10-Q 1 lnc1stq0410q.txt LEUCADIA 1ST QTR. 2004 FORM 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 March 31, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-5721 LEUCADIA NATIONAL CORPORATION (Exact name of registrant as specified in its Charter) New York 13-2615557 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 315 Park Avenue South, New York, New York 10010-3607 (Address of principal executive offices) (Zip Code) (212) 460-1900 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) ______________________ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ------ ------ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES X NO ------ ------ APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, at April 30, 2004: 70,872,502. PART I - FINANCIAL INFORMATION Item 1. Financial Statements. LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets March 31, 2004 and December 31, 2003 (Dollars in thousands, except par value)
March 31, December 31, 2004 2003 ----------- ----------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 345,796 $ 214,390 Investments 660,342 714,363 Trade, notes and other receivables, net 468,819 372,104 Prepaids and other current assets 49,164 49,506 ----------- ----------- Total current assets 1,524,121 1,350,363 Non-current investments 647,925 673,742 Notes and other receivables, net 16,356 193,459 Other assets 309,310 298,589 Property, equipment and leasehold improvements, net 1,388,667 1,450,099 Investments in associated companies 475,678 430,912 ----------- ----------- Total $ 4,362,057 $ 4,397,164 =========== =========== LIABILITIES Current liabilities: Trade payables and expense accruals $ 343,226 $ 377,473 Deferred revenue 44,978 47,311 Other current liabilities 112,286 89,390 Customer banking deposits due within one year 85,146 103,331 Long-term debt due within one year 23,033 23,956 Income taxes payable 18,528 15,867 ----------- ----------- Total current liabilities 627,197 657,328 Long-term deferred revenue 152,353 156,582 Other non-current liabilities 228,178 234,446 Non-current customer banking deposits 33,943 42,201 Long-term debt 1,158,725 1,154,878 ----------- ----------- Total liabilities 2,200,396 2,245,435 ----------- ----------- Commitments and contingencies Minority interest 16,434 17,568 ----------- ----------- SHAREHOLDERS' EQUITY Common shares, par value $1 per share, authorized 150,000,000 shares; 70,871,502 and 70,823,502 shares issued and outstanding, after deducting 47,710,719 shares held in treasury 70,872 70,824 Additional paid-in capital 614,450 613,274 Accumulated other comprehensive income 174,045 152,251 Retained earnings 1,285,860 1,297,812 ----------- ----------- Total shareholders' equity 2,145,227 2,134,161 ----------- ----------- Total $ 4,362,057 $ 4,397,164 =========== ===========
See notes to interim consolidated financial statements. 2 LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations For the three months ended March 31, 2004 and 2003 (In thousands, except per share amounts) (Unaudited)
2004 2003 ---- ---- Revenues: Telecommunications $ 380,979 $ -- Healthcare 63,227 -- Manufacturing 13,382 12,147 Finance 8,485 17,144 Investment and other income 36,430 25,303 Net securities gains 9,272 2,305 --------- --------- 511,775 56,899 --------- --------- Expenses: Cost of sales: Telecommunications 286,777 -- Healthcare 51,786 -- Manufacturing 9,696 8,949 Interest 21,003 6,799 Salaries 43,140 9,072 Depreciation and amortization 63,125 4,591 Selling, general and other expenses 71,908 31,689 --------- --------- 547,435 61,100 --------- --------- Loss before income taxes, minority expense of trust preferred securities and equity in income (losses) of associated companies (35,660) (4,201) Income taxes 273 (1,486) --------- --------- Loss before minority expense of trust preferred securities and equity in income (losses) of associated companies (35,933) (2,715) Minority expense of trust preferred securities, net of taxes -- (1,381) Equity in income (losses) of associated companies, net of taxes 23,981 (9,690) --------- --------- Net loss $ (11,952) $ (13,786) ========= ========= Basic loss per common share $ (.17) $ (.23) ====== ====== Diluted loss per common share $ (.17) $ (.23) ====== ======
See notes to interim consolidated financial statements. 3 LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows For the three months ended March 31, 2004 and 2003 (In thousands) (Unaudited)
2004 2003 --------- --------- Net cash flows from operating activities: Net loss $ (11,952) $ (13,786) Adjustments to reconcile net loss to net cash provided by (used for) operations: Deferred income tax benefit -- (219) Depreciation and amortization of property, equipment and leasehold improvements 64,434 4,968 Other amortization 683 857 Provision for doubtful accounts 982 4,472 Net securities gains (9,272) (2,305) Equity in (income) losses of associated companies (23,981) 9,690 Distributions from associated companies 20,382 18,072 Gain on disposal of real estate, property and equipment, and other assets (10,429) (2,745) Investments classified as trading, net 8,371 (5,654) Net change in: Trade, notes and other receivables 29,610 1,781 Prepaids and other assets (4,689) (4,267) Trade payables and expense accruals (27,432) (9,399) Other liabilities 21,878 (4,055) Deferred revenue (6,562) -- Income taxes payable 2,661 (2,462) Other 672 (1,677) --------- --------- Net cash provided by (used for) operating activities 55,356 (6,729) --------- --------- Net cash flows from investing activities: Acquisition of property, equipment and leasehold improvements (18,182) (1,323) Acquisitions of and capital expenditures for real estate investments (2,839) (1,654) Proceeds from disposals of real estate, property and equipment, and other assets 17,055 5,303 Advances on loan receivables -- (2,906) Principal collections on loan receivables 29,093 37,580 Advances on notes receivables -- (100) Collections on notes receivables 26,462 3,111 Investments in associated companies (51,000) (1,853) Purchases of investments (other than short-term) (287,498) (76,833) Proceeds from maturities of investments 185,060 36,949 Proceeds from sales of investments 205,730 64,313 --------- --------- Net cash provided by investing activities 103,881 62,587 --------- --------- Net cash flows from financing activities: Net change in customer banking deposits (26,342) (85,792) Issuance of long-term debt, net of issuance costs -- 3,961 Reduction of long-term debt (2,682) (901) Issuance of common shares 1,224 182 --------- --------- Net cash used for financing activities (27,800) (82,550) --------- --------- Effect of foreign exchange rate changes on cash (31) 34 --------- --------- Net increase (decrease) in cash and cash equivalents 131,406 (26,658) Cash and cash equivalents at January 1, 214,390 418,600 --------- --------- Cash and cash equivalents at March 31, $ 345,796 $ 391,942 ========= =========
See notes to interim consolidated financial statements. 4 LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Changes in Shareholders' Equity For the three months ended March 31, 2004 and 2003 (In thousands, except par value) (Unaudited)
Series A Non-Voting Common Accumulated Convertible Shares Additional Other Preferred $1 Par Paid-In Comprehensive Retained Stock Value Capital Income (Loss) Earnings Total --------- ------- -------- ------------- -------- ----- Balance, January 1, 2003 $47,507 $ 58,269 $154,260 $ 56,025 $ 1,218,464 $1,534,525 ---------- Comprehensive income: Net change in unrealized gain (loss) on investments 13,364 13,364 Net change in unrealized foreign exchange gain (loss) 994 994 Net change in unrealized gain (loss) on derivative instruments (197) (197) Net loss (13,786) (13,786) ------- Comprehensive income 375 ------- Conversion of convertible preferred shares into common shares (47,507) 1,348 46,159 -- Exercise of options to purchase common shares 6 176 182 ------- -------- -------- -------- ----------- ---------- Balance, March 31, 2003 $ -- $ 59,623 $200,595 $ 70,186 $ 1,204,678 $1,535,082 ======= ======== ======== ======== =========== ========== Balance, January 1, 2004 $ -- $ 70,824 $613,274 $152,251 $ 1,297,812 $2,134,161 ---------- Comprehensive income: Net change in unrealized gain (loss) on investments 22,235 22,235 Net change in unrealized foreign exchange gain (loss) (1,029) (1,029) Net change in unrealized gain (loss) on derivative instruments 588 588 Net loss (11,952) (11,952) ---------- Comprehensive income 9,842 ---------- Exercise of options to purchase common shares 48 1,176 1,224 ------- -------- -------- -------- ----------- ---------- Balance, March 31, 2004 $ -- $ 70,872 $614,450 $174,045 $ 1,285,860 $2,145,227 ======= ======== ======== ======== =========== ==========
See notes to interim consolidated financial statements. 5 LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES Notes to Interim Consolidated Financial Statements 1. The unaudited interim consolidated financial statements, which reflect all adjustments (consisting only of normal recurring items) that management believes necessary to present fairly results of interim operations, should be read in conjunction with the Notes to Consolidated Financial Statements (including the Summary of Significant Accounting Policies) included in the Company's audited consolidated financial statements for the year ended December 31, 2003, which are included in the Company's Annual Report filed on Form 10-K, as amended by Form 10-K/A, for such year (the "2003 10-K"). Results of operations for interim periods are not necessarily indicative of annual results of operations. The consolidated balance sheet at December 31, 2003 was extracted from the audited annual financial statements and does not include all disclosures required by generally accepted accounting principles for annual financial statements. Certain amounts for prior periods have been reclassified to be consistent with the 2004 presentation. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), establishes a fair value method for accounting for stock-based compensation plans, either through recognition in the statements of operations or disclosure. As permitted, the Company applies APB Opinion No. 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized in the statements of operations for its stock-based compensation plans. Had compensation cost for the Company's stock option plans been recorded in the statements of operations consistent with the provisions of SFAS 123, the Company's net loss would not have been materially different from that reported. In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"), which addresses consolidation of variable interest entities, which are entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. In December 2003, the FASB issued a revision ("FIN 46R") to FIN 46 to clarify certain provisions and exempt certain entities from its requirements. In addition, FIN 46R deferred to the first quarter of 2004 application of its provisions to certain entities in which a variable interest was acquired prior to February 1, 2003. The implementation of FIN 46 and FIN 46R did not have a material effect on the Company's consolidated results of operations or financial condition. 2. Results of operations for the Company's segments are reflected from the date of acquisition. As more fully described in the 2003 10-K, WilTel Communications Group, Inc. ("WilTel") became a consolidated subsidiary of the Company in November 2003, and Symphony Health Services, LLC ("Symphony") became a consolidated subsidiary of the Company in September 2003. Except for the telecommunications segments of WilTel, the primary measure of segment operating results and profitability used by the Company is income (loss) from continuing operations before income taxes, minority expense of trust preferred securities and equity in income (losses) of associated companies. For WilTel's segments, segment profit from operations is the primary performance measure of segment operating results and profitability. WilTel defines segment profit from operations as income before income taxes, interest expense, investment income, depreciation and amortization expense and other non-operating income and expense. The following information reconciles segment profit from operations of the Network and Vyvx segments to the most comparable measure under generally accepted accounting principles ("GAAP"), which is used for all other reportable segments, for the first quarter of 2004 (in thousands): 6 Notes to Interim Consolidated Financial Statements, continued
Network Vyvx --------- --------- Segment profit from operations (1) $ 14,459 $ 6,351 Depreciation and amortization expense (54,545) (2,288) Interest expense, net of investment income (2) (6,555) (556) Other non-operating income (expense), net (2) 3,004 20 --------- -------- Income (loss) from continuing operations before income taxes, minority expense of trust preferred securities and equity in income (losses) of associated companies $ (43,637) $ 3,527 ========= ========
(1) See note (c) to segment information below. (2) These items have been allocated to each segment based upon a formula that considers each segment's revenues, property and equipment and headcount. Certain information concerning the Company's segments for the three month periods ended March 31, 2004 and 2003 is presented in the following table.
2004 2003 ---- ---- (In thousands) Revenues (a): Network (b) $ 362,175 $ -- Vyvx 27,963 -- Healthcare Services 63,247 -- Banking and Lending 8,707 20,468 Manufacturing 13,401 12,166 Domestic Real Estate 17,391 10,122 Other Operations 8,650 7,070 Corporate 14,732 7,073 Intersegment elimination (c) (4,491) -- --------- -------- Total consolidated revenues $ 511,775 $ 56,899 ========= ======== Income (loss) from continuing operations before income taxes, minority expense of trust preferred securities and equity in income (losses) of associated companies: Network (c) $ (43,637) $ -- Vyvx (c) 3,527 -- Healthcare Services 2,383 -- Banking and Lending 5,314 4,840 Manufacturing 926 262 Domestic Real Estate 7,960 1,532 Other Operations (378) (1,074) Corporate (11,755) (9,761) --------- -------- Total consolidated loss from continuing operations before income taxes, minority expense of trust preferred securities and equity in income (losses) of associated companies $ (35,660) $ (4,201) ========= ========
(a) Revenues for each segment include amounts for services rendered and products sold, as well as segment reported amounts classified as investment and other income and net securities gains (losses) on the Company's consolidated statements of operations. (b) Includes services provided to SBC Communications Inc. ("SBC") of $238,400,000 pursuant to long-term preferred provider agreements as described in the 2003 10-K. 7 Notes to Interim Consolidated Financial Statements, continued (c) Eliminates intersegment revenues billed from Network to Vyvx. However, the intersegment revenues are included in the calculation to determine the income (loss) from continuing operations for each of Network and Vyvx. 3. The following tables provide summarized data with respect to significant investments in associated companies accounted for under the equity method of accounting for the periods the investments were owned by the Company and, with respect to WilTel, for the period prior to it becoming a consolidated subsidiary of the Company. The information is provided for those investments (other than WilTel) whose relative significance to the Company could result in the Company including separate audited financial statements for such investments in its Annual Report on Form 10-K for the year ended December 31, 2004 (in thousands).
March 31, 2003 ---- Investment in WilTel: Total revenues $ 288,000 Loss from continuing operations before extraordinary items (73,200) Net loss (73,200) The Company's equity in net loss (34,800) March 31, March 31, 2004 2003 ---- ---- Investment in Berkadia: Total revenues $ 2,400 $ 60,300 Income from continuing operations before extraordinary items 2,200 53,200 Net income 2,200 53,200 The Company's equity in net income 800 22,800 Investment in Olympus Re Holdings, Ltd.: Total revenues $ 134,100 $ 91,600 Income from continuing operations before extraordinary items 50,300 49,100 Net income 50,300 49,100 The Company's equity in net income 8,300 12,300 Investment in EagleRock Capital Partners (QP), LP: Total revenues $ 5,300 $ 700 Income from continuing operations before extraordinary items 5,100 100 Net income 5,100 100 The Company's equity in net income 4,300 100 Investment in Jefferies Partners Opportunity Fund II, LLC: Total revenues $ 7,000 $ 5,800 Income from continuing operations before extraordinary items 6,400 5,000 Net income 6,400 5,000 The Company's equity in net income 4,400 3,500 For the three month periods ended March 31, 2004 and 2003, the Company's equity in the income of Berkadia consists of the following (in thousands): 2004 2003 ---- ---- Net interest spread on the Berkadia loan - 10% of total $ -- $ 900 Net interest savings 300 400 Amortization of Berkadia loan discount related to cash fees - 50% of total 200 8,400 Amortization of Berkadia loan discount related to FINOVA stock - 50% of total 300 13,100 --------- --------- Equity in income of associated companies - Berkadia $ 800 $ 22,800 ========= =========
8 Notes to Interim Consolidated Financial Statements, continued Since the Berkadia loan was fully repaid during the first quarter of 2004, the Company will no longer have any income related to the Berkadia loan in future periods. 4. A summary of investments at March 31, 2004 and December 31, 2003 is as follows (in thousands):
March 31, 2004 December 31, 2003 ----------------------------- ------------------------------- Carrying Value Carrying Value Amortized and Estimated Amortized and Estimated Cost Fair Value Cost Fair Value ---------- ------------- --------- -------------- Current Investments: Investments available for sale $ 563,577 $ 580,488 $ 606,387 $ 623,570 Trading securities 63,287 75,600 74,923 86,392 Other investments, including accrued interest income 4,254 4,254 4,401 4,401 --------- --------- --------- --------- Total current investments $ 631,118 $ 660,342 $ 685,711 $ 714,363 ========= ========= ========= ========== Non-current Investments: Investments available for sale $ 373,752 $ 629,354 $ 420,947 $ 655,178 Other investments 18,571 18,571 18,564 18,564 --------- --------- --------- --------- Total non-current investments $ 392,323 $ 647,925 $ 439,511 $ 673,742 ========= ========= ========= =========
5. A summary of intangible assets (which are included in other assets in the consolidated balance sheets) at March 31, 2004 and December 31, 2003 is as follows (in thousands):
March 31, December 31, 2004 2003 -------- ----------- Mineral rights $ 47,639 $ 48,404 Tradename, net of accumulated amortization of $172 and $85 5,049 3,427 Customer relationships, net of accumulated amortization of $716 and $351 20,134 12,459 -------- -------- $ 72,822 $ 64,290 ======== ========
As more fully described in the 2003 10-K, tradename and customer relationship intangible assets were recognized in connection with the acquisition of WilTel. The net carrying amount of these intangible assets increased approximately $8,200,000 during the first quarter of 2004, due to the completion of certain, but not all of the analyses used to allocate the purchase price to the individual assets acquired, which also resulted in a reduction to the amount initially allocated to property and equipment. During the three months ended March 31, 2004, the Company recorded approximately $1,500,000 of customer relationship intangible assets in connection with an acquisition made by its manufacturing segment. The manufacturing segment's customer relationship intangible assets will be amortized on a straight-line basis over an average useful life of approximately three years. Amortization expense on intangible assets was $500,000 for the three month period ended March 31, 2004. The estimated aggregate future amortization expense for the tradename and customer relationship intangible assets for each of the next five years is approximately $2,200,000. As previously disclosed in the 2003 10-K, the intangible asset associated with mineral rights relates to the Las Cruces mineral rights of MK Gold. These mineral rights will be amortized once production at the Las Cruces project commences. 9 Notes to Interim Consolidated Financial Statements, continued 6. A summary of accumulated other comprehensive income (loss) at March 31, 2004 and December 31, 2003 is as follows (in thousands):
March 31, December 31, 2004 2003 ----------- ---------- Net unrealized gains on investments $ 184,023 $ 161,788 Net unrealized foreign exchange gains 6,473 7,502 Net unrealized losses on derivative instruments (2,812) (3,400) Net minimum pension liability (13,639) (13,639) --------- --------- $ 174,045 $ 152,251 ========= =========
7. Included in investment and other income for the three month periods ended March 31, 2004 and 2003 is income (charges) of $(1,200,000) and $1,600,000, respectively, as a result of accounting for its derivative financial instruments in accordance with Statement of Financial Accounting Standards No. 133 ("SFAS 133"). 8. Pension expense for the three month periods ended March 31, 2004 and 2003 related to the defined benefit pension plan (other than WilTel's plan) charged to operations included the following components (in thousands):
2004 2003 ---- ---- Interest cost $ 532 $ 581 Expected return on plan assets (448) (445) Actuarial loss 144 60 Amortization of prior service cost 1 1 ------ ------ Net pension expense $ 229 $ 197 ====== ======
WilTel's pension expense for the three month period ended March 31, 2004 related to the defined benefit pension plan charged to operations included the following components (in thousands):
Interest cost $ 1,612 Service cost 863 Expected return on plan assets (960) ------- Net pension expense $ 1,515 =======
Employer contributions to WilTel's defined benefit pension plan were not material during the first quarter of 2004. Several subsidiaries provide certain healthcare and other benefits to certain retired employees under plans which are currently unfunded. The Company pays the cost of postretirement benefits as they are incurred. Amounts charged to expense were not material in each of the three month periods ended March 31, 2004 and 2003. 9. Income tax expense for the three months ended March 31, 2004 relates to state income taxes. The Company has not recorded a federal income tax benefit for its loss from operations due to the uncertainty of future taxable income required to recognize a federal income tax benefit. 10 Notes to Interim Consolidated Financial Statements, continued 10. Per share amounts were calculated by dividing net loss by the sum of the weighted average number of common shares outstanding. The number of shares used to calculate basic and diluted loss per share amounts was 70,848,000 and 59,618,000 for the three month periods ended March 31, 2004 and 2003, respectively. For 2004 and 2003, options and warrants to purchase approximately 621,000 and 373,000 weighted average shares of common stock, respectively, were outstanding but were not included in the computation of diluted loss per share, as those options and warrants were antidilutive. Due to the nature of their rights and their nominal liquidation value, the Series A Non-Voting Convertible Preferred Shares are treated as common shares and are included in the weighted average share calculations for basic and diluted per share computations for 2003. 11. Cash paid for interest and net income taxes paid (refunded) was $27,600,000 and $(28,000,000), respectively for the three month period ended March 31, 2004 and $8,500,000 and $400,000, respectively, for the three month period ended March 31, 2003. 12. In March 2004, the Company entered into agreements to sell its subprime automobile and collateralized consumer loan portfolios, which represent 97% of banking and lending's total outstanding loans (net of unearned finance charges) as of March 31, 2004. The sales closed during the second quarter of 2004, and the Company received aggregate cash proceeds of approximately $149,000,000 and will report a pre-tax gain of approximately $8,000,000. The remaining activities at the banking and lending segment primarily consist of the collection or sale of its remaining loans (including pursuing recoveries for previously written-off loans) and the retirement or sale of its customer banking deposits using the segment's available cash. The Company expects to complete these activities during 2004, and will then surrender its national bank charter. Once the liquidation of this segment is complete, it will be reclassified as a discontinued operation. 13. Effective March 2004, the Company amended its unsecured bank credit facility to extend its maturity to March 2007. As of March 31, 2004, no amounts were outstanding under this $110,000,000 bank credit facility. 14. In April 2004, the Company sold $100,000,000 principal amount of its 7% Senior Notes due 2013 in a private placement transaction at 102.191% of the principal amount. The net cash proceeds from the sale of the notes are being used for general corporate purposes. The Company is obligated to complete a registered exchange offer pursuant to which each holder of the privately placed senior notes will have the opportunity to exchange those notes for publicly registered notes. In April 2004, the Company sold $350,000,000 principal amount of its 3 3/4% Convertible Senior Subordinated Notes due 2014 in a private placement transaction. The notes are convertible into the Company's common shares at any time before their maturity, subject to certain restrictions contained in the notes, at a conversion rate of 14.5138 shares per each $1,000 principal amount of notes (an aggregate of 5,079,830 shares), subject to adjustment. The net cash proceeds from the sale of the notes are being used for general corporate purposes. The Company is obligated to file a shelf registration statement in respect of the notes and the common shares issuable upon conversion of the notes. 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Interim Operations. The following should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 2003 10-K. Liquidity and Capital Resources For the three month period ended March 31, 2004, net cash was provided by operations principally as a result of distributions from associated companies, the pre-funding by SBC of certain of WilTel's capital expenditures, as described below, and the refund of excess federal income tax payments. For the three month period ended March 31, 2003, net cash was used for operations principally as a result of an increase in the Company's investment in the trading portfolio, lower investment income on corporate investments, and payment of corporate interest and overhead expenses. As of March 31, 2004, the Company's readily available cash, cash equivalents and marketable securities, excluding amounts held by its regulated subsidiaries and non-regulated subsidiaries that are parties to agreements which restrict the payment of dividends, totaled $1,216,600,000. This amount is comprised of cash and short-term bonds and notes of the United States Government and its agencies of $627,300,000 (52%), the equity investment in White Mountains Insurance Group, Ltd. of $196,700,000 (16%) (that can be sold privately or otherwise in compliance with the securities laws and have the benefit of a registration rights agreement) and other publicly traded debt and equity securities aggregating $392,600,000 (32%). In January 2004 the Company invested $50,000,000 for a limited partnership interest in Pershing Square, L.P. ("Pershing"), a partnership that is authorized to engage in a variety of investing activities. The Company has the right to receive an annual distribution equal to its share of Pershing's profits, if any, but cannot otherwise redeem its investment prior to December 31, 2005. The Company recorded $2,900,000 of pre-tax income from this investment under the equity method of accounting for the first quarter of 2004. As of March 31, 2004, WilTel had aggregate cash and investments of $220,900,000 (excluding investments pledged as collateral), an increase of $35,100,000 from December 31, 2003. During the first quarter of 2004, net cash was generated by WilTel's operating activities, and WilTel's capital expenditures were $15,200,000. In addition, in conjunction with a pricing agreement for certain voice services, WilTel received $25,000,000 from SBC for pre-funding of certain capital expenditures. If WilTel and SBC enter into another pricing agreement for certain voice services by January 2005, WilTel will be required to refund this amount to SBC. If WilTel and SBC do not enter into another pricing agreement by such date, to the extent the $25,000,000 is not spent as outlined in the agreement, the unspent portion is to be returned to SBC. The Company has reflected the amount received as a liability in its consolidated balance sheet. WilTel is a party to various legal actions and claims, and has reserved $37,900,000 for the satisfaction of all litigation. Certain of these actions relate to the rights of way licensed to WilTel in connection with the installation of its fiber-optic cable and seek damages from WilTel for failure to obtain all necessary landowner consents. Additional right of way claims may be asserted against WilTel. The Company does not believe that the ultimate resolution of all claims, legal actions and complaints will have a material adverse effect upon WilTel's results of operations, although unfavorable outcomes could significantly impact WilTel's liquidity. In a recent ruling, the Federal Communications Commission ("FCC") clarified that whenever traffic originates and terminates on the public switched telephone network, long distance carriers (such as WilTel) that carry such traffic must pay access charges. Regional Bell Operating Companies have attempted to recover unpaid access charges from long distance carriers who were following business practices not consistent with the recent FCC ruling. Although WilTel had been actively seeking clarification from the FCC concerning this matter, WilTel's policy has been to accrue access charges in a manner that it believes is consistent with the FCC's ruling. The FCC's ruling is not expected to have any material impact on WilTel; however, certain of WilTel's customers may be adversely affected. As of December 31, 2003, Symphony was not in compliance with a financial covenant contained in its $50,000,000 credit facility but had obtained a waiver from the lender that suspended application of the covenant until March 31, 2004. Symphony was in compliance with the covenant as of March 31, 2004, and expects it will continue to be in compliance in the future. 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Interim Operations, continued. The Company's consolidated banking and lending operations had outstanding loans (net of unearned finance charges) of $168,900,000 and $205,500,000 at March 31, 2004 and December 31, 2003, respectively. At March 31, 2004, 45% were loans to individuals generally collateralized by automobiles; 51% were loans to consumers, substantially all of which were collateralized by real or personal property; 2% were loans to small businesses; and 2% were unsecured loans. The banking and lending segment is no longer making consumer loans; operating activities at this segment have been limited to maximizing the amount collected from its loan portfolios (including pursuing recoveries for previously written-off loans) and liquidating the business in an orderly and cost efficient manner. These loans were primarily funded by deposits generated by the Company's deposit-taking facilities and by brokers, which totaled $119,100,000 and $145,500,000 at March 31, 2004 and December 31, 2003, respectively. The cash flows generated from the collections on its loan portfolios have been used to retire these deposits as they matured. In March 2004, the Company entered into agreements to sell its subprime automobile and collateralized consumer loan portfolios. These portfolios are classified as current assets as of March 31, 2004. The sales closed during the second quarter of 2004, and the Company received aggregate cash proceeds of approximately $149,000,000. The Company expects to complete the liquidation of this segment during 2004, and will reclassify the segment as a discontinued operation at that time. Effective March 2004, the Company amended its unsecured bank credit facility to extend its maturity to March 2007. As of March 31, 2004, no amounts were outstanding under this $110,000,000 bank credit facility. In April 2004, the Company sold $100,000,000 principal amount of its 7% Senior Notes due 2013 in a private placement transaction at 102.191% of the principal amount. In April 2004, the Company sold $350,000,000 principal amount of its 3 3/4% Convertible Senior Subordinated Notes due 2014 in a private placement transaction. The net cash proceeds from the sales of the 7% Senior Notes and the 3 3/4% Convertible Senior Subordinated Notes are being used for general corporate purposes. Results of Operations Three Months Ended March 31, 2004 Compared to the Three Months Ended March 31, 2003 Telecommunications The following table reconciles WilTel's segment profit from operations to pre-tax income (loss) for the first quarter of 2004. For WilTel's segments, segment profit from operations is the primary performance measure of segment operating results and profitability. WilTel defines segment profit from operations as income before income taxes, interest expense, investment income, depreciation and amortization expense and other non-operating income and expense.
Network Vyvx Total ------- ---- ----- (In thousands) Operating revenues (1) $ 353,100 $ 27,800 $ 380,900 ========== ========= ========== Segment profit from operations $ 14,500 $ 6,400 $ 20,900 Depreciation and amortization expense (54,500) (2,300) (56,800) Interest expense, net of investment income (2) (6,600) (600) (7,200) Other non-operating income (expense), net (2) 3,000 -- 3,000 ---------- --------- ---------- Pre-tax income (loss) $ (43,600) $ 3,500 $ (40,100) ========== ========= ==========
(1) Excludes intersegment revenues from amounts billed by Network to Vyvx of $4,500,000. (2) These items have been allocated to each segment based upon a formula that considers each segment's revenues, property and equipment and headcount. 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Interim Operations, continued. As more fully discussed in the 2003 10-K, prior to November 2003 the Company accounted for its 47.4% share of WilTel's losses under the equity method of accounting, and recorded losses related to its investment in WilTel of $34,800,000 for the first quarter of 2003. SBC, a major communications provider in the U.S., is WilTel's largest customer. As more fully described in the 2003 10-K, WilTel and SBC have entered into preferred provider agreements that extend until 2019, which govern the manner in which pricing for individual services is determined. Network's revenues include services provided to SBC of $238,400,000 during 2004, representing approximately 66% of total Network revenues. Network's revenues from SBC have continued to grow, principally related to voice products, for which SBC and WilTel have agreed to use a fixed price through January 2005. The growth in voice revenue resulted from, in part, SBC's continued growth in long distance services in various states, including California, Michigan, Indiana, Ohio, Illinois and Wisconsin. Revenues and gross margins for non-SBC related business continue to reflect the excess telecommunications capacity in the marketplace, which has resulted in lower prices for WilTel and others in the industry, and created a very competitive environment for acquiring new business. Network cost of sales reflects the level of revenues, primarily due to traffic related access and egress costs. The Company's consolidated statement of operations includes salaries expense of $27,600,000 and selling, general and other expenses of $38,300,000 for Network during the first quarter of 2004. Other income includes a gain of $2,800,000 related to cash and securities received in excess of the book value of a secured claim in a customer's bankruptcy. Vyvx revenues and profitability reflect the typical seasonality of the advertising distribution business, with lower volumes in the early part of the year as compared to higher volumes during the holiday movie season later in the year. Cost of sales reflects the level of revenue. The Company's consolidated statement of operations includes salaries expense of $4,200,000 and selling, general and other expenses of $3,600,000 for Vyvx during the first quarter of 2004. Healthcare Services For the three month period ended March 31, 2004, the pre-tax income of the healthcare services segment was $2,400,000. During this period, healthcare services revenues were $63,200,000 and cost of sales, which primarily consist of salaries and employee benefits, were $51,800,000. Legislative caps on Part B Medicare therapy, which negatively impacted Symphony's revenues in 2003, have been removed for 2004 and 2005, and the fee schedule for such services has also been increased by 1.5%. As a result, Symphony's revenues for these therapy services increased 39% in the first quarter of 2004 compared to the fourth quarter of 2003, comparing only those locations that were operating during both quarters. Symphony also added new customers during 2004; however, certain low margin and non-profitable accounts were cancelled resulting in a slight decrease in total locations serviced. For the first quarter of 2004, one customer accounted for approximately 16% of Symphony's revenues. The ability of Symphony to continue to grow its business depends heavily upon its ability to attract, develop and retain qualified therapists. There is a current shortage of qualified therapists industry-wide, and Symphony has open positions for both full-time and part-time professionals. The inability to fully staff these positions in-house causes Symphony and others in its industry to hire independent contractors to perform required services, which increases costs, thereby reducing margins, and can also result in lost revenue opportunities. 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Interim Operations, continued. Banking and Lending As stated previously, the current activities of the banking and lending segment are limited to liquidating its business in an orderly and cost efficient manner. As a result, revenues and expenses for this segment included in the Company's consolidated statements of operations are reflective of the continuing decrease in the size of the loan portfolio. Pre-tax income for the banking and lending segment was $5,300,000 and $4,800,000 for the three months ended March 31, 2004 and 2003, respectively. Finance revenues, which reflect both the level and mix of consumer instalment loans, decreased in the three month period ended March 31, 2004 as compared to the similar period in 2003 due to fewer average loans outstanding. Average loans outstanding were $185,900,000 and $348,500,000 for the three month periods ended March 31, 2004 and 2003, respectively. Although finance revenues decreased in the 2004 period as compared to the same period in 2003, pre-tax results increased primarily due to a $1,800,000 reduction in interest expense, principally resulting from reduced customer banking deposits, a decline in the provision for loan losses, less interest paid on interest rate swaps and lower salaries expense resulting from the segment's restructuring efforts. Pre-tax results for the banking and lending segment in the 2003 period also includes gains related to the mark-to-market values of interest rate swaps of $1,700,000. In the three month period ended March 31, 2004, the banking and lending segment's provision for loan losses decreased as compared to the same period in 2003 primarily due to the decline in loans outstanding and lower net charge-offs. At March 31, 2004, the allowance for loan losses for the Company's entire loan portfolio was $17,300,000 or 10.2% of the outstanding loans, as compared to $24,200,000 or 11.8% of the outstanding loans at December 31, 2003. Manufacturing Manufacturing revenues increased approximately 10% in the first quarter of 2004 as compared to the same period in 2003 primarily due to increases in the construction, carpet padding and agricultural markets, although revenues in the consumer products and packaging markets declined. Although raw material costs have increased in 2004, the Company has increased selling prices in most markets, which has enabled it to maintain its gross profit margins. The increase in pre-tax results for 2004 reflects the revenue and gross margin increase and lower operating expenses than in 2003, primarily due to workforce reductions and other cost reduction initiatives. Domestic Real Estate Revenues and pre-tax income from domestic real estate increased in the first quarter of 2004 as compared to the same period in 2003 principally as a result of increased gains from property sales of $6,100,000. In January 2004, the Company closed on the sale of appropriately 2,400 acres of unimproved land in Utah which it had owned since 1997 for cash proceeds of $8,800,000, and recognized a gain of $7,600,000. Pre-tax income for 2004 also reflects increased operating profits at the Company's Hawaiian hotel. The Company has begun a lot sales program with respect to its proposed 95-lot development project in South Walton County, Florida, which had a book value of $10,600,000 at March 31, 2004. The Company has entered into agreements to sell 73 lots at a total sales price of approximately $39,000,000, subject to the buyers approval of certain project documents and customary closing conditions. The Company began marketing the remaining lots for sale during May 2004. All of the lot sale agreements will require the Company to complete certain improvements to the lots as a condition to closing, which improvements the Company expects to complete during 2004. 15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Interim Operations, continued. Corporate and Other Operations Net security gains for the three month period ended March 31, 2004 include gains on the sale of a portion of the investment in Carmike Cinemas, Inc., which reduced the common stock interest in Carmike to 6%. Net securities gains (losses) for the three month period ended March 31, 2003 include a provision of $2,700,000 to write down the Company's investments in certain available for sale securities. The increase in investment and other income in the three month period ended March 31, 2004 as compared to the same period in 2003 principally reflects greater revenues from the Company's gas operations and other miscellaneous income, although revenues from the Company's wineries declined. Corporate investment and other income also reflects a decline related to the accounting for mark-to-market values of Corporate derivatives. The increase in interest expense in 2004 as compared to 2003 primarily reflects interest expense relating to the $275,000,000 aggregate principal amount of the 7% Senior Notes that the Company issued subsequent to the first quarter of 2003, and dividends accrued on its trust issued preferred securities, which commencing July 1, 2003 are classified as interest expense (shown as minority interest in prior periods) as a result of the implementation of Statement of Financial Accounting Standards No. 150. Income tax expense for the three months ended March 31, 2004 relates to state income taxes. The Company has not recorded a federal income tax benefit for its loss from operations due to the uncertainty of future taxable income required to recognize a federal income tax benefit. Associated Companies Equity in income (losses) of associated companies for the three month periods ended March 31, 2004 and 2003 includes the following (in thousands):
2004 2003 ---- ---- Berkadia $ 800 $ 22,800 Olympus Re Holdings, Ltd. 8,300 12,300 WilTel -- (34,800) EagleRock Capital Partners (QP), LP 4,300 100 Jefferies Partners Opportunity Fund II, LLC 4,400 3,500 HomeFed Corporation 2,000 (700) Pershing 2,900 -- Other 1,300 900 -------- --------- Pre-tax 24,000 4,100 Income tax expense -- 13,800 -------- --------- Equity in income (losses), net of taxes $ 24,000 $ (9,700) ======== =========
Since the Berkadia loan was fully repaid during the first quarter of 2004, the Company will no longer have any income related to the Berkadia loan in the future. The reduction in the Company's equity in income of Olympus reflects the reduction in the Company's ownership interest as discussed in the 2003 10-K. As more fully discussed in the 2003 10-K, WilTel became a consolidated subsidiary in November 2003 and the Company ceased applying the equity method of accounting at that time. 16 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Interim Operations, continued. Cautionary Statement for Forward-Looking Information Statements included in this Management's Discussion and Analysis of Financial Condition and Results of Interim Operations may contain forward-looking statements. Such forward-looking statements are made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements may relate, but are not limited, to projections of revenues, income or loss, capital expenditures, plans for growth and future operations, competition and regulation, as well as assumptions relating to the foregoing. Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted or quantified. When used in this Management's Discussion and Analysis of Financial Condition and Results of Interim Operations, the words "estimates", "expects", "anticipates", "believes", "plans", "intends" and variations of such words and similar expressions are intended to identify forward-looking statements that involve risks and uncertainties. Future events and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements. The factors that could cause actual results to differ materially from those suggested by any such statements include, but are not limited to, those discussed or identified from time to time in the Company's public filings, including: A worsening of general economic and market conditions or increases in prevailing interest rate levels, which may result in reduced sales of our products and services, lower valuations for our associated companies and investments or a negative impact on the credit quality of our assets; Changes in foreign and domestic laws, regulations and taxes, which may result in higher costs and lower revenue for our businesses, including as a result of unfavorable political and diplomatic developments, currency fluctuations, changes in governmental policies, expropriation, nationalization, confiscation of assets and changes in legislation relating to non-U.S. ownership; Increased competition and changes in pricing environments, which may result in decreasing revenues and/or margins, increased raw materials costs for our plastics business, loss of market share or significant price erosion; Continued instability and uncertainty in the telecommunications industry, associated with increased competition, aggressive pricing and overcapacity; Dependence on key personnel, the loss of which would severely affect our ability to develop and implement our business strategy; Inability to attract and retain highly skilled personnel, which would make it difficult to conduct the businesses of certain of our subsidiaries, including WilTel and Symphony; Adverse legal and regulatory developments that may affect particular businesses, such as regulatory developments in the telecommunications and healthcare industries, or in the environmental area, which could affect the Company's real estate development activities and telecommunications business, as well as the Company's other operations; Weather related conditions and significant natural disasters, including hurricanes, tornadoes, windstorms, earthquakes and hailstorms, which may impact our wineries, real estate holdings and reinsurance operations; The inability to reinsure certain risks economically, which could result in the Company having to self-insure business risks; 17 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Interim Operations, continued. Changes in U.S. real estate markets, including the residential market in Southern California and the commercial market in Washington D.C., which are sensitive to mortgage interest rate levels, and the vacation market in Hawaii; Adverse economic, political or environmental developments in Spain, which could delay or preclude the issuance of permits necessary to develop the Company's copper mineral rights or which could result in increased costs of bringing the project to completion and increased costs in financing the development of the project; Decreases in world wide copper prices, which could adversely affect the commercial viability of the Company's mineral rights in Spain; The inability to obtain the necessary financing for the Las Cruces copper mining project, which could delay or prevent completion of the project; WilTel's dependence on a small number of suppliers and high-volume customers (including SBC), the loss of any of which could adversely affect WilTel's ability to generate operating profits and positive cash flows; Changes in telecommunications laws and regulations, which could adversely affect WilTel and its customers through, for example, higher costs, increased competition and a loss of revenue; WilTel's ability to adapt to technological developments or continued or increased pricing competition in the telecommunications industry, which could adversely affect WilTel's ability to generate operating profits and positive cash flows; WilTel's inability to generate operating profits and positive cash flows, which could result in a default under WilTel's credit agreement, pursuant to which substantially all of its assets are pledged; Current and future legal and administrative claims and proceedings against WilTel, which may result in increased costs and diversion of management's attention; WilTel's ability to acquire or maintain rights of way necessary for the operation of its network, which could require WilTel to find alternate routes or increase WilTel's costs to provide services to its customers; Changes in economic conditions including those affecting real estate and other collateral values, the continued financial stability of the Company's borrowers and their ability to make loan principal and interest payments; Regional or general increases in the cost of living, particularly in the regions in which the Company has operations or sells its products or services, which may result in lower sales of such products and service; and Risks associated with future acquisitions and investments, including changes in the composition of the Company's assets and liabilities through such acquisitions, diversion of management's attention from normal daily operations of the business and insufficient revenues to offset increased expenses associated with acquisitions. 18 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Interim Operations, continued. This list of factors that may affect future performance and the accuracy of forward-looking statements is illustrative, but is not intended to be exhaustive. Therefore, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty. Undue reliance should not be placed on these forward-looking statements. The Company does not undertake any obligation to revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this Management's Discussion and Analysis of Financial Condition and Results of Interim Operations or to reflect the occurrence of unanticipated events. Item 3. Quantitative and Qualitative Disclosures About Market Risk. Information required under this Item is contained in Item 7A of the Company's Annual Report on Form 10-K for the year ended December 31, 2003, and is incorporated by reference herein. Item 4. Controls and Procedures. (a) The Company's management evaluated, with the participation of the Company's principal executive and principal financial officers, the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")), as of March 31, 2004. Based on their evaluation, the Company's principal executive and principal financial officers concluded that the Company's disclosure controls and procedures were effective as of March 31, 2004. (b) There were no significant changes in the Company's internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the Company's fiscal quarter ended March 31, 2004, that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 19 PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. a) Exhibits. 31.1 Certification of Chairman of the Board and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of President pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.3 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chairman of the Board and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of President pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.3 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. b) Reports on Form 8-K. The Company filed current reports on Form 8-K dated March 5, 2004, March 12, 2004, March 19, 2004 and March 26, 2004, which set forth information under Item 5. Other Events and Item 7. Financial Statements and Exhibits. 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LEUCADIA NATIONAL CORPORATION (Registrant) Date: May 7, 2004 By: /s/ Barbara L. Lowenthal ------------------------------ Barbara L. Lowenthal Vice President and Comptroller (Chief Accounting Officer) 21 Exhibit Index 31.1 Certification of Chairman of the Board and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of President pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.3 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chairman of the Board and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of President pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.3 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.