SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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 November 6, 2002: 55,357,173.
PART I - FINANCIAL INFORMATION Item 1. Financial Statements. LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets September 30, 2002 and December 31, 2001 (Dollars in thousands, except par value) <TABLE> <CAPTION> September 30, December 31, 2002 2001 ----------- ---------- (Unaudited) <S> <C> <C> Assets Investments: Available for sale (aggregate cost of $452,717 and $579,342) $ 481,589 $ 626,584 Trading securities (aggregate cost of $47,975 and $68,547) 40,636 63,850 Held to maturity (aggregate fair value of $650 and $1,665) 650 1,666 Other investments, including accrued interest income 4,433 14,949 ---------- ---------- Total investments 527,308 707,049 Cash and cash equivalents 680,464 373,222 Trade, notes and other receivables, net 446,598 596,229 Prepaids and other assets 215,696 227,709 Property, equipment and leasehold improvements, net 171,154 162,158 Investments in associated companies 359,356 358,761 Net assets of discontinued operations -- 43,959 ---------- ---------- Total $2,400,576 $2,469,087 ========== ========== Liabilities Customer banking deposits $ 443,119 $ 476,495 Trade payables and expense accruals 73,356 74,988 Other liabilities 183,854 215,689 Income taxes payable 81,246 124,692 Deferred tax liability 29,607 17,051 Debt, including current maturities 246,416 252,279 ---------- ---------- Total liabilities 1,057,598 1,161,194 ---------- ---------- Commitments and contingencies Minority interest 10,768 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; 55,347,343 and 55,318,257 shares issued and outstanding, after deducting 63,120,448 and 63,117,584 shares held in treasury 55,347 55,318 Additional paid-in capital 55,387 54,791 Accumulated other comprehensive income 15,254 14,662 Retained earnings 1,108,022 1,070,682 ---------- ---------- Total shareholders' equity 1,234,010 1,195,453 ---------- ---------- Total $2,400,576 $2,469,087 ========== ========== </TABLE> See notes to interim consolidated financial statements. 2
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations For the periods ended September 30, 2002 and 2001 (In thousands, except per share amounts) (Unaudited) <TABLE> <CAPTION> For the Three For the Nine Month Period Month Period Ended September 30, Ended September 30, --------------------- ---------------------- 2002 2001 2002 2001 ---- ---- ---- ---- <S> <C> <C> <C> <C> Revenues: Manufacturing $ 13,691 $ 15,550 $ 39,994 $ 41,811 Finance 21,269 29,374 68,975 85,984 Investment and other income 31,225 58,342 97,398 145,928 Equity in income (losses) of associated companies 21,808 (77,000) 77,393 (50,176) Net securities gains (losses) (13,812) 10,477 (26,110) 23,511 --------- --------- --------- --------- 74,181 36,743 257,650 247,058 --------- --------- --------- --------- Expenses: Manufacturing cost of goods sold 9,103 10,330 26,535 28,364 Interest 8,299 12,174 25,809 36,821 Salaries 9,463 10,305 29,691 34,138 Selling, general and other expenses 51,481 41,465 127,819 117,836 --------- --------- --------- --------- 78,346 74,274 209,854 217,159 --------- --------- --------- --------- Income (loss) from continuing operations before income taxes, minority expense of trust preferred securities and cumulative effect of a change in accounting principle (4,165) (37,531) 47,796 29,899 Income taxes (3,061) (13,924) 15,407 8,480 --------- --------- --------- --------- Income (loss) from continuing operations before minority expense of trust preferred securities and cumulative effect of a change in accounting principle (1,104) (23,607) 32,389 21,419 Minority expense of trust preferred securities, net of taxes 1,380 1,380 4,141 4,141 --------- --------- --------- --------- Income (loss) from continuing operations before cumulative effect of a change in accounting principle (2,484) (24,987) 28,248 17,278 Income (loss) from discontinued operations, net of taxes -- (6,973) 4,580 (43,262) Gain on disposal of discontinued operations, net of taxes -- -- 4,512 -- --------- --------- --------- --------- Income (loss) before cumulative effect of a change in accounting principle (2,484) (31,960) 37,340 (25,984) Cumulative effect of a change in accounting principle -- -- -- 411 --------- --------- --------- --------- Net income (loss) $ (2,484) $ (31,960) $ 37,340 $ (25,573) ========= ========= ========= ========= Basic earnings (loss) per common share: Income (loss) from continuing operations before cumulative effect of a change in accounting principle $ (.04) $ (.45) $ .51 $ .31 Income (loss) from discontinued operations -- (.13) .08 (.78) Gain on disposal of discontinued operations -- -- .08 -- Cumulative effect of a change in accounting principle -- -- -- .01 --------- --------- --------- --------- Net income (loss) $ (.04) $ (.58) $ .67 $ (.46) ========= ========= ========= ========= Diluted earnings (loss) per common share: Income (loss) from continuing operations before cumulative effect of a change in accounting principle $ (.04) $ (.45) $ .51 $ .31 Income (loss) from discontinued operations -- (.13) .08 (.78) Gain on disposal of discontinued operations -- -- .08 -- Cumulative effect of a change in accounting principle -- -- -- .01 --------- -------- --------- --------- Net income (loss) $ (.04) $ (.58) $ .67 $ (.46) ========= ========= ========= ========= </TABLE> See notes to interim consolidated financial statements. 3
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows For the nine months ended September 30, 2002 and 2001 (In thousands) (Unaudited) <TABLE> <CAPTION> 2002 2001 ---- ---- <S> <C> <C> Net cash flows from operating activities: Net income (loss) $ 37,340 $ (25,573) Adjustments to reconcile net income (loss) to net cash provided by (used for) operations: Cumulative effect of a change in accounting principle -- (411) Provision (benefit) for deferred income taxes 21,539 (34,446) Depreciation and amortization of property, equipment and leasehold improvements 13,904 11,791 Other amortization (primarily related to investments) (1,507) (11,133) Provision for doubtful accounts 28,619 27,413 Net securities (gains) losses 26,110 (23,511) Equity in (income) losses of associated companies (77,393) 50,176 Gain on disposal of real estate, property and equipment, and other assets (19,722) (47,616) Gain on disposal of discontinued operations (4,512) -- Investments classified as trading, net 47,897 (3,424) Net change in: Trade and other receivables 9,190 (705) Prepaids and other assets (2,856) (7,437) Trade payables and expense accruals (2,518) (39,873) Other liabilities (1,099) 472 Income taxes payable (45,977) 7,067 Other 3,478 8,363 Net change in net assets of discontinued operations (5,384) 66,461 --------- --------- Net cash provided by (used for) operating activities 27,109 (22,386) --------- --------- Net cash flows from investing activities: Acquisition of real estate, property and equipment, and other assets (29,210) (36,904) Proceeds from disposals of real estate, property and equipment, and other assets 72,108 113,767 Proceeds from sale of discontinued operations 66,241 -- Advances on loan receivables (70,008) (238,775) Principal collections on loan receivables 138,853 145,276 Advances on notes receivables (715) (3,230) Collections on notes receivables 213 39,387 Investments in associated companies (9,721) (6,519) Distributions from associated companies 38,761 121,143 Purchases of investments (other than short-term) (614,653) (903,471) Proceeds from maturities of investments 567,529 427,682 Proceeds from sales of investments 159,596 165,682 --------- --------- Net cash provided by (used for) investing activities 318,994 (175,962) --------- --------- Net cash flows from financing activities: Net change in customer banking deposits (32,515) 30,435 Issuance of long-term debt, net of issuance costs 6,145 66,631 Reduction of long-term debt (12,543) (5,929) Purchase of common shares for treasury (98) (45) --------- --------- Net cash provided by (used for) financing activities (39,011) 91,092 --------- --------- Effect of foreign exchange rate changes on cash 150 (378) --------- --------- Net increase (decrease) in cash and cash equivalents 307,242 (107,634) Cash and cash equivalents at January 1, 373,222 475,367 --------- --------- Cash and cash equivalents at September 30, $ 680,464 $ 367,733 ========= ========= See notes to interim consolidated financial statements. </TABLE> 4
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES Consolidated Statements of Changes in Shareholders' Equity For the nine months ended September 30, 2002 and 2001 (In thousands, except par value) (Unaudited) <TABLE> <CAPTION> Common Accumulated Shares Additional Other $1 Par Paid-In Comprehensive Retained Value Capital Income (Loss) Earnings Total ------- ---------- -------------- ---------- ----------- <S> <C> <C> <C> <C> <C> 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 16,801 16,801 Net change in unrealized foreign exchange gain (loss) (4,882) (4,882) Net change in unrealized gain (loss) on derivative instruments (including the cumulative effect of a change in accounting principle of $1,371) (456) (456) Net loss (25,573) (25,573) ---------- Comprehensive loss (14,110) ---------- Exercise of options to purchase common shares 20 429 449 Purchase of stock for treasury (2) (43) (45) ------- ------- -------- ---------- ---------- Balance, September 30, 2001 $55,315 $54,726 $ 14,048 $1,066,446 $1,190,535 ======= ======= ======== ========== ========== 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 (12,520) (12,520) Net change in unrealized foreign exchange gain (loss) 13,854 13,854 Net change in unrealized gain (loss) on derivative (742) (742) instruments Net income 37,340 37,340 ---------- Comprehensive income 37,932 ---------- Exercise of options to purchase common shares 32 691 723 Purchase of stock for treasury (3) (95) (98) ------- ------- -------- ---------- ---------- Balance, September 30, 2002 $55,347 $55,387 $ 15,254 $1,108,022 $1,234,010 ======= ======= ======== ========== ========== </TABLE> 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 nine month period ended September 30, 2002, and an increase to shareholders' equity of $12,100,000 as of September 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 nine month period ended September 30, 2002, while increasing shareholders' equity as of September 30, 2002. The Euro denominated sale proceeds were not converted into US dollars immediately upon receipt. The Company entered into a participating currency derivative, which expired in September 2002. Upon expiration, net of the premium paid to purchase the contract, the Company received $67,900,000 in exchange for 70,000,000 Euros and recognized a foreign exchange gain of $2,000,000, which is included in investment and other income for the nine month period ended September 30, 2002. 3. Certain information concerning the Company's segments for the nine and three month periods ended September 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. <TABLE> <CAPTION> For the Three Month For the Nine Month Period Ended September 30, Period Ended September 30, -------------------------- -------------------------- 2002 2001 2002 2001 ---- ---- ---- ---- (In thousands) <S> <C> <C> <C> <C> Revenues: Banking and lending $23,447 $ 29,179 $ 76,847 $ 91,133 Domestic real estate 17,336 30,196 42,778 56,777 Manufacturing 13,930 15,603 40,269 41,959 Other operations 6,785 14,678 25,086 40,238 Equity in associated companies 21,808 (77,000) 77,393 (50,176) Corporate (a) (9,125) 24,087 (4,723) 67,127 ------- -------- -------- -------- Total consolidated revenues $74,181 $ 36,743 $257,650 $247,058 ======= ======== ======== ======== (continued) </TABLE> 6
Notes to Interim Consolidated Financial Statements, continued <TABLE> <CAPTION> For the Three Month For the Nine Month Period Ended September 30, Period Ended September 30, -------------------------- -------------------------- 2002 2001 2002 2001 ---- ---- ---- ---- (In thousands) <S> <C> <C> <C> <C> 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 $ (7,812) $ (1,756) $ 2,698 $ 3,314 Domestic real estate 7,535 20,417 16,632 32,661 Manufacturing 1,497 2,321 4,791 3,963 Other operations (1,634) 7,592 1,172 16,207 Equity in associated companies 21,808 (77,000) 77,393 (50,176) Corporate (a) (25,559) 10,895 (54,890) 23,930 -------- -------- -------- -------- Total consolidated income (loss) from continuing operations before income taxes, minority expense of trust preferred securities and cumulative effect of a change in accounting principle $ (4,165) $(37,531) $ 47,796 $ 29,899 ======== ======== ======== ======== </TABLE> (a) Includes provisions that reduce net security gains (losses) by $22,500,000 and $2,400,000 for the nine and three month periods ended September 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 September 30, 2002, the book value of the Company's equity investment in Berkadia was negative $84,100,000, 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 October 31, 2002, the outstanding amount of the guarantee was $227,500,000. For the nine and three month periods ended September 30, 2002 and 2001, the Company's equity in the income (loss) of Berkadia consists of the following (in thousands): <TABLE> <CAPTION> For the Three Month For the Nine Month Period Ended September 30, Period Ended September 30, --------------------------- -------------------------- 2002 2001 2002 2001 ---- ---- ---- ---- <S> <C> <C> <C> <C> Net interest spread on the Berkadia loan - 10% of total $ 1,300 $ 1,300 $ 4,900 $ 1,300 Amortization of Berkadia loan discount related to cash fees - 50% of total 6,000 2,900 18,200 2,900 Amortization of Berkadia loan discount related to FINOVA stock - 50% of total 9,300 4,500 28,600 4,500 Share of FINOVA loss under equity method - 50% of total -- (94,400) -- (94,400) ------- -------- ------- -------- Equity in income (loss) of associated companies - Berkadia $16,600 $(85,700) $51,700 $(85,700) ======= ======== ======= ======== </TABLE> 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 nine and three month periods ended September 30, 2002, the effect of this acceleration was to increase the Company's equity in income of Berkadia by approximately $22,200,000 and $5,300,000, 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 September 30, 2002 and December 31, 2001 is as follows (in thousands): <TABLE> <CAPTION> September 30, December 31, 2002 2001 ------------ ----------- <S> <C> <C> Net unrealized gains on investments $ 19,161 $ 31,681 Net unrealized foreign exchange losses (2,758) (16,612) Net unrealized losses on derivative instruments (1,149) (407) -------- -------- $ 15,254 $ 14,662 ======== ======== </TABLE> 6. Included in investment and other income are charges of $3,000,000 and $2,000,000 for the nine and three month periods ended September 30, 2002, respectively, and $4,600,000 and $3,900,000 for the nine and three month periods ended September 30, 2001, respectively, as a result of accounting for its derivative financial instruments in accordance with Statement of Financial Accounting Standards No. 133 ("SFAS 133"). 7. Per share amounts were calculated by dividing net income (loss) by the sum of the weighted average number of common shares outstanding and, for diluted earnings (loss) per share, the incremental weighted average number of shares issuable upon exercise of outstanding options and warrants for the periods they were outstanding. The number of shares used to calculate basic earnings (loss) per share amounts was 55,334,000 and 55,307,000 for the nine month periods ended September 30, 2002 and 2001, respectively, and 55,346,000 and 55,314,000 for the three month periods ended September 30, 2002 and 2001, respectively. The number of shares used to calculate diluted earnings (loss) per share amounts was 55,649,000 and 55,307,000 for the nine month periods ended September 30, 2002 and 2001, respectively, and 55,346,000 and 55,314,000 for the three month periods ended September 30, 2002 and 2001, respectively. Options and warrants to purchase 323,000, 302,000 and 325,000 weighted average shares of common stock were outstanding during the three month periods ended September 30, 2002 and 2001 and the nine month period ended September 30, 2001, respectively, but were not included in the computation of diluted loss per share, as those options and warrants were antidilutive. 8. Cash paid for interest and income taxes (net of refunds) was $27,500,000 and $37,400,000, respectively, for the nine month period ended September 30, 2002 and $39,000,000 and $11,700,000, respectively, for the nine month period ended September 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 $100,000,000 of liability. The Company is fully reserved for this exposure. In April 2002, the IRS revised these Notices of Proposed Adjustments. As a result, when the statute of limitations expires on December 31, 2002, the Company will take all of these reserves into income in the Company's year end financial statements. 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 Company has no funding obligations for this joint venture. The transaction is subject to legislative review and customary closing conditions, and is expected to close in 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 September 30, 2002, the Company's equity investment in these businesses was $14,100,000. 8
Notes to Interim Consolidated Financial Statements, continued 11. On October 15, 2002, two of the Company's subsidiaries acquired 44% of the outstanding equity of WilTel Communications Group, Inc. ("WilTel"), a newly formed Nevada corporation that emerged on that date from the chapter 11 bankruptcy proceedings of Williams Communications Group, Inc. ("Old WCG"). The aggregate purchase price of $330,000,000, in the form of irrevocable letters of credit, has been deposited into escrow pending receipt of requisite regulatory approval from the Federal Communications Commission ("FCC"). The letters of credit are collateralized by United States Government securities with an aggregate value of $350,000,000, which were included in the consolidated balance sheet as cash equivalents at September 30, 2002. If the requisite FCC approval is not obtained, the letters of credit will expire on March 14, 2003. The WilTel stock was acquired by the Company under Old WCG's chapter 11 Restructuring Plan pursuant to a claims purchase agreement with The Williams Companies, Inc. and an investment agreement with Old WCG. The Plan, which became effective on October 15, 2002, was consummated under special temporary authority granted by the FCC. The Company expects requisite approvals will be received from the FCC prior to the end of this year; at such time the purchase price will be released from escrow, and thereupon, the Company will account for this investment under the equity method of accounting. The Company has appointed four members (including the Company's Chairman and President) to the newly constituted nine member board of directors of WilTel and has entered into a stockholders agreement with WilTel pursuant to which the Company has agreed to certain restrictions on its ability to acquire or sell WilTel stock. On October 28, 2002, in a private transaction, the Company purchased 1,700,000 shares of WilTel common stock, on a when issued basis, for $20,400,000. This purchase, which represented 3.4% of the outstanding equity of WilTel, increased the Company's total common stock interest in WilTel to 47.4%. 12. 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. 13. In October 2002, the Company sold one of its real estate subsidiaries, CDS Holding Corporation ("CDS"), to HomeFed Corporation ("HomeFed") for a purchase price of $25,000,000, consisting of $1,000,000 in cash and 24,742,268 newly issued shares of HomeFed's common stock, which represents approximately 30.3% of the newly outstanding HomeFed stock. The gain on this sale of approximately $10,400,000 will be deferred and recognized into income as CDS' principal asset, the real estate project known as San Elijo Hills that is owned through a majority-owned subsidiary, is developed and sold. The Company will account for its investment in HomeFed under the equity method of accounting. 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 nine month period ended September 30, 2002, net cash was provided by operations. For the nine month period ended September 30, 2001, net cash was used for operations, reflecting lower investment income on corporate investments, payment of interest and overhead and a reduction of payables related to the trading portfolio. As of September 30, 2002, the Company's readily available cash, cash equivalents and marketable securities, excluding those amounts held by its regulated subsidiaries, totaled $872,800,000, before reduction for the WilTel transactions that occurred in October 2002 as discussed below. This amount is comprised of cash and short-term bonds and notes of the United States Government and its agencies of $623,100,000 (71%), the equity investment in White Mountains Insurance Group, Ltd. of $110,400,000 (13%) (which can be sold privately or otherwise in compliance with the securities laws and are subject to a registration rights agreement) and other publicly traded debt and equity securities aggregating $139,300,000 (16%). Additional sources of liquidity as of September 30, 2002 include $164,600,000 of cash and marketable securities collateralizing letters of credit. As a result of principal payments, as of October 31, 2002, the Company's guarantee of Berkadia's financing has been reduced to $227,500,000. 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 to 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 Company has no funding obligations for this joint venture. The transaction is subject to legislative review and customary closing conditions, and is expected to close in 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 September 30, 2002, the Company's equity investment in these businesses was $14,100,000. On October 15, 2002, two of the Company's subsidiaries acquired 44% of the outstanding equity of WilTel Communications Group, Inc. ("WilTel"), a newly formed Nevada corporation that emerged on that date from the chapter 11 bankruptcy proceedings of Williams Communications Group, Inc. ("Old WCG"). The aggregate purchase price of $330,000,000, in the form of irrevocable letters of credit, has been deposited into escrow pending receipt of requisite regulatory approval from the Federal Communications Commission ("FCC"). The letters of credit are collateralized by United States Government securities with an aggregate value of $350,000,000 and, if the requisite FCC approval is not obtained, will expire on March 14, 2003. The WilTel stock was acquired by the Company under Old WCG's chapter 11 Restructuring Plan pursuant to a claims purchase agreement with The Williams Companies, Inc. and an investment agreement with Old WCG. The Plan, which became effective on October 15, 2002, was consummated under special temporary authority granted by the FCC. The Company expects requisite approvals will be received from the FCC prior to the end of this year; at such time the purchase price will be released from escrow, and thereupon, the Company will account for this investment under the equity method of accounting. The Company has appointed four members (including the Company's Chairman and President) to the newly constituted nine member board of directors of WilTel and has entered into a stockholders agreement with WilTel pursuant to which the Company has agreed to certain restrictions on its ability to acquire or sell WilTel stock. 10
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Interim Operations, continued. On October 28, 2002, in a private transaction, the Company purchased 1,700,000 shares of WilTel common stock, on a when issued basis, for $20,400,000. This purchase, which represented 3.4% of the outstanding equity of WilTel, increased the Company's total common stock interest in WilTel to 47.4%. In October 2002, the Company sold one of its real estate subsidiaries, CDS Holding Corporation ("CDS"), to HomeFed Corporation ("HomeFed") for a purchase price of $25,000,000, consisting of $1,000,000 in cash and 24,742,268 newly issued shares of HomeFed's common stock, which represents approximately 30.3% of the newly outstanding HomeFed stock. The gain on this sale of approximately $10,400,000 will be deferred and recognized into income as CDS' principal asset, the real estate project known as San Elijo Hills that is owned through a majority-owned subsidiary, is developed and sold. The Company will account for its investment in HomeFed under the equity method of accounting. 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 nine and three month periods ended September 30, 2002 as compared to the similar periods in 2001 due to fewer average loans outstanding. Average loans outstanding during the nine and three month periods ended September 30, 2002 were $458,600,000 and $427,600,000, respectively, as compared to $546,500,000 and $566,000,000, respectively, during the nine and three month periods ended September 30, 2001. Pre-tax results for the banking and lending segment were also adversely affected by greater net interest paid on interest rate swaps of $3,700,000 and lower investment income of $2,800,000 for the nine month 2002 period and by a higher provision for loan losses of $6,300,000 for the three month 2002 period. Such decreases for the nine and three month periods in 2002 as compared to the prior year were partially offset by changes in market values of its interest rate swaps (see below), lower interest expense of $10,900,000 and $3,700,000, respectively, due to reduced customer banking deposits and lower interest rates thereon, and lower salaries expense of $4,600,000 and $1,600,000, respectively, and lower operating costs of $2,900,000 and $1,500,000, respectively, which related to 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. Loan losses in the subprime automobile portfolio increased significantly during the third quarter, which the Company believes reflects the difficulties experienced by subprime borrowers in the current economy. The losses increased both in absolute dollar amount and as a percentage of the declining subprime automobile portfolio. At September 30, 2002, the allowance for loan losses for this segment's entire loan portfolio was $35,900,000 or 8.7% of the net outstanding loans, compared to $35,700,000 or 6.8% of the net outstanding loans at December 31, 2001. The provisions for loan losses for this segment were $28,400,000 and $27,300,000 for the nine month periods ended September 30, 2002 and 2001, respectively, and $17,200,000 and $10,900,000 for the three month periods ended September 30, 2002 and 2001, respectively. The Company is considering its alternatives for its banking and lending operation, which include selling its subprime automobile portfolio and selling or liquidating some or all of its loan portfolios; however, the Company is no longer contemplating the merger of its banking and lending subsidiaries as had previously been reported. The Company believes that it is likely that its national bank subsidiary will be downgraded by its primary federal regulator, the Office of the Comptroller of the Currency (the "OCC"), and would, therefore, become subject to formal enforcement action as a result of its loan loss experience. The Company does not believe that such actions by the OCC would have a significant impact on its existing operations, as the Company is in the process of taking the actions the OCC is likely to require. However, no assurance can be given that other regulatory actions will not be taken or that any such actions won't have an adverse impact on the banking and lending segment. 11
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Interim Operations, continued. Pre-tax results for the banking and lending segment reflect $2,000,000 and $(7,000,000), respectively, of income (charges) primarily resulting from marking-to-market its interest rate swaps for the nine month periods ended September 30, 2002 and 2001 and $600,000 and $(3,900,000), respectively, for the three month periods ended September 30, 2002 and 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 declined in the nine and three month periods ended September 30, 2002 as compared to the same periods in 2001 as a result of lower gains from property sales and 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, partially offset by 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 and the write-down of a mortgage receivable on a property on which the Company is in the process of foreclosing. Manufacturing revenues decreased in the nine and three month periods ended September 30, 2002 as compared to the same periods in 2001. The decline in manufacturing revenues for the nine month period ended September 30, 2002 was primarily due to reductions in the consumer products and agricultural markets aggregating $3,900,000 partially offset by increases in the construction and home furnishing markets totaling $1,800,000. The reductions in the consumer products market resulted from the loss of a customer for the Asian market and for its consumer dust wipe products, and reduced demand for one of the Company's healthcare products. The reduction in the agricultural market reflected increased competition. While revenues declined in all markets in the third quarter of 2002, the most significant reductions were in the consumer products and construction markets aggregating $1,200,000. The reduction in the consumer products market resulted from the loss of a customer for its consumer dust wipe products. The decline in the construction markets reflected customers' earlier buying pattern compared to the same period in 2001. Although gross profit was largely unchanged for the nine month period ended September 30, 2002 as compared to the same period in 2001, pre-tax results for the 2002 period increased reflecting cost reduction initiatives that resulted in lower operating expenses. Gross profit and pre-tax results declined for the third quarter of 2002 as compared to the same period in 2001 principally due to the reduced sales partially offset by lower raw material and labor costs. Investment and other income declined in the nine and three month periods ended September 30, 2002 as compared to the same periods in 2001 principally due to reduced rent income and reduced gains from domestic property sales as discussed above, and a reduction in investment income of $19,000,000 and $5,100,000, respectively, resulting from a decline in interest rates and, for the three month 2002 period, due to a lower amount of invested assets. The decrease in investment and other income was also due to a decline of $9,000,000 and $1,300,000, respectively, in revenues from the Company's gas operations principally due to lower production and prices and a gain of $6,300,000 recognized in 2001 from the sale of the Company's investment in two inactive insurance companies and, for the three month period ended September 30, 2002, decreased foreign exchange gains. The decreases were partially offset by increased revenues from the Company's Hawaiian hotel, changes in market values related to the Company's derivative financial instruments and, for the nine month period ended September 30, 2002, increased foreign exchange gains. The increase in equity in income of associated companies in the nine and three month periods ended September 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 $51,700,000 and $16,600,000, respectively, of income from Berkadia for the nine and three month periods ended September 30, 2002, of which $46,800,000 and $15,300,000, 12
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Interim Operations, continued. respectively, related to the amortization of discount from the Berkadia loan. In 2001, the Company recognized its share of Berkadia's losses of $85,700,000, which primarily resulted from Berkadia's accounting for its share of FINOVA's losses under the equity method of accounting. Equity in income of associated companies for the nine and three month periods ended September 30, 2002 also included $14,000,000 and $4,600,000, 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 $6,600,000 and $8,700,000 of losses for the nine and three month periods ended September 30, 2002, respectively, from the Company's investment in December 2001 in a limited partnership that invests in securities and other obligations of highly leveraged, distressed and out of favor companies. In addition, for the nine month period ended September 30, 2002, the Company recognized $11,800,000 less income from its equity investment in Jefferies Partners Opportunity Fund II, LLC and $5,500,000 less income from its equity investments in real estate businesses; such changes were not significant for the three month period in 2002. Net securities gains (losses) for the nine and three month periods ended September 30, 2002 include a provision of $22,500,000 and $2,400,000, 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 nine and three month periods ended September 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 increase in selling, general and other expenses for the nine month period ended September 30, 2002 as compared to the same period in 2001 primarily resulted from greater net interest paid on the Company's derivative financial instruments of $5,800,000, increased operating costs of $5,500,000 related to the Hawaiian hotel and losses on the sale or write-down of miscellaneous assets aggregating $4,000,000, partially offset by lower expenses related to MK Gold Company of $4,500,000. The increase in selling, general and other expenses for the three month period ended September 30, 2002 as compared to the same period in 2001 primarily resulted from higher provisions for loan losses at the banking and lending segment of $6,200,000, losses on the sale or write-down of miscellaneous assets aggregating $2,800,000 and greater net interest paid on the Company's derivative financial instruments of $1,500,000. 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: 13
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Interim Operations, continued. 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, 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 downgrade of the Company's banking subsidiary by the OCC and becoming subject to formal enforcement action, 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, o assuming the release of the Wiltel escrow, deterioration in the business and operations of WilTel and the ability of WilTel to generate operating profits, WilTel's ability to retain key customers and suppliers, regulatory changes in the telecommunications markets and increased competition from reorganized telecommunication companies, 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. 14
Item 4. Controls and Procedures. (a) The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company's filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Company's management, including its Chairman of the Board and Chief Executive Officer, President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company's management, including the Chairman of the Board and Chief Executive Officer, President and Chief Financial Officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Within 90 days prior to the filing date of this quarterly report on Form 10-Q, the Company has carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chairman of the Board and Chief Executive Officer, President and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on such evaluation, the Company's Chairman of the Board and Chief Executive Officer, President and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective. (b) There have been no significant changes in the Company's internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation in connection with the preparation of this quarterly report on Form 10-Q. 15
PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. a) Exhibits. Item 601(a) of Regulation S-K Exhibit No. Description 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. 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. 16
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LEUCADIA NATIONAL CORPORATION (Registrant) Date: November 13, 2002 By: /s/ Barbara L. Lowenthal ------------------------ Barbara L. Lowenthal Vice President and Comptroller (Chief Accounting Officer) CERTIFICATIONS I, Ian M. Cumming, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Leucadia National Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a- 14 and 15d- 14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 By:/s/ Ian M. Cumming -------------------------- Ian M. Cumming Chairman of the Board and Chief Executive Officer 17
CERTIFICATIONS I, Joseph S. Steinberg, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Leucadia National Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a- 14 and 15d- 14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 By: /s/ Joseph S. Steinberg ----------------------- Joseph S. Steinberg President 18
CERTIFICATIONS I, Joseph A. Orlando, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Leucadia National Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a- 14 and 15d- 14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 13, 2002 By: /s/ Joseph A. Orlando --------------------- Joseph A. Orlando Chief Financial Officer 19
EXHIBIT INDEX Exhibit No. Description 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. 20