-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SmMx2aV/UHDNKl+LOUI9Vqpdu7RYUNj+YDvyu/iXlCX2fwR5KD+JZapEEcBm2OIv lWU6qw+mmVnmRm063fk+gg== 0000096223-02-000019.txt : 20020814 0000096223-02-000019.hdr.sgml : 20020814 20020814135833 ACCESSION NUMBER: 0000096223-02-000019 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LEUCADIA NATIONAL CORP CENTRAL INDEX KEY: 0000096223 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 132615557 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-05721 FILM NUMBER: 02734268 BUSINESS ADDRESS: STREET 1: 315 PARK AVE S CITY: NEW YORK STATE: NY ZIP: 10010 BUSINESS PHONE: 2124601900 MAIL ADDRESS: STREET 1: 315 PARK AVENUE SOUTH CITY: NEW YORK STATE: NY ZIP: 10010 FORMER COMPANY: FORMER CONFORMED NAME: TALCOTT NATIONAL CORP DATE OF NAME CHANGE: 19800603 10-Q 1 lnc2q02q.txt LNC 2ND QTR. 2002 10-Q 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, 2002 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 ------- ------- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES NO ------- ------- APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, at August 5, 2002: 55,346,343. PART I - FINANCIAL INFORMATION Item 1. Financial Statements. LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets June 30, 2002 and December 31, 2001 (Dollars in thousands, except par value)
June 30, December 31, 2002 2001 ----------- ---------- (Unaudited) ASSETS Investments: Available for sale (aggregate cost of $662,213 and $579,342) $ 716,931 $ 626,584 Trading securities (aggregate cost of $36,587 and $68,547) 32,367 63,850 Held to maturity (aggregate fair value of $359 and $1,665) 359 1,666 Other investments, including accrued interest income 7,729 14,949 ---------- ---------- Total investments 757,386 707,049 Cash and cash equivalents 483,853 373,222 Trade, notes and other receivables, net 505,301 596,229 Prepaids and other assets 213,330 227,709 Property, equipment and leasehold improvements, net 170,605 162,158 Investments in associated companies 348,228 358,761 Net assets of discontinued operations -- 43,959 ---------- ---------- Total $2,478,703 $2,469,087 ========== ========== LIABILITIES Customer banking deposits $ 468,025 $ 476,495 Trade payables and expense accruals 74,537 74,988 Other liabilities 198,992 215,689 Income taxes payable 98,248 124,692 Deferred tax liability 25,470 17,051 Debt, including current maturities 250,777 252,279 -------- ---------- Total liabilities 1,116,049 1,161,194 ---------- ---------- Commitments and contingencies Minority interest 11,068 14,240 ---------- ---------- Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debt securities of the Company 98,200 98,200 ---------- ---------- SHAREHOLDERS' EQUITY Common shares, par value $1 per share, authorized 150,000,000 shares; 55,343,843 and 55,318,257 shares issued and outstanding, after deducting 63,120,448 and 63,117,584 shares held in treasury 55,344 55,318 Additional paid-in capital 55,311 54,791 Accumulated other comprehensive income 32,225 14,662 Retained earnings 1,110,506 1,070,682 ---------- ---------- Total shareholders' equity 1,253,386 1,195,453 ---------- ---------- Total $2,478,703 $2,469,087 ========== ==========
See notes to interim consolidated financial statements. 2 LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Income For the periods ended June 30, 2002 and 2001 (In thousands, except per share amounts) (Unaudited)
For the Three Month For the Six Month Period Ended June 30, Period Ended June 30, --------------------- --------------------- 2002 2001 2002 2001 ---- ---- ---- ---- Revenues: Manufacturing $ 13,915 $ 12,613 $ 26,303 $ 26,261 Finance 23,002 28,898 47,706 56,610 Investment and other income 36,692 47,387 66,173 87,586 Equity in income of associated companies 25,055 18,509 55,585 26,824 Net securities gains (losses) (3,292) 10,415 (12,298) 13,034 --------- --------- --------- --------- 95,372 117,822 183,469 210,315 --------- --------- --------- --------- Expenses: Manufacturing cost of goods sold 9,140 8,346 17,432 18,034 Interest 8,922 12,436 17,510 24,647 Salaries 9,660 11,240 20,228 23,833 Selling, general and other expenses 35,439 38,896 76,338 76,371 --------- --------- --------- --------- 63,161 70,918 131,508 142,885 --------- --------- --------- --------- Income from continuing operations before income taxes, minority expense of trust preferred securities and cumulative effect of a change in accounting principle 32,211 46,904 51,961 67,430 Income taxes 11,402 15,046 18,468 22,404 --------- --------- --------- --------- Income from continuing operations before minority expense of trust preferred securities and cumulative effect of a change in accounting principle 20,809 31,858 33,493 45,026 Minority expense of trust preferred securities, net of taxes 1,380 1,380 2,761 2,761 --------- --------- --------- --------- Income from continuing operations before cumulative effect of a change in accounting principle 19,429 30,478 30,732 42,265 Income (loss) from discontinued operations, net of taxes 3,140 (4,604) 4,580 (36,289) Gain on disposal of discontinued operations, net of taxes 4,512 -- 4,512 -- --------- --------- --------- --------- Income before cumulative effect of a change in accounting principle 27,081 25,874 39,824 5,976 Cumulative effect of a change in accounting principle -- -- -- 411 --------- --------- --------- --------- Net income $ 27,081 $ 25,874 $ 39,824 $ 6,387 ========= ========= ========= ========= Basic earnings (loss) per common share: Income from continuing operations before cumulative effect of a change in accounting principle $ .35 $ .55 $ .56 $ .76 Income (loss) from discontinued operations .06 (.08) .08 (.65) Gain on disposal of discontinued operations .08 -- .08 -- Cumulative effect of a change in accounting principle -- -- -- .01 --------- --------- --------- --------- Net income $ .49 $ .47 $ .72 $ .12 ========= ========= ========= ========= Diluted earnings (loss) per common share: Income from continuing operations before cumulative effect of a change in accounting principle $ .35 $ .55 $ .56 $ .76 Income (loss) from discontinued operations .06 (.08) .08 (.65) Gain on disposal of discontinued operations .08 -- .08 -- Cumulative effect of a change in accounting principle -- -- -- .01 --------- --------- --------- --------- Net income $ .49 $ .47 $ .72 $ .12 ========= ========= ========= =========
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, 2002 and 2001 (In thousands) (Unaudited)
2002 2001 ---- ---- Net cash flows from operating activities: Net income $ 39,824 $ 6,387 Adjustments to reconcile net income to net cash provided by operations: Cumulative effect of a change in accounting principle -- (411) Provision (benefit) for deferred income taxes 6,316 (3,438) Depreciation and amortization of property, equipment and leasehold improvements 9,350 7,741 Other amortization (primarily related to investments) (474) (7,000) Provision for doubtful accounts 11,440 16,448 Net securities (gains) losses 12,298 (13,034) Equity in income of associated companies (55,585) (26,824) Gain on disposal of real estate, property and equipment, and other assets (11,859) (16,172) Gain on disposal of discontinued operations (4,512) -- Investments classified as trading, net 56,177 (3,687) Net change in: Trade and other receivables 3,676 (793) Prepaids and other assets 546 (3,454) Trade payables and expense accruals (2,065) (30,821) Other liabilities (106) 31,661 Income taxes payable (26,808) (5,091) Other 1,489 2,882 Net change in net assets of discontinued operations (5,384) 54,654 -------- --------- Net cash provided by operating activities 34,323 9,048 -------- --------- Net cash flows from investing activities: Acquisition of real estate, property and equipment, and other assets (19,789) (24,196) Proceeds from disposals of real estate, property and equipment, and other assets 44,875 45,551 Proceeds from sale of discontinued operations 66,241 -- Advances on loan receivables (48,381) (164,129) Principal collections on loan receivables 93,734 95,908 Advances on notes receivables (650) (2,584) Collections on notes receivables 74 38,622 Investments in associated companies (1,506) (5,714) Distributions from associated companies 36,470 50,709 Purchases of investments (other than short-term) (478,784) (638,801) Proceeds from maturities of investments 324,449 158,966 Proceeds from sales of investments 69,333 124,516 --------- --------- Net cash provided by (used for) investing activities 86,066 (321,152) --------- --------- Net cash flows from financing activities: Net change in customer banking deposits (7,794) 29,681 Issuance of long-term debt, net of issuance costs 6,145 53,979 Reduction of long-term debt (8,163) (4,048) Purchase of common shares for treasury (98) (34) --------- --------- Net cash provided by (used for) financing activities (9,910) 79,578 --------- --------- Effect of foreign exchange rate changes on cash 152 (457) --------- --------- Net increase (decrease) in cash and cash equivalents 110,631 (232,983) Cash and cash equivalents at January 1, 373,222 475,367 --------- --------- Cash and cash equivalents at June 30, $ 483,853 $ 242,384 ========= =========
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, 2002 and 2001 (In thousands, except par value) (Unaudited)
Common Accumulated Shares Additional Other $1 Par Paid-In Comprehensive Retained Value Capital Income (Loss) Earnings Total ----- ---------- ------------- -------- ----- Balance, January 1, 2001 $ 55,297 $ 54,340 $ 2,585 $1,092,019 $1,204,241 ---------- Comprehensive loss: Net change in unrealized gain (loss) on investments (7,632) (7,632) Net change in unrealized foreign exchange gain (loss) (10,286) (10,286) Net change in unrealized gain (loss) on derivative instruments (including the cumulative effect of a change in accounting principle of $1,371) (139) (139) Net income 6,387 6,387 --------- Comprehensive loss (11,670) --------- Exercise of options to purchase common shares 17 376 393 Purchase of stock for treasury (1) (33) (34) -------- -------- --------- ---------- --------- Balance, June 30, 2001 $ 55,313 $ 54,683 $ (15,472) $1,098,406 $1,192,930 ======== ======== ========= ========== ========== Balance, January 1, 2002 $ 55,318 $ 54,791 $ 14,662 $1,070,682 $1,195,453 ---------- Comprehensive income: Net change in unrealized gain (loss) on investments 4,315 4,315 Net change in unrealized foreign exchange gain (loss) 14,209 14,209 Net change in unrealized gain (loss) on derivative instruments (961) (961) Net income 39,824 39,824 ---------- Comprehensive income 57,387 ---------- Exercise of options to purchase common shares 29 615 644 Purchase of stock for treasury (3) (95) (98) -------- --------- --------- ---------- ---------- Balance, June 30, 2002 $ 55,344 $ 55,311 $ 32,225 $1,110,506 $1,253,386 ======== ========= ========= ========== ==========
See notes to interim consolidated financial statements. 5 LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES Notes to Interim Consolidated Financial Statements 1. The unaudited interim consolidated financial statements, which reflect all adjustments (consisting only of normal recurring items) that management believes necessary to present fairly results of interim operations, should be read in conjunction with the Notes to Consolidated Financial Statements (including the Summary of Significant Accounting Policies) included in the Company's audited consolidated financial statements for the year ended December 31, 2001, which are included in the Company's Annual Report filed on Form 10-K for such year (the "2001 10-K"). Results of operations for interim periods are not necessarily indicative of annual results of operations. The consolidated balance sheet at December 31, 2001 was extracted from the audited annual financial statements and does not include all disclosures required by generally accepted accounting principles for annual financial statements. Certain amounts for prior periods have been reclassified to be consistent with the 2002 presentation. 2. During the second quarter of 2002, the Company sold its interest in Fidei, its foreign real estate subsidiary, to an unrelated third party for total proceeds of 70,400,000 Euros ($66,200,000), which resulted in an after tax gain on the sale reflected in results of operations of $4,500,000 for the six and three month periods ended June 30, 2002, and an increase to shareholders' equity of $12,100,000 as of June 30, 2002. In connection with this transaction, the Company classified its foreign real estate operations as discontinued operations and, accordingly, prior period financial statements have been reclassified to conform with this presentation. Prior to the sale, the Company had recorded an unrealized loss in accumulated other comprehensive income of $7,600,000, relating to currency translation adjustments and a deferred gain resulting from the early termination of a currency swap agreement. Upon the sale, this unrealized loss was recognized in results of operations, reducing the after tax gain on the sale for the six and three month periods ended June 30, 2002, while increasing shareholders' equity as of June 30, 2002. In connection with receiving the sale proceeds in Euros, the Company entered into a participating currency derivative that upon expiration provides for the Company to receive a minimum of $65,100,000 in exchange for 70,000,000 Euros. If the Euro should appreciate in value relative to the dollar above $.93, the derivative contract provides that the Company will receive 75% of such appreciation. Included in investment and other income for the periods ended June 30, 2002, is a net gain of $2,100,000, representing the translation gain on the Euros held by the Company, partially offset by the mark-to-market loss on the derivative contract and the premium paid to purchase the contract. 3. Certain information concerning the Company's segments for the six and three month periods ended June 30, 2002 and 2001 is presented in the following table. Prior period amounts have been reclassified for the domestic real estate operations, which were previously included in Other Operations.
For the Three Month For the Six Month Period Ended June 30, Period Ended June 30, --------------------- --------------------- 2002 2001 2002 2001 ---- ---- ---- ---- (In thousands) Revenues: Banking and lending $ 24,723 $ 32,886 $ 53,400 $ 61,954 Domestic real estate 17,063 16,840 25,442 26,581 Manufacturing 13,931 12,657 26,339 26,356 Other operations 10,723 12,117 18,301 25,560 Equity in associated companies 25,055 18,509 55,585 26,824 Corporate (a) 3,877 24,813 4,402 43,040 -------- -------- --------- --------- Total consolidated revenues $ 95,372 $117,822 $ 183,469 $ 210,315 ======== ======== ========= ========= (continued)
6 Notes to Interim Consolidated Financial Statements, continued
For the Three Month For the Six Month Period Ended June 30, Period Ended June 30, --------------------- --------------------- 2002 2001 2002 2001 ---- ---- ---- ---- (In thousands) Income (loss) from continuing operations before income taxes, minority expense of trust preferred securities and cumulative effect of a change in accounting principle: Banking and lending $ 6,445 $ 5,789 $ 10,510 $ 5,070 Domestic real estate 8,854 9,200 9,097 12,244 Manufacturing 2,064 900 3,294 1,642 Other operations 2,514 2,969 2,806 8,615 Equity in associated companies 25,055 18,509 55,585 26,824 Corporate (a) (12,721) 9,537 (29,331) 13,035 ------- -------- --------- -------- Total consolidated income from continuing operations before income taxes, minority expense of trust preferred securities and cumulative effect of a change in accounting principle $32,211 $ 46,904 $ 51,961 $ 67,430 ======= ======== ========= ========
(a) Includes provisions that reduce net security gains (losses) by $19,700,000 and $14,700,000 for the six and three month periods ended June 30, 2002, respectively, to write down investments in certain available for sale securities and an equity investment in a non-public fund. 4. The Company accounts for its investment in Berkadia under the equity method of accounting. At June 30, 2002, the book value of the Company's equity investment in Berkadia was negative $98,800,000, which is included in other liabilities in the consolidated balance sheet. As more fully described in the 2001 10-K, the negative carrying amount results from Berkadia's distribution of loan fees received and the Company's recognition in 2001 of its share of The FINOVA Group Inc.'s ("FINOVA") non-cash losses recorded by Berkadia, partially offset by the Company's share of Berkadia's income related to Berkadia's loan to FINOVA. The Company has guaranteed 10% of Berkadia's debt and, although the Company has no cash investment in Berkadia, it records its share of any losses recorded by Berkadia up to the amount of the guarantee. In 2001, Berkadia suspended its recognition of its share of FINOVA's losses, since the carrying amount of Berkadia's investment in FINOVA's common stock was reduced to zero. As of July 31, 2002, the outstanding amount of the guarantee was $265,000,000. For the six and three month periods ended June 30, 2002, the Company's equity in the income of Berkadia consists of the following (in thousands):
For the Three For the Six Month Period Month Period Ended June 30, 2002 Ended June 30, 2002 ------------------- -------------------- Net interest spread on the Berkadia loan - 10% of total $ 1,500 $ 3,600 Amortization of Berkadia loan discount related to cash fees - 50% of total 5,100 12,200 Amortization of Berkadia loan discount related to FINOVA stock - 50% of total 8,100 19,300 --------- --------- Equity in income of associated companies - Berkadia $ 14,700 $ 35,100 ========= =========
7 Notes to Interim Consolidated Financial Statements, continued The amortization of the Berkadia loan discount has been accelerated as a result of principal payments on the Berkadia loan that were greater than expected at the time the loan was made. For the six and three month periods ended June 30, 2002, the effect of this acceleration was to increase the Company's equity in income of Berkadia by approximately $16,900,000 and $3,500,000, respectively. Loan repayments from FINOVA are unlikely to continue at the pace experienced to date. 5. A summary of accumulated other comprehensive income (loss) at June 30, 2002 and December 31, 2001 is as follows (in thousands):
June 30, December 31, 2002 2001 ------ ---------- Net unrealized gains on investments $35,996 $ 31,681 Net unrealized foreign exchange losses (2,403) (16,612) Net unrealized losses on derivative instruments (1,368) (407) ------- -------- $32,225 $ 14,662 ======= ========
6. Included in investment and other income for the six and three month periods ended June 30, 2002 are charges of $1,000,000 and $3,700,000, respectively, as a result of accounting for its derivative financial instruments in accordance with Statement of Financial Accounting Standards No. 133 ("SFAS 133"). Amounts for the six and three month periods ended June 30, 2001 were not material. 7. Per share amounts were calculated by dividing net income by the sum of the weighted average number of common shares outstanding and, for diluted earnings (loss) per share, the incremental weighted average number of shares issuable upon exercise of outstanding options and warrants for the periods they were outstanding. The number of shares used to calculate basic earnings (loss) per share amounts was 55,328,000 and 55,304,000 for the six month periods ended June 30, 2002 and 2001, respectively, and 55,336,000 and 55,309,000 for the three month periods ended June 30, 2002 and 2001, respectively. The number of shares used to calculate diluted earnings (loss) per share amounts was 55,642,000 and 55,640,000 for the six month periods ended June 30, 2002 and 2001, respectively, and 55,694,000 and 55,635,000 for the three month periods ended June 30, 2002 and 2001, respectively. 8. Cash paid for interest and income taxes (net of refunds) was $17,800,000 and $37,300,000, respectively, for the six month period ended June 30, 2002 and $24,500,000 and $11,700,000, respectively, for the six month period ended June 30, 2001. 9. As disclosed in the 2001 10-K, in connection with its audit of the Company's consolidated federal income tax returns for the years 1996 through 1999, the Internal Revenue Service ("IRS") had issued Notices of Proposed Adjustments that, if sustained, would have resulted in approximately $80,000,000 of tax, plus interest. The Company believes that it is adequately reserved for this exposure. In April 2002, the IRS revised these Notices of Proposed Adjustments. The Company has agreed to these revised Notices of Proposed Adjustments, as well as other adjustments proposed by the IRS, which in total resulted in the payment of $326,000. Although the Company has agreed to the IRS adjustments, until the statute of limitations expires on December 31, 2002, the IRS has the right to propose additional adjustments. 10. In July 2002, the Company agreed to sell its equity interest in certain thoroughbred racetrack businesses to a third party for net proceeds of approximately $28,000,000 and form a joint venture with the buyer and the other sellers to pursue the potential development of gaming ventures in Maryland (if authorized by state law). The transaction is subject to regulatory approvals, legislative review and customary closing conditions, and is expected to close in the fall of 2002; however, there can be no assurance that it will ultimately be consummated or that, if consummated, the joint venture will have any significant value to the Company. At June 30, 2002, the Company's equity investment in the businesses was $11,400,000. 8 Notes to Interim Consolidated Financial Statements, continued In July 2002, the Company agreed to acquire approximately 45% of the common stock of Williams Communications Group, Inc. ("WCG") to be outstanding upon WCG's emergence from chapter 11 proceedings. These shares would be acquired pursuant to a claims purchase agreement with The Williams Companies, Inc. and an investment agreement with WCG, which filed for bankruptcy protection on April 22, 2002. Under the agreements, which will be part of a comprehensive restructuring of WCG, the Company's aggregate investment in the WCG stock will be $330,000,000. The restructuring will be implemented through a plan of reorganization under chapter 11. Consummation of this transaction is subject to bankruptcy court approval of the agreements, the chapter 11 plan and related disclosure statement and consummation of the restructuring plan, as well as normal closing conditions (including receipt of third party consents), other regulatory approvals, and negotiation of a WCG restructured credit agreement on terms acceptable to the Company. Under certain conditions, The Williams Companies, Inc. and a non-debtor subsidiary of WCG would each be obligated to pay the Company a termination fee of $5,000,000. There can be no assurance that this transaction will ultimately be consummated. On July 11, 2002, options to purchase an aggregate of 308,500 shares of Common Stock were granted to employees under the Company's 1999 Stock Option Plan at an exercise price of $30.74 per share, the then current market price per share. 9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Interim Operations The following should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 2001 10-K. Liquidity and Capital Resources For the six month periods ended June 30, 2002 and 2001, net cash was provided by operations. As of June 30, 2002, the Company's readily available cash, cash equivalents and marketable securities, excluding those amounts held by its regulated subsidiaries, totaled $892,200,000. This amount is comprised of cash and short-term bonds and notes of the United States Government and its agencies of $650,300,000 (73%), the equity investment in White Mountains Insurance Group, Ltd. of $118,700,000 (13%) and other publicly traded debt and equity securities aggregating $123,200,000 (14%). Additional sources of liquidity as of June 30, 2002 include $163,600,000 of cash and marketable securities collateralizing letters of credit. As a result of principal payments, as of July 31, 2002, the Company's guarantee of Berkadia's financing has been reduced to $265,000,000. During the second quarter of 2002, the Company sold its interest in Fidei, its foreign real estate subsidiary, to an unrelated third party for total proceeds of 70,400,000 Euros ($66,200,000). Such amount is included in the Company's readily available cash and cash equivalents referred to above. In July 2002, the Company agreed to sell its equity interest in certain thoroughbred racetrack businesses to a third party for net proceeds of approximately $28,000,000 and form a joint venture with the buyer and the other sellers to pursue the potential development of gaming ventures in Maryland (if authorized by state law). The transaction is subject to regulatory approvals, legislative review and customary closing conditions, and is expected to close in the fall of 2002; however, there can be no assurance that it will ultimately be consummated or that, if consummated, the joint venture will have any significant value to the Company. At June 30, 2002, the Company's equity investment in the businesses was $11,400,000. In July 2002, the Company agreed to acquire approximately 45% of the common stock of Williams Communications Group, Inc. ("WCG") to be outstanding upon WCG's emergence from chapter 11 proceedings. These shares would be acquired pursuant to a claims purchase agreement with The Williams Companies, Inc. and an investment agreement with WCG, which filed for bankruptcy protection on April 22, 2002. Under the agreements, which will be part of a comprehensive restructuring of WCG, the Company's aggregate investment in the WCG stock will be $330,000,000. The restructuring will be implemented through a plan of reorganization under chapter 11. Consummation of this transaction is subject to bankruptcy court approval of the agreements, the chapter 11 plan and related disclosure statement and consummation of the restructuring plan, as well as normal closing conditions (including receipt of third party consents), other regulatory approvals, and negotiation of a WCG restructured credit agreement on terms acceptable to the Company. Under certain conditions, The Williams Companies, Inc. and a non-debtor subsidiary of WCG would each be obligated to pay the Company a termination fee of $5,000,000. There can be no assurance that this transaction will ultimately be consummated. Results of Operations The 2002 Periods Compared to the 2001 Periods Finance revenues, which reflect the level and mix of consumer instalment loans, decreased in the six and three month periods ended June 30, 2002 as compared to the similar periods in 2001 due to fewer average loans outstanding. Average loans outstanding during the six and three month periods ended June 30, 2002 were $474,300,000 and $457,800,000, respectively, as compared to $536,600,000 and $548,700,000, respectively, during the six and three month periods ended June 30, 2001. Pre-tax results for the banking and lending segment improved for the six month and three month periods ended June 30, 2002 as compared to the prior year, principally due to lower interest expense of $7,200,000 and $3,700,000, respectively, a lower provision for loan losses of $5,100,000 and $3,300,000, respectively, and less salaries expense of $3,100,000 and $1,500,000, respectively, partially offset by greater net interest paid on interest rate swaps of $2,900,000 and $1,200,000, respectively, and less investment income of $2,300,000 and $900,000, respectively. 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Interim Operations, continued The reduction in loans, the lower provision for loan losses and the reduced salaries expense resulted from the Company's decision in September 2001 to stop originating subprime automobile loans and subsequently to consolidate its operations, as more fully described in the 2001 10-K. The reduction in interest expense resulted from reduced customer banking deposits and lower interest rates on these deposits, and the reduction in investment income also was due to lower interest rates. In addition, pre-tax results for the banking and lending segment reflect $1,300,000 and $(3,100,000), respectively, of income (charges) primarily resulting from marking-to-market its interest rate swaps for the six month periods ended June 30, 2002 and 2001 and $(500,000) for the three month period ended June 30, 2002. Such amount was not material for the three month period ended June 30, 2001. The Company uses interest rate swaps to manage the impact of interest rate changes on its customer banking deposits. Although the Company believes that these derivative financial instruments serve as economic hedges, they do not meet certain effectiveness criteria under SFAS 133, and therefore are not accounted for as hedges. Revenues from domestic real estate did not change significantly in the six and three month periods ended June 30, 2002 as compared to the same periods in 2001 as a result of less rent income, largely due to the sale of one of the Company's shopping centers in the fourth quarter of 2001 and two shopping centers during 2002, lower gains from property sales and increased revenues from the Company's Hawaiian hotel, which the Company began operating in the third quarter of 2001. The decline in pre-tax income from domestic real estate in the 2002 periods as compared to the similar periods in 2001 also reflects greater operating costs, principally related to the Hawaiian hotel. Manufacturing revenues increased in the second quarter of 2002 as compared to the same period in 2001 primarily due to increased demand in the construction and home furnishings markets aggregating $1,500,000, partially offset by reductions in the consumer products market. Manufacturing revenues for the six month period ended June 30, 2002 were largely unchanged as compared to the same period in 2001 as the increased sales in the construction and home furnishings markets aggregating $2,600,000 were offset by reductions in the consumer products market of $2,300,000 and reductions in the agricultural market. The reductions in the consumer products market resulted from the loss of a customer for the Asian market and reduced demand for one of the Company's healthcare products. Gross profit for the 2002 periods increased as compared to the 2001 periods principally due to lower raw material costs and plant personnel reductions partially offset by higher fixed costs relating to the Belgium manufacturing facility, and for the three month period due to the increased sales. Pre-tax results also increased in the 2002 periods due to cost reduction initiatives that resulted in lower operating expenses. Investment and other income declined in the six and three month periods ended June 30, 2002 as compared to the same periods in 2001 principally due to a reduction in investment income of $13,800,000 and $6,800,000, respectively, resulting from a decline in interest rates, a decline of $7,700,000 and $2,200,000, respectively, in revenues from the Company's gas operations due to lower production and prices, reduced rent income and reduced gains from domestic property sales as discussed above and, for the three month period ended June 30, 2002, changes in market values related to its derivative financial instruments. Such decreases were partially offset by increased revenues from the Company's Hawaiian hotel and increased foreign exchange gains. The increase in equity in income of associated companies in the six and three month periods ended June 30, 2002 as compared to the same periods in 2001 was primarily due to income from the Company's equity investment in Berkadia LLC. As more fully described in Note 4 of Notes to Interim Consolidated Financial Statements, the Company recognized $35,100,000 and $14,700,000, respectively, of income from this investment in the six and three month periods ended June 30, 2002, of which $31,500,000 and $13,200,000, respectively, related to the amortization of discount from the Berkadia loan. Equity in income of associated companies for the six and three month periods ended June 30, 2002 also included $9,400,000 and $6,500,000, respectively, of income from the Company's equity investment in Olympus Re Holdings, Ltd., an investment the Company made in December 2001. Such increases were partially offset by $11,500,000 and $6,000,000 less income from the Company's equity investment in Jefferies Partners Opportunity Fund II, LLC for the six and three month periods ended June 30, 2002, respectively. In addition, income from the Company's equity investments in real estate businesses for the six and three month periods ended June 30, 2002 declined by $6,000,000 and $9,000,000, respectively. 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Interim Operations, continued Net securities gains (losses) for the six and three month periods ended June 30, 2002 include a provision of $19,700,000 and $14,700,000, respectively, to write down the Company's investments in certain available for sale securities and its equity investment in a non-public fund. The decline in interest expense in the six and three month periods ended June 30, 2002 as compared to the same periods in 2001 was principally due to lower interest expense at the banking and lending segment due to reduced customer banking deposits and lower interest rates thereon. The decline in selling, general and other expenses for the three month period ended June 30, 2002 as compared to the same period in 2001 primarily resulted from lower provisions for loan losses at the banking and lending segment, and lower expenses related to MK Gold Company of $2,800,000. This decrease was partially offset by greater net interest paid on the Company's derivative financial instruments of $1,900,000 and increased operating costs related to the Hawaiian hotel of $2,800,000. Cautionary Statement for Forward-Looking Information Statements included in this Management's Discussion and Analysis of Financial Condition and Results of Interim Operations may contain forward-looking statements. Such forward-looking statements are made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements may relate, but are not limited, to projections of revenues, income or loss, capital expenditures, fluctuations in insurance reserves, plans for growth and future operations, competition and regulation, as well as assumptions relating to the foregoing. Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted or quantified. When used in this Management's Discussion and Analysis of Financial Condition and Results of Interim Operations, the words "estimates", "expects", "anticipates", "believes", "plans", "intends" and variations of such words and similar expressions are intended to identify forward-looking statements that involve risks and uncertainties. Future events and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements. The factors that could cause actual results to differ materially from those suggested by any such statements include, but are not limited to, those discussed or identified from time to time in the Company's public filings, including: o general economic and market conditions or prevailing interest rate levels, o changes in foreign and domestic laws, regulations and taxes, o changes in competition and pricing environments, o regional or general changes in asset valuation, o the occurrence of significant natural disasters, the inability to reinsure certain risks economically, increased competition in the reinsurance markets, the adequacy of loss and loss adjustment expense reserves, o weather related conditions that may affect the Company's operations or investments, o changes in U.S. real estate markets, including the residential market in Southern California and the commercial market in Hawaii, 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Interim Operations, continued o increased competition in the super premium wine industry, o adverse economic, political or environmental developments in Spain that could delay or preclude the issuance of permits necessary to obtain the Company's copper mining rights or could result in increased costs of bringing the project to completion, increased costs in financing the development of the project, decreases in world wide copper prices, o increased competition in the international and domestic plastics market and increased raw material costs, o increased default rates and decreased value of assets pledged to the Company, the Company's ability to generate new loan products, o any deterioration in the business and operations of FINOVA, in the ability of FINOVA Capital to repay the Berkadia loan, further deterioration in the value of the assets pledged by FINOVA and FINOVA Capital in connection with the Berkadia loan, and o changes in the composition of the Company's assets and liabilities through acquisitions or divestitures. Undue reliance should not be placed on these forward-looking statements, which are applicable only as of the date hereof. The Company undertakes no obligation to revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this Management's Discussion and Analysis of Financial Condition and Results of Interim Operations or to reflect the occurrence of unanticipated events. 13 PART II - OTHER INFORMATION 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 2002 Annual Meeting of Shareholders held on May 14, 2002. a) Election of directors.
Number of Shares For Withheld --- -------- Ian M. Cumming 49,563,886 132,067 Paul M. Dougan 49,563,794 132,159 Lawrence D. Glaubinger 49,563,794 132,159 James E. Jordan 49,563,894 132,059 Jesse Clyde Nichols, III 49,563,866 132,087 Joseph S. Steinberg 49,563,876 132,077
b) Ratification of PricewaterhouseCoopers LLP, as independent auditors for the year ended December 31, 2002. For 49,006,239 Against 539,742 Abstentions 149,972 Broker non votes - c) Approval of an amendment to the Company's charter to reduce from two-thirds to a majority the number of outstanding shares necessary to authorize any merger, consolidation or dissolution of the Company, or any sale, lease, exchange or other disposition of all or substantially all of the Company's assets. For 37,768,217 Against 5,061,509 Abstentions 389,363 Broker non votes 6,476,864 d) Approval of proposed corporate reorganization whereby the Company's domicile will change from New York to Bermuda. For 37,496,855 Against 5,519,400 Abstentions 202,834 Broker non votes 6,476,864 14 PART II - OTHER INFORMATION, continued Item 6. Exhibits and Reports on Form 8-K. a) Exhibits. Item 601(a) of Regulation S-K Exhibit No. Description 10.1 Settlement Agreement dated as of July 26, 2002, by and among The Williams Companies Inc., Williams Communications Group, Inc., CG Austria, Inc., the official committee of unsecured creditors and Leucadia National Corporation (filed as Exhibit 99.2 to the July 31, 2002 8-K).* 10.2 Investment Agreement dated as of July 26, 2002, by and among Leucadia National Corporation, Williams Communications Group, Inc. and, for purposes of Section 7.4 (thereto) only, Williams Communications, LLC (filed as Exhibit 99.4 to the July 31, 2002 8-K).* 10.3 Purchase and Sale Agreement dated as of July 26, 2002, by and between The Williams Companies, Inc. and Leucadia National Corporation (filed as Exhibit 99.5 to the July 31, 2002 8-K).* 99.1 Certification of Chairman of the Board and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of President pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.3 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. - ---------------------------------- * Incorporated herein by reference. b) Reports on Form 8-K. The Company filed a current report on Form 8-K dated July 31, 2002, which sets forth information under Item 5. Other Events and Item 7. Financial Statements and Exhibits. 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LEUCADIA NATIONAL CORPORATION (Registrant) Date: August 14, 2002 By: /s/ Barbara L. Lowenthal ------------------------ Barbara L. Lowenthal Vice President and Comptroller (Chief Accounting Officer) 16 EXHIBIT INDEX Exhibit No. Description 10.1 Settlement Agreement dated as of July 26, 2002, by and among The Williams Companies Inc., Williams Communications Group, Inc., CG Austria, Inc., the official committee of unsecured creditors and Leucadia National Corporation (filed as Exhibit 99.2 to the July 31, 2002 8-K).* 10.2 Investment Agreement dated as of July 26, 2002, by and among Leucadia National Corporation, Williams Communications Group, Inc. and, for purposes of Section 7.4 (thereto) only, Williams Communications, LLC (filed as Exhibit 99.4 to the July 31, 2002 8-K).* 10.3 Purchase and Sale Agreement dated as of July 26, 2002, by and between The Williams Companies, Inc. and Leucadia National Corporation (filed as Exhibit 99.5 to the July 31, 2002 8-K).* 99.1 Certification of Chairman of the Board and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification of President pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.3 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ----------------- * Incorporated herein by reference. 17 EX-99 3 imccert.txt 99.1 Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Ian M. Cumming, as Chairman of the Board and Chief Executive Officer of Leucadia National Corporation (the "Company") certify, pursuant to 18 U.S.C. ss. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) the accompanying Form 10-Q report for the period ending June 30, 2002 as filed with the U.S. Securities and Exchange Commission (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 14, 2002 By: /s/ Ian M. Cumming -------------------------- Ian M. Cumming Chairman of the Board and Chief Executive Officer EX-99 4 jsscert.txt 99.2 Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Joseph S. Steinberg, as President of Leucadia National Corporation (the "Company") certify, pursuant to 18 U.S.C. ss. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) the accompanying Form 10-Q report for the period ending June 30, 2002 as filed with the U.S. Securities and Exchange Commission (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 14, 2002 By: /s/ Joseph S. Steinberg ---------------------------- Joseph S. Steinberg President EX-99 5 jaocert.txt 99.3 Exhibit 99.3 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Joseph A. Orlando, as Chief Financial Officer of Leucadia National Corporation (the "Company") certify, pursuant to 18 U.S.C. ss. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) the accompanying Form 10-Q report for the period ending June 30, 2002 as filed with the U.S. Securities and Exchange Commission (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: August 14, 2002 By: /s/ Joseph A. Orlando -------------------------- Joseph A. Orlando Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----