expense accruals $ 377,851 $ 377,473
Deferred revenue 43,945 47,311
Other current liabilities 103,087 89,390
Customer banking deposits due within one year 50,784 103,331
Long-term debt due within one year 50,614 23,956
Income taxes payable 18,821 15,867
----------- -----------
Total current liabilities 645,102 657,328
Long-term deferred revenue 158,280 156,582
Other non-current liabilities 220,266 234,446
Non-current customer banking deposits 13,414 42,201
Long-term debt 1,579,941 1,154,878
----------- -----------
Total liabilities 2,617,003 2,245,435
----------- -----------
Commitments and contingencies
Minority interest 16,555 17,568
----------- -----------
Shareholders' Equity
Common shares, par value $1 per share, authorized 150,000,000 shares;
70,896,002 and 70,823,502 shares issued and outstanding, after deducting
47,710,719 shares held in treasury 70,896 70,824
Additional paid-in capital 615,014 613,274
Accumulated other comprehensive income 129,391 152,251
Retained earnings 1,319,835 1,297,812
----------- -----------
Total shareholders' equity 2,135,136 2,134,161
----------- -----------
Total $ 4,768,694 $ 4,397,164
=========== ===========
See notes to interim consolidated financial statements.
2
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the periods ended June 30, 2004 and 2003
(In thousands, except per share amounts)
(Unaudited)
For the Three Month For the Six Month
Period Ended June 30, Period Ended June 30,
--------------------- ---------------------
2004 2003 2004 2003
---- ---- ---- ----
Revenues:
Telecommunications $ 395,414 $ -- $ 776,393 $ --
Healthcare 64,044 -- 127,271 --
Manufacturing 16,683 14,078 30,065 26,225
Finance 1,279 14,734 9,764 31,878
Investment and other income 41,526 40,609 77,956 65,912
Net securities gains (losses) 52,346 (2,091) 61,618 214
--------- -------- --------- ---------
571,292 67,330 1,083,067 124,229
--------- -------- --------- ---------
Expenses:
Cost of sales:
Telecommunications 285,514 -- 572,291 --
Healthcare 52,281 -- 104,067 --
Manufacturing 11,831 10,201 21,527 19,150
Interest 24,743 7,473 45,746 14,272
Salaries 45,584 6,927 88,724 15,999
Depreciation and amortization 58,975 3,921 122,100 8,512
Selling, general and other expenses 68,485 27,139 140,393 58,828
--------- -------- --------- ---------
547,413 55,661 1,094,848 116,761
--------- -------- --------- ---------
Income (loss) from continuing operations before income taxes,
minority expense of trust preferred securities and equity
in income (losses) of associated companies 23,879 11,669 (11,781) 7,468
Income tax provision (benefit) (3,889) 1,348 (3,616) (138)
--------- -------- --------- ---------
Income (loss) from continuing operations before minority
expense of trust preferred securities and equity in
income (losses) of associated companies 27,768 10,321 (8,165) 7,606
Minority expense of trust preferred securities, net of taxes -- (1,380) -- (2,761)
Equity in income (losses) of associated companies, net of taxes 4,151 2,542 28,132 (7,148)
--------- -------- --------- ---------
Income (loss) from continuing operations 31,919 11,483 19,967 (2,303)
Income from discontinued operations, net of tax benefit of $663
for 2003 2,056 3,934 2,056 3,934
--------- -------- --------- ---------
Net income $ 33,975 $ 15,417 $ 22,023 $ 1,631
========= ======== ========= =========
Basic earnings (loss) per common share:
Income (loss) from continuing operations $ .45 $ .19 $ .28 $ (.04)
Income from discontinued operations .03 07 .03 .07
--------- -------- --------- ---------
Net income $ .48 $ .26 $ .31 $ .03
========= ======== ========= =========
Diluted earnings (loss) per common share:
Income (loss) from continuing operations $ .44 $ .19 $ .28 $ (.04)
Income from discontinued operations .03 07 .03 .07
--------- -------- --------- ---------
Net income $ .47 $ .26 $ .31 $ .03
========= ======== ========= =========
See notes to interim consolidated financial statements.
3
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the six months ended June 30, 2004 and 2003
(In thousands)
(Unaudited)
2004 2003
---- ----
Net cash flows from operating activities:
Net income $ 22,023 $ 1,631
Adjustments to reconcile net income to net cash provided by (used for) operations:
Deferred income tax provision (benefit) 10,752 (2,248)
Depreciation and amortization of property, equipment and leasehold improvements 124,564 9,893
Other amortization 1,127 82
Provision for doubtful accounts (6,542) 5,357
Net securities gains (61,618) (214)
Equity in (income) losses of associated companies (43,280) 7,148
Distributions from associated companies 20,948 22,129
Gain on disposal of real estate, property and equipment, loan receivables and
other assets (16,197) (13,950)
Gain on disposal of discontinued operations (2,056) --
Investments classified as trading, net 11,608 (9,446)
Net change in:
Trade, notes and other receivables 28,195 (5,113)
Prepaids and other assets (14,091) (12,060)
Trade payables and expense accruals 13,236 (12,885)
Other liabilities 7,559 (2,006)
Deferred revenue (1,668) --
Income taxes payable 2,954 1,734
Other (1,689) (337)
Net change in net assets of discontinued operations -- (1,824)
----------- ----------
Net cash provided by (used for) operating activities 95,825 (12,109)
----------- ----------
Net cash flows from investing activities:
Acquisition of property, equipment and leasehold improvements (48,074) (3,308)
Acquisitions of and capital expenditures for real estate investments (5,193) (11,383)
Proceeds from disposals of real estate, property and equipment, and other assets 25,467 13,829
Cash acquired upon acquisition of WebLink -- 21,459
Advances on loan receivables -- (2,966)
Principal collections on loan receivables 37,280 73,674
Proceeds from sale of loan receivables 149,042 --
Advances on notes receivables (400) (400)
Collections on notes receivables 26,868 13,214
Investments in associated companies (51,422) (11,390)
Purchases of investments (other than short-term) (1,202,857) (520,385)
Proceeds from maturities of investments 402,225 140,405
Proceeds from sales of investments 567,756 307,446
----------- ----------
Net cash provided by (used for) investing activities (99,308) 20,195
----------- ----------
Net cash flows from financing activities:
Net change in customer banking deposits (81,002) (138,697)
Issuance of long-term debt, net of issuance costs 437,598 211,049
Reduction of long-term debt (6,182) (2,548)
Issuance of common shares 1,812 522
----------- ----------
Net cash provided by financing activities 352,226 70,326
----------- ----------
Effect of foreign exchange rate changes on cash (112) 302
----------- ----------
Net increase in cash and cash equivalents 348,631 78,714
Cash and cash equivalents at January 1, 214,390 418,600
----------- ----------
Cash and cash equivalents at June 30, $ 563,021 $ 497,314
=========== ==========
See notes to interim consolidated financial statements.
4
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
For the six months ended June 30, 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, net of taxes of $24,541 45,435 45,435
Net change in unrealized foreign exchange
gain (loss), net of taxes of $971 4,468 4,468
Net change in unrealized gain (loss) on
derivative instruments, net of taxes of $399 (741) (741)
Net income 1,631 1,631
----------
Comprehensive income 50,793
----------
Conversion of convertible preferred shares into
common shares (47,507) 1,348 46,159 --
Exercise of options to purchase common shares 22 500 522
Purchase of stock for treasury (2) (59) (61)
------- ------- -------- -------- ---------- ----------
Balance, June 30, 2003 $ -- $59,637 $200,860 $105,187 $1,220,095 $1,585,779
======= ======= ======== ======== ========== ==========
Balance, January 1, 2004 $ -- $70,824 $613,274 $152,251 $1,297,812 $2,134,161
----------
Comprehensive loss:
Net change in unrealized gain (loss) on
investments, net of taxes of $10,545 (22,421) (22,421)
Net change in unrealized foreign exchange
gain (loss), net of taxes of $504 (1,072) (1,072)
Net change in unrealized gain (loss) on
derivative instruments, net of taxes of $297 633 633
Net income 22,023 22,023
----------
Comprehensive loss (837)
----------
Exercise of options to purchase common shares 72 1,740 1,812
------- ------- -------- -------- ---------- ----------
Balance, June 30, 2004 $ -- $70,896 $615,014 $129,391 $1,319,835 $2,135,136
======= ======= ======== ======== ========== ==========
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 of normal recurring items or items discussed
herein) 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 accounting principles generally accepted in the
United States of America ("GAAP") 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 income would not have been materially different from that
reported.
In January 2003, the Financial Accounting Standards Board ("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 GAAP, which
is used for all other reportable segments, for the three and six month
periods ended June 30, 2004 (in thousands):
6
Notes to Interim Consolidated Financial Statements, continued
For the Three Month For the Six Month
Period Ended June 30, 2004 Period Ended June 30, 2004
-------------------------- --------------------------
Network Vyvx Network Vyvx
------- ---- ------- ----
Segment profit from operations (1) $ 31,891 $ 8,713 $ 46,350 $ 15,064
Depreciation and amortization expense (51,117) (2,174) (105,662) (4,462)
Interest expense, net of investment income (2) (7,047) (529) (13,602) (1,085)
Other non-operating income (expense), net (2) (66) (6) 2,938 14
--------- --------- ---------- --------
Income (loss) from continuing operations before income taxes,
minority expense of trust preferred securities and equity in
income (losses) of associated companies $ (26,339) $ 6,004 $ (69,976) $ 9,531
========= ========= ========== ========
(1) See note (d) 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 and six
month periods ended June 30, 2004 and 2003 is presented in the following
table.
For the Three Month For the Six Month
Period Ended June 30, Period Ended June 30,
--------------------- ---------------------
2004 2003 2004 2003
---- ---- ---- ----
Revenues (a):
Network (b) $ 369,698 $ -- $ 731,873 $ --
Vyvx 31,421 -- 59,384 --
Healthcare Services 64,068 -- 127,315 --
Banking and Lending 11,183 16,720 19,890 37,188
Manufacturing 16,675 14,437 30,076 26,603
Domestic Real Estate 10,363 16,104 27,754 26,226
Other Operations 8,153 8,105 16,803 15,175
Corporate (c) 64,312 11,964 79,044 19,037
Intersegment elimination (d) (4,581) -- (9,072) --
--------- --------- ---------- ----------
Total consolidated revenues $ 571,292 $ 67,330 $1,083,067 $ 124,229
========= ========= ========== ==========
Income (loss) from continuing operations before income taxes,
minority expense of trust preferred securities and equity in
income (losses) of associated companies:
Network (d) $ (26,339) $ -- $ (69,976) $ --
Vyvx (d) 6,004 -- 9,531 --
Healthcare Services 5,405 -- 7,788 --
Banking and Lending 9,252 7,080 14,566 11,920
Manufacturing 2,336 1,515 3,262 1,777
Domestic Real Estate (5,382) 7,158 2,578 8,690
Other Operations (1,440) (140) (1,818) (1,214)
Corporate (c) 34,043 (3,944) 22,288 (13,705)
--------- --------- ---------- ----------
Total consolidated income (loss) from continuing
operations before income taxes, minority expense of
trust preferred securities and equity in income (losses)
of associated companies $ 23,879 $ 11,669 $ (11,781) $ 7,468
========= ========= ========== ==========
7
Notes to Interim Consolidated Financial Statements, continued
(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
$261,600,000 and $500,000,000, respectively, for the three and six
month periods ended June 30, 2004, pursuant to long-term preferred
provider agreements as described in the 2003 10-K.
(c) Includes net securities gains of $52,500,000 and $61,500,000,
respectively, for the three and six month periods ended June 30, 2004.
(d) 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).
June 30,
2003
----------
Investment in WilTel:
Total revenues $ 611,500
Loss from continuing operations before extraordinary items (119,900)
Net loss (119,900)
The Company's equity in net loss (57,100)
June 30, June 30,
2004 2003
--------- --------
Investment in Berkadia:
Total revenues $ 2,400 $ 80,500
Income from continuing operations before extraordinary items 2,200 68,100
Net income 2,200 68,100
The Company's equity in net income 800 27,300
Investment in Olympus Re Holdings, Ltd.:
Total revenues $ 244,400 $ 209,900
Income from continuing operations before extraordinary items 96,700 90,100
Net income 96,700 90,100
The Company's equity in net income 15,500 22,500
Investment in EagleRock Capital Partners (QP), LP:
Total revenues $ 7,400 $ 16,500
Income from continuing operations before extraordinary items 6,900 14,500
Net income 6,900 14,500
The Company's equity in net income 5,900 14,300
Investment in Jefferies Partners Opportunity Fund II, LLC:
Total revenues $ 13,900 $ 11,100
Income from continuing operations before extraordinary items 12,600 9,700
Net income 12,600 9,700
The Company's equity in net income 8,700 6,900
8
Notes to Interim Consolidated Financial Statements, continued
For the three and six month periods ended June 30, 2004 and 2003, the
Company's equity in the income of Berkadia consists of the following (in
thousands):
For the Three Month For the Six Month
Period Ended June 30, Period Ended June 30,
--------------------- ---------------------
2004 2003 2004 2003
---- ---- ---- ----
Net interest spread on the Berkadia loan - 10% of total $ -- $ 600 $ -- $ 1,500
Net interest savings -- 500 300 900
Amortization of Berkadia loan discount related to cash fees -
50% of total -- 1,300 200 9,700
Amortization of Berkadia loan discount related to FINOVA
stock - 50% of total -- 2,100 300 15,200
------ ------ ------- --------
Equity in income of associated companies - Berkadia $ -- $ 4,500 $ 800 $ 27,300
====== ======= ======= ========
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.
Equity in income of associated companies is net of income tax expense of
$15,200,000 and $13,500,000 for the three month periods ended June 30, 2004
and 2003, respectively, and $15,200,000 and $27,200,000 for the six month
periods ended June 30, 2004 and 2003, respectively.
4. A summary of investments at June 30, 2004 and December 31, 2003 is as
follows (in thousands):
June 30, 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 $ 838,977 $ 838,809 $ 606,387 $ 623,570
Trading securities 55,901 65,084 74,923 86,392
Other investments, including accrued interest income 6,930 6,930 4,401 4,401
--------- ---------- --------- ----------
Total current investments $ 901,808 $ 910,823 $ 685,711 $ 714,363
========= ========== ========= ==========
Non-current Investments:
Investments available for sale $ 492,449 $ 712,100 $ 420,947 $ 655,178
Other investments 17,676 17,676 18,564 18,564
--------- ---------- --------- ----------
Total non-current investments $ 510,125 $ 729,776 $ 439,511 $ 673,742
========= ========== ========= ==========
5. A summary of intangible assets (which are included in other assets in the
consolidated balance sheets) at June 30, 2004 and December 31, 2003 is as
follows (in thousands):
June 30, December 31,
2004 2003
---------- -----------
Tradename, net of accumulated amortization of $260 and $85 $ 4,961 $ 3,427
Customer relationships, net of accumulated amortization of $1,229 and $351 20,029 12,459
-------- -------
$ 24,990 $15,886
======== =======
9
Notes to Interim Consolidated Financial Statements, continued
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 $8,200,000 during the first six months 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 2004, the Company recorded $1,900,000 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 $600,000 and $1,100,000,
respectively, for the three and six month periods ended June 30, 2004. The
estimated aggregate future amortization expense for the tradename and
customer relationship intangible assets for each of the next five years is
as follows (in thousands): 2004 (for the remaining six months) - $1,200;
2005 - $2,400; 2006 - $2,400; 2007 - $2,200; and 2008 - $1,800.
As previously disclosed in the 2003 10-K, the Las Cruces mineral rights of
MK Resources Company (formerly MK Gold Company) have been classified as an
intangible asset. Effective April 2004, the FASB ratified the Emerging
Issues Task Force's consensus that mineral rights should be accounted for
as tangible assets and classified as a component of property and equipment.
In accordance with this pronouncement, the Company has reclassified this
asset in the consolidated balance sheet as of December 31, 2003.
6. Effective March 2004, the Company amended its unsecured bank credit
facility to extend its maturity to March 2007. As of June 30, 2004, no
amounts were outstanding under this $110,000,000 bank credit facility.
7. 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 has completed a
registered exchange offer pursuant to which each holder of the privately
placed senior notes exchanged 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 (the "3 3/4% Convertible
Notes") in a private placement transaction. The notes are convertible into
the Company's common shares at $68.90 per share 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.
8. A summary of accumulated other comprehensive income (loss) at June 30, 2004
and December 31, 2003 is as follows (in thousands):
June 30, December 31,
2004 2003
---------- ----------
Net unrealized gains on investments $ 139,367 $ 161,788
Net unrealized foreign exchange gains 6,430 7,502
Net unrealized losses on derivative instruments (2,767) (3,400)
Net minimum pension liability (13,639) (13,639)
---------- ---------
$ 129,391 $ 152,251
========== =========
9. Included in investment and other income is income of $2,500,000 and
$1,300,000, respectively, for the three and six month periods ended June
30, 2004 and income (charges) of $(900,000) and $700,000, respectively, for
the three and six month periods ended June 30, 2003, as a result of
accounting for its derivative financial instruments in accordance with
Statement of Financial Accounting Standards No. 133 ("SFAS 133").
10
Notes to Interim Consolidated Financial Statements, continued
10. In May 2004, the Company sold its subprime automobile and collateralized
consumer loan portfolios, which represented 97% of banking and lending's
total outstanding loans (net of unearned finance charges) as of March 31,
2004. The Company received aggregate cash proceeds of $149,000,000 and
reported a pre-tax gain of $9,000,000, which is reflected in investment and
other income.
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 upon
completion will surrender its national bank charter. Once the liquidation
of this segment is complete, it will be reclassified as a discontinued
operation.
11. During the second quarter of 2004, selling, general and other expenses
include a non-cash charge of approximately $7,100,000 to reduce the
carrying amount of a commercial real estate property to its estimated fair
value. The Company does not have an active program to dispose of the
property and is not committed to do so; however, the Company is considering
selling the property and has received a non-binding letter of intent from a
third party purchaser. Accordingly, the Company has employed the held and
used model to evaluate the recoverability of the property; fair value used
to determine the impairment was estimated primarily based on the letter of
intent. If the property is sold, the Company is likely to incur prepayment
mortgage penalties of approximately $1,000,000, which have not been
recorded at June 30, 2004. This property will be classified as a
discontinued operation in the period in which it is either disposed of or
meets the criteria for held for sale treatment.
12. Pension expense for the three and six month periods ended June 30, 2004 and
2003 related to the defined benefit pension plan (other than WilTel's plan)
charged to operations included the following components (in thousands):
For the Three Month For the Six Month
Period Ended June 30, Period Ended June 30,
--------------------- ---------------------
2004 2003 2004 2003
---- ---- ---- ----
Interest cost $ 531 $ 581 $1,063 $1,162
Expected return on plan assets (447) (445) (895) (890)
Actuarial loss 144 61 288 121
Amortization of prior service cost -- -- 1 1
------ ------ ------ ------
Net pension expense $ 228 $ 197 $ 457 $ 394
====== ====== ====== ======
WilTel's pension expense for the three and six month periods ended June 30,
2004 related to the defined benefit pension plan charged to operations
included the following components (in thousands):
For the Three Month For the Six Month
Period Ended June 30, 2004 Period Ended June 30, 2004
-------------------------- --------------------------
Interest cost $ 1,612 $ 3,224
Service cost 864 1,727
Expected return on plan assets (961) (1,921)
-------- ---------
Net pension expense $ 1,515 $ 3,030
======== =========
11
Notes to Interim Consolidated Financial Statements, continued
Employer contributions to WilTel's defined benefit pension plan were not
material during the six month period ended June 30, 2004. As discussed in
the 2003 10-K, 2004 pension contributions were expected to be $5,000,000;
however, based on updated actuarial calculations, 2004 contributions are
now expected to be $3,800,000.
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 and six
month periods ended June 30, 2004 and 2003.
13. In the fourth quarter of 2003, WebLink Wireless, Inc. sold substantially
all of its operating assets to a subsidiary of Metrocall Holdings, Inc.
("Metrocall") and was classified as a discontinued operation. A portion of
the sales proceeds consisted of a warrant to purchase up to 100,000 shares
of Metrocall's common stock at $40 per share, subject to certain vesting
criteria. During the second quarter of 2004, these warrants vested and the
Company recorded $2,200,000 as gain on disposal of discontinued operations
(net of minority interest), which represented the estimated fair value of
the warrants. The gain has not been reduced for any federal income tax
expense due to WebLink's large net operating loss carryforwards, which
carried a full valuation allowance at December 31, 2003.
During the second quarter of 2003, the Company settled certain tax payment
responsibilities with the purchaser of Colonial Penn Insurance Company.
Income from discontinued operations for the 2003 periods includes a payment
of $1,800,000 from the purchaser to reimburse the Company for tax payments
previously made.
14. For the six month period ended June 30, 2004, the Company has recorded a
net federal income tax provision on income from continuing operations,
inclusive of a federal tax provision netted against equity in income of
associated companies. The provision for federal income tax on income from
continuing operations is fully offset by a federal income tax benefit
recognized on losses in other comprehensive income. As a result, when all
components of income are aggregated there is no net federal income tax
expense recorded for the periods ended June 30, 2004. Income taxes for the
2004 periods also include a provision for state income taxes. Income taxes
for the 2003 periods differ from the expected statutory federal rate
principally due to the exclusion of the income related to the refund of
foreign taxes not based on income.
15. 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. In addition, the calculations of diluted
earnings (loss) per share assume the 3 3/4% Convertible Notes had been
converted into common shares for the period they were outstanding and
earnings increased for the interest on such notes, net of the income tax
effect. The number of shares used to calculate basic earnings (loss) per
share amounts was 70,880,000 and 59,630,000 for the three month periods
ended June 30, 2004 and 2003, respectively, and 70,863,000 and 59,624,000
for the six month periods ended June 30, 2004 and 2003, respectively. The
number of shares used to calculate diluted earnings (loss) per share
amounts was 75,299,000 and 60,069,000 for the three month periods ended
June 30, 2004 and 2003, respectively, and 71,478,000 and 59,624,000 for the
six month periods ended June 30, 2004 and 2003, respectively. For the six
month period ended June 30, 2004, the 3 3/4% Convertible Notes were not
included in the computation of diluted earnings per share, as these notes
were antidilutive. For the six month period ended June 30, 2003, options
and warrants to purchase approximately 407,000 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.
16. On June 16, 2004, Joseph S. Steinberg, President of the Company, sold his
warrants to purchase 400,000 of the Company's common shares to Jefferies &
Company, Inc., based on a value of $50 per Leucadia share. The warrants are
exercisable through May 15, 2005 at an exercise price of $23.95 per share.
The Company has filed a shelf registration statement covering the 400,000
shares issuable upon conversion of the warrants. The registration statement
has not been declared effective.
17. Cash paid for interest and net income taxes paid (refunded) was $38,000,000
and $(27,800,000), respectively, for the six month period ended June 30,
2004 and $14,200,000 and $3,300,000, respectively, for the six month period
ended June 30, 2003.
12
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 six month period ended June 30, 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, the refund of excess federal income tax payments, accrued but unpaid
interest on debt and an increase in accounts payable due to the timing of
payments. For the six month period ended June 30, 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 June 30, 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 $1,644,800,000. This amount is comprised of cash
and short-term bonds and notes of the United States Government and its agencies
of $1,065,400,000 (65%), the equity investment in White Mountains Insurance
Group, Ltd. of $191,300,000 (12%) (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 $388,100,000 (23%).
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.
Effective March 2004, the Company amended its unsecured bank credit facility to
extend its maturity to March 2007. As of June 30, 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.
As of June 30, 2004, WilTel had aggregate cash and investments of $246,700,000
(excluding investments pledged as collateral), an increase of $60,900,000 from
December 31, 2003. During the six month period ended June 30, 2004, net cash was
generated by WilTel's operating activities, and WilTel's capital expenditures
were $38,900,000. 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.
13
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
WilTel is a party to various legal actions and claims, and has reserved
$38,900,000 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.
On March 2, 2004, the U.S. Court of Appeals for the District of Columbia Circuit
struck down a Federal Communications Commission ("FCC") rule that required
regional telephone companies to open their networks to competitors at reasonable
rates. Although a number of parties have petitioned for a Supreme Court review
of this ruling, these petitions have not been granted. As a result, competing
telephone companies may be charged higher rates by regional telephone companies
to use parts of their networks, or incur costs to purchase and install their own
networks in order to offer local phone service. This ruling is not expected to
have a material impact on WilTel's costs but could have a significant impact on
the costs of certain of WilTel's customers.
In a May 2004 ruling, the 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
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 a material impact on WilTel; however, certain of WilTel's
customers and competitors may be adversely affected.
In July 2004, the Company filed a notification and report pursuant to the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR") with the Federal
Trade Commission and the Department of Justice with respect to acquiring 50% or
more of the outstanding common stock of MCI Inc., a telecommunications company
(formerly known as WorldCom Inc.). The waiting period under HSR is scheduled to
expire on August 9, 2004, unless extended or earlier terminated. There can be no
assurance that the Company will acquire control of MCI.
As disclosed in the 2003 10-K, the Company had previously exercised an option to
sell two of its older corporate aircraft for total proceeds of $38,800,000. The
option was received in connection with the purchase of two new corporate
aircraft. The Company completed the sales in July 2004, and expects to report a
pre-tax gain of approximately $11,000,000 in the third quarter of 2004.
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 is currently in compliance with the covenant and expects it will
continue to be in compliance in the future.
14
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 $6,200,000 and $205,500,000 at June 30,
2004 and December 31, 2003, respectively. These loans were primarily funded by
deposits generated by the Company's deposit-taking facilities and by brokers,
which totaled $64,200,000 and $145,500,000 at June 30, 2004 and December 31,
2003, respectively. The cash flows generated from the collections on and sales
of its loan portfolios have been used to retire these deposits as they matured.
During the second quarter of 2004, the Company sold its subprime automobile and
collateralized consumer loan portfolios for aggregate cash proceeds of
$149,000,000 and recognized a pre-tax gain of $9,000,000. 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. The Company
expects to complete the liquidation of this segment during 2004, and will
reclassify the segment as a discontinued operation at that time.
Results of Operations
The 2004 Periods Compared to the 2003 Periods
Telecommunications
The following table reconciles WilTel's segment profit from operations to
pre-tax income (loss) for the three and six month periods ended June 30, 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.
For the Three Month For the Six Month
Period Ended June 30, 2004 Period Ended June 30, 2004
-------------------------- --------------------------
Network Vyvx Total Network Vyvx Total
------- ---- ----- ------- ---- -----
(In thousands)
Operating revenues (1) $ 364,100 $ 31,400 $ 395,500 $ 717,200 $59,200 $ 776,400
========= ========= ========= ========= ======= =========
Segment profit from operations $ 31,900 $ 8,700 $ 40,600 $ 46,400 $15,100 $ 61,500
Depreciation and amortization expense (51,100) (2,200) (53,300) (105,700) (4,500) (110,200)
Interest expense, net of investment income (2) (7,000) (500) (7,500) (13,600) (1,100) (14,700)
Other non-operating income (expense), net (2) (100) -- (100) 2,900 -- 2,900
--------- --------- --------- --------- ------- ---------
Pre-tax income (loss) $ (26,300) $ 6,000 $ (20,300) $ (70,000) $ 9,500 $ (60,500)
========= ========= ========= ========= ======= =========
(1) Excludes intersegment revenues from amounts billed by Network to Vyvx of
$4,600,000 and $9,100,000, respectively, for the three and six month
periods ended June 30, 2004.
(2) These items have been allocated to each segment based upon a formula that
considers each segment's revenues, property and equipment and headcount.
15
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
$22,300,000 and $57,100,000, respectively, for the three and six month periods
ended June 30, 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 $261,600,000 and $500,000,000, respectively, during
the three and six month periods ended June 30, 2004, representing approximately
71% and 68%, respectively 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. In addition, the first quarter of 2004 includes
a charge of $3,500,000 for international voice access costs, for which no
revenue was recognized. WilTel entered into a commitment for these access costs
in order to provide services for a specific customer; however, the customer
defaulted under its contract, and WilTel accrued the remaining amount of the
commitment which it does not expect to be able to recover from the customer. The
Company's consolidated statement of operations includes salaries expense of
$29,000,000 and $56,600,000, respectively, and selling, general and other
expenses of $32,200,000 and $70,500,000, respectively, for Network during the
three and six month periods ended June 30, 2004. For the three month period
ended June 30, 2004, selling, general and other expenses includes a reduction of
$4,100,000 to the provision for doubtful accounts, principally due to the
collection of previously reserved accounts receivable which had been in dispute.
During the first quarter of 2004, the provision for doubtful accounts included a
charge of $2,700,000 to fully reserve for a customer's accounts receivable which
is not expected to be collected.
Network's segment profit from operations was $14,500,000 for the first quarter
of 2004 as compared to $31,900,000 for the second quarter of 2004. The increase
reflects the impact of SBC related non-recurring revenues and adjustments, the
first quarter charge related to international voice access costs and the
adjustments to the provision for bad debts discussed above. Other income for the
six month period ended June 30, 2004 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 summer and holiday movie season.
Cost of sales reflects the level of revenue. The Company's consolidated
statement of operations includes salaries expense of $4,600,000 and $8,800,000,
respectively, and selling, general and other expenses of $3,600,000 and
$7,200,000, respectively, for Vyvx during the three and six month periods ended
June 30, 2004.
Healthcare Services
For the three and six months period ended June 30, 2004, the pre-tax income of
the healthcare services segment was $5,400,000 and $7,800,000, respectively.
During these periods, healthcare services revenues were $64,000,000 and
$127,300,000, respectively, and cost of sales, which primarily consist of
salaries and employee benefits, were $52,300,000 and $104,100,000, respectively.
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 approximately 40% in
each of the first and second quarters of 2004 as compared to the fourth quarter
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
of 2003, comparing only those locations that were operating during all periods.
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. During 2004, one customer accounted for approximately 16% of
Symphony's revenues. The increase in pre-tax income during the second quarter of
2004 as compared to the first quarter principally results from the collection of
receivables in excess of their carrying amounts by approximately $2,700,000.
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.
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;
revenues and expenses for this segment are reflective of the continuing decrease
in the size of the loan portfolio. In May 2004, the Company sold its subprime
automobile and collateralized consumer loan portfolios for aggregate cash
proceeds of $149,000,000 and recognized a pre-tax gain of $9,000,000, which is
reflected in investment and other income. Pre-tax income for the banking and
lending segment was $9,300,000 and $7,100,000 for the three month periods ended
June 30, 2004 and 2003, respectively, and $14,600,000 and $11,900,000 for the
six month periods ended June 30, 2004 and 2003, respectively.
Finance revenues, which reflect both the level and mix of consumer instalment
loans, decreased in the three and six month periods ended June 30, 2004 as
compared to the similar periods in 2003 principally due to the loan portfolios
sales in May 2004. Although finance revenues decreased in the 2004 periods as
compared to the same periods in 2003, pre-tax results increased primarily due to
a decline in the provision for loan losses, reductions in interest expense,
principally resulting from reduced customer banking deposits, 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 three and six month periods ended June 30, 2003 also include gains related
to the mark-to-market values of interest rate swaps of $600,000 and $2,300,000,
respectively.
The banking and lending segment's provision for loan losses decreased during the
2004 periods as compared to the same periods in 2003 primarily due to the sales
of the loan portfolios discussed above, and lower net charge-offs. At June 30,
2004, the remaining loan portfolios aggregated $6,200,000.
Manufacturing
Pre-tax income for the manufacturing segment was $2,300,000 and $1,500,000 for
the three month periods ended June 30, 2004 and 2003, respectively, and
$3,300,000 and $1,800,000 for the six month periods ended June 30, 2004 and
2003, respectively. Manufacturing revenues increased approximately 19% and 15%,
respectively, in the three and six month periods ended June 30, 2004 as compared
to the same periods in 2003 reflecting increases in most of the Company's
markets. The Company believes that these increases reflect a variety of factors
including an improved economy, new product development and the acquisition in
the first quarter of 2004 of customer receivables and inventory of a competitor
that was exiting certain markets. 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. Pre-tax results for 2004 also
reflect lower operating expenses than in 2003, primarily due to workforce
reductions and other cost reduction initiatives; however, pre-tax results for
2003 also include cash received from government grants.
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
Domestic Real Estate
Pre-tax income (loss) for the domestic real estate segment was $(5,400,000) and
$7,200,000 for the three month periods ended June 30, 2004 and 2003,
respectively, and $2,600,000 and $8,700,000 for the six month periods ended June
30, 2004 and 2003, respectively. Revenues during 2004 reflect decreased gains
from property sales at the Company's residential and commercial project in the
Florida panhandle as the lots have largely been sold, and reduced amortization
of the deferred gain on the sale of CDS. However, revenues increased slightly
during the six month period ended June 30, 2004 as compared to the prior year as
a result of the first quarter sale of approximately 2,400 acres of unimproved
land in Utah, which the Company had owned since 1997, for cash proceeds of
$8,800,000. The Company recognized a $7,600,000 gain on this transaction.
The pre-tax loss recognized during the second quarter of 2004 results from the
recognition of a non-cash charge of approximately $7,100,000 in selling, general
and other expenses to reduce the carrying amount of a commercial real estate
property to its estimated fair value. The Company does not have an active
program to dispose of the property and is not committed to do so; however, the
Company is considering selling the property and has received a non-binding
letter of intent from a third party purchaser. Accordingly, the Company has
employed the held and used model to evaluate the recoverability of the property;
fair value used to determine the impairment was estimated primarily based on the
letter of intent. If the property is sold, the Company is likely to incur
prepayment mortgage penalties of approximately $1,000,000, which have not been
recorded at June 30, 2004. This property will be classified as a discontinued
operation in the period in which it is either disposed of or meets the criteria
for held for sale treatment.
During the first and second quarters of 2004, the Company entered into
agreements to sell all available lots at its 95-lot development project in South
Walton County, Florida, which had a book value of $10,900,000 at June 30, 2004.
These agreements were subject to the Company obtaining approval of certain
project documents, and necessitated the posting of a $2,000,000 cash
collateralized letter of credit. In July 2004, the Company obtained the
necessary approvals, and expects it will close all of the lot sales for
aggregate total sales proceeds of approximately $50,000,000 during the third
quarter of 2004. The Company will be required under the sale agreements to make
significant improvements to the property (which are not reflected in its current
book value), including infrastructure and certain amenities, which it expects to
complete in 2005. Revenue and profit relating to this project will be deferred
using the percentage of completion method of accounting.
Corporate and Other Operations
During 2004, substantially all of the Company's net securities gains (losses)
reflect realized gains from the sale of publicly traded debt and equity
securities that had been classified as Corporate available for sale securities.
Net securities gains (losses) for the three and six month periods ended June 30,
2003 include a provision of $2,400,000 and $5,100,000, respectively, to write
down the Company's investments in certain available for sale securities and a
non-public security. Such write downs were $600,000 for the 2004 periods.
Investment and other income was largely unchanged year-to-date in 2004 and
declined in the second quarter of 2004 as compared to the same periods in 2003.
The decline principally relates to the recording in the 2003 periods of
$4,900,000 relating to a refund of foreign taxes not based on income and related
interest and a gain of $1,500,000 from the sale of a portion of the Company's
interest in Olympus Re. The three and six month 2004 periods reflect increased
income of $4,000,000 and $3,000,000, respectively, related to the accounting for
mark-to-market values of Corporate derivatives, greater revenues from the
Company's gas and winery operations and miscellaneous other income.
18
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
The increase in interest expense in the 2004 periods as compared to the 2003
periods primarily reflects interest expense relating to the $375,000,000
aggregate principal amount of the 7% Senior Notes, the $350,000,000 principal
amount of its 3 3/4% Convertible Senior Subordinated Notes 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.
For the six month period ended June 30, 2004, the Company has recorded a net
federal income tax provision on income from continuing operations, inclusive of
a federal tax provision netted against equity in income of associated companies.
The provision for federal income tax on income from continuing operations is
fully offset by a federal income tax benefit recognized on losses in other
comprehensive income. As a result, when all components of income are aggregated
there is no net federal income tax expense recorded for the periods ended June
30, 2004. Income taxes for the 2004 periods also include a provision for state
income taxes. Income taxes for the 2003 periods differ from the expected
statutory federal rate principally due to the exclusion of the income related to
the refund of foreign taxes not based on income discussed above.
Associated Companies
Equity in income (losses) of associated companies for the three and six month
periods ended June 30, 2004 and 2003 includes the following (in thousands):
For the Three Month For the Six Month
Period Ended June 30, Period Ended June 30,
--------------------- ---------------------
2004 2003 2004 2003
------ -------- -------- -------
Berkadia $ -- $ 4,500 $ 800 $ 27,300
Olympus Re Holdings, Ltd. 7,200 10,200 15,500 22,500
WilTel -- (22,300) -- (57,100)
EagleRock Capital Partners (QP), LP 1,600 14,200 5,900 14,300
Jefferies Partners Opportunity Fund II, LLC 4,300 3,400 8,700 6,900
HomeFed Corporation 1,700 7,800 3,700 7,100
Pershing 3,100 -- 6,000 --
Other 1,400 (1,800) 2,700 (900)
-------- -------- -------- --------
Pre-tax 19,300 16,000 43,300 20,100
Income tax expense 15,200 13,500 15,200 27,200
-------- -------- -------- --------
Equity in income (losses), net of taxes $ 4,100 $ 2,500 $ 28,100 $ (7,100)
======== ======== ======== ========
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 Re reflects the
reduction in the Company's ownership interest in June 2003 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.
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.
19
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
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, in particular, our Chairman and President, the
loss of whom 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 our
real estate development activities and telecommunications business, as well
as our 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
us having to self-insure business risks;
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;
20
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
The inability to obtain the necessary financing for the Las Cruces copper
mining project, which could delay or prevent completion of the project;
Decreases in world wide copper prices, which could adversely affect the
commercial viability of our mineral rights in Spain;
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 we have operations or sell our 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 our 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.
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.
21
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 June 30, 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 June 30, 2004.
(b) There were no 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 June 30, 2004,
that has materially affected, or is reasonably likely to materially affect,
the Company's internal control over financial reporting.
As a result of Section 404 of the Sarbanes-Oxley Act of 2002 and the rules
issued thereunder, the Company will be required to include in its Annual
Report on Form 10-K for the year ending December 31, 2004 a report on
management's assessment of the effectiveness of the Company's internal
controls over financial reporting. The Company's independent registered
public accountants will also be required to attest to and report on
management's assessment.
As part of the process of preparing for compliance with these requirements,
in 2003, the Company initiated a review of its internal controls over
financial reporting. As part of this review, management has been engaged in
a process to document and evaluate the Company's internal controls over
financial reporting. In this regard, management has dedicated internal
resources, engaged outside consultants and adopted a detailed plan to (i)
document the Company's internal controls over financial reporting, (ii)
assess the adequacy of the Company's internal controls over financial
reporting, (iii) take steps to improve control processes where appropriate
and (iv) validate through testing that controls are functioning as
documented. This documentation, evaluation and testing process will
continue throughout the remainder of this year. There can be no assurance
that deficiencies or weaknesses in the design or operation of internal
controls over financial reporting will not be found and, if found, that the
Company will have sufficient time to remediate any such deficiencies or
weaknesses and perform testing procedures before the end of the year.
The Company believes that any system of internal accounting controls, no
matter how well designed and operated, can provide only reasonable (and not
absolute) assurance that all of its objectives will be met, including the
detection of fraud. Furthermore, no evaluation of internal accounting
controls can provide absolute assurance that all control issues and
instances of fraud, if any, have been detected.
22
PART II - OTHER INFORMATION
Item 2.
On April 29, 2004, the Company sold $350,000,000 principal amount of its
3 3/4% Convertible Notes in a private transaction pursuant to Rule 4(2)
under the Securities Act of 1933. Jefferies & Company, Inc. was the
initial purchaser of the notes, which were immediately resold by Jefferies
& Company, Inc. to buyers who represented themselves to be qualified
institutional investors. The aggregate offering price was $350,000,000 and
the aggregate underwriting discount was $8,165,500. 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.
Item 4. Submission of Matters to a Vote of Security Holders.
The following matters were submitted to a vote of shareholders at the
Company's 2004 Annual Meeting of Shareholders held on May 11, 2004.
a) Election of directors.
Number of Shares
----------------
For Withheld
---------- --------
Ian M. Cumming 59,506,577 230,322
Paul M. Dougan 59,356,894 380,005
Lawrence D. Glaubinger 59,355,555 381,344
Alan J. Hirschfield 59,602,560 134,339
James E. Jordan 59,253,114 483,785
Jeffrey C. Keil 59,602,678 134,221
Jesse Clyde Nichols, III 59,356,894 380,005
Joseph S. Steinberg 59,504,931 231,968
b) Approval of an amendment to the Company's certification of
incorporation extending the expiration date of certain
restrictions on the transferability of the Company's common
shares to December 31, 2024.
For 47,967,591
Against 1,491,524
Abstentions 109,892
Broker non votes 10,167,892
c) Ratification of PricewaterhouseCoopers LLP, as independent
auditors for the year ended December 31, 2004.
For 59,112,457
Against 565,024
Abstentions 59,418
Broker non votes --
23
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 April 21,
2004, which set forth information under Item 9. Regulation FD
Disclosure, and on April 22, 2004 and May 7, 2004, which set
forth information under Item 5. Other Events and Item 7.
Financial Statements and Exhibits.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEUCADIA NATIONAL CORPORATION
(Registrant)
Date: August 6, 2004 By: /s/ Barbara L. Lowenthal
-----------------------------
Barbara L. Lowenthal
Vice President and Comptroller
(Chief Accounting Officer)
25
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.