-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S6422EoQ8PJyEZrPvoCZLTH/wwKdcvaZoTxiFFFKakNLnmxhs/0QB5113yg5G22s bQ7iMlkCupQCWafPJI9K9Q== 0000096223-03-000011.txt : 20030328 0000096223-03-000011.hdr.sgml : 20030328 20030328111500 ACCESSION NUMBER: 0000096223-03-000011 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030328 FILER: COMPANY DATA: COMPANY CONFORMED NAME: LEUCADIA NATIONAL CORP CENTRAL INDEX KEY: 0000096223 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 132615557 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-05721 FILM NUMBER: 03623224 BUSINESS ADDRESS: STREET 1: 315 PARK AVE S CITY: NEW YORK STATE: NY ZIP: 10010 BUSINESS PHONE: 2124601900 MAIL ADDRESS: STREET 1: 315 PARK AVENUE SOUTH CITY: NEW YORK STATE: NY ZIP: 10010 FORMER COMPANY: FORMER CONFORMED NAME: TALCOTT NATIONAL CORP DATE OF NAME CHANGE: 19800603 10-K 1 lnc0210k.txt LEUCADIA NATIONAL CORPORATION 2002 10K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM 10-K ------------------ [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 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 Identification No.) Incorporation or Organization) 315 Park Avenue South New York, New York 10010 (212) 460-1900 ------------------------------------------------------------------------------- (Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant's Principal Executive Offices) Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange Title of Each Class on Which Registered - -------------------------------------------------------------------------------- COMMON SHARES, PAR VALUE $1 PER SHARE NEW YORK STOCK EXCHANGE PACIFIC EXCHANGE, INC. 7-3/4% SENIOR NOTES DUE AUGUST 15, 2013 NEW YORK STOCK EXCHANGE 8-1/4% SENIOR SUBORDINATED NOTES DUE NEW YORK STOCK EXCHANGE JUNE 15, 2005 7-7/8% SENIOR SUBORDINATED NOTES DUE NEW YORK STOCK EXCHANGE OCTOBER 15, 2006 Securities registered pursuant to Section 12(g) of the Act: None. ------------------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [x] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statement incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [x]. Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [x] No [_] Aggregate market value of the voting stock of the registrant held by non-affiliates of the registrant at June 30, 2002 (computed by reference to the last reported closing sale price of the Common Shares on the New York Stock Exchange on such date): $1,114,008,000. On March 25, 2003, the registrant had outstanding 59,617,292 Common Shares. DOCUMENTS INCORPORATED BY REFERENCE: Certain portions of the registrant's definitive proxy statement pursuant to Regulation 14A of the Securities Exchange Act of 1934 in connection with the 2003 annual meeting of shareholders of the registrant are incorporated by reference into Part III of this Report. =============================================================================== 1 PART I Item 1. Business. - ------ -------- THE COMPANY The Company is a diversified holding company engaged in a variety of businesses, including telecommunications, banking and lending, manufacturing, real estate activities, winery operations, development of a copper mine and property and casualty reinsurance. The Company concentrates on return on investment and cash flow to build long-term shareholder value, rather than emphasizing volume or market share. Additionally, the Company continuously evaluates the retention and disposition of its existing operations and investigates possible acquisitions of new businesses in order to maximize shareholder value. In identifying possible acquisitions, the Company tends to seek assets and companies that are troubled or out of favor and, as a result, are selling substantially below the values the Company believes to be present. Shareholders' equity has grown from a deficit of $7,700,000 at December 31, 1978 (prior to the acquisition of a controlling interest in the Company by the Company's Chairman and President), to a positive shareholders' equity of $1,534,525,000 at December 31, 2002, equal to a book value per common share of the Company (a "common share") of negative $.11 at December 31, 1978 and $25.74 at December 31, 2002. The December 31, 2002 shareholders' equity and book value per share amounts have been reduced by the $811,900,000 special cash dividend paid in 1999. In December 2002, the Company completed a private placement of approximately $150,000,000 of equity securities, based on a common share price of $35.25, to mutual fund clients of Franklin Mutual Advisers, LLC, including the funds comprising the Franklin Mutual Series Funds. The private placement included 2,907,599 common shares and newly authorized Series A Non-Voting Convertible Preferred Stock, that were converted into 1,347,720 common shares in March 2003. The securities sold in the private placement represent 7.1% of the Company's outstanding common shares at March 25, 2003. In the fourth quarter of 2002, the Company completed the acquisition of 44% of the outstanding common stock of WilTel Communications Group, Inc. ("WilTel") for an aggregate purchase price of $330,000,000, excluding expenses. The WilTel stock was acquired by the Company under the chapter 11 restructuring plan of Williams Communications Group, Inc. In October 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. Together, these transactions resulted in the Company acquiring 47.4% of the outstanding common stock of WilTel for an aggregate purchase price of $350,400,000, excluding expenses. WilTel is a publicly traded telecommunications company that owns or leases and operates a nationwide inter-city fiber-optic network, extended locally and globally, to provide Internet, data, voice and video services. WilTel's common stock is traded on the Nasdaq National Market (Symbol: WTEL). 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. 2 The Company's banking and lending operations have historically consisted of making instalment loans to niche markets primarily funded by customer banking deposits insured by the Federal Deposit Insurance Corporation (the "FDIC"). However, as a result of increased loss experience and declining profitability in its automobile lending program, the segment's largest program, the Company stopped originating new automobile loans in September 2001. In 2003, the Company ceased originating all other lending programs. 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. The Company's manufacturing operations manufacture and market proprietary lightweight plastic netting used for a variety of purposes including, among other things, construction, agriculture, packaging, carpet padding, filtration and consumer products. The Company's domestic real estate operations include a mixture of commercial properties, residential land development projects and other unimproved land, all in various stages of development and all available for sale. During 2002, the Company sold its interest in Compagnie Fonciere FIDEI ("Fidei"), its foreign real estate subsidiary, for total proceeds of 70,400,000 Euros ($66,200,000) and recorded an increase to shareholders' equity of $12,100,000. The Company's winery operations consist of Pine Ridge Winery in Napa Valley, California and Archery Summit in the Willamette Valley of Oregon. These wineries primarily produce and sell wines in the luxury segment of the premium table wine market. The Company's copper mine development operations consist of its 72.8% interest in MK Gold Company ("MK Gold"), a publicly traded company listed on the NASD OTC Bulletin Board (Symbol: MKAU). The Company's property and casualty reinsurance business is conducted through its 25% common stock interest in Olympus Re Holdings, Ltd. ("Olympus"), a Bermuda reinsurance company primarily engaged in the property excess, marine and aviation reinsurance business. As used herein, the term "Company" refers to Leucadia National Corporation, a New York corporation organized in 1968, and its subsidiaries, except as the context otherwise may require. Investor Information The Company is subject to the informational requirements of the Securities Exchange Act of 1934 (the "Exchange Act"). Accordingly, the Company files periodic reports, proxy statements and other information with the Securities and Exchange Commission (the "SEC"). Such reports, proxy statements and other information may be obtained by visiting the Public Reference Room of the SEC at 450 Fifth Street, NW, Washington, D.C. 20549 or by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding the Company and other issuers that file electronically. In addition, material filed by the Company can be inspected at the offices of the New York Stock Exchange, Inc. (the "NYSE"), 20 Broad Street, New York, NY 10005 and the Pacific Exchange, Inc., 115 Sansome Street, San Francisco, CA 94104, on which the Company's common shares are listed. The Company does not maintain a website. The Company will provide without charge upon request copies of its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act. Requests for such copies should be directed to: Leucadia National Corporation, 315 Park Avenue South, New York, NY 10010 (telephone number (212) 460-1900), Attention: Corporate Secretary. 3 Financial Information about Segments The Company's reportable segments consist of its operating units, which offer different products and services and are managed separately. These reportable segments are: banking and lending, manufacturing and domestic real estate. Banking and lending operations historically made collateralized personal automobile instalment loans to individuals who have difficulty obtaining credit, at interest rates above those charged to individuals with good credit histories. Such loans were primarily funded by deposits insured by the FDIC. Manufacturing operations manufacture and market proprietary lightweight plastic netting used for a variety of purposes. The Company's domestic real estate operations consist of a variety of commercial properties, residential land development projects and other unimproved land, all in various stages of development and all available for sale. Other operations primarily consist of winery operations and development of a copper mine. Associated companies include equity interests in entities that the Company does not control and that are accounted for on the equity method of accounting. WilTel, a public telecommunications company that owns or leases and operates a nationwide fiber optic network over which it provides a variety of telecommunications services is an associated company, as is Olympus, a Bermuda-based reinsurance company. The information in the following table for Corporate assets primarily consists of investments and cash and cash equivalents. Corporate revenues listed below primarily consist of investment income and securities gains and losses on Corporate assets. Corporate assets, revenues, overhead expenses and interest expense are not allocated to the operating units. The Company has a manufacturing facility located in Belgium and an interest, through MK Gold, in a copper deposit in Spain. The Company does not have any other material foreign operations or investments. 4 Certain information concerning the Company's segments for 2002, 2001 and 2000 is presented in the following table. Associated Companies are only reflected in the table below under Identifiable assets employed. Prior period amounts have been reclassified to reflect the Company's Foreign Real Estate segment as a discontinued operation.
2002 2001 2000 ---- ---- ---- (In millions) Revenues: Banking and Lending $ 95.9 $ 122.4 $ 108.8 Manufacturing 51.0 57.4 65.1 Domestic Real Estate 51.3 65.3 83.1 Other Operations 48.3 39.3 44.9 Corporate (a) (b) (4.7) 89.8 191.5 ---------- -------- --------- Total consolidated revenues (c) $ 241.8 $ 374.2 $ 493.4 ========== ========= ========= Income (loss) from continuing operations before income taxes, minority expense of trust preferred securities and equity in income (losses) of associated companies: Banking and Lending $ 1.9 $ (6.1) $ 11.0 Manufacturing 3.1 7.8 11.3 Domestic Real Estate 16.7 30.4 58.8 Other Operations 11.7 8.2 5.2 Corporate (a) (b) (74.9) 32.8 115.0 ---------- --------- --------- Total consolidated income (loss) from continuing operations before income taxes, minority expense of trust preferred securities and equity in income (losses) of associated companies (c) $ (41.5) $ 73.1 $ 201.3 ========== ========= ========= Identifiable assets employed: Banking and Lending $ 481.5 $ 595.7 $ 664.2 Manufacturing 51.5 59.3 63.4 Domestic Real Estate 106.8 176.4 218.1 Other Operations 193.7 171.2 177.1 Investment in Associated Companies: WilTel 340.6 -- -- Other Associated Companies 397.1 358.8 192.5 Net Assets of Discontinued Operations -- 44.0 156.9 Corporate 970.6 1,063.7 945.6 --------- --------- --------- Total consolidated assets $ 2,541.8 $ 2,469.1 $ 2,417.8 ========= ========= =========
(a) For 2002, includes a provision of $37,100,000 to write down investments in certain available for sale securities and an equity investment in a non-public fund. The write down of the available for sale securities resulted from a decline in market value determined to be other than temporary. (b) For 2000, includes, among other items, pre-tax securities gains on sale of Fidelity National Financial, Inc. ($90,900,000) and Jordan Telecommunication Products, Inc., ($24,800,000), as described in Note 12 to the Consolidated Financial Statements. (c) Prior period amounts have been reclassified to exclude equity in income (losses) of associated companies from these captions. At December 31, 2002, the Company and its consolidated subsidiaries had 785 full-time employees. 5 TELECOMMUNICATIONS In December 2002, the Company completed the acquisition of 44% of the outstanding common stock of WilTel, for an aggregate purchase price, excluding expenses, of $330,000,000. The WilTel stock was acquired by the Company under the chapter 11 restructuring plan of Williams Communications Group, Inc. ("WCG"), the predecessor of WilTel pursuant to a claims purchase agreement with The Williams Companies, Inc. and an investment agreement with WCG. In October 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. Together, these transactions resulted in the Company acquiring 47.4% of the outstanding common stock of WilTel. 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. WilTel owns or leases and operates a nationwide inter-city fiber-optic network, extended locally and globally. WilTel has two reportable operating segments, Network and Vyvx. Network provides Internet, data, voice, and video services to companies that use high capacity communications in their businesses. These companies include regional Bell operating companies, cable television companies, Internet service providers, application service providers, data storage service providers, managed network service providers, digital subscriber line service providers, long distance carriers, local service providers, utilities, governmental entities, educational institutions, international carriers, and other companies who desire high-speed communications services. WilTel also offers rights of use in dark fiber, which is fiber that it installs but for which it does not provide communications transmission services. Network has built networks and entered into strategic relationships to provide services in the United States with connections to Asia, Australia, New Zealand, Canada, Mexico, and Europe. Vyvx transmits media for its customers regardless of format (analog or digital), method (fiber-optics or satellite), or geographic reach (domestic or international). In 1990, Vyvx provided the first video transmission over a terrestrial network and carried the first of fourteen consecutive Super Bowls for the NFL and its broadcasters. Vyvx provides quality, reliable, network-based methods for aggregating, managing, and distributing content for content owners and rights holders. Vyvx also offers a fully integrated hybrid satellite/terrestrial service to support dedicated and occasional requirements for the distribution of live content for customers like broadcasters CNN and Fox in their coverage of breaking news events in remote locations. WilTel's global network is used to provide services to the customers of both Network and Vyvx and includes ownership interests in or rights to use: - nearly 30,000 miles of fiber optic cable, of which 28,554 is currently in service; - local fiber optic cable networks within 20 of the largest U.S. cities; - 120 network centers located in 107 U.S. cities; - operational border crossings between the U.S. and Mexico in California and Texas, and between the U.S. and Canada in Washington, Michigan, and New York; and - capacity on five major undersea cable systems connecting the continental U.S. with Europe, Asia, Australia, New Zealand, and Hawaii. The telecommunications industry has experienced a great deal of instability during the past several years. During the 1990s, forecasts of very high levels of future demand brought a significant number of new entrants and new capital investments into the industry. However, many industry participants have gone through bankruptcy and those forecasts have not materialized. Telecommunications capacity now far exceeds actual demand, and the resulting marketplace is characterized by fierce price competition as traditional and next generation carriers compete to secure market share. Resulting lower prices have eroded margins and have kept many carriers--including WilTel--from attaining positive cash flow from operations. Many network providers, and their customers, have and are undergoing reorganizations through bankruptcy, contemplating bankruptcy, or experiencing significant operating losses while consuming much of their remaining liquidity. 6 WilTel does not know if and when the current state of aggressive pricing will end, or whether the current instability in the sector will lead to industry consolidation. If industry consolidation does occur, it would not necessarily benefit WilTel or assure that pricing rationality will return to the industry. However, if consolidation does not occur and new investment capital continues to flow into telecommunications carriers, pricing pressures could continue and supply may continue to outpace demand for the foreseeable future. While WilTel will examine opportunities to acquire other carriers or large blocks of business if such opportunities are presented to WilTel, even if such transactions could be consummated at prices deemed to be attractive, no assurance can be given that WilTel could successfully complete such acquisitions or that WilTel could obtain the necessary capital or lender approvals to do so. WilTel's current focus is to retain its existing business by providing a high quality of service, to obtain new business if it can be done on a profitable basis, to reduce its operating expenses to the greatest extent possible, and to conserve liquidity. At December 31, 2002, WilTel had $291,300,000 of cash and cash equivalents to meet its cash requirements, and believes that it has sufficient liquidity to meet its needs through 2004. WilTel has $375,000,000 of senior debt outstanding under its credit facility, of which approximately $157,000,000 matures during 2005. Unless WilTel is able to generate significant cash flows from operations through revenue growth, expense reductions or some combination of both, it is likely that new capital will have to be raised to meet its maturing debt obligations in 2005. Upon its emergence from bankruptcy proceedings, WilTel adopted fresh start accounting, resulting in a new reporting entity for accounting purposes as of October 31, 2002. Accordingly, WilTel's consolidated financial statements for periods prior to emergence from bankruptcy are not comparable and not combined with its consolidated financial statements subsequent to emergence. For the two months ended December 31, 2002, after its emergence from bankruptcy, WilTel generated revenues of approximately $191,700,000, of which approximately $168,600,000 were generated from the network segment and approximately $23,100,000 were generated by Vyvx. For this period, approximately 37% of WilTel's consolidated revenues were attributed to its single largest customer, SBC Communications Inc. WilTel's net loss for the two months ended December 31, 2002 was $61,000,000. For the period from acquisition through December 31, 2002, the Company recorded $13,400,000 of pre-tax losses from its investment in WilTel under the equity method of accounting. As a result of its emergence from bankruptcy proceedings and its continued restructuring of its operations, WilTel has reduced its headcount, operating costs and interest expense. However, despite these cost reductions, the Company believes that WilTel will continue to report losses from continuing operations for the foreseeable future. Even if WilTel is able to generate breakeven cash flow from operations, substantial depreciation charges will still result in losses from continuing operations over the next several years. The Company will record its 47.4% share of these losses in its statements of operations, and the recognition of these losses could reduce the carrying amount of its investment in WilTel to zero. The Company will not record any further losses in WilTel if and when its investment is reduced to zero, unless the Company has guaranteed any of WilTel's obligations, or otherwise has committed or intends to commit to provide further financial support. The Company has not provided any such guarantees or commitments. WilTel is subject to federal, state, local, and foreign laws, regulations, and orders that affect the rates, terms, and conditions of certain of its service offerings, its costs, and other aspects of its operations. WilTel's primary federal regulator is the Federal Communications Commission ("FCC"). Regulation of the telecommunications industry varies from state to state and from country to country, and it changes regularly (sometimes in unpredictable ways) in response to regulatory proceedings, judicial rulings, technological developments, competition, and government policies. WilTel's operations also are subject to a variety of environmental, building, safety, health, and other governmental laws and regulations. WilTel cannot predict what impact, if any, regulatory changes may have on its business or results of operations, nor can it guarantee that domestic or international regulatory authorities will not raise material issues regarding its compliance with applicable regulations. 7 BANKING AND LENDING The Company's banking and lending operations principally are conducted through American Investment Bank, N.A. ("AIB"), a national bank subsidiary, and American Investment Financial ("AIF"), an industrial loan corporation. AIB and AIF take money market and other non-demand deposits that are eligible for insurance provided by the FDIC. AIB and AIF had aggregate deposits of $392,900,000 and $476,500,000 at December 31, 2002 and 2001, respectively. AIB and AIF currently have three deposit-taking branches in the Salt Lake City area, which have generated approximately three-quarters of their deposit balances. Various brokers generated the remainder of the Company's deposits. Deposits have primarily been used to fund consumer instalment loans. The Company's consolidated banking and lending operations had outstanding loans (net of unearned finance charges) of $373,600,000 and $521,200,000 at December 31, 2002 and 2001, respectively. At December 31, 2002, 55% were loans to individuals generally collateralized by automobiles; 38% were loans to consumers, substantially all of which were collateralized by real or personal property; 4% were loans to small businesses; and 3% were unsecured loans. Historically, collateralized personal automobile instalment loans were primarily made through automobile dealerships to individuals who have difficulty obtaining credit, at interest rates above those charged to individuals with good credit histories. These loans were made to consumers principally to purchase used, moderately priced automobiles. In September 2001, the Company decided to stop originating subprime automobile loans as a result of increasing loss experience and the increasingly difficult competitive environment. The Company continues to service and closely monitor these loans, and takes prompt possession of the collateral in the event of a default. During 2001 and 2000, the Company generated $434,700,000 of these loans, which typically had an initial loan balance of $12,200, an average contractual maturity of 58 months and an anticipated average life of 26 months. 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 alternatives for its banking and lending operations, which could include selling or liquidating some or all of its loan portfolios, and outsourcing certain functions. The Company anticipates that it will close its remaining satellite branch in 2003, and reduce its operating and overhead expenses. It is the Company's policy to charge to income an allowance for losses which, based upon management's analysis of numerous factors, including current economic trends, aging of the loan portfolio, historical loss experience and collateral value, is deemed adequate to cover probable losses on outstanding loans. At December 31, 2002, the allowance for loan losses for the Company's entire loan portfolio was $31,800,000 or 8.5% of the net outstanding loans, compared to $35,700,000 or 6.8% of net outstanding loans at December 31, 2001. The Company's policy is to charge-off an account when the property securing the delinquent loan is repossessed, which generally occurs when the loan is 60 days delinquent. Otherwise, the Company charges off the account due to the customer's bankruptcy and in no event later than the month in which it becomes 120 days delinquent. The charge-off represents the difference between the net realizable value of the property and the amount of the delinquent loan, including accrued interest. 8 Certain information with respect to the Company's banking and lending segment is as follows for the years ended December 31, 2002, 2001 and 2000 (dollars in thousands):
2002 2001 2000 ---- ---- ---- Average loans outstanding $440,810 $545,036 $423,030 Interest income earned on loans $ 86,018 $111,849 $ 87,865 Average loan yield 19.5% 20.5% 20.8% Average deposits outstanding $454,497 $536,020 $422,607 Interest expense on non-demand deposits $ 18,035 $ 31,499 $ 26,421 Average rate on non-demand deposits 3.9% 5.9% 6.3% Net yield on interest-bearing assets 11.5% 13.3% 13.1%
Investments held by the banking and lending segment are primarily short-term bonds and notes of the United States Government and its agencies. The Company's principal banking and lending operations are subject to detailed supervision by state authorities, as well as federal regulation pursuant to the Federal Consumer Credit Protection Act, the Truth in Lending Act, the Equal Credit Opportunity Act, the Right to Financial Privacy Act, the Community Reinvestment Act, the Fair Credit Reporting Act and regulations promulgated by the Federal Trade Commission and the Board of Governors of the Federal Reserve System. The Company's banking operations are subject to federal and state regulation and supervision by, among others, the Office of the Comptroller of the Currency (the "OCC"), the FDIC and the State of Utah. AIB's primary federal regulator is the OCC, while the primary federal regulator for AIF is the FDIC. 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 Competitive Equality Banking Act of 1987 ("CEBA") places certain restrictions on the operations of AIB and restricts further acquisitions of banks and savings institutions by the Company. CEBA does not restrict AIF as currently operated. 9 MANUFACTURING Through its plastics division, the Company manufactures and markets proprietary lightweight plastic netting used for a variety of purposes including, among other things, construction, agriculture, packaging, carpet padding, filtration and consumer products. The products are primarily used to add strength to other materials or act as barriers, such as warning fences and crop protection from birds. This division is a market leader in netting products used in carpet cushion, turf reinforcement, erosion control, nonwoven reinforcement and crop protection. It markets its products both domestically and internationally, with approximately 16% of its 2002 revenues generated by customers in Europe, Latin America, Japan and Australia. Products are sold primarily through an employee sales force, located in the United States and Europe. Manufacturing revenues were $50,700,000, $53,700,000 and $65,000,000 for the years ended December 31, 2002, 2001 and 2000, respectively. New product development focuses on niches where the division's proprietary technology and expertise can lead to sustainable competitive economic advantages. Historically, this targeted product development generally has been carried out in partnership with a prospective customer or industry where the value of the product has been recognized. The plastics division has also begun focusing on developing products for which it does not yet have a customer. Over the last several years, the plastics division has spent approximately 2% to 4% of annual sales on the development and marketing of new products and new applications of existing products. Primarily as a result of a general downturn in the economy, revenues for the plastics division declined in each of the last two years and the division currently has excess manufacturing capacity. The plastics division is attempting to develop new products, applications and markets to replace its lost business and utilize its excess capacity. In addition, the Company has been focusing on managing costs and improving service levels by reducing lead times. The plastics division is subject to domestic and international competition, generally on the basis of price, service and quality. Additionally, certain products are dependent on cyclical industries, including the construction industry. The Company holds patents on certain improvements to the basic manufacturing processes and on applications thereof. The Company believes that the expiration of these patents, individually or in the aggregate, is unlikely to have a material effect on the plastics division. DOMESTIC REAL ESTATE At December 31, 2002, the Company's domestic real estate assets had a book value of $85,200,000. The real estate operations include a mixture of commercial properties, residential land development projects and other unimproved land, all in various stages of development and all available for sale. The Company's largest domestic real estate investment is a fully-renovated 719-room hotel located on Waikiki Beach in Hawaii. The Company also owns a shopping center on Long Island, New York that has 60,000 square feet of retail space. During the fourth quarter of 2002, the Company sold one of its real estate subsidiaries, CDS Holding Corporation ("CDS"), to HomeFed Corporation ("HomeFed"), approximately 9.5% and 8.8% of which is owned by the Company's Chairman and President, respectively. The purchase price for this transaction was $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. Since 1998, HomeFed has served as the development manager for this project, for which it was entitled to certain fees based upon the project's revenues and a success fee, which represented a substantial portion of the project's future cash flows. HomeFed is engaged, directly and through subsidiaries, in the investment in and development of residential real estate projects in the State of California. HomeFed is a publicly traded company listed on the NASD OTC Bulletin Board (Symbol: HFDC.OB). OTHER OPERATIONS The Company owns two wineries, Pine Ridge Winery in Napa Valley, California and Archery Summit in the Willamette Valley of Oregon. Pine Ridge, which was acquired in 1991, has been conducting operations since 1978, while the Company started Archery Summit in 1993. These wineries primarily produce and sell wines in the luxury segment of the premium table wine market. During 2002, the wineries sold approximately 77,700 9-liter equivalent cases of wine generating wine revenues of $15,700,000. Approximately 8% of the revenues of the wineries and 24% of case sales were derived from a wine that is not in the luxury segment and is made from purchased grapes. Since acquisition, the Company's investment in winery operations has grown, principally to fund the Company's acquisition of land for vineyard development and to increase production capacity and storage facilities at both of the wineries. It can take up to five years for a new vineyard property to reach full production and, depending upon the varietal produced, up to three years after grape harvest before the wine can be sold. For the 2002 harvest, approximately 94% of the Company's vineyards were producing grapes and the balance was under development. At December 31, 2002, the Company's combined investment in these wineries was $60,900,000. 10 The Company's 72.8% interest in MK Gold, a company that is traded on the NASD OTC Bulletin Board, had a net carrying value of $49,200,000 at December 31, 2002. MK Gold's subsidiary, Cobre Las Cruces, S.A., a Spanish company, holds the exploration and mineral rights to the Las Cruces copper deposit in the Pyrite Belt of Spain. An independent feasibility study of this project was completed by Bechtel International, Inc. in 2001. This study is based on proven and probable reserves of 15,800,000 metric tonnes grading 5.94% copper overlain by a gold-bearing gossan (which has not been evaluated) and by 150 meters of unconsolidated overburden. Independent Mining Consultants, Inc. performed the reserve calculations used in the feasibility study. Based on the feasibility study, cash operating costs are estimated to average $.33 per pound of copper and the estimated capital cost to bring the mine into production is approximately $290,000,000, excluding interest and other financing costs. These estimates are subject to a number of risks and uncertainties, including fluctuations in the value of the euro relative to the U.S. dollar. Since the feasibility study was completed, the value of the euro has appreciated against the U.S. dollar, which if sustained, or if it appreciates further, will increase the actual operating and capital costs. Mining will be subject to obtaining required permits, obtaining both debt and equity financing for the project, engineering and construction. The market price of copper has been depressed over the past couple of years, reflecting generally weak global economic conditions. The amount of financing that can be obtained for the project and its related cost will be significantly affected by the assessment of potential lenders of the current and expected future market price of copper. Environmental approval of the project has been obtained from the Spanish and Andalusian government agencies. Mining and water concession applications have been submitted to the applicable governmental agencies, but approval has not yet been received. MK Gold currently anticipates that these operating permits will be received in the second half of 2003, that final design, construction and mine development will begin in 2004 and copper production will begin in 2006. Although MK Gold believes the necessary permitting and financing will be obtained, no assurances can be given that they will be successful. Further, there may be other political and economic circumstances that could prevent or delay development of Las Cruces. OTHER INVESTMENTS In December 2002, the Company entered into an agreement to purchase certain debt and equity securities of WebLink Wireless, Inc. ("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 (representing 91% of the total outstanding debt) and, upon receipt of approval from the FCC, will acquire approximately 80% of the outstanding common stock of WebLink. WebLink, a privately held company, is in the wireless messaging industry, providing wireless data services and traditional paging services. The Company has an investment in Berkadia LLC, an entity jointly owned by the Company and Berkshire Hathaway Inc. ("Berkshire"). In 2001, Berkadia lent $5,600,000,000 on a senior secured basis to FINOVA Capital Corporation (the "Berkadia Loan"), the principal operating subsidiary of The FINOVA Group Inc. ("FINOVA"), to facilitate a chapter 11 restructuring of the outstanding debt of FINOVA and its principal subsidiaries. Berkadia also received newly issued shares of common stock of FINOVA representing 50% of the stock of FINOVA outstanding on a fully diluted basis. In 2001, the Company entered into a ten-year management agreement with FINOVA, for which it receives an $8,000,000 annual fee that it shares equally with Berkshire. FINOVA is a financial services holding company that, prior to its filing for bankruptcy, provided a broad range of financing and capital markets products, primarily to mid-size businesses. Since its chapter 11 restructuring, FINOVA's business activities have been limited to the orderly collection and liquidation of its assets and FINOVA has not engaged in any new lending activities. 11 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). As of March 7, 2003, principal payments have reduced the outstanding amount of Leucadia's guarantee to $152,500,000. All income related to the Berkadia Loan, after payment of financing costs, is shared 90% to Berkshire and 10% to the Company. At December 31, 2002, the book value of the Company's equity investment in Berkadia was negative $72,100,000. The negative carrying amount principally results from Berkadia's distribution of loan fees received and the Company's recognition in 2001 of its share of FINOVA's losses under the equity method of accounting. This negative carrying amount is being amortized into income over the term of the Berkadia Loan, and effectively represents an unamortized discount on the Berkadia Loan. For the year ended December 31, 2002, the Company recorded $65,600,000 of pre-tax income from this investment, of which $59,000,000 related to the amortization of the discount on the Berkadia loan. At December 31, 2002, the book value of the Company's investment in Olympus was $155,700,000. For the year ended December 31, 2002, the Company recorded $24,100,000 of pre-tax income from this investment under the equity method of accounting. Olympus was formed in 2001 to take advantage of the lack of capacity and favorable pricing in the reinsurance market. It has entered into a quota share reinsurance agreement with Folksamerica Reinsurance Company, an affiliate of White Mountains Insurance Group, Ltd. ("WMIG"), and will also seek to obtain reinsurance business from other sources as well. When the market opportunity to underwrite reinsurance business on favorable terms recedes, the by-laws of Olympus include mechanisms to return its capital to its investors, subject to Bermuda insurance regulations and other laws restricting the return of capital. At December 31, 2002, the book value of the Company's equity investment in Jefferies Partners Opportunity Fund II, LLC ("JPOF II"), a registered broker-dealer, was $115,200,000. JPOF II is managed and controlled by Jefferies & Company, Inc., a full service investment bank to middle market companies. JPOF II invests in high yield securities, special situation investments and distressed securities and provides trading services to its customers and clients. For the year ended December 31, 2002, the Company recorded $15,200,000 of pre-tax income from this investment under the equity method of accounting; this amount was distributed to the Company in February 2003. The Company owns 375,000 common shares that represent approximately 4.5% of WMIG. WMIG is a publicly traded, Bermuda domiciled financial services holding company, principally engaged through its subsidiaries and affiliates in property and casualty insurance and reinsurance. At December 31, 2002, the Company's investment had a market value of $121,100,000. The Company owns approximately 36% of the common stock of Light & Power Holdings Ltd., the parent company of The Barbados Light and Power Company Limited, the primary generator and distributor of electricity in Barbados. As of December 31, 2002, the Company's investment of $12,100,000 was accounted for on the cost method of accounting, due to currency exchange restrictions and stock transfer restrictions. The Company owns equity interests representing more than 5% of the outstanding capital stock of each of the following domestic public companies at March 25, 2003: AmeriKing, Inc. ("AmeriKing") (6.8%), Carmike Cinemas, Inc. ("Carmike") (11.1%), GFSI Holdings, Inc. ("GFSI") (6.9%), HomeFed (30.3%), Jackson Products, Inc. ("Jackson") (8.8%), Jordan Industries, Inc. ("JII") (10.1%), and WilTel (47.4%). Since 1982, a subsidiary of the Company has had a partnership interest in The Jordan Company LLC and Jordan/Zalaznick Capital Company, entities that have specialized in structuring leveraged buyouts in which the owners are given the opportunity to become equity participants. However, in the fourth quarter of 2002, members of The Jordan Company raised a new $1.5 billion fund through which they will conduct their investment activities. As a result, the Company's partnership participation arrangement with The Jordan Company ended. The Company has committed to invest $10,000,000 in the general partner of the new fund, and will retain the investments obtained through its prior partnership interest. These investments include AmeriKing, Carmike, GFSI, Jackson, JII, JZ Equity Partners PLC (a British company traded on the London Stock Exchange in which the Company holds a 6.5% equity interest), and a total of 34 other private companies. These investments are carried in the Company's consolidated financial statements at $62,000,000, of which $43,700,000 relates to public companies carried at market value. 12 For further information about the Company's business, including the Company's investments, reference is made to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Report and Notes to Consolidated Financial Statements. Item 2. Properties. - ------ ---------- 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 410,300 square feet) and facilities and land in California and Oregon used for winery operations (totaling approximately 107,100 square feet and 457 acres, respectively). The Company and its subsidiaries lease numerous manufacturing, warehousing, office and headquarters facilities. The facilities vary in size and have leases expiring at various times, subject, in certain instances, to renewal options. See Notes to Consolidated Financial Statements. Item 3. Legal Proceedings. - ------ ----------------- The Company and its subsidiaries are parties to legal proceedings that are considered to be either ordinary, routine litigation incidental to their business or not material to the Company's consolidated financial position. The Company does not believe that any of the foregoing actions will have a material adverse effect on its consolidated financial position, consolidated results of operations or liquidity. Item 10. Executive Officers of the Registrant. - ------- ------------------------------------ All executive officers of the Company are elected at the organizational meeting of the Board of Directors of the Company held annually and serve at the pleasure of the Board of Directors. As of March 25, 2003, the executive officers of the Company, their ages, the positions held by them and the periods during which they have served in such positions were as follows:
Name Age Position with Leucadia Office Held Since - ---- --- ---------------------- ----------------- Ian M. Cumming 62 Chairman of the Board June 1978 Joseph S. Steinberg 59 President January 1979 Thomas E. Mara 57 Executive Vice President May 1980; and Treasurer January 1993 Joseph A. Orlando 47 Vice President and January 1994; Chief Financial Officer April 1996 Barbara L. Lowenthal 48 Vice President and April 1996 Comptroller Mark Hornstein 55 Vice President July 1983 H.E. Scruggs 46 Vice President August 2002
Mr. Cumming has served as a director and Chairman of the Board of the Company since June 1978 and as Chairman of the Board of FINOVA since August 2001. In addition, he has served as a director of Allcity since February 1988, MK Gold since June 1995 and WilTel since October 2002. Mr. Cumming has also been a director of Skywest, Inc., a Utah-based regional air carrier, since June 1986, a director of HomeFed since May 1999 and a director of Carmike since January 2002. 13 Mr. Steinberg has served as a director of the Company since December 1978 and as President of the Company since January 1979. In addition, he has served as a director of Allcity since February 1988, MK Gold since June 1995, JII since June 1988, HomeFed since August 1998, FINOVA since August 2001, WMIG since June 2001 and WilTel since October 2002. Mr. Mara joined the Company in April 1977 and was elected Vice President of the Company in May 1977. He has served as Executive Vice President of the Company since May 1980 and as Treasurer of the Company since January 1993. In addition, he has served as a director of Allcity since October 1994, MK Gold since February 2000 and FINOVA since September 2002. Mr. Orlando, a certified public accountant, has served as Chief Financial Officer of the Company since April 1996 and as Vice President of the Company since January 1994. In addition, he has served as a director of Allcity since October 1998. Ms. Lowenthal, a certified public accountant, has served as Vice President and Comptroller of the Company since April 1996. Mr. Hornstein joined the Company as Vice President in July 1983. Mr. Scruggs joined the Company in 1995, served as Vice President from March 2000 through December 2001, and from August 2002 until the present. Mr. Scruggs has been Chairman of AIB since 1997, Chairman and President of the Empire Group since October 2000, Chairman of Conwed Plastics since January 2000 and a Senior Vice President of WilTel since October 2002. In addition, he has served as a director of MK Gold since March 2001. 14 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters. - ------ --------------------------------------------------------------------- The common shares of the Company are traded on the New York Stock Exchange and Pacific Exchange, Inc. under the symbol LUK. The following table sets forth, for the calendar periods indicated, the high and low sales price per common share on the consolidated transaction reporting system, as reported by the Bloomberg Professional Service provided by Bloomberg L.P.
Common Share ------------ High Low ---- --- 2001 First Quarter $35.70 $30.50 Second Quarter 34.90 30.58 Third Quarter 33.65 28.25 Fourth Quarter 31.96 26.31 2002 First Quarter $36.04 $28.00 Second Quarter 38.16 30.95 Third Quarter 36.37 27.62 Fourth Quarter 40.27 32.85 2003 First Quarter (through March 25, 2003) $38.60 $32.59
As of March 25, 2003, there were approximately 2,976 record holders of the common shares. In 2002 and 2001, the Company paid cash dividends of $.25 per common share. The payment of dividends in the future is subject to the discretion of the Board of Directors and will depend upon general business conditions, legal and contractual restrictions on the payment of dividends and other factors that the Board of Directors may deem to be relevant. In connection with the declaration of dividends or the making of distributions on, or the purchase, redemption or other acquisition of common shares, the Company is required to comply with certain restrictions contained in certain of its debt instruments. The Company's regulated subsidiaries are restricted in the amount of distributions that can be made to the Company without regulatory approval. For further information, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this Report. 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. 15 In December 2002, the Company completed a private placement of approximately $150,000,000 of equity securities, based on a common share price of $35.25, to mutual fund clients of Franklin Mutual Advisers, LLC, including the funds comprising the Franklin Mutual Series Funds. The private placement included 2,907,599 common shares and newly authorized Series A Non-Voting Convertible Preferred Stock, that were converted into 1,347,720 common shares in March 2003. The private placement was exempt from registration under Section 4(2) of the Securities Act of 1933 as a transaction not involving a public offering. On May 14, 2002, shareholders approved the Company's reorganization from New York, its current state of incorporation, to Bermuda. The Company continues to evaluate the possibility of reorganizing as a Bermuda company and would not implement the reorganization unless the estimated cost of the reorganization is acceptable given the anticipated benefits. If the Board of Directors has not determined to implement the reorganization before the 2005 annual meeting of shareholders, management will either abandon the reorganization or resubmit it for shareholder approval at the 2005 annual meeting of shareholders. In addition, the Board of Directors may determine to abandon the reorganization for other reasons deemed to be in the Company's best interests and/or the best interest of its shareholders. 16 Item 6. Selected Financial Data. - ------ ----------------------- The following selected financial data have been summarized from the Company's consolidated financial statements and are qualified in their entirety by reference to, and should be read in conjunction with, such consolidated financial statements and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Report. Prior period amounts have been reclassified to reflect the Company's Foreign Real Estate segment as a discontinued operation.
Year Ended December 31, ----------------------- 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- (In thousands, except per share amounts) SELECTED INCOME STATEMENT DATA: Revenues (a) $241,805 $374,161 $493,408 $460,814 $199,070 Expenses 283,330 301,079 292,105 226,171 183,968 Income (loss) from continuing operations before income taxes, minority expense of trust preferred securities and equity in income (losses) of associated companies (41,525) 73,082 201,303 234,643 15,102 Income from continuing operations before minority expense of trust preferred securities and equity in income (losses) of associated companies (b) 103,340 84,423 133,087 195,175 45,814 Minority expense of trust preferred securities, net of taxes (5,521) (5,521) (5,521) (5,521) (8,248) Equity in income (losses) of associated companies, net of taxes 54,712 (15,974) 19,040 (1,906) 15,138 Income from continuing operations 152,531 62,928 146,606 187,748 52,704 Income (loss) from discontinued operations, including gain (loss) on disposal, net of taxes 9,092 (70,847) (30,598) 27,294 1,639 Cumulative effect of a change in accounting principle -- 411 -- -- -- Net income (loss) 161,623 (7,508) 116,008 215,042 54,343 Per share: Basic earnings (loss) per common share: Income from continuing operations $ 2.74 $ 1.13 $ 2.64 $ 3.16 $ .83 Income (loss) from discontinued operations, including gain (loss) on disposal .16 (1.28) (.55) .46 .03 Cumulative effect of a change in accounting principle -- .01 -- -- -- ------- -------- ------- --------- -------- Net income (loss) $ 2.90 $ (.14) $ 2.09 $ 3.62 $ .86 ======= ======== ======= ========= ======== Diluted earnings (loss) per common share: Income from continuing operations $ 2.72 $ 1.13 $2.64 $ 3.16 $ .83 Income (loss) from discontinued operations, including gain (loss) on disposal .16 (1.28) (.55) .46 .03 Cumulative effect of a change in accounting principle -- .01 -- -- -- ------- -------- ------- --------- -------- Net income (loss) $ 2.88 $ (.14) $ 2.09 $ 3.62 $ .86 ======= ======== ======= ========= ========
17
At December 31, --------------- 2002 2001 2000 1999 1998 ---- ---- ---- ---- ---- (In thousands, except per share amounts) SELECTED BALANCE SHEET DATA: Cash and investments $1,043,471 $1,080,271 $ 998,892 $ 759,089 $1,485,107 Total assets 2,541,778 2,469,087 2,417,783 2,255,239 2,920,916 Debt, including current maturities 233,073 252,279 190,486 268,736 473,226 Customer banking deposits 392,904 476,495 526,172 329,301 189,782 Shareholders' equity 1,534,525 1,195,453 1,204,241 1,121,988 1,853,159 Book value per common share $25.74 $21.61 $21.78 $19.75 $29.90 Cash dividends per common share $ .25 $ .25 $ .25 $13.58 $ --
(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. Item 7. Management's Discussion and Analysis of Financial Condition and Results ------------------------------------------------------------------------ of Operations. -------------- The purpose of this section is to discuss and analyze the Company's consolidated financial condition, liquidity and capital resources and results of operations. This analysis should be read in conjunction with the consolidated financial statements and related notes which appear elsewhere in this Report. Liquidity and Capital Resources Parent Company Liquidity 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. 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. 18 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. In December 2002, the Company completed a private placement of approximately $150,000,000 of equity securities, based on a common share price of $35.25, to mutual fund clients of Franklin Mutual Advisers, LLC, including the funds comprising the Franklin Mutual Series Funds. The Company issued 2,907,599 common shares and newly authorized Series A Non-Voting Convertible Preferred Stock, that were converted into 1,347,720 common shares in March 2003. The securities sold in the private placement represent 7.1% of the Company's outstanding common shares at March 25, 2003. In December 2002, the Company completed the acquisition of 44% of the outstanding common stock of WilTel, for an aggregate purchase price, excluding expenses, of $330,000,000. The WilTel stock was acquired by the Company under the chapter 11 restructuring plan of WCG pursuant to a claims purchase agreement with The Williams Companies, Inc. and an investment agreement with WCG. In October 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. Together, these transactions resulted in the Company acquiring 47.4% of the outstanding common stock of WilTel. 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. WilTel's current focus is to retain its existing business by providing a high quality of service, to obtain new business if it can be done on a profitable basis, to reduce its operating expenses to the greatest extent possible, and to conserve liquidity. At December 31, 2002, WilTel had $291,300,000 of cash and cash equivalents to meet its cash requirements, and believes that it has sufficient liquidity to meet its needs through 2004. WilTel has $375,000,000 of senior debt outstanding under its credit facility, of which approximately $157,000,000 matures during 2005. Unless WilTel is able to generate significant cash flows from operations through revenue growth, expense reductions or some combination of both, it is likely that new capital will have to be raised to meet its maturing debt obligations in 2005. 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. 19 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. 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. In March 2003, the Company entered into a new $110,000,000 unsecured bank credit facility that matures in three years and bears interest based on the Eurocurrency Rate or the prime rate. As of March 25, 2003, the Company is authorized to repurchase an additional 4,490,000 common shares. Such purchases may be made from time to time in the open market, through block trades or otherwise. Depending on market conditions and other factors, such purchases may be commenced or suspended at any time without prior notice. At December 31, 2002, a maximum of $10,200,000 was available to the Parent as dividends from its regulated subsidiaries without regulatory approval. There are no restrictions on distributions from non-regulated subsidiaries. The Parent also receives tax sharing payments from subsidiaries included in its consolidated income tax return, including certain regulated subsidiaries. Payments from regulated subsidiaries for dividends and tax sharing payments totaled $7,100,000 for the year ended December 31, 2002. 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. Consolidated Liquidity 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. 20 The Company's consolidated banking and lending operations had outstanding loans (net of unearned finance charges) of $373,600,000 and $521,200,000 at December 31, 2002 and 2001, respectively. At December 31, 2002, 55% were loans to individuals generally collateralized by automobiles; 38% were loans to consumers, substantially all of which were collateralized by real or personal property; 4% were loans to small businesses; and 3% were unsecured loans. The banking and lending segment is no longer making consumer loans and is in the process of liquidating its remaining portfolio. These loans were primarily funded by deposits generated by the Company's deposit-taking facilities and by brokers. The Company intends to use the cash flows generated from its loan portfolios to retire these deposits as they mature, which the Company expects will be substantially complete by the end of 2005. The Company's customer banking deposits totaled $392,900,000 and $476,500,000 as of December 31, 2002 and 2001, respectively. 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. As shown below, at December 31, 2002, the Company's contractual cash obligations totaled $807,472,000. The Company's debt instruments require maintenance of minimum Tangible Net Worth, limit distributions to shareholders and limit Indebtedness, as defined in the agreements. In addition, the debt instruments contain limitations on investments, liens, contingent obligations and certain other matters. The Company is in compliance with all of these restrictions, and the Company has the ability to incur additional indebtedness or make distributions to its shareholders and still remain in compliance with these restrictions.
Payments Due by Period (in thousands) ----------------------------------------------------------------------- Less than 1 Contractual Cash Obligations Total Year 1-3 Years 4-5 Years After 5 Years - ---------------------------- ----- ----------- --------- --------- ------------- Customer Banking Deposits $392,904 $283,613 $ 89,959 $ 19,332 $ -- Long-Term Debt 233,073 3,647 27,124 39,815 162,487 Operating Leases, net of Sublease Income 83,295 4,946 7,770 6,829 63,750 Preferred Securities of Subsidiary Trust 98,200 -- -- -- 98,200 -------- -------- -------- -------- -------- Total Contractual Cash Obligations $807,472 $292,206 $124,853 $ 65,976 $324,437 ======== ======== ======== ======== ========
21 Off-Balance Sheet Arrangements 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. Results of Operations Critical Accounting Policies and Estimates The Company's discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles. The preparation of these financial statements requires the Company to make estimates and assumptions that affect the reported amounts in the financial statements and disclosures of contingent assets and liabilities. On an on-going basis, the Company evaluates all of these estimates and assumptions. Actual results could differ from those estimates. The allowance for loan losses is established through a provision that is charged to expense. As of December 31, 2002, the Company's allowance for loan losses was $31,800,000 or 8.5% of the related outstanding loan receivable balance of $373,600,000. The allowance for loan losses is an amount that the Company believes will be adequate to absorb probable losses inherent in its portfolio based on the Company's evaluations of the collectibility of loans and prior loan loss experience. Factors considered by the Company include actual experience, current economic trends, aging of the loan portfolio and collateral value. During periods of economic weakness, delinquencies, defaults, repossessions and losses generally increase. These periods may also be accompanied by decreased demand and declining values of automobiles securing outstanding loans, which weakens collateral coverage and increases the amount of a loss in the event of default. In addition, incentives offered by the automobile industry on new 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 actual loss experience may be different. 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. 22 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 $152,500,000 as of March 7, 2003. Since the Company does not expect that Berkadia will suffer losses resulting in the Company having to fund its guarantee obligation, no reserve has been recorded. As of December 31, 2002, the carrying amount of the Company's investment in the mining properties of MK Gold was approximately $59,300,000. The recoverability of this asset is entirely dependent upon the success of MK Gold's mining project at the Las Cruces copper deposit in the Pyrite Belt of Spain. Mining will be subject to obtaining required permits, obtaining both debt and equity financing for the project, engineering and construction. The market price of copper has been depressed over the past couple of years, reflecting generally weak global economic conditions. The amount of financing that can be obtained for the project and its related cost will be significantly affected by the assessment of potential lenders of the current and expected future market price of copper. In addition, the actual price of copper, the operating cost of the mine and the capital cost to bring the mine into production will affect the recoverability of this asset. Based on the current status of the project and MK Gold's estimate of future financing costs and future cash flows, the Company believes the asset is recoverable. Banking and Lending Finance revenues, which reflect the level and mix of consumer instalment loans, decreased in 2002 as compared to 2001 due to fewer average loans outstanding. Average loans outstanding were $440,800,000, $545,000,000 and $423,000,000 for 2002, 2001 and 2000, respectively. This decline was primarily due to the Company's decision in September 2001 to stop originating subprime automobile loans. Although finance revenues decreased in 2002 as compared to 2001, pre-tax results increased primarily due to a $13,700,000 reduction in interest expense, due to reduced customer banking deposits and lower interest rates thereon, a net change of $10,000,000 in the accounting for the market values of interest rate swaps (discussed below), a decline in the provision for loan losses of $7,100,000, and lower salaries expense and operating costs resulting from the segment's restructuring efforts. These changes were partially offset by higher interest paid on interest rate swaps of $4,100,000. In 2002, the banking and lending segment's provision for loan losses decreased as compared to the prior year primarily due to the decline in loans outstanding, although as a percent of outstanding loans it increased due to increased loss experience, particularly in the subprime automobile portfolio. The Company believes this loss experience reflects the difficulties experienced by subprime borrowers in the current economy. At December 31, 2002, the allowance for loan losses for the Company's entire loan portfolio was $31,800,000 or 8.5% of the net outstanding loans, compared to $35,700,000 or 6.8% of net outstanding loans at December 31, 2001. 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. 23 Although finance revenues increased in 2001 as compared to 2000, pre-tax results declined primarily due to a larger provision for loan losses, changes in market values of interest rate swaps, higher interest paid on interest rate swaps, charges recorded in connection with the Company's decision to stop originating new subprime automobile loans and to consolidate all operations in Salt Lake City, and higher interest expense due to the increased customer banking deposits through September of 2001. 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 reflected 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. Pre-tax results for the banking and lending segment for 2001 also included $7,100,000 of charges related to consolidating all operations in Salt Lake City. Pre-tax results for the banking and lending segment include income (expense) of $3,500,000 and ($6,500,000) for the years ended December 31, 2002 and 2001, respectively, resulting from mark-to-market changes on its interest rate swaps. 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. Manufacturing 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. For the year ended December 31, 2002, the division recorded an impairment charge of approximately $1,250,000 to write down the book value of certain production lines that the division does not expect will be utilized over the next several years. These lines were initially purchased to provide additional capacity to produce a specific product for a specific customer; however, the customer discontinued the product in 2001 and the Company no longer believes that the cost of these lines are currently recoverable from other business. When the division's customer discontinued the product and terminated their contract in 2001, they were required to pay the division a termination payment of $3,500,000, which was recognized as other income in 2001. The division did not record an impairment charge in 2001 since its expected production volume for these lines would have resulted in future cash flows that did not support an impairment charge at that time. 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. 24 Domestic Real Estate Revenues from domestic real estate declined in 2002 as compared to 2001 as a result of lower gains from property sales of $16,400,000, and less rent income of $7,300,000 largely due to the sale of one of the Company's shopping centers in 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 also reflects greater operating costs, principally related to the Hawaiian hotel and a $1,300,000 write-down of a mortgage receivable. 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. The reduction in revenues and pre-tax income from domestic real estate in 2001 as compared to the prior year was principally due to the foreclosure gains recorded in 2000 and lower gains from property sales, net of costs. During 2001, the Company sold 691 residential sites and a school site resulting in pre-tax gains of $18,100,000 at San Elijo Hills. Other Investment and other income declined in 2002 as compared to 2001 principally due to reductions in gains from domestic property sales and rent income as discussed above, a reduction of $20,600,000 in investment income resulting from a decline in interest rates and a lower amount of invested assets, a decline of $9,200,000 in revenues from the Company's gas operations principally due to lower production and prices, and the gain recognized in 2001 of $6,300,000 from the sale of the Company's investment in two inactive insurance companies. The decreases were partially offset by a $14,300,000 gain from the sale of certain thoroughbred racetrack businesses and increased revenues from the Company's Hawaiian hotel of $8,200,000. 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. Net securities gains (losses) for 2002 include a provision of $37,100,000 to write down the Company's investments in certain available for sale securities and its equity investment in a non-public fund. The write down of the available for sale securities resulted from a decline in market value determined to be other than temporary. Net securities gains (losses) for 2000 include pre-tax security gains related to the Company's investments in Fidelity National Financial, Inc. ($90,900,000) and Jordan Telecommunication Products, Inc. ($24,800,000). 25 For 2002, the Company recognized $91,400,000 of pre-tax income from its equity investments in associated companies as compared to $24,600,000 of pre-tax losses for 2001. The increase in 2002 was primarily due to income from the Company's equity investment in Berkadia of $65,600,000 as compared to a loss from this investment of $70,400,000 in 2001, and $24,100,000 of income from the Company's equity investment in Olympus, an investment the Company made in December 2001. These increases were partially offset by a $11,900,000 decline in income from its investment in JPOF II, from which the Company recorded $15,200,000 of income in 2002, and a loss of $13,400,000 from the Company's equity investment in WilTel, representing the Company's share of WilTel's losses under the equity method of accounting. 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 book value of the Company's equity investment in Berkadia was negative $72,100,000 and negative $129,000,000 at December 31, 2002 and 2001, respectively. The negative carrying amount principally results from Berkadia's distribution of loan fees received and the Company's recognition in 2001 of its share of FINOVA's losses under the equity method of accounting. This negative carrying amount is being amortized into income over the term of the Berkadia Loan, and effectively represents an unamortized discount on the Berkadia Loan. Since its acquisition in the fourth quarter of 2002, the Company has recorded its share of WilTel's losses under the equity method of accounting. As a result of its emergence from bankruptcy proceedings and its continued restructuring of its operations, WilTel has reduced its headcount, operating costs and interest expense. However, despite these cost reductions, the Company believes that WilTel will continue to report losses from continuing operations for the foreseeable future. Even if WilTel is able to generate breakeven cash flow from operations, substantial depreciation charges will still result in losses from continuing operations over the next several years. The Company will record its 47.4% share of these losses in its statements of operations, and the recognition of these losses could reduce the carrying amount of its investment in WilTel to zero. The Company will not record any further losses in WilTel if and when its investment is reduced to zero, unless the Company has guaranteed any of WilTel's obligations, or otherwise has committed or intends to commit to provide further financial support. The Company has not provided any such guarantees or commitments. For 2001, the Company recognized $24,600,000 of pre-tax losses from its equity investments in associated companies as compared to $29,300,000 of pre-tax 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, as described above. The Company's loss related to Berkadia was partially offset by income from other equity investments, the most significant of which related to JPOF II. The Company recognized income from its investment in JPOF II of $27,100,000 and $17,300,000 in 2001 and 2000, respectively. 26 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. Salaries expense in 2001 primarily reflects decreased expenses related to lower bonus expense. Selling, general and other expenses increased in 2001 as compared to the prior year primarily due to higher provisions for loan losses and charges recorded in connection with consolidating the banking and lending operations referred to above, partially offset by lower expenses related to MK Gold. Income taxes for 2002 reflect the reversal of tax reserves aggregating $120,000,000, as a result of the favorable resolution of certain federal income tax contingencies discussed above. Income taxes for 2001 reflect a benefit of $36,200,000 for the favorable resolution of federal and state income tax contingencies, and in 2000, the Company's effective income tax rate did not vary materially from the expected statutory federal rate. Property and Casualty Insurance--Discontinued Operation In December 2001, upon approval by the Company's Board of Directors to commence an orderly liquidation of the Empire Group, the Company classified as discontinued operations the property and casualty insurance operations of the Empire Group. The Empire Group had historically engaged in commercial and personal lines of property and casualty insurance, principally in the New York metropolitan area. The Empire Group only accepts new business that it is obligated to accept by contract or New York insurance law; it does not engage in any other business activities except for its claims runoff operations. The voluntary liquidation is expected to be substantially complete by 2005. In December 2001, the Company wrote down its investment in the Empire Group to its estimated net realizable value based on expected operating results and cash flows during the liquidation period, which indicated that the Company is unlikely to realize any value once the liquidation is complete. Accordingly, the Company recorded a $31,100,000 after-tax charge (net of taxes of $16,800,000) as a loss on disposal of discontinued operations to fully write-off its investment. While this estimated net realizable value represents management's best estimate, the amount the Company will ultimately realize could be, but is not expected to be, greater. The Company has no obligation to contribute additional capital to the Empire Group. Recently Issued Accounting Standards 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 27 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. Cautionary Statement for Forward-Looking Information 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. Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted or quantified. When used in this Report, the words "estimates", "expects", "anticipates", "believes", "plans", "intends" and variations of such words and similar expressions are intended to identify forward-looking statements that involve risks and uncertainties. Future events and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements. The factors that could cause actual results to differ materially from those suggested by any such statements include, but are not limited to, those discussed or identified from time to time in the Company's public filings, including: o general economic and market conditions or prevailing interest rate levels; o changes in foreign and domestic laws, regulations and taxes; o changes in competition and pricing environments; o regional or general changes in asset valuation; o the occurrence of significant natural disasters, the inability to reinsure certain risks economically, increased competition in the reinsurance markets, the adequacy of loss and loss adjustment expense reserves; o weather related conditions that may affect the Company's operations or investments; o changes in U.S. real estate markets, including the residential market in Southern California and the commercial and vacation markets in Hawaii; o increased competition in the luxury segment of the premium table wine market; 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 and 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; o further adverse regulatory action by the OCC; 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 deterioration in the business and operations of WilTel and the ability of WilTel to generate operating profits and positive cash flows, 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. 28 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. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. - ------- ---------------------------------------------------------- The following includes "forward-looking statements" that involve risk and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. The Company's market risk arises principally from interest rate risk related to its investment portfolio, its borrowing activities and the banking and lending activities of certain subsidiaries. The Company's investment portfolio is primarily classified as available for sale, and consequently, is recorded on the balance sheet at fair value with unrealized gains and losses reflected in shareholders' equity. Included in the Company's investment portfolio are fixed income securities, which comprised approximately 69% of the Company's total investment portfolio at December 31, 2002. These fixed income securities are primarily rated "investment grade" or are U.S. governmental agency issued or guaranteed obligations. The estimated weighted average remaining life of these fixed income securities was approximately 4.6 years at December 31, 2002. The Company's fixed income securities, like all fixed income instruments, are subject to interest rate risk and will fall in value if market interest rates increase. The Company's investment portfolio also includes its investment in WMIG, carried at its aggregate market value of $121,100,000. This investment is approximately 19% of the Company's total investment portfolio, and its value is subject to change if the market value of the WMIG stock rises or falls. At December 31, 2001, fixed income securities comprised approximately 68% of the Company's total investment portfolio and had an estimated weighted average remaining life of 2.0 years. At December 31, 2002 and 2001, the Company's portfolio of trading securities was not material. The Company is subject to interest rate risk on its long-term fixed interest rate debt and the Company-obligated mandatorily redeemable preferred securities of its subsidiary trust holding solely subordinated debt securities of the Company. Generally, the fair market value of debt and preferred securities with a fixed interest rate will increase as interest rates fall, and the fair market value will decrease as interest rates rise. The Company's banking and lending operations are subject to risk resulting from interest rate fluctuations to the extent that there is a difference between the amount of the interest-earning assets and the amount of interest-bearing liabilities that are prepaid/withdrawn, mature or reprice in specified periods. The principal objectives of the Company's banking and lending asset/liability management activities are to provide maximum levels of net interest income while maintaining acceptable levels of interest rate and liquidity risk and to facilitate funding needs. The Company utilizes an interest rate sensitivity model as the primary quantitative tool in measuring the amount of interest rate risk that is present. The model quantifies the effects of various interest rate scenarios on the projected net interest margin over the ensuing twelve-month period. Derivative financial instruments, including interest rate swaps, may be used to modify the Company's indicated net interest sensitivity to levels deemed to be appropriate based on risk management policies and the Company's current economic outlook. Counterparties to such agreements are major financial institutions, which the Company believes are able to fulfill their obligations; however, if they are not, the Company believes that any losses are unlikely to be material. 29 The following table provides information about the Company's financial instruments used for purposes other than trading that are primarily sensitive to changes in interest rates. For investment securities and debt obligations, the table presents principal cash flows by expected maturity dates. For the variable rate notes receivable and variable rate borrowings, the weighted average interest rates are based on implied forward rates in the yield curve at the reporting date. For loans, securities and liabilities with contractual maturities, the table presents contractual principal cash flows adjusted for the Company's historical experience and prepayments of mortgage-backed securities. For banking and lending's variable rate products, the weighted average variable rates are based upon the respective pricing index at the reporting date. For money market deposits that have no contractual maturity, the table presents principal cash flows based on the Company's historical experience and management's judgment concerning their most likely withdrawal behaviors. For interest rate swaps, the table presents notional amounts by contractual maturity date. For additional information, see Notes 5, 9 and 19 to Consolidated Financial Statements. 30
Expected Maturity Date ---------------------- 2003 2004 2005 2006 2007 Thereafter Total Fair Value ---- ---- ---- ---- ---- ---------- ----- ---------- (Dollars in thousands) The Company, Excluding Banking and Lending: Rate Sensitive Assets: Available for Sale Fixed Income Securities: U.S. Government $ 98,763 $16,536 $ -- $ 1,621 $ -- $ -- $116,920 $116,920 Weighted Average Interest Rate 1.64% 3.95% -- 4.14% -- -- Other Fixed Maturities: Rated Investment Grade $ 10,783 $13,785 $ 1,567 $ 1,699 $ -- $ -- $ 27,834 $ 27,834 Weighted Average Interest Rate 6.43% 7.25% 5.96% 6.75% -- -- Rated Less Than Investment Grade/Not Rated $ 15,298 $26,518 $ 9,045 $ 10,394 $ 15,404 $ 52,804 $129,463 $129,463 Weighted Average Interest Rate 7.43% 6.88% 5.32% 8.03% 9.17% 8.57% Rate Sensitive Liabilities: Fixed Interest Rate Borrowings $ 1,515 $ 1,631 $21,265 $23,539 $ 2,233 $123,268 $173,451 $179,290 Weighted Average Interest Rate 7.92% 7.92% 7.92% 7.88% 7.88% 7.86% Variable Interest Rate Borrowings $ 2,114 $ 2,114 $ 2,114 $ 2,114 $ 11,929 $ 39,219 $ 59,604 $ 59,604 Weighted Average Interest Rate 2.20% 2.84% 3.50% 3.94% 4.32% 5.33% Other Rate Sensitive Financial Instruments: Company-obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debt Securities of the Company $ -- $ -- $ -- $ -- $ -- $ 98,200 $ 98,200 $ 98,200 Weighted Average Interest Rate 8.65% 8.65% 8.65% 8.65% 8.65% 8.65%
31
Expected Maturity Date ---------------------- 2003 2004 2005 2006 2007 Thereafter Total Fair Value ---- ---- ---- ---- ---- ---------- ----- ---------- (Dollars in thousands) Rate Sensitive Derivative Financial Instruments: Euro currency swap $ 2,085 $ 2,085 $ 2,085 $ 2,085 $ 2,085 $ 4,693 $ 15,118 $ (1,566) Average Pay Rate 5.89% 5.89% 5.89% 5.89% 5.89% 5.89% Average Receive Rate 7.60% 7.60% 7.60% 7.60% 7.60% 7.60% Pay Fixed/Receive Variable Interest Rate Swap $ 2,114 $ 2,114 $ 2,114 $ 2,114 $ 2,114 $ 39,219 $ 49,789 $ (4,251) Average Pay Rate 5.01% 5.01% 5.01% 5.01% 5.01% 5.01% Average Receive Rate 1.70% 2.39% 3.09% 3.55% 3.95% 4.67% Off-Balance Sheet Items: Unused Lines of Credit $152,500 $ -- $ -- $ -- $ -- $ -- $152,500 $152,500 Weighted Average Interest Rate 1.45% -- -- -- -- -- Banking and Lending: Rate Sensitive Assets: Certificates of Deposit $ 697 $ -- $ -- $ -- $ -- $ -- $ 697 $ 697 Weighted Average Interest Rate 2.06% -- -- -- -- -- 2.06% Fixed Interest Rate Securities $ 9,725 $ 2,757 $ 1,651 $ 414 $ 1 $ 8,146 $ 22,694 $ 22,694 Weighted Average Interest Rate 9.06% 9.10% 9.12% 9.12% 10.93% 5.12% 7.62% Variable Interest Rate Securities $ 29,843 $16,895 $12,839 $ 9,819 $ 2,993 $ 18,753 $ 91,142 $ 91,140 Weighted Average Interest Rate 3.22% 1.77% 1.78% 1.78% 1.83% 3.32% 2.57% Fixed Interest Rate Loans $ 72,558 $73,017 $52,444 $21,427 $ 4,525 $ 82,039 $306,010 $280,351 Weighted Average Interest Rate 21.09% 21.00% 21.62% 21.35% 19.28% 18.66% 20.50% Variable Interest Rate Loans $ 7,651 $ 2,896 $ 3,342 $ 3,930 $ 4,560 $ 45,215 $ 67,594 $ 67,287 Weighted Average Interest Rate 17.28% 19.00% 18.92% 18.61% 17.85% 15.24% 16.19% Rate Sensitive Liabilities: Money Market Deposits $ 36,004 $ 350 $ 350 $ -- $ -- $ -- $ 36,704 $ 36,704 Weighted Average Interest Rate .30% .25% .25% -- -- -- .30% Time Deposits $247,609 $61,004 $28,255 $ 7,574 $ 11,758 $ -- $356,200 $362,863 Weighted Average Interest Rate 3.30% 3.90% 3.53% 5.33% 4.58% -- 3.50% Fixed Interest Rate Borrowings $ 18 $ -- $ -- $ -- $ -- $ -- $ 18 $ 18 Weighted Average Interest Rate 7.38% -- -- -- -- -- 7.38% Rate Sensitive Derivative Financial Instruments: Pay Fixed/Receive Variable Interest Rate Swap $160,000 $ -- $ -- -- $ -- $ -- $160,000 $ (3,135) Average Pay Rate 6.22% -- -- -- -- -- 6.22% Average Receive Rate 1.76% -- -- -- -- -- 1.76% Off-Balance Sheet Items: Commitments to Extend Credit $ 5,503 $ -- $ -- $ -- $ -- $ -- $ 5,503 $ 5,503 Weighted Average Interest Rate 17.44% -- -- -- -- -- 17.44% Unused Lines of Credit $ 3,000 $ -- $ -- $ -- $ -- $ 17,192 $ 20,192 $ 20,192 Weighted Average Interest Rate 4.75% -- -- -- -- 1.25% 1.77%
32 Item 8. Financial Statements and Supplementary Data. - ------ ------------------------------------------- Financial Statements and supplementary data required by this Item 8 are set forth at the pages indicated in Item 15(a) below. Item 9. Changes in and Disagreements with Accountants on Accounting and - ------ ----------------------------------------------------------------- Financial Disclosure. -------------------- Not applicable. PART III Item 10. Directors and Executive Officers of the Registrant. - ------- -------------------------------------------------- The information to be included under the caption "Nominees for Election as Directors" in the Company's definitive proxy statement to be filed with the Commission pursuant to Regulation 14A of the 1934 Act in connection with the 2003 annual meeting of shareholders of the Company (the "Proxy Statement") is incorporated herein by reference. In addition, reference is made to Item 10 in Part I of this Report. Item 11. Executive Compensation. - ------- ---------------------- The information to be included under the caption "Executive Compensation" in the Proxy Statement is incorporated herein by reference. 33 Item 12. Security Ownership of Certain Beneficial Owners and Management. - ------- -------------------------------------------------------------- Equity Compensation Plan Information The following table summarizes information regarding the Company's equity compensation plans as of December 31, 2002. All outstanding awards relate to the Company's common stock.
Number of securities remaining available for future issuance Number of securities Weighted-average under equity to be issued upon exercise price of compensation plans exercise of outstanding options, outstanding options, (excluding securities warrants and rights warrants and rights reflected in column (a)) Plan Category (a) (b) (c) - ------------- ------------------------------- -------------------- ----------------------- Equity compensation plans approved by security holders 1,353,070 $ 25.29 578,050 Equity compensation plans not approved by security holders -- -- -- ----------- ------- ------- Total 1,353,070 $ 25.29 578,050 =========== ======= =======
The information to be included under the caption "Present Beneficial Ownership of Common Shares" in the Proxy Statement is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions. - ------- ---------------------------------------------- The information to be included under the caption "Executive Compensation - Certain Relationships and Related Transactions" in the Proxy Statement is incorporated herein by reference. Item 14. Controls and Procedures. - ------- ----------------------- (a) Based on their evaluation as of a date within 90 days of the filing date of this Annual Report on Form 10-K, the Company's chief executive officer and chief financial officer have concluded that the Company's disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Exchange Act) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. (b) There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 34 PART IV Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. - -------- -----------------------------------------------------------------
(a)(1)(2) Financial Statements and Schedules. Report of Independent Accountants..........................................................F-1 Financial Statements: Consolidated Balance Sheets at December 31, 2002 and 2001.................................F-2 Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000....................................................................................F-3 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000....................................................................................F-4 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2002, 2001 and 2000........................................................F-6 Notes to Consolidated Financial Statements................................................F-7 Financial Statement Schedule: Schedule II - Valuation and Qualifying Accounts...........................................F-36
(3) Executive Compensation Plans and Arrangements. --------------------------------------------- 1999 Stock Option Plan (filed as Annex A to the Company's Proxy Statement dated April 9, 1999 (the "1999 Proxy Statement")). Amended and Restated Shareholders Agreement dated as of December 16, 1997 among the Company, Ian M. Cumming and Joseph S. Steinberg (filed as Exhibit 10.4 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the "1997 10-K")). Leucadia National Corporation Senior Executive Annual Incentive Bonus Plan (filed as Annex D to the Company's Proxy Statement dated October 3, 1997 (the "1997 Proxy Statement")). Employment Agreement made as of December 28, 1993 by and between the Company and Ian M. Cumming (filed as Exhibit 10.17 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1993 (the "1993 10-K")). Amendment, dated as of May 5, 1999, to the Employment Agreement made as of December 28, 1993 by and between the Company and Ian M. Cumming (filed as Exhibit 10.19 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2001 (the "2001 10-K")). Employment Agreement made as of December 28, 1993 by and between the Company and Joseph S. Steinberg (filed as Exhibit 10.18 to the 1993 10-K). Amendment, dated as of May 5, 1999, to the Employment Agreement made as of December 28, 1993 by and between the Company and Joseph S. Steinberg (filed as Exhibit 10.21 to the 2001 10-K). Deferred Compensation Agreement between the Company and Joseph S. Steinberg dated December 8, 1998 (filed as Exhibit 10.6 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1998 (the "1998 10-K")). Deferred Compensation Agreement between the Company and Joseph S. Steinberg dated as of December 30, 1999 (filed as Exhibit 10.16 to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999 (the "1999 10-K")). Deferred Compensation Agreement between the Company and Mark Hornstein dated as of January 10, 2000 (filed as Exhibit 10.17 to the 1999 10-K). Deferred Compensation Agreement between the Company and Thomas E. Mara dated as of January 10, 2000 (filed as Exhibit 10.17 to the 2001 10-K). 35 Deferred Compensation Agreement between the Company and Mark Hornstein dated as of December 29, 2000 (filed as Exhibit 10.18 to the 2000 10-K). Leucadia National Corporation Senior Executive Warrant Plan (filed as Annex B to the 1999 Proxy Statement). Deferred Compensation Agreement between the Company and Thomas E. Mara dated as of December 20, 2001 (filed as Exhibit 10.28 the 2001 10-K). Deferred Compensation Agreement between the Company and Mark Hornstein dated as of December 27, 2001 (filed as Exhibit 10.29 to the 2001 10-K). Deferred Compensation Agreement between the Company and Mark Hornstein dated as of December 16, 2002. (b) Reports on Form 8-K. The Company filed current reports on Form 8-K dated October 15, 2002, October 16, 2002 and December 24, 2002 which set forth information under Item 5. Other Events and Item 7. Financial Statements and Exhibits. The Company filed current reports on Form 8-K dated November 27, 2002 which set forth information under Item 2. Acquisition or Disposition of Assets, Item 5. Other Events and Item 7. Financial Statements and Exhibits. (c) Exhibits. 3.1 Restated Certificate of Incorporation (filed as Exhibit 5.1 to the Company's Current Report on Form 8-K dated July 14, 1993). * 3.2 Certificate of Amendment of the Certificate of Incorporation dated as of December 23, 2002. 3.3 Amended and Restated By-laws as amended through February 23, 1999 (filed as Exhibit 3.2 to the 1998 10-K).* 4.1 The Company undertakes to furnish the Securities and Exchange Commission, upon request, a copy of all instruments with respect to long-term debt not filed herewith. 10.1 1999 Stock Option Plan (filed as Annex A to the 1999 Proxy Statement).* - ------------------------------------------ * Incorporated by reference 36 10.2 Articles and Agreement of General Partnership, effective as of April 15, 1985, of Jordan/Zalaznick Capital Company (filed as Exhibit 10.20 to the Company's Registration Statement No. 33-00606).* 10.3 Operating Agreement of The Jordan Company LLC, dated as of July 23, 1998 (filed as Exhibit 10.3 to the 1998 10-K).* 10.4 Leucadia National Corporation Senior Executive Warrant Plan (filed as Annex B to the 1999 Proxy Statement).* 10.5 Amended and Restated Shareholders Agreement dated as of December 16, 1997 among the Company, Ian M. Cumming and Joseph S. Steinberg (filed as Exhibit 10.4 to the 1997 10-K).* 10.6 Deferred Compensation Agreement between the Company and Joseph S. Steinberg dated December 8, 1998 (filed as Exhibit 10.6 to the 1998 10-K).* 10.7 Form of Amended and Restated Revolving Credit Agreement dated as of June 27, 2000 between the Company, Fleet National Bank as Administrative Agent, The Chase Manhattan Bank, as Syndication Agent, and the Banks signatory thereto, with Fleet Boston Robertson Stephens, Inc., as Arranger (filed as Exhibit 10.9 to the 2000 10-K).* 10.8 Form of First Amendment, dated as of August 10, 2001, to Amended and Restated Revolving Credit Agreement dated as of June 27, 2000 between the Company, Fleet National Bank as Administrative Agent, The Chase Manhattan Bank, as Syndication Agent, and the Banks signatory thereto, with Fleet Boston Robertson Stephens, Inc., as Arranger (filed as Exhibit 10.8 to the Company's 2001 10-K).* 10.9 Purchase Agreement among Conseco, Inc., the Company, Charter National Life Insurance Company, Colonial Penn Group, Inc., Colonial Penn Holdings, Inc., Leucadia Financial Corporation, Intramerica Life Insurance Company, Colonial Penn Franklin Insurance Company and Colonial Penn Insurance Company dated as of April 30, 1997 (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997).* 10.10 Purchase Agreement among General Electric Capital Corporation, the Company, Charter National Life Insurance Company, Colonial Penn Group Inc. and Colonial Penn Holdings, Inc. dated as of June 30, 1997 (filed as Annex A to the 1997 Proxy Statement).* 10.11 Purchase Agreement by and among Allstate Life Insurance Company, Allstate Life Insurance Company of New York, Charter National Life Insurance Company, Intramerica Life Insurance Company and the Company, dated February 11, 1998 (filed as Exhibit 10.16 to the 1997 10-K).* 10.12 Leucadia National Corporation Senior Executive Annual Incentive Bonus Plan (filed as Annex D to the 1997 Proxy Statement).* - ------------------------------------------ * Incorporated by reference 37 10.13 Stock Purchase Agreement by and between the Company and Allstate Life Insurance Company dated as of December 18, 1998 (filed as Exhibit 10.14 to the 1998 10-K).* 10.14 Deferred Compensation Agreement between the Company and Joseph S. Steinberg dated as of December 30, 1999 (filed as Exhibit 10.16 to the Company's 1999 10-K).* 10.15 Deferred Compensation Agreement between the Company and Mark Hornstein dated as of January 10, 2000 (filed as Exhibit 10.17 to the 1999 10-K).* 10.16 Deferred Compensation Agreement between the Company and Thomas E. Mara dated as of January 10, 2000 (filed as Exhibit 10.17 to the 2000 10-K).* 10.17 Deferred Compensation Agreement between the Company and Mark Hornstein dated as of December 29, 2000 (filed as Exhibit 10.18 to the 2000 10-K).* 10.18 Employment Agreement made as of December 28, 1993 by and between the Company and Ian M. Cumming (filed as Exhibit 10.17 to the Company's 1993 Form 10-K).* 10.19 Amendment, dated as of May 5, 1999, to the Employment Agreement made as of December 28, 1993 by and between the Company and Ian M. Cumming (filed as Exhibit 10.19 to the 2001 10-K).* 10.20 Employment Agreement made as of December 28, 1993 by and between the Company and Joseph S. Steinberg (filed as Exhibit 10.18 to the 1993 10-K).* 10.21 Amendment, dated as of May 5, 1999, to the Employment Agreement made as of December 28, 1993 by and between the Company and Joseph S. Steinberg (filed as Exhibit 10.21 to the 2001 10-K).* 10.22 Commitment Letter dated February 26, 2001 among the Company, Berkshire Hathaway Inc., Berkadia LLC, The FINOVA Group Inc. and FINOVA Capital Corporation (filed as Exhibit 10.19 to the 2000 10-K).* 10.23 Management Services Agreement dated as of February 26, 2001 among The FINOVA Group Inc., the Company and Leucadia International Corporation (filed as Exhibit 10.20 to the 2000 10-K).* 10.24 Leucadia National Corporation Guaranty to Fleet Securities, Inc., as administrative agent, and the lenders from time to time party to the Fleet Facility, dated as of August 21, 2001 (filed as Exhibit 4 to the Schedule 13D filed with the SEC on August 28, 2001 in respect of Company Common Stock by Berkshire Hathaway Inc. et al. (the "Berkshire Schedule 13D")).* 10.25 Berkadia Management LLC Operating Agreement, dated August 21, 2001, by and between BH Finance LLC and WMAC Investment Corporation (filed as Exhibit 8 to the Berkshire Schedule 13D).* 10.26 Voting Agreement, dated August 21, 2001, by and among Berkadia LLC, Berkshire Hathaway Inc., the Company and The FINOVA Group Inc. (filed as Exhibit 10.J to the Company's Current Report on Form 8-K dated August 27, 2001).* 10.27 First Amended and Restated Berkadia LLC Operating Agreement, dated August 21, 2001, by and among BHF Berkadia Member Inc., WMAC Investment Corporation and Berkadia Management LLC (filed as Exhibit 11 to the Berkshire Schedule 13D).* - ------------------------------------------ * Incorporated by reference 38 10.28 Deferred Compensation Agreement between the Company and Thomas E. Mara dated as of December 20, 2001 (filed as Exhibit 10.28 to the 2001 10-K).* 10.29 Deferred Compensation Agreement between the Company and Mark Hornstein dated as of December 27, 2001 (filed as Exhibit 10.29 to the 2001 10-K).* 10.30 Settlement Agreement dated as of July 26, 2002, by and among The Williams Companies Inc. ("TWC"), Williams Communications Group, Inc. ("WCG"), CG Austria, Inc., the official committee of unsecured creditors and the Company (filed as Exhibit 99.2 to the Current Report on Form 8-K of WCG dated July 31, 2002 (the "WCG July 31, 2002 8-K")).* 10.31 Investment Agreement, dated as of July 26, 2002, by and among the Company, WCG and, for purposes of Section 7.4 only, Williams Communications, LLC ("WCL") (filed as Exhibit 99.4 to the WCG July 31, 2002 8-K). * 10.32 First Amendment, made as of September 30, 2002, to the Investment Agreement, dated as of July 26, 2002, by and among the Company, WCG and WCL (filed as Exhibit 99.4 to the Current Report on Form 8-K of WCG dated October 24, 2002 (the "WilTel October 24, 2002 8-K")). * 10.33 Second Amendment, made as of October 15, 2002, to the Investment Agreement, dated as of July 26, 2002, as amended on September 30, 2002, by and among the Company, WCG and WCL (filed as Exhibit 99.5 to the WilTel October 24, 2002 8-K).* 10.34 Purchase and Sale Agreement, dated as of July 26, 2002, by and between TWC and the Company (filed as Exhibit 99.5 to the Company's Current Report on Form 8-K dated July 31, 2002).* 10.35 Amendment, made as of October 15, 2002, to the Purchase and Sale Agreement, dated as of July 26, 2002, by and among the Company and TWC (filed as Exhibit 99.2 to the WilTel October 24, 2002 8-K). * 10.36 Escrow Agreement, dated as of October 15, 2002, among the Company, TWC, WilTel and The Bank of New York, as Escrow Agent (filed as Exhibit 99.3 to the WilTel October 24, 2002 8-K). * 10.37 Share Purchase Agreement, dated April 17, 2002, between LUK Fidei L.L.C and Hampton Trust PLC. 10.38 Reiterative Share Purchase Agreement, dated June 4, 2002, among Savits AB Private, Hampton Trust Holding (Europe) SA, John C. Jones and Herald Centruy Consolidated SA. 10.39 Stock Purchase Agreement, dated as of October 21, 2002, between HomeFed Corporation ("HomeFed") and the Company (filed as Exhibit 10.1 to the Current Report on Form 8-K of HomeFed dated October 22, 2002). * 10.40 Second Amended and Restated Berkadia LLC Operating Agreement dated December 2, 2002, by and among BH Finance LLC and WMAC Investment Corporation. 10.41 Subscription Agreement made and entered into as of December 23, 2002 by and among the Company and each of the entities named in Schedule I thereto. 10.42 Deferred Compensation Agreement between the Company and Mark Hornstein dated as of December 26, 2002. 21 Subsidiaries of the registrant. - ------------------------------------------ * Incorporated by reference 39 23.1 Consent of PricewaterhouseCoopers LLP with respect to the incorporation by reference into the Company's Registration Statement on Form S-8 (File No. 2-84303), Form S-8 and S-3 (File No. 33-6054), Form S-8 and S-3 (File No. 33-26434), Form S-8 and S-3 (File No. 33-30277), Form S-8 (File No. 33-61682), Form S-8 (File No. 33-61718), Form S-8 (File No. 333-51494) and Form S-4 (File No. 333-86018). 23.2 Independent Auditors' Consent from PricewaterhouseCoopers, with respect to the inclusion in this Annual Report on Form 10-K the financial statements of Olympus Re Holdings, Ltd. and with respect to the incorporation by reference in the Company's Registration Statements on Form S-8 (No. 2-84303), Form S-8 and S-3 (No. 33-6054), Form S-8 and S-3 (No. 33-26434), Form S-8 and S-3 (No. 33-30277), Form S-8 (No. 33-61682), Form S-8 (No. 33-61718), Form S-8 (No. 333-51494) and Form S-4 (No.333-86018). 23.3 Consent of independent auditors from Ernst & Young LLP with respect to the inclusion in this Annual Report on Form 10-K of the financial statements of Berkadia LLC and with respect to the incorporation by reference in the Company's Registration Statements on Form S-8 (No. 2-84303), Form S-8 and S-3 (No. 33-6054), Form S-8 and S-3 (No. 33-26434), Form S-8 and S-3 (No. 33-30277), Form S-8 (No. 33-61682), Form S-8 (No. 33-61718), Form S-8 (No. 333-51494) and Form S-4 (No. 333-86018). 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. (d) Financial statement schedules. ----------------------------- (1) Berkadia LLC financial statements as of December 31, 2002 and 2001 and for the year ended December 31, 2002 and for the period from inception, February 26, 2001, to December 31, 2001. (2) Olympus Re Holdings, Ltd. combined financial statements as of December 31, 2002 and 2001 and for the year ended December 31, 2002 and for the period from date of incorporation, December 3, 2001 to December 31, 2001. 40 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 March 28, 2003 By: /s/ Barbara L. Lowenthal ----------------------------- Barbara L. Lowenthal Vice President and Comptroller Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, on the date set forth above. Signature Title --------- ----- /s/ Ian M. Cumming Chairman of the Board - ----------------------------- (Principal Executive Officer) Ian M. Cumming /s/ Joseph S. Steinberg President and Director - ----------------------------- (Principal Executive Officer) Joseph S. Steinberg /s/ Joseph A. Orlando Vice President and Chief Financial Officer - ----------------------------- (Principal Financial Officer) Joseph A. Orlando /s/ Barbara L. Lowenthal Vice President and Comptroller - ----------------------------- (Principal Accounting Officer) Barbara L. Lowenthal /s/ Paul M. Dougan Director - ----------------------------- Paul M. Dougan /s/ Lawrence D. Glaubinger Director - ----------------------------- Lawrence D. Glaubinger /s/ James E. Jordan Director - ----------------------------- James E. Jordan /s/ Jesse Clyde Nichols, III Director ---------------------------- Jesse Clyde Nichols, III 41 CERTIFICATIONS I, Ian M. Cumming, certify that: 1. I have reviewed this annual report on Form 10-K of Leucadia National Corporation; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 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 annual 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 annual report (the "Evaluation Date"); and c) presented in this annual 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 annual report whether 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: March 28, 2003 By: /s/ Ian M. Cumming -------------------------- Ian M. Cumming Chairman of the Board and Chief Executive Officer 42 CERTIFICATIONS I, Joseph S. Steinberg, certify that: 1. I have reviewed this annual report on Form 10-K of Leucadia National Corporation; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 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 annual 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 annual report (the "Evaluation Date"); and c) presented in this annual 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 annual report whether 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: March 28, 2003 By:/s/ Joseph S. Steinberg ----------------------- Joseph S. Steinberg President 43 CERTIFICATIONS I, Joseph A. Orlando, certify that: 1. I have reviewed this annual report on Form 10-K of Leucadia National Corporation; 2. Based on my knowledge, this annual 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 annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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 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 annual 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 annual report (the "Evaluation Date"); and c) presented in this annual 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 annual report whether 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: March 28, 2003 By: /s/ Joseph A. Orlando --------------------- Joseph A. Orlando Chief Financial Officer 44 EXHIBIT INDEX 3.1 Restated Certificate of Incorporation (filed as Exhibit 5.1 to the Company's Current Report on Form 8-K dated July 14, 1993). * 3.2 Certificate of Amendment of the Certificate of Incorporation dated as of December 23, 2002. 3.3 Amended and Restated By-laws as amended through February 23, 1999 (filed as Exhibit 3.2 to the 1998 10-K).* 4.1 The Company undertakes to furnish the Securities and Exchange Commission, upon request, a copy of all instruments with respect to long-term debt not filed herewith. 10.1 1999 Stock Option Plan (filed as Annex A to the 1999 Proxy Statement).* 10.2 Articles and Agreement of General Partnership, effective as of April 15, 1985, of Jordan/Zalaznick Capital Company (filed as Exhibit 10.20 to the Company's Registration Statement No. 33-00606).* 10.3 Operating Agreement of The Jordan Company LLC, dated as of July 23, 1998 (filed as Exhibit 10.3 to the 1998 10-K).* 10.4 Leucadia National Corporation Senior Executive Warrant Plan (filed as Annex B to the 1999 Proxy Statement).* 10.5 Amended and Restated Shareholders Agreement dated as of December 16, 1997 among the Company, Ian M. Cumming and Joseph S. Steinberg (filed as Exhibit 10.4 to the 1997 10-K).* 10.6 Deferred Compensation Agreement between the Company and Joseph S. Steinberg dated December 8, 1998 (filed as Exhibit 10.6 to the 1998 10-K).* 10.7 Form of Amended and Restated Revolving Credit Agreement dated as of June 27, 2000 between the Company, Fleet National Bank as Administrative Agent, The Chase Manhattan Bank, as Syndication Agent, and the Banks signatory thereto, with Fleet Boston Robertson Stephens, Inc., as Arranger (filed as Exhibit 10.9 to the 2000 10-K).* 10.8 Form of First Amendment, dated as of August 10, 2001, to Amended and Restated Revolving Credit Agreement dated as of June 27, 2000 between the Company, Fleet National Bank as Administrative Agent, The Chase Manhattan Bank, as Syndication Agent, and the Banks signatory thereto, with Fleet Boston Robertson Stephens, Inc., as Arranger (filed as Exhibit 10.8 to the Company's 2001 10-K).* - ------------------------------------------ * Incorporated by reference 45 10.9 Purchase Agreement among Conseco, Inc., the Company, Charter National Life Insurance Company, Colonial Penn Group, Inc., Colonial Penn Holdings, Inc., Leucadia Financial Corporation, Intramerica Life Insurance Company, Colonial Penn Franklin Insurance Company and Colonial Penn Insurance Company dated as of April 30, 1997 (filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 1997).* 10.10 Purchase Agreement among General Electric Capital Corporation, the Company, Charter National Life Insurance Company, Colonial Penn Group Inc. and Colonial Penn Holdings, Inc. dated as of June 30, 1997 (filed as Annex A to the 1997 Proxy Statement).* 10.11 Purchase Agreement by and among Allstate Life Insurance Company, Allstate Life Insurance Company of New York, Charter National Life Insurance Company, Intramerica Life Insurance Company and the Company, dated February 11, 1998 (filed as Exhibit 10.16 to the 1997 10-K).* 10.12 Leucadia National Corporation Senior Executive Annual Incentive Bonus Plan (filed as Annex D to the 1997 Proxy Statement).* 10.13 Stock Purchase Agreement by and between the Company and Allstate Life Insurance Company dated as of December 18, 1998 (filed as Exhibit 10.14 to the 1998 10-K).* 10.14 Deferred Compensation Agreement between the Company and Joseph S. Steinberg dated as of December 30, 1999 (filed as Exhibit 10.16 to the Company's 1999 10-K).* 10.15 Deferred Compensation Agreement between the Company and Mark Hornstein dated as of January 10, 2000 (filed as Exhibit 10.17 to the 1999 10-K).* 10.16 Deferred Compensation Agreement between the Company and Thomas E. Mara dated as of January 10, 2000 (filed as Exhibit 10.17 to the 2000 10-K).* 10.17 Deferred Compensation Agreement between the Company and Mark Hornstein dated as of December 29, 2000 (filed as Exhibit 10.18 to the 2000 10-K).* 10.18 Employment Agreement made as of December 28, 1993 by and between the Company and Ian M. Cumming (filed as Exhibit 10.17 to the Company's 1993 Form 10-K).* 10.19 Amendment, dated as of May 5, 1999, to the Employment Agreement made as of December 28, 1993 by and between the Company and Ian M. Cumming (filed as Exhibit 10.19 to the 2001 10-K).* 10.20 Employment Agreement made as of December 28, 1993 by and between the Company and Joseph S. Steinberg (filed as Exhibit 10.18 to the 1993 10-K).* 10.21 Amendment, dated as of May 5, 1999, to the Employment Agreement made as of December 28, 1993 by and between the Company and Joseph S. Steinberg (filed as Exhibit 10.21 to the 2001 10-K).* - ------------------------------------------ * Incorporated by reference 46 10.22 Commitment Letter dated February 26, 2001 among the Company, Berkshire Hathaway Inc., Berkadia LLC, The FINOVA Group Inc. and FINOVA Capital Corporation (filed as Exhibit 10.19 to the 2000 10-K).* 10.23 Management Services Agreement dated as of February 26, 2001 among The FINOVA Group Inc., the Company and Leucadia International Corporation (filed as Exhibit 10.20 to the 2000 10-K).* 10.24 Leucadia National Corporation Guaranty to Fleet Securities, Inc., as administrative agent, and the lenders from time to time party to the Fleet Facility, dated as of August 21, 2001 (filed as Exhibit 4 to the Berkshire Schedule 13D).* 10.25 Berkadia Management LLC Operating Agreement, dated August 21, 2001, by and between BH Finance LLC and WMAC Investment Corporation (filed as Exhibit 8 to the Berkshire Schedule 13D).* 10.26 Voting Agreement, dated August 21, 2001, by and among Berkadia LLC, Berkshire Hathaway Inc., the Company and The FINOVA Group Inc. (filed as Exhibit 10.J to the Company's Current Report on Form 8-K dated August 27, 2001).* 10.27 First Amended and Restated Berkadia LLC Operating Agreement, dated August 21, 2001, by and among BHF Berkadia Member Inc., WMAC Investment Corporation and Berkadia Management LLC (filed as Exhibit 11 to the Berkshire Schedule 13D).* 10.28 Deferred Compensation Agreement between the Company and Thomas E. Mara dated as of December 20, 2001 (filed as Exhibit 10.28 to the 2001 10-K).* 10.29 Deferred Compensation Agreement between the Company and Mark Hornstein dated as of December 27, 2001 (filed as Exhibit 10.29 to the 2001 10-K).* 10.30 Settlement Agreement dated as of July 26, 2002, by and among The Williams Companies Inc. ("TWC"), Williams Communications Group, Inc. ("WCG"), CG Austria, Inc., the official committee of unsecured creditors and the Company (filed as Exhibit 99.2 to the WCG July 31, 2002 8-K).* 10.31 Investment Agreement, dated as of July 26, 2002, by and among the Company, WCG and, for purposes of Section 7.4 only, Williams Communications, LLC ("WCL") (filed as Exhibit 99.4 to the WCG July 31, 2002 8-K). * 10.32 First Amendment, made as of September 30, 2002, to the Investment Agreement, dated as of July 26, 2002, by and among the Company, WCG and WCL (filed as Exhibit 99.4 to the WilTel October 24, 2002 8-K). * 10.33 Second Amendment, made as of October 15, 2002, to the Investment Agreement, dated as of July 26, 2002, as amended on September 30, 2002, by and among the Company, WCG and WCL (filed as Exhibit 99.5 to the WilTel October 24, 2002 8-K). * - ------------------------------------------ * Incorporated by reference 47 10.34 Purchase and Sale Agreement, dated as of July 26, 2002, by and between TWC and the Company (filed as Exhibit 99.5 to the Company's Current Report on Form 8-K dated July 31, 2002).* 10.35 Amendment, made as of October 15, 2002, to the Purchase and Sale Agreement, dated as of July 26, 2002, by and among the Company and TWC (filed as Exhibit 99.2 to the WilTel October 24, 2002 8-K). * 10.36 Escrow Agreement, dated as of October 15, 2002, among the Company, TWC, WilTel and The Bank of New York, as Escrow Agent (filed as Exhibit 99.3 to the WilTel October 24, 2002 8-K). * 10.37 Share Purchase Agreement, dated April 17, 2002, between LUK Fidei L.L.C and Hampton Trust PLC. 10.38 Reiterative Share Purchase Agreement, dated June 4, 2002, among Savits AB Private, Hampton Trust Holding (Europe) SA, John C. Jones and Herald Centruy Consolidated SA. 10.39 Stock Purchase Agreement, dated as of October 21, 2002, between HomeFed Corporation ("HomeFed") and the Company (filed as Exhibit 10.1 to the Current Report on Form 8-K of HomeFed dated October 22, 2002). * 10.40 Second Amended and Restated Berkadia LLC Operating Agreement dated December 2, 2002, by and among BH Finance LLC and WMAC Investment Corporation. 10.41 Subscription Agreement made and entered into as of December 23, 2002 by and among the Company and each of the entities named in Schedule I thereto. 10.42 Deferred Compensation Agreement between the Company and Mark Hornstein dated as of December 26, 2002. 21 Subsidiaries of the registrant. 23.1 Consent of PricewaterhouseCoopers LLP with respect to the incorporation by reference into the Company's Registration Statement on Form S-8 (File No. 2-84303), Form S-8 and S-3 (File No. 33-6054), Form S-8 and S-3 (File No. 33-26434), Form S-8 and S-3 (File No. 33-30277), Form S-8 (File No. 33-61682), Form S-8 (File No. 33-61718), Form S-8 (File No. 333-51494) and Form S-4 (File No. 333-86018). 23.2 Independent Auditors' Consent from PricewaterhouseCoopers, with respect to the inclusion in this Annual Report on Form 10-K the financial statements of Olympus Re Holdings, Ltd. and with respect to the incorporation by reference in the Company's Registration Statements on Form S-8 (No. 2-84303), Form S-8 and S-3 (No. 33-6054), Form S-8 and S-3 (No. 33-26434), Form S-8 and S-3 (No. 33-30277), Form S-8 (No. 33-61682), Form S-8 (No. 33-61718), Form S-8 (No. 333-51494) and Form S-4 (No.333-86018). 23.3 Consent of independent auditors from Ernst & Young LLP with respect to the inclusion in this Annual Report on Form 10-K of the financial statements of Berkadia LLC and with respect to the incorporation by reference in the Company's Registration Statements on Form S-8 (No. 2-84303), Form S-8 and S-3 (No. 33-6054), Form S-8 and S-3 (No. 33-26434), Form S-8 and S-3 (No. 33-30277), Form S-8 (No. 33-61682), Form S-8 (No. 33-61718), Form S-8 (No. 333-51494) and Form S-4 (No. 333-86018). - ------------------------------------------ * Incorporated by reference 48 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. (d) Financial statement schedules. ----------------------------- (1) Berkadia LLC financial statements as of December 31, 2002 and 2001 and for the year ended December 31, 2002 and for the period from inception, February 26, 2001, to December 31, 2001. (2) Olympus Re Holdings, Ltd. combined financial statements as of December 31, 2002 and 2001 and for the year ended December 31, 2002 and for the period from date of incorporation, December 3, 2001 to December 31, 2001. 49 Report of Independent Accountants To the Board of Directors and Shareholders of Leucadia National Corporation In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1)(2) of this Form 10-K, present fairly, in all material respects, the financial position of Leucadia National Corporation and Subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(1)(2) of this Form 10-K, presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP New York, New York March 12, 2003 F-1 LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS December 31, 2002 and 2001 (Dollars in thousands, except par value)
2002 2001 ---- ---- ASSETS - ------ Investments: Available for sale (aggregate cost of $484,571 and $579,342) $ 569,861 $ 626,584 Trading securities (aggregate cost of $49,888 and $68,547) 48,036 63,850 Held to maturity (aggregate fair value of $766 and $1,665) 768 1,666 Other investments, including accrued interest income 6,206 14,949 ---------- ---------- Total investments 624,871 707,049 Cash and cash equivalents 418,600 373,222 Trade, notes and other receivables, net 407,422 596,229 Prepaids and other assets 187,046 227,709 Property, equipment and leasehold improvements, net 166,207 162,158 Investments in associated companies: WilTel Communications Group, Inc. 340,551 -- Other associated companies 397,081 358,761 Net assets of discontinued operations -- 43,959 ---------- ---------- Total $2,541,778 $2,469,087 ========== ========== LIABILITIES - ----------- Customer banking deposits $ 392,904 $ 476,495 Trade payables and expense accruals 77,394 74,988 Other liabilities 140,586 215,689 Income taxes payable 38,231 124,692 Deferred tax liability 16,556 17,051 Debt, including current maturities 233,073 252,279 ---------- ---------- Total liabilities 898,744 1,161,194 ---------- ---------- Commitments and contingencies Minority interest 10,309 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 - -------------------- Series A Non-Voting Convertible Preferred Stock 47,507 -- Common shares, par value $1 per share, authorized 150,000,000 shares; 58,268,572 and 55,318,257 shares issued and outstanding, after deducting 60,213,299 and 63,117,584 shares held in treasury 58,269 55,318 Additional paid-in capital 154,260 54,791 Accumulated other comprehensive income 56,025 14,662 Retained earnings 1,218,464 1,070,682 ---------- ---------- Total shareholders' equity 1,534,525 1,195,453 ---------- ---------- Total $2,541,778 $2,469,087 ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-2 LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended December 31, 2002, 2001 and 2000 (In thousands, except per share amounts)
2002 2001 2000 ---- ---- ---- REVENUES: - --------- Manufacturing $ 50,744 $ 53,667 $ 65,019 Finance 87,812 113,422 89,007 Investment and other income 140,315 178,622 214,418 Net securities gains (losses) (37,066) 28,450 124,964 --------- --------- --------- 241,805 374,161 493,408 --------- --------- --------- EXPENSES: - --------- Manufacturing cost of goods sold 33,963 36,803 40,650 Interest 33,547 47,763 48,109 Salaries 41,814 42,611 48,815 Selling, general and other expenses 174,006 173,902 154,531 --------- --------- --------- 283,330 301,079 292,105 --------- --------- --------- Income (loss) from continuing operations before income taxes, minority expense of trust preferred securities and equity in income (losses) of associated companies (41,525) 73,082 201,303 --------- --------- --------- Income tax (benefit) provision: Current (116,817) 30,362 39,898 Deferred (28,048) (41,703) 28,318 --------- --------- --------- (144,865) (11,341) 68,216 --------- --------- --------- Income from continuing operations before minority expense of trust preferred securities and equity in income (losses) of associated companies 103,340 84,423 133,087 Minority expense of trust preferred securities, net of taxes (5,521) (5,521) (5,521) Equity in income (losses) of associated companies, net of taxes 54,712 (15,974) 19,040 --------- --------- --------- Income from continuing operations 152,531 62,928 146,606 Income (loss) from discontinued operations, net of taxes 4,580 (39,742) (30,598) Gain (loss) on disposal of discontinued operations, net of taxes 4,512 (31,105) -- --------- --------- --------- Income (loss) before cumulative effect of a change in accounting principle 161,623 (7,919) 116,008 Cumulative effect of a change in accounting principle -- 411 -- --------- --------- --------- Net income (loss) $ 161,623 $ (7,508) $ 116,008 ========= ========= ========= Basic earnings (loss) per common share: Income from continuing operations $ 2.74 $ 1.13 $ 2.64 Income (loss) from discontinued operations .08 (.72) (.55) Gain (loss) on disposal of discontinued operations .08 (.56) -- Cumulative effect of a change in accounting principle -- .01 -- --------- --------- --------- Net income (loss) $ 2.90 $ (.14) $ 2.09 ========= ========= ========= Diluted earnings (loss) per common share: Income from continuing operations $ 2.72 $ 1.13 $ 2.64 Income (loss) from discontinued operations .08 (.72) (.55) Gain (loss) on disposal of discontinued operations .08 (.56) -- Cumulative effect of a change in accounting principle -- .01 -- --------- --------- --------- Net income (loss) $ 2.88 $ (.14) $ 2.09 ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. F-3 LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 2002, 2001 and 2000 (In thousands)
2002 2001 2000 ---- ---- ---- Net cash flows from operating activities: - ----------------------------------------- Net income (loss) $ 161,623 $ (7,508) $ 116,008 Adjustments to reconcile net income (loss) to net cash provided by (used for) operations: Cumulative effect of a change in accounting principle -- (411) -- (Benefit) provision for deferred income taxes (28,048) (35,291) 28,318 Depreciation and amortization of property, equipment and leasehold improvements 18,714 17,476 15,903 Other amortization (primarily related to investments) (2,517) (14,108) (2,838) Provision for doubtful accounts 36,248 43,263 30,320 Net securities (gains) losses 37,066 (28,450) (124,964) Equity in (income) losses of associated companies (54,712) 15,974 (19,040) (Gain) on disposal of real estate, property and equipment, and other assets (35,051) (48,407) (65,154) (Gain) loss on disposal of discontinued operations (4,512) 31,105 -- Investments classified as trading, net 48,990 (6,675) (3,978) Net change in: Trade and other receivables 10,681 574 (10,617) Prepaids and other assets (1,021) (3,055) (3,039) Trade payables and expense accruals 11,936 (34,940) (54,111) Other liabilities (4,243) (1,925) 12,824 Income taxes payable (137,327) (13,180) (8,908) Other 2,934 6,941 9,753 Net change in net assets of discontinued operations (5,384) 63,982 53,039 ------------- ----------- ---------- Net cash provided by (used for) operating activities 55,377 (14,635) (26,484) ------------- ----------- ---------- Net cash flows from investing activities: - ----------------------------------------- Acquisition of real estate, property, equipment and leasehold improvements (37,854) (51,920) (83,119) Proceeds from disposals of real estate, property and equipment, and other assets 108,146 187,629 221,909 Proceeds from disposal of discontinued operations, net of expenses 66,241 -- -- Reduction in cash related to sale of subsidiary, net of cash proceeds from sale (18,979) -- -- Advances on loan receivables (81,650) (262,388) (355,604) Principal collections on loan receivables 174,718 186,626 148,259 Advances on notes receivables (2,390) (9,593) (30,864) Collections on notes receivables 4,373 39,790 266,954 Investments in associated companies (375,307) (186,782) (108,600) Distributions from associated companies 43,807 123,871 19,784 Purchases of investments (other than short-term) (1,143,361) (1,014,015) (769,194) Proceeds from maturities of investments 657,487 696,340 68,688 Proceeds from sales of investments 548,249 201,840 898,842 ------------- ----------- ---------- Net cash (used for) provided by investing activities (56,520) (88,602) 277,055 ------------- ----------- ---------- (continued)
The accompanying notes are an integral part of these consolidated financial statements. F-4 LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS, continued For the years ended December 31, 2002, 2001 and 2000 (In thousands)
2002 2001 2000 ---- ---- ---- Net cash flows from financing activities: - ----------------------------------------- Net change in short-term borrowings $ -- $ -- $ (75,500) Net change in customer banking deposits (82,351) (45,928) 192,512 Issuance of long-term debt, net of issuance costs 6,145 71,496 105,850 Reduction of long-term debt (13,265) (10,555) (113,114) Issuance of convertible preferred shares 47,507 -- -- Issuance of common shares 102,535 517 -- Purchase of common shares for treasury (115) (45) (32,094) Dividends paid (13,841) (13,829) (13,824) ---------- ---------- --------- Net cash provided by financing activities 46,615 1,656 63,830 ---------- ---------- --------- Effect of foreign exchange rate changes on cash (94) (564) (51) ---------- ---------- --------- Net increase (decrease) in cash and cash equivalents 45,378 (102,145) 314,350 Cash and cash equivalents at January 1, 373,222 475,367 161,017 ---------- ---------- --------- Cash and cash equivalents at December 31, $ 418,600 $ 373,222 $ 475,367 ========== ========== ========= Supplemental disclosures of cash flow information: - -------------------------------------------------- Cash paid during the year for: Interest $ 34,681 $ 51,232 $ 44,213 Income tax payments, net of refunds $ 17,314 $ 11,885 $ 24,774
The accompanying notes are an integral part of these consolidated financial statements. F-5 LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY For the years ended December 31, 2002, 2001 and 2000 (In thousands, except par value and per share amounts)
Series A Non-Voting Common Accumulated Convertible Shares Additional Other Preferred $1 Par Paid-In Comprehensive Retained Stock Value Capital Income (Loss) Earnings Total ---------- -------- ---------- ------------- -------- ----- Balance, January 1, 2000 $ -- $56,802 $ 84,929 $(9,578) $ 989,835 $1,121,988 ---------- Comprehensive income: Net change in unrealized gain (loss) on investments, net of taxes of $9,078 16,386 16,386 Net change in unrealized foreign exchange gain (loss), net of taxes of $47 (4,223) (4,223) Net income 116,008 116,008 ---------- Comprehensive income 128,171 ---------- Purchase of stock for treasury (1,505) (30,589) (32,094) Dividends ($.25 per common share) (13,824) (13,824) ------- -------- -------- -------- ---------- ---------- Balance, December 31, 2000 -- 55,297 54,340 2,585 1,092,019 1,204,241 ---------- Comprehensive income: Net change in unrealized gain (loss) on investments, net of taxes of $9,537 17,850 17,850 Net change in unrealized foreign exchange gain (loss), net of taxes of $882 (5,366) (5,366) Net change in unrealized gain (loss) on derivative instruments (including the cumulative effect of a change in accounting principle of $1,371), net of taxes of $219 (407) (407) Net loss (7,508) (7,508) ---------- Comprehensive income 4,569 ---------- Exercise of options to purchase common shares 23 494 517 Purchase of stock for treasury (2) (43) (45) Dividends ($.25 per common share) (13,829) (13,829) ------- -------- -------- -------- ---------- ---------- Balance, December 31, 2001 -- 55,318 54,791 14,662 1,070,682 1,195,453 ---------- Comprehensive income: Net change in unrealized gain (loss) on investments, net of taxes of $14,215 26,331 26,331 Net change in unrealized foreign exchange gain (loss), net of taxes of $1,691 16,375 16,375 Net change in unrealized gain (loss) on derivative instruments, net of taxes of $724 (1,343) (1,343) Net income 161,623 161,623 ---------- Comprehensive income 202,986 ---------- Issuance of convertible preferred shares 47,507 47,507 Issuance of common shares 2,908 98,585 101,493 Exercise of options to purchase common shares 46 996 1,042 Purchase of stock for treasury (3) (112) (115) Dividends ($.25 per common share) (13,841) (13,841) ------- ------- ------- ------- ---------- ---------- Balance, December 31, 2002 $47,507 $58,269 $154,260 $56,025 $1,218,464 $1,534,525 ======= ======= ======== ======= ========== ==========
The accompanying notes are an integral part of these consolidated financial statements. F-6 LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements 1. Nature of Operations: --------------------- The Company is a diversified holding company engaged in a variety of businesses, including telecommunications, banking and lending, manufacturing, real estate activities, winery operations, and property and casualty reinsurance, principally in markets in the United States, and development of a copper mine in Spain. The Company's telecommunications operations are conducted through its 47.4% interest in WilTel Communications Group, Inc. ("WilTel"), a public company (traded on the Nasdaq National Market, Symbol: WTEL) that owns or leases and operates a nationwide inter-city fiber-optic network, extended locally and globally, to provide Internet, data, voice and video services. The Company's banking and lending operations principally consist of making instalment loans to niche markets primarily funded by customer banking deposits insured by the Federal Deposit Insurance Corporation ("FDIC"). Historically, the Company's principal lending activities have consisted of providing collateralized personal automobile loans to individuals with poor credit histories. As a result of increased loss experience and declining profitability in its auto lending program, the Company stopped originating new subprime automobile loans in September 2001. Due to current economic conditions, portfolio performance and the relatively small size of the Company's other consumer loan portfolios and target markets, in January 2003 the Company decided to stop 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. The Company's manufacturing operations manufacture and market proprietary lightweight plastic netting used for a variety of purposes including, among other things, construction, agriculture, packaging, carpet padding, filtration and consumer products. The Company's domestic real estate operations include a mixture of commercial properties, residential land development projects and other unimproved land, all in various stages of development and all available for sale. The Company's winery operations consist of two wineries, which produce and sell wines in the luxury segment of the premium table wine market. The Company's copper mine development operations consist of its 72.8% interest in MK Gold Company ("MK Gold"), a company that is traded on the NASD OTC Bulletin Board. During the second quarter of 2002, the Company sold its interest in Compagnie Fonciere FIDEI ("Fidei"), a French real estate company and, accordingly, has classified its foreign real estate operations as discontinued operations. Prior period financial statements have been reclassified to conform with this presentation. 2. Significant Accounting Policies: ------------------------------- (a) Critical Accounting Policies and Estimates: The preparation of financial ------------------------------------------ statements in conformity with generally accepted accounting principles ("GAAP") requires the Company to make estimates and assumptions that affect the reported amounts in the financial statements and disclosures of contingent assets and liabilities. On an on-going basis, the Company evaluates all of these estimates and assumptions. Actual results could differ from those estimates. F-7 2. Significant Accounting Policies, continued: ------------------------------- The allowance for loan losses is established through a provision for loan losses charged to expense. The allowance for loan losses is an amount that the Company believes will be adequate to absorb probable losses inherent in its portfolio based on the Company's evaluations of the collectibility of loans and prior loan loss experience. Factors considered by the Company include actual experience, current economic trends, aging of the loan portfolio and collateral value. During periods of economic weakness, delinquencies, defaults, repossessions and losses generally increase. These periods may also be accompanied by decreased demand and declining values of automobiles securing outstanding loans, which weakens collateral coverage and increases the amount of a loss in the event of default. In addition, incentives offered by the automobile industry on new cars affect the supply of used cars and the value the Company may realize upon sale of repossessed automobiles. The allowance for loan losses is based on numerous judgments and assumptions and actual loss experience may be different. 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 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. Since the Company does not expect that Berkadia will suffer losses resulting in the Company having to fund its guarantee obligation, no reserve has been recorded. As of December 31, 2002, the carrying amount of the Company's investment in the mining properties of MK Gold was approximately $59,300,000. The recoverability of this asset is entirely dependent upon the success of MK Gold's mining project at the Las Cruces copper deposit in the Pyrite Belt of Spain. Mining will be subject to obtaining required permits, obtaining both debt and equity financing for the project, engineering and construction. The market price of copper has been depressed over the past couple of years, reflecting generally weak global economic conditions. The amount of financing that can be obtained for the project and its related cost will be significantly affected by the assessment of potential lenders of the current and expected future market price of copper. In addition, the actual price of copper, the operating cost of the mine and the capital cost to bring the mine into production will affect the recoverability of this asset. Based on the current status of the project and MK Gold's estimate of future financing costs and future cash flows, the Company believes the asset is recoverable. (b) Consolidation Policy: The consolidated financial statements include the -------------------- accounts of the Company and all majority-owned entities except for those in which control does not rest with the Company due to the significant participating or controlling rights of other parties. All significant intercompany transactions and balances are eliminated in consolidation. Associated companies are investments in equity interests of entities that the Company does not control and that are accounted for on the equity method of accounting. Certain amounts for prior periods have been reclassified to be consistent with the 2002 presentation and for discontinued operations. (c) Statements of Cash Flows: The Company considers short-term investments, ------------------------ which have maturities of less than three months at the time of acquisition, to be cash equivalents. Cash and cash equivalents include short-term investments of $267,900,000 and $286,100,000 at December 31, 2002 and 2001, respectively. F-8 2. Significant Accounting Policies, continued: ------------------------------- (d) Investments: At acquisition, marketable debt and equity securities are ----------- designated as either i) held to maturity, which are carried at amortized cost, ii) trading, which are carried at estimated fair value with unrealized gains and loses reflected in results of operations, or iii) available for sale, which are carried at estimated fair value with unrealized gains and losses reflected as a separate component of shareholders' equity, net of taxes. Held to maturity investments are made with the intention of holding such securities to maturity, which the Company has the ability to do. Estimated fair values are principally based on quoted market prices. Investments with an impairment in value considered to be other than temporary are written down to estimated net realizable values. The writedowns are included in "Net securities gains (losses)" in the Consolidated Statements of Operations. The cost of securities sold is based on average cost. (e) Property, Equipment and Leasehold Improvements: Property, equipment and ---------------------------------------------- leasehold improvements are stated at cost, net of accumulated depreciation and amortization ($117,500,000 and $112,600,000 at December 31, 2002 and 2001, respectively). Depreciation and amortization are provided principally on the straight-line method over the estimated useful lives of the assets or, if less, the term of the underlying lease. (f) Revenue Recognition: Revenue from loans made by the banking and lending ------------------- operations is recognized over the term of the loan to provide a constant yield on the daily principal balance outstanding. Manufacturing revenues are recognized when title passes, which is generally upon shipment of goods. Revenue from the sale of real estate is recognized when title passes. (g) Income Taxes: The Company provides for income taxes using the liability ------------ method. The future benefit of certain tax loss carryforwards and future deductions is recorded as an asset. A valuation allowance is provided if deferred tax assets are not considered to be more likely than not to be realized. (h) Derivative Financial Instruments: On January 1, 2001, the Company adopted -------------------------------- Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended ("SFAS 133"). Under SFAS 133, the Company reflects its derivative financial instruments in its balance sheet at fair value. The Company has utilized derivative financial instruments to manage the impact of changes in interest rates on its customer banking deposits and certain debt obligations, hedge net investments in foreign subsidiaries and manage foreign currency risk on certain available for sale securities. Although the Company believes that these derivative financial instruments are practical economic hedges of the Company's risks, except for the hedge of the net investment in foreign subsidiaries, they do not meet the effectiveness criteria under SFAS 133, and therefore are not accounted for as hedges. In accordance with the transition provisions of SFAS 133, the Company recorded income from a cumulative effect of a change in accounting principle of $411,000, net of taxes, in results of operations for the year ended December 31, 2001 and recorded a loss of $1,371,000, net of taxes, as a cumulative effect of a change in accounting principle in accumulated other comprehensive income. The net pre-tax charge that the Company expects to reclassify during the next twelve months to investment and other income from the transition adjustment that was recorded in accumulated other comprehensive income is not material. Amounts recorded as charges to investment and other income as a result of accounting for its derivative financial instruments in accordance with SFAS 133 were $1,700,000 and $2,300,000 for the years ended December 31, 2002 and 2001, respectively. Net unrealized losses on derivative instruments were $1,800,000 and $400,000 at December 31, 2002 and 2001, respectively. F-9 2. Significant Accounting Policies, continued: ------------------------------- (i) Translation of Foreign Currency: Foreign currency denominated investments ------------------------------- and financial statements are translated into U.S. dollars at current exchange rates, except that revenues and expenses are translated at average exchange rates during each reporting period; resulting translation adjustments are reported as a component of shareholders' equity. Net foreign exchange gains were $2,500,000 for 2002, $2,100,000 for 2000 and not material for 2001. Net unrealized foreign exchange losses were $200,000 and $16,600,000 at December 31, 2002 and 2001, respectively. (j) Stock-Based Compensation: Statement of Financial Accounting Standards No. ------------------------ 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), establishes a fair value method for accounting for stock-based compensation plans, either through recognition in the statements of operations or disclosure. As permitted, the Company applies APB Opinion No. 25 and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized in the statements of operations for its stock-based compensation plans. Had compensation cost for the Company's stock option plans been recorded in the statements of operations consistent with the provisions of SFAS 123, the Company's net income (loss) would not have been materially different from that reported in 2002, 2001 and 2000. (k) Recently Issued Accounting Standards: 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. 3. Investments in Associated Companies: ----------------------------------- The Company has investments in several Associated Companies. The Company records its portion of the earnings of certain companies based on fiscal periods ended up to three months prior to the end of the Company's reporting period. The amounts reflected as equity in income (losses) of associated companies in the consolidated statements of operations are net of income tax provisions (benefits) of $36,700,000, $(8,600,000) and $10,300,000 for the years ended December 31, 2002, 2001 and 2000, respectively. F-10 3. Investments in Associated Companies, continued: ----------------------------------- The following table provides summarized data with respect to the Associated Companies accounted for on the equity method of accounting included in results of operations for the three years ended December 31, 2002, except for Berkadia and WilTel which are separately summarized below. (Amounts are in thousands.)
2002 2001 ---- ---- Assets $1,597,400 $1,317,200 Liabilities 584,500 429,400 ---------- ---------- Net assets $1,012,900 $ 887,800 ========== ========== The Company's portion of the reported net assets $ 387,600 $ 340,400 ========== ==========
2002 2001 2000 ---- ---- ---- Total revenues $ 479,200 $ 277,700 $ 233,500 Income from continuing operations before extraordinary items $ 133,400 $ 79,900 $ 42,900 Net income $ 136,600 $ 96,700 $ 42,900 The Company's equity in net income $ 39,200 $ 45,800 $ 29,300
The Company has not provided any guarantees, nor is it contingently liable for any of the liabilities reflected in the above table. All such liabilities are non-recourse to the Company. The Company's exposure to adverse events at the investee companies is limited to the book value of its aggregate net investment of $397,100,000. During 2000, the Company invested $100,000,000 in the equity of a limited liability company, Jefferies Partners Opportunity Fund II, LLC ("JPOF II"), that is a registered broker-dealer. JPOF II is managed and controlled by Jefferies & Company, Inc., a full service investment bank to middle market companies. JPOF II invests in high yield securities, special situation investments and distressed securities and provides trading services to its customers and clients. For the years ended December 31, 2002, 2001 and 2000, the Company recorded $15,200,000, $27,100,000 and $17,300,000, respectively, of pre-tax income from this investment under the equity method of accounting. These earnings were distributed by JPOF II as dividends shortly after the end of each year. In December 2001, the Company invested $127,500,000 for an approximate 25% common stock interest in Olympus Re Holdings, Ltd. ("Olympus"), a newly formed Bermuda reinsurance company primarily engaged in the property excess, marine and aviation reinsurance business. For the year ended December 31, 2002, the Company recorded $24,100,000 of pre-tax income from this investment under the equity method of accounting. In December 2001, the Company invested $50,000,000 in a limited partnership that invests primarily in securities and other obligations of highly leveraged, distressed and out of favor companies. For the year ended December 31, 2002, the Company recorded $4,500,000 of pre-tax losses from this investment under the equity method of accounting. 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 shares of HomeFed's common stock, which represents approximately 30.3% of HomeFed's outstanding common stock. At December 31, 2002, the deferred gain on this sale was $12,100,000 which will be recognized into income as CDS's principal asset, the real estate project known as San Elijo Hills, is developed and sold. The Company is accounting for its investment in HomeFed under the equity method of accounting. F-11 3. Investments in Associated Companies, continued: ----------------------------------- In November 2002, the Company sold its approximately 40% equity interest in certain thoroughbred racetrack businesses to a third party for net proceeds of $28,000,000. The sale resulted in a pre-tax gain of $14,300,000. As part of the 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. In August 2001, Berkadia LLC, an entity jointly owned by the Company and Berkshire Hathaway Inc. loaned $5,600,000,000 on a senior secured basis to FINOVA Capital Corporation (the "Berkadia Loan"), the principal operating subsidiary of The FINOVA Group Inc. ("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. The Berkadia Loan is collateralized by substantially all of the assets of FINOVA and its subsidiaries and is guaranteed by FINOVA and substantially all of the subsidiaries of FINOVA and FINOVA Capital. Berkadia financed the Berkadia Loan with bank financing that is guaranteed, 90% by Berkshire Hathaway and 10% by the Company (with the Company's guarantee being secondarily guaranteed by Berkshire Hathaway), 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. As of March 7, 2003, principal payments have reduced the amount outstanding under the Berkadia Loan and Berkadia's financing to $1,525,000,000. During 2001, Berkadia was paid a $60,000,000 commitment fee by FINOVA Capital upon execution of the commitment, and a $60,000,000 funding fee upon funding of the Berkadia Loan. The Company's share of these fees, $60,000,000 in the aggregate, was distributed to the Company shortly after the fees were received. In addition, FINOVA Capital has reimbursed Berkadia, Berkshire Hathaway and the Company for all fees and expenses incurred in connection with Berkadia's financing of its funding obligation under the commitment. In connection with the funding commitment, in February 2001, FINOVA entered into a ten-year management agreement with the Company, for which the Company receives an annual fee of $8,000,000. Under the agreement governing Berkadia, the Company and Berkshire Hathaway have agreed to equally share the commitment fee, funding fee and all management fees. All income related to the Berkadia Loan, after payment of financing costs, will be shared 90% to Berkshire Hathaway and 10% to the Company. For 2002 and the 2001 period, the Company recorded income of $6,600,000 and $3,900,000, respectively, representing 10% of the net interest spread on the Berkadia Loan. All of this income has been distributed to the Company. In August 2001, Berkadia transferred $5,540,000,000 in cash to FINOVA Capital, representing the $5,600,000,000 loan reduced by the funding fee of $60,000,000. As indicated above, in exchange for these funds, Berkadia received a $5,600,000,000 note from FINOVA Capital and the FNV Shares. Under generally accepted accounting principles, Berkadia was required to allocate the $5,540,000,000 cash transferred, reduced by the previously received $60,000,000 commitment fee, between its investment in the Berkadia Loan and the FNV Shares, based upon the relative fair values of the securities received. Further, the fair value of the FNV Shares was presumed to be equal to the trading price of the stock on the day Berkadia received the FNV Shares, with only relatively minor adjustments allowed for transfer restrictions and the inability of the traded market price to account for a large block transfer. The requirement to use the trading price as the basis for the fair value estimate resulted in an initial book value for the FNV Shares of $188,800,000, which was far in excess of the $17,600,000 aggregate book net worth of FINOVA on the effective date of the Plan, and was inconsistent with the Company's view that the FINOVA common stock has a very limited value. Based on this determination of fair value, Berkadia recorded an initial investment in the FNV Shares of $188,800,000 and in the Berkadia Loan of $5,291,200,000. F-12 3. Investments in Associated Companies, continued: ----------------------------------- The allocation of $188,800,000 to the investment in the common stock of FINOVA, plus the $120,000,000 of cash fees received, were recorded and reflected as a discount from the face amount of the Berkadia Loan. The discount is being amortized to income over the life of the Berkadia Loan under the effective interest method. Subsequent to acquisition, Berkadia accounts for its investment in the FINOVA common stock under the equity method of accounting. Berkadia's recognition of its share of FINOVA's losses was suspended once the carrying amount of Berkadia's equity interest in FINOVA was reduced to zero during 2001. 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. This non-cash loss recorded by Berkadia is being reversed by Berkadia's accretion of the non-cash portion of the discount on the Berkadia Loan discussed above. The Company accounts for its investment in Berkadia under the equity method of accounting because it does not control Berkadia. Although the Company has no cash investment in Berkadia, since it has guaranteed 10% of the third party financing provided to Berkadia, the Company records its share of any losses recorded by Berkadia, up to the amount of the Company's guarantee. The total amount of the Company's guarantee is $152,500,000 as of March 7, 2003. For the year ended December 31, 2002 and for the period from the effective date of the Plan to December 31, 2001, the Company's equity in the income (loss) of Berkadia consists of the following (in thousands):
2002 2001 ---- ---- Net interest spread on the Berkadia Loan - 10% of total $ 6,600 $ 3,900 Amortization of Berkadia Loan discount related to cash fees - 50% of total 22,900 7,800 Amortization of Berkadia Loan discount related to FINOVA stock - 50% of total 36,100 12,300 Share of FINOVA loss under equity method - 50% of total -- (94,400) ------- -------- Equity in income (loss) of associated companies - Berkadia $65,600 $(70,400) ======= ========
The loss recorded by the Company related to its share of Berkadia's equity method loss in FINOVA in 2001 is a non-cash loss that is being reversed over the term of the Berkadia Loan as Berkadia accretes the discount on the Berkadia Loan into income. The net carrying amount of the Company's investment in Berkadia was negative $72,100,000 and $129,000,000, as of December 31, 2002 and 2001, respectively, which is included in "Other liabilities" in the consolidated balance sheets. The negative carrying amounts are due to Berkadia's distribution of the commitment and funding fees and its recognition of its share of FINOVA's losses under the equity method of accounting, partially offset by the Company's share of Berkadia's income related to the Berkadia loan. As a result of the application of these accounting rules, the negative carrying amount of the Company's investment in Berkadia effectively represents an unamortized discount on the Berkadia Loan, which is being amortized to income over the term of the loan. F-13 3. Investments in Associated Companies, continued: ----------------------------------- The following table provides certain summarized data with respect to Berkadia at December 31, 2002 and 2001 and for the year ended December 31, 2002 and for the period from the effective date of the Plan through December 31, 2001. (Amounts are in thousands.)
2002 2001 ---- ---- Assets $2,030,700 $4,646,700 Liabilities 2,177,700 4,908,500 ---------- ---------- Net assets $ (147,000) $ (261,800) ========== ========== Total revenues $ 245,200 $ (52,100) Income (loss) from continuing operations before extraordinary items and cumulative effect of a change in accounting principle $ 180,900 $ (110,100) Net income (loss) $ 180,900 $ (110,100)
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 year ended December 31, 2002, the effect of this acceleration was to increase the Company's equity in income of Berkadia by approximately $23,300,000. Loan repayments from FINOVA are unlikely to continue at the pace experienced to date. In December 2002, the Company completed the acquisition of 44% of the outstanding equity of WilTel for an aggregate purchase price of $333,500,000, including expenses. The WilTel stock was acquired by the Company under the chapter 11 restructuring plan of Williams Communications Group, Inc. In October 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. Together, these transactions resulted in the Company acquiring 47.4% of the outstanding common stock of WilTel. For the period from acquisition through December 31, 2002, the Company recorded $13,400,000 of pre-tax losses from this investment under the equity method of accounting. The book value of the Company's investment in WilTel was $340,600,000 at December 31, 2002. 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. During the two years subsequent to the effective date of the chapter 11 restructuring plan, the Company may not sell an amount of WilTel shares greater than 15% of the total outstanding WilTel common shares. The following table provides certain summarized data with respect to WilTel at December 31, 2002 and for the period from acquisition through December 31, 2002. (Amounts are in thousands.)
Assets $2,062,300 Liabilities 1,372,600 ---------- Net assets $ 689,700 ========== Total revenues $ 191,700 Loss from continuing operations before extraordinary items $ (61,000) Net loss $ (61,000) The Company's equity in net loss $ (13,400)
4. Discontinued Operations: ----------------------- In December 2001, upon approval by the Company's Board of Directors to commence an orderly liquidation of the Empire Group, the Company classified as discontinued operations the property and casualty insurance operations of the Empire Group. The Empire Group had historically engaged in commercial and personal lines of property and casualty insurance, principally in the New York metropolitan area. The Empire Group only accepts new business that it is obligated to accept by contract or New York insurance law; it does not engage in F-14 4. Discontinued Operations, continued: ----------------------- any other business activities except for its claims runoff operations. The voluntary liquidation is expected to be substantially complete by 2005. In December 2001, the Company wrote down its investment in the Empire Group to its estimated net realizable value based on expected operating results and cash flows during the liquidation period, which indicated that the Company is unlikely to realize any value once the liquidation is complete. Accordingly, the Company recorded a $31,100,000 after-tax charge (net of taxes of $16,800,000) as a loss on disposal of discontinued operations to fully write-off its investment. While this estimated net realizable value represents management's best estimate, the amount the Company will ultimately realize could be, but is not expected to be, greater. The Company has no obligation to contribute additional capital to the Empire Group. 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 (net of income tax expense of $2,400,000) for the year ended December 31, 2002, and an increase to shareholders' equity of $12,100,000 as of December 31, 2002. The Euro denominated sale proceeds were not converted into U.S. 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 year ended December 31, 2002. At December 31, 2001, the components of net assets of discontinued operations are as follows (in thousands):
Investments $ 296,215 Cash and cash equivalents 129,163 Reinsurance and other receivables, net 106,573 Prepaids and other assets 43,831 Property, equipment and leasehold improvements, net 15,472 ---------- Total assets 591,254 ---------- Trade payables and expense accruals 20,044 Other liabilities 24,474 Policy reserves 345,989 Unearned premiums 16,124 Debt, including current maturities 90,997 ---------- Total liabilities 497,628 ---------- Minority interest 1,813 ---------- 91,813 Reserve for anticipated loss on liquidation (47,854) ---------- Net assets of discontinued operations $ 43,959 ==========
F-15 4. Discontinued Operations, continued: ----------------------- A summary of the results of discontinued operations is as follows for the three year period ended December 31, 2002 (in thousands):
2002 2001 2000 ---- ---- ---- Revenues: Insurance revenues and commissions $ -- $ 64,078 $108,494 Investment and other income 12,904 46,921 87,566 Net securities gains (losses) (364) 12,419 (1,739) -------- --------- -------- 12,540 123,418 194,321 -------- --------- -------- Expenses: Provision for insurance losses and policy benefits -- 125,984 150,066 Amortization of deferred policy acquisition costs -- 16,965 26,289 Interest 2,163 7,437 9,604 Salaries 505 6,744 10,167 Selling, general and other expenses 2,721 24,743 33,954 -------- --------- -------- 5,389 181,873 230,080 -------- --------- -------- Income (loss) before income taxes 7,151 (58,455) (35,759) Income tax provision (benefit) 2,571 (18,713) (5,161) -------- --------- -------- Income (loss) from discontinued operations, net of taxes $ 4,580 $ (39,742) $(30,598) ======== ========= ========
5. Investments: ----------- The amortized cost, gross unrealized gains and losses and estimated fair value of investments classified as held to maturity and as available for sale at December 31, 2002 and 2001 are as follows (in thousands):
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ----------- ---------- -------- Held to maturity: 2002 - ---- Bonds and notes: United States Government agencies and authorities $ 66 $ -- $ 2 $ 64 States, municipalities and political subdivisions 7 -- -- 7 Other fixed maturities 695 -- -- 695 ------- ----- ---- ------ $ 768 $ -- $ 2 $ 766 ======= ===== ==== ====== 2001 - ---- Bonds and notes - States, municipalities and political subdivisions $ 501 $ -- $ 1 $ 500 Other fixed maturities 1,165 -- -- 1,165 ------- ----- ---- ------ $ 1,666 $ -- $ 1 $1,665 ======= ===== ==== ======
F-16 5. Investments, continued: -----------
Gross Gross Estimated Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------- ---------- --------- ---------- Available for sale: 2002 - ---- Bonds and notes: United States Government agencies and authorities $195,285 $ 837 $ 206 $195,916 States, municipalities and political subdivisions 8,530 21 388 8,163 Foreign governments 4,492 248 -- 4,740 All other corporates 146,175 23,618 7,336 162,457 Other fixed maturities 14,129 -- -- 14,129 -------- -------- ------- -------- Total fixed maturities 368,611 24,724 7,930 385,405 -------- -------- ------- -------- Equity securities: Preferred stocks 4,103 304 -- 4,407 Common stocks: Banks, trusts and insurance companies 93,373 60,745 10,192 143,926 Industrial, miscellaneous and all other 18,484 18,878 1,239 36,123 -------- -------- ------- -------- Total equity securities 115,960 79,927 11,431 184,456 -------- -------- ------- -------- $484,571 $104,651 $19,361 $569,861 ======== ======== ======= ======== 2001 - ---- Bonds and notes: United States Government agencies and authorities $285,272 $ 1,210 $ 24 $286,458 States, municipalities and political subdivisions 11,862 13 48 11,827 Foreign governments 4,475 238 -- 4,713 Public utilities 660 2 -- 662 All other corporates 118,281 13,073 21,266 110,088 Other fixed maturities 25,171 -- -- 25,171 -------- -------- ------- -------- Total fixed maturities 445,721 14,536 21,338 438,919 -------- -------- ------- -------- Equity securities: Preferred stocks 4,632 -- -- 4,632 Common stocks: Banks, trusts and insurance companies 102,468 55,500 7,570 150,398 Industrial, miscellaneous and all other 26,521 11,249 5,135 32,635 -------- -------- ------- -------- Total equity securities 133,621 66,749 12,705 187,665 -------- -------- ------- -------- $579,342 $ 81,285 $34,043 $626,584 ======== ======== ======= ========
In May 2001, the Company invested $75,000,000 in a new issue of restricted convertible preference shares of White Mountains Insurance Group, Ltd. ("WMIG"). In August 2001, upon approval by WMIG's shareholders, these securities were converted into 375,000 common shares which represent approximately 4.5% of WMIG. WMIG is a publicly traded, Bermuda domiciled financial services holding company, principally engaged through its subsidiaries and affiliates in property and casualty insurance and reinsurance. At December 31, 2002 and 2001, the Company's investment in WMIG, which is reflected in investments available for sale, had a market value of $121,100,000 and $130,500,000, respectively. F-17 5. Investments, continued: ----------- At December 31, 2002, investments also included a publicly traded common stock equity interest of 11.1% in Carmike Cinemas, Inc. Net unrealized gains on investments were $58,000,000, $31,700,000 and $13,800,000 at December 31, 2002, 2001 and 2000, respectively. Reclassification adjustments included in comprehensive income for the three year period ended December 31, 2002 are as follows (in thousands):
2002 2001 2000 ---- ---- ---- Unrealized holding gains arising during the period, net of tax provision of $12,558, $12,665 and $8,735 $ 23,253 $ 23,653 $ 15,748 Less: reclassification adjustment for (gains) losses included in net income, net of tax provision (benefit) of $(1,657), $3,128 and $(343) 3,078 (5,803) 638 --------- --------- -------- Net change in unrealized gain on investments, net of tax provision of $14,215, $9,537 and $9,078 $ 26,331 $ 17,850 $ 16,386 ========= ========= ========
The amortized cost and estimated fair value of investments classified as held to maturity and as available for sale at December 31, 2002, by contractual maturity are shown below. Expected maturities are likely to differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Held to Maturity Available for Sale ---------------- ------------------ Estimated Estimated Amortized Fair Amortized Fair Cost Value Cost Value --------- -------- --------- --------- (In thousands) Due in one year or less $ 695 $ 695 $134,728 $134,246 Due after one year through five years 66 64 91,349 101,537 Due after five years through ten years 7 7 42,876 47,272 Due after ten years -- -- 21,915 24,670 -------- -------- -------- -------- 768 766 290,868 307,725 Mortgage-backed securities -- -- 77,743 77,680 -------- -------- -------- -------- $ 768 $ 766 $368,611 $385,405 ======== ======== ======== ========
At December 31, 2002 and 2001, securities with book values aggregating $1,400,000 and $1,500,000, respectively, were on deposit with various regulatory authorities. Additionally, at December 31, 2002 and 2001, securities with book values of $165,300,000 and $163,500,000, respectively, collateralized a letter of credit issued in connection with the sale of the Colonial Penn Insurance Company and securities with a book value of $4,800,000 at December 31, 2002 collateralized certain swap agreements. F-18 5. Investments, continued: ----------- Certain information with respect to trading securities at December 31, 2002 and 2001 is as follows (in thousands):
Amortized Estimated Carrying Cost Fair Value Value --------- ---------- -------- 2002 - ---- Fixed maturities - corporate bonds and notes $ 45,225 $ 44,204 $ 44,204 Equity securities: Preferred stocks 2,382 2,076 2,076 Common stocks - industrial, miscellaneous and all other 259 344 344 Other investments 2,022 1,412 1,412 -------- -------- --------- Total trading securities $ 49,888 $ 48,036 $ 48,036 ======== ======== ========= 2001 - ---- Fixed maturities - corporate bonds and notes $ 10,781 $ 9,298 $ 9,298 Equity securities: Preferred stocks 17,043 14,986 14,986 Common stocks - industrial, miscellaneous and all other 832 359 359 Other investments 39,891 39,207 39,207 -------- -------- --------- Total trading securities $ 68,547 $ 63,850 $ 63,850 ======== ======== =========
6. Trade, Notes and Other Receivables, Net: --------------------------------------- A summary of trade, notes and other receivables, net at December 31, 2002 and 2001 is as follows (in thousands):
2002 2001 ---- ---- Instalment loan receivables, net of unearned finance charges of $1,614 and $3,748 (a) $ 373,604 $ 521,242 Receivables related to securities 4,430 30,835 Receivables relating to real estate activities 32,720 35,431 Other 29,399 45,039 --------- --------- 440,153 632,547 Allowance for doubtful accounts (32,731) (36,318) --------- --------- $ 407,422 $ 596,229 ========= =========
(a) Contractual maturities of instalment loan receivables at December 31, 2002 were as follows (in thousands): 2003 - $80,200; 2004 - $75,900; 2005 - $55,800; 2006 - $25,400; and 2007 and thereafter - $136,300. Experience shows that a substantial portion of such notes will be repaid or renewed prior to contractual maturity. Accordingly, the foregoing is not to be regarded as a forecast of future cash collections. 7. Prepaids and Other Assets: -------------------------- At December 31, 2002 and 2001, prepaids and other assets included real estate assets, net, of $85,200,000 and $145,800,000, respectively. Prepaids and other assets at December 31, 2002 and 2001 also included $59,300,000 and $51,100,000, respectively, of mining properties, net, related to MK Gold. F-19 8. Trade Payables, Expense Accruals and Other Liabilities: ------------------------------------------------------- A summary of trade payables and expense accruals and other liabilities at December 31, 2002 and 2001 is as follows (in thousands):
2002 2001 ---- ---- Trade Payables and Expense Accruals: Payables related to securities $ 26,379 $ 20,548 Trade payables 9,043 14,697 Accrued compensation, severance and other employee benefits 21,684 16,621 Accrued interest payable 3,652 3,620 Other 16,636 19,502 --------- --------- $ 77,394 $ 74,988 ========= ========= Other Liabilities: Investment in Berkadia $ 72,106 $ 129,043 Postretirement and postemployment benefits 9,228 9,857 Liabilities related to real estate activities 18,948 36,441 Other 40,304 40,348 --------- --------- $ 140,586 $ 215,689 ========= =========
9. Indebtedness: ------------ The principal amount, stated interest rate and maturity of debt outstanding at December 31, 2002 and 2001 are as follows (dollars in thousands):
2002 2001 ---- ---- Senior Notes: Bank credit facility $ -- $ -- 7 3/4% Senior Notes due 2013, less debt discount of $531 and $581 99,469 99,419 Industrial Revenue Bonds (with variable interest) 9,815 9,815 Aircraft financing 49,789 51,902 Other due 2003 through 2016 with a weighted average interest rate of 7.97% 33,265 50,419 --------- --------- 192,338 211,555 --------- --------- Subordinated Notes: 8 1/4% Senior Subordinated Notes due 2005 19,101 19,101 7 7/8% Senior Subordinated Notes due 2006, less debt discount of $42 and $53 21,634 21,623 --------- --------- 40,735 40,724 --------- --------- $ 233,073 $ 252,279 ========= =========
At December 31, 2002, the Company had an unsecured bank credit facility of $152,500,000. In March 2003, the Company entered into a new $110,000,000 unsecured bank credit facility which bears interest based on the Eurocurrency Rate or the prime rate and matures in 2006. At December 31, 2002, no amounts were outstanding under this bank credit facility. F-20 9. Indebtedness, continued: ------------ During 2001, the Company borrowed $53,100,000 secured by its corporate aircraft. This debt bears interest based on a floating rate, requires monthly payments of principal and interest and matures in ten years. The interest rate at December 31, 2002 was 2.6%. The Company has entered into an interest rate swap agreement on this financing, which fixed the interest rate at approximately 5.7%. The Company would have (paid) received $(4,300,000) and $1,100,000 at December 31, 2002 and 2001, respectively, if the swap were terminated. Changes in interest rates in the future will change the amounts to be received under the agreement, as well as interest to be paid under the related variable debt obligation. The Company has financed the renovation of its Hawaiian hotel and has obtained loan commitments totaling $25,000,000. At December 31, 2002 and 2001, $24,900,000 and $18,900,000, respectively, was outstanding under this non-recourse borrowing. This borrowing bears interest at a rate of 8.05% through September 1, 2005, at which time the rate is adjusted based on the three year treasury index to a new fixed rate through maturity. The borrowing matures in six years and is collateralized by the hotel. The Company's debt instruments require maintenance of minimum Tangible Net Worth, limit distributions to shareholders and limit Indebtedness, as defined in the agreements. In addition, the debt instruments contain limitations on investments, liens, contingent obligations and certain other matters. As of December 31, 2002, cash dividends of approximately $534,500,000 would be eligible to be paid under the most restrictive covenants. Property, equipment and leasehold improvements of the manufacturing division with a net book value of $7,100,000 are pledged as collateral for the Industrial Revenue Bonds; and $99,100,000 of other assets (primarily property) are pledged for other indebtedness aggregating $83,100,000. Interest rate agreements are used to manage the potential impact of changes in interest rates on customer banking deposits. Under interest rate swap agreements, the Company has agreed with other parties to pay fixed rate interest amounts and receive variable rate interest amounts calculated by reference to an agreed notional amount. The variable interest rate portion of the swaps is a specified LIBOR interest rate. These interest rate swaps expire in 2003 and require fixed rate payments of 6.2%. The Company would have paid $3,100,000 and $7,300,000 at December 31, 2002 and 2001, respectively, on retirement of these agreements. The LIBOR rate at December 31, 2002 was 1.4%. Changes in LIBOR interest rates in the future will change the amounts to be received under the agreements, as well as interest to be paid under the related variable debt obligations. Counterparties to interest rate and currency swap agreements are major financial institutions, that management believes are able to fulfill their obligations. Management believes any losses due to default by the counterparties are likely to be immaterial. The aggregate annual mandatory redemptions of debt during the five year period ending December 31, 2007 are as follows (in thousands): 2003 - $3,600; 2004 - $3,700; 2005 - $23,400; 2006 - $25,700; and 2007 - $14,200. At December 31, 2002, customer banking deposits include $138,200,000 aggregate amount of time deposits in denominations of $100,000 or more. The weighted average interest rate on short-term borrowings (primarily customer banking deposits) was 3.5% and 4.8% at December 31, 2002 and 2001, respectively. F-21 10. Preferred Securities of Subsidiary Trust: ---------------------------------------- In January 1997, the Company sold $150,000,000 aggregate liquidation amount of 8.65% trust issued preferred securities of its wholly-owned subsidiary, Leucadia Capital Trust I (the "Trust"). These Company-obligated mandatorily redeemable preferred securities have an effective maturity date of January 15, 2027 and represent undivided beneficial interests in the Trust's assets, which consist solely of $154,600,000 principal amount of 8.65% Junior Subordinated Deferrable Interest Debentures due 2027 of the Company. Considered together, the "back-up undertakings" of the Company related to the Trust's preferred securities constitute a full and unconditional guarantee by the Company of the Trust's obligations under the preferred securities. During 1998, a subsidiary of the Company repurchased $51,800,000 aggregate liquidation amount of the 8.65% trust issued preferred securities for $42,200,000, plus accrued interest. The difference between the purchase price and the book value was credited directly to shareholders' equity, net of taxes. 11. Common Shares, Stock Options and Preferred Shares: ------------------------------------------------- The Board of Directors from time to time has authorized acquisitions of the Company's Common Shares. In December 1999, the Company's Board of Directors increased to 6,000,000 the maximum number of shares that the Company is authorized to purchase. During the three year period ended December 31, 2002, the Company acquired 1,509,635 Common Shares at an average price of $21.37 per Common Share. As a result, as of December 31, 2002, the Company is authorized to repurchase 4,490,365 Common Shares. In December 2002, the Company completed a private placement of approximately $150,000,000 of equity securities, based on a common share price of $35.25, to mutual fund clients of Franklin Mutual Advisers, LLC, including the funds comprising the Franklin Mutual Series Funds. The Company issued 2,907,599 of the Company's Common Shares and newly authorized Series A Non-Voting Convertible Preferred Stock, that were converted into 1,347,720 Common Shares in March 2003. The securities sold in the private placement represent 7.1% of the Company's outstanding Common Shares at March 25, 2003. The Company has a fixed stock option plan which provides for grants of options or rights to non-employee directors and certain employees up to a maximum grant of 300,000 shares to any individual in a given taxable year. The maximum number of Common Shares which may be acquired through the exercise of options or rights under this plan cannot exceed, in the aggregate, 1,200,000. The plan provides for the issuance of stock options and stock appreciation rights at not less than the fair market value of the underlying stock at the date of grant. Options generally become exercisable in five equal annual instalments starting one year from date of grant. No stock appreciation rights have been granted. During the second quarter of 2000, pursuant to shareholder approval, warrants to purchase 400,000 Common Shares were issued to each of the Company's Chairman and President. The warrants are exercisable through May 15, 2005 at an exercise price of $23.95 per Common Share (105% of the closing price of a Common Share on the date of grant). F-22 11. Common Shares, Stock Options and Preferred Shares, continued: ------------------------------------------------- A summary of activity with respect to the Company's stock options for the three years ended December 31, 2002 is as follows:
Common Weighted Available Shares Average Options For Future Subject Exercise Exercisable Option to Option Prices at Year-End Grants --------- --------- ----------- ---------- Balance at January 1, 2000 -- $ -- -- 1,200,000 ========= ========= Granted 409,250 $ 22.64 Cancelled (17,500) $ 22.63 --------- Balance at December 31, 2000 391,750 $ 22.64 10,000 808,250 ========= ========= Granted 4,000 $ 33.14 Exercised (22,850) $ 22.63 Cancelled (46,500) $ 22.63 --------- Balance at December 31, 2001 326,400 $ 22.77 58,663 850,750 ========= ========= Granted 312,500 $ 30.80 Exercised (46,030) $ 22.63 Cancelled (39,800) $ 24.15 --------- Balance at December 31, 2002 553,070 $ 27.22 81,545 578,050 ========= ========= =========
The weighted-average fair value of the options granted was $7.91 per share for 2002, $9.46 per share for 2001 and $6.25 per share for 2000 as estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: (1) expected volatility of 30.3% for 2002, 29.7% for 2001 and 25.4% for 2000; (2) risk-free interest rates of 3.5% for 2002, 4.9% for 2001 and 6.8% for 2000; (3) expected lives of 3.7 years for 2002, 4.0 years for 2001 and 3.7 years for 2000; and (4) dividend yields of .8% for 2002 and 2001, and 1.1% for 2000. The following table summarizes information about fixed stock options outstanding at December 31, 2002:
Options Outstanding Options Exercisable ---------------------------------------------------- -------------------------- Common Weighted Weighted Common Weighted Shares Average Average Shares Average Range of Subject Remaining Exercise Subject Exercise Exercise Prices to Option Contractual Life Price to Option Price - --------------- --------- ---------------- ---------- --------- --------- $22.63 - $22.81 244,070 3.3 years $22.64 77,545 $22.66 $30.74 301,000 5.5 years $30.74 3,000 $30.74 $33.14 4,000 3.4 years $33.14 1,000 $33.14 $35.23 4,000 4.4 years $35.23 -- $ --
At December 31, 2002 and 2001, 578,050 and 850,750, respectively, of the Company's Common Shares were reserved for stock options and 800,000 of the Company's Common Shares were reserved for warrants. F-23 11. Common Shares, Stock Options and Preferred Shares, continued: ------------------------------------------------- At December 31, 2002 and 2001, 5,999,990 and 6,000,000, respectively, of preferred shares (redeemable and non-redeemable), par value $1 per share, were authorized and not issued. 12. Net Securities Gains (Losses): ----------------------------- The following summarizes net securities gains (losses) for each of the three years in the period ended December 31, 2002 (in thousands):
2002 2001 2000 ---- ---- ---- Net realized gains (losses) on securities $ (1,126) $ 28,138 $ 134,552 Writedown of investments (37,053) (a) (1,907) -- Net unrealized gains (losses) on trading securities 1,113 2,219 (9,588) --------- -------- -------- $ (37,066) $ 28,450 $124,964 ========= ======== ========
(a) Consists of a provision to write down investments in certain available for sale securities and an equity investment in a non-public fund. During 2000, the Company sold its entire equity interest in Fidelity National Financial, Inc. ("FNF") for proceeds of $179,900,000 and recognized a pre-tax gain of $90,900,000. Additionally, during 2000, the Company sold its 10% equity interest in Jordan Telecommunication Products, Inc. ("JTP") for $27,300,000 and recorded a pre-tax gain of $24,800,000. Proceeds from sales of investments classified as available for sale were $649,000,000, $186,000,000 and $883,000,000 during 2002, 2001 and 2000, respectively. Gross gains of $20,500,000, $15,100,000 and $123,700,000 and gross losses of $52,600,000, $4,800,000 and $11,300,000 were realized on these sales during 2002, 2001 and 2000, respectively. 13. Other Results of Operations Information: --------------------------------------- Investment and other income for each of the three years in the period ended December 31, 2002 consists of the following (in thousands):
2002 2001 2000 ---- ---- ---- Interest on short-term investments $ 7,647 $ 14,187 $ 13,201 Interest on fixed maturities 17,604 28,075 19,184 Interest on notes receivable 5,903 3,005 16,462 Other investment income 8,300 14,817 19,481 Gains on sale and foreclosure of real estate and other assets, net of costs 39,320 48,559 68,401 Rental income 7,635 14,891 12,685 MK Gold product and service income 4,841 7,299 17,402 Winery revenues 16,433 13,736 15,337 Prepayment penalty on promissory notes -- -- 7,500 Other 32,632 34,053 24,765 -------- -------- -------- $140,315 $178,622 $214,418 ======== ======== ========
F-24 13. Other Results of Operations Information, continued: --------------------------------------- Taxes, other than income or payroll, amounted to $3,900,000 for the year ended December 31, 2002, $5,800,000 for the year ended December 31, 2001 and $2,600,000 for the year ended December 31, 2000. Advertising costs amounted to $1,400,000, $2,500,000 and $3,000,000 for the years ended December 31, 2002, 2001 and 2000, respectively. 14. Income Taxes: ------------- The principal components of the deferred tax liability at December 31, 2002 and 2001 are as follows (in thousands):
2002 2001 ---- ---- Deferred Tax Asset: Insurance reserves and unearned premiums $ 10,839 $ 16,731 Securities valuation reserves 45,714 48,490 Investment in WilTel 4,681 -- Other accrued liabilities 38,962 45,801 ---------- ---------- 100,196 111,022 Valuation allowance (54,232) (49,103) ---------- ---------- 45,964 61,919 ---------- ---------- Deferred Tax Liability: Unrealized gains on investments (29,701) (17,585) Depreciation (15,864) (7,209) Intangible drilling costs (5,627) (5,615) Other, net (11,328) (48,561) ---------- ---------- (62,520) (78,970) ---------- ---------- Net deferred tax liability $ (16,556) $ (17,051) ========== ==========
The valuation allowance principally relates to uncertainty as to the realization of unrealized capital losses. The provision (benefit) for income taxes for each of the three years in the period ended December 31, 2002 was as follows (in thousands):
2002 2001 2000 ---- ---- ---- State income taxes (currently payable) $ 750 $ 500 $ 1,113 Federal income taxes: Current (117,617) 29,812 38,747 Deferred (28,048) (41,703) 28,318 Foreign income taxes (currently payable) 50 50 38 --------- --------- --------- $(144,865) $ (11,341) $ 68,216 ========= ========= =========
F-25 14. Income Taxes, continued: ------------ The table below reconciles the expected statutory federal income tax to the actual income tax provision (benefit) (in thousands):
2002 2001 2000 ---- ---- ---- Expected federal income tax $ (14,534) $ 25,579 $ 70,456 State income taxes, net of federal income tax benefit 488 325 723 Resolution of tax contingency (119,778) -- -- Recognition of additional tax benefits (9,360) (36,234) (1,597) Other (1,681) (1,011) (1,366) -------- -------- -------- Actual income tax provision (benefit) $(144,865) $(11,341) $ 68,216 ========= ======== ========
Reflected above as recognition of additional tax benefits and resolution of tax contingency are reductions to the Company's income tax provision for the favorable resolution of certain federal income tax contingencies. The Internal Revenue Service has completed its audit of the Company's consolidated federal income tax returns for the years 1996 through 1999, without any material payment required from the Company. The statue of limitations with respect to the years 1996, 1997 and 1998 expired on December 31, 2002, and the Company made the adjustments reflected above. Under certain circumstances, the value of U.S. tax loss carryforwards and other tax benefits could be substantially reduced if certain changes in ownership were to occur. In order to reduce this possibility, the Company's certificate of incorporation includes restrictions which prohibit transfers of the Company's Common Stock under certain circumstances. In connection with the sale of certain of the Company's operations in recent years, the Company has agreed to indemnify the purchasers for certain tax matters. The Company does not believe that such indemnification obligations will result in any additional material liability to the Company. 15. Pension Plan and Postretirement Benefits: ---------------------------------------- The Company has defined contribution pension plans covering certain employees. Contributions and costs are a percent of each covered employee's salary. Amounts charged to expense related to such plans were $1,600,000, $1,800,000 and $1,600,000 for the years ended December 31, 2002, 2001 and 2000, respectively. Prior to 1999, the Company also maintained defined benefit pension plans covering employees of certain units who also met age and service requirements. Effective December 31, 1998, the Company froze its defined benefit F-26 15. Pension Plan and Postretirement Benefits, continued: ----------------------------------------- pension plans. A summary of activity with respect to the Company's defined benefit pension plans for 2002 and 2001 is as follows (in thousands):
2002 2001 ---- ---- Projected Benefit Obligation: Projected benefit obligation at January 1, $ 52,705 $ 52,815 Interest cost (a) 3,548 3,726 Actuarial (gain) loss 2,672 1,895 Benefits paid (6,443) (5,731) -------- -------- Projected benefit obligation at December 31, $ 52,482 $ 52,705 ======== ======== Change in Plan Assets: Fair value of plan assets at January 1, $ 48,760 $ 49,011 Actual return on plan assets 2,976 3,614 Employer contributions 728 1,987 Benefits paid (6,443) (5,731) Administrative expenses (116) (121) -------- -------- Fair value of plan assets at December 31, $ 45,905 $ 48,760 ======== ======== Funded Status $ (6,577) $ (3,945) Unrecognized prior service cost 56 58 Unrecognized net loss from experience differences and assumption changes 9,813 6,824 -------- -------- Accrued pension asset $ 3,292 $ 2,937 ======== ========
(a) Includes charges to expense of $1,200,000 and $1,300,000 for 2002 and 2001, respectively, relating to discontinued operations obligations. Pension expense related to the defined benefit pension plans charged to operations included the following components (in thousands):
2002 2001 2000 ---- ---- ---- Interest cost $ 2,361 $ 2,459 $2,517 Expected return on plan assets (1,947) (2,153) (2,218) Actuarial loss 76 -- -- Amortization of prior service cost 3 3 3 ------- ------- ------ Net pension expense $ 493 $ 309 $ 302 ======= ======= ======
F-27 15. Pension Plan and Postretirement Benefits, continued: ---------------------------------------- The projected benefit obligation at December 31, 2002 and 2001 was determined using an assumed discount rate of 6.5% and 7.0%, respectively, and the assumed long-term rate of return on plan assets was 6.5% and 7.5% at December 31, 2002 and 2001, respectively. Several subsidiaries provide certain health care and other benefits to certain retired employees under plans which are currently unfunded. The Company pays the cost of postretirement benefits as they are incurred. Amounts charged to expense were not material in each of the three years ended December 31, 2002. A summary of activity with respect to the Company's postretirement plans for 2002 and 2001 is as follows (in thousands):
2002 2001 ---- ---- Accumulated postretirement benefit obligation at January 1, $ 5,536 $ 5,566 Interest cost 345 389 Contributions by plan participants 180 175 Actuarial loss 176 172 Benefits paid (796) (766) Plan amendments (191) -- ------- ------- Accumulated postretirement benefit obligation at December 31, 5,250 5,536 Unrecognized prior service cost 316 197 Unrecognized net actuarial gain 1,923 2,276 ------- ------- Accrued postretirement benefit obligation $ 7,489 $ 8,009 ======= =======
The discount rate used in determining the accumulated postretirement benefit obligation was 6.5% and 7.0% at December 31, 2002 and 2001, respectively. The assumed health care cost trend rates used in measuring the accumulated postretirement benefit obligation were between 5.0% and 9.0% for 2002 and 5.0% and 9.5% for 2001, declining to an ultimate rate of between 5.0% and 6.0% by 2010. If the health care cost trend rates were increased or decreased by 1%, the accumulated postretirement obligation as of December 31, 2002 would have increased or decreased by $400,000 and $300,000, respectively. The effect of these changes on the aggregate of service and interest cost for 2002 would be immaterial. 16. Commitments: ----------- The Company and its subsidiaries rent office space and office equipment under non-cancelable operating leases with terms generally varying from one to twenty years. Rental expense (net of sublease rental income) charged to operations was $5,200,000 in 2002, $4,700,000 in 2001 and $6,400,000 in 2000. Aggregate minimum annual rentals (exclusive of real estate taxes, maintenance and certain other charges) relating to facilities under lease in effect at December 31, 2002 are as follows (in thousands): 2003 - $6,600; 2004 - $6,000; 2005 - $5,600; 2006 - $5,400; 2007 - $5,300; and thereafter - $65,200. Future minimum sublease rental income relating to facilities under lease in effect at December 31, 2002 are as follows (in thousands): 2003 - $1,600; 2004 - $1,900; 2005 - $1,900; 2006 - $1,900; 2007 - $1,900; and thereafter - $1,400. F-28 16. Commitments, continued: ----------- In connection with the sale of certain subsidiaries and certain non-recourse financings, the Company has made or guaranteed the accuracy of certain representations. No material loss is expected in connection with such matters. In connection with the 1997 sale of the property and casualty insurance business of the Colonial Penn Insurance Company, the Company provided the purchaser with a $100,000,000 non-cancelable letter of credit to collateralize certain indemnification obligations. This letter of credit, which expires in 2003, is collateralized by certain deposits of the Company aggregating $165,300,000, consisting of investments of $110,100,000 and cash and cash equivalents of $55,200,000. Prior to the sale of CDS, the Company had agreed to continue 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. The bonds provide funds in the event CDS is unable or unwilling to complete certain infrastructure improvement in the San Elijo Hills project. 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, $30,000,000 was outstanding under these bonds, $25,400,000 of which expires in 2003 and the remainder expires in 2004. At December 31, 2002, the Company also had an $18,000,000 indemnification guarantee in connection with the financing of a real estate property. See Note 3 for information concerning the Company's guarantee of Berkadia's financing. The banking and lending subsidiaries are limited by regulatory requirements and agreements in the amount of dividends and other transfers of funds that are available to the Company. Principally as a result of such restrictions, the net assets of subsidiaries which are subject to limitations on transfer of funds to the Company were approximately $77,400,000 at December 31, 2002. 17. Litigation: ---------- The Company is subject to various litigation which arises in the course of its business. Based on discussions with counsel, management is of the opinion that such litigation is not likely to have any material adverse effect on the consolidated financial position of the Company, its consolidated results of operations or liquidity. 18. Earnings (Loss) Per Common Share: --------------------------------- For each of the three years in the period ended December 31, 2002, there were no differences in the numerators for the basic and diluted per share computations for income from continuing operations. These numerators were $152,500,000, $62,900,000 and $146,600,000 for 2002, 2001 and 2000, respectively. The denominators for basic per share computations were 55,667,000, 55,309,000 and 55,529,000 for 2002, 2001 and 2000, respectively. There were no differences for the denominators for diluted per share computations except for the dilutive effect of 349,000, 295,000 and 69,000 options and warrants for 2002, 2001 and 2000, respectively. Due to the nature of their rights and their nominal liquidation value, the Series A Non-Voting Convertible Preferred shares are treated as common shares and are included in the denominator for basic and diluted per share computations for 2002. F-29 19. Fair Value of Financial Instruments: ------------------------------------ The following table presents fair value information about certain financial instruments, whether or not recognized on the balance sheet. Fair values are determined as described below. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The fair value amounts presented do not purport to represent and should not be considered representative of the underlying "market" or franchise value of the Company. The methods and assumptions used to estimate the fair values of each class of the financial instruments described below are as follows: (a) Investments: The fair values of marketable equity securities, fixed maturity securities and investments held for trading purposes (which include securities sold not owned) are substantially based on quoted market prices, as disclosed in Note 5. (b) Cash and cash equivalents: For cash equivalents, the carrying amount approximates fair value. (c) Notes receivables: The fair values of variable rate notes receivable are estimated to be the carrying amount. (d) Loan receivables of banking and lending subsidiaries: The fair value of loan receivables of the banking and lending subsidiaries is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings for the same remaining maturities. (e) Investments in associated companies for which a quoted market price is available: The fair values are based upon quoted market prices. (f) Customer banking deposits: The fair value of customer banking deposits is estimated using rates currently offered for deposits of similar remaining maturities. (g) Long-term and other indebtedness: The fair values of non-variable rate debt are estimated using quoted market prices and estimated rates which would be available to the Company for debt with similar terms. The fair value of variable rate debt is estimated to be the carrying amount. (h) Derivative instruments: The fair values of the interest rate swap and currency rate swap agreements are based on rates currently available for similar agreements. F-30 19. Fair Value of Financial Instruments, continued: ----------------------------------- The carrying amounts and estimated fair values of the Company's financial instruments at December 31, 2002 and 2001 are as follows (in thousands):
2002 2001 ---- ---- Carrying Fair Carrying Fair Amount Value Amount Value -------- ----- -------- ------ Financial Assets: Investments $ 624,871 $ 624,869 $ 707,049 $ 707,048 Cash and cash equivalents 418,600 418,600 373,222 373,222 Notes receivable 30,240 30,240 41,659 41,659 Loan receivables of banking and lending subsidiaries, net of allowance 341,756 347,638 485,547 517,128 Investments in associated companies for which a quoted market price is available: WilTel 340,551 374,223 -- -- Other associated companies 36,527 59,045 2,033 13,893 Financial Liabilities: Customer banking deposits 392,904 399,567 476,495 486,830 Debt 233,073 238,912 252,279 258,578 Securities sold not owned 26,379 26,379 19,344 19,344 Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated debt securities of the Company 98,200 98,200 98,200 98,200 Derivative Instruments: Interest rate swaps (7,386) (7,386) (6,292) (6,292) Foreign currency swaps (1,679) (1,679) 990 990
20. Segment Information: -------------------- The Company's reportable segments consist of its operating units, which offer different products and services and are managed separately. These reportable segments are: banking and lending, manufacturing and domestic real estate. Banking and lending operations historically made collateralized personal automobile instalment loans to individuals who have difficulty obtaining credit, at interest rates above those charged to individuals with good credit histories. Such loans were primarily funded by deposits insured by the FDIC. Manufacturing operations manufacture and market proprietary lightweight plastic netting used for a variety of purposes. The Company's domestic real estate operations consist of a variety of commercial properties, residential land development projects and other unimproved land, all in various stages of development and all available for sale. Other operations primarily consist of winery operations and development of a copper mine. Associated companies include equity interests in entities that the Company does not control and that are accounted for on the equity method of accounting. WilTel, a public telecommunications company that owns or leases and operates a nationwide fiber optic network over which it provides a variety of telecommunications services is an associated company, as is Olympus, a Bermuda-based reinsurance company. F-31 20. Segment Information, continued: -------------------- The information in the following table for Corporate assets primarily consists of investments and cash and cash equivalents. Corporate revenues listed below primarily consist of investment income and securities gains and losses on Corporate assets. Corporate assets, revenues, overhead expenses and interest expense are not allocated to the operating units. The Company has a manufacturing facility located in Belgium and an interest, through MK Gold, in a copper deposit in Spain. The Company does not have any other material foreign operations or investments. Certain information concerning the Company's segments for 2002, 2001 and 2000 is presented in the following table. Associated Companies are only reflected in the table below under Identifiable assets employed. Prior period amounts have been reclassified to reflect the Company's Foreign Real Estate segment as a discontinued operation. F-32 20. Segment Information, continued: -------------------
2002 2001 2000 ---- ---- ---- (In millions) Revenues: Banking and Lending $ 95.9 $ 122.4 $ 108.8 Manufacturing 51.0 57.4 65.1 Domestic Real Estate 51.3 65.3 83.1 Other Operations 48.3 39.3 44.9 Corporate (a) (b) (4.7) 89.8 191.5 ---------- --------- --------- Total consolidated revenues (c) $ 241.8 $ 374.2 $ 493.4 ========== ========= ========= Income (loss) from continuing operations before income taxes, minority expense of trust preferred securities and equity in income (losses) of associated companies: Banking and Lending $ 1.9 $ (6.1) $ 11.0 Manufacturing 3.1 7.8 11.3 Domestic Real Estate 16.7 30.4 58.8 Other Operations 11.7 8.2 5.2 Corporate (a) (b) (74.9) 32.8 115.0 ---------- --------- --------- Total consolidated income (loss) from continuing operations before income taxes, minority expense of trust preferred securities and equity in income (losses) of associated companies (c) $ (41.5) $ 73.1 $ 201.3 ========== ========= ========= Identifiable assets employed: Banking and Lending $ 481.5 $ 595.7 $ 664.2 Manufacturing 51.5 59.3 63.4 Domestic Real Estate 106.8 176.4 218.1 Other Operations 193.7 171.2 177.1 Investment in Associated Companies: WilTel 340.6 -- -- Other Associated Companies 397.1 358.8 192.5 Net Assets of Discontinued Operations -- 44.0 156.9 Corporate 970.6 1,063.7 945.6 --------- --------- --------- Total consolidated assets $ 2,541.8 $ 2,469.1 $ 2,417.8 ========= ========= =========
(a) For 2002, includes a provision of $37,100,000 to write down investments in certain available for sale securities and an equity investment in a non-public fund. The write down of the available for sale securities resulted from a decline in market value determined to be other than temporary. (b) For 2000, includes, among other items, pre-tax securities gains on sale of FNF ($90,900,000) and JTP ($24,800,000), as described in Note 12. (c) Prior period amounts have been reclassified to exclude equity in income (losses) of associated companies from these captions. F-33 21. Selected Quarterly Financial Data (Unaudited): ---------------------------------------------
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- (In thousands, except per share amounts) 2002: - ----- Revenues $ 57,567 $ 70,317 $ 52,373 $ 61,548 =========== =========== ========= ========== Income (loss) from continuing operations $ 11,303 $ 19,429 $ (2,484) $ 124,283 =========== =========== ========= ========== Income from discontinued operations, net of taxes $ 1,440 $ 3,140 $ -- $ -- =========== =========== ========= ========== Gain on disposal of discontinued operations, net of taxes $ -- $ 4,512 $ -- $ -- =========== =========== ========= ========== Net income (loss) $ 12,743 $ 27,081 $ (2,484) $ 124,283 =========== =========== ========= ========== Basic earnings (loss) per common share: Income (loss) from continuing operations $ .20 $ .35 $ (.04) $ 2.20 Income from discontinued operations .03 .06 -- -- Gain on disposal of discontinued operations -- .08 -- -- ----------- ----------- --------- ---------- Net income (loss) $ .23 $ .49 $ (.04) $ 2.20 =========== =========== ========= ========== Number of shares used in calculation 55,320 55,336 55,346 56,420 =========== =========== ========= ========== Diluted earnings (loss) per common share: Income (loss) from continuing operations $ .20 $ .35 $ (.04) $ 2.19 Income from discontinued operations .03 .06 -- -- Gain on disposal of discontinued operations -- .08 -- -- ----------- ----------- --------- ---------- Net income (loss) $ .23 $ .49 $ (.04) $ 2.19 =========== =========== ========= ========== Number of shares used in calculation 55,558 55,694 55,346 56,871 =========== =========== ========= ========== 2001: - ----- Revenues $ 84,178 $ 99,313 $ 113,743 $ 76,927 =========== =========== ========= ========== Income (loss) from continuing operations $ 11,787 $ 30,478 $ (24,987) $ 45,650 =========== =========== ========= ========== Income (loss) from discontinued operations, net of taxes $ (31,685) $ (4,604) $ (6,973) $ 3,520 =========== =========== ========= ========== Loss on disposal of discontinued operations, net of taxes $ -- $ -- $ -- $ (31,105) =========== =========== ========= ========== Cumulative effect of a change in accounting principle $ 411 $ -- $ -- $ -- =========== =========== ========= ========== Net income (loss) $ (19,487) $ 25,874 $ (31,960) $ 18,065 =========== =========== ========= ========== Basic earnings (loss) per common share: Income (loss) from continuing operations $ .21 $ .55 $ (.45) $ .83 Income (loss) from discontinued operations (.57) (.08) (.13) .06 Loss on disposal of discontinued operations -- -- -- (.56) Cumulative effect of a change in accounting principle .01 -- -- -- ----------- ----------- --------- ---------- Net income (loss) $ (.35) $ .47 $ (.58) $ .33 =========== =========== ========= ========== Number of shares used in calculation 55,299 55,309 55,314 55,316 =========== =========== ========= ========== Diluted earnings (loss) per common share: Income (loss) from continuing operations $ .21 $ .55 $ (.45) $ .83 Income (loss) from discontinued operations (.57) (.08) (.13) .06 Loss on disposal of discontinued operations -- -- -- (.56) Cumulative effect of a change in accounting principle .01 -- -- -- ----------- ----------- --------- ---------- Net income (loss) $ (.35) $ .47 $ (.58) $ .33 =========== =========== ========= ========== Number of shares used in calculation 55,299 55,635 55,314 55,521 =========== =========== ========= ==========
F-34 21. Selected Quarterly Financial Data (Unaudited), continued: --------------------------------------------- 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 the fourth quarter of 2002 reflects a benefit of approximately $120,000,000. Quarterly data for 2001 includes equity losses of $70,400,000 representing the Company's share of the loss recorded by Berkadia primarily in the third quarter. In 2002 and 2001, the totals of quarterly per share amounts do not necessarily equal annual per share amounts. F-35 Schedule II - Valuation and Qualifying Accounts LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES For the years ended December 31, 2002, 2001 and 2000 (In thousands)
Additions Deductions ------------------------ ---------- Charged Balance at to Costs Balance Beginning and Write at End Description of Period Expenses Recoveries Offs of Period ----------- --------- -------- ---------- --------- ----------- 2002 ---- Loan receivables of banking and lending subsidiaries $ 35,695 $ 36,027 $ 9,646 $ 49,520 $ 31,848 Trade, notes and other receivables 623 221 179 140 883 --------- --------- -------- --------- --------- Total allowance for doubtful accounts $ 36,318 $ 36,248 $ 9,825 $ 49,660 $ 32,731 ========= ========= ======== ========= ======== 2001 ---- Loan receivables of banking and lending subsidiaries $ 27,364 $ 43,125 $ 8,519 $ 43,313 $ 35,695 Trade, notes and other receivables 663 138 16 194 623 --------- --------- -------- --------- -------- Total allowance for doubtful accounts $ 28,027 $ 43,263 $ 8,535 $ 43,507 $ 36,318 ========= ========= ======== ========= ======== 2000 ---- Loan receivables of banking and lending subsidiaries $ 16,975 $ 30,169 $ 5,681 $ 25,461 $ 27,364 Trade, notes and other receivables 565 151 14 67 663 -------- --------- -------- --------- -------- Total allowance for doubtful accounts $ 17,540 $ 30,320 $ 5,695 $ 25,528 $ 28,027 ======== ========= ======== ========= ========
F-36 FINANCIAL STATEMENTS Berkadia LLC (a joint venture between Berkshire Hathaway Inc. and Leucadia National Corporation) Years ended December 31, 2002 and 2001 Berkadia LLC Financial Statements Years ended December 31, 2002 and 2001 Contents Report of Independent Auditors................................................2 Audited Financial Statements Balance Sheets................................................................3 Statements of Operations and Changes in Members' Deficit......................4 Statement of Cash Flows.......................................................5 Notes to Financial Statements.................................................6 Report of Independent Auditors The Members of Berkadia LLC We have audited the accompanying balance sheets of Berkadia LLC (the "Company") as of December 31, 2002 and 2001, and the related statements of operations and changes in members' equity and cash flows for the year ended December 31, 2002 and for the period from February 26, 2001 to December 31, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Berkadia LLC at December 31, 2002 and 2001 and the results of its operations and its cash flows for the year ended December 31, 2002 and for the period from February 26, 2001 to December 31, 2001, in conformity with accounting principles generally accepted in the United States. Ernst & Young, LLP Phoenix, Arizona February 28, 2003 2 Berkadia LLC Balance Sheets
December 31 2002 2001 ----------- ------------- (In thousands) Assets Cash $ -- $ 1 Loan receivable due from FINOVA, net of discount 2,024,503 4,631,476 Interest and facility fee receivable 6,155 15,244 ----------- ----------- Total assets $ 2,030,658 $ 4,646,721 =========== =========== Liabilities and members' accumulated deficit Liabilities: Long-term debt $ 2,175,000 $ 4,900,000 Interest and facility fee payable 2,693 8,486 ----------- ----------- Total liabilities 2,177,693 4,908,486 Members' accumulated deficit (147,035) (261,765) ----------- ----------- Total liabilities and members' accumulated deficit $ 2,030,658 $ 4,646,721 =========== ===========
See accompanying notes to financial statements. 3 Berkadia LLC Statements of Operations and Changes in Members' Accumulated Deficit
Ten-month period Year ended ended December 31, 2002 December 31, 2001 ----------------- ----------------- (In thousands) Revenue Interest income and amortization of loan discount $ 245,167 $ 136,734 --------- --------- Total revenue 245,167 136,734 Expenses Equity loss in FINOVA -- 188,800 Interest expense 64,287 57,990 --------- --------- Total expenses 64,287 246,790 --------- --------- Net income 180,880 (110,056) Members' accumulated deficit, beginning of period (261,765) -- Distributions to members (66,150) (151,709) --------- --------- Members' accumulated deficit, end of period $(147,035) $(261,765) ========= =========
See accompanying notes to financial statements. 4 Berkadia LLC Statement of Cash Flows
Ten-month period Year ended ended December 31, 2002 December 31, 2001 ----------------- ----------------- (In thousands) Net cash flows from operating activities Net income (loss) $ 180,880 $ (110,056) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Equity loss in FINOVA -- 188,800 Amortization of loan discount (118,028) (40,276) Net change in: Receivables 9,090 (15,244) Payables (5,793) 8,486 ----------- ------------ Net cash provided by operating activities 66,149 31,710 ----------- ------------ Net cash flows from investing activities Loan to FINOVA, net -- (5,480,000) Loan repayment from FINOVA 2,725,000 700,000 ----------- ----------- Net cash provided by (used in) investing activities 2,725,000 (4,780,000) ----------- ----------- Net cash flows from financing activities Issuance of long-term debt -- 5,600,000 Repayment of long-term debt (2,725,000) (700,000) Distributions to members (66,150) (151,709) ----------- ----------- Net cash provided by (used in) financing activities (2,791,150) 4,748,291 ----------- ----------- Net increase (decrease) in cash (1) 1 Cash and cash equivalents at beginning of period 1 -- ----------- ----------- Cash and cash equivalents at end of period $ -- $ 1 =========== =========== Supplemental disclosure of noncash investing activities Allocation of loan receivable due from FINOVA to equity investment in FINOVA shares $ -- $ 188,800 =========== ===========
See accompanying notes to financial statements. 5 Berkadia LLC Notes to the Financial Statements December 31, 2002 and 2001 1. Formation and Nature of Operations Berkadia LLC (the "Company" or "Berkadia") was formed on February 26, 2001 as a joint venture between Berkshire Hathaway Inc. ("Berkshire") and Leucadia National Corporation ("Leucadia"). Berkshire and Leucadia through their respective wholly owned affiliates hold the interests in the Company and are referred to as the "Members". The principal business purpose of the Company was to lend up to $6,000,000,000 on a senior secured basis to FINOVA Capital Corporation ("FINOVA Capital"), the principal operating subsidiary of The FINOVA Group Inc. ("FINOVA"), to facilitate a chapter 11 restructuring of the outstanding debt of FINOVA and its principal subsidiaries. On August 10, 2001, the bankruptcy court confirmed the Chapter 11 reorganization plan for the FINOVA companies (the "Plan"). On August 21, 2001, the effective date of the Plan, the Company loaned $5,600,000,000 par amount on a senior secured basis to FINOVA Capital (the "Berkadia Loan"). Concurrent with the loan, the Company received 61,020,581 newly issued shares of common stock of FINOVA (the "Shares"), representing 50 percent of the outstanding stock of FINOVA. The Berkadia Loan is collateralized by substantially all of the assets of FINOVA and its subsidiaries and guaranteed by FINOVA and substantially all of the subsidiaries of FINOVA. The Company borrowed the entire amount required to finance the Berkadia Loan from a consortium of lenders led by Fleet Bank (the "Fleet Loan"). The Fleet Loan is guaranteed, 90 percent by Berkshire Hathaway and 10 percent by Leucadia (with Leucadia's guarantee being secondarily guaranteed by Berkshire), and is also secured by the Company's pledge of the Berkadia Loan. The Company was paid a $60,000,000 commitment fee by FINOVA Capital upon execution of the loan commitment in February 2001, and a $60,000,000 fee upon funding of the Berkadia Loan on August 21, 2001. Under the operating agreement governing the Company, Berkshire and Leucadia share equally in the commitment fee, funding fee and any proceeds realized from the Shares. Interest on the Berkadia Loan, after payment of interest on the Fleet Loan, is allocated 90 percent to Berkshire and 10 percent to Leucadia. To date, all cash received by the Company, after payment of any financing costs, has been distributed to the Members. In addition, FINOVA Capital has reimbursed the Company and the Members, for all fees and expenses incurred in connection with their commitments. Fees reimbursed to the Company aggregated $11,950,000 during 2001. There were no such fees in 2002. 6 Berkadia LLC Notes to the Financial Statements December 31, 2002 and 2001 1. Formation and Nature of Operations (continued) The Members have not contributed any equity capital to the Company, and the Company does not currently anticipate that any capital contributions will be required in the future. Decisions concerning the management of the business and affairs of the Company generally require the consent of all Members. However, Berkshire makes any and all decisions with respect to the Berkadia Loan in its sole and absolute discretion. Upon FINOVA's emergence from bankruptcy in 2001, each of Berkshire and Leucadia designated two persons to serve on FINOVA's reconstituted board of directors. From and after the effective date of the Plan, the Company, Berkshire and Leucadia are not entitled to designate FINOVA board members. During 2002, several structural changes to the Company were executed, which were intended to simplify the ownership structure of the Company and to provide a debt-free vehicle for the Berkadia members to use to pursue other investments. These changes did not alter the ownership interests in the Company, ultimately held by Berkshire and Leucadia, and resulted in no gains or losses or other changes to member's accumulated deficit. Among the changes, the Company effectively distributed all of its right, title and interest in and to the Shares to an entity formed by the Members (Berkadia Equity Holdings LLC). As a result, the Company no longer has a financial interest in the FINOVA Shares. 2. Significant Accounting Policies (a) Use of Estimates in Preparing Financial Statements: The preparation of ----------------------------------------------------- financial statements in conformity with accounting principles generally accepted in the United States ("GAAP") requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities at the date of the financial statements and (iii) the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (b) Loan Receivable from FINOVA: The Berkadia Loan is carried net of --------------------------- unamortized discount related to the commitment fee, the funding fee and the amount of the Berkadia Loan allocated to Berkadia's investment in the Shares. The discount is accreted into investment income over the life of the Berkadia Loan through the effective interest method. FINOVA is current with respect to all amounts due to the Company under the Berkadia Loan. As of December 31, 2002, there was no allowance for losses on the Berkadia Loan. 7 Berkadia LLC Notes to the Financial Statements December 31, 2002 and 2001 2. Significant Accounting Policies (continued) (c) Investment in FINOVA Shares: Berkadia accounted for its investment in the --------------------------- Shares under the equity method. Under the equity method, Berkadia recognized its proportionate share of FINOVA's net income or loss. For the period August 21 through September 30, 2001, FINOVA incurred significant operating losses primarily as a result of the September 11 terrorist attack. Berkadia's share of such losses far exceeded the cost allocated to the Shares, which was based upon the relative fair values of the Shares and the Berkadia Loan as of August 21, 2001. The application of the equity method was suspended once the carrying amount of Shares was reduced to zero. As a result of the structural changes to the Company in 2002 discussed in Note 1, Berkadia possessed no financial interests in the Shares as of December 31, 2002. (d) Income taxes: The Company does not file an income tax return. Each Member is ------------ responsible for the tax liability, if any, deriving from the taxable income allocated to such Member. Accordingly, no provision for income taxes has been reflected in these financial statements. 3. Berkadia Loan The Berkadia Loan bears interest payable monthly, at the Eurodollar Rate plus 2.25 percent. All unpaid principal and accrued interest is due at maturity on August 20, 2006. For the year ended December 31, 2002, the weighted-average interest rate was 4.14 percent. For the ten-month period from February 26, 2001 to December 31, 2001, the weighted average interest rate was 5.06%. FINOVA and substantially all of its direct and indirect subsidiaries (except those that are contractually prohibited from acting as a guarantor) have guaranteed FINOVA Capital's repayment of the Berkadia Loan. The guarantees are secured by substantially all of the assets of FINOVA and its subsidiaries. On August 21, 2001, the Company transferred $5,540,000,000 in cash to FINOVA Capital, representing the $5,600,000,000 loan reduced by the funding fee of $60,000,000. As indicated above, in exchange for these funds, the Company received a $5,600,000,000 note from FINOVA Capital and the Shares. The Company allocated the $5,540,000,000 cash transferred, reduced further by the $60,000,000 commitment fee received in February 2001, between its investment in the Berkadia Loan and the Shares, based upon the respective relative fair values of the Berkadia Loan and the Shares. As a result, the Berkadia Loan was recorded at an initial value of $5,291,200,000, which is net of a discount related to the commitment and funding fees of $120,000,000 and the cost allocated to the Shares of $188,800,000. 8 Berkadia LLC Notes to the Financial Statements December 31, 2002 and 2001 3. Berkadia Loan (continued) The terms of the Berkadia Loan permit FINOVA to retain a reserve of cash and cash equivalents in an amount not to exceed the sum of (a) 125 percent of the projected operating expenses for the next fiscal quarter, (b) unfunded customer commitments expected to be funded over the next two fiscal quarters, (c) taxes payable during the next fiscal quarter, (d) interest, loan fees and other amounts due on the Berkadia Loan during the next fiscal quarter, (e) an amount equal to all payments of principal, interest or fees relating to other permitted indebtedness that will, by their terms, become due and payable in cash during the next fiscal quarter, and (f) such other reserves as are necessary in FINOVA's good faith judgment and as approved in advance by the Company for the operations of FINOVA. Any amount in excess of the cash reserve is paid to the Company to reduce the principal amount of the loan on a quarterly basis. During 2002, the Company gave its consent to FINOVA to use up to $300 million of cash to repurchase certain subordinated notes rather than make mandatory prepayments of the Berkadia Loan. In consideration for its consent, FINOVA and the Company agreed that they would share equally in the net interest savings resulting from any repurchase. As a result of repurchases made by FINOVA during 2002, the Company recognized approximately $1.6 million in interest income related to the net interest savings. For the years ended December 31, 2002 and 2001, the Company received $2.725 billion and $700 million in loan repayments from FINOVA. During the first two months of 2003, the Company has received $450 million in loan repayments. The pace of the repayments depends on numerous factors, such as the rate of FINOVA's collections from borrowers and asset sales. As such, there can be no assurance that the Berkadia Loan will continue to be repaid at this pace. The terms of the Berkadia Loan agreement require FINOVA to maintain at all times, a ratio of Collateral Value (as defined in the Berkadia Loan agreement) to the loan balance of not less than 1.25 to 1. As of December 31, 2002, FINOVA's collateral value to loan balance ratio was 1.70 to 1, and thereby, in compliance with this covenant. 9 Berkadia LLC Notes to the Financial Statements December 31, 2002 and 2001 4. Fleet Loan The Fleet Loan bears interest payable monthly, at a rate generally equal to the cost of funds for the lenders' conduit facilities plus 0.25 percent. The lenders' cost of funds rate is expected to be substantially equal to the Eurodollar Rate that is used to determine the interest rate on the Berkadia Loan. For the year ended December 31, 2002, the weighted-average interest rate was 2.11 percent. For the ten-month period from February 26, 2001 to December 31, 2001, the weighted average interest rate was 3.04%. All unpaid principal and accrued interest is due at maturity on August 20, 2006. Pursuant to the Fleet Loan agreement, any principal payments received by the Company on the Berkadia Loan must be used to make principal payments on the Fleet Loan. The Fleet Loan agreement restricts the Company's ability to incur additional indebtedness, liens or to make other investments, which restrictions are consistent with the business purpose and operations of the Company. The Berkadia Loan is pledged as collateral to secure the Fleet Loan. In addition, if the asset value of FINOVA (as defined in the Fleet Loan agreement) is not equal to at least 1.2 times the Fleet Loan balance as of the end of any month, then the Company is required to pay principal on the Fleet Loan in an amount that is sufficient to comply with this ratio. As of December 31, 2002, the asset value of FINOVA was greater than 1.2 times the Fleet Loan balance. 5. Members' Capital For the year ended December 31, 2002, the Company distributed substantially all of its available cash to its Members, aggregating $66.2 million. Of this amount, $59.4 million was distributed to Berkshire Members and $6.8 million to Leucadia Members. 10 Olympus Re Holdings, Ltd. (Incorporated in Bermuda) Combined Financial Statements December 31, 2002 and 2001 (expressed in U.S. dollars) February 18, 2003 Report of Independent Accountants To the Shareholders of Olympus Re Holdings, Ltd. In our opinion, the accompanying combined balance sheets and the related combined statements of income and retained earnings, comprehensive income and cash flows present fairly, in all material respects, the financial position of Olympus Re Holdings, Ltd. at December 31, 2002 and 2001, and the results of its operations and its cash flows for the year ended December 31, 2002 and the period from December 3, 2001, (date of incorporation) to December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. These combined financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these combined financial statements in accordance with auditing standards generally accepted in the United States of America which require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the combined financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall combined financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. Chartered Accountants Olympus Re Holdings, Ltd. Combined Balance Sheets As of December 31, 2002 and 2001 - -------------------------------------------------------------------------------- (expressed in U.S. dollars)
2002 2001 $ $ ----------- ------------ ASSETS Cash and cash equivalents 64,156,759 509,312,866 Investments (amortized cost - 2002 - $583,018,489; 2001 - $Nil) (note 3) 599,123,769 -- Investment income due and accrued 6,684,911 20,049 Common voting shares, subscription receivable (Note 7b) -- 150,000 Premiums receivable 76,489,609 -- Deferred acquisition costs 23,318,087 -- Other assets 158,188 -- ----------- ----------- 769,931,323 509,482,915 =========== =========== LIABILITIES Incorporation cost payable -- 7,883,231 Loss and loss adjustment expense reserves (note 4) 44,707,594 -- Unearned premiums 74,365,214 -- Accounts payable and accrued expenses 581,289 30,000 Investment trades pending 2,455,041 -- Reinsurance balances payable (note 5) 25,170,228 -- ----------- ---------- 147,279,366 7,913,231 ----------- ---------- SHAREHOLDERS' EQUITY Common voting shares (5,100,000 shares issued and outstanding) (note 7) 51,000 51,000 Additional paid-in capital (note 7) 509,949,000 509,949,000 Accumulated other comprehensive income 16,105,280 -- Retained earnings (deficit) 96,546,677 (8,430,316) ----------- ----------- 622,651,957 501,569,684 ----------- ----------- 769,931,323 509,482,915 =========== ===========
Approved by the Board of Directors - ------------------------- Director --------------------------Director The accompanying notes are an integral part of these combined financial statements OLYMPUS RE HOLDINGS, LTD. Combined Statements of Income and Retained Earnings For the year ended December 31, 2002 and for the period from December 3, 2001, (date of incorporation) to December 31, 2001 - ------------------------------------------------------------------------------- (expressed in U.S. dollars)
2002 2001 $ $ ----------- ---------- Revenues Gross premiums written 298,522,087 -- ----------- ---------- Net premiums written 298,522,087 -- Change in unearned premiums (74,365,214) -- ------------ ---------- Net premiums earned 224,156,873 -- ----------- ---------- Net Investment income 18,002,285 232,594 Net Realized gains (losses) on investments 2,969,859 -- ----------- ---------- Total Revenues 245,129,017 232,594 ----------- ---------- Expenses Losses and loss expenses (note 4) 57,901,965 -- Commissions 78,078,362 -- Premium taxes and fees 2,184,366 -- Other underwriting expenses 750,726 -- Incorporation costs -- 8,632,780 General and administrative expenses 1,236,605 30,130 ----------- ---------- Total Expenses 140,152,024 8,662,910 ----------- ---------- Net Income (loss) 104,976,993 (8,430,316) Retained earnings (deficit) - Beginning of year (8,430,316) -- ----------- ---------- Retained earnings - End of year 96,546,677 (8,430,316) =========== ==========
The accompanying notes are an integral part of these combined financial statements. Olympus Re Holdings, Ltd. Combined Statements of Comprehensive Income For the year ended December 31, 2002 and for the period from December 3, 2001, (date of incorporation) to December 31, 2001 - ------------------------------------------------------------------------------ (expressed in U.S. dollars)
2002 2001 $ $ ----------- ---------- Net income (loss) for the year 104,976,993 (8,430,316) Other comprehensive income Change in unrealized appreciation on marketable investments 16,105,280 -- ----------- ---------- Comprehensive income (loss) for the year 121,082,273 (8,430,316) =========== ==========
The accompanying notes are an integral part of these combined financial statements. Olympus Re Holdings, Ltd. Combined Statement of Cash Flows For the year ended December 31, 2002 and for the period from December 3, 2001, (date of incorporation) to December 31, 2001 - ------------------------------------------------------------------------------ (expressed in U.S. dollars)
2002 2001 $ $ ------------ ----------- Cash flows from operating activities Net income for the year 104,976,993 (8,430,316) Adjustments to reconcile net income to net cash provided by operating activities Gains on sales of investments (2,969,859) -- Amortization of discount / premium 3,087,459 -- Investment income due and accrued (6,664,862) (20,049) Incorporation cost payable (7,883,231) 7,883,231 Premiums receivable (76,489,609) -- Deferred acquisition costs (23,318,087) -- Other assets (158,188) -- Loss and loss adjustment expense reserves 44,707,594 -- Unearned premiums 74,365,214 -- Accounts payable and accrued expenses 551,289 30,000 Investment trades pending 2,455,041 -- Reinsurance balances payable 25,170,228 -- ------------- ------------ Cash provided by (used in) operating activities 137,829,982 (537,134) ------------- ------------ Cash flows from investing activities Purchase of investments (1,066,976,281) -- Proceeds from sales of investments 483,840,192 -- -------------- ------------ Cash used in investing activities (583,136,089) -- -------------- ------------ Cash flows from financing activity Proceeds from issuance of common shares 150,000 509,850,000 -------------- ------------ Cash provided by financing activity 150,000 509,850,000 -------------- ------------ Increase (decrease) in cash and cash equivalents (445,156,107) 509,312,866 Cash and cash equivalents - Beginning of year 509,312,866 -- -------------- ------------ Cash and cash equivalents - End of year 64,156,759 509,312,866 ============== ============
The accompanying notes are an integral part of these combined financial statements. Olympus Re Holdings, Ltd. Notes to Combined Financial Statements December 31, 2002 and 2001 - -------------------------------------- (expressed in U.S. dollars) 1. Nature of the business Olympus Re Holdings, Ltd. and its subsidiaries (the "Company") were incorporated under the laws of Bermuda on December 3, 2001. The Company's principal operating subsidiary is Olympus Reinsurance Company, Ltd. ("Olympus Re"). Olympus Re is registered as a Class 4 insurer under The Insurance Act 1978, amendments thereto and related regulations ("The Act"). The Company's bye-laws provide that the Board of Directors of Olympus Re shall consist of persons who first have been elected as designated directors by a resolution in a general meeting of the shareholders of the Company. The Board of Directors of the Company must then vote all shares of Olympus Re owned by the Company to elect such designated directors as Olympus Re directors. The bye-law provisions with respect to the removal of directors of Olympus Re operate similarly. The Company, through Olympus Re, writes a diversified range of reinsurance business on a global basis with an emphasis on property excess business. During the year ended December 31, 2002, this was through a quota share reinsurance agreement with a U.S. reinsurance company (see note 6). The purpose of this quota share agreement is to produce primarily property excess reinsurance. In addition, Olympus Re has a contract with a non-U.S. advisor (see note 5) to recommend business and consult on the quota share agreement. The non-U.S. advisor is related to the previously mentioned U.S. reinsurance company through common ownership. 2. Significant accounting policies Olympus Re's Board of Directors, who are elected as described above, have unilateral authority, except for certain actions that require approval by the Company as sole shareholder, to manage the affairs of Olympus Re. Accordingly, the accompanying financial statements have been prepared on a combined basis, rather than on a consolidated basis. The combined financial statements include the financial statements of Olympus Re Holdings Ltd. and its wholly-owned subsidiary Olympus Re. All significant inter-company balances have been eliminated on combination. These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, as well as disclosure of contingent assets and liabilities as at the balance sheet date. Estimates also affect the reported amounts of income and expenses for the reporting period. Actual results could differ from those estimates. The following is a summary of the significant accounting policies adopted by the Company (a) Premiums and unearned premiums The Company records premiums based on cession statements received. These cession statements earn premium income evenly over the term of the underlying reinsurance contract, in proportion to the risk assumed. The portion of the premium related to the unexpired portion of the contract at the end of the fiscal year is reflected in unearned premiums. Olympus Re Holdings, Ltd. Notes to Combined Financial Statements December 31, 2002 and 2001 - -------------------------------------------------------------------------------- (expressed in U.S. dollars) Certain reinsurance premiums assumed are estimated based on information provided by the underlying ceding companies. The information used in establishing these estimates is reviewed and subsequent adjustments are taken into income in the period in which they are determined. These premiums are earned over the terms of the related reinsurance contracts. (b) Deferred acquisition costs The Company records acquisition costs based on cessions statements received, in addition to its own direct acquisition costs. Policy acquisition costs are comprised of ceding commissions, brokerage, premium taxes and other expenses that relate directly to the acquisition of premiums. These costs are deferred and amortized over the terms of the related contracts. Deferred policy acquisition costs are reviewed to determine if they are recoverable from future underwriting profits, including investment income. If such costs are estimated to be unrecoverable, they are expensed. (c) Loss and loss adjustment expense reserves The Company records loss and loss adjustment expenses based on cessions statements received. The reported amounts for incurred but not reported losses are also separately reviewed by the Company. Loss and loss adjustment expense reserves, including losses incurred but not reported and provisions for settlement expenses, includes amounts determined from losses reported to the Company, and management estimates. Due to limited historical experience, industry data is relied upon in the reserving process. A significant portion of the Company's business is in the property catastrophe market and programs with higher layers of risks. Reserving for losses in such programs is inherently complicated in that losses in excess of the attachment level of the underlying policies are characterized by high severity and low frequency. This limits the volume of industry claims experience available from which to reliably predict ultimate losses following a loss event. The ceding company uses industry data and professional judgment to estimate the ultimate loss to the Company from reinsurance contracts exposed to a loss event. Delays in reporting losses to the Company together with the potential for unforeseen adverse developments, may result in losses and loss expenses significantly greater or less than the reserve provided at the time of the loss event. Loss and loss adjustment reserve estimates are regularly reviewed and updated, as new information becomes known to the Company. Any resulting adjustments are included in income in the period in which they become known. (d) Cash and cash equivalents Cash and cash equivalents include debt securities and time deposits with a maturity of three months or less from the date of purchase. Olympus Re Holdings, Ltd. Notes to Combined Financial Statements December 31, 2002 and 2001 - -------------------------------------- (expressed in U.S. dollars) (e) Investments The Company's investments are currently in fixed maturities which are classified as "available-for-sale" and are carried at fair value, based on quoted market prices. Unrealized gains and losses are included within accumulated other comprehensive income in shareholders' equity. Net investment income is stated net of investment management and custody fees. Interest income is recognized on the accrual basis and includes the amortization of premium or discount on fixed interest securities purchased at amounts different from their par value. Gains and losses on investments are included in investment income when realized. Investments are recorded on a trade date basis and the cost of securities sold is determined on the first-in, first-out basis. Investments are reviewed periodically to determine if they have sustained an impairment of value that is considered to be other than temporary. The identification of potentially impaired investments involves significant management judgment, which includes the determination of their fair value and the assessment of whether any decline in value is other than temporary. If investments are determined to be impaired, a loss is charged to the income statement in that period. (f) Incorporation costs Incorporation costs are expensed as incurred. (g) New accounting pronouncements In January 2003 the FASB issued FASB Interpretation No. 46, Consolidation of variable interest entities - an interpretation of ARB No. 51 ("FIN 46"). FIN 46 clarifies the accounting and reporting for certain entities in which equity investors do not have the characteristics of a controlling financial interest. As disclosed in notes 1 and 2 these financial statements are prepared on a combined rather than consolidated basis based on the fact that Olympus Re's and the Company's Bye-laws provide certain restrictions relating to the election of directors of Olympus Re. FIN 46 is effective in the first quarter of fiscal 2003. The impact of adopting this interpretation will be to present the financial statements as consolidated beginning in period ending March 31, 2003. This is not expected to have any impact on the Company's net income or net shareholders' equity as presented in these financial statements. 3. Investments
Amortized Unrealized Unrealized 2002 Cost gain loss Fair value $ $ $ $ ---------- ------------ ----------- ----------- U.S. government and agency 351,457,556 9,286,371 -- 360,743,927 Corporate 143,334,311 6,499,571 -- 149,833,882 Mortgage-backed securities 88,226,622 333,785 14,447 88,545,960 ----------- ---------- ------ ----------- 583,018,489 16,119,727 14,447 599,123,769 =========== ========== ====== ===========
Olympus Re Holdings, Ltd. Notes to Combined Financial Statements December 31, 2002 and 2001 - -------------------------------------------------------------------------------- (expressed in U.S. dollars) The estimated fair value of investments in fixed interest securities is based on quoted market values. The Company does not have any investment in a single corporate security which exceeds 2.1% of total fixed interest securities. The following table sets forth certain information regarding the investment ratings of the Company's fixed interest securities portfolio as at December 31, 2002.
Amortized cost Ratings $ % ------- ------------- ----- U.S. government and agency 353,912,597 60 AAA 65,367,410 11 AA 67,472,319 12 A 93,134,771 16 BBB 3,131,392 1 ------------- ----- 583,018,489 100 ============= =====
The amortized cost and estimated fair value amounts for fixed interest securities held at December 31, 2002 are shown by contractual maturity. Actual maturity may differ from contractual maturity because certain borrowers have the right to call or prepay certain obligations with or without call or prepayment penalties.
Amortized cost Fair Value $ $ ------------- ----------- Due within one year 25,125,281 25,390,750 Due after one year through five years 410,631,034 425,245,759 Due after five years through ten years 59,035,552 59,941,300 ------------- ------------ 494,791,867 510,577,809 Mortgage-backed securities 88,226,622 88,545,960 ------------- ------------ 583,018,489 599,123,769 ============= ============
Olympus Re Holdings, Ltd. Notes to Combined Financial Statements December 31, 2002 and 2001 - -------------------------------------------------------------------------------- (expressed in U.S. dollars) The components of net investment income are as follows:
Period from December 3, 2001 Year end (date of incorporation) December 31, 2002 to December 31, 2001 $ $ ----------------- ---------------------- Interest on fixed maturities 20,691,286 -- Net amortization of premium/discount on fixed maturities (3,087,459) -- Interest on cash and cash equivalents 1,592,238 232,594 ---------- --------- 19,196,065 232,594 Net investment expenses (1,193,780) -- ---------- --------- 18,002,285 232,594 ========== =========
During 2002, proceeds from sales of available-for-sale securities were $483,840,192. Gross realized gains were $3,361,350 and gross realized losses were $391,491. OneBeacon Asset Management receives a management fee at an annual rate of 0.2% of net invested assets. In the normal course of business, the Company provides collateral to the reinsured in accordance with the quota share agreement in the form of a trust agreement. The Company has cash equivalents of $10,339,521 and investments of $65,214,300 in a Trust, as of December 31, 2002, held as collateral for the reinsured. 4. Loss and loss adjustment expense reserve Loss and loss adjustment expense reserves are estimates subject to variability, and the variability could be material in the near term. The variability arises because all events affecting the ultimate settlement of claims have not taken place and may not take place for some time. Variability can be caused by receipt of additional claim information, changes in judicial interpretation of contracts or significant changes in the severity or frequency of claims from historical trends. Loss and loss adjustment expenses estimates are based on all relevant information available to the Company. Methods of estimation are used which the Company believes produce reasonable results given current information. Olympus Re Holdings, Ltd. Notes to Combined Financial Statements December 31, 2002 and 2001 - -------------------------------------------------------------------------------- (expressed in U.S. dollars) Reserve activity for loss and loss expenses is summarized below:
$ --------- Balance - Beginning of year -- Less: Amounts recoverable from reinsurers -- --------- Net balance - Beginning of year -- --------- Net loss and loss expenses incurred for the year related to: Current year 57,901,965 Net paid loss and loss expenses for the year related to: Current year 13,194,371 Net balance - End of year 44,707,594 Plus: Amounts recoverable from reinsurers -- ---------- Balance - End of year 44,707,594 ==========
The year-end balance comprises provisions for reported claims of $10,536,402 and provisions for claims incurred but not reported of $34,171,192. 5. Reinsurance balances payable Reinsurance balances payable represents profit commissions payable, including a 20% profit commission payable to the non-U.S. advisors, White Mountains Underwriting Limited, for all business on which they advise. 6. Major customers During the year ended December 31, 2002, the Company derived 99% of its premiums written from Folksamerica Reinsurance Company ("Folksamerica") for which the Company pays a 12% override commission. Folksamerica is a wholly-owned subsidiary of White Mountains Insurance Group Ltd., which is a minority shareholder of the Company through a 50% joint venture, and is also the parent of the Company's investment advisors and the Company's non-U.S. advisors noted in notes 1, 3 and 5. It is not expected that this customer concentration with Folksamerica will be as extensive in 2003. Olympus Re Holdings, Ltd. Notes to Combined Financial Statements December 31, 2002 and 2001 - -------------------------------------------------------------------------------- (expressed in U.S. dollars) 7. Capital stock (a) Authorized shares The Company's authorized share capital is 20,000,000 common shares of the par value $0.01 each. (b) Common stock At December 31, 2002, the total issued and outstanding shares of the Company were 5,100,000 with a par value of $0.01. The holders of the ordinary shares are entitled to receive dividends and are allocated one vote per share, provided that, if the controlled shares of any shareholder (excluding Leucadia National Corporation) constitute 9.5 percent or more of the outstanding common shares of the Company, only a fraction of the vote will be allowed so as not to exceed 9.5 percent. There are various restrictions on the ability of shareholders to dispose of their shares. In the period to December 31, 2001, the Company received cash of $509,850,000 in respect of subscriptions of common shares. On January 2, 2002, payment of the remaining outstanding subscriptions totaling $150,000 was received from shareholders. Following receipt of the outstanding subscriptions payments, all issued and outstanding common voting shares were fully paid. 8. Taxation Bermuda The Company has received an undertaking from the Bermuda government exempting it from all local income, withholding and capital gains taxes until March 28, 2016. At the present time no such taxes are levied in Bermuda. United States The Company does not consider itself to be engaged in trade or business in the United States and, accordingly, does not expect to be subject to United States income tax. 9. Statutory requirements Under The Act, Olympus Re is required to prepare Statutory Financial Statements and to file a Statutory Financial Return. The Act also requires Olympus Re to meet certain minimum capital and surplus requirements. To satisfy these requirements, the Company was required to maintain a minimum level of statutory capital and surplus of $149,261,044 and $100,000,000 at December 31, 2002 and 2001 respectively. Olympus Re's statutory capital and surplus was $593,312,822 and $494,999,111 at December 31, 2002 and 2001 respectively. Statutory capital and surplus as reported under The Act is different from shareholders' equity as determined in conformity with accounting principles generally accepted in the United States of America ("GAAP") due to certain items that are capitalized under GAAP but expensed under The Act. Olympus Re is also required to maintain a minimum liquidity ratio, which was met for the year ended December 31, 2002. EX-3.(I) 3 certofinc.txt EXHIBIT 3.2 LNC CERT. OF INCORP. Exhibit 3.2 CERTIFICATE OF AMENDMENT OF THE CERTIFICATE OF INCORPORATION OF LEUCADIA NATIONAL CORPORATION UNDER SECTION 805 OF THE BUSINESS CORPORATION LAW Pursuant to the provisions of Section 805 of the Business Corporation Law, the undersigned hereby certifies: 1. The name of the Corporation is Leucadia National Corporation (the "Corporation"). The name under which the Corporation was formed is Talcott National Corporation. 2. The date the Certificate of Incorporation was filed by the Department of State was May 24, 1968. 3. The Corporation is authorized to issue a total of 156,000,000 shares, consisting of 150,000,000 shares of Common Stock of the par value of $1 per share of Common Stock and 6,000,000 shares of Preferred Stock of the par value of $1 per share. An amendment of the Corporation's Certificate of Incorporation effected by the Certificate of Amendment to add the terms of the designations, rights and preference of Series A Non-Voting Convertible Preferred Stock par value $1 per share (the "Convertible Preferred Stock") is hereby made. To effect the foregoing, a new Article FIFTH of the Corporation's Certificate of Incorporation, relating to the Convertible Preferred Stock, is hereby added, and all subsequent Articles of the Corporation's Certificate of Incorporation are renumbered accordingly. Article FIFTH shall read in its entirety as follows: FIFTH: The Corporation's Board of Directors has designated 10 shares of Preferred Stock as Series A Non-Voting Convertible Preferred Stock, which shall have the following designations, rights and preferences: Section 1. Designation and Amount. The shares of such series shall be ------------------------ designated as the "Series A Non-Voting Convertible Preferred Stock" (the "Convertible Preferred Stock") and the number of shares constituting such series shall be ten (10). Section 2. Dividends and Distribution. (a) The holders of Convertible ---------------------------- Preferred Stock, in preference to the holders of common shares, par value $1.00 per share of the Company (the "Common Shares"), shall be entitled to receive, subject to Section 510 of the New York Business Corporation Law ("NYBCL"), when, as and if declared by the Board of Directors out of surplus of the Company legally available for the payment of dividends, a pro rata share of any dividends declared and paid with respect to Common Shares (determined as if the Convertible Preferred Stock had been fully converted into Common Shares as provided herein). The Board of Directors may fix a record date for the determination of holders of Convertible Preferred Stock entitled to receive payment of a dividend declared thereon, which record date shall coincide with the record date selected with respect to the dividends declared and to be paid to holders of Common Shares. (b) If any dividend payment on the Convertible Preferred Stock is not paid as required herein, the Company shall be prohibited from declaring, paying or setting apart for payment any dividends or making any other distributions on any Common Shares, and from redeeming, purchasing or otherwise acquiring (or making any payment to or available for a sinking fund for the redemption, purchase or other acquisition of any shares of such stock) (either directly or through any Subsidiary) any Common Shares, until all such dividends that are due are paid in full. Dividends paid on the Convertible Preferred Stock in an amount less than the total amount of such dividends payable and due on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. (c) The holders of Convertible Preferred Stock shall not be entitled to receive any dividends or other distributions except as provided herein. Section 3. Voting Rights. The holders of shares of Convertible Preferred ------------- Stock shall have no voting rights, and their consent shall not be required for the taking of any corporate action, except as is required by the NYBCL. Section 4. Conversion. Each share of Convertible Preferred Stock shall ---------- automatically and immediately be converted into a number of Common Shares equal to the Conversion Number on the earlier to occur of (i) the date the Company determines (with the concurrence of the Initial Holders of the Convertible Preferred Stock) that the approval required from the Federal Reserve Board with respect to the conversion of the Convertible Preferred Stock held by the Initial Holders into Common Shares has been obtained, (ii) the sale in accordance with the terms hereof to a Person that is not an Affiliate of the Initial Holders of the Convertible Preferred Stock and (iii) 90 days following the issuance of the Convertible Preferred Stock to the Initial Holders of the Convertible Preferred Stock . Section 5. Adjustment of Conversion Number. (a) Share Dividends, ----------------------------------- ------------------ Subdivisions, Reclassifications, Combinations. If the Company declares a - ------------------------------------------------ dividend or makes a distribution on the outstanding Common Shares in Common Shares, or subdivides or reclassifies the outstanding Common Shares into a greater number of Common Shares, or combines the outstanding Common Shares into a smaller number of Common Shares, then, in each such event, (i) the then applicable Conversion Number shall be adjusted so that the registered holder of each Convertible Preferred Stock shall be entitled to receive, upon the conversion thereof, the number of Common Shares which such holder would have been entitled to receive immediately after the happening of any of the events described above had such Convertible Preferred Stock been converted immediately prior to the happening of such event or the record date therefor, whichever is earlier; and (ii) an adjustment to the Conversion Number made pursuant to this clause (a) shall become effective (A) in the case of any such dividend or distribution, immediately after the close of business on the record date for the determination of holders of Common Shares entitled to receive such dividend or distribution or (B) in the case of any such subdivision, reclassification or combination, at the close of business on the day upon which such corporate action becomes effective. (b) Issuances upon Merger, Amalgamation, Consolidation or Sale of ------------------------------------------------------------------- Company. If the Company shall be a party to any transaction (including a merger, - ------- amalgamation, consolidation, sale of all or substantially all of the Company's assets, liquidation or recapitalization of the Common Shares and excluding any transaction to which Section 5(a) applies) in which the previously outstanding Common Shares shall be changed into or, pursuant to the operation of law or the terms of the transaction to which the Company is a party, exchanged for different securities of the Company or common shares or other securities of another corporation or interests in a noncorporate entity or other property (including cash) or any combination of any of the foregoing, then, as a condition of the consummation of such transaction, lawful and adequate provision shall be made so that each holder of Convertible Preferred Stock shall be entitled, upon conversion, to an amount per Convertible Preferred Stock equal to (A) the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as applicable, into which or for which each Common Share is changed or exchanged multiplied by (B) the Conversion Number in effect immediately prior to the consummation of such transaction. (c) Adjustment to Certificate. Irrespective of any adjustments in the -------------------------- Conversion Number or the kind of shares into which of the Convertible Preferred Stock will automatically convert pursuant hereto, certificates theretofore or thereafter issued may continue to express the same Conversion Number and kind of shares as are stated on the certificates initially issuable pursuant to the provisions hereof, but such Conversion Number and number and kind of shares shall be understood to be adjusted as provided herein. (d) Notices of Adjustment. (i) Upon any adjustment of the Conversion ---------------------- Number pursuant to Section 5, the Company shall promptly, but in any event within 10 days thereafter, cause to be given to each registered holder of a Convertible Preferred Stock, at its address appearing on the share register by registered mail, postage prepaid, a certificate signed by an executive officer setting forth the Conversion Number and/or the number of shares of other securities or assets issuable upon the conversion of each Convertible Preferred Stock as so adjusted and describing in reasonable detail the facts accounting for such adjustment and the method of calculation used. Where appropriate, such certificate may be given in advance and included as a part of the notice required to be mailed under the other provisions of this Section 5. (ii) In the event the Company proposes to take (or receives notice of) any action which would require an adjustment of the Conversion Number pursuant to Section 5, then the Company shall cause to be given to each registered holder of Convertible 2 Preferred Stock at its address appearing on the share register, at least 10 days prior to the applicable record date or effective date for such action, a written notice in accordance with Section 5: (A) stating such record date or effective date, (B) describing such action in reasonable detail and (C) stating the date as of which it is expected that holders of record of Common Shares shall be entitled to receive any applicable dividends or distributions or to exchange their shares for securities or other property, if any, deliverable upon such action. The failure to give the notice required by this Section 5(d) or any defect therein shall not affect the legality or validity of any such action or the vote upon any such action. Section 6. Liquidation, Dissolution or Winding Up. (a) If the Company shall -------------------------------------- adopt a plan of liquidation or of dissolution, or commence a voluntary case under applicable bankruptcy, insolvency or similar laws, or consent to the entry of an order for relief of any involuntary case under any such law or to the appointment of a receiver, liquidator, assignee, custodian, trustee or sequestrator (or similar official) of the Company or of any substantial part of its property, or make an assignment for the benefit of its creditors, or admit in writing its inability to pay its debts generally as they become due and on account of such event the Company shall liquidate, dissolve or wind up, or upon any other liquidation, dissolution or winding up of the Company, the holders of Convertible Preferred Stock shall be entitled to receive a pro rata share (determined as if the Convertible Preferred Stock had been fully converted into Common Shares as provided herein) of any distributions made to the holders of Common Shares ("Liquidating Distributions"); provided, however, that each holder of Convertible Preferred Stock shall not receive less than $10.00 per share of Convertible Preferred Stock owned of record by such holder together with an amount in cash equal to all dividends accrued and unpaid thereon to the date of such distribution or payment (the "Liquidation Preference"). (b) Neither the consolidation, merger, amalgamation or other business combination of the Company with or into any other Person or Persons nor the sale, lease, exchange or conveyance of all or any part of the property, assets or business of the Company to a Person or Persons shall be deemed to be a liquidation, dissolution or winding up of the Company for purposes of this Section 6. Section 7. Rank. The Convertible Preferred Stock shall rank, with respect ---- to preferences and relative, participating, optional and other special rights of the shares of such series and the qualifications, limitations and restrictions thereof, including, without limitation, with respect to the payment of dividends and redemption payments and the distribution of assets, prior to all Common Shares of the Company only to the extent provided herein and otherwise shall rank pari passu with the Common Shares. As provide in Section 6, with respect to any event that would require payment of the Liquidation Preference pursuant to Section 6(a), the Convertible Preferred Stock shall rank prior to all Common Shares with respect to distributions up to an amount equal to such Liquidation Preference, and with respect to all other distributions, pari passu with all Common Shares of the Company. Section 8. Transfer. Except to the extent required by applicable law, -------- Convertible Preferred Stock may not be transferred, other than (i) with the prior written consent of the Company, which consent shall not be unreasonably withheld or (ii) by any Initial Holder to one of its Affiliates. The Convertible Preferred Stock has not been registered under the Securities Act and may not be offered or sold in the United States or to any citizen or resident of the United States in the absence of a valid registration under the Securities Act except in reliance on an exemption from the registration requirements of the Securities Act. Section 9. Definitions. For the purposes of this Exhibit: ----------- "Affiliate" of any specified Person means any other Person directly or ----------- indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For purposes of this definition, "control" means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, by contract, or otherwise. "Board of Directors" means the Board of Directors of the Company. -------------------- 3 "Company" means Leucadia National Corporation. --------- "Conversion Number" means initially 134,772 and thereafter shall be -------------------- subject to adjustment from time to time pursuant to the terms of Section 5 hereof. "Initial Holders" means each purchaser of Convertible Preferred Stock ------------------ pursuant to the Subscription Agreement, dated as of December 23, 2002, among such purchasers and the Company. "Person" means any person or entity of any nature whatsoever, -------- specifically including an individual, a firm, a company, a Company, a partnership, a trust or other entity. "Securities Act" shall mean the United States Securities Act of 1933, ----------------- and the rules and regulations promulgated thereunder. "Subsidiary" of any Person means any Company or other entity of which a ------------ majority of the voting power of the voting equity securities or equity interest is owned, directly or indirectly, by such Person. 4. The foregoing amendment of the Corporation's Certificate of Incorporation was adopted by an affirmative vote of the Board of Directors of the Corporation at a special meeting of the Board on December 20, 2002. 4 IN WITNESS WHEREOF, the Corporation has caused this Certificate of Amendment of the Certificate of Incorporation to be executed by a duly authorized officer as of the 23rd day of December, 2002. LEUCADIA NATIONAL CORPORATION By: /s/ Joseph A. Orlando ------------------------- Name: Joseph A. Orlando Title: Vice President and Chief Financial Officer 5 EX-21 4 exhb21.txt LEUCADIA NATIONAL CORPORATION EXHIBIT 21 Exhibit 21 LEUCADIA NATIONAL CORPORATION Subsidiaries as of December 31, 2002 State/Country of Name Incorporation - ---- ------------- Baldwin Enterprises, Inc. Colorado NSAC, Inc. Colorado RRP, Inc. Colorado 330 Mad. Parent Corp. Delaware Aques Investments Corporation II Delaware Aques Investments Corporation III Delaware AIC Financial Corporation Delaware American Investment Company Delaware Baldwin-CIS L.L.C. Delaware BELLPET, Inc. Delaware Conwed Corporation Delaware Hawaii Ventures, LLC Delaware HWB 2507 Kalakaua, LLC Delaware Leucadia Aviation, Inc. Delaware Leucadia Cellars, Ltd. Delaware Leucadia Property Holdings, Ltd. Delaware LNC Investments, LLC Delaware LUK-Acquisition I, LLC Delaware LUK-Acquisition II, LLC Delaware LUK-Asia LLC Delaware LUK-HY Fund, LLC Delaware LUK-Israel LLC Delaware LUK-Shop, LLC Delaware LUK-TTP, LLC Delaware LUK-Visible, LLC Delaware Lympus, LLC Delaware MK Gold Company Delaware Nead Corporation Delaware Neward Corporation Delaware Rastin Investing Corp. Delaware Stillwater Holdings, LLC Delaware Terra Thermal Power, LLC Delaware Rosemary Beach Cottage Rental Company Florida Rosemary Beach Land Company Florida Rosemary Beach Realty, Inc. Florida College Life Development Corporation Indiana Professional Data Management, Inc. Indiana TTP Corporation Nevada Allcity Insurance Company New York Empire Insurance Company New York Leucadia, Inc. New York Leucadia Investors, Inc. New York LUK-REN, Inc. New York HWB Ventures, Inc. New York Phlcorp, Inc. Pennsylvania Pine Ridge Winery, LLC Texas American Investment Bank, N.A. United States American Investment Financial Utah Leucadia Financial Corporation Utah Leucadia Properties, Inc. Utah Silver Mountain Industries, Inc. Utah Telluride Properties Acquisition, Inc. Utah Terracor II Utah WMAC Investment Corporation Wisconsin Canadian International Power Company Limited Wyoming LUK-Japan Ltd. British Virgin Islands MV Gold de Brazil Ltd. Brazil MK Gold de Mexico, S. de R.L. de. C.V. (Mexico) Mexico Cobre Las Cruces, S.A. Spain Subsidiaries not included on this list, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary as of December 31, 2002. EX-23 5 pwcconsent.txt EXHIBIT 23.1 PRICEWATERHOUSECOOPERS CONSENT Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No.2-84303), Form S-8 and S-3 (No.33-6054), Form S-8 and S-3 (No.33-26434), Form S-8 and S-3 (No.33-30277), Form S-8 (No.33-61682), Form S-8 (No.33-61718), Form S-8 (No.333-51494) and Form S-4 (No.333-86018), of Leucadia National Corporation of our report dated March 12, 2003 relating the financial statements and financial statement schedule, which appears in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP New York, New York March 12, 2003 EX-23 6 olympuscon.txt EXHIBIT 23.2 OLYMPUS RE CONSENT Exhibit 23.2 Consent of Independent Auditors We consent to the inclusion of our report, dated February 18, 2003 with respect to the financial statements of Olympus Re Holdings Ltd. for the year ended December 31, 2002 and the period from December 3, 2001 (date of incorporation) to December 31, 2001, included as Item 15(d) in this Form 10-K and with respect to the incorporation by reference in the Registration Statements on Form S-8 (No. 2-84303), Form S-8 and S-3 (No. 33-6054), Form S-8 and S-3 (No. 33-26434), Form S-8 and S-3 (No. 33-30277), Form S-8 (No. 33-61682), Form S-8 (No. 33-61718), Form S-8 (No. 333-51494), and Form S-4 (No. 333-86018). /s/ PricewaterhouseCoopers - -------------------------- PricewaterhouseCoopers March 25, 2002 EX-23 7 eyconsent.txt EXHIBIT 23.3 ERNST & YOUNG CONSENT Exhibit 23.3 Consent of Independent Auditors We consent to the inclusion of our report, dated February 28, 2003, with respect to the financial statements of Berkadia LLC for the year ended December 31, 2002, included as Item 15(d) in this Form 10-K and with respect to the incorporation by reference in the Registration Statements on Form S-8 (No. 2-84303), Form S-8 and S-3 (No. 33-6054), Form S-8 and S-3 (No. 33-26434), Form S-8 and Form S-3 (No. 33-30277), Form S-8 (No. 33-61682), Form S-8 (No. 33-61718), Form S-8 (No. 333-51494), and Form S-4 (No. 333-86018). /s/ Ernst & Young LLP Phoenix, Arizona March 25, 2003 EX-10 8 jd3-25_share.txt EXHIBIT 10.37 LUK FIDEI SHARE PURCHASE AGREEMENT Exhibit 10.37 - -------------------------------------------------------------------------------- SHARE PURCHASE AGREEMENT - -------------------------------------------------------------------------------- BETWEEN: - - LUK FIDEI L.L.C., having its registered office 1209, Orange Street New Castle Country, Delaware, (USA), represented for the purposes of this Agreement by Mr. Luis Medeiros, acting in his capacity as Vice-President, or its successor in interest which holds the Shares (as defined below) as of the Date of Completion. Hereinafter jointly and severally referred to as the "SELLER", OF THE FIRST PART AND - - HAMPTON TRUST PLC, having its registered office 121, Mount Street, Mayfair, London WIK 3NW, represented by Mr. Graeme Jackson, Chairman of the Board of Directors, which shall substitute HAMPTON TRUST HOLDING (EUROPE) SA, a joint stock company governed by the Laws of Luxembourg, with a share capital of EUR 100,000 having its registered office at 81, rue Jean-Baptiste Gillardin, Petange, 4735 Luxembourg, registered with the Trade and Company registry of Luxembourg under number B86120, represented for the purposes of this Agreement by Mr. John C. Jones, acting in his capacity as Administrateur Delegue. Hereinafter jointly and severally referred to as the "BUYER", OF THE SECOND PART The SELLER and the BUYER shall be individually referred to as a "Party", and collectively as the "Parties" RECITALS Whereas SELLER is the sole shareholder of COMPAGNIE FONCIERE FIDEI (hereafter "FIDEI"), a French joint stock company ("societe anonyme") with a share capital of EUR 2,017,870.07, having its registered office located at 17 rue de Miromesnil - 75008 Paris, registered with the Trade and Company Registry of Paris under number 692 044 308; Whereas SELLER shall act solely in its own name and not on behalf of any other person; Whereas FIDEI owns, directly or indirectly a majority of the issued and outstanding shares of each of the Subsidiaries listed on EXHIBIT 1 and, SELLER shall undertake to cause FIDEI to wholly own, directly or indirectly, such Subsidiaries as of the Date of Completion, provided, however, that FIDEI does not own a majority of the issued and outstanding shares of DL Finance & Partners and as of the Date of Completion, FIDEI SCA will either (i) wholly own, directly or indirectly or (ii) not own any shares of DL Finance & Partners; Whereas FIDEI is in the process of converting from a "societe anonyme" into a "societe en commandite par actions" (hereafter the "Conversion") and after giving effect to the Conversion, FIDEI shall be referred to as FIDEI SCA. Whereas it is a condition to this Agreement that the Conversion be consummated prior to the Date of Completion and the failure of the Conversion to occur on or prior to June 1, 2002 shall result in the automatic termination of this Agreement without liability of either Party under this Agreement. Whereas, it is a condition to this Agreement that the limited partners of FIDEI SCA receive at least Euro 52,000,000 pursuant to a share buy back proposed by the Managing Director ("gerant") of FIDEI SCA after the Date of Signature but prior to the Date of Completion. Whereas SELLER agrees to sell to BUYER and BUYER agrees to purchase from SELLER, according to the terms and conditions set forth below, all of the issued and outstanding shares of FIDEI SCA and the Rights as General Partner as of the Date of Completion. NOW, THEREFORE, THE PARTIES HERETO HAVE AGREED AS FOLLOWS: ARTICLE 1. DEFINITIONS 1.1 The terms set out hereunder shall have the following meaning for the purpose of the Agreement: - - "Agreement": shall mean this agreement, including the Exhibits hereto, executed by SELLER and BUYER ; - - "Available Funds": shall mean cash and/or the value of marketable securities as indicated in the Financial Statements, adjusted to reflect the cash and/or value of marketable securities of FIDEI SCA on the Date of Completion; - - "Bonds": shall mean all the issued and outstanding bonds of FIDEI; the categories of issued and outstanding bonds of FIDEI are listed on EXHIBIT 2; - - "Business Day": shall mean a day (other than Saturday or Sunday and bank holidays) on which banks are normally open in Paris for normal business; 2 - -"Conversion": shall mean the conversion of FIDEI from a societe anonyme into a "societe en commandite par actions". - -"Date of Completion": shall mean the date that is (i) twenty-five days after the deposit of the extract of the minutes of the shareholders meeting of FIDEI SCA deciding of the share buy-back with the Paris Trade Register and (ii) after the cancellation by the manager of FIDEI SCA to the redeemed shares, and shall occur no later than June 30, 2002, with a best efforts to May 31, 2002, unless otherwise agreed to by the Parties; - - "Date of Signature": shall mean the date on which this Agreement is executed by the Parties; - - "FIDEI": shall mean COMPAGNIE FONCIERE FIDEI, as defined in the Recitals; and "FIDEI SCA" shall mean FIDEI after its conversion into a "societe en commandite par actions" as set forth in Section 6.1; - - "Financial Statements": shall mean the profit and loss accounts as well as the balance sheet of FIDEI and the Subsidiaries, prepared in accordance with generally accepted French accounting principles, applied on a consistent basis and established on a consolidated basis for the financial year ending on 31 December 2001. These statements are attached in EXHIBIT 3. - -"Pro forma Balance Sheet": is the draft document being in Exhibit 7, a definitive document being provided five (5) Business Days before Date of Completion. Temporary Proforma Balance Sheet means the Proforma Balance Sheet attached hereto at the Date of Signature. Final Proforma Balance Sheet means the one issued Five (5) Business Days before the Date of Completion. - -"Rights as General Partner" : shall mean the rights owned by the sole General Partner of FIDEI SCA and mentioned in the draft articles of association of FIDEI SCA (EXHIBIT 5); - -"Shares": shall mean shares of FIDEI or FIDEI SCA, with a nominal value of EUR 0.76]; - - "Subsidiaries" shall mean the entities that are majority owned by FIDEI and listed on EXHIBIT 1, which entities SELLER shall undertake to be wholly owned, either directly or indirectly, by FIDEI SCA on the Date of Completion, provided, however, that FIDEI does not own a majority of the issued and outstanding shares of DL Finance & Partners and as of the Date of Completion, FIDEI SCA will either (i) wholly own, directly or indirectly or (ii) not own any shares of DL Finance & Partners; - -"Transfer Order": shall mean the legal form ("Ordre de mouvement") according to which SELLER will transfer the Shares of FIDEI SCA to BUYER. 1.2 Plural forms shall include singular forms and vice versa. ARTICLE 2. SALE AND PURCHASE OF THE SHARES OF FIDEI SCA AND RIGHTS AS GENERAL - --------- ------------------------------------------------------------------- PARTNER - ------- 2.1 SELLER undertakes in its own name and not on behalf of any other person to sell on the Date of Completion to BUYER and BUYER undertakes to purchase on the Date of Completion from SELLER, all of the issued and outstanding shares of FIDEI SCA. 2.2 SELLER undertakes in its own name and not on behalf of any other party to sell on the Date of Completion and BUYER undertakes to purchase on the Date of Completion from SELLER all of its Rights as General Partner. 3 2.3 SELLER shall undertake to causes FIDEI SCA to directly or indirectly to wholly own each of the Subsidiaries, on the Date of Completion, provided, however, that as of the Date of Completion, FIDEI SCA will either (i) wholly own, directly or indirectly or (ii) not own any shares of DL Finance & Partners. ARTICLE 3. AGGREGATE PURCHASE PRICE OF THE SHARES OF FIDEI SCA AND RIGHTS AS - ---------- ------------------------------------------------------------------ GENERAL PARTNER - --------------- 3.1 On the Date of Completion, BUYER shall pay to SELLER, TWENTY THREE EUROS and SEVENTY CENTIMES (EUR 23.70) per share for each share of FIDEI SCA issued and outstanding, in accordance with Article 5 hereof. The number of shares of FIDEI SCA to be purchased by BUYER on the Date of Completion shall be EIGHT HUNDRED and TEN THOUSAND THREE HUNDRED and TWENTY FOUR (810,324) and the aggregate purchase price for the shares of FIDEI SCA paid to SELLER shall be NINETEEN MILION TWO HUNDRED SEVEN THOUSAND EUROS (EUR 19.207.00) (hereafter the "Purchase Price"). 3.2 On the Date of Completion, BUYER shall pay to SELLER an additional TWO THOUSAND TWO HUNDRED and EIGHTY SIX EUROS (EUR 2,286), for SELLER's Rights as General Partner (together with Purchase Price, the "Aggregate Purchase Price"). 3.3 The Aggregate Purchase Price shall be adjusted in compliance with article 7.5. ARTICLE 4. CLOSING OF THE SALE OF SHARES AND RIGHTS AS GENERAL PARTNER - --------- ----------------------------------------------------------- 4.1 Subject to the satisfaction of the conditions contained herein, the closing of the sale of Shares shall occur on the Date of Completion pursuant to the execution of a Transfer Order by SELLER and BUYER. The Parties undertake to have the transfer of the Shares registered in the books and records of FIDEI SCA on the Date of Completion but in any event no later than five (5) Business Days after the Date of Completion. The above mentioned registration in the books and records of FIDEI SCA shall only occur upon the receipt by SELLER of the Aggregate Share Purchase Price in accordance with Article 5 below. The Shares shall be transferred with full rights ("jouissance") as of the date of their transfer. Registration duties due to any person incurred by the transfer of Shares shall be the sole responsibility of, and shall be borne by, BUYER. 4.2 Upon SELLER's receipt of the additional price of TWO THOUSAND TWO HUNDRED and EIGHTY SIX EUROS (EUR 2,286) SELLER's Rights as General Partner shall be transferred pursuant to a transfer agreement between the Parties. An extraordinary shareholders' meeting shall be called and held by the BUYER to modify the articles of association of FIDEI SCA in this respect. Registration duties due to any person incurred by the transfer of Rights as General Partner shall be the sole responsibility of, and shall be borne by, BUYER. 4 ARTICLE 5. PAYMENT OF THE PURCHASE PRICE - ----------- ----------------------------- BUYER shall pay the Purchase Price as set forth in Articles 3 and 4 above on the Date of Completion by wire transfer in immediately available funds to an account designated by SELLER at least three days prior to the expected Date of Completion. The BUYER shall justify the wire transfer on the Date of Completion. ARTICLE 6. CONDITIONS TO CLOSING - ---------- ---------------------- 6.1 In the event that the Conversion has not been consummated on or prior to June 1, 2002 for any reason beyond the reasonable control of the SELLER, this Agreement shall be considered as cancelled without liability of either Party under this Agreement. However the Parties undertake to negociate in goodfaith an equitable alternative transaction 6.2 In the event that creditors of FIDEI SCA request the repayment of an aggregate amount of FIFTY MILLION EUROS (EUR 50,000,000) or more during the twenty (20) day period after the notice of redemption be filled to the Paris Trade Register, this Agreement shall be considered as cancelled without liability of either Party under this Agreement. However the Parties undertake to negociate in goodfaith an equitable alternative transaction 6.3 In the event that FIDEI SCA does not have Available Funds equal to or greater than TWENTY FIVE MILLION (EUR 25,000,000) on the Date of Completion, BUYER shall be entitled to cancel this Agreement without liability to either Party under this Agreement by notifying SELLER in writing pursuant to the notice provisions contained in Section 10.8 below on or before the Date of Completion. 6.4 At the Date of Completion, SELLER shall deliver to BUYER: o the written resignation of the Managing Director ("gerant") and all the members of the Supervisory Board of FIDEI SCA, provided, however, that such resignations shall be accepted and ratified at the next shareholders' meetings of FIDEI SCA and the Subsidiaries as set forth in Section 6.6 below; o the written resignation of all the members of each Board of Directors and each Chairman or President of each of the Subsidiaries, a list of such directors, Chairmen and Presidents is set forth on EXHIBIT 4 hereto, provided, however, that such resignations shall be accepted and ratified at the next shareholders' meetings of FIDEI SCA and the Subsidiaries as set forth in Section 6.6 below. 6.5 The replacement of the Managing Director and the members of the Supervisory Board of FIDEI SCA and the members of the Board of Directors and each Chairman or President of each of the Subsidiaries shall take place at the next shareholders' meetings of FIDEI SCA and the Subsidiaries, which meetings shall be convened no later than five (5) Business Days after the Date of Completion. ARTICLE 7. REAL ESTATE PROPERTIES - ----------- ---------------------- 7.1 EXHIBIT 9 hereto lists all real property owned by FIDEI that are under a commitment to sell ("promesse de vente" or "compromis de vente") as of the Date of Signature, by FIDEI or the Subsidiaries, on the one hand, and third parties on the other hand. 7.2 In the event that any property listed on EXHIBIT 9, other than Sevran lot n 3 which BUYER has agreed to purchase from FIDEI, is not sold in accordance with the contract of sale, BUYER shall have the option to sell such property to 5 SELLER (hereafter the "Put Right") by giving SELLER written notice no later than 90 days after the Date of Completion of its intent to sell such property to SELLER. Upon giving such notice to SELLER, BUYER shall be obligated to sell to SELLER and SELLER shall be obligated to purchase from BUYER any such property at a price equal to the purchase price as set forth on EXHIBIT 9. The closing of the sale of real property pursuant to a Put Right shall take place within 60 days after receipt by SELLER of the notice described above and SELLER shall pay the purchase price by wire transfer in immediately available funds to an account designated by BUYER at least three days prior to the expected closing date. 7.3 Prior to and after the Date of Completion, BUYER hereby agrees not to intervene or interfere in the process of sale of the properties listed on EXHIBIT 9 by FIDEI (or FIDEI SCA or the Subsidiaries, as the case may be) to any third party, provided that the purchase price is at least equal to the purchase price listed on EXHIBIT 9. After the Date of Completion, BUYER will use its good faith efforts to fulfill the obligations of FIDEI SCA under such sale agreements. Any breach of BUYER's commitment shall result in the termination of the Put Right with respect to the real property concerned. 7.4 SELLER hereby agrees that a representative of SELLER selected by Seller shall assist in the sale of the properties listed on EXHIBIT 9 pursuant to the contracts of sale. BUYER shall give SELLER written notice at least five (5) Business Days prior to any meeting with a third party relating to the sale of the properties listed on EXHIBIT 9 and shall permit SELLER's representative to participate fully in any such meetings. Any breach of BUYER's commitment shall result in the termination of the Put Right with respect to the real property concerned. 7.5 EXHIBITS 8A through 8C list real estate property currently under lease contracts ("credit bail") by FIDEI or the Subsidiaries. EXHIBITS 8D 8E and 8F list real estate property currently owned by FIDEI or the Subsidiaries. The Parties hereby agree that FIDEI (or FIDEI SCA) shall retain the properties set forth on EXHIBITS 8A through 8F at the value set forth on such EXHIBITS. The Parties hereby agree that the assets listed on EXHIBITS 8D shall be subject to a revised valuation based on the revised rental situation (indicating for each real estate, the identity of lessees and projected yearly rentals) of real estate owned by FIDEI, FIDEI SCA or the Subsidiaries, as the case may be, five Business Days prior to the expected Date of Completion (hereafter the "Valuation Date"). Such revised valuation shall only occur if the rental situation is modified between the Date of Signature and the Valuation Date and shall be based upon the present value of the increase in rental income attributable to the properties. The Parties hereby agree that the revised valuation shall not take into account any new lease contracts that are for a term of less than two (2) years ("Baux precaires"). In the event that the revised valuation results in an increase to the valuation of the assets listed on EXHIBIT 8D, the Aggregate Share Purchase Price shall be increased by such adjustment. In no event shall the revised valuation result in a decrease in the Aggregate Share Purchase Price. SELLER shall provide BUYER with an adjusted valuation of the Valuation Date. In the event that BUYER objects to the revaluation, the consummation of the transactions shall take place on the Date of Completion and BUYER shall pay the Purchase Price, as adjusted pursuant to this Section 7.5; provided, however, that BUYER and SELLER shall negotiate in good faith to agree on the revised valuation. If not, article 10.2 will apply. 6 ARTICLE 8. REPRESENTATIONS OF SELLER 8.1 SELLER hereby represents that as of the Date of Signature: o FIDEI is a French "societe anonyme" (to be converted into an "societe en commandite par actions"), with a share capital of EUR 2,017,870.07 divided into 2,647,272 shares with a par value of EURO 0.76, all of the same class and fully paid up when issued, whose registered office is located at 17, rue de Miromesnil - 75008 Paris, registered with the Trade and Companies Register of Paris under number 692 044 308, as certified by the "Extrait K-bis" attached hereto as EXHIBIT 6. o the information given in the said "Extrait K bis" is true and accurate in all material respects, and FIDEI was incorporated in accordance with the French Companies Act and all relevant regulations in effect under the form of a "societe anonyme" by way of a private agreement that was registered with the Trade and Companies Register of Paris on 29 October 1969. o SELLER owns the issued and outstanding Shares of FIDEI free and clear of any and all liens, encumbrances, pre-emptive rights, seizures, or any other restrictions on transfer and has the full power and authority to transfer the issued and outstanding Shares of FIDEI. o other than as set forth on EXHIBIT 1, FIDEI and the Subsidiaries are not shareholders or partners in any other companies and are not representatives of other companies or members of a "groupement d'interet economique". o the issued and outstanding categories of Bonds are listed on EXHIBIT 2. o to the knowledge of SELLER, other than the Bonds the tangible and intangible property, personal and real property of FIDEI is not encumbered by any collateral, mortgage or security interest. o to the knowledge of SELLER, FIDEI has not granted any pledge, guarantee or personal guarantee of the performance of any obligations entered into by FIDEI or any third party. o to the knowledge of SELLER, other than the Conversion, the implementation of a Share buy back, FIDEI has not entered into any [material] financial transactions that are not reflected on the Financial Statements. o to the knowledge of SELLER, FIDEI is not a party to any loan that is not reflected in the Financial Statements. o to the knowledge of SELLER, FIDEI is insured in such amounts and against such risks and losses as are customary for companies conducting the business as conducted by FIDEI. To the knowledge of SELLER, none of the insurance policies taken out by FIDEI are cancelable as a result of the Conversion or the transfer of the issued and outstanding Shares of FIDEI SCA to BUYER. To the knowledge of SELLER, the insurance policies of FIDEI are valid and in full force and effect. o to the knowledge of SELLER, other than as set forth on EXHIBIT 10, there is no action, suit, proceeding or investigation pending against FIDEI or the Subsidiaries. 7 o The Financial Statements have been prepared in accordance with generally accepted French accounting principles, applied on a consistent basis during the periods involved. To the knowledge of SELLER, the Financial Statements of FIDEI fairly present in all material respects the consolidated financial position of FIDEI as at 31 December 2001. 8.2 Tax Issues: - --- ----------- SELLER represents to BUYER that the following amount of ordinary tax losses, deferred tax losses (evergreen losses) and long term capital losses are as set in the FY 2001 tax returns of the FIDEI Tax group and Fideicom: i) FIDEI Tax group - - Tax group ordinary losses: EUR 18,152,170 Such ordinary losses are allocated as follows: created in FY Amount 1999 EUR 18,152,170 2000 EUR 0 2001 EUR 0 - - Tax group deferred losses: EUR 28,845,553 - - Tax group long term tax losses: EUR 20,641,424 Such long term tax losses are allocated as follows: created in FY Amount 1995 EUR 19,444,393 1996 EUR 1,197,031 ii) Fideicom tax losses: - - Ordinary tax losses : EUR 0 - - Long term losses: EUR 0 - - Deferred tax losses : EUR 30,712,158 The above amounts were determinated as follows: o the amounts stated in the 2001 FIDEI consolidated tax return and the 2001 Fideicom tax return, as applicable, o less the use of 1997 and 1999 FIDEI group ordinary tax losses resulting from the de-booking of the long term capital gain reserve of FIDEI as an ordinary reserve during FY 2002. In the event that the French tax administration disallows any of the amounts listed above as inaccurate, improper or incorrect under the tax laws of France existing as of the Date of signature, SELLER shall indemnify and hold BUYER harmless against any loss, liability, obligation or damage, and all assessments, judgments and penalties incident to any such loss, liability, obligation or damage (hereafter "Losses") incurred by BUYER; provided, however, that SELLER shall have no obligation to indemnify BUYER unless and until such Losses exceed 8 EURO 200,000 and provided, further, however, that SELLER shall not be liable to BUYER for Losses in excess of EURO 979,102. In the absence of an agreement between BUYER and SELLER, all sums due by SELLER to BUYER by virtue of this indemnity shall be paid within thirty (30) Business Days from such sums being adjudged finally due, as a result of a final and non-appealable legal judgment handed down by any competent taxing authority. In respect of the calculation of the indemnity which may be due by SELLER to BUYER, it is agreed that: o any tax reassessment involving a simple decrease of the above mentioned tax losses of the FIDEI consolidated tax group or of Fideicom shall be taken into account only if it triggers an effective reduction on availability of the tax losses for such consolidated tax group and for Fideicom; o for the purpose of calculating the amount of any indemnity payment to be made by SELLER to BUYER, such indemnity payment shall be reduced by any benefit obtained or likely to be obtained by the FIDEI consolidated tax group, by Fideicom or by BUYER for any reason, including, without limitation, by reason of an increase in liabilities or decrease in assets giving rise to such indemnity payment, such as (i) a tax decrease, saving or refund, (ii) the creation or increase in deficits on the Date of Completion (of any kind) or (iii) the receipt of proceeds from an insurance policy or (iv) any adjustments made to tax returns of prior years that result in any of the above. It is agreed that the amount of indemnity to be paid under this specific tax indemnity by SELLER to BUYER shall be determined by applying to the amount of tax losses listed above that are effectively challenged by the French tax authorities, the following rates: - Ordinary tax losses: created in FY Rate 1999 6% 2000 7% 2001 8% - Deferred tax losses: 10% - Long term tax losses: 7.5% All claims under this indemnity must be made in writing with acknowledgement of receipt addressed by BUYER to SELLER by the end of the relevant applicable statute of limitation period for tax matters plus thirty (30) days. This specific indemnity shall expire on 31 January 2005. BUYER shall ensure that (i) SELLER will receive copies of complete documents relating to any claims within eight (8) Business Days, (ii) neither BUYER, FIDEI SCA nor the Subsidiaries shall accept liability for or compromise any claims that give rise or could give rise to any claim for indemnification hereunder without the prior consent of SELLER, (iii) BUYER, FIDEI SCA and the Subsidiaries shall give SELLER and its advisors access to all documents and information likely to be useful in the defense of any claim and (iv) BUYER, FIDEI SCA and the Subsidiaries shall allow SELLER to select its own counsel who will act under the instructions of SELLER to defend the interests of FIDEI, FIDEI SCA and the Subsidiaries in respect of the tax claims. If BUYER, FIDEI SCA or the Subsidiaries decide, contrary to the demand of SELLER, not to defend any claim, 9 BUYER, FIDEI SCA and the Subsidiaries shall have no right to seek indemnification from SELLER under this indemnity. SELLER shall have the right but not the obligation (by providing BUYER notice pursuant to Section 10.8 below) to represent the interests of FIDEI SCA and the Subsidiaries in any tax audit or administrative or court proceeding relating to the taxable periods of FIDEI SCA and the Subsidiaries which end on or before the Date of Completion. BUYER agrees that it will cooperate fully with the SELLER and its counsel in the defense against or compromise of any claim in any said proceeding. SELLER shall bear the legal fees of its advisors or counsels. BUYER shall cause FIDEI SCA and the Subsidiaries to give, free access to SELLER and its advisors to all premises, documents and accounts of FIDEI SCA and the Subsidiaries and will keep SELLER informed of the progression of all elements reflected or which should be reflected in the accounts of FIDEI SCA and the Subsidiaries. It is understood that this free access is limited to the scope and the needs of Article 8. BUYER undertakes to ensure that FIDEI SCA and the Subsidiaries shall keep and maintain all books and records as may be needed to defend any claim from the tax authorities and SELLER shall be relieved of its obligation to indemnify BUYER for any Losses that SELLER could not adequately contest because of BUYER's failure to ensure such books and records are maintained. ARTICLE 9. REPRESENTATION OF BUYER - ----------- ----------------------- BUYER represents that it (i) has received all the information it considers necessary or appropriate for deciding whether to purchase the Shares and Rights as General Partner, (ii) has had an opportunity to ask questions and receive answers from FIDEI and the Subsidiaries regarding the business conducted by FIDEI and the Subsidiaries and the business, properties and financial condition of FIDEI and the Subsidiaries, (iii) has had the opportunity to visit and survey the properties of FIDEI and the Subsidiaries, (iv) has had the opportunity to properly examine and evaluate all documentation relevant to the properties and (v) has had an opportunity to conduct a thorough and serious technical and operational investigation into the various assets and liabilities of FIDEI and the Subsidiaries for the purpose of the Agreement. BUYER has satisfied itself in respect of all investigations and documentation received or requested from SELLER. ARTICLE 10. MISCELLANEOUS - ------------ ------------- 10.1 LANGUAGE - GOVERNING LAW This Agreement is drawn up in English and shall be governed by and construed in accordance with the laws of France. Should a French version be prepared, the prevailing version shall be the English version. 10.2. DISPUTE RESOLUTION The Parties agree to submit any dispute or disagreement arising from this Agreement to an arbitral tribunal composed of three (3) arbitrators. The seat of the arbitral tribunal shall be Paris. Each Party shall appoint one arbitrator within 15 days from the notice sent by the most diligent party appointing its arbitrator, by letter with acknowledgment of receipt. If either Party fails to appoint its arbitrator, this Party shall be notified to do so within 15 days by letter with acknowledgment of receipt. 10 If such Party does not appoint its arbitrator within this schedule, such appointment shall be requested to the President of the Tribunal de Commerce de Paris, "statuant en la forme des referes", at the request of the most diligent Party. The two arbitrators shall appoint the third arbitrator within the month following the appointment of the second arbitrator. If the two arbitrators fail to do so, the appointment of the third arbitrator shall be requested to the resident of the Tribunal de Commerce de Paris, "statuant en la forme des referes", at the request of the most diligent Party. The decisions of such arbitrators shall be final and not open to appeal. The Parties shall be responsible for their own costs and expenses (including legal fees) in connection with any arbitration; provided, however, that each Party will be responsible for 50% of the fees and expenses of the arbitrators. 10.2 CONFIDENTIALITY Prior to the Date of Completion, BUYER hereby agrees not to disclose any confidential information currently in its possession or which may come into its possession concerning FIDEI, FIDEI SCA and the Subsidiaries and not to use such information for the benefit of any third party. After the Date of Completion, SELLER hereby agrees not to disclose any confidential information currently in its possession or which may come into its possession concerning FIDEI, FIDEI SCA and the Subsidiaries and not to use such information for the benefit of any third party Neither BUYER, SELLER nor any of their representatives shall issue any press release or public announcement concerning this Agreement or the transactions contemplated hereby without obtaining the prior written approval of the other party hereto, unless, disclosure is otherwise required by applicable law or by the applicable rules of any stock exchange on which BUYER or SELLER or their respective affiliates lists securities, provided, however, that, to the extent required by applicable law or the rules of any stock exchange, the party intending to make such release shall use its commercially reasonable efforts consistent with such applicable law or rule to consult with the other party with respect to the text thereof. 10.3 FEES AND EXPENSES Each of the Parties shall bear its own costs and expenses (including legal fees and expenses) incurred by either Party in connection with the preparation and negotiation of this Agreement and the consummation of the transactions contemplated hereby. 10.4 ENTIRE AGREEMENT; SEVERABILITY; AMENDMENTS This Agreement constitutes the entire agreement among the Parties and supersedes any prior and contemporaneous understandings, agreements, or representations by or among the Parties, written or oral, to the extent they related in any way to the subject matter hereof. Any term or provision of this Agreement that is invalid or unenforceable in any situation in any jurisdiction shall not affect the validity or enforceability of the remaining terms and provisions of this Agreement or the validity or enforceability of the offending term or provision in any other situation or in any other jurisdiction. However, the Parties hereto shall attempt, through negotiations in good faith, to replace any provision of this Agreement so held to be invalid or unenforceable by a provision of comparable effect. The failure of the Parties to reach an agreement on a replacement provision shall neither affect the validity of the remaining provisions of this Agreement nor the validity of the valid or enforceable part of any provision held partly invalid, which provision shall take effect to the maximum extent permitted by law. 11 No amendment of any provision of this Agreement shall be valid unless the same shall be in writing and signed by each Party. 10.5 BINDING EFFECT; ASSIGNMENT This Agreement shall be binding upon and inure to the benefit of the parties and their respective successors and permitted assigns. Nothing in this Agreement shall create or be deemed to create any third party beneficiary rights in any person or entity not a party to this Agreement. Other than the Conversion and the implementation of a Share buy back, no assignment of this Agreement or of any rights or obligations hereunder may be made by either the SELLER or the BUYER (by operation of law or otherwise) without the prior written consent of the other parties hereto and any attempted assignment without the required consents shall be void[; provided, however, that the SELLER may assign this Agreement and any or all rights or obligations hereunder to any affiliate of SELLER. Upon any such permitted assignment, the references in this Agreement to the SELLER shall apply to any such assignee unless the context otherwise requires]. 10.6 WAIVERS The failure of any Party hereto to exercise any right, power or remedy provided under this Agreement or otherwise available in respect hereof at law or in equity, or to insist upon compliance by any other Party hereto with its obligations hereunder, and any custom or practice of the parties at variance with the terms hereof, shall not constitute a waiver by such Party of its right to exercise any such or other right, power or remedy or to demand such compliance. 10.7 NOTIFICATIONS All notices and other communications required or permitted hereunder shall be in writing and, unless otherwise provided in this Agreement, will be deemed to have been duly given when delivered in person or when dispatched by electronic facsimile transfer (confirmed in writing by mail simultaneously dispatched) or two Business Days after having been dispatched by a nationally recognized overnight courier service to the appropriate party at the address specified below |X| To BUYER at: HAMPTON TRUST HOLDINGS (EUROPE) SA 81, rue Jean-Baptiste Gillardin Petange 4735 Luxembourg Attn.: Mr. John C. Jones, Administrateur Delegue Facsimile: With a copy to: TESTU PACLOT MOITRY Me Jean-Hubert Moitry 4, rue de Galliera 75 116 Paris Facsimile: To SELLER at :LUK FIDEI LLC 1315 Park Avenue South New York, New York, 10010 Attention: Luis Medeiros Facsimile: (212) 598-3245 12 With a copy to: JF Delepoulle Colisee Mur 17, rue de Miromesnil F - 75008 Paris Facsimile: and Weil, Gotshal & Manges LLP 767 Fifth Avenue New York, New York 10153 Attention: Andrea A. Bernstein Facsimile: (212) 310-8007 10.8 LIST OF EXHIBITS Exhibit 1 : List of Subsidiaries Exhibit 2 : List of the categories of Bonds issued by FIDEI Exhibit 3 : Financial Statements Exhibit 4 : List of representatives and managers of FIDEI and its Subsidiaries Exhibit 5 : Draft of the articles of association of FIDEI SCA Exhibit 6 : Articles of association and Extrait K bis of FIDEI and its Subsidiaries Exhibit 7: Temporary Pro forma Balance Sheet at the Date of Signature Exhibit 8A through 8F: Value of the real estate and financial lease contracts owned by FIDEI and the Subsidiaries at the Date of Completion Exhibit 9: List of real estate properties under commitment to sell Exhibit 10: Action, suit,proceeding or investigation pending against FIDEI or the Subsidiaries On the 17th April 2002, In Paris, Made in two (2) original copies /s/ Luis Medeiros /s/ Graeme Jackson - -------------------------------- -------------------------------- SELLER BUYER LUK FIDEI L.L.C and HAMPTON TRUST HOLDING (EUROPE) SA HAMPTON TRUST PLC by: John C. Jones title: Administrateur Delegue by: Luis Medeiros by: Graeme Jackson Title: Vice President Title: Chairman of the Board 13 EX-10 9 jd3-25_reiterative.txt EXHIBIT 10.38 REITERATIVE SHARE PUR AGREE Exhibit 10.38 - -------------------------------------------------------------------------------- REITERATIVE SHARE PURCHASE AGREEMENT - -------------------------------------------------------------------------------- BETWEEN: - - SAVITS AB PRIVATE (formerly Startskottet 21918 AB), a company governed under the Laws of Sweden, having its registered office, c/o Hellstrom & Partners Advokatbyra HB - Box 7305 - 103 90 STOCKHOLM -SWEDEN, registered under number 556622 - 7574, represented for the purposes of this Reiterative Share Purchase Agreement by Luis Medeiros duly empowered pursuant to a Power of Attorney attached on EXHIBIT 10 hereto. Hereinafter referred to as the "SELLER", OF THE FIRST PART AND - - HAMPTON TRUST HOLDING (EUROPE) SA, a joint stock company governed by the Laws of Luxembourg, with a share capital of EUR 100,000 having its registered office at 81, rue Jean-Baptiste Gillardin, Petange, 4735 Luxembourg, registered with the Trade and Company registry of Luxembourg under number B86120, represented for the purposes of this Agreement by Mr John C. Jones, acting in his capacity as Administrateur Delegue, and represented by Mr. Graeme Jackson acting in his capacity as "Administrateur" - - MR JOHN C. JONES, having his domicile at Courtenay Lodge, Courtenay Terrace, Hove, BN3 2WF, United Kingdom - - HERALD CENTURY CONSOLIDATED SA, a joint stock company governed by the Laws of Luxembourg, with a share capital of EUR 100,000 having its registered office at 69, route d'Esch, 2953 Luxembourg, registered with the Trade and Company registry of Luxembourg under number B 62-171, represented for the purposes of this Reiterative share Purchase Agreement by Mr John C. Jones, acting in his capacity as "Administateur Delegue" Hereinafter jointly and severally referred to as the "BUYER", OF THE SECOND PART The SELLER and the BUYER shall be individually referred to as a "Party", and collectively as the "Parties" RECITALS Whereas LUK FIDEI LLC was merged on April 24, 2002 into Baldwin Inc having its registered office 1209, Orange Street New Castle Country Delaware (USA). Whereas the "shareholders unconditional contribution" of FIDEI SCA to SAVITS AB by Baldwin Inc has been implemented on May 2, 2002; Whereas SELLER holds 99.99 % of COMPAGNIE FONCIERE FIDEI (hereafter "FIDEI SCA"), a French partnership with limited shares ("societe en commandite par actions") with a share capital of EUR 550,329, having its registered office located at 17 rue de Miromesnil - 75008 Paris, registered with the Trade and Company Registry of Paris under number 692 044 308 ; Whereas FIDEI is owned by three (3) other minor shareholders which are Lortay LLC, Rishly LLC and Homry LLC, three (3) companies organized under the Laws of Delaware (USA) and which respectively own one (1) share of FIDEI SCA; Whereas SELLER shall act in its own name and on behalf of the three (3) above mentioned minor shareholders ; Whereas FIDEI owns today directly 100 % of the issued and outstanding shares of each of the Subsidiaries; an updated list of Subsidiaries is attached on EXHIBIT 1 hereto; Whereas FIDEI, formerly a "societe anonyme", has been converted into a "societe en commandite par actions" by its extraordinary shareholders meeting dated April 29, 2002. A copy of the updated "Extrait K bis" is attached on EXHIBIT 2 hereto; Whereas by virtue of this reiterative share purchase agreement (Hereinafter "Reiterative Share Purchase Agreement" or "Reiterative SPA"), the Parties reiterate today the share purchase agreement (Hereafter "SPA") executed on April 17th, 2002, article 3 of which, on Aggregate Purchase price and Right as general partner, was modified in accordance with the articles 3.3, 7.5 and 10.5 al. 3 of the SPA by an amendment (Hereafter "Amendment") executed by both Parties on May 6, 2002 ; Whereas the extraordinary shareholders meeting held on May 6, 2002 decided a share buy back operation which minutes have been filed with the Paris Trade and Companies Register on May 7, 2002 and whereas the managing director of FIDEI SCA noted on minutes dated June 3, 2002, that the creditors opposition time period was elapsed and, consequently, (i) the share buy back was completed, (ii) the redeemed shares were cancelled and (iii) the share capital reduced. A copy of the non-opposition certificate issued by the Clerk of the Commercial Court of Paris is attached on EXHIBIT 3. The legal formalities regarding this operation are currently being processed by FIDEI SCA ; 2 Whereas the two following conditions, contained in Article 6 of the SPA, are today realised, namely : o the Conversion of FIDEI SCA has been implemented on April 29th, 2002 ; o The wire transfer by FIDEI SCA to SAVITS AB of an amount of EUR 51,982,803 following to the share buy back operation has been implemented on June 3, 2002. Whereas SELLER agrees to sell to BUYER and BUYER agrees to purchase from SELLER, according to the terms and conditions set forth below all of the issued and outstanding shares of FIDEI SCA. Whereas the Right as General Partner shall be purchased today in a separate agreement. NOW, THEREFORE, THE PARTIES HERETO HAVE AGREED AS FOLLOWS: ARTICLE 1. DEFINITIONS 1.1. The terms set out hereunder shall have the following meaning for the purpose of the Reiterative SPA: - - "Amendment": shall mean the amendment of the SPA executed on May 6, 2002. - -"Final Pro forma Balance Sheet": is the pro forma balance sheet attached on EXHIBIT 4 hereto; - - "Reiterative SPA": shall mean this agreement, including its Exhibits executed by SELLER and BUYER. - - "Minor shareholders of FIDEI SCA": shall mean Lortay LLC, Homry LLC and Rishly LLC, companies organized and existing under the Laws of Delaware (USA), each of them owning one (1) share of FIDEI ; - -"SPA": shall mean the share purchase agreement executed on April 17, 2002. - -"Shares": shall mean the 721.983 shares of FIDEI SCA after the share buy back operation. - -"Transfer Order": shall mean the legal form ("Ordre de mouvement") according to which SELLER shall transfer the Shares of FIDEI SCA to BUYER, a copy of which are attached hereto on EXHIBIT 5 hereto. 1.2. The other terms with a first capital letter are defined in the SPA. 1.3. Plural forms shall include singular forms and vice versa. 3 ARTICLE 2. SALE AND PURCHASE OF THE SHARES OF FIDEI SCA - ---------- --------------------------------------------- SELLER shall sell today in its own name and on behalf of the Minor Shareholders of FIDEI SCA to BUYER and BUYER shall purchase today from SELLER, all of the issued and outstanding shares of FIDEI SCA. The Parties undertake to have the transfers of the Shares registered in the books and records of FIDEI SCA today. The Shares shall be transferred with full rights ("jouissance") as of today. ARTICLE 3. PURCHASE PRICE OF THE SHARES OF FIDEI SCA - ---------- ------------------------------------------ BUYER shall pay to SELLER and the Minority Shareholders of FIDEI SCA on the basis of the Final Pro Forma Balance Sheet attached on EXHIBIT 4 - the amount of TWENTY FIVE EUROS and FORTY EIGHT CENTIMES (EUR 25.48) per share for each share of FIDEI SCA issued and outstanding. The number of shares of FIDEI SCA to be purchased by BUYER today shall be SEVEN HUNDRED TWENTY ONE THOUSAND NINE HUNDRED and EIGHTY THREE (721 983) and the purchase price for the shares of FIDEI SCA paid to SELLER and the Minor Shareholders shall be EIGHTEEN MILLION THREE HUNDRED NINETY SEVEN THOUSAND AND EIGHT HUNDRED AND EIGHTY THREE EUROS SIXTY SEVEN CENTIMES (18,397,883.67) (hereafter the "Purchase Price"). o Savits AB : 721.980 shares: 18,397,807.23 Euros: to be sold to Hampton Trust Holdings (Europe) SA o Lortay LLC: 1 share: 25.48 Euros: to be sold to Hampton Trust Holdings (Europe SA) o Rishly LLC: 1 share: 25.48 Euros: to be sold to Herald Century Consolidated SA o Homry LLC:1 share: 25.28 Euros: to be sold to Mr John C. JONES Registration duties due to any person incurred by the transfer of Shares shall be the sold responsibility of, and shall be borne by, BUYER. ARTICLE 4. PAYMENT OF THE PURCHASE PRICE - ---------- ------------------------------ BUYER shall pay the Purchase Price as set forth in Article 3 today by certificate check to the SELLER and the three (3) Minority Shareholders. Copies of the checks are attached on Exhibit 6 hereto. 4 ARTICLE 5. CONDITIONS TO CLOSING - ---------- ---------------------- SELLER shall deliver to BUYER today : o the written resignation of the Managing Director ("gerant"), the President and the Secretary of the Supervisory Board of FIDEI SCA at the effective date of today; a copy of these letters is attached on EXHIBIT 7 hereto ; o the written resignation of all the Presidents of each of the Subsidiaries listed on EXHIBIT 1 hereto ; a copy of these letters of resignation shall be attached on EXHIBIT 7 hereto ; o all the corporate documents listed on EXHIBIT 9 hereto. The Parties mutually agree that the replacement of the Managing Director of FIDEI SCA and the dismissal of the members of the Supervisory Board shall take place at the extraordinary shareholders' meeting of FIDEI SCA to be held today. ARTICLE 6. REAL ESTATE PROPERTIES - ---------- ----------------------- EXHIBIT 8 hereto is an updated list of all real property owned by FIDEI SCA which are still under a commitment to sell ("promesse de vente" or "compromis de vente") as of today, by FIDEI or the Subsidiaries, on the one hand, and third parties on the other hand. It is agreed by the Parties that the provisions 7.2, 7.3 and 7.4 of the SPA shall continue to apply and produce their effects. ARTICLE 7. REPRESENTATIONS OF SELLER AND BUYER - ---------- ------------------------------------ The Parties agree to refer to the articles 8 and 9 of the SPA as regards the representations and warranties made by them. ARTICLE 8. MISCELLANEOUS - ---------- -------------- This Reiterative Agreement is drawn up in English and shall be governed by and construed in accordance with the laws of France. Should a French version be prepared, the prevailing version shall be the English version. This Reiterative Agreement is confidential under the same conditions as defined in article 10.3 of the SPA. Each of the Parties shall bear its own costs and expenses (including legal fees and expenses) incurred by either Party in connection with the preparation and negotiation of the Reiterative Agreement and the consummation of the transactions contemplated hereby. 5 This Reiterative Agreement shall be binding upon and inure to the benefit of the Parties and their respective successors and permitted assigns in the same condition than in the article 10.6 of the SPA. The failure of any Party hereto to exercise any right, power or remedy provided under this Agreement or otherwise available in respect hereof at law or in equity, or to insist upon compliance by any other Party hereto with its obligations hereunder, and any custom or practice of the Parties at variance with the terms hereof, shall not constitute a waiver by such Party of its right to exercise any such or other right, power or remedy or to demand such compliance. All notices and other communications required or permitted hereunder shall be in writing and, unless otherwise provided in this Agreement, will be deemed to have been duly given when delivered in person or when dispatched by electronic facsimile transfer (confirmed in writing by mail simultaneously dispatched) or two Business Days after having been dispatched by a nationally recognized overnight courier service to the appropriate party at the address specified below |X| To BUYER at: HAMPTON TRUST HOLDINGS (EUROPE) SA 81, rue Jean-Baptiste Gillardin Petange 4735 Luxembourg Attn.: Mr. John C. Jones, Administrateur Delegue Facsimile: With a copy to: TESTU PACLOT MOITRY Me Jean-Hubert Moitry 4, rue de Galliera 75 116 Paris Facsimile: |X| To SELLER at : SAVITS AB PRIVATE Box 7305 10390 STOCKHOLM - SWEDEN Attn : Philip Cannella 6 With a copy to: JF Delepoulle Colisee Mur 17, rue de Miromesnil F - 75008 Paris and Weil, Gotshal & Manges LLP 767 Fifth Avenue New York, New York 10153 Attention: Andrea A. Bernstein Facsimile: (212) 310-8007 All other provisions contained in the article 10 of the SPA shall be applicable to this Reiterative Agreement. 10.9 LIST OF EXHIBITS Exhibit 1 : Updated list of Subsidiaries and their Presidents Exhibit 2 : "Extrait K bis" upon Conversion of FIDEI SCA Exhibit 3 : Creditors non opposition certificate from the Clerk of the commercial court. Exhibit 4 : Final Pro forma Balance Sheet Exhibit 5 : FIDEI SCA Share transfer orders Exhibit 6 : Copies of the checks Exhibit 7 : Copy of the resignation letters concerning FIDEI SCA and its Subsidiaries Exhibit 8 : Updated list of real estate properties under commitment to sell Exhibit 9 : List of corporate documents to be delivered by FIDEI to HAMPTON Exhibit 10 : Power of Attorney 7 On June the 4th 2002, In Paris, Made in two (4) original copies GRAEME JACKSON /s/ Luis Medeiros /s/ Graeme Jackson - --------------------------------- --------------------------------- SELLER BUYER SAVITS AB HAMPTON TRUST HOLDING (EUROPE) SA By : Luis Medeiros by : John C. Jones --------------------------------- Title: Administrateur Delegue Represented by: Graeme Jackson Title: Administrateur /s/ John C. Jones -------------------------------- BUYER HERALD CENTURY CONSOLIDATED SA Represented by: John C. Jones Title: Administrateur Delegue /s/ John C. Jones -------------------------------- BUYER JOHN C. JONES 8 EX-10 10 jd3-26_berkadia.txt EXHIBIT 10.40 BERKADIA AMEND/RESTATED OP AGREE Exhibit 10.40 - -------------------------------------------------------------------------------- BERKADIA LLC, A DELAWARE LIMITED LIABILITY COMPANY SECOND AMENDED AND RESTATED OPERATING AGREEMENT December 2, 2002 - -------------------------------------------------------------------------------- SECOND AMENDED AND RESTATED OPERATING AGREEMENT OF BERKADIA LLC This SECOND AMENDED AND RESTATED OPERATING AGREEMENT, amending and restating in its entirety that certain First Amended and Restated Operating Agreement of Berkadia LLC, as amended by that certain First Amendment to the First Amended and Restated Operating Agreement of Berkadia LLC, is entered into by and between BH Finance LLC, a Nebraska limited liability company ("BH Finance"), and WMAC Investment Corporation, a Wisconsin corporation ("WMAC"), as the sole Members of the Company. This Agreement shall be effective as of December 2, 2002. SECTION 1 THE COMPANY 1.1 Formation. The Company has been formed as a limited liability company under and pursuant to the provisions of the Act and upon the terms and conditions set forth in this Agreement. The rights and liabilities of the Members shall be as provided under the Act, the Certificate (as defined herein) and this Agreement. 1.2 Name. The name of the Company shall be "Berkadia LLC" and all business of the Company shall be conducted in such name or such other name as is agreed by the Members. 1.3 Purpose; Powers. The Company has previously (i) obtained approximately $6 billion principal amount of debt financing for the purpose of funding the Company's activities (the "Outside Financing"); (ii) negotiated, executed and delivered such loan or credit agreements, notes, security agreements, pledge agreements, certificates, and other agreements, documents and/or instruments as were necessary or desirable in connection with the Outside Financing (the "Outside Financing Documents"); (iii) negotiated, executed, delivered and accepted the credit agreement relating to a loan to FCC on a senior secured basis (the "Senior Loan") contemplated by the plan of reorganization of FNV and its subsidiaries as confirmed by the bankruptcy court in August 2001; (iv) negotiated, executed, delivered and accepted notes, security agreements, pledge agreements, guarantees, certificates and other agreements, documents and/or instruments as were necessary or desirable in connection with the Senior Loan (including the credit agreement, the "Senior Loan Documents"); and (v) utilized the proceeds of the Outside Financing to fund the Senior Loan. The purposes of the Company are: (a) to amend, modify, restate, waive, or enforce any terms and conditions of the Outside Financing Documents; and to repay, prepay, refinance, extend, renew, redeem, substitute and/or replace the Outside Financing from time to time; (b) to hold collateral, assets, securities, instruments, contracts, rights and other property of FCC, FNV, Affiliates of FCC or FNV or other persons or entities (the "Collateral") as security for, or in full or partial fulfillment of, the obligations of any party to the Senior Loan Documents; to amend, modify, restate, waive or enforce any terms and conditions of the Senior Loan Documents; to acquire title to or possession of, hold, transfer, sell or dispose of Collateral and other property pursuant to the terms of the Senior Loan Documents; (c) to make such additional investments and engage in such additional investment activities as the Members may approve; and (d) to engage in any and all activities related or incidental to the foregoing purposes. (The activities described in clauses (a) through (d) above shall be referred to as the "Business.") The Company shall have the power to do any and all acts necessary, appropriate, proper, advisable, incidental or convenient to or in furtherance of such purposes. 1.4 Principal Place of Business. The principal place of business of the Company shall be at such location within or without the State of Delaware as the Members may agree. 1.5 Term. The term of the Company commenced on February 26, 2001 (the "Formation Date"), the date the certificate of formation of the Company (as such certificate may be amended, modified, supplemented or restated from time to time, the "Certificate") was filed in the office of the Secretary of State of the State of Delaware in accordance with the Act, and shall continue until the winding up and liquidation of the Company pursuant to Section 10 hereof. 1.6 Filings; Agent for Service of Process. (a) The Certificate has been filed in the office of the Secretary of State of the State of Delaware in accordance with the Act. The Members shall take any and all other actions reasonably necessary to perfect and maintain the status of the Company as a limited liability company under the laws of the State of Delaware, including the preparation and filing of such amendments to the Certificate and such other assumed name certificates, documents, instruments and publications as may be required by law. (b) The Members shall execute and cause to be filed original or amended certificates and shall take any and all other actions as may be 2 reasonably necessary to perfect and maintain the status of the Company as a limited liability company or similar type of entity under the laws of any other jurisdictions in which the Company engages in business. (c) As of the date hereof, the name and address of the Company's designated agent and registered office for service of process on the Company in the State of Delaware is Corporation Service Company, 2711 Centerville Road, Suite 400, Wilmington, Delaware 19808. 1.7 Definitions. (a) Capitalized words and phrases used in this Agreement have the following meanings: "Act" means the Delaware Limited Liability Company Act, 6 Del. C.ss.18-101, et seq., as amended from time to time (or any corresponding provisions of succeeding law). "Additional Capital Contributions" means, with respect to each Member, the Capital Contributions, if any, made by such Member pursuant to Section 2.4 hereof. "Adjusted Capital Account Deficit" means, with respect to any Member, the deficit balance, if any, in such Member's Capital Account as of the end of the relevant Allocation Year, after giving effect to the following adjustments: (i) Credit to such Capital Account any amounts which such Member is deemed to be obligated to restore pursuant to Section 1.704-1(b)(2)(ii)(c) or the penultimate sentences in Sections 1.704-2(g)(1) and 1.704-2(i)(5) of the Regulations; and (ii) Debit to such Capital Account the items described in Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5) and 1.704-1(b)(2)(ii)(d)(6) of the Regulations. The foregoing definition of Adjusted Capital Account Deficit is intended to comply with the provisions of Section 1.704-1(b)(2)(ii)(d) of the Regulations and shall be interpreted consistently therewith. "Affiliate" means, with respect to any Person, any other Person who, directly or indirectly, controls, is controlled by, or is under common control with, such Person. "Affiliated Member" has the meaning set forth in Section 9.2 of this Agreement. "Agreement" means this Second Amended and Restated Operating Agreement of Berkadia LLC, including any appendix attached hereto, as amended from time to time. Words such as "herein," "hereinafter," "hereof," "hereto" and "hereunder" refer to this Agreement as a whole, unless the context otherwise requires. "Allocation Year" means (i) the period that commenced on the Formation Date and ends on December 31, 2001, (ii) any subsequent twelve (12) month period commencing on January 1 and ending on December 31 or (iii) any portion of the period described in clauses (i) or (ii) for which the Company is required to 3 allocate Profits, Losses and other items of Company income, gain, loss or deduction pursuant to Section 3 hereof and Appendix B hereto. "Available Cash" means the amount of cash that the Members deem available for distribution, taking into account all debts, liabilities, and obligations of the Company then due or soon to come due, including, without limitation, payments of principal and interest on, and fees and expenses with respect to, the Outside Financing, and working capital and other amounts and reserves that the Members deem necessary or advisable in connection with the operation of the Company's Business and the payment of principal and interest on, and fees and expenses with respect to, the Outside Financing; provided, however, that Available Cash shall be determined without regard to any Net Interest Savings and any management or similar fees described in Section 11.1. "Berkshire" means Berkshire Hathaway Inc., a Delaware corporation. "BH Finance" has the meaning set forth in the initial paragraph of this Agreement. "Capital Account" means, with respect to any Member, the Capital Account maintained for such Member in accordance with the following provisions: (i) To each Member's Capital Account there shall be credited (A) such Member's Capital Contributions actually (or deemed) made, (B) such Member's distributive share of Profits and any items in the nature of income or gain which are specially allocated pursuant to Section 3 hereof or Paragraph 1, 2 or 3 of Appendix B hereto, and (C) the amount of any Company liabilities assumed by such Member or which are secured by any property distributed to such Member; (ii) To each Member's Capital Account there shall be debited (A) the amount of money and the Gross Asset Value of any property distributed (or deemed distributed) to such Member pursuant to Section 2.3(d), 4, 5.4 or 10 hereof, (B) such Member's distributive share of Losses and any items in the nature of expenses or losses which are specially allocated pursuant to Section 3 hereof or Paragraph 1, 2 or 3 of Appendix B hereto, and (C) the amount of any liabilities of such Member assumed by the Company or which are secured by any property contributed by such Member to the Company; and (iii) In the event an Interest is Transferred in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent it relates to the Interest. The foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts are intended to comply with Regulations Section 1.704-1(b), and shall be interpreted and applied in a manner consistent with such Regulations. "Capital Contributions" means, with respect to any Member, the amount of money and the initial Gross Asset Value of any property (other than money) contributed or required to be contributed to the Company by such Member pursuant to Section 2, Section 10.2 or Section 12.2 hereof, including Required Capital Contributions and Additional Capital Contributions. 4 "Certificate" has the meaning set forth in Section 1.5 of this Agreement. "Certificate of Cancellation" means a certificate filed in accordance with Section 18-203 of the Act. "Code" means the United States Internal Revenue Code of 1986, as amended from time to time. "Company" means the limited liability company formed pursuant to the Certificate and continued pursuant to this Agreement. "Company Minimum Gain" has the same meaning as the term "partnership minimum gain" in Section 1.704-2(b)(2) and 1.704-2(d) of the Regulations. "Covered Losses" means all losses, liabilities, expenses or damages (including reasonable attorneys' fees and expenses) paid to any Third Party Claimant for claims or legal actions arising out of the Senior Loan or the Management Agreement or the performance of responsibilities, or taking of actions or decisions pursuant to either, but shall not include claims or actions to collect or enforce the Outside Financing or any other contractual obligation of the Company. "Debt Percentage" means, with respect to any Member, such Member's Debt Percentage as set forth in Appendix A hereto. "Depreciation" means, for each Allocation Year, an amount equal to the depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such Allocation Year, except that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such Allocation Year, Depreciation shall be an amount which bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization, or other cost recovery deduction for such Allocation Year bears to such beginning adjusted tax basis; provided, however, that if the adjusted basis for federal income tax purposes of an asset at the beginning of such Allocation Year is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the Members. "FCC" means Finova Capital Corporation. "Fiscal Year" means (i) the period that commenced on the Formation Date and ends on December 31, 2001, (ii) any subsequent twelve-month period commencing on January 1 and ending on December 31 and (iii) the period commencing on the immediately preceding January 1 and ending on the date on which all property is distributed to the Members pursuant to Section 10 hereof. "FNV" means The Finova Group Inc. "Formation Date" has the meaning set forth in Section 1.5 of this Agreement. 5 "Gross Asset Value" means with respect to any asset, the asset's adjusted basis for federal income tax purposes, except as follows: (i) The initial Gross Asset Value of any asset contributed by a Member to the Company shall be the gross fair market value of such asset at the time of contribution, as determined by the Members; (ii) The Gross Asset Values of all Company assets shall be adjusted to equal their respective gross fair market values (taking Code Section 7701(g) into account), as determined by the Members as of the following times: (A) the acquisition of an additional interest in the Company by any new or existing Member in exchange for more than a de minimis Capital Contribution; (B) the distribution by the Company to a Member of more than a de minimis amount of Company property as consideration for an interest in the Company; and (C) the liquidation of the Company within the meaning of Regulations Section 1.704-1(b)(2)(ii)(g); provided that an adjustment at the times described in clauses (A) and (B) of this paragraph shall be made only if the Members determine that such adjustment is necessary to reflect the relative economic interests of the Members in the Company; (iii) The Gross Asset Value of any item of Company assets distributed to any Member shall be adjusted to equal the gross fair market value (taking Code Section 7701(g) into account) of such asset on the date of distribution as determined by the Members; and (iv) The Gross Asset Values of Company assets shall be increased (or decreased) to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Regulations Section 1.704-1(b)(2)(iv)(m) and subparagraph (vi) of the definition of "Profits" and "Losses" or Paragraph 1(g) of Appendix B hereto; provided, however, that Gross Asset Values shall not be adjusted pursuant to this subparagraph (iv) to the extent that an adjustment pursuant to subparagraph (ii) is required in connection with a transaction that would otherwise result in an adjustment pursuant to this subparagraph (iv). If the Gross Asset Value of an asset has been determined or adjusted pursuant to subparagraph (ii) or (iv), such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset, for purposes of computing Profits and Losses. "Gross Profit" shall mean the sum of (a) the amounts distributed to a Member pursuant to Section 4.1 or Section 10.2 of this Agreement, (b) in the case of WMAC, the fees paid to WMAC or any of its Affiliates pursuant to the Management Agreement (net of amounts, if any, paid over to BH Finance or its Affiliates pursuant to Section 11.1 hereof), and (c) in the case of BH Finance, the amounts, if any, paid over to BH Finance or its Affiliates pursuant to Section 11.1 hereof, in each case, from the Formation Date to the date of the Covered Loss. 6 "Interest" means an ownership interest in the Company, including any and all benefits to which the holder of such Interest may be entitled as provided in this Agreement, together with all obligations of such Person to comply with the terms and provisions of this Agreement. "Leucadia" means Leucadia National Corporation, a New York corporation. "Losses" has the meaning set forth in the definition of "Profits" and "Losses." "Management Agreement" means that certain Second Amended and Restated Management Services Agreement by and among Leucadia, Leucadia International Corporation and FNV, dated as of June 10, 2001 (and prior to June 10, 2001, the predecessor Management Services Agreement dated February 26, 2001, and the First Amended and Restated Management Services Agreement dated April 3, 2001), or any similar agreement. "Member" means any Person (i) who is referred to as such on Appendix A hereto, or who has become a substituted Member pursuant to the terms of this Agreement and (ii) who has not ceased to be a Member. "Member Nonrecourse Debt" has the same meaning as the term "partner nonrecourse debt" in Section 1.704-2(b)(4) of the Regulations. "Member Nonrecourse Debt Minimum Gain" means an amount, with respect to each Member Nonrecourse Debt, equal to the Company Minimum Gain that would result if such Member Nonrecourse Debt were treated as a Nonrecourse Liability, determined in accordance with Section 1.704-2(i)(3) of the Regulations. "Member Nonrecourse Deductions" has the same meaning as the term "partner nonrecourse deductions" in Sections 1.704-2(i)(1) and 1.704-2(i)(2) of the Regulations. "Net Interest Savings" means the amounts, if any, received by the Company from FNV pursuant to that certain letter agreement dated August 14, 2002 (relating to the proposed repurchase by FNV of certain of its 7.5% Senior Secured Notes Maturing 2009 with Contingent Interest due 2016), as well as any amounts derived by the Company therefrom. "Nonrecourse Deductions" has the meaning set forth in Section 1.704-2(b)(1) of the Regulations. "Nonrecourse Liability" has the meaning set forth in Section 1.704-2(b)(3) of the Regulations. "Outside Financing" has the meaning set forth in Section 1.3 of this Agreement. "Outside Financing Documents" has the meaning set forth in Section 1.3 of this Agreement. "Person" means any individual, partnership (whether general or limited), limited liability company, corporation, trust, estate, association, nominee or other entity. 7 "Profits" and "Losses" mean, for each Allocation Year, an amount equal to the Company's taxable income or loss for such Allocation Year, determined in accordance with Code Section 703(a) (for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to Code Section 703(a)(1) shall be included in taxable income or loss), with the following adjustments (without duplication): (i) Any income of the Company that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses pursuant to this definition of "Profits" and "Losses" shall be added to such taxable income or loss; (ii) Any expenditures of the Company described in Code Section 705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account in computing Profits or Losses pursuant to this definition of "Profits" and "Losses" shall be subtracted from such taxable income or loss; (iii) In the event the Gross Asset Value of any Company asset is adjusted pursuant to subparagraphs (ii) or (iii) of the definition of Gross Asset Value, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the Gross Asset Value of the asset) or an item of loss (if the adjustment decreases the Gross Asset Value of the asset) from the disposition of such asset and shall be taken into account for purposes of computing Profits or Losses; (iv) Gain or loss resulting from any disposition of property with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of the property disposed of, notwithstanding that the adjusted tax basis of such property differs from its Gross Asset Value; (v) In lieu of the depreciation, amortization, and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such Allocation Year, computed in accordance with the definition of Depreciation; (vi) To the extent an adjustment to the adjusted tax basis of any Company asset pursuant to Code Section 734(b) is required, pursuant to Regulations Section 1.704-1(b)(2)(iv)(m)(4), to be taken into account in determining Capital Accounts as a result of a distribution other than in liquidation of a Member's Interest, the amount of such adjustment shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) from the disposition of such asset and shall be taken into account for purposes of computing Profits or Losses; and (vii) Notwithstanding any other provision of this definition, any items which are specially allocated pursuant to Section 3.1(a) hereof or Paragraph 1, 2 or 3 of Appendix B hereto shall not be taken into account in computing Profits or Losses. The amounts of the items of Company income, gain, loss or deduction available to be specially allocated pursuant to Section 3.1(a) hereof and Paragraphs 1, 2 or 8 3 of Appendix B hereto shall be determined by applying rules analogous to those set forth in subparagraphs (i) through (vi) above. "Proportionate Share" for any Member shall mean the product of (x) the quotient obtained by dividing (I) the Gross Profit of such Member by (II) the aggregate Gross Profit of all Members multiplied by (y) the amount of the Covered Loss. "Regulations" means the Income Tax Regulations, including Temporary Regulations, promulgated under the Code, as such regulations are amended from time to time. "Required Capital Contributions" means, with respect to each Member, the Capital Contributions, if any, made or required to be made by such Member pursuant to Section 2.3 or 12.2 hereof. "Senior Loan" has the meaning set forth in Section 1.3 of this Agreement. "Senior Loan Documents" has the meaning set forth in Section 1.3 of this Agreement. "Senior Loan Shortfall Amount" means the lesser of (i) the unamortized original issue discount, if any, with respect to the Senior Loan as determined for federal income tax purposes or (ii) the excess, if any, of the outstanding balance of the Senior Loan over the proceeds received by the Company upon a disposition of the Senior Loan in liquidation. "Shortfall Percentage" means, with respect to any Member, such Member's Shortfall Percentage as set forth in Appendix A hereto. "Third Party Claimant" means a Person other than the Company, a Member, FCC, FNV, any lender or other party to any of the Outside Financing Documents, or any Affiliate of any of the foregoing; provided, however, that a Third Party Claimant shall include the shareholders or debtholders of FNV (other than a Member or an Affiliate of a Member) whether making a claim directly or in a derivative form of action. "Transfer" means, as a noun, any voluntary or involuntary transfer, sale, pledge or hypothecation or other disposition and, as a verb, voluntarily or involuntarily to transfer, sell, pledge or hypothecate or otherwise dispose of. "WMAC" has the meaning set forth in the initial paragraph of this Agreement. SECTION 2 FINANCING; CAPITAL CONTRIBUTIONS 2.1 Initial Capital Contributions. The Members have not made, and shall not be required to make, any initial Capital Contributions to the Company. 9 2.2 Outside Financing; Guarantees. The terms of the Outside Financing include (i) a primary guarantee by Berkshire of 90 percent of the Company's obligations under such Outside Financing, and (ii) a primary guarantee by Leucadia of the remaining 10 percent of the Company's obligations under such Outside Financing, as well as a secondary guaranty by Berkshire of such remaining 10 percent of the Company's obligations under such Outside Financing. All other matters relating to the Outside Financing, including, without limitation, the timing, terms and conditions thereof, as well as all matters related to the administration of the Outside Financing, shall be determined by BH Finance after consultation with WMAC. 2.3 Required Capital Contributions. (a) If any payment, including any amount of principal, interest or similar item, or any amount attributable to indemnification obligations of the Company under the Outside Financing Documents, is due to be paid to the lenders who have provided the Outside Financing and the Company does not have sufficient funds to make such payment (apart from any Net Interest Savings), then on or before the date such funds are required to be paid, the Members shall fund to the Company, pro rata in accordance with their Debt Percentages, an amount of Capital Contributions that is sufficient to pay the amounts required to be paid (without drawing upon such Net Interest Savings, which shall not be applied by the Company to satisfy such Company payment and shall retain their status as such for all purposes of this Agreement, including for purposes of applying Section 4.1 hereof). Consistent with the preceding sentence, and pursuant to Section 18-303(b) of the Act, BH Finance hereby agrees to be liable for 90 percent of the Company's obligations under the Outside Financing and WMAC hereby agrees to be liable for 10 percent of the Company's obligations under the Outside Financing. (b) If the Company incurs costs or expenses, other than those set forth in Section 2.3(a) above, and does not have sufficient funds to pay such expenses (apart from any Net Interest Savings), upon demand by the Company or by either Member, the Members shall promptly make Capital Contributions sufficient to pay such costs and expenses (without drawing upon such Net Interest Savings, which shall not be applied by the Company to satisfy such Company payment and shall retain their status as such for all purposes of this Agreement, including for purposes of applying Section 4.1 hereof) in accordance with their Debt Percentages; provided, however, that Section 12.2 shall control Capital Contributions required to fund costs and expenses that constitute Covered Losses. (c) Berkshire agrees to contribute (or cause to be contributed) to BH Finance, and Leucadia agrees to contribute (or cause to be contributed) to WMAC, an amount sufficient in each case for such Member to fund its Required Capital Contributions as and when required under this Section 2.3. (d) If BH Finance or WMAC (the "defaulting Member") fails to fund its Required Capital Contributions as and when required, whether pursuant to this Section 2.3, Section 12.2, or otherwise, the non-defaulting Member shall have a direct claim against the defaulting Member for breach of contract hereunder, and 10 the non-defaulting Member and the Company (at the sole direction of the non-defaulting Member) shall have all remedies available to either of them in law or equity with respect to such failure by the defaulting Member. Without limiting the foregoing, (i) interest shall accrue on a defaulting Member's unfunded Capital Contributions from the date required to be made at a per annum rate equal to the "prime rate" (as specified in the Wall Street Journal or similar national publication) plus two percentage points ("prime plus two"), compounded annually, (ii) the non-defaulting Member shall be entitled to contribute to the Company the amount of such unfunded Capital Contributions, and (iii) to the extent the non-defaulting Member has funded in place of the defaulting Member, amounts otherwise distributable to the defaulting Member under this Agreement, whether pursuant to Section 4.1, upon liquidation of the Company pursuant to Section 10.2, or otherwise, shall be distributed by the Company to the non-defaulting Member, but deemed for all purposes of this Agreement as distributed to the defaulting Member and immediately recontributed to the Company as Required Capital Contributions, until such time as the non-defaulting Member has received from the Company on account of such distributions a return of the amount, if any, funded in place of the defaulting Member, plus interest thereon from the date funded at prime plus two, compounded annually. To the extent the non-defaulting Member has not funded in place of the defaulting Member, amounts otherwise distributable to the defaulting Member shall be retained by the Company, but deemed for all purposes of this Agreement as distributed to the defaulting Member and immediately recontributed to the Company as Required Capital Contributions, until such time as the Company has retained an amount of such distributions equal to the amount not funded by the defaulting Member (or by the non-defaulting Member pursuant to the immediately preceding sentence), plus interest thereon from the date required to be made at prime plus two, compounded annually. A defaulting Member shall remain in default hereunder until it has contributed, or is deemed to have contributed, to the Company, all amounts required to be contributed under this Section 2.3(d), including interest. Beginning on the date that is 10 days after the receipt of written notice from the Company or the non-defaulting Member that the recipient Member is in default hereunder, the defaulting Member shall not have any voting, consent or appointment rights as a Member, or any other rights to direct the Company in any manner, during the continuation of such default. 2.4 Additional Capital Contributions. The Members may make additional Capital Contributions (in addition to those required by Section 2.3 hereof) with the written consent of both Members, in which event the Company shall adjust the Members' interests hereunder in the manner unanimously agreed by the Members. SECTION 3 ALLOCATIONS 3.1 Profits and Losses. (a) After giving effect to the special allocations set forth in Paragraphs 1, 2 and 3 of Appendix B hereto, (i) income constituting original issue discount with respect to the Senior Loan for any Allocation Year, as well as all original issue discount-related adjustments, shall be allocated 50 percent to each Member and (ii) items of Company income and gain for such 11 Allocation Year attributable to any Net Interest Savings shall be allocated 70 percent to BH Finance and 30 percent to WMAC. (b) After giving effect to the special allocations set forth in Paragraphs 1, 2 and 3 of Appendix B hereto, and the additional special allocations set forth in Section 3.1(a) above, the Company shall allocate Profits, Losses and any items of Company income, gain, loss or deduction for any Allocation Year to the Members as follows: (i) Losses and any items of Company expense or deduction for such Allocation Year shall be allocated (x) first, to those Members with positive Capital Account balances in proportion to such positive Capital Account balances, until the Capital Accounts of such Members have been reduced to zero, (y) second, to the Members in accordance with their Shortfall Percentages, until an amount equal to the Senior Loan Shortfall Amount has been allocated pursuant to this clause (y), and (z) thereafter, to the Members in accordance with their Debt Percentages. (ii) Profits and any items of Company income or gain for such Allocation Year shall be allocated (x) first, to reverse any Losses (or items thereof) allocated to the Members pursuant to Section 3.1(b)(i) in the reverse of the order in which they were previously allocated, and (y) thereafter, to the Members pro rata in accordance with their Debt Percentages. 3.2 Additional Allocations. Additional provisions respecting allocations are set forth in Appendix B hereto and are incorporated by reference herein. SECTION 4 DISTRIBUTIONS 4.1 Distributions. Subject to Section 2.3(d) hereof: (a) Net Interest Savings, if any, shall be distributed to the Members at such times as the Members shall determine, 70 percent to BH Finance and 30 percent to WMAC; and (b) Available Cash, if any, shall be distributed to the Members at such times as the Members shall determine in proportion to their Debt Percentages. 4.2 Return of Distributions. Except as required by law, no Member shall be required to restore to the Company any funds properly distributed to it pursuant to this Section 4 or Section 10 hereof; provided, however, that nothing herein shall affect the obligation to make any Required Capital Contributions. 12 SECTION 5 MANAGEMENT 5.1 Management by Members. (a) All powers to control and manage the Business and affairs of the Company shall be exclusively vested in the Members and the Members may exercise all powers of the Company and do all such lawful acts as are not by statute, the Certificate or this Agreement prohibited, and in so doing shall have the right and authority to take all actions which the Members deem necessary, useful or appropriate for the management and conduct of the Business. (b) Except as otherwise provided in this Agreement, including, without limitation, Section 2.3(d) (relating to a defaulting Member's loss of voting, consent and other rights) and Section 5.5 (relating to BH Finance's control of matters relating to the Senior Loan), or as required by the Act, all matters requiring approval of the Members or relating to the management of the Business and affairs of the Company shall require the consent of both Members and the Company shall act only by the affirmative vote of both Members. (c) The Members shall have the power to delegate authority to such officers, employees, agents and representatives of the Company as it may from time to time deem appropriate. Any delegation of authority to take any action must be approved in the same manner as would be required to approve such action directly. 5.2 Meetings of the Members; Approval; Expedited Decision. (a) The Members shall meet at such times as they may agree. (b) For all matters under this Agreement or under the Act for which the consent, approval or affirmative vote of a Member is required, such Member's consent, approval or affirmative vote may be given (i) at a physical meeting of the Members or (ii) at a meeting held by means through which all persons participating in the meeting can hear and respond to each other, provided that a summary of such other meeting is promptly delivered to the Members in writing, followed, in the case of a facsimile transmission, by hard copy sent by recognized overnight delivery service or U.S. mail, postage and charges prepaid, addressed as described in Section 12.1 hereof, or to such other address as a Member may from time to time specify by notice to the other Member. (c) Notwithstanding anything to the contrary in this Section 5.2, the Members may take any action without a meeting that may be taken by the Members under this Agreement if such action is approved by the written consent of both Members. (d) In addition to the methods set forth above, a Member may solicit the expedited decision of the other Member with respect to any matter under this Agreement by having its Designated Representative contact, by telephone, facsimile or other agreed means, the other Member's Designated Representative. "Designated Representative" shall mean, in the case of a Member, its authorized representative as identified by such Member in a written notice to the other 13 Member. Upon receipt of a request for an expedited decision by a Member's Designated Representative, the recipient Member's Designated Representative shall use reasonable efforts to deliver a written decision, consent, approval, disapproval or other relevant response to the request within 48 hours following receipt from the requesting Member (or otherwise) of all available information reasonably required to reach such a decision. The failure of a Member's Designated Representative to timely respond in writing to such a request shall be treated as such Member's disapproval or decision not to consent with respect to the matter involved. Any expedited decision reached in accordance with this paragraph shall be valid only if the relevant communication is delivered in writing, followed, in the case of a facsimile transmission, by hard copy sent by recognized overnight delivery service or U.S. mail, postage and charges prepaid, addressed as described in Section 12.1 hereof, or to such other address as a Member may from time to time specify by notice to the other Member. 5.3 Duties and Obligations of the Members. (a) The Members shall cause the Company to conduct its Business and operations separate and apart from that of any Member or its Affiliates, including, without limitation, (i) segregating Company assets and not allowing funds or other assets of the Company to be commingled with the funds or other assets of, held by, or registered in the name of, any Member or its Affiliates, (ii) maintaining books and financial records of the Company separate from the books and financial records of any Member or its Affiliates, and observing all Company procedures and formalities, including, without limitation, maintaining minutes of Company meetings and acting on behalf of the Company only pursuant to due authorization of the Members, (iii) causing the Company to pay its liabilities from assets of the Company, and (iv) causing the Company to conduct its dealings with third parties in its own name and as a separate and independent entity. (b) The Members shall take all actions which may be necessary or appropriate (i) for the continuation of the Company's valid existence as a limited liability company under the laws of the State of Delaware and of each other jurisdiction in which such existence is necessary to protect the limited liability of the Members or to enable the Company to conduct the business in which it is engaged and (ii) for the accomplishment of the Company's purposes, in accordance with the provisions of this Agreement and applicable laws and regulations. (c) A Member shall not have any duties, fiduciary or otherwise, to the Company or the other Member, other than the contractual obligations of such Member set forth herein. 5.4 Reimbursements. (a) Except as otherwise specified in this Agreement, and subject to reimbursement by FNV or FCC pursuant to the Senior Loan and the Senior Loan Documents, each Member shall pay its own costs and expenses incurred and paid by such Member in the conduct of the Company's Business. Without limiting the generality of the foregoing, the Company shall not be responsible for the costs and expenses resulting from the performance by Leucadia or any Affiliate thereof of its obligations under the Management Agreement. 14 (b) Notwithstanding the foregoing, the Members intend that all costs and expenses incurred in the operation of the Company's Business (other than Covered Losses) shall be borne by the Company; provided, however, that direct costs and expenses of a Member, such as salaries or benefits of its employees or travel expenses, shall not be treated as expenses of, or paid by, the Company, and such Member shall not be entitled to any reimbursement hereunder with respect thereto. (c) To the extent that any costs or expenses of the Members or the Company are reimbursed to the Company by FCC or FNV pursuant to the terms of the Senior Loan Documents or otherwise, such amounts shall promptly be distributed to the Members who (or whose predecessors) bore such costs or expenses (if costs or expenses paid by a Member or its predecessors are being reimbursed), or to the Members pro rata in accordance with the percentage of such cost or expense paid by the Members in accordance with Section 2.3(b) (if costs or expenses paid by the Company are being reimbursed). 5.5 BH Finance Control of Senior Loan. Notwithstanding any other provision of this Agreement, and without limiting the generality of Section 5.1, decisions by the Company relating to any act taken or not taken by the Company with respect to the Senior Loan, including, without limitation, any decisions relating to the documentation or administration of such Senior Loan or arising out of any default, decisions relating to enforcement or to the waiver of any covenants or requirements with respect to the Senior Loan, and the control of any contest related thereto, shall be made by BH Finance on behalf of the Company in its sole and absolute discretion, after consultation with WMAC. The Company shall promptly reimburse BH Finance for its reasonable costs and expenses, including attorneys fees, incurred in connection with any investigation or dispute arising out of any such occurrence. Without limiting the foregoing, so long as the Senior Loan is outstanding, decisions of the Company in connection with requests by FNV or its subsidiaries to repurchase any 7.5% Senior Secured Notes Maturing 2009 with Contingent Interest due 2016 of FNV shall be made by BH Finance on behalf of the Company after consultation with WMAC. 5.6 Withdrawal. Except as otherwise provided in Sections 4, 5.4(c) and 10 hereof, no Member shall demand or receive a return on or of its Capital Contributions or withdraw or resign from the Company without the consent of the other Member. Under circumstances requiring a return of any Capital Contributions, no Member has the right to receive property other than cash except as may be specifically provided herein. 5.7 Member Compensation. No Member shall receive any interest, salary or drawing with respect to its Capital Contributions or its Capital Account or for services rendered on behalf of the Company, or otherwise, in its capacity as a Member, except as otherwise provided in this Agreement. 15 5.8 Member Liability. Subject to Section 2.3(a), no Member shall be liable to any third party under a judgment, decree or order of a court, or in any other manner for the debts or any other obligations or liabilities of the Company. Except as required by applicable law or this Agreement, a Member shall be liable only to make its Capital Contributions and shall not be required to restore a deficit balance in its Capital Account or to lend any funds to the Company or, apart from its Capital Contributions, to make any additional contributions, assessments or payments to the Company. SECTION 6 REPRESENTATIONS AND WARRANTIES 6.1 In General. As of the date hereof, each Member hereby makes each of the representations and warranties applicable to such Member as set forth in Section 6.2 hereof, and such warranties and representations shall survive the execution of this Agreement. 6.2 Representations and Warranties. Each Member hereby represents and warrants that: (a) Due Incorporation or Formation; Authorization of Agreement. Such Member is a corporation or limited liability company duly organized, validly existing, and in good standing under the laws of the jurisdiction of its incorporation or formation and has the company power and authority to own its property and carry on its business as owned and carried on at the date hereof and as contemplated hereby. Such Member is duly licensed or qualified to do business and in good standing in each of the jurisdictions in which the failure to be so licensed or qualified would have a material adverse effect on its financial condition or its ability to perform its obligations hereunder. Such Member has the company power and authority to execute and deliver this Agreement and to perform its obligations hereunder and the execution, delivery, and performance of this Agreement has been duly authorized by all necessary company action. This Agreement constitutes the legal, valid, and binding obligation of such Member. (b) No Conflict with Restrictions; No Default. Neither the execution, delivery, and performance of this Agreement, nor the consummation by such Member of the transactions contemplated hereby (i) will conflict with, violate, or result in a breach of any of the terms, conditions, or provisions of any law, regulation, order, writ, injunction, decree, determination, or award of any court, any governmental department, board, agency, or instrumentality, domestic or foreign, or any arbitrator, applicable to such Member, (ii) will conflict with, violate, result in a breach of, or constitute a default under any of the terms, conditions, or provisions of the articles of incorporation or bylaws of such Member, or of any material agreement or instrument to which such Member is a party or by which such Member is or may be bound or to which any of its material properties or assets is subject, (iii) will conflict with, violate, result in a breach of, constitute a default under (whether with notice or lapse of time or both), accelerate or permit the acceleration of the performance required by, give to others any material interests or rights, or require any 16 consent, authorization, or approval under any indenture, mortgage, lease agreement, or instrument to which such Member is a party or by which such Member is or may be bound, or (iv) will result in the creation or imposition of any lien upon any of the material properties or assets of such Member. (c) Governmental Authorizations. Any registration, declaration, or filing with, or consent, approval, license, permit, or other authorization or order by, any governmental or regulatory authority, domestic or foreign, that is required in connection with the valid execution, delivery, acceptance and performance by such Member under this Agreement, or the consummation by such Member of any transaction contemplated hereby has been completed, made, or obtained on or before the date hereof. (d) Litigation. There are no actions, suits, proceedings, or investigations pending or, to the knowledge of such Member threatened against or affecting such Member or any of its wholly-owned Affiliates or any of their properties, assets, or businesses in any court or before or by any governmental department, board, agency, or instrumentality, domestic or foreign, or any arbitrator which could, if adversely determined (or, in the case of an investigation could lead to any action, suit, or proceeding, which if adversely determined could) reasonably be expected to materially impair such Member's ability to perform its obligations under this Agreement, and such Member has not received any currently effective notice of any default, and such Member is not in default, under any applicable order, writ, injunction, decree, permit, determination, or award of any court, any governmental department, board, agency, or instrumentality, domestic or foreign, or any arbitrator which could reasonably be expected to materially impair such Member's ability to perform its obligations under this Agreement. SECTION 7 ACCOUNTING, BOOKS AND RECORDS 7.1 Accounting, Books and Records. The Company shall keep on site at its principal place of business such books and records relating to the Company and its affairs as it reasonably deems appropriate, and any Member or its designated representative shall have the right to have reasonable access to and inspect and copy the contents of such books or records, subject to compliance by such Member with the safety, security and confidentiality procedures and guidelines of the Company, as such procedures and guidelines may be established from time to time. 7.2 Reports. The Company shall cause to be delivered to each Member such periodic reports and financial statements as may be reasonably requested by a Member from time to time. 7.3 Tax Matters. Subject to the agreement of both Members, the Tax Matters Member (as defined below) shall make on behalf of the Company any and all elections for federal, state, local, and foreign tax purposes that it determines appropriate, and shall represent the Company and the Members before taxing authorities or courts of competent jurisdiction in tax matters affecting the Company or the Members in their capacities as Members, and file any tax returns and execute any 17 agreements or other documents relating to or affecting such tax matters, including agreements or other documents that bind the Members with respect to such tax matters or otherwise affect the rights of the Company and the Members. BH Finance is specifically authorized to act as the "Tax Matters Member" under the Code and in any similar capacity under state or local law. SECTION 8 AMENDMENTS 8.1 Amendments. This Agreement may be amended or modified only by a written instrument signed by each Member. SECTION 9 TRANSFERS 9.1 Restrictions on Transfers. Except as otherwise permitted by this Agreement, no Member shall Transfer all or any portion of its Interest. 9.2 Permitted Transfers. Subject to the conditions and restrictions set forth in Section 9.3 hereof, a Member may at any time Transfer all, but not less than all, of its Interest to (a) any other Member or wholly-owned Affiliate of another Member, (b) any wholly-owned Affiliate of the transferor (or of Berkshire or Leucadia), or (c) any other Person, subject to receipt, in the case of clause (c), of the prior written consent of the other Member in its absolute discretion if the Senior Loan has not then been paid in full (any such Transfer pursuant to clauses (a), (b) or (c) being referred to in this Agreement as a "Permitted Transfer"). Notwithstanding the foregoing, a Member may transfer less than all of its Interests to one or more wholly-owned Affiliates (or wholly-owned Affiliates of Berkshire, in the case of BH Finance, or of Leucadia, in the case of WMAC) (each, an "Affiliated Member"); provided, however, that for purposes hereof, all of a Member's Affiliated Members shall be deemed to constitute one and the same Member and any action or consent required hereunder with respect to BH Finance's or WMAC's Affiliated Members shall be given solely through the action or consent of BH Finance or WMAC, as agent for all BH Finance or WMAC Affiliated Members, as applicable. Any distribution or allocation to be made hereunder shall be made as if neither BH Finance nor WMAC had any Affiliated Members, shall be made as BH Finance or WMAC directs to one Member as agent for all BH Finance or WMAC Affiliated Members, as applicable, and thereafter BH Finance or WMAC, as applicable, shall be responsible for apportioning such distribution among their respective Affiliated Members, if any, according to their respective Interests. A Transfer to an Affiliated Member shall not relieve the transferor of its obligations hereunder. 18 9.3 Conditions to Permitted Transfers. A Transfer shall not be treated as a Permitted Transfer under Section 9.2 hereof unless and until the following conditions are satisfied: (a) The transferor and transferee shall execute and deliver to the Company such documents and instruments of conveyance as may be necessary or appropriate in the opinion of counsel to the Company to effect such Transfer. The Company shall be reimbursed by the transferor and/or transferee for all costs and expenses that it reasonably incurs in connection with such Transfer. (b) The transferor and transferee shall furnish the Company with the transferee's taxpayer identification number, sufficient information to determine the transferee's initial tax basis in the Interest transferred, and any other information reasonably necessary to permit the Company to file all required federal and state tax returns and other legally required information statements or returns. Without limiting the generality of the foregoing, the Company shall not be required to make any distribution otherwise provided for in this Agreement with respect to any transferred Interest until it has received such information. (c) The transferee of Interests (other than, with respect to clauses (i) and (ii) below, a transferee that was a Member prior to the Transfer) shall, by written instrument in form and substance reasonably satisfactory to the nontransferring Member (and, in the case of clause (iii) below, the transferor Member), (i) make representations and warranties to the nontransferring Member equivalent to those set forth in Section 6, (ii) accept and adopt the terms and provisions of this Agreement, including, without limitation, this Section 9 and Section 11, and (iii) assume the obligations of the transferor Member under this Agreement with respect to the transferred Interest. (d) The transferor shall not be relieved of its obligations hereunder. 9.4 Prohibited Transfers. (a) Any purported Transfer of an Interest that is neither a Permitted Transfer nor a Transfer of less than all of a Member's Interests to one or more Affiliated Members in compliance with Section 9.2, shall be null and void and of no force or effect whatever; provided, however, that if the Company is required by law to recognize a Transfer that is not a Permitted Transfer, the Interest Transferred shall be strictly limited to the transferor's rights to allocations and distributions as provided by this Agreement with respect to the transferred Interest, which allocations and distributions may be applied (without limiting any other legal or equitable rights of the Company) to satisfy any debts, obligations, or liabilities for damages that the transferor or transferee of such Interest may have to the Company, and such transferee shall not become a Member of the Company. (b) In the case of a Transfer or attempted Transfer of an Interest that is neither a Permitted Transfer nor a Transfer of less than all of a Member's Interests to one or more Affiliated Members in compliance with Section 9.2, the parties engaging or attempting to engage in such Transfer shall be 19 liable to indemnify and hold harmless the Company and the other Members from all cost, liability, and damage that any of such indemnified Members may incur (including, without limitation, incremental tax liabilities, lawyers' fees and expenses) as a result of such Transfer or attempted Transfer and efforts to enforce the indemnity granted hereby. 9.5 Rights of Unadmitted Assignees. A Person who acquires an Interest but who is not admitted as a substituted Member pursuant to Section 9.6 hereof shall be entitled only to allocations and distributions with respect to such Interest in accordance with this Agreement, and shall have no right to any information or accounting of the affairs of the Company, shall not be entitled to inspect the books or records of the Company, and shall not have any of the rights of a Member under the Act or this Agreement. 9.6 Admission of Substituted Members. Subject to the other provisions of this Section 9, a transferee of an Interest in a Permitted Transfer shall be admitted to the Company as a substituted Member. 9.7 Distributions and Allocations in Respect of Transferred Interest. If any Interests are Transferred during any Allocation Year in compliance with the provisions of this Section 9, Profits, Losses, each item thereof, and all other items attributable to the Transferred Interest for such Allocation Year shall be divided and allocated between the transferor and the transferee by taking into account their varying Percentage Interests during the Fiscal Year in accordance with Code Section 706(d), using any conventions permitted by law and selected by the Members. All distributions on or before the date of such Transfer shall be made to the transferor, and all distributions thereafter shall be made to the transferee. SECTION 10 DISSOLUTION AND WINDING UP 10.1 Dissolution Events. Except as otherwise unanimously agreed to by the Members, the Company shall dissolve and shall commence winding up and liquidating upon the first to occur of any of the following (each a "Dissolution Event"): (a) The unanimous vote of the Members to dissolve, wind up, and liquidate the Company; (b) A judicial determination that an event has occurred that makes it unlawful, impossible or impractical to carry on the Business; (c) The dissolution or liquidation of a Member or the taking of any action by its directors or a majority of its stockholders looking to the dissolution or liquidation of such Member, unless substantially all assets of such Member are transferred or are to be transferred to a wholly-owned Affiliate of such Member (or of Berkshire or Leucadia); 20 (d) The bankruptcy or insolvency of a Member or the occurrence of any other event which would permit a trustee or receiver to acquire control of the affairs or assets of a Member; or (e) The payment in full of each of the Senior Loan and the Outside Financing, unless waived by both Members. The Members hereby agree that, notwithstanding any provision of the Act, the Company shall not dissolve prior to the occurrence of a Dissolution Event. 10.2 Winding Up. Upon the occurrence of a Dissolution Event, the Company shall continue solely for the purposes of winding up its affairs in an orderly manner, liquidating its assets, and satisfying the claims of its creditors and Members, and no Member shall take any action that is inconsistent with, or not necessary to or appropriate for, the winding up of the Company's Business and affairs; provided, that all covenants contained in this Agreement and obligations provided for in this Agreement shall continue to be fully binding upon the Members until such time as the Company's property has been distributed pursuant to this Section 10.2 and the Certificate has been canceled pursuant to the Act. The Liquidator shall be responsible for overseeing the winding up and dissolution of the Company, which winding up and dissolution shall be completed within one (1) year of the occurrence of the Dissolution Event. The Liquidator shall take full account of the Company's liabilities and property and shall cause the property or the proceeds from the sale thereof, to the extent sufficient therefor, to be applied and distributed, to the maximum extent permitted by law, in the following order: (a) First, to creditors (including Members who are creditors, to the extent otherwise permitted by law) in satisfaction of all of the Company's debts and other liabilities (whether by payment or the making of reasonable provision for payment thereof); and (b) The balance, if any, to the Members in accordance with Section 4.1 hereof, by the end of the taxable year of the Company during which the liquidation of the Company occurs (or, if later, by 90 days after the date of liquidation). Except as provided in the next sentence, if any Member has a deficit balance in its Capital Account (after giving effect to all contributions, distributions and allocations for all periods), such Member shall have no obligation to make any contribution to the capital of the Company with respect to such deficit, and such deficit shall not be considered a debt owed to the Company or to any other Person for any purpose whatsoever. Notwithstanding the foregoing, in connection with the liquidation of the Company, and prior to the application and distribution of Company assets pursuant to clauses (a) and (b) above, each Member shall contribute to the Company an amount equal to any portion of its Required Capital Contributions that has not previously been contributed (or deemed contributed), including interest thereon to the extent required by Section 2.3(d); provided, however, that notwithstanding anything to the contrary set forth in Section 2.3(a) hereof, but subject to Section 2.3(d), the amount, if any, required to be contributed by the Members pursuant to Section 2.3(a) at the time of any such liquidation of the Company shall be 21 contributed as follows: (i) first, pro rata in accordance with the Members' respective Shortfall Percentages, until the Members have contributed an amount pursuant to this clause (i) equal to the Senior Loan Shortfall Amount, if any, at the time of such liquidation; (ii) second, 100 percent by BH Finance, until all contributions made under Section 2.3(a) (including contributions paid or deemed paid under Section 2.3(d), other than any interest component thereof) or clause (i) or (ii) hereof during the life of the Company have been made 90 percent by BH Finance and 10 percent by WMAC; and (iii) thereafter, pro rata in accordance with the Members' respective Debt Percentages. No Member shall receive additional compensation for any services performed pursuant to this Section 10. 10.3 Rights of Members. Except as otherwise provided in this Agreement, each Member shall look solely to the Company's property for the return of its Capital Contribution and has no right or power to demand or receive property other than cash from the Company, and if the assets of the Company remaining after payment or discharge of the debts or liabilities of the Company are insufficient to return such Capital Contribution, a Member shall have no recourse against the Company or the other Member. 10.4 Termination. Upon completion of the distribution of the Company's property as provided in this Section 10, the Company shall be terminated, and the Liquidator shall cause the filing of the Certificate of Cancellation pursuant to Section 18-203 of the Act and shall take all such other actions as may be necessary to terminate the Company. 10.5 Allocations During Period of Liquidation. During the period commencing on the first day of the Fiscal Year during which a Dissolution Event occurs and ending on the date on which all of the assets of the Company have been distributed to the Members pursuant to Section 10.2 hereof (the "Liquidation Period"), the Members shall continue to share Profits, Losses, and other items of Company income, gain, loss or deduction in the manner provided in Section 3 hereof and Appendix B hereto. 10.6 The Liquidator. (a) The "Liquidator" shall mean a Person appointed by the Members to oversee the liquidation of the Company. The Liquidator may be an officer, a Member or any other Person. (b) The Company is authorized to pay a reasonable fee to the Liquidator for its services performed pursuant to this Section 10 and to reimburse the Liquidator for its reasonable costs and expenses incurred in performing those services. (c) The Company shall indemnify, save harmless, and pay all judgments and claims against such Liquidator or any officers, directors, agents or employees of the Liquidator relating to any liability or damage incurred by 22 reason of any act performed or omitted to be performed by the Liquidator, or any officers, directors, agents or employees of the Liquidator in connection with the liquidation of the Company, including reasonable attorneys' fees incurred by the Liquidator, officer, director, agent or employee in connection with the defense of any action based on any such act or omission, which attorneys' fees may be paid as incurred, except to the extent such liability or damage is caused by the fraud, gross negligence, intentional misconduct of, or a knowing violation of the laws by the Liquidator which was material to the cause of action. 10.7 Form of Liquidating Distributions. For purposes of making distributions required by Section 10.2 hereof, the Liquidator may determine whether to distribute all or any portion of the property in-kind or to sell all or any portion of the property and distribute the proceeds therefrom; provided, however, that no Member shall be required to accept property in-kind in lieu of cash if cash is being delivered to another Member. SECTION 11 AGREEMENTS RELATING TO DEALINGS WITH FNV 11.1 Treatment of Management Fees. The Members hereby acknowledge and agree that all management and other services to be provided by Leucadia or its Affiliates pursuant to the terms of the Management Agreement are activities conducted on behalf of the Company, and that any management or similar fees received by Leucadia, Leucadia International or any of their Affiliates under the Management Agreement are received as a Member and that such fees are income of the Company to be shared evenly between the Members. Consequently, WMAC and Leucadia shall promptly pay over (or cause to be paid over) to BH Finance 50 percent of any such fee paid directly to Leucadia, Leucadia International or any of their Affiliates. Any such payment to BH Finance shall not be treated as a contribution to the Company. In the event that any such fee is paid by FNV or an Affiliate directly to the Company, such fee shall be distributed 50 percent to each Member. Leucadia and the Members hereby agree that this Section 11.1 shall survive any dissolution and winding up of the Company pursuant to Section 10. 11.2 Cooperation; Provision of Information. The Members, Berkshire and Leucadia shall keep one another fully and promptly informed of developments in FNV's or its Affiliates' business or relationships with or affecting its creditors, including any notices from its lenders, suppliers or advisors or any notices from any third party related to its creditors, in each case whether such information is obtained from FNV or its Affiliates pursuant to the terms of the Management Agreement or otherwise. The Company shall take the following actions only if first approved by each Member: (i) file any pleading with, or take any legal and/or factual position or action in the Bankruptcy Court; (ii) approve the terms or form of any pleading, including any plan of reorganization, disclosure statement or related proposed bankruptcy court order; or (iii) subject to Section 5.5, waive a term or condition of any agreement, plan of reorganization or bankruptcy court order. 23 11.3 Designation of Observers Pursuant to Management Agreement. BH Finance shall be entitled to designate at least one (1) of the three (3) persons that Leucadia is entitled to designate to the Board of Directors of FNV pursuant to the terms of the Management Agreement, and Leucadia shall cause such BH Finance designee to be so designated. 11.4 Exercise of Management Agreement Approval Rights. Leucadia shall not, nor shall it permit any of its Affiliates to, provide its consent or approval with respect to any act or omission by FNV or its Affiliates for which Leucadia's (or any Affiliate's) consent or approval is required under the terms of the Management Agreement or otherwise, without the written consent of BH Finance, which decision regarding consent shall be made promptly (in light of its circumstances) after receipt of notice seeking such consent. Without limiting the generality of the foregoing, without the written consent of BH Finance, Leucadia shall not, nor shall it permit any of its Affiliates to, agree to any amendment or cancellation of, or waiver of any of its rights or FNV's obligations under, the Management Agreement. 11.5 Purchase of Additional FNV Securities or Interests or Participations in Bank Loans. If, during the term of this Agreement, a Member, or any Affiliate thereof, desires to acquire additional securities (whether debt or equity) of, or interests or participations in bank loans of, FNV or its Affiliates, then such Member or Affiliate may not proceed with such transaction unless such Member affords the other Member a reasonable opportunity to acquire one-half of such securities or interests or participations in bank loans on the same terms and conditions. SECTION 12 MISCELLANEOUS 12.1 Notices. Any notice, payment, demand, or communication required or permitted to be given by any provision of this Agreement shall be in writing and shall be deemed to have been delivered, given, and received for all purposes (i) if delivered personally to the Person or to an officer of the Person to whom the same is directed, or (ii) when the same is actually received, if sent either by recognized overnight delivery service or registered or certified mail, postage and charges prepaid, or by facsimile, if such facsimile is followed by a hard copy of the facsimile communication sent promptly thereafter by recognized overnight delivery service or registered or certified mail, postage and charges prepaid, addressed as follows, or to such other address as such Person may from time to time specify by notice to the Members and the Company: (a) If to the Company, to the address determined pursuant to Section 1.4 hereof; and (b) If to a Member, to the address set forth on Appendix A hereto. 24 12.2 Covered Losses. (a) The Company shall indemnify and hold harmless any Member from any Covered Loss in excess of such Member's Proportionate Share of such Covered Loss. (b) If a Covered Loss is incurred by the Company, or if the Company indemnifies a Member from a Covered Loss pursuant to Section 12.2(a), each of the Members shall contribute to the Company as Required Capital Contributions, upon demand of the Company or any Member, the amount by which such Member's Proportionate Share exceeds the amount of such Covered Loss paid by such Member to date either directly or by Required Capital Contributions made to date pursuant to this Section 12.2(b). Berkshire agrees to contribute (or cause to be contributed) to BH Finance, and Leucadia agrees to contribute (or cause to be contributed) to WMAC, an amount sufficient in each case for such Member to fund its Required Capital Contributions as and when required under this Section 12.2(b). (c) In the event a Member or the Company becomes aware of a potential claim, event or state of affairs that could result in a Covered Loss, such Member or the Company shall promptly notify all of the Members thereof, and shall provide all Members with copies of all letters, pleadings or other documents in its possession which could or are alleged to form the material basis of any such claim or action; provided, that the failure to provide such notice in a timely fashion shall not affect the parties' respective obligations hereunder except and only to the extent that any delay in providing such notice results in actual prejudice to another party. In any case, the Members shall cooperate with respect to the defense of any such claim or action to the extent that the Members are not adverse parties or have adverse interests therein. The Members shall jointly control the defense of any such claim or action. 12.3 Defaults by Berkshire or Leucadia. If Berkshire or Leucadia fails to fulfill its obligations under Section 2.3(c) or 12.2(b) hereof, then the Member that is not related to such Person shall have a direct claim against such Person for breach of contract hereunder, and the unrelated Member and the Company (at the sole direction of the unrelated Member) shall have all remedies available to either of them in law or equity with respect to such failure by such Person. 12.4 Binding Effect. Except as otherwise provided in this Agreement, every covenant, term, and provision of this Agreement shall be binding upon and inure to the benefit of the Members and their respective successors, transferees, and assigns. 12.5 Headings. Section and other headings contained in this Agreement are for reference purposes only and are not intended to describe, interpret, define, or limit the scope, extent, or intent of this Agreement or any provision hereof. 25 12.6 Severability. Except as otherwise provided in the succeeding sentence, every provision of this Agreement is intended to be severable, and, if any term or provision of this Agreement is illegal or invalid for any reason whatsoever, such illegality or invalidity shall not affect the validity or legality of the remainder of this Agreement. The immediately preceding sentence shall be of no force or effect if the consequence of enforcing the remainder of this Agreement without such illegal or invalid term or provision would be to cause any Member to lose the material benefit of its economic bargain. 12.7 Governing Law. The laws of the State of Delaware shall govern the validity of this Agreement, the construction of its terms, and the interpretation of the rights and duties arising hereunder. 12.8 WAIVER OF JURY TRIAL. EACH OF THE MEMBERS, BERKSHIRE AND LEUCADIA IRREVOCABLY WAIVES TO THE EXTENT PERMITTED BY LAW, ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT. 12.9 Arbitration. All claims, disputes and other matters in question arising out of, or relating to this Agreement or the performance thereof, including, without limitation, questions as to whether a matter is governed by this arbitration clause, shall be subject to arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association (the "AAA Rules") then pertaining, insofar as the AAA Rules are not inconsistent with the provisions expressly set forth in this Agreement, unless the parties mutually agree otherwise, and pursuant to the following procedures: (i) the arbitration shall take place in Chicago, Illinois, (ii) a single neutral arbitrator having at least ten (10) years experience in complex commercial arbitration involving financial and partnership or limited liability company issues shall be appointed in the manner specified in the AAA Rules; provided, that if the amount at issue is greater than Twenty-Five Million Dollars ($25,000,000), then a panel of three (3) such neutral arbitrators shall be appointed in the manner specified in the AAA Rules; (iii) each party will, upon the written request of the other party, provide the other with copies of documents relevant to the issues raised by any claim or counterclaim; (iv) each party shall have the right to take the deposition of one individual and any expert witness(es) designated by the other party; (v) other discovery may be ordered by the arbitrator(s) to the extent the arbitrator(s) deem additional discovery appropriate, and any dispute regarding discovery, including disputes as to the need therefor or the relevance or the scope thereof, shall be determined by the arbitrator(s), which determination shall be conclusive; (vi) the arbitrator(s) shall have sixty (60) days following their appointment in which to resolve the question at issue, unless the parties agree in writing to extend such period; (vii) the award rendered by the arbitrator(s) may grant any remedy or relief that the arbitrator(s) deem just and equitable within the scope of this Agreement, including, without limitation, 26 damages, specific performance or injunctive relief, but may not include punitive damages or any remedy or relief that a court having jurisdiction thereof would not have the power to grant; (viii) judgment on the award rendered by the arbitrator(s) may be entered in any court having jurisdiction thereof; (ix) all reasonable out-of-pocket costs and reasonable legal fees incurred by the prevailing party shall be paid by the nonprevailing party, except in the event that a non-arbitrated settlement is reached, in which case each party shall pay its own respective costs and fees incurred thereby; (x) subject to clause (ix), each party shall pay one-half of the costs and fees charged by the arbitrator(s) with regard to the submitted dispute; and (xi) the parties shall be entitled to seek preliminary injunctive relief or other extraordinary remedies in any court having jurisdiction thereof, to preserve the status quo pending the outcome of arbitration. 12.10 Counterpart Execution. This Agreement may be executed in any number of counterparts with the same effect as if all of the Members had signed the same document. All counterparts shall be construed together and shall constitute one agreement. 12.11 Specific Performance. Each Member (as well as, in the case of BH Finance, Berkshire, and in the case of WMAC, Leucadia) agrees with the other Member that such other Member would be irreparably damaged if any of the provisions of this Agreement are not performed in accordance with their specific terms and that monetary damages would not provide an adequate remedy in such event. Accordingly, it is agreed that, in addition to any other remedy to which the non-breaching Member may be entitled, at law or in equity, the non-breaching Member shall be entitled to injunctive relief to prevent breaches of the provisions of this Agreement and specifically to enforce the terms and provisions hereof in any action instituted in any court of the United States or any state thereof having subject matter jurisdiction thereof. 12.12 Further Assurances. Each Member covenants and agrees on behalf of itself, its successors and its assigns, without further consideration, to prepare, execute, acknowledge, file and deliver such other instruments, documents and statements, and to take such other action as may be required by law or reasonably necessary to effectively carry out the purposes of this Agreement. 12.13 Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto pertaining to the subject matter hereof and fully supersedes any and all prior or contemporaneous agreements or understandings between the parties hereto pertaining to the subject matter hereof. 27 IN WITNESS WHEREOF, the parties have executed and entered into this Second Amended and Restated Operating Agreement of the Company on November 27, 2002, effective as of the day first above set forth. BH FINANCE LLC By: /s/ Mark D. Hamburg -------------------------------------- Name: Mark D. Hamburg Title: WMAC INVESTMENT CORPORATION By: /s/ Joseph A. Orlando -------------------------------------- Name: Joseph A. Orlando Title: ACKNOWLEDGED AND AGREED, provided that, except as and to the extent specifically set forth in this Agreement, the signatories below are not undertaking to cause or procure the performance of obligations undertaken herein by the Members. BERKSHIRE HATHAWAY INC. By: /s/ Mark D. Hamburg -------------------------------------- Name: Mark D. Hamburg Title: LEUCADIA NATIONAL CORPORATION By: /s/ Joseph A. Orlando -------------------------------------- Name: Title: Appendix A-4 APPENDIX A Attached to and Made a Part of the Second Amended and Restated Operating Agreement of Berkadia LLC Members ------- Name and Address Debt Percentage Shortfall Percentage - ---------------- --------------- -------------------- BH Finance LLC 90% 50% 1440 Kiewit Plaza Omaha, Nebraska 68131 Attn: Marc Hamburg Facsimile: (402) 346-3375 WMAC Investment Corporation 10% 50% 315 Park Avenue South New York, New York 10010 Attn: Joseph Steinberg Facsimile: (212) 598-4869 Appendix B-4 APPENDIX B Attached to and Made a Part of the Second Amended and Restated Operating Agreement of Berkadia LLC Additional Allocations ---------------------- 1. Special Allocations. The following special allocations shall be made in the following order: (a) Minimum Gain Chargeback. Except as otherwise provided in Section 1.704-2(f) of the Regulations, notwithstanding any other provision of Section 3 of the Agreement and this Appendix B, if there is a net decrease in Company Minimum Gain during any Allocation Year, each Member shall be specially allocated items of Company income and gain for such Allocation Year (and, if necessary, subsequent Allocation Years) in an amount equal to such Member's share of the net decrease in Company Minimum Gain, determined in accordance with Regulations Section 1.704-2(g). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Member pursuant thereto. The items to be so allocated shall be determined in accordance with sections 1.704-2(f)(6) and 1.704-2(j)(2) of the Regulations. This Paragraph 1(a) is intended to comply with the minimum gain chargeback requirement in Section 1.704-2(f) of the Regulations and shall be interpreted consistently therewith. (b) Member Minimum Gain Chargeback. Except as otherwise provided in Section 1.704-2(i) (4) of the Regulations, notwithstanding any other provision of Section 3 of the Agreement and this Appendix B, if there is a net decrease in Member Nonrecourse Debt Minimum Gain attributable to Member Nonrecourse Debt during any Allocation Year, each Member who has a share of the Member Nonrecourse Debt Minimum Gain attributable to such Member Nonrecourse Debt, determined in accordance with Section 1.704-2(i)(5) of the Regulations, shall be specially allocated items of Company income and gain for such Allocation Year (and, if necessary, subsequent Allocation Years) in an amount equal to such Member's share of the net decrease in Member Nonrecourse Debt, determined in accordance with Regulations Section 1.704-2(i)(4). Allocations pursuant to the previous sentence shall be made in proportion to the respective amounts required to be allocated to each Member pursuant thereto. The items to be so allocated shall be determined in accordance with Sections 1.704-2(i)(4) and 1.704-2(j)(2) of the Regulations. This Paragraph 1(b) is intended to comply with the minimum gain chargeback requirement in Section 1.704-2(i)(4) of the Regulations and shall be interpreted consistently therewith. (c) Qualified Income Offset. In the event any Member unexpectedly receives any adjustments, allocations, or distributions described in Sections 1.704-1(b)(2)(ii)(d)(4), 1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6) of the Regulations, items of Company income and gain shall be specially allocated to such Member in an amount and manner sufficient to eliminate, to the extent required by the Regulations, the Adjusted Capital Account Deficit of the Member as quickly as possible; provided that an allocation pursuant to this Paragraph Appendix B-1 1(c) shall be made only if and to the extent that the Member would have an Adjusted Capital Account Deficit after all other allocations provided for in Section 3 of the Agreement and this Appendix B have been tentatively made as if this Paragraph 1(c) were not part of this Appendix B. (d) Gross Income Allocation. In the event any Member has a deficit Capital Account at the end of any Allocation Year which is in excess of the sum of the amount such Member is obligated to restore pursuant to the penultimate sentences of Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5), each such Member shall be specially allocated items of Company income and gain in the amount of such excess as quickly as possible; provided that an allocation pursuant to this Paragraph 1(d) shall be made only if and to the extent that such Member would have a deficit Capital Account in excess of such sum after all other allocations provided for in Section 3 of the Agreement and this Appendix B have been made as if Paragraph 1(c) hereof and this Paragraph 1(d) were not part of this Appendix B. (e) Nonrecourse Deductions. Nonrecourse Deductions for any Allocation Year shall be specially allocated to the Members in proportion to their respective Debt Percentages. (f) Member Nonrecourse Deductions. Any Member Nonrecourse Deductions for any Allocation Year shall be specially allocated to the Member who bears the economic risk of loss with respect to the Member Nonrecourse Debt to which such Member Nonrecourse Deductions are attributable in accordance with Regulations Section 1.704-2(i)(1). (g) Section 754 Adjustments. To the extent an adjustment to the adjusted tax basis of any Company asset, pursuant to Code Section 734(b) or Code Section 743(b) is required, pursuant to Regulations Section 1.704-1(b)(2)(iv)(m)(2) or 1.704-1(b)(2)(iv)(m)(4), to be taken into account in determining Capital Accounts as the result of a distribution to a Member in complete liquidation of such Member's interest in the Company, the amount of such adjustment to Capital Accounts shall be treated as an item of gain (if the adjustment increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be specially allocated to the Members in accordance with their interests in the Company in the event Regulations Section 1.704-1(b)(2)(iv)(m)(2) applies, or to the Member to whom such distribution was made in the event Regulations Section 1.704-1(b)(2)(iv)(m)(4) applies. 2. Curative Allocations. The allocations set forth in Paragraphs 1(a) through (g) and Paragraph 3 hereof (the "Regulatory Allocations") are intended to comply with certain requirements of the Regulations. It is the intent of the Members that, to the extent possible, all Regulatory Allocations shall be offset either with other Regulatory Allocations or with special allocations of other items of Company income, gain, loss or deduction pursuant to this Paragraph 2. Therefore, notwithstanding any other provision of Section 3 of the Agreement and this Appendix B (other than the Regulatory Allocations), the Company shall make such offsetting special allocations of Company income, gain, loss or deduction in whatever manner it determines appropriate so that, after such offsetting allocations are made, each Member's Capital Account balance is, to the extent possible, equal to the Capital Account balance such Member would have had if the Regulatory Allocations were not part of the Agreement and all Company items were allocated pursuant to Section 3 of the Agreement. Appendix B-2 3. Loss Limitation. Losses allocated pursuant to Section 3 of the Agreement shall not exceed the maximum amount of Losses that can be allocated without causing any Member to have an Adjusted Capital Account Deficit at the end of any Allocation Year. In the event some but not all of the Members would have Adjusted Capital Account Deficits as a consequence of an allocation of Losses pursuant to Section 3 of the Agreement, the limitation set forth in this Paragraph 3 shall be applied on a Member by Member basis and Losses not allocable to any Member as a result of such limitation shall be allocated to the other Members in accordance with the positive balances in such Member's Capital Accounts so as to allocate the maximum permissible Losses to each Member under Section 1.704-1(b)(2)(ii)(d) of the Regulations. 4. Other Allocation Rules. (a) For purposes of determining the Profits, Losses, or any other items allocable to any period, Profits, Losses, and any such other items shall be determined on a daily, monthly, or other basis, as determined by the Members using any permissible method under Code Section 706 and the Regulations thereunder. (b) The Members are aware of the income tax consequences of the allocations made by Section 3 of the Agreement and this Appendix B and hereby agree to be bound by such provisions in reporting their shares of Company income and loss for income tax purposes. (c) Solely for purposes of determining a Member's proportionate share of the "excess nonrecourse liabilities" of the Company within the meaning of Regulations Section 1.752-3(a) (3), the Members' interests in Company profits are in proportion to their Debt Percentages. (d) To the extent permitted by Section 1.704-2(h)(3) of the Regulations, the Company shall endeavor to treat any distributions as having been made from the proceeds of a Nonrecourse Liability or a Member Nonrecourse Debt only to the extent that such distributions would cause or increase an Adjusted Capital Account Deficit for any Member. 5. Tax Allocations; Code Section 704(c). (a) In accordance with Code Section 704(c) and the Regulations thereunder, income, gain, loss, and deduction with respect to any property contributed to the capital of the Company shall, solely for tax purposes, be allocated among the Members so as to take account of any variation between the adjusted basis of such property to the Company for federal income tax purposes and its initial Gross Asset Value (computed in accordance with the definition of Gross Asset Value). (b) In the event the Gross Asset Value of any Company asset is adjusted pursuant to subparagraph (ii) of the definition of Gross Asset Value, subsequent allocations of income, gain, loss, and deduction with respect to such asset shall take account of any variation between the adjusted basis of such asset for federal income tax purposes and its Gross Asset Value in the same manner as under Code Section 704(c) and the Regulations thereunder. Appendix B-3 (c) Any elections or other decisions relating to such allocations shall be made by the Members in any manner that reasonably reflects the purpose and intention of this Agreement. Allocations pursuant to this Paragraph 5 are solely for purposes of federal, state, and local taxes and shall not affect, or in any way be taken into account in computing, any Member's Capital Account or share of Profits, Losses, other items, or distributions pursuant to any provision of this Agreement. (d) The Members shall, for federal income tax purposes, share any original issue discount recognized by the Company in accordance with their Shortfall Percentages. (e) Subject to the foregoing, for federal income tax purposes each item of income, gain, loss or deduction that corresponds to an item of income, gain, loss or expense taken into account in calculating Profits or Losses or specially allocated under Section 3.1(a) of the Agreement or Section 1, 2 or 3 of this Appendix B (a "Book Item") shall be allocated between the Members in the same proportion as the corresponding Book Item is allocated between the Members. Appendix b-4 EX-10 11 subscripdoc.txt EXHIBIT 10.41 SUBSCRIPTION AGREEMENT Exhibit 10.41 ______________________________________________________ SUBSCRIPTION AGREEMENT by and among LEUCADIA NATIONAL CORPORATION AND EACH OF THE ENTITIES NAMED IN SCHEDULE I HERETO ______________________________________________________ Dated as of December 23, 2002 ______________________________________________________ TABLE OF CONTENTS Page 1. Definitions....................................................1 2. Purchase and Sale..............................................1 3. Purchase Price.................................................1 4. The Closing....................................................2 5. Representations and Warranties of the Company.......... .......2 6. Representations and Warranties of each Purchaser...............2 7. Conditions.....................................................4 8. Restrictions on Transfer.......................................4 9. Agreement......................................................4 10. Miscellaneous.................................................5 SCHEDULE I............................................................9 EXHIBIT A............................................................10 SUBSCRIPTION AGREEMENT THIS SUBSCRIPTION AGREEMENT (the "Agreement") is made and entered into as of December 23, 2002 by and among Leucadia National Corporation, a New York corporation (the "Company") and each of the entities named in Schedule I hereto (each a "Purchaser" and, together, the "Purchasers"). W I T N E S S E T H: WHEREAS, the Company desires to sell to each Purchaser, and each Purchaser desires to purchase from the Company, upon the terms and conditions hereinafter provided, the number of common shares, par value $1.00 per share, of the Company (the "Common Shares") and the number of shares of Series A Convertible Preferred Stock (the "Series A Preferred Stock") set forth opposite its name in Schedule I hereto (such Common Shares and Series A Preferred Stock being collectively referred to as the "Securities"); and WHEREAS pursuant to this Agreement and subject to and conditioned upon the terms and provisions hereof, the parties desire to set forth certain rights and obligations of the Purchasers with respect to the Securities acquired by the Purchasers pursuant hereto, and the Company and each of the Purchasers wish to make various additional agreements, all as expressly set forth below. NOW, THEREFORE, in consideration of the premises and the respective agreements hereinafter set forth, the parties hereto agree as follows: 1. Definitions. As used in this Agreement, the following terms have the ----------- following meanings: "Closing" shall have the meaning given to such term in Section 4. "Closing Date" shall have the meaning given to such term in Section 4. "Excluded Liens" means Liens imposed by or arising from this Agreement. "Liens" means liens, security interests, claims, pledges and encumbrances of any kind. "Material Adverse Effect" with respect to any person means a material adverse effect on (a) the business, financial condition or results of operations of such person and its subsidiaries, taken as a whole, or (b) the ability of such person to perform its obligations under this Agreement. "Registration Rights Agreement" means a registration rights agreement between the Company and the Purchasers dated as of the Closing Date and in the form of Exhibit A attached hereto. "Securities Act" means the Securities Act of 1933, as amended. 2. Purchase and Sale. On the Closing Date, and upon the terms and subject ----------------- to the conditions herein set forth, the Company agrees to issue and sell to each Purchaser, free and clear of all Liens other than any Excluded Liens, and each Purchaser hereby agrees to purchase and accept from the Company, a face amount of Securities equal to the amount set forth opposite each Purchaser's name in Schedule I hereto (with respect to each Purchaser, its "Allocated Securities"). Subject to the terms and conditions of this Agreement and in reliance upon the representations, warranties and agreements of each Purchaser hereunder, the Company shall deliver to each Purchaser on the Closing Date (against payment of the Purchase Price provided for in Section 3) certificates representing the Allocated Securities registered in the name of each Purchaser or a designated affiliate thereof. 3. Purchase Price. On the Closing Date, each Purchaser shall pay to the ---------------- Company $35.25 per Common Share and $4,750,713.00 per share of Series A Preferred Stock, aggregating to the amount set forth opposite such Purchaser's name in Schedule I hereto (with respect to such Purchaser, the "Purchase Price") for the purchase of its Allocated Securities. The Purchase Price shall be paid in immediately available funds by wire transfer to a bank account designated by the Company. 1 4. The Closing. ----------- (a) Upon the terms and subject to the conditions herein set forth, the purchase and sale provided for herein (the "Closing") will take place (a) at the offices of Weil, Gotshal & Manges LLP, 767 Fifth Avenue, New York, NY 10153, at 10:00 a.m., New York City time, on December 24, 2002 or (b) at such other time, date and place as shall be fixed by agreement among the parties hereto. The date and time of Closing are herein referred to as the "Closing Date". (b) The Closing shall be conditioned upon the Company having received the consent of WilTel Communications Group, Inc. to the sale of the Securities pursuant to this Agreement. Until such consent is received, the Company shall have no obligation to close. 5. Representations and Warranties of the Company. The Company represents ---------------------------------------------- and warrants to each Purchaser as follows: 5.1 Authority of Seller. The Company has been duly formed and is validly -------------------- existing under the laws of the State of New York. The issuance, sale and delivery by the Company of the Securities has been duly authorized by the Company. Upon issuance and delivery as contemplated by Section 2 of this Agreement and upon payment therefor as contemplated by Section 3 of this Agreement, the Securities will have been duly authorized, validly issued, fully paid and nonassessable. This Agreement has been duly and validly executed and delivered by the Company and is the legal, valid and binding obligation of the Company enforceable against the Company in all material respects in accordance with its terms. No action, consent or approval by, or filing with, any Federal, state, municipal, foreign or other court or governmental or administrative body or agency, or any other regulatory or self-regulatory body (a "Governmental Authority"), by reason of authority over the affairs of the Company, is required to be made by the Company in connection with the execution and delivery by the Company of this Agreement or the consummation by the Company of the transactions contemplated hereby, other than (a) those which may be required solely by reason of any Purchaser's (as opposed to any other third party's) participation in the transaction contemplated hereby and (b) such other consents, approvals and filings, the failure of which to obtain would not have a Material Adverse Effect on the Company. 5.2 No Conflicts; No Violations. None of the execution, delivery or ------------------------------ performance of this Agreement by the Company will (a) result in any violation of or be in conflict with or constitute a default under any term of the constitutive documents of the Company, (b) result in any material breach of any terms or provisions of, or constitute a material default under, any material contract, agreement or instrument to which the Company is a party or by which the Company or its property is bound or (c) violate any judgment, order, decree, statute, law, rule or regulation applicable to the Company except for in the case of the foregoing clauses (b) and (c), any violation, conflict, breach or default which would not have a Material Adverse Effect on the Company. 5.3 Brokers. No broker, investment banker, financial advisor or other ------- person is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of the Company, other than Jefferies & Company, Inc. 6. Representations and Warranties of each Purchaser. Each Purchaser, ---------------------------------------------------- severally and not jointly, represents and warrants to the Company as follows: 6.1 Authority of Purchaser. Such Purchaser has been duly formed and is ----------------------- validly existing under the laws of the state or other jurisdiction of its incorporation or formation. Such Purchaser has full right, power and authority to consummate the transactions contemplated herein. This Agreement has been duly and validly executed and delivered by such Purchaser and is the legal, valid and binding obligation of such Purchaser enforceable against such Purchaser in all material respects in accordance with its terms. No action, consent or approval by, or filing with, any Governmental Authority, by reason of authority over the affairs of such Purchaser, is required to be made or obtained by such Purchaser in connection with the execution and delivery by such Purchaser of this Agreement or the consummation by such Purchaser of the transactions contemplated hereby other than such consents, approvals and filings, the failure of which to obtain would not have a Material Adverse Effect on such Purchaser. 2 6.2 No Conflicts; No Violations. None of the execution, delivery or ------------------------------ performance of this Agreement or the receipt of the Securities by such Purchaser will (a) result in any violation of or be in conflict with or constitute a default under any term of constitutive documents of such Purchaser, (b) result in any material breach of any terms or provisions of, or constitute a material default under, any material contract, agreement or instrument to which such Purchaser is a party or by which such Purchaser or its property is bound or (c) violate any judgment, order, decree, statute, law, rule or regulation applicable to such Purchaser, except for in the case of the foregoing clauses (b) and (c), any violation, conflict, breach or default which would not have a Material Adverse Effect on such Purchaser. 6.3 Investment Intention; No Resales. Such Purchaser is acquiring the ---------------------------------- Securities hereunder for investment, solely for its own account and not with a view to, or for resale in connection with, the distribution thereof. Such Purchaser will not resell, transfer, assign or distribute the Securities except in compliance with this Agreement, the Registration Rights Agreement and the registration requirements of the Securities Act and applicable state securities laws or pursuant to an available exemption therefrom. 6.4 Accredited Investor; Ability to Bear Risk; Evaluation of Risks. -------------------------------------------------------------- (a) Such Purchaser is an "Accredited Investor" as defined in Rule 501(a) promulgated under Regulation D of the Securities Act. (b) Such Purchaser is in a financial position to bear the risk of holding the Securities and is able to withstand a complete loss of its investment in the Securities. (c) The knowledge and experience of such Purchaser in financial and business matters is such that it, together with its advisors, is capable of reading and interpreting financial statements and evaluating the merits and risks of the investment in the Securities and has the net worth to undertake such risks. (d) Such Purchaser acknowledges that no representations, express or implied, are being made with respect to the Company, the Securities, or otherwise, other than those expressly set forth herein. 6.5 Securities Unregistered. Such Purchaser has been advised by the Company ----------------------- that (a) the offer and sale of the Securities have not been registered under the Securities Act and (b) the offering and sale of the Securities is intended to be exempt from registration under the Securities Act pursuant to Section 4(2) of the Securities Act and (c) there is no established market for the Series A Preferred Stock and it is not anticipated that there will be any public market for the Series A Preferred Stock in the foreseeable future. 6.6 Brokers. No broker, investment banker, financial advisor or other ------- person is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by or on behalf of such Purchaser. 6.7 Investment Decision. Each Purchaser is making its own investment -------------------- decision and each investment decision is not based on the investment decision of any other Purchaser. 3 7. Conditions. ---------- 7.1 Conditions to Obligations of the Purchasers. The obligations of each -------------------------------------------- Purchaser to perform under this Agreement are subject to the satisfaction or waiver by such Purchaser of each of the following conditions: (a) the delivery to the Purchaser by the Company of its Allocated Securities and a duly executed Registration Rights Agreement and (b) the absence on the Closing Date of any injunction or other order, or statute, rule or regulation, of any Governmental Authority prohibiting the consummation of the sale and purchase of the Securities hereunder. 7.2 Conditions to Obligations of the Company. The obligations of the ------------------------------------------- Company to perform under this Agreement are subject to the satisfaction or waiver by the Company of each of the following conditions: (a) each Purchaser shall have delivered to the Company the Purchase Price specified on Schedule I in accordance with the provisions of Section 3, (b) the execution and delivery to the Company by each Purchaser of the Registration Rights Agreement and (c) the absence on the Closing Date of any injunction or other order, or statute, rule or regulation, of any Governmental Authority preventing or the prohibiting the consummation of the sale and purchase of the Securities hereunder. 8. Restrictions on Transfer. ------------------------ 8.1 General Restriction. The Securities are "restricted securities" within ------------------- the meaning of Rule 144(a)(3) under the Securities Act (the "Restricted Securities"), and will be transferable only upon the satisfaction of the terms and conditions set forth in (x) this Section 8, (y) the Registration Rights Agreement and (z) the Company's restated certificate of incorporation (the "Charter"). Any transfer or purported transfer in violation of this Section 8 will be void. 8.2 Notice of Transfer. Subject to the terms of the Registration Rights ------------------- Agreement and the Charter, prior to any transfer of any Restricted Securities, the holder thereof will give written notice to the Company describing in reasonable detail the manner and terms of the proposed transfer and the identity of the proposed transferee, accompanied by the written agreement of the proposed transferee to be bound by all of the provisions hereof applicable to holders of such Restricted Securities hereunder or thereunder. 8.3 Restrictive Legends. For so long as the Securities remain subject to -------------------- the restrictions on transfer set forth in this Section 8, the certificates representing such securities will bear restrictive legends in addition to those required by the Charter in substantially the following form: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAW AND MAY NOT BE SOLD OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO (A) AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR (B) AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT." 8.4 Termination of Restrictions. The restrictions imposed by this Section 8 --------------------------- upon the transferability of Restricted Securities will terminate as to any particular Restricted Securities when such Restricted Securities have been sold pursuant to an effective registration statement under the Securities Act, or pursuant to Rule 144 under the Securities Act or any other exemption from the registration requirements of the Securities Act pursuant to which the transferee receives securities that are not "restricted securities" within the meaning of that term as defined in Rule 144(a)(3). Whenever any of such restrictions terminates as to any Restricted Securities, the holder thereof will be entitled to receive from the Company, at the Company's expense, new certificates representing such Securities, without the restrictive legend set forth in Section 8.3, but containing any other legend required by the Charter at that time. Notwithstanding the foregoing, the restrictions on transferability set forth in the Charter shall remain unaffected by any sale referred to in this Section. 9. Agreement. --------- 4 9.1 Registration Rights Agreement. The Company and each of the Purchasers ------------------------------ hereby agree to duly execute and deliver on the Closing Date the Registration Rights Agreement. 9.2 Best Efforts; Further Actions. Each of the Company and the Purchasers ------------------------------ will use its best efforts to take or cause to be taken all action and to do or cause to be done all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement. If, at any time after the Closing Date, any further action is necessary or desirable to carry out the purposes of this Agreement or to vest each Purchaser with full title to the Securities, the proper officers, directors, partners or duly authorized representatives of each party to this Agreement shall take all such necessary action. 9.3 Consents. Each of the Company and the Purchasers will cooperate with -------- each other, and use its best efforts, in filing any necessary applications, reports or other documents with, giving any notices to, and seeking any consents from, all regulatory bodies and all governmental agencies and authorities and all third parties (including, without limitation, any other equityholders) as may be necessary or desirable in connection with the consummation of the transactions contemplated by this Agreement. 9.4 Public Announcements. Each of the Company, the Purchasers, and their --------------------- respective affiliates, will consult with each other before issuing, and provide each other the opportunity to review and comment upon, any press release or other public statement with respect to the sale and purchase of the Securities and the transactions contemplated by this Agreement and shall not issue any press release, disclose the name of any Purchaser or make any such public statement without the advance approval of the other parties following such consultation (such approval not to be unreasonably withheld or delayed), except as may be required by applicable law, court process or by the requirements of any securities exchange. 10. Miscellaneous. ------------- 10.1 Amendment and Waiver. This Agreement may not be amended or ---------------------- supplemented except by an instrument in writing duly executed by an authorized officer of the Company and an authorized officer of Purchasers holding a majority of the Securities being issued pursuant to this Agreement. Any term or provision of this Agreement may be waived, but only in writing by the party which is entitled to the benefit thereof. The waiver by any party hereto of a breach of any provision of this Agreement shall not operate or be construed as a waiver of any preceding or succeeding breach and no failure by either party to exercise any right or privilege hereunder shall be deemed a waiver of such party's rights or privileges hereunder or shall be deemed a waiver of such party's rights to exercise the same at any subsequent time or times hereunder. 10.2 Counterparts. This Agreement may be executed in one or more ------------ counterparts, each of which when so executed and delivered will be deemed an original, and all of which together shall constitute one and the same agreement. It shall not be necessary for each party to sign each counterpart so long as every party has signed at least one counterpart. 5 10.3 Facsimile Signatures. This Agreement may be executed and delivered by -------------------- facsimile and upon such delivery the facsimile signature will be deemed to have the same effect as if the original signature had been delivered to the other party. 10.4 Notices. All notices and other communications hereunder shall be in ------- writing and shall be deemed to have been given if delivered personally or sent by registered or certified mail (return receipt requested), postage prepaid, or by facsimile transmission to the parties to this Agreement at the following addresses or at such other address for a party as shall be specified by like notice: If to the Company, at: Leucadia National Corporation 315 Park Avenue South New York, NY 10010 Fax: (212) 598-3242 Attention: Joseph A. Orlando with a copy to: Weil, Gotshal & Manges LLP 767 Fifth Avenue New York, NY 10153 Fax: (212) 310-8000 Attention: Andrea A. Bernstein, Esq. If to the Purchasers, at: Franklin Mutual Advisers, LLC 51 John F. Kennedy Parkway Short Hills, NJ 07078 Fax: (973) 912-0646 Attention: Bradley Takahashi All such notices and communications shall be deemed to have been received on the date of delivery, on the date that the facsimile transmission is confirmed as having been received or on the third business day in New York after the mailing thereof, as the case may be. 10.5 Assignment. Neither this Agreement nor any right, remedy, obligation ---------- or liability arising hereunder or by reason hereof shall be assignable by any party to this Agreement without the prior written consent of the other parties, and any attempt to assign any right, remedy, obligation or liability arising hereunder without such consent shall be void. 10.6 Entire Agreement. This Agreement constitutes the entire agreement ----------------- between the parties with respect to the subject matter hereof and supersedes all prior agreements and undertakings, written and oral. 10.7 Binding Effect; Parties in Interest. This Agreement shall be binding ------------------------------------ upon and inure to the benefit of the parties to this Agreement and their respective successors and permitted assigns, and nothing in this Agreement, express or implied, is intended to or shall confer upon any other person any rights, benefits or remedies of any nature whatsoever under or by reason of this Agreement. 6 10.8 Expenses, Indemnification. -------------------------- (a) Whether or not the purchase and sale of the Securities is consummated, each party hereto shall pay its own fees and expenses incident to preparing for, entering into and carrying out this Agreement and the consummation of the transactions contemplated hereby. (b) A party in breach of this Agreement shall, on demand, indemnify and hold harmless the other parties for and against all reasonable out-of-pocket expenses, including legal fees, incurred by such other parties by reason of the enforcement and protection of its rights under this Agreement. The payment of such expenses is in addition to any other relief to which such other party may be entitled. 10.9 Applicable Law and Jurisdiction; Service of Process; Waiver of Jury ---------------------------------------------------------------------- Trial. - ----- (a) This Agreement shall be governed by and construed in accordance with the laws of the State of New York without reference to any applicable principles of conflict of laws to the extent that the application of the laws of another jurisdiction would be required thereby. Any and all suits, legal actions or proceedings against any party hereto arising out of this Agreement shall be brought in the United States Federal court sitting in the Southern District of New York, or, if such court shall not have jurisdiction, in the Supreme Court of the State of New York sitting in the County of New York, and each party hereby submits to and accepts the exclusive jurisdiction of such courts for the purpose of such suits, legal action or proceedings. Each party hereto hereby irrevocably waives any objection which it may now or hereafter have to the laying of venue of any such suit, legal action or proceeding in any such court and hereby further waives any claim that any suit, legal action or proceeding brought in any such court has been brought in an inconvenient forum. The parties hereto agree that service of process in connection with any suit, legal action or proceeding brought hereunder or in connection herewith may be made by any means of service of process permitted by law. (b) Each party waives, to the fullest extent permitted by applicable law, any right it may have to a trial by jury in respect of any litigation arising out of or relating to this Agreement. Each party (x) certifies that no representative, agent or attorney of another party has presented, expressly or otherwise, that such other party would not, in the event of litigation, seek to enforce the foregoing waiver and (y) acknowledges that it has been induced to enter into this Agreement by, among other things, the mutual waivers and certifications set forth in this Section 10.9. 10.10 Section Headings. The section and other headings contained in this ----------------- Agreement are for reference purposes only and shall not affect the meaning or interpretation of this Agreement. 10.11 Termination. This Agreement may be terminated at any time prior to ----------- the Closing by the mutual consent of each of the Purchasers and the Company. 10.12 Specific Enforcement. Each of the parties hereto acknowledges and --------------------- agrees that in the event of any breach of this Agreement, the non-breaching party would be irreparably harmed and could not be made whole by monetary damages. It is accordingly agreed that the parties hereto will waive the defense in any action for specific performance that a remedy at law would be adequate and that the parties hereto, in addition to any other remedy to which they may be entitled at law or in equity, shall be entitled to an injunction or injunctions to prevent breaches of the provisions of this Agreement and to enforce specifically the terms and provisions hereof without the necessity of proving actual damage or securing or posting any bond or providing prior notice. 10.13 Further Assurances. Subject to the specific terms of this Agreement, ------------------ each of the parties hereto shall make, execute, acknowledge and deliver such other instruments and documents, and take all such other actions, as may be reasonably required in order to effectuate the purposes of this Agreement and to consummate the transactions contemplated hereby. [REMAINDER OF PAGE IS INTENTIONALLY LEFT BLANK] 7 IN WITNESS WHEREOF, each party hereto has executed this Agreement as of the day and year first above written. LEUCADIA NATIONAL CORPORATION By: __________________________ Name: Title: MUTUAL BEACON FUND By: __________________________ Name: Title: MUTUAL DISCOVERY FUND By: __________________________ Name: Title: MUTUAL FINANCIAL SERVICES FUND By: __________________________ Name: Title: MUTUAL QUALIFIED FUND By: __________________________ Name: Title: MUTUAL SHARES FUND By: __________________________ Name: Title: MUTUAL BEACON FUND (Ontario, Canada) By: __________________________ Name: Title: MUTUAL DISCOVERY SECURITIES FUND By: __________________________ Name: Title: MUTUAL SHARES SECURITIES FUND By: __________________________ Name: Title: FRANKLIN MUTUAL BEACON FUND By: __________________________ Name: Title: MASTERS' SELECT VALUE FUND By: __________________________ Name: Title: 8
SCHEDULE I Names Type of Securities Number of Shares Purchase Price ----- ------------------ ---------------- -------------- Mutual Beacon Fund Common 595,496 $20,991,234.00 Series A Preferred 2 $9,501,426.00 Mutual Discovery Fund Common 415,236 $14,637,069.00 Series A Preferred 2 $9,501,426.00 Mutual Financial Services Fund Common 87,450 $3,082,612.50 Mutual Qualified Fund Common 422,096 $14,878,884.00 Series A Preferred 2 $9,501,426.00 Mutual Shares Fund Common 1,012,141 $35,677,970.25 Series A Preferred 4 $19,002,852.00 Mutual Beacon Fund (Ontario) Common 22,060 $777,615.00 Mutual Discovery Securities Fund Common 34,780 $1,225,995.00 Mutual Shares Securities Fund Common 184,830 $6,515,257.50 Franklin Mutual Beacon Fund Common 84,290 $2,971,222.50 Masters' Select Value Fund Common 49,220 $1,735,005.00 ------------- Total $149,999,994.75 ===============
9 EXHIBIT A [REGISTRATION RIGHTS AGREEMENT] 10 EX-10 12 hornsteindefcomp.txt EXHIBIT 10.42 MARK HORNSTEIN DEFERRED COMP AGREE. Exhibit 10.42 DEFERRED COMPENSATION AGREEMENT ------------------------------- THIS DEFERRED COMPENSATION AGREEMENT, (the "Agreement") is made and entered into on December 16, 2002 by and between LEUCADIA NATIONAL CORPORATION, a New York corporation (the "Company"), and Mark Hornstein, (the "Executive"), collectively the parties ("Parties"). WITNESSETH: ----------- WHEREAS, Executive is employed by the Company as Vice President; and WHEREAS, in connection with the provision of services to the Company in his capacity as Vice President the Executive desires to defer the receipt of certain compensation from the Company to which in the future he may become entitled, and the Company agrees to do so, in accordance with the terms and provisions herein contained; NOW, THEREFORE, in consideration of the premises and the mutual convenants and agreements herein contained, the Parties hereby agree as follows: 1. Deferral of Payments. -------------------- The Company shall defer the payment of 50% of bonus compensation, other than Holiday Bonus, that may be awarded to the Executive by the Company from and after the date of this Agreement through the end of calendar year 2003. The Executive acknowledges that the Company is under no obligation to award any bonus to the Executive and that the award of any bonus, as well as the amount of any bonus that may be awarded, remains fully discretionary with the Company. Each deferred payment shall accrue interest (on the basis of a 360-day year), compounded annually, from the first day of the month immediately following the date on which payment otherwise would have been made if no deferral had existed (the "First New Month Date") until the date of actual payment, at a rate of interest equal to the yield on Treasury bills maturing in one year in effect at each First New Month Date, and the rate of interest shall be reset on the first day of each subsequent quarter. For purposes hereof, the quarters shall begin January 1, April 1, July 1, and October 1. All amounts deferred pursuant to this Agreement, including interest, shall be paid to the Executive in January 2008. Notwithstanding the preceding sentence, to the extent that the aggregate deferred payments hereunder (including interest) exceed the maximum annual amount deductible as compensation by the Company under applicable U.S. federal tax laws, the Company may make such payments in two or more installments in different taxable years to permit the Company to obtain the maximum annual deduction available. In addition, to the extent that the Company determines the aggregate deferred payments hereunder (including interest) will not be fully deductible when paid as compensation by the Company under applicable U.S. federal tax laws, the Company may prepay such amounts to obtain the maximum tax deduction possible. The rights of the Executive to the payment of the amounts pursuant to this Agreement shall be no greater than the rights of an unsecured general creditor of the Company and may not be assigned, pledged or otherwise transferred by him during his lifetime to any person, whether by operation of law or otherwise, and shall not be subject to execution, attachment or similar proceeding. By written notice delivered to the Company, the Executive may designate (or change a prior designation of) one or more beneficiaries (or his estate) to receive payment hereunder in the event of his death. 2. Withholding. ----------- The Executive acknowledges and agrees that the Company shall be entitled to withhold from his compensation all federal, state, local or other taxes which the Company determines are required to be withheld on amounts payable to the Executive pursuant to this Agreement or otherwise. The Executive further agrees to indemnify the Company and hold it harmless from and against any and all taxes (and penalties thereon) and interest with respect thereto arising out of the Executive's failure to pay fully his tax liability on such deferred payment pursuant to any present or future law, regulation or ordinance of the United States of America or any state, city or municipality therein. 3. Governing Law. ------------- This Agreement shall be governed by and construed in accordance with the laws of the State of New York. 4. Entire Agreement. ---------------- This Agreement constitutes the entire agreement between the Parties hereto with respect to the subject matter hereof and supersedes all prior agreements, understandings and arrangements, both oral and written, between the Parties hereto with respect to such subject matter. This Agreement may not be modified in any manner, except by a written instrument signed by both the Company and the Executive. 5. Notices. ------- Any notice required or permitted to be given under this Agreement shall be in writing and shall be deemed to have been duly given when delivered by hand or facsimile transmission or when deposited in the United States mail by registered or certified mail, return receipt requested, postage prepaid, as follows: If to the Company: Leucadia National Corporation 315 Park Avenue South New York, NY 10010 Attn: Chief Financial Officer with a copy to: Weil, Gotshal & Manges LLP 767 Fifth Avenue New York, New York 10153 Attention: Andrea Bernstein If to Executive: Mark Hornstein 25 Sutton Place South New York, New York 10022 or to such other addresses as either the Company or the Executive may from time to time specify to the other. 6. Notice of Termination; Applicability of Agreement. ------------------------------------------------- Amounts deferred pursuant to this Agreement shall be paid to the Executive only as provided herein. At any time, by notice in writing from the Executive to the Company, the Executive may terminate this Agreement whereupon any compensation earned by the Executive subsequent to such notification shall not be subject to the provisions hereof. Amounts earned prior to any such notification shall remain subject to the terms hereof even after such termination. 7. Benefit; Binding Effect. ----------------------- This Agreement shall be for the benefit of and binding upon the Parties hereto and their respective heirs, personal representatives, legal representatives, successors and, where applicable, assigns. IN WITNESS WHEREOF, the Parties hereto have executed and delivered this Agreement as of the day and year first above written. LEUCADIA NATIONAL CORPORATION By: ------------------------------- JOSEPH A. ORLANDO -------------------------------- MARK HORNSTEIN 2 EX-99 13 imccert.txt EXHIBIT 99.1 IAN M. CUMMING CERTIFICATION Exhibit 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Ian M. Cumming, as Chairman of the Board and Chief Executive Officer of Leucadia National Corporation (the "Company") certify, pursuant to 18 U.S.C. ss. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) the accompanying Form 10-K report for the year ended December 31, 2002 as filed with the U.S. Securities and Exchange Commission (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 28, 2003 By: /s/ Ian M. Cumming ------------------------------ Ian M. Cumming Chairman of the Board and Chief Executive Officer A signed original of this written statement required by Section 906 has been provided to Leucadia National Corporation and will be retained by Leucadia National Corporation and furnished to the Securities and Exchange Commission or its staff upon request. EX-99 14 jsscert.txt EXHIBIT 99.2 JOSEPH S. STEINBERG CERTIFICATION Exhibit 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Joseph S. Steinberg, as President of Leucadia National Corporation (the "Company") certify, pursuant to 18 U.S.C. ss. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) the accompanying Form 10-K report for the year ending December 31, 2002 as filed with the U.S. Securities and Exchange Commission (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 28, 2003 By: /s/ Joseph S. Steinberg ------------------------ Joseph S. Steinberg President A signed original of this written statement required by Section 906 has been provided to Leucadia National Corporation and will be retained by Leucadia National Corporation and furnished to the Securities and Exchange Commission or its staff upon request. EX-99 15 jaocert.txt EXHIBIT 99.3 JOSEPH A. ORLANDO CERTIFICATION Exhibit 99.3 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Joseph A. Orlando, as Chief Financial Officer of Leucadia National Corporation (the "Company") certify, pursuant to 18 U.S.C. ss. 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) the accompanying Form 10-K report for the year ending December 31, 2002 as filed with the U.S. Securities and Exchange Commission (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: March 28, 2003 By: /s/ Joseph A. Orlando ------------------------- Joseph A. Orlando Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to Leucadia National Corporation and will be retained by Leucadia National Corporation and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----