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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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 October 29, 2004:
71,480,102.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2004 and December 31, 2003
(Dollars in thousands, except par value)
September 30, December 31,
2004 2003
------------ ------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 480,735 $ 213,848
Investments 1,074,253 714,363
Trade, notes and other receivables, net 329,144 372,104
Prepaids and other current assets 56,378 58,676
----------- -----------
Total current assets 1,940,510 1,358,991
Non-current investments 664,512 673,742
Notes and other receivables, net 15,886 193,459
Other assets 264,372 207,408
Property, equipment and leasehold improvements, net 1,346,611 1,524,718
Investments in associated companies 503,231 430,912
----------- -----------
Total $ 4,735,122 $ 4,389,230
=========== ===========
LIABILITIES
Current liabilities:
Trade payables and expense accruals $ 377,171 $ 376,671
Deferred revenue 45,212 47,311
Other current liabilities 95,052 89,303
Customer banking deposits due within one year 27,803 103,331
Long-term debt due within one year 79,441 23,604
Income taxes payable 17,502 16,008
----------- -----------
Total current liabilities 642,181 656,228
Long-term deferred revenue 159,900 156,582
Other non-current liabilities 211,891 234,320
Non-current customer banking deposits 8,387 42,201
Long-term debt 1,482,200 1,148,170
----------- -----------
Total liabilities 2,504,559 2,237,501
----------- -----------
Commitments and contingencies
Minority interest 18,547 17,568
----------- -----------
SHAREHOLDERS' EQUITY
Common shares, par value $1 per share, authorized 150,000,000 shares;
71,473,102 and 70,823,502 shares issued and outstanding, after deducting
47,710,719 shares held in treasury 71,473 70,824
Additional paid-in capital 628,330 613,274
Accumulated other comprehensive income 117,814 152,251
Retained earnings 1,394,399 1,297,812
----------- -----------
Total shareholders' equity 2,212,016 2,134,161
----------- -----------
Total $ 4,735,122 $ 4,389,230
=========== ===========
See notes to interim consolidated financial statements.
2
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the periods ended September 30, 2004 and 2003
(In thousands, except per share amounts)
(Unaudited)
For the Three Month For the Nine Month
Period Ended September 30, Period Ended September 30,
-------------------------- --------------------------
2004 2003 2004 2003
---- ---- ---- ----
Revenues and other income:
Telecommunications $ 401,759 $ -- $1,178,152 $ --
Healthcare 63,102 16,590 190,373 16,590
Manufacturing 18,742 14,569 48,807 40,794
Finance 153 12,795 9,917 44,673
Investment and other income 94,850 30,817 170,867 94,656
Net securities gains 55,823 332 117,441 546
--------- -------- ---------- --------
634,429 75,103 1,715,557 197,259
--------- -------- ---------- --------
Expenses:
Cost of sales:
Telecommunications 276,390 -- 848,681 --
Healthcare 54,351 14,102 158,418 14,102
Manufacturing 12,532 10,181 34,059 29,331
Interest 26,874 11,780 72,356 25,775
Salaries 47,714 9,145 136,438 25,144
Depreciation and amortization 55,318 5,451 177,068 13,616
Selling, general and other expenses 80,739 31,479 213,270 89,065
--------- -------- ---------- --------
553,918 82,138 1,640,290 197,033
--------- -------- ---------- --------
Income (loss) from continuing operations before income taxes,
minority expense of trust preferred securities and equity
in income (losses) of associated companies 80,511 (7,035) 75,267 226
Income tax provision (benefit) 1,879 (11,542) 521 (11,769)
--------- -------- ---------- --------
Income from continuing operations before minority
expense of trust preferred securities and equity in
income (losses) of associated companies 78,632 4,507 74,746 11,995
Minority expense of trust preferred securities, net of taxes -- -- -- (2,761)
Equity in income (losses) of associated companies, net of taxes (3,919) 50,090 24,213 42,942
--------- -------- ---------- --------
Income from continuing operations 74,713 54,597 98,959 52,176
Income (loss) from discontinued operations, net of taxes (149) 1,493 (2,372) 5,545
--------- -------- ---------- --------
Net income $ 74,564 $ 56,090 $ 96,587 $ 57,721
========= ======== ========== ========
Basic earnings (loss) per common share:
Income from continuing operations $ 1.05 $ .92 $ 1.39 $ .88
Income (loss) from discontinued operations -- .02 (.03) .09
------- ----- ------ -----
Net income $ 1.05 $ .94 $ 1.36 $ .97
======= ===== ====== =====
Diluted earnings (loss) per common share:
Income from continuing operations $ 1.00 $ .91 $ 1.38 $ .87
Income (loss) from discontinued operations -- .02 (.03) .09
------- ----- ------ -----
Net income $ 1.00 $ .93 $ 1.35 $ .96
======= ===== ====== =====
See notes to interim consolidated financial statements.
3
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the nine months ended September 30, 2004 and 2003
(In thousands)
(Unaudited)
2004 2003
---- ----
Net cash flows from operating activities:
Net income $ 96,587 $ 57,721
Adjustments to reconcile net income to net cash provided by (used for) operations:
Deferred income tax provision 23,538 19,153
Depreciation and amortization of property, equipment and leasehold improvements 181,253 16,549
Other amortization 2,262 (374)
Provision for doubtful accounts (7,128) 12,790
Net securities gains (117,441) (546)
Equity in income of associated companies, net of taxes (24,213) (42,942)
Distributions from associated companies 22,757 22,764
Gain on disposal of real estate, property and equipment, loan receivables and
other assets (63,047) (18,418)
Gain on disposal of discontinued operations (2,056) --
Investments classified as trading, net (46,739) (9,259)
Net change in:
Trade, notes and other receivables 37,272 (1,795)
Prepaids and other assets (31,032) (22,187)
Trade payables and expense accruals 11,263 (15,424)
Other liabilities (49,644) (3,288)
Deferred revenue 1,219 --
Income taxes payable 1,494 (30,569)
Other 1,614 (2,464)
Net change in net assets of discontinued operations 7,026 (1,828)
---------- -----------
Net cash provided by (used for) operating activities 44,985 (20,117)
---------- -----------
Net cash flows from investing activities:
Acquisition of property, equipment and leasehold improvements (65,720) (59,563)
Acquisitions of and capital expenditures for real estate investments (20,034) (65,961)
Proceeds from disposals of real estate, property and equipment, and other assets 119,154 103,481
Investment in WebLink and Symphony, net of cash acquired -- 14,837
Advances on loan receivables -- (2,966)
Principal collections on loan receivables 40,870 109,160
Proceeds from sale of loan receivables 157,171 --
Advances on notes receivables (400) (2,079)
Collections on notes receivables 27,414 13,883
Investments in associated companies (69,148) (34,298)
Return of investment in associated companies -- 7,174
Purchases of investments (other than short-term) (2,032,747) (1,031,142)
Proceeds from maturities of investments 655,333 252,611
Proceeds from sales of investments 1,141,228 452,439
---------- -----------
Net cash used for investing activities (46,879) (242,424)
---------- -----------
Net cash flows from financing activities:
Net change in customer banking deposits (108,937) (207,415)
Issuance of long-term debt, net of issuance costs 444,477 249,845
Reduction of long-term debt (82,363) (9,185)
Exercise of warrants to purchase common shares 13,388 --
Exercise of options to purchase common shares 2,317 998
Purchase of common shares for treasury -- (61)
---------- -----------
Net cash provided by financing activities 268,882 34,182
---------- -----------
Effect of foreign exchange rate changes on cash (101) 478
---------- -----------
Net increase (decrease) in cash and cash equivalents 266,887 (227,881)
Cash and cash equivalents at January 1, 213,848 416,965
---------- -----------
Cash and cash equivalents at September 30, $ 480,735 $ 189,084
========== ===========
See notes to interim consolidated financial statements.
4
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
For the nine months ended September 30, 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 $28,043 52,277 52,277
Net change in unrealized foreign exchange
gain (loss), net of taxes of $273 4,316 4,316
Net change in unrealized gain (loss) on
derivative instruments, net of taxes of $457 (851) (851)
Net income 57,721 57,721
----------
Comprehensive income 113,463
----------
Conversion of convertible preferred shares into
common shares (47,507) 1,348 46,159 --
Exercise of options to purchase common shares 40 958 998
Purchase of stock for treasury (2) (59) (61)
------- ------- -------- -------- ---------- ----------
Balance, September 30, 2003 $ -- $59,655 $201,318 $111,767 $1,276,185 $1,648,925
======= ======= ======== ======== ========== ==========
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, net of taxes of $18,233 (34,415) (34,415)
Net change in unrealized foreign exchange
gain (loss), net of taxes of $32 (547) (547)
Net change in unrealized gain (loss) on
derivative instruments, net of taxes of $282 525 525
Net income 96,587 96,587
----------
Comprehensive income 62,150
----------
Exercise of warrants to purchase common shares 559 12,829 13,388
Exercise of options to purchase common shares 90 2,227 2,317
------- ------- -------- -------- ---------- ----------
Balance, September 30, 2004 $ -- $71,473 $628,330 $117,814 $1,394,399 $2,212,016
======= ======= ======== ======== ========== ==========
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 nine month
periods ended September 30, 2004 (in thousands):
6
Notes to Interim Consolidated Financial Statements, continued
For the Three Month Period For the Nine Month Period
Ended September 30, 2004 Ended September 30, 2004
------------------------ ------------------------
Network Vyvx Network Vyvx
------- ---- ------- ----
Segment profit from operations (1) $ 39,605 $ 8,663 $ 85,955 $ 23,727
Depreciation and amortization expense (48,398) (2,075) (154,060) (6,537)
Interest expense, net of investment income (2) (7,751) (542) (21,353) (1,627)
Other non-operating income (expense), net (2) (3) 23,136 2,557 26,074 2,571
--------- ------- --------- --------
Income (loss) from continuing operations before income taxes,
minority expense of trust preferred securities and equity in
income (losses) of associated companies $ 6,592 $ 8,603 $ (63,384) $ 18,134
========= ======= ========= ========
(1) See note (d) to segment information below.
(2) If items in these categories cannot be directly attributed to a
particular WilTel segment they are allocated to each segment based
upon a formula that considers each segment's revenues, property and
equipment and headcount.
(3) For the three and nine month periods ended September 30, 2004 includes
income of $18,500,000 related to the settlement of litigation for less
than amounts reserved, income of $6,000,000 related to the sale of an
equity security which had a zero book value and income of $2,000,000
related to the reversal of excess reserves for long-term commitments.
In addition, the nine month period ended September 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.
Certain information concerning the Company's segments for the three and
nine month periods ended September 30, 2004 and 2003 is presented in the
following table (in thousands):
For the Three Month For the Nine Month
Period Ended September 30, Period Ended September 30,
-------------------------- --------------------------
2004 2003 2004 2003
---- ---- ---- ----
Revenues and other income (a):
Network (b) $ 402,271 $ -- $ 1,134,144 $ --
Vyvx 33,531 -- 92,915 --
Healthcare Services 63,775 16,595 191,090 16,595
Banking and Lending 10,147 14,157 30,037 51,345
Manufacturing 19,032 14,557 49,108 41,160
Domestic Real Estate 27,282 14,064 53,097 38,217
Other Operations 6,697 9,237 23,500 24,412
Corporate (c) 76,556 6,493 155,600 25,530
Intersegment elimination (d) (4,862) -- (13,934) --
--------- --------- ----------- ---------
Total consolidated revenues and other income $ 634,429 $ 75,103 $ 1,715,557 $ 197,259
========= ========= =========== =========
Income (loss) from continuing operations before income taxes,
minority expense of trust preferred securities and equity in
income (losses) of associated companies:
Network (d) $ 6,592 $ -- $ (63,384) $ --
Vyvx (d) 8,603 -- 18,134 --
Healthcare Services (403) (883) 7,385 (883)
Banking and Lending 8,823 (1,240) 23,389 10,680
Manufacturing 3,988 1,769 7,250 3,546
Domestic Real Estate 14,861 5,989 23,976 14,472
Other Operations (6,405) 1,423 (8,223) 209
Corporate (c) 44,452 (14,093) 66,740 (27,798)
--------- --------- ----------- ---------
Total consolidated income (loss) from continuing
operations before income taxes, minority expense of
trust preferred securities and equity in income (losses)
of associated companies $ 80,511 $ (7,035) $ 75,267 $ 226
========= ========= =========== =========
7
Notes to Interim Consolidated Financial Statements, continued
(a) Revenues and other income 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 on the Company's consolidated statements of operations.
(b) Includes services provided to SBC Communications Inc. ("SBC") of
$267,100,000 and $767,100,000, respectively, for the three and nine
month periods ended September 30, 2004, pursuant to long-term
preferred provider agreements as described in the 2003 10-K.
(c) Includes net securities gains of $49,200,000 and $110,700,000,
respectively, for the three and nine month periods ended September 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).
September 30,
2003
-----------
WilTel:
Total revenues $ 971,800
Loss from continuing operations before extraordinary items (109,000)
Net loss (109,000)
The Company's equity in net loss (52,200)
September 30, September 30,
2004 2003
----------- -----------
Berkadia:
Total revenues $ 2,400 $ 165,200
Income from continuing operations before extraordinary items 2,200 148,900
Net income 2,200 148,900
The Company's equity in net income 800 65,200
Olympus Re Holdings, Ltd.:
Total revenues $392,500 $ 338,300
Income from continuing operations before extraordinary items 41,600 139,100
Net income 41,600 139,100
The Company's equity in net income 5,100 30,400
EagleRock Capital Partners (QP), LP:
Total revenues $ 2,500 $ 41,200
Income from continuing operations before extraordinary items 1,700 38,100
Net income 1,700 38,100
The Company's equity in net income 1,400 33,900
Jefferies Partners Opportunity Fund II, LLC:
Total revenues $ 20,300 $ 16,500
Income from continuing operations before extraordinary items 18,300 14,000
Net income 18,300 14,000
The Company's equity in net income 12,700 9,900
8
Notes to Interim Consolidated Financial Statements, continued
For the three and nine month periods ended September 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 Nine Month
Period Ended September 30, Period Ended September 30,
-------------------------- --------------------------
2004 2003 2004 2003
---- ---- ---- ----
Net interest spread on the Berkadia loan - 10% of total $ -- $ 600 $ -- $ 2,100
Net interest savings -- 500 300 1,400
Amortization of Berkadia loan discount related to cash fees -
50% of total -- 14,300 200 24,000
Amortization of Berkadia loan discount related to FINOVA
stock - 50% of total -- 22,500 300 37,700
------- --------- ------- --------
Equity in income of associated companies - Berkadia $ -- $ 37,900 $ 800 $ 65,200
======= ========= ======= ========
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
(benefit) of ($2,100,000) and $24,500,000 for the three month periods ended
September 30, 2004 and 2003, respectively, and $13,100,000 and $51,700,000
for the nine month periods ended September 30, 2004 and 2003, respectively.
4. A summary of investments at September 30, 2004 and December 31, 2003 is as
follows (in thousands):
September 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 $ 936,029 $ 936,105 $ 606,387 $ 623,570
Trading securities 125,210 132,570 74,923 86,392
Other investments, including accrued interest income 5,578 5,578 4,401 4,401
---------- ---------- --------- ---------
Total current investments $1,066,817 $1,074,253 $ 685,711 $ 714,363
========== ========== ========= =========
Non-current Investments:
Investments available for sale $ 448,431 $ 646,805 $ 420,947 $ 655,178
Other investments 17,707 17,707 18,564 18,564
---------- ---------- --------- ---------
Total non-current investments $ 466,138 $ 664,512 $ 439,511 $ 673,742
========== ========== ========= =========
5. A summary of intangible assets (which are included in other assets in the
consolidated balance sheets) at September 30, 2004 and December 31, 2003 is
as follows (in thousands):
September 30, December 31,
2004 2003
------------ ------------
Tradename, net of accumulated amortization of $347 and $85 $ 4,874 $ 3,427
Customer relationships, net of accumulated amortization of $1,744 and $351 19,549 12,459
-------- --------
$ 24,423 $ 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 nine months of 2004, due to the
completion 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 $1,700,000,
respectively, for the three and nine month periods ended September 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 three months) - $600;
2005 - $2,400; 2006 - $2,400; 2007 - $2,100; 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. In July 2004, the Company invested $50,000,000 in INTL Consilium Emerging
Market Absolute Return Fund, LLC ("INTL"), a limited liability company that
is invested in a master fund which primarily invests in emerging markets
debt and equity securities. INTL and the master fund are managed and
controlled by an investment manager who has full discretion over investment
and operating decisions. As of September 30, 2004, the Company's capital
account represents approximately 98% of INTL's total members' capital. In
accordance with FIN 46R, INTL is a variable interest entity and the Company
is currently the primary beneficiary; as a result, the Company accounts for
its investment in INTL as a consolidated subsidiary. In October 2004, the
Company invested an additional $25,000,000 in INTL. INTL plans to sell
additional membership interests in the future, which could result in the
Company no longer accounting for INTL as a consolidated subsidiary.
At September 30, 2004, INTL had total assets of $51,900,000, which are
reflected as investments in the Company's consolidated balance sheet, and
its liabilities were not material. The creditors of INTL have recourse only
to the assets of INTL and do not have recourse to any other assets of the
Company. The Company can generally withdraw its capital account interest
upon 90 days notice, subject to the manager's ability to liquidate security
positions in an orderly manner.
7. Effective March 2004, the Company amended its unsecured bank credit
facility to extend its maturity to March 2007. As of September 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. 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 has filed a shelf registration statement in respect
of the notes and the common shares issuable upon conversion of the notes.
10
Notes to Interim Consolidated Financial Statements, continued
8. In September 2004, WilTel refinanced its existing $375,000,000 credit
agreement debt by entering into an amended credit agreement consisting of a
$240,000,000 first lien term loan facility, a $120,000,000 second lien term
loan facility and a $25,000,000 revolving credit facility. WilTel also used
$90,000,000 of its cash and investments to repay in full one of the
mortgage notes that was secured by its headquarters building ($54,600,000
including accrued interest), reduce the amount outstanding under its credit
agreement ($15,000,000), reduce the amount outstanding under the other note
that is secured by its headquarters building ($13,300,000) and pay
expenses. The amended credit agreement has not been guaranteed by the
Company and is not secured by any of the Company's assets other than the
assets of WilTel.
The first lien term loan facility requires quarterly principal payments of
approximately $632,000 commencing December 31, 2004 through June 30, 2009,
and quarterly principal payments of $57,000,000 thereafter until final
maturity on June 30, 2010. The second lien term loan facility matures on
December 31, 2010. However, if WilTel does not refinance its obligations
under the remaining promissory note that is secured by its headquarters
building ($60,800,000 outstanding) prior to October 1, 2009, then the first
lien term loan facility will mature on October 1, 2009, and if such
promissory note is not refinanced by January 1, 2010, then the second lien
term loan facility will mature on January 1, 2010. The revolving credit
facility will terminate on September 24, 2009. Loans under the credit
agreement bear interest at a variable rate based upon either the prime rate
or LIBOR, at WilTel's option, plus a specified margin for each loan.
WilTel's obligations under its credit agreement are secured by
substantially all of its assets other than those assets securing its
headquarters building, for which the new credit agreement lenders have a
second priority lien, and its aircraft capital lease.
9. A summary of accumulated other comprehensive income (loss), net of taxes at
September 30, 2004 and December 31, 2003 is as follows (in thousands):
September 30, December 31,
2004 2003
------------ ------------
Net unrealized gains on investments $ 127,373 $ 161,788
Net unrealized foreign exchange gains 6,955 7,502
Net unrealized losses on derivative instruments (2,875) (3,400)
Net minimum pension liability (13,639) (13,639)
---------- ----------
$ 117,814 $ 152,251
========== ==========
Total comprehensive income was $63,000,000 and $62,700,000, respectively,
for the three months ended September 30, 2004 and 2003 and $62,200,000 and
$113,500,000, respectively, for the nine months ended September 30, 2004
and 2003.
10. Included in investment and other income is a charge of $1,300,000 for the
three month period ended September 30, 2004 and income of $2,000,000 and
$2,600,000, respectively, for the three and nine month periods ended
September 30, 2003, as a result of accounting for its derivative financial
instruments in accordance with Statement of Financial Accounting Standards
No. 133. Such amount for the nine month period ended September 30, 2004 was
not material.
11. 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. In September 2004, the Company sold certain loan portfolios
that had been substantially written-off and reported a pre-tax gain of
$7,600,000, 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 (aggregating
approximately $5,500,000, net of unearned finance charges) and the
retirement or sale of its customer banking deposits using the segment's
available cash. The Company has entered into an agreement to sell its
customer banking deposits to an unrelated financial institution which is
subject to regulatory approval. The Company expects to substantially
complete the liquidation of its historical lending operations during 2004,
and at that time will surrender its national bank charter.
11
Notes to Interim Consolidated Financial Statements, continued
Concurrently with the surrender of its national bank charter, the Company
expects to submit an application to the state of Utah to convert its
current charter to a Utah state commercial bank charter. The application is
subject to regulatory review and approval, including review and approval of
the Company's business plan. If its application is approved, the primary
regulator of the Company's banking and lending operations would be the Utah
State Department of Financial Institutions.
12. In September 2004, the Company entered into an agreement to sell a
commercial real estate property and classified it as a discontinued
operation since it met the accounting criteria for held for sale treatment.
The sale closed in the fourth quarter and the Company estimates it will
record an additional loss of $500,000 resulting principally from mortgage
prepayment penalties incurred upon satisfaction of the property's mortgage
at closing. As previously disclosed, during the second quarter of 2004, the
Company had recorded a non-cash charge of approximately $7,100,000 to
reduce the carrying amount of this property to its estimated fair value.
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 nine month period ended
September 30, 2003 includes a payment of $1,800,000 from the purchaser to
reimburse the Company for tax payments previously made.
Results of discontinued operations are net of income tax expenses
(benefits) of ($2,200,000) for the nine month period ended September 30,
2004 and $800,000 and $300,000, respectively, for the three and nine month
periods ended September 30, 2003. The income tax benefit for the three
month period ended September 30, 2004 was not material.
13. Pension expense charged to operations for the three and nine month periods
ended September 30, 2004 and 2003 related to the defined benefit pension
plan (other than WilTel's plan) included the following components (in
thousands):
For the Three Month For the Nine Month
Period Ended September 30, Period Ended September 30,
-------------------------- --------------------------
2004 2003 2004 2003
---- ---- ---- ----
Interest cost $ 532 $ 581 $ 1,595 $ 1,743
Expected return on plan assets (448) (445) (1,343) (1,335)
Actuarial loss 144 61 432 182
Amortization of prior service cost 1 1 2 2
------- ------ ------- -------
Net pension expense $ 229 $ 198 $ 686 $ 592
======= ====== ======= =======
WilTel's pension expense charged to operations for the three and nine month
periods ended September 30, 2004 related to the defined benefit pension
plan included the following components (in thousands):
12
Notes to Interim Consolidated Financial Statements, continued
For the Three Month Period For the Nine Month Period
Ended September 30, 2004 Ended September 30, 2004
------------------------ ------------------------
Interest cost $ 2,648 $ 5,872
Service cost 1,258 2,985
Expected return on plan assets (2,123) (4,044)
Amortization of loss 35 35
-------- ---------
Net pension expense $ 1,818 $ 4,848
======== =========
Employer contributions to WilTel's defined benefit pension plan were
$2,800,000 during the nine month period ended September 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 nine
month periods ended September 30, 2004 and 2003.
14. The income tax provision reflects the reversal of tax reserves aggregating
$27,300,000 and $10,500,000 for the nine month periods ended September 30,
2004 and 2003, respectively, as a result of the favorable resolution of
federal income tax contingencies. Income taxes for the nine month period
ended September 30, 2003 also differ from the expected statutory federal
rate due to the exclusion of income related to the refund of foreign taxes
not based on income.
For the nine month period ended September 30, 2004, the Company has
recorded a federal income tax provision on income from continuing
operations (inclusive of a federal tax provision netted against equity in
income of associated companies), and federal income tax benefits on loss
from discontinued operations and losses recognized in other comprehensive
income. In the aggregate, the Company has recognized a net federal income
tax provision of $18,600,000 for the nine month period ended September 30,
2004 (excluding the reversal of tax reserves discussed above), although no
federal income tax payments are due. As more fully described in the 2003
10-K, any net federal income tax provision for the year will result in a
reduction to the deferred tax valuation allowance that was established when
WilTel was acquired. At the end of 2004, any reduction to the valuation
allowance will first be applied to reduce the carrying amount of WilTel's
acquired non-current intangible assets.
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 periods 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 71,145,000 and 59,642,000 for the three month periods
ended September 30, 2004 and 2003, respectively, and 70,973,000 and
59,630,000 for the nine month periods ended September 30, 2004 and 2003,
respectively. The number of shares used to calculate diluted earnings
(loss) per share amounts was 76,715,000 and 60,072,000 for the three month
periods ended September 30, 2004 and 2003, respectively, and 74,594,000 and
60,044,000 for the nine month periods ended September 30, 2004 and 2003,
respectively. Due to the nature of their rights and their nominal
liquidation value, the Series A Non-Voting Convertible Preferred Shares are
treated as common shares and are included in the weighted average share
calculations for basic and diluted per share computations for 2003. The
Company did not have any antidilutive securities outstanding during the
2004 and 2003 periods.
13
Notes to Interim Consolidated Financial Statements, continued
16. In June 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. ("Jefferies") based on a value of $50 per Leucadia share. The
warrants were exercised during the third quarter of 2004 at an exercise
price of $23.95 per share. In September 2004, Ian M. Cumming, Chairman of
the Board of the Company, and others (principally family members) sold
warrants to purchase 241,000 of the Company's common shares to Jefferies
based on a value of $55 per Leucadia share. Additionally, in September
2004, Mr. Cumming and others (principally family members) exercised
warrants to purchase 159,000 shares at an exercise price of $23.95 per
share. The Company has filed shelf registration statements covering the
shares issuable upon conversion of the warrants sold to Jefferies.
17. Cash paid for interest and net income taxes paid (refunded) was $74,200,000
and ($27,500,000), respectively, for the nine month period ended September
30, 2004 and $24,600,000 and $3,500,000, respectively, for the nine month
period ended September 30, 2003.
14
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 nine month period ended September 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 and an increase in
accounts payable due to the timing of payments. For the nine month period ended
September 30, 2003, net cash was used for operations principally as a result of
an increase in the Company's investment in the trading portfolio, income tax
payments and payment of corporate interest and overhead expenses.
As of September 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 $1,717,300,000. This amount is comprised of cash
and short-term bonds and notes of the United States Government and its agencies
of $1,097,200,000, the equity investment in White Mountains Insurance Group,
Ltd. of $197,300,000 (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 $422,800,000.
Effective March 2004, the Company amended its unsecured bank credit facility to
extend its maturity to March 2007. As of September 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.
In July 2004, the Company invested $50,000,000 in INTL, a limited liability
company that is invested in a master fund which primarily invests in emerging
markets debt and equity securities. INTL and the master fund are managed and
controlled by an investment manager who has full discretion over investment and
operating decisions. In accordance with FIN 46R, INTL is a variable interest
entity and the Company is currently the primary beneficiary; as a result, the
Company accounts for its investment in INTL as a consolidated subsidiary. In
October 2004, the Company invested an additional $25,000,000 in INTL. INTL plans
to sell additional membership interests in the future, which if successful could
result in the Company no longer accounting for INTL as a consolidated
subsidiary. The creditors of INTL have recourse only to the assets of INTL and
do not have recourse to any other assets of the Company.
In September 2004, WilTel refinanced its existing $375,000,000 credit agreement
debt by entering into an amended credit agreement consisting of a $240,000,000
first lien term loan facility, a $120,000,000 second lien term loan facility and
a $25,000,000 revolving credit facility. WilTel also used $90,000,000 of its
cash and investments to repay in full one of the mortgage notes that was secured
by its headquarters building ($54,600,000 including accrued interest), reduce
the amount outstanding under its credit agreement ($15,000,000), reduce the
amount outstanding under the other note that is secured by its headquarters
building ($13,300,000) and pay expenses. The amended credit agreement has not
been guaranteed by the Company and is not secured by any of the Company's assets
other than the assets of WilTel.
15
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
The first lien term loan facility requires quarterly principal payments of
approximately $632,000 commencing December 31, 2004 through June 30, 2009, and
quarterly principal payments of $57,000,000 thereafter until final maturity on
June 30, 2010. The second lien term loan facility matures on December 31, 2010.
However, if WilTel does not refinance its obligations under the remaining
promissory note that is secured by its headquarters building ($60,800,000
outstanding) prior to October 1, 2009, then the first lien term loan facility
will mature on October 1, 2009, and if such promissory note is not refinanced by
January 1, 2010, then the second lien term loan facility will mature on January
1, 2010. The revolving credit facility will terminate on September 24, 2009.
Loans under the credit agreement bear interest at a variable rate based upon
either the prime rate or LIBOR, at WilTel's option, plus a specified margin for
each loan. WilTel's obligations under its credit agreement are secured by
substantially all of its assets other than those assets securing its
headquarters building, for which the new credit agreement lenders have a second
priority lien, and its aircraft capital lease.
As of September 30, 2004, WilTel had aggregate cash and investments of
$201,000,000, an increase of $15,200,000 from December 31, 2003. The increase
during this period reflects WilTel's positive operating results, reduced by
WilTel's capital expenditures of $50,400,000 and cash used for the refinancing
activities discussed above of $90,000,000. 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
$23,900,000 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 March 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. In response, the FCC has issued interim rules requiring regional local
telephone companies to continue opening their networks to competitors at
reasonable rates until such time as the FCC issues permanent rules or September
13, 2005 (with increased rates and reduced availability effective March 13,
2005), whichever is earlier. A Court of Appeals decision to address petitions to
eliminate these interim rules has been delayed until January 4, 2005. As a
result, it is possible that competing telephone companies will 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. Although WilTel's wholesale carrier market segment is not likely to be
materially affected by these actions, its enterprise market segment could
experience a cost disadvantage with competitors who have cheaper access to local
telephone company networks. In addition, certain of WilTel's customers could be
significantly affected by these changes.
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, but has not
yet addressed whether traffic originating on broadband networks is subject to
such 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.
16
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
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 reported a pre-tax
gain of $11,300,000 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.
The Company's consolidated banking and lending operations had outstanding loans
(net of unearned finance charges) of $5,500,000 and $205,500,000 at September
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 $36,200,000 and $145,500,000 at September 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. In September 2004, the Company sold certain loan
portfolios that had been substantially written-off for aggregate cash proceeds
of $8,100,000. The Company has entered into an agreement to sell its customer
banking deposits to an unrelated financial institution (using the segment's
available liquidity) which is subject to regulatory approval. 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 and liquidating its historical lending operations in an orderly and
cost efficient manner. The Company expects to substantially complete the
liquidation of these operations during 2004, and at that time will surrender its
national bank charter.
Concurrently with the surrender of its national bank charter, the Company
expects to submit an application to the state of Utah to convert its current
charter to a Utah state commercial bank charter. The application is subject to
regulatory review and approval, including review and approval of the Company's
business plan. If its application is approved, the primary regulator of the
Company's banking and lending operations would be the Utah State Department of
Financial Institutions.
Results of Operations
The 2004 Periods Compared to the 2003 Periods
Telecommunications
The following table reconciles WilTel's segment profit from operations to income
(loss) from continuing operations before income taxes for the three and nine
month periods ended September 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 Nine Month
Period Ended September 30, 2004 Period Ended September 30, 2004
------------------------------- -------------------------------
Network Vyvx Total Network Vyvx Total
------- ---- ----- ------- ---- -----
(In thousands)
Operating revenues (1) $ 371,000 $ 30,800 $401,800 $ 1,088,200 $ 90,000 $1,178,200
========= ========= ======== =========== ========= ==========
Segment profit from operations $ 39,600 $ 8,600 $ 48,200 $ 86,000 $ 23,700 $ 109,700
Depreciation and amortization expense (48,400) (2,100) (50,500) (154,100) (6,600) (160,700)
Interest expense, net of investment income (2) (7,800) (500) (8,300) (21,400) (1,600) (23,000)
Other non-operating income (expense), net (2) 23,200 2,600 25,800 26,100 2,600 28,700
--------- --------- -------- ----------- --------- ----------
Pre-tax income (loss) $ 6,600 $ 8,600 $ 15,200 $ (63,400) $ 18,100 $ (45,300)
========= ========= ======== =========== ========= ==========
17
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
(1) Excludes intersegment revenues from amounts billed by Network to Vyvx of
$4,900,000 and $13,900,000, respectively, for the three and nine month
periods ended September 30, 2004.
(2) If items in these categories can not be directly attributed to a particular
WilTel segment they are allocated to each segment based upon a formula that
considers each segment's revenues, property and equipment and headcount.
As more fully discussed in the 2003 10-K, prior to November 2003 the Company
accounted for its 47.4% share of WilTel's income (losses) under the equity
method of accounting, and recorded income (losses) related to its investment in
WilTel of $5,000,000 and ($52,200,000), respectively, for the three and nine
month periods ended September 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
long-term preferred provider agreements which govern the manner in which pricing
for individual services is determined. Network's revenues include services
provided to SBC of $267,100,000 and $767,100,000, respectively, during the three
and nine month periods ended September 30, 2004, representing approximately 71%
and 70%, respectively, of Network operating 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
$30,800,000 and $87,400,000, respectively, and selling, general and other
expenses of $39,900,000 and $110,400,000, respectively, for Network during the
three and nine month periods ended September 30, 2004. During second quarter
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, $31,900,000 and
$39,600,000, for the first, second and third quarter of 2004, respectively. The
increase from the first quarter to the second quarter principally reflects the
recognition 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. The increase from the second
quarter to the third quarter is primarily due to improved voice and data gross
margins and favorable access cost dispute resolutions. Gross margin is estimated
to have improved by approximately $7,500,000, resulting from both revenue growth
and reduced costs due to a higher percentage of traffic carried on WilTel-owned
fiber.
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 $13,400,000,
respectively, and selling, general and other expenses of $3,800,000 and
$11,000,000, respectively, for Vyvx during the three and nine month periods
ended September 30, 2004.
18
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
For the three and nine month periods ended September 30, 2004, WilTel's other
non-operating income includes income of $18,500,000 related to the settlement of
litigation for less than amounts reserved, income of $6,000,000 related to the
sale of an equity security which had a zero book value, and income of $2,000,000
related to the reversal of excess reserves for long-term commitments. In
addition, the nine month period ended September 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.
Healthcare Services
For the three and nine month periods ended September 30, 2004, pre-tax income
(loss) of the healthcare services segment was ($400,000) and $7,400,000,
respectively. During these periods, healthcare services revenues were
$63,800,000 and $191,100,000, respectively, and cost of sales, which primarily
consist of salaries and employee benefits, were $54,400,000 and $158,400,000,
respectively. Symphony, which was acquired in September 2003, had revenues of
$16,600,000, cost of sales of $14,100,000 and a pre-tax loss of $900,000 for the
three and nine month periods ended September 30, 2003.
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 on average by
approximately 42% during the first three quarters of 2004 as compared to the
fourth quarter 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 17% of Symphony's revenues. While Symphony's revenues were
largely unchanged in the third quarter of 2004 as compared to the prior 2004
quarters, cost of sales increased in the third quarter principally due to lower
productivity and higher hourly wages. Pre-tax results for the three and nine
month periods ended September 30, 2004 included approximately $200,000 and
$2,900,000, respectively, from the collection of receivables in excess of their
carrying amounts. In addition, pre-tax results for the 2004 periods reflect a
gain of $700,000 from the sale of certain property.
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 loan portfolios 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 and recognized a
pre-tax gain of $9,000,000, which is reflected in investment and other income.
In September 2004, the Company sold certain loan portfolios that had been
substantially written-off and reported a pre-tax gain of $7,600,000, which is
reflected in investment and other income. Pre-tax income (loss) for the banking
and lending segment was $8,800,000 and ($1,200,000) for the three month periods
ended September 30, 2004 and 2003, respectively, and $23,400,000 and $10,700,000
for the nine month periods ended September 30, 2004 and 2003, respectively.
19
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
Finance revenues, which reflect both the level and mix of consumer instalment
loans, decreased in the three and nine month periods ended September 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 nine month periods ended September 30, 2003 also include gains
related to the mark-to-market values of interest rate swaps of $700,000 and
$3,000,000, 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.
Manufacturing
Pre-tax income for the manufacturing segment was $4,000,000 and $1,800,000 for
the three month periods ended September 30, 2004 and 2003, respectively, and
$7,300,000 and $3,500,000 for the nine month periods ended September 30, 2004
and 2003, respectively. Manufacturing revenues increased approximately 29% and
20%, respectively, in the three and nine month periods ended September 30, 2004
as compared to the same periods in 2003 reflecting increases in most of the
division'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 division has increased selling prices in most
markets, which has enabled it to maintain its gross profit margins. Pre-tax
results for the nine month 2004 period also reflect lower operating expenses
than in 2003, primarily due to workforce reductions and other cost reduction
initiatives, and for the three month 2004 period also reflect a gain of $300,000
resulting from the sale of certain assets related to a former product line.
Pre-tax results for the nine month 2003 period also include cash received from
government grants.
Domestic Real Estate
Pre-tax income for the domestic real estate segment was $14,900,000 and
$6,000,000 for the three month periods ended September 30, 2004 and 2003,
respectively, and $24,000,000 and $14,500,000 for the nine month periods ended
September 30, 2004 and 2003, respectively. During the third quarter of 2004, the
Company sold 92 lots of its 95-lot development project in South Walton County,
Florida for aggregate sales proceeds of approximately $50,000,000 and recognized
pre-tax profits of $13,900,000, net of minority interest. The Company will be
required under the sale agreements to make significant improvements to the
property, including infrastructure and certain amenities, which it expects to
complete in 2005. In order to secure certain of its improvement obligations, the
Company was required to post a $2,000,000 cash collateralized letter of credit.
The Company estimates it will recognize additional pre-tax profit of $11,900,000
related to this project. Revenues during 2004 also reflect decreased gains from
property sales at the Company's other residential and commercial project in the
Florida panhandle as the lots have largely been sold, and amortization of the
deferred gain on the sale of CDS Holding Corporation. Additionally, revenues
increased during the nine month period ended September 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 pre-tax gain of $7,600,000
on that transaction.
20
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
Corporate and Other Operations
Net securities gains for Corporate and Other Operations aggregated $49,000,000
and $1,000,000 for the three month periods ended September 30, 2004 and 2003,
respectively, and $110,600,000 and $1,100,000 for the nine month periods ended
September 30, 2004 and 2003, respectively. During 2004, substantially all of the
Company's net securities gains 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 for the nine month period
ended September 30, 2003 include a provision of $5,100,000 to write down the
Company's investments in certain available for sale securities and a non-public
security. Such write downs were $2,800,000 and $3,400,000, respectively, for the
three and nine month periods ended September 30, 2004.
Investment and other income increased in the 2004 periods as compared to the
same periods in 2003. The increase principally relates to the pre-tax gain from
the sale of two of the older corporate aircraft, discussed above, greater
dividend and interest income (of $8,700,000 and $8,200,000 for the three and
nine month 2004 periods, respectively) and miscellaneous other income.
Investment and other income for the three month 2004 period also reflects
expense of $1,300,000 related to the accounting for mark-to-market values of
Corporate derivatives as compared to income of $1,300,000 for the comparable
2003 period, and decreased revenues from the Company's gas operations.
Investment and other income for the 2003 periods also reflects $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 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.
The increase in selling, general and other expenses in the 2004 periods as
compared to the 2003 periods primarily reflects greater professional fees, which
largely relate to existing and potential investments and $1,400,000 of expense
to adjust cost of goods sold of the winery operations. The winery operations,
which account for inventory under the LIFO method of accounting, recorded an
adjustment to cost of goods sold based upon the results of its annual harvest.
The additional expense was caused by a lower yield than had been previously
estimated.
The income tax provision reflects the reversal of tax reserves aggregating
$27,300,000 and $10,500,000 for the nine month periods ended September 30, 2004
and 2003, respectively, as a result of the favorable resolution of federal
income tax contingencies. Income taxes for the nine month period ended September
30, 2003 also differ from the expected statutory federal rate due to the
exclusion of income related to the refund of foreign taxes not based on income.
For the nine month period ended September 30, 2004, the Company has recorded a
federal income tax provision on income from continuing operations (inclusive of
a federal tax provision netted against equity in income of associated
companies), and federal income tax benefits on loss from discontinued operations
and losses recognized in other comprehensive income. In the aggregate, the
Company has recognized a net federal income tax provision of $18,600,000 for the
nine month period ended September 30, 2004 (excluding the reversal of tax
reserves discussed above), although no federal income tax payments are due. As
more fully described in the 2003 10-K, any net federal income tax provision for
the year will result in a reduction to the deferred tax valuation allowance that
was established when WilTel was acquired. At the end of 2004, any reduction to
the valuation allowance will first be applied to reduce the carrying amount of
WilTel's acquired non-current intangible assets.
21
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
Associated Companies
Equity in income (losses) of associated companies for the three and nine month
periods ended September 30, 2004 and 2003 includes the following (in thousands):
For the Three Month For the Nine Month
Period Ended September 30, Period Ended September 30,
-------------------------- --------------------------
2004 2003 2004 2003
---- ---- ---- ----
Berkadia $ -- $ 37,900 $ 800 $ 65,200
Olympus Re Holdings, Ltd. (10,500) 7,900 5,100 30,400
WilTel -- 5,000 -- (52,200)
EagleRock Capital Partners (QP), LP (4,500) 19,600 1,400 33,900
Jefferies Partners Opportunity Fund II, LLC 4,000 3,100 12,700 9,900
HomeFed Corporation 1,600 1,000 5,400 8,100
Pershing Square, L.P. 4,900 -- 11,000 --
Other (1,500) 100 900 (700)
-------- -------- -------- --------
Pre-tax equity in income (losses) of
associated companies (6,000) 74,600 37,300 94,600
Income tax expense (benefit) (2,100) 24,500 13,100 51,700
-------- -------- -------- --------
Equity in income (losses) of associated
companies, net of taxes $ (3,900) $ 50,100 $ 24,200 $ 42,900
======== ======== ======== ========
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.
For the three month period ended September 30, 2004, Olympus reported a net loss
as a result of property damage claims caused by severe hurricanes. The Company's
share of the Olympus loss for this period is reflected in the table above. In
addition, for the period prior to the hurricane related losses, the reduction in
the Company's ownership interest in Olympus in June 2003 resulted in a lower
share of earnings during 2004 as compared to the same period in 2003.
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.
Pershing Square, L.P. ("Pershing"), is a limited partnership that is authorized
to engage in a variety of investing activities, in which the Company has
invested $50,000,000. The Company has entered into an agreement with the manager
of Pershing pursuant to which it expects it will fully withdraw its capital and
profits, if any, during 2004 and 2005.
Discontinued Operations
In September 2004, the Company entered into an agreement to sell a commercial
real estate property and classified it as a discontinued operation since it met
the accounting criteria for held for sale treatment. The sale closed in the
fourth quarter and the Company estimates it will record an additional loss of
$500,000 resulting principally from mortgage prepayment penalties incurred upon
satisfaction of the property's mortgage at closing. During the second quarter of
2004, the Company had recorded a non-cash charge of approximately $7,100,000 to
reduce the carrying amount of this property to its estimated fair value.
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.
22
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
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 nine month period ended September 30, 2003
includes a payment of $1,800,000 from the purchaser to reimburse the Company for
tax payments previously made.
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, 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;
23
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations, continued.
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 insure or reinsure certain risks economically, or the
ability to collect on its insurance or reinsurance policies, 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;
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.
24
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 September 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 September 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 September 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.
In order for management to conclude that the Company's system of internal
controls is effective, management must conclude that there is only a remote
likelihood that a material misstatement in the annual or interim financial
statements would not be prevented or detected. This conclusion will,
depending upon the specific circumstances, be based on qualitative as well
as quantitative factors, requiring the exercise of judgment. The
qualitative importance of an item must be considered when evaluating its
impact on the financial statements, even if it is below a quantitative
materiality threshold. As a result, in order for management to conclude
that its system of internal controls over financial reporting is effective,
the documentation, assessment and testing procedures described below are
being applied to substantially all of the accounts and processes of the
Company and its subsidiaries.
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. 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
estimates it will spend approximately $4,000,000 on Section 404 compliance
for 2004 for its outside consultants and independent registered public
accountants.
25
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 or the internal controls themselves can provide absolute assurance
that all control issues and instances of fraud, if any, have been or will
be detected. The Company believes that the time, effort and financial
resources required to comply with Section 404 will enhance the reliability
of the Company's financial reporting process and will improve the Company's
ability to detect fraud. However, since this effort is mandated by law, the
Company has not attempted to estimate whether the benefits achieved will
outweigh the costs incurred.
26
PART II - OTHER INFORMATION
Item 6. 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.
27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEUCADIA NATIONAL CORPORATION
(Registrant)
Date: November 9, 2004 By: /s/ Barbara L. Lowenthal
-------------------------
Barbara L. Lowenthal
Vice President and Comptroller
(Chief Accounting Officer)
28
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.
29