(a) Prior period amounts have been changed to reclassify equity in income (loss) of associated companies such that it is no longer classified as revenues. Includes net securities gains (losses) of $(37,066,000), $28,450,000, $124,964,000, $16,268,000 and $(66,159,000) for the years ended December 31, 2002, 2001, 2000, 1999 and 1998, respectively.
(b) During 2002, the Internal Revenue Service completed the audit of the Company's consolidated federal income tax returns for the years 1996 through 1999, without any material tax payment required from the Company. As a result of this favorable resolution of various federal income tax contingencies, the income tax provision for 2002 reflects a benefit of approximately $120,000,000.
As of December 31, 2002, the Company's readily available cash, cash equivalents and marketable securities, excluding those amounts held by its regulated subsidiaries, totaled $680,000,000. This amount is comprised of cash and short-term bonds and notes of the United States Government and its agencies of $375,600,000 (55%), the equity investment in WMIG of $121,100,000 (18%) (which can be sold privately or otherwise in compliance with the securities laws and is subject to a registration rights agreement), and other publicly traded debt and equity securities aggregating $183,300,000 (27%). Additional sources of liquidity as of December 31, 2002 include $170,100,000 of cash and marketable securities primarily collateralizing letters of credit.
During 2002, the Internal Revenue Service completed the audit of the Company's consolidated federal income tax returns for the years 1996 through 1999, without any material tax payment required from the Company. As a result of this favorable resolution of various federal income tax contingencies, the income tax provision for 2002 reflects a benefit from the reversal of tax reserves aggregating approximately $120,000,000.
The Company entered into a stockholders agreement with WilTel pursuant to which the Company designated four members of WilTel's newly constituted nine member board of directors. As long as the Company maintains an ownership interest in WilTel of at least 20%, WilTel agreed to use its best efforts to cause WilTel's board to nominate four Leucadia nominees in the future. In addition, the Company agreed to certain restrictions on its ability to increase its ownership in WilTel above 49% during the first two years after its acquisition, and certain other restrictions on its ability to increase its ownership during the first five years after its acquisition. While the stockholders agreement and WilTel's charter restrict the transferability of WilTel's securities, the Company does have the ability to sell an amount of WilTel shares equal to 15% of the total outstanding WilTel shares. The Company has no current intention to sell its WilTel stock, and although it has a registration rights agreement with respect to its interest in WilTel, the Company does not consider this investment to be liquid.
In December 2002, the Company entered into an agreement to purchase certain debt and equity securities of WebLink, for an aggregate purchase price of $19,000,000. Pursuant to the agreement, the Company acquired outstanding secured notes of WebLink with a principal amount of $36,500,000 and, upon receipt of approval from the FCC, will acquire approximately 80% of the outstanding common stock of WebLink.
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), and recorded an increase to shareholders' equity of $12,100,000. Although the Euro denominated sale proceeds were not converted into US dollars immediately upon receipt, the Company did enter 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. In connection with the sale, the Company classified its foreign real estate operations as discontinued operations.
In November 2002, the Company sold its 40% equity interest in certain thoroughbred racetrack businesses for net proceeds of approximately $28,000,000, and recorded a pre-tax gain of $14,300,000. As part of this transaction, the Company has an approximately 15% profits interest in a joint venture formed with the buyer of the businesses to pursue the potential development and management of gaming ventures in Maryland, including slot machines and video lottery terminals (if authorized by state law). The Company has no funding obligations for this joint venture. The Company is unable to currently determine the value, if any, of this profits interest.
Based on discussions with commercial and investment bankers, the Company believes that it has the ability to raise additional funds under acceptable conditions for use in its existing businesses or for appropriate investment opportunities. Standard & Poor's and Duff & Phelps Inc. have rated the Company's senior debt obligations as investment grade since 1993, while Moody's Investors Services, Inc. rates the Company's senior debt obligations below investment grade. Ratings issued by bond rating agencies are subject to change at any time.
In 2002, net cash was provided by operating activities, principally as a result of a reduction to the Company's investment in the trading portfolio. In 2001 and 2000, net cash was used for operations, reflecting lower investment income on corporate investments as a result of the special dividend payment of $811,900,000 in 1999, payment of the Parent's interest and overhead expenses and a reduction of payables related to the trading portfolio.
As previously stated, AIB stopped originating new sub-prime automobile loans in September 2001, and both AIB and AIF ceased originating all other consumer loans in January 2003. The FDIC and OCC have supported these actions taken with respect to the sub-prime portfolio. However, effective February 2003, AIB entered into a formal agreement with the OCC, agreeing to develop a written strategic plan subject to prior OCC approval for the continued operations of AIB, to continue to maintain certain risk-weighted capital levels, to obtain prior approval before paying any dividends, to provide certain monthly reports and to comply with certain other criteria. AIB will also be unable to accept brokered deposits during the period the agreement remains in effect. In the event AIB fails to comply with the agreement, the OCC would have the authority to assert formal charges and seek other statutory remedies and AIB may also be subject to civil monetary penalties. AIB is complying with the agreement and, given that it has ceased all lending activities, the agreement is not expected to have a significant impact on its operations. However, no assurance can be given that other regulatory actions will not be taken.
The Company and certain of its subsidiaries have or have had tax loss carryforwards and other tax attributes, the amount and availability of which are subject to certain qualifications, limitations and uncertainties. In order to reduce the possibility that certain changes in ownership could impose limitations on the use of the tax loss carryforwards, the Company's certificate of incorporation contains provisions which generally restrict the ability of a person or entity from accumulating five percent or more of the common shares and the ability of persons or entities now owning five percent or more of the common shares from acquiring additional common shares. The restrictions will remain in effect until the earliest of (a) December 31, 2005, (b) the repeal of Section 382 of the Internal Revenue Code (or any comparable successor provision) and (c) the beginning of a taxable year of the Company to which certain tax benefits may no longer be carried forward.
At December 31, 2002, the Company's off-balance sheet arrangements consist of guarantees aggregating $265,500,000. The Company's guarantee of 10% of Berkadia's financing incurred in connection with the Berkadia Loan represents $217,500,000 of that total, $65,000,000 of which expired in connection with payments of principal on the Berkadia Loan in the first quarter of 2003. To the extent that future principal payments are received under the Berkadia Loan prior to maturity, such amounts will be used to paydown the Berkadia financing and the remaining $152,500,000 guarantee will expire proportionally at such times. The Berkadia Loan matures in August 2006.
Prior to the sale of CDS, the Company had agreed to provide project improvement bonds primarily for the benefit of the City of San Marcos for the San Elijo Hills project, which are required prior to the commencement of any project development. These bonds provide funds primarily to the City in the event that CDS is unable or unwilling to complete certain infrastructure improvements in the San Elijo Hills project. CDS is responsible for paying all third party fees related to obtaining the bonds. Should the City or others draw on the bonds for any reason, CDS and one of its subsidiaries would be obligated to reimburse the Company for the amount drawn. At December 31, 2002, the amount of outstanding bonds was $30,000,000, of which $25,400,000 expires in less than one year. The Company's remaining guarantee at December 31, 2002 is an $18,000,000 indemnification in connection with the financing of a real estate property.
The Company records a valuation allowance to reduce its deferred taxes to the amount that is more likely than not to be realized. If the Company were to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment would increase income in such period. Similarly, if the Company were to determine that it would not be able to realize all or part of its net deferred taxes in the future, an adjustment would be charged to income in such period. The Company also records reserves for contingent tax liabilities related to potential exposure.
The Company's remaining consumer lending programs have primarily consisted of marine, recreational vehicle, motorcycle and elective surgery loans. Due to current economic conditions, portfolio performance and the relatively small size of these loan portfolios and target markets, in January 2003 the Company stopped originating all consumer loans. The Company is considering its alternatives for its banking and lending operations, which could include selling or liquidating some or all of its loan portfolios, and outsourcing certain functions.
Manufacturing revenues for the plastics division declined approximately 5% in 2002 as compared to 2001 primarily due to reductions in the consumer products market of $3,800,000, partially offset by increases in the construction market of $1,200,000. 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. Gross profit was largely unchanged for 2002 as compared to 2001, reflecting cost reduction initiatives that reduced labor costs, improved material utilization and reduced non-resin raw material costs.
Manufacturing revenues, gross profit and pre-tax results for the plastics division declined in 2001 as compared to 2000. Of the $11,400,000 decline in manufacturing revenues in 2001, the most significant reduction was in the consumer products market, which declined by $7,300,000. This decline was primarily due to a customer for the Asian market no longer using one of the Company's products and a lower than anticipated demand for consumer dust wipe products. In addition, increased competition in the agriculture, home furnishing and packaging markets and customer inventory reductions in the construction and certain industrial markets also contributed to the reduction in sales in 2001. Gross profit for 2001 declined primarily due to the decline in sales and higher fixed costs related to the Belgium manufacturing facility. The decline in pre-tax income in 2001 was partially offset by the contract termination gain referred to above.
During the fourth quarter of 2002, the Company sold one of its real estate subsidiaries, CDS, to HomeFed for a purchase price of $25,000,000, consisting of $1,000,000 in cash and 24,742,268 shares of HomeFed's common stock, which represents approximately 30.3% of the outstanding HomeFed stock. CDS's principal asset is the master-planned community located in San Diego County, California known as San Elijo Hills, for which HomeFed has served as the development manager since 1998. The deferred gain on this sale of approximately $12,100,000 at December 31, 2002, will be recognized into income as the San Elijo Hills project is developed and sold. The Company is accounting for its investment in HomeFed under the equity method of accounting. Income recognized representing its share of HomeFed's earnings in 2002 was not material. Prior to the sale to HomeFed, the Company recognized pre-tax gains of $7,800,000 from sales of residential sites at San Elijo Hills during 2002.
Investment and other income declined in 2001 as compared to 2000 in part from non-recurring income recognized in 2000 totaling $25,900,000, primarily consisting of foreclosure gains from certain domestic real estate properties of $10,700,000, a prepayment penalty related to certain promissory notes of $7,500,000 and a gain from the sale of a corporate owned aircraft of $7,700,000. In addition, investment and other income declined in 2001 due to decreased gains from sales of various domestic real estate properties of $8,500,000 and a reduction in revenues related to MK Gold of $10,100,000. Such decreases were partially offset by the 2001 gain from the sale of the Company's investment in two inactive insurance companies referred to above and increased revenues from the Company's oil and gas operations of $6,200,000.
For 2002, the Company's equity in the income of Berkadia consisted of pre-tax income of $59,000,000 related to the amortization of the discount on the Berkadia Loan and $6,600,000 from its share of the net interest spread on the Berkadia Loan. For 2001, the Company's equity in the loss of Berkadia consisted of a pre-tax loss of $94,400,000 for its share of FINOVA's losses under the equity method of accounting, $20,100,000 of pre-tax income related to the amortization of the discount on the Berkadia Loan and $3,900,000 of pre-tax income from its share of the net interest spread on the Berkadia Loan. As more fully described in Note 3 to the Company's consolidated financial statements, Berkadia's initial investment in the FINOVA stock and the Berkadia Loan are determined based upon the relative fair values of the securities received in exchange for the funds transferred to FINOVA. The fair value assigned to the FINOVA stock was based upon the trading price of FINOVA's common stock on the day the FINOVA stock was received, was far in excess of FINOVA's net worth and was inconsistent with the Company's view that the FINOVA common stock has a very limited value. Subsequent to acquisition, and principally as a result of the terrorist attacks on September 11, 2001, Berkadia recorded its share of FINOVA's losses in an amount that reduced Berkadia's investment in FINOVA's common stock to zero in 2001.
The decline in interest expense for 2002 as compared to 2001 primarily reflects lower interest expense at the banking and lending segment due to reduced customer banking deposits and lower interest rates thereon.
In July 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"), which is effective for exit or disposal activities initiated after December 31, 2002. SFAS 146 addresses issues regarding the recognition, measurement and reporting of costs associated with exit and disposal activities, including restructuring activities. SFAS 146 requires a liability be recognized at fair value for costs associated with exit or disposal activities only when the liability is incurred as opposed to at the time the Company commits to an exit plan as permitted under Emerging Issues Task Force Issue No. 94-3. In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"), which requires a guarantor for certain guarantees to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of FIN 45 are applied on a prospective basis to guarantees issued or modified after December 31, 2002. In addition, FIN 45 modified the disclosure requirements for such guarantees effective for interim or annual periods ending after December 15, 2002; the Company has adopted these disclosure requirements. 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. FIN 46 is effective immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. FIN 46 applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. FIN 46 may be applied prospectively with a cumulative effect adjustment as of the date on which it is first applied or by restating previously issued financial statements with a cumulative effect adjustment as of the beginning of the first year restated. The Company is reviewing the impact of the implementation of SFAS 146, the initial recognition and measurement provisions of FIN 45, and the implementation of FIN 46.
Statements included in this Report 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.
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 Report or to reflect the occurrence of unanticipated events.