Through its various subsidiaries, the Company owns and utilizes in its operations offices in Salt Lake City, Utah used for corporate and banking and lending activities (totaling approximately 80,200 square feet). Subsidiaries of the Company own facilities primarily used for manufacturing located in Georgia and Genk, Belgium (totaling approximately 373,800 square feet) and facilities and land in California and Oregon used for winery operations (totaling approximately 107,100 square feet and 404 acres, respectively).
Management's Discussion and Analysis of Financial Condition - ------ and Results of Operations. -----------------------------------------------------------
Leucadia National Corporation (the "Parent") is a holding company whose assets principally consist of the stock of its direct subsidiaries, cash and cash equivalents and other investments. The Parent continuously evaluates the retention and disposition of its existing operations and investigates possible acquisitions of new businesses in order to maximize shareholder value. Accordingly, while the Parent does not have any material arrangement, commitment or understanding with respect thereto (except as disclosed in this Report), further acquisitions, divestitures, investments and changes in capital structure are possible. Its principal sources of funds are its available cash resources, bank borrowings, public and private capital market transactions, repayment of subsidiary advances, funds distributed from its subsidiaries as tax sharing payments, management and other fees, and borrowings and dividends from its regulated and non-regulated subsidiaries. It has no substantial recurring cash requirements other than payment of interest and principal on its debt, tax payments and corporate overhead expenses.
Except for the Euro denominated debt of Fidei, which is non-recourse to the Company, the Parent maintains the principal borrowings for the Company and its non-banking subsidiaries and has provided working capital to certain of its subsidiaries. These borrowings have primarily been made from banks through the Company's credit agreement facility and through public financings. During the year ended December 31, 2001, the Company did not use its $152,500,000 unsecured bank credit facility. This facility bears interest based on the Eurocurrency Rate or the prime rate and matures in June 2003.
The Company is financing the renovation of its Hawaiian hotel and has obtained loan commitments totaling $25,000,000. At December 31, 2001, the amount outstanding under this borrowing was $18,900,000. The borrowing matures in seven years and is collateralized by the hotel.
As of February 22, 2002, the Company is authorized to repurchase an additional 4,494,000 Common Shares. Such purchases may be made from time to time in the open market, through block trades or
In August 2001, Berkadia LLC, an entity jointly owned by the Company and Berkshire lent $5,600,000,000 on a senior secured basis to FINOVA Capital Corporation, the principal operating subsidiary of FINOVA, to facilitate a chapter 11 restructuring of the outstanding debt of FINOVA and its principal subsidiaries. Berkadia also received 61,020,581 newly issued shares of common stock of FINOVA (the "FNV Shares"), representing 50% of the stock of FINOVA outstanding on a fully diluted basis. Berkadia financed the Berkadia Loan with bank financing that is guaranteed, 90% by Berkshire and 10% by the Company (with the Company's guarantee being secondarily guaranteed by Berkshire), and that is also secured by Berkadia's pledge of the $5,600,000,000 five year senior secured promissory note from FINOVA Capital to Berkadia issued pursuant to the Berkadia Loan. The financing provided to Berkadia matures on the same date as the Berkadia Loan; principal payments prior to maturity are required only to the extent principal payments are received on the Berkadia Loan. In 2001, Berkadia was paid $120,000,000 in fees in connection with the Berkadia Loan, of which the Company received its $60,000,000 share in 2001. All income related to the Berkadia Loan, after payment of financing costs, will be shared 90% to Berkshire and 10% to the Company. As a result of principal payments made by FINOVA in 2001 and 2002, the balance due under the Berkadia Loan and the balance payable to Berkadia's lenders is $3,900,000,000 as of February 22, 2002. During 2001, the Company also entered into a ten-year management agreement with FINOVA, for which it will receive an $8,000,000 annual fee, the first of which was paid when the agreement was signed. Under the agreement governing Berkadia, the Company and Berkshire have agreed to equally share the management fees.
In December 2001, the Company invested $127,500,000 for an approximate 25% common stock interest in Olympus. The Company cannot redeem its interest in Olympus prior to December 31, 2003. Beginning at that date, the Company has the right to request a redemption annually; however, the granting of any such request will be at the discretion of Olympus' Board of Directors based on the company's need for capital and be subject to Bermuda insurance laws and regulations. The Company will account for this investment under the equity method of accounting.
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.
The Company historically provided collateralized automobile loans to individuals with poor credit histories. The Company's investment in automobile loans was $379,800,000 and $410,300,000 at December 31, 2001 and 2000, respectively. Deposits generated by the Company's deposit-taking facilities and by brokers primarily fund these loans. Deposits raised in 2001 totaled $175,200,000 and had an average maturity of 12 months and a weighted average interest rate of 5.3%.
(a) Of the total amount, $490,000,000 represents the Company's guarantee of 10% of Berkadia's financing incurred in connection with the Berkadia Loan, as more fully described above. The $100,000,000 commitment expiration in the less than one year period results from actual principal payments received under the Berkadia Loan that were used to reduce the balance due under Berkadia's financing. 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 $390,000,000 guarantee will expire at an earlier date than reflected above.
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 at least five percent of the Common Shares and the ability of persons or entities now owning at least five percent of the Common Shares from acquiring additional Common Shares.
cars affect the supply of used cars and the value the Company may realize upon sale of repossessed automobiles. The allowance is based on judgments and assumptions and the ultimate loss may differ.
The Company accounts for its investment in Berkadia under the equity method of accounting. Although the Company has no cash investment in Berkadia, the Company has a contingent liability resulting from its guarantee of 10% of the third party financing provided to Berkadia. The total amount of the Company's guarantee is $390,000,000 as of February 22, 2002. While the Company does not expect that Berkadia will suffer losses resulting in the Company having to fund its guarantee obligation, actual results could differ.
In 2001, the banking and lending segment's provision for loan losses increased $13,000,000 as compared to the prior year. This increase primarily reflects higher net charge-offs, for which the Company believes a weaker economy and increased bankruptcies were contributing factors, and an increase in the rates used by the Company to establish the allowance for loan losses in recognition of its increased loss experience. In an effort to reduce losses, the Company exited certain states and automobile dealer relationships with historically higher loan losses, but losses continued to increase throughout 2001. This loss experience, combined with the increasingly difficult competitive environment, resulted in the Company's decision in September 2001 to stop originating any new subprime automobile loans. The
Company will continue to service the remaining automobile portfolio as well as originate other products, although it is anticipated that new loan originations will be substantially less than originations previously generated in the subprime automobile portfolio. The Company will also seek to acquire loan portfolios that meet its credit criteria if these portfolios can be purchased on attractive terms.
The increase in revenues and pre-tax income relating to domestic real estate in 2000 as compared to 1999 primarily resulted from greater net gains from sales of various properties and $10,700,000 of gains recorded upon the foreclosure of certain shopping centers. During 2000, the first residential lot sales occurred at the Company's project located in San Diego County; 528 residential sites were sold resulting in pre-tax gains of $25,500,000.
For 2001, the Company recognized $24,600,000 of losses from its equity investments in associated companies as compared to $29,300,000 of income for 2000. The loss in 2001 was primarily due to a loss
of $70,400,000, representing the Company's share of the loss recorded by Berkadia. The Company's share of Berkadia's loss consists of the following (in thousands):
As more fully described in Note 4 to the Company's consolidated financial statements, Berkadia's initial investment in the FNV Shares 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 FNV Shares is based upon the trading price of FINOVA's common stock on the day the FNV Shares were received, was far in excess of FINOVA's net worth and is 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.
Salaries expense in 2001 primarily reflects decreased expenses related to lower bonus expense. Salaries expense in 2000 reflects an increase in employees, primarily at the banking and lending segment.
Income taxes for 2001 reflect a benefit of $36,200,000 for the favorable resolution of income tax contingencies. Income taxes for 1999 reflect a benefit of $40,100,000 from the utilization of capital loss carryforwards, of which $33,300,000 was previously included in the valuation allowance. Income taxes for
During 2001, the Empire Group increased its reserve estimates for its commercial package policies lines of business, primarily due to increases in severity of liability claims for accident years 1998 and prior. The Empire Group has exposure for third party liability claims in many of its lines of insurance. During 2001, there were several settlements and court decisions on third party liability cases for amounts that are greater than the industry's or the Empire Group's historical experience for similar claims, which had formed the basis for the Empire Group's estimated loss reserves. While many of these decisions are being appealed, these results may signal a change in the judicial environment in the Empire Group's marketplace. Accordingly, the Empire Group has increased its loss reserve estimate by $23,000,000 due to an estimated increase in severity for these exposures.
Reserve increases in 2001 also resulted from unfavorable development principally in automobile lines of business for the 1998 through 2000 accident years, primarily relating to personal injury protection coverage ("PIP") and in its workers' compensation lines of insurance. The Empire Group believes that the increased loss estimates for PIP are consistent with recent trends in the industry, and has increased loss reserves for all automobile lines by $10,900,000 for 2001. In addition, the Empire Group also increased its reserve for loss adjustment expenses by $23,300,000 as a result of the increases to its loss reserves and an increase in future overhead costs which will be allocated to settle claims currently incurred.
During the period between 1984 and 1995, the Empire Group entered into certain retrospectively rated reinsurance contracts covering substantially all lines of business, except workers' compensation. Under these contracts, the Empire Group paid the reinsurer provisional premiums that are subject to adjustment based on subsequent loss development. Ceded premiums accrued under these contracts reduce both net written and earned premiums during the period the retrospective reinsurance premiums are accrued. If additional unfavorable loss development emerges in future periods, the Empire Group may be required to accrue additional retrospective reinsurance premiums. As a consequence of its reserve increases, the Empire Group reduced premiums and pre-tax profits in 2001 by $8,000,000 to recognize reinsurance premiums due for 1995 and prior years under retrospectively rated reinsurance agreements.
During 1999, the Empire Group recorded adverse loss reserve development of $18,300,000, principally due to an increase in severity of 1998 accident year losses in the assigned risk automobile and voluntary private passenger automobile lines, and 1996 accident year losses in certain classes of the commercial automobile line. As a result, the Empire Group increased its reserves by $7,500,000 for assigned risk automobile, $5,000,000 for voluntary private passenger automobile and $4,500,000 for commercial automobile lines.
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141, "Business Combinations" ("SFAS 141"), which is effective for all business combinations after June 30, 2001, Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"), which is effective for fiscal years beginning after December 15, 2001, and Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement Obligations" ("SFAS 143"), which is effective for fiscal years beginning after June 15, 2002. In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which is effective for fiscal years beginning after December 15, 2001. SFAS 141 requires that companies use the purchase method of accounting for all business combinations initiated after June 30, 2001 and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS 142 addresses the initial recognition and measurement of intangible assets acquired outside a business combination and the recognition and measurement of goodwill and other intangible assets subsequent to acquisition. SFAS 143 requires recognition of the fair value of liabilities associated with the retirement of long-lived assets when a legal obligation to incur such costs arises as a result of the acquisition, construction, development and/or the normal operation of a long-lived asset. Upon recognition of the liability, a corresponding asset is recorded and depreciated over the remaining life of the long-lived asset. SFAS 144 requires that one accounting model be used for the long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and broadens the presentation of discontinued operations to include more disposal transactions and resolves implementation issues. The Company has