SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 2007
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
Commission File Number 1-5721
LEUCADIA NATIONAL CORPORATION
(Exact name of registrant as specified in its Charter)
New York 13-2615557
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
315 Park Avenue South, New York, New York 10010-3607
(Address of principal executive offices) (Zip Code)
(212) 460-1900
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
----------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
------- -------
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer X Accelerated filer Non-accelerated filer
----- ----- -----
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
YES NO X
------ ------
APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding
of each of the issuer's classes of common stock, at August 1, 2007: 216,633,165.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, 2007 and December 31, 2006
(Dollars in thousands, except par value)
June 30, December 31,
2007 2006
------------- -----------
(Unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents $ 467,335 $ 287,199
Investments 716,530 903,973
Trade, notes and other receivables, net 122,555 69,822
Prepaids and other current assets 187,015 105,215
------------ -----------
Total current assets 1,493,435 1,366,209
Non-current investments 1,807,587 1,465,849
Notes and other receivables, net 15,785 24,999
Intangible assets, net and goodwill 66,584 59,437
Deferred tax asset, net 891,254 978,415
Other assets 441,992 401,689
Property, equipment and leasehold improvements, net 263,191 234,216
Investments in associated companies 1,395,525 773,010
------------ -----------
Total $ 6,375,353 $ 5,303,824
============ ===========
LIABILITIES
-----------
Current liabilities:
Trade payables and expense accruals $ 204,585 $ 127,739
Deferred revenue 107,665 --
Other current liabilities 11,104 5,688
Debt due within one year 221,087 184,815
Income taxes payable 963 8,411
------------ -----------
Total current liabilities 545,404 326,653
Other non-current liabilities 92,841 90,268
Long-term debt 1,479,537 974,646
------------ -----------
Total liabilities 2,117,782 1,391,567
------------ -----------
Commitments and contingencies
Minority interest 21,837 18,982
------------ -----------
SHAREHOLDERS' EQUITY
--------------------
Common shares, par value $1 per share, authorized 600,000,000 and 300,000,000
shares; 216,619,665 and 216,351,466 shares issued and outstanding,
after deducting 56,884,989 and 56,881,489 shares held in treasury 216,620 216,351
Additional paid-in capital 531,703 520,892
Accumulated other comprehensive income (loss) 291,980 (4,726)
Retained earnings 3,195,431 3,160,758
------------ -----------
Total shareholders' equity 4,235,734 3,893,275
------------ -----------
Total $ 6,375,353 $ 5,303,824
============ ===========
See notes to interim consolidated financial statements.
2
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the periods ended June 30, 2007 and 2006
(In thousands, except per share amounts)
(Unaudited)
For the Three Month For the Six Month
Period Ended June 30, Period Ended June 30,
--------------------- ---------------------
2007 2006 2007 2006
---- ---- ---- ----
Revenues and Other Income:
Manufacturing $ 110,398 $ 118,414 $ 206,992 $ 237,805
Telecommunications 110,944 -- 143,715 --
Property management and service fees 18,345 -- 18,345 --
Investment and other income 54,077 61,594 105,976 195,097
Net securities gains 50,240 44,418 66,161 83,132
----------- --------- ----------- ---------
344,004 224,426 541,189 516,034
----------- --------- ----------- ---------
Expenses:
Cost of sales:
Manufacturing 92,772 100,276 173,519 198,789
Telecommunications 94,237 -- 121,844 --
Direct operating expenses for property management and services 11,890 -- 11,890 --
Interest 26,836 21,548 46,912 38,698
Salaries and incentive compensation 21,232 27,690 40,372 42,588
Depreciation and amortization 6,699 5,418 12,879 10,332
Selling, general and other expenses 53,727 27,752 105,958 72,346
----------- --------- ----------- ---------
307,393 182,684 513,374 362,753
----------- --------- ----------- ---------
Income from continuing operations before income taxes
and equity in income of associated companies 36,611 41,742 27,815 153,281
Income taxes 14,850 14,901 11,118 57,580
----------- --------- ----------- ---------
Income from continuing operations before equity in
income of associated companies 21,761 26,841 16,697 95,701
Equity in income of associated companies, net of taxes 4,554 9,534 17,479 23,263
----------- --------- ----------- ---------
Income from continuing operations 26,315 36,375 34,176 118,964
Income (loss) from discontinued operations, net of taxes (13) 280 209 (1,153)
Gain (loss) on disposal of discontinued operations, net of taxes (3) 365 288 (98)
----------- --------- ----------- ---------
Net income $ 26,299 $ 37,020 $ 34,673 $ 117,713
=========== ========= =========== =========
Basic earnings (loss) per common share:
Income from continuing operations $.12 $ .17 $ .16 $ .55
Income (loss) from discontinued operations -- -- -- (.01)
Gain (loss) on disposal of discontinued operations -- -- -- --
----- ----- ----- -----
Net income $.12 $ .17 $ .16 $ .54
===== ===== ===== =====
Diluted earnings (loss) per common share:
Income from continuing operations $.12 $ .17 $ .16 $ .53
Income (loss) from discontinued operations -- -- -- --
Gain (loss) on disposal of discontinued operations -- -- -- --
----- ----- ----- -----
Net income $.12 $ .17 $ .16 $ .53
===== ===== ===== =====
See notes to interim consolidated financial statements.
3
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the six months ended June 30, 2007 and 2006
(In thousands)
(Unaudited)
2007 2006
---- ----
Net cash flows from operating activities:
Net income $ 34,673 $ 117,713
Adjustments to reconcile net income to net cash provided by operations:
Deferred income tax provision 18,774 66,665
Depreciation and amortization of property, equipment and leasehold improvements 16,197 19,422
Other amortization (547) (8,155)
Share-based compensation 5,975 9,363
Excess tax benefit from exercise of stock options (684) (197)
Provision for doubtful accounts (47) 1,029
Net securities gains (66,161) (83,132)
Equity in income of associated companies (29,117) (37,567)
Distributions from associated companies 47,469 41,485
Net gains related to real estate, property and equipment, and other assets (19,238) (100,460)
(Gain) loss on disposal of discontinued operations (479) 158
Investments classified as trading, net 36,216 (2,541)
Net change in:
Restricted cash 44 8,574
Trade, notes and other receivables (11,234) 182,978
Prepaids and other assets 380 2,519
Trade payables and expense accruals 26,240 (139,163)
Other liabilities 2,166 (9,401)
Income taxes payable (3,281) 1,188
Other 1,685 15,701
----------- ----------
Net cash provided by operating activities 59,031 86,179
----------- ----------
Net cash flows from investing activities:
Acquisition of property, equipment and leasehold improvements (14,330) (39,754)
Acquisitions of and capital expenditures for real estate investments (30,197) (28,051)
Proceeds from disposals of real estate, property and equipment, and other assets 22,066 177,020
Proceeds from sale of discontinued operations 786 558
Acquisitions, net of cash acquired (101,915) (105,059)
Net change in restricted cash (10,000) ( 56,515)
Advances on notes and other receivables (10,257) (251)
Collections on notes, loan and other receivables 18,083 4,211
Investments in associated companies (667,870) (226,709)
Capital distributions from associated companies 32,748 20,480
Purchases of investments (other than short-term) (1,281,574) (2,172,760)
Proceeds from maturities of investments 645,947 689,494
Proceeds from sales of investments 987,267 1,517,961
Other (374) --
----------- ----------
Net cash used for investing activities (409,620) (219,375)
----------- ----------
Net cash flows from financing activities:
Issuance of long-term debt 525,600 133,524
Reduction of long-term debt (1,692) (33,360)
Issuance of common shares 4,523 1,523
Purchase of common shares for treasury (102) (33)
Excess tax benefit from exercise of stock options 684 197
Other 1,696 1,277
----------- ----------
Net cash provided by financing activities 530,709 103,128
----------- ----------
Effect of foreign exchange rate changes on cash 16 53
----------- ----------
Net increase (decrease) in cash and cash equivalents 180,136 (30,015)
Cash and cash equivalents at January 1, 287,199 386,957
----------- ----------
Cash and cash equivalents at June 30, $ 467,335 $ 356,942
=========== ==========
See notes to interim consolidated financial statements.
4
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
For the six months ended June 30, 2007 and 2006
(In thousands, except par value)
(Unaudited)
Common Accumulated
Shares Additional Other
$1 Par Paid-In Comprehensive Retained
Value Capital Income (Loss) Earnings Total
----- ------- ------------- -------- -----
Balance, January 1, 2006 $216,058 $501,914 $ (81,502) $ 3,025,444 $3,661,914
----------
Comprehensive income:
Net change in unrealized gain (loss) on
investments, net of taxes of $1,455 (2,564) (2,564)
Net change in unrealized foreign exchange
gain (loss), net of taxes of $2,268 3,999 3,999
Net change in unrealized gain (loss) on
derivative instruments, net of taxes of $198 (349) (349)
Net income 117,713 117,713
----------
Comprehensive income 118,799
----------
Share-based compensation expense 9,363 9,363
Exercise of options to purchase common shares,
including excess tax benefit 168 1,552 1,720
Purchase of common shares for treasury (1) (32) (33)
-------- -------- ---------- ----------- ----------
Balance, June 30, 2006 $216,225 $512,797 $ (80,416) $ 3,143,157 $3,791,763
======== ======== ========== =========== ==========
Balance, January 1, 2007 $216,351 $520,892 $ (4,726) $ 3,160,758 $3,893,275
----------
Comprehensive income:
Net change in unrealized gain (loss) on
investments, net of taxes of $167,145 294,580 294,580
Net change in unrealized foreign exchange
gain (loss), net of taxes of $775 1,365 1,365
Net change in unrealized gain (loss) on
derivative instruments, net of taxes of $99 173 173
Net change in minimum pension liability and
postretirement benefits, net of taxes of $333 588 588
Net income 34,673 34,673
----------
Comprehensive income 331,379
----------
Share-based compensation expense 5,975 5,975
Exercise of options to purchase common shares,
including excess tax benefit 272 4,935 5,207
Purchase of common shares for treasury (3) (99) (102)
-------- -------- ---------- ----------- ----------
Balance, June 30, 2007 $216,620 $531,703 $ 291,980 $ 3,195,431 $4,235,734
======== ======== ========== =========== ==========
See notes to interim consolidated financial statements.
5
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Interim Consolidated Financial Statements
1. The unaudited interim consolidated financial statements, which reflect all
adjustments (consisting of normal recurring items or items discussed
herein) that management believes necessary to present fairly results of
interim operations, should be read in conjunction with the Notes to
Consolidated Financial Statements (including the Summary of Significant
Accounting Policies) included in the Company's audited consolidated
financial statements for the year ended December 31, 2006, which are
included in the Company's Annual Report filed on Form 10-K, as amended, for
such year (the "2006 10-K"). Results of operations for interim periods are
not necessarily indicative of annual results of operations. The
consolidated balance sheet at December 31, 2006 was extracted from the
audited annual financial statements and does not include all disclosures
required by accounting principles generally accepted in the United States
of America ("GAAP") for annual financial statements.
Effective January 1, 2007, the Company adopted Financial Accounting
Standards Board Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes - an Interpretation of FASB Statement No. 109" ("FIN 48"),
which prescribes the accounting for and disclosure of uncertainty in income
tax positions. FIN 48 specifies a recognition threshold that must be met
before any part of the benefit of a tax position can be recognized in the
financial statements, specifies measurement criteria and provides guidance
for classification and disclosure. The Company was not required to record
an adjustment to its financial statements upon the adoption of FIN 48.
The Company's accounting policy for recording interest and penalties, if
any, with respect to uncertain tax positions is to classify interest and
penalties as components of income tax expense. As of the date of adoption
of FIN 48, the aggregate amount of unrecognized tax benefits reflected in
the Company's consolidated balance sheet was $14,000,000 (including
$3,500,000 for interest); if recognized, such amounts would lower the
Company's effective tax rate. Unrecognized tax benefits were not materially
different at June 30, 2007. The statute of limitations with respect to the
Company's federal income tax returns has expired for all years through
2001. The Company's New York State and New York City income tax returns are
currently being audited for the 1999 to 2002 period.
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 157, "Fair Value
Measurements" ("SFAS 157"), which defines fair value, establishes a
framework for measuring fair value and expands disclosures about fair value
measurements. SFAS 157 is effective for fiscal years beginning after
November 15, 2007. In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, "The Fair Value Option for Financial Assets
and Financial Liabilities - Including an amendment of FASB Statement No.
115" ("SFAS 159"), which permits entities to choose to measure many
financial instruments and certain other items at fair value. SFAS 159 is
effective for fiscal years beginning after November 15, 2007. The Company
is currently evaluating the impact of adopting SFAS 157 and SFAS 159 on its
consolidated financial statements.
Certain amounts for prior periods have been reclassified to be consistent
with the 2007 presentation.
2. Results of operations for the Company's segments are reflected from the
date of acquisition, which was March 2007 for the telecommunications
business conducted by the Company's 75% owned subsidiary STi Prepaid, LLC
("STi Prepaid") and June 2007 for the property management and services
business conducted by the Company's subsidiary ResortQuest International,
Inc. ("ResortQuest"). The primary measure of segment operating results and
profitability used by the Company is income (loss) from continuing
operations before income taxes and equity in income of associated
companies.
Certain information concerning the Company's segments for the three and six
month periods ended June 30, 2007 and 2006 is presented in the following
table.
6
For the Three Month For the Six Month
Period Ended June 30, Period Ended June 30,
--------------------- ---------------------
2007 2006 2007 2006
---- ---- ---- ----
(In thousands)
Revenues and other income (a):
Manufacturing:
Idaho Timber $ 83,170 $ 91,743 $ 155,687 $ 184,281
Plastics 27,307 27,069 51,485 54,231
Telecommunications 111,450 -- 144,294 --
Property Management and Services 18,485 -- 18,485 --
Gaming Entertainment -- 842 -- 842
Domestic Real Estate 8,071 9,748 12,365 71,796
Medical Product Development 709 199 980 291
Other Operations 18,727 8,515 29,282 17,475
Corporate 76,085 86,310 128,611 187,118
--------- --------- --------- ---------
Total consolidated revenues and other income $ 344,004 $ 224,426 $ 541,189 $ 516,034
========= ========= ========= =========
Income from continuing operations before income taxes and equity
in income of associated companies:
Manufacturing:
Idaho Timber $ 4,581 $ 4,309 $ 8,810 $ 11,536
Plastics 5,264 4,997 8,628 10,224
Telecommunications 6,450 -- 9,355 --
Property Management and Services 1,534 -- 1,534 --
Gaming Entertainment -- 613 -- 613
Domestic Real Estate 3,614 3,162 2,117 50,983
Medical Product Development (7,009) (2,784) (15,376) (8,447)
Other Operations 2,184 (4,480) (2,826) (5,539)
Corporate 19,993 35,925 15,573 93,911
--------- --------- --------- ---------
Total consolidated income from continuing
operations before income taxes and equity in income
of associated companies $ 36,611 $ 41,742 $ 27,815 $ 153,281
========== ========= ========= =========
(a) Revenues and other income for each segment include amounts for
services rendered and products sold, as well as segment reported
amounts classified as investment and other income and net securities
gains on the Company's consolidated statements of operations.
For the three month periods ended June 30, 2007 and 2006, income from
continuing operations has been reduced by depreciation and amortization
expenses of $11,300,000 and $10,000,000, respectively; such amounts are
primarily comprised of Corporate ($3,000,000 and $3,000,000, respectively),
manufacturing ($4,400,000 and $4,400,000, respectively) and other
operations ($2,200,000 and $1,300,000, respectively). For the six month
periods ended June 30, 2007 and 2006, income from continuing operations has
been reduced by depreciation and amortization expenses of $22,000,000 and
$18,900,000, respectively; such amounts are primarily comprised of
Corporate ($5,900,000 and $5,900,000, respectively), manufacturing
($9,000,000 and $8,600,000, respectively) and other operations ($4,400,000
and $2,200,000, respectively). Depreciation and amortization expenses for
other segments are not material.
For the three month periods ended June 30, 2007 and 2006, income from
continuing operations has been reduced by interest expense of $26,800,000
and $21,500,000, respectively; such amounts are primarily comprised of
Corporate ($26,700,000 and $18,100,000, respectively) and gaming
entertainment ($3,400,000 in 2006). For the six month periods ended June
30, 2007 and 2006, income from continuing operations has been reduced by
interest expense of $46,900,000 and $38,700,000, respectively; such amounts
are primarily comprised of Corporate ($46,800,000 and $35,100,000,
respectively) and gaming entertainment ($3,400,000 in 2006). Interest
expense for other segments is not material.
7
3. The following tables provide summarized data with respect to significant
investments in associated companies accounted for under the equity method
of accounting for the periods the investments were owned by the Company.
The information is provided for those investments whose relative
significance to the Company during 2007 could result in the Company
including separate audited financial statements for such investments in its
Annual Report on Form 10-K for the year ended December 31, 2007 (in
thousands).
June 30, June 30,
2007 2006
----------- ---------
EagleRock Capital Partners (QP), LP ("EagleRock"):
Total revenues $ 7,600 $ 17,100
Income from continuing operations before extraordinary items 7,300 16,600
Net income 7,300 16,600
The Company's equity in net income 5,400 12,000
Jefferies High Yield Holdings, LLC ("JHYH"):
Total revenues $ 41,400 $ --
Income from continuing operations before extraordinary items 30,100 --
Net income 30,100 --
The Company's equity in net income 8,900 --
During the first quarter of 2007, the Company and Jefferies & Company, Inc.
("Jefferies") expanded and restructured the Company's equity investment in
Jefferies Partners Opportunity Fund II, LLC ("JPOF II"), one of several
entities managed by Jefferies that invested capital in Jefferies' high
yield trading business. The Company has committed to invest $600,000,000 in
JHYH, a newly formed entity, Jefferies has committed to invest the same
amount as the Company, and passive investors may invest up to $800,000,000
in the aggregate over time. Jefferies received additional JHYH securities
entitling it to 20% of the profits. Jefferies and the Company each have the
right to nominate two of a total of four directors to JHYH's board, and
each own 50% of the voting securities. JHYH owns a registered broker-dealer
engaged in the secondary sales and trading of high yield securities and
specialized situation securities formerly conducted by Jefferies, including
bank debt, post-reorganization equity, equity, equity derivatives, credit
defaults swaps and other financial instruments. It commits capital to the
market by making markets in high yield and distressed securities and
invests in and provides research coverage on these types of securities. In
April 2007, after regulatory approval for the new venture was received, the
Company contributed $250,000,000 to JHYH along with its investment in JPOF
II. The timing of the Company's remaining $250,000,000 contribution is at
the sole discretion of Jefferies.
The Company accounts for its investment in JHYH under the equity method of
accounting. Under GAAP, JHYH is considered to be a variable interest entity
that is consolidated by Jefferies, since Jefferies is the primary
beneficiary.
In June 2007, the Company invested $200,000,000 to acquire a 10% limited
partnership interest in Pershing Square IV, L.P. ("Pershing Square"), a
newly-formed private investment partnership whose investment decisions are
at the sole discretion of Pershing Square's general partner. The stated
objective of Pershing Square is to create significant capital appreciation
by investing in a North American "large-cap" company selected by the
general partner. The Company classified its investment in Pershing Square
as an investment in an associated company accounted for under the equity
method of accounting.
8
4. A summary of investments at June 30, 2007 and December 31, 2006 is as
follows (in thousands):
June 30, 2007 December 31, 2006
------------------------------ -----------------------------
Carrying Value Carrying Value
Amortized and Estimated Amortized and Estimated
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
Current Investments:
Investments available for sale $ 637,050 $ 637,511 $ 803,034 $ 809,927
Trading securities 60,234 63,980 79,526 80,321
Other investments, including accrued interest income 15,039 15,039 13,725 13,725
---------- ---------- ---------- ----------
Total current investments $ 712,323 $ 716,530 $ 896,285 $ 903,973
========== ========== ========== ==========
Non-current Investments:
Investments available for sale $ 999,555 $1,619,775 $1,131,198 $1,283,261
Other investments 187,812 187,812 182,588 182,588
---------- ---------- ---------- ----------
Total non-current investments $1,187,367 $1,807,587 $1,313,786 $1,465,849
========== ========== ========== ==========
Non-current available for sale investments include 26,400,000 common shares
of Fortescue Metals Group Ltd ("Fortescue"), representing approximately
9.98% of the outstanding Fortescue common stock at June 30, 2007. Fortescue
is a publicly traded company on the Australian Stock Exchange (Symbol:
FMG), and the shares acquired by the Company may be sold without
restriction. The Fortescue shares have a cost of $202,100,000 and market
values of $757,800,000 and $276,300,000 at June 30, 2007 and December 31,
2006, respectively.
In July 2007, Fortescue sold new common shares in an underwritten public
offering to raise additional capital for its mining project and to fund
future growth. In connection with this offering, the Company exercised its
pre-emptive rights to maintain its ownership position and acquired an
additional 1,398,600 common shares of Fortescue for $44,200,000.
Non-current other investments include 5,600,000 common shares of Inmet
Mining Corporation ("Inmet"), a Canadian-based global mining company traded
on the Toronto stock exchange (Symbol: IMN), which have a cost and carrying
value of $78,000,000 at June 30, 2007 and December 31, 2006. As more fully
discussed in the 2006 10-K, the Inmet shares are restricted and may not be
sold until August 2009 or earlier under certain specified circumstances.
The Inmet shares will be carried at the initially recorded value (unless
there is an other than temporary impairment) until one year prior to the
termination of the transfer restrictions. At June 30, 2007, the market
value of the Inmet shares is $433,100,000.
During the second quarter of 2007, the Company sold all of its common stock
holdings in Eastman Chemical Company and recognized a net security gain of
$37,800,000.
5. A summary of intangible assets, net and goodwill at June 30, 2007 and
December 31, 2006 is as follows (in thousands):
June 30, December 31,
2007 2006
--------- ---------
Intangibles:
Customer relationships, net of accumulated amortization of $15,362 and $11,768 $ 51,756 $ 46,967
Trademarks and tradename, net of accumulated amortization of $305 and $227 1,822 1,642
Patents, net of accumulated amortization of $375 and $298 1,955 2,032
Other, net of accumulated amortization of $1,942 and $1,727 2,900 645
Goodwill 8,151 8,151
-------- --------
$ 66,584 $ 59,437
======== ========
9
As a result of the acquisitions of STi Prepaid during the first quarter of
2007 and ResortQuest during the second quarter of 2007, intangibles
increased by $6,800,000; see Note 17 for further information concerning
these acquisitions. Intangible assets also increased by $1,900,000 and
$2,400,000 during 2007 related to an acquisition by Conwed Plastics and
within the Other Operations segment, respectively.
Amortization expense on intangible assets was $1,900,000 for each of the
three month periods ended June 30, 2007 and 2006, respectively, and
$4,000,000 and $3,700,000 for the six month periods ended June 30, 2007 and
2006, respectively. The estimated aggregate future amortization expense for
the intangible assets for each of the next five years is as follows (in
thousands): 2007 (for the remaining six months) - $4,000; 2008 - $8,000;
2009 - $7,500; 2010 - $7,200; and 2011 - $7,000.
All of the goodwill in the above table relates to Conwed Plastics.
6. A summary of accumulated other comprehensive income (loss), net of taxes at
June 30, 2007 and December 31, 2006 is as follows (in thousands):
June 30, December 31,
2007 2006
---------- ----------
Net unrealized gains on investments $ 332,386 $ 37,806
Net unrealized foreign exchange gains 2,243 878
Net unrealized losses on derivative instruments (1,059) (1,232)
Net minimum pension liability (42,333) (42,960)
Net postretirement benefits 743 782
---------- ----------
$ 291,980 $ (4,726)
========== ==========
7. Investment and other income includes changes in the fair values of
derivative financial instruments of $600,000 and $800,000 for the three
month periods ended June 30, 2007 and 2006, respectively, and $500,000 and
$1,800,000 for the six month periods ended June 30, 2007 and 2006,
respectively.
8. Pension expense charged to operations for the three and six month periods
ended June 30, 2007 and 2006 related to defined benefit pension plans
included the following components (in thousands):
For the Three Month For the Six Month
Period Ended June 30, Period Ended June 30,
--------------------- ---------------------
2007 2006 2007 2006
---- ---- ---- ----
Interest cost $ 2,956 $ 2,970 $ 5,913 $ 5,942
Expected return on plan assets (2,667) (2,032) (5,333) (4,064)
Actuarial loss 412 633 823 1,264
Amortization of prior service cost 1 1 1 1
------- ------- --------- --------
Net pension expense $ 702 $ 1,572 $ 1,404 $ 3,143
======= ======= ========= ========
The Company did not make any contributions to its defined benefit pension
plans during the six month period ended June 30, 2007.
Several subsidiaries provide certain healthcare and other benefits to
certain retired employees under plans which are currently unfunded. The
Company pays the cost of postretirement benefits as they are incurred.
Amounts charged to expense were not material in each of the three and six
month periods ended June 30, 2007 and 2006.
9. Salaries and incentive compensation expense included $2,600,000 and
$9,000,000, respectively, for the three month periods ended June 30, 2007
and 2006, and $6,000,000 and $9,400,000 for the six month periods ended
June 30, 2007 and 2006, respectively, for share-based compensation expense
relating to grants made under the Company's senior executive warrant plan
and fixed stock option plan. During the three and six month 2007 periods,
12,000 options were granted at an exercise price of $33.50 per share, the
market price on the grant date.
10
10. Basic earnings (loss) per share amounts are calculated by dividing net
income (loss) by the sum of the weighted average number of common shares
outstanding. To determine diluted earnings (loss) per share, the weighted
average number of common shares is adjusted for the incremental weighted
average number of shares issuable upon exercise of outstanding options and
warrants, unless the effect is antidilutive. In addition, the calculations
of diluted earnings (loss) per share assume the 3 3/4% Convertible Notes
are converted into common shares and earnings increased for the interest on
such notes, net of the income tax effect, unless the effect is
antidilutive. The number of shares used to calculate basic earnings (loss)
per share amounts was 216,596,000 and 216,201,000 for the three month
periods ended June 30, 2007 and 2006, respectively, and 216,491,000 and
216,154,000 for the six month periods ended June 30, 2007 and 2006,
respectively. The number of shares used to calculate diluted earnings
(loss) per share amounts was 217,229,000 and 231,777,000 for the three
month periods ended June 30, 2007 and 2006, respectively, and 216,912,000
and 231,482,000 for the six month periods ended June 30, 2007 and 2006,
respectively. The denominators for dilutive per share computations reflect
the effect of dilutive options and warrants and, for 2006, the 3 3/4%
Convertible Notes. For the three and six month periods ended June 30, 2007,
the 3 3/4% Convertible Notes, which are convertible into 15,239,490 common
shares, were not included in the computation of diluted earnings per share
as the effect was antidilutive.
11. Cash paid for interest and income taxes (net of refunds) was $36,100,000
and $7,600,000, respectively, for the six month period ended June 30, 2007
and $34,600,000 and $4,500,000, respectively, for the six month period
ended June 30, 2006.
12. Debt due within one year includes $217,400,000 and $181,800,000 as of June
30, 2007 and December 31, 2006, respectively, relating to repurchase
agreements. At June 30, 2007, these fixed rate repurchase agreements have a
weighted average interest rate of approximately 5.3%, mature in July 2007
and are secured by non-current investments with a carrying value of
$222,900,000.
13. In March 2007, the Company sold $500,000,000 principal amount of its newly
authorized 7 1/8% Senior Notes due 2017 in a private placement transaction.
On June 15, 2007, the Company filed a registration statement with respect
to an offer to exchange each of the 7 1/8% Senior Notes for a new issue of
debt securities registered under the Securities Act, with terms identical
to those of the 7 1/8% Senior Notes (except for provisions relating to
transfer restrictions and payment of additional interest). The registration
was declared effective on August 1, 2007 and the exchange offer was
commenced on August 2, 2007. The exchange offer is expected to be completed
in September 2007, subject to the terms and conditions thereof.
14. In March 2007, the Board of Directors increased the number of the Company's
common shares that the Company is authorized to purchase. As a result, the
Company is authorized to purchase up to 12,000,000 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 notice. During
2007, the only common shares acquired by the Company were from employees in
connection with the employees' exercise of stock options.
15. In January 2007, the Company increased its equity interest in Goober
Drilling, LLC ("Goober") to 42% for an additional equity investment of
$25,000,000. In addition, the Company's existing $126,000,000 secured loan
to Goober was amended to increase the interest rate to LIBOR plus 5%, and
the Company agreed to provide Goober with an additional secured credit
facility for up to $45,000,000 at an interest rate of LIBOR plus 10%. As of
June 30, 2007, $30,000,000 was outstanding under this additional facility.
The additional funding was required primarily due to increased raw material
and labor costs to construct new drilling rigs and working capital needs
due to delays in rig construction. The Company's investment in Goober is
classified as an investment in an associated company; for the three and six
month periods ended June 30, 2007, the Company recorded $3,000,000 and
$5,700,000, respectively, of pre-tax income from this investment under the
equity method of accounting.
11
16. At December 31, 2006, the Company owned approximately 69% of Sangart, Inc.
("Sangart"), a biopharmaceutical company principally engaged in developing
an oxygen transport agent for various medical uses. In March 2007, the
Company invested an additional $48,500,000 in Sangart (increasing its
ownership interest to 87%) principally to fund Sangart's ongoing product
development activities. As more fully discussed in the 2006 10-K, Sangart
is a development stage company without any product sales and is currently
conducting clinical trials of its current product candidate, Hemospan(R), a
form of cell-free hemoglobin administered intravenously to treat a variety
of medical conditions. The Company also received warrants for the right
(but not the obligation) to invest up to an additional $48,500,000 on the
same terms, which if fully invested would increase its ownership interest
to 90%. The Company expects that the amount invested in Sangart will be
expensed as Sangart uses the funds to pay operating expenses and conduct
research and development activities.
The effective acquisition of a portion of the non-controlling interests in
Sangart was accounted for under the purchase method. Under the purchase
method, the purchase price is allocated to Sangart's individual assets and
liabilities based on their relative fair values; in Sangart's case, a
portion of the fair value of assets acquired is initially allocated to
research and development. However, since under GAAP the Company is not
permitted to recognize research and development as an asset under the
purchase method, any amounts initially allocated to research and
development are immediately expensed. For the six month period ended June
30, 2007, the Company expensed acquired research and development of
$4,000,000, which is included in the caption selling, general and other
expenses in the consolidated statement of operations.
17. In March 2007, STi Prepaid purchased 75% of the assets of Telco Group, Inc.
and its affiliates (collectively, "Telco") for an aggregate purchase price
of $121,800,000 in cash, including expenses. The remaining Telco assets
were contributed to STi Prepaid by the former owners in exchange for a 25%
interest in STi Prepaid. STi Prepaid is a provider of international prepaid
phone cards and other telecommunications services in the U.S.
The acquisition cost was principally allocated to components of working
capital and to deferred tax assets. In connection with the acquisition, the
Company revised its projections of future taxable income and reassessed the
required amount of its deferred tax valuation allowance. As a result of the
reassessment, the Company concluded that it was more likely than not that
it could realize additional deferred tax assets in the future; accordingly,
a reduction to the deferred tax valuation allowance of $107,400,000 was
recognized in the purchase price allocation (in addition to certain
acquired deferred tax assets). The Company will not finalize its allocation
of the purchase price until an independent third-party appraisal of the
fair value of the assets acquired is completed. When finalized, any changes
to the preliminary purchase price allocation could result in changes to
inventory, deferred tax assets, property and equipment, identifiable
intangible assets and/or goodwill.
Revenues from sales of prepaid phone cards are deferred when the cards are
initially sold; at June 30, 2007 STi Prepaid's deferred revenues aggregated
$66,600,000. Deferred revenues are recognized in the statement of
operations when the cards are used by the consumer and/or administrative
fees are charged in accordance with the cards' terms, resulting in a
reduction of STi Prepaid's outstanding obligation to the customer. STi
Prepaid's cost of sales primarily consists of origination, transport and
termination of telecommunications traffic, and connectivity costs paid to
underlying service providers.
In June 2007, the Company completed the acquisition of ResortQuest, a
company engaged in offering management services to vacation properties in
beach and mountain resort locations in the continental U.S. and Canada, as
well as in real estate brokerage services and other rental and property
owner services. Pursuant to the terms of the stock purchase agreement, the
purchase price is subject to adjustment to reflect net working capital (as
defined in the agreement) at closing, and consisted of cash and an
$8,000,000 10% four-year promissory note of a subsidiary of the Company.
Including estimated expenses of $1,200,000 and estimated net working
capital adjustments, for accounting purposes the aggregate purchase price
is $15,000,000.
12
ResortQuest typically receives cash deposits on advance bookings of its
vacation properties that are recorded as deferred revenue. ResortQuest's
deferred revenues aggregated $39,400,000 at June 30, 2007.
Unaudited pro forma operating results for the Company, assuming the
acquisitions of STi Prepaid and ResortQuest had occurred as of the
beginning of each period presented below, are as follows (in thousands,
except per share amounts):
For the Three Month For the Six Month
Period Ended June 30, Period Ended June 30,
--------------------- --------------------
2007 2006 2007 2006
---- ---- ---- ----
Revenues $367,200 $400,700 $696,300 $849,500
Income before extraordinary items and cumulative
effect of a change in accounting principles $ 23,500 $ 42,300 $ 32,900 $127,700
Net income $ 23,500 $ 42,300 $ 32,900 $127,700
Per Share:
Basic $.11 $.20 $.15 $.59
Diluted $.11 $.19 $.15 $.57
The amounts above reflect the historical operating results of Telco and
ResortQuest for periods prior to the purchase transactions. Telco's
historical results include a $3,300,000 charge to write down certain
inventory in the six month 2007 period.
Pro forma adjustments principally reflect the preliminary allocation of the
purchase price to the difference between fair value and book value of
property and equipment, resulting in increases or decreases to historical
depreciation expense, and the allocation to identifiable intangible assets,
resulting in increased amortization expense. The unaudited pro forma data
is not indicative of future results of operations or what would have
resulted if the acquisitions had actually occurred as of the beginning of
the periods presented.
18. As more fully discussed in the 2006 10-K, the Company is a defendant in
Special Situations Fund III, L.P., et al. v. Leucadia National Corporation,
et al, a consolidated action involving a petition for appraisal and a class
action pending in the Delaware Chancery Court related to the Company's 2005
acquisition of the minority interest in MK Resources Company ("MK
Resources"). The parties have entered into a settlement agreement for,
among other terms, complete releases and a dismissal with prejudice in
exchange for an aggregate settlement payment by the Company of
approximately $13,800,000. The settlement agreement is subject to court
approval, which is not expected to be received before the fourth quarter of
2007. During the first quarter of 2007, the Company increased its accrual
to the expected settlement amount and recorded an additional expense of
$7,500,000.
19. On July 30, 2007, the Bankruptcy Court for the Southern District of
Mississippi (the "Court") entered an order confirming the chapter 11
reorganization plan of Premier Entertainment Biloxi, LLC ("Premier") and
its subsidiary, Premier Finance Biloxi Corp. The reorganization plan
provides for the payment in full of all of Premier's creditors, including
payment of principal and accrued interest due to the holders of Premier's
10 3/4% senior secured notes. The plan also establishes a $14,700,000
escrow for the full amount of a prepayment penalty asserted by the senior
secured notes that is disputed by Premier. Entitlement to the escrow will
be determined by the Court at a later date.
On August 2, 2007 certain of the holders of the senior secured notes filed
a notice of appeal of the confirmation order and a motion for stay of the
confirmation order pending resolution of the appeal. The motion for stay is
scheduled for hearing before the Court on August 9, 2007. The Company
believes the appeal and the motion for stay are without merit, and the
Company and Premier intend to vigorously contest both actions. If a stay is
granted, however, it would indefinitely delay Premier's payment of its
prepetition creditors and its emergence from chapter 11.
13
The reorganization plan is to be funded in part with an $180,000,000
senior secured credit facility to be provided by a subsidiary of the
Company. The credit facility will mature February 1, 2012, will bear
interest at 10 3/4%, will be prepayable at any time without penalty, and
will contain other covenants, terms and conditions similar to those
contained in the indenture governing Premier's 10 3/4% senior secured
notes. It is anticipated that consummation of the reorganization plan and
the credit facility will occur on or about August 10, 2007; however,
consummation of the plan could be delayed due to the pending appeal of the
confirmation order. The Company will fund its obligation under the credit
facility out of available cash and investments. Upon emergence from
chapter 11 proceedings, Premier will become a consolidated subsidiary of
the Company as a result of the Company's controlling voting interest in
Premier.
14
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Interim Operations.
The following should be read in conjunction with the Management's Discussion and
Analysis of Financial Condition and Results of Operations included in the 2006
10-K.
Liquidity and Capital Resources
In addition to cash and cash equivalents, the Company also considers investments
classified as current assets and investments classified as non-current assets on
the face of its consolidated balance sheet as being generally available to meet
its liquidity needs. Securities classified as current and non-current
investments are not as liquid as cash and cash equivalents, but they are
generally easily convertible into cash within a short period of time. As of June
30, 2007, the sum of these amounts aggregated $2,991,500,000. However, since
$583,500,000 of this amount is pledged as collateral pursuant to various
agreements, represents investments in non-public securities or is held by
subsidiaries that are party to agreements which restrict the Company's ability
to use the funds for other purposes (including the Inmet shares), the Company
does not consider those amounts to be available to meet the Parent's liquidity
needs. The $2,408,000,000 that is available is comprised of cash and short-term
bonds and notes of the U.S. Government and its agencies, U.S.
Government-Sponsored Enterprises and other publicly traded debt and equity
securities, including the Company's investment in Fortescue ($757,800,000 at
June 30, 2007). The investment income realized from the Parent's cash, cash
equivalents and marketable securities is used to meet the Parent company's
short-term recurring cash requirements, which are principally the payment of
interest on its debt and corporate overhead expenses.
In January 2007, the Company increased its equity interest in Goober to 42% for
an additional equity investment of $25,000,000. In addition, the Company's
existing $126,000,000 secured loan to Goober was amended to increase the
interest rate to LIBOR plus 5%, and the Company agreed to provide Goober with an
additional secured credit facility for up to $45,000,000 at an interest rate of
LIBOR plus 10%. As of June 30, 2007, $30,000,000 was outstanding under this
additional facility.
In January 2007, the Company invested $74,000,000 in Highland Opportunity Fund,
L.P. ("Highland Opportunity"), a limited partnership which principally invests
through a master fund in mortgage-backed and asset-backed securities, and
$25,000,000 in HFH ShortPLUS Fund, L.P. ("Shortplus"), a limited partnership
which principally invests through a master fund in a short-term based portfolio
of asset-backed securities.
In March 2007, the Company invested an additional $48,500,000 in Sangart
(increasing its ownership interest to 87%) principally to fund Sangart's ongoing
product development activities. The Company also received warrants for the right
(but not the obligation) to invest up to an additional $48,500,000 on the same
terms, which if fully invested would increase its ownership interest to 90%.
In March 2007, STi Prepaid purchased 75% of the assets of Telco for an aggregate
purchase price of $121,800,000 in cash, including expenses. STi Prepaid is a
provider of international prepaid phone cards and other telecommunications
services in the U.S. The acquisition cost was principally allocated to
components of working capital and to deferred tax assets, including a reduction
to the Company's deferred tax valuation allowance of $107,400,000.
In March 2007, the Company sold $500,000,000 principal amount of its newly
authorized 7 1/8% Senior Notes due 2017 in a private placement transaction.
Pursuant to a registration statement that was declared effective on August 1,
2007, these notes are currently being exchanged for a new issue of debt
securities registered under the Securities Act, with terms identical to those of
the 7 1/8% Senior Notes (except for provisions relating to transfer restrictions
and payment of additional interest). The exchange offer is expected to be
completed in September 2007, subject to the terms and conditions thereof.
15
In March 2007, the Board of Directors increased the number of the Company's
common shares that the Company is authorized to purchase. As a result, the
Company is authorized to purchase up to 12,000,000 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 notice. During 2007, the only
common shares acquired by the Company were from employees in connection with the
employees' exercise of stock options.
As discussed above, the Company and Jefferies expanded and restructured the
Company's equity investment in JPOF II, one of several entities managed by
Jefferies that invested capital in Jefferies' high yield trading business. The
Company has committed to invest $600,000,000 in a newly formed entity, JHYH,
Jefferies has committed to invest the same amount as the Company, and passive
investors may invest up to $800,000,000 in the aggregate over time. In April
2007, after regulatory approval for the new venture was received, the Company
contributed $250,000,000 to JHYH along with its investment in JPOF II. The
timing of the Company's remaining $250,000,000 contribution is at the sole
discretion of Jefferies. The Company will account for its investment in JHYH
under the equity method of accounting.
In June 2007, the Company completed the acquisition of ResortQuest for an
aggregate purchase price of $15,000,000, net of estimated working capital
adjustments, which was paid in cash and an $8,000,000 10% four-year promissory
note of a subsidiary of the Company.
In June 2007, the Company invested $200,000,000 to acquire a 10% limited
partnership interest in Pershing Square, a newly-formed private investment
partnership whose investment decisions are at the sole discretion of Pershing
Square's general partner. The Company classified its investment in Pershing
Square as an investment in an associated company accounted for under the equity
method of accounting.
As discussed above, on July 30, 2007, the Bankruptcy Court for the Southern
District of Mississippi (the "Court") entered an order confirming the chapter 11
reorganization plan of Premier. The reorganization plan is to be funded in part
with an $180,000,000 senior secured credit facility to be provided by a
subsidiary of the Company. The credit facility will mature February 1, 2012,
will bear interest at 10 3/4% and will be prepayable at any time without
penalty. It is anticipated that consummation of the reorganization plan and the
credit facility will occur on or about August 10, 2007; however, consummation of
the plan could be delayed due to a notice of appeal filed by certain holders of
Premier's senior secured notes. The Company will fund its obligation under the
credit facility out of available cash and investments. Upon emergence from
chapter 11 proceedings, Premier will become a consolidated subsidiary of the
Company as a result of the Company's controlling voting interest in Premier.
Consolidated Statements of Cash Flows
Net cash provided by operating activities decreased by $27,100,000 in the six
month period ended June 30, 2007 compared to the same period in 2006 principally
due to decreased collections of receivables and increased income tax payments.
The change in operating cash flows also reflects increased funds generated from
activity in the trading portfolio, increased distributions of earnings from
associated companies, decreased payment of incentive compensation and decreased
defined benefit pension plan contributions. Funds provided by operating
activities reflect funds used by Sangart, a development stage company, of
$11,500,000 and $7,100,000 during 2007 and 2006, respectively, and increased
corporate overhead expenses. During 2006, cash provided by operating activities
reflects the collection of the balance of certain receivables from AT&T Inc.
($123,500,000). The AT&T receivables resulted from a termination agreement
entered into between the Company's former telecommunications subsidiary, WilTel
Communications Group, LLC ("WilTel"), and its largest customer during 2005. In
2007, distributions from associated companies principally include earnings
distributed by JPOF II ($29,200,000) and EagleRock ($15,000,000). In 2006,
distributions from associated companies principally include earnings distributed
by JPOF II ($23,600,000) and EagleRock ($16,600,000). Contributions to the
defined benefit pension plans were $42,800,000 in 2006; no contributions were
made in 2007.
16
Net cash flows used for investing activities were $409,600,000 and $219,400,000
for the six month periods ended June 30, 2007 and 2006, respectively. During
2007, acquisitions, net of cash acquired principally include assets acquired by
STi Prepaid ($84,600,000) and ResortQuest ($9,800,000). During 2006,
acquisitions, net of cash acquired principally include the acquisition of
Premier ($105,500,000). During 2006, funds provided by the disposal of real
estate and other assets include the sales of 8 acres of unimproved land in
Washington, D.C. by 711 Developer, LLC ("Square 711"), a 90% owned subsidiary of
the Company, ($75,700,000) and the sale of two associated companies. The Company
received aggregate cash proceeds of $56,400,000 from the sale of the Company's
equity interest in, and loan repayment by, two associated companies. Investments
in associated companies include JHYH ($250,000,000), Pershing Square
($200,000,000), Goober ($55,000,000), Highland Opportunity ($74,000,000),
Shortplus ($25,000,000), Cobre Las Cruces, S.A. ("CLC") ($23,900,000) and others
($40,000,000) in 2007 and Goober ($114,500,000), Safe Harbor Domestic Partners
L.P. ("Safe Harbor") ($50,000,000), Wintergreen Partners Fund, L.P.
("Wintergreen") ($30,000,000), CLC ($8,500,000) and others ($23,700,000) in
2006. Capital distributions from associated companies principally include Safe
Harbor ($25,000,000) in 2007 and EagleRock ($20,100,000) in 2006.
Net cash provided by financing activities was $530,700,000 in 2007 and
$103,100,000 in 2006. Issuance of long-term debt for the 2007 period reflects
the issuance of $500,000,000 principal amount of the Company's 7 1/8% Notes (net
of issuance expenses) and for the 2007 and 2006 periods reflects the increase in
repurchase agreements of $35,600,000 and $129,300,000, respectively. The
reduction of long-term debt during the six month period ended June 30, 2006
includes the repayment of debt of Square 711 ($32,000,000), which was sold.
Issuance of common shares for the six month periods ended June 30, 2007 and 2006
principally reflects the exercise of employee stock options.
Critical Accounting 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 GAAP. 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. The following areas have been identified as critical accounting
estimates because they have the potential to have a material impact on the
Company's financial statements, and because they are based on assumptions which
are used in the accounting records to reflect, at a specific point in time,
events whose ultimate outcome won't be known until a later date. Actual results
could differ from these estimates.
Income Taxes - The Company records a valuation allowance to reduce its deferred
tax asset to the amount that is more likely than not to be realized. If in the
future the Company were to determine that it would be able to realize its
deferred tax asset in excess of its net recorded amount, an adjustment would
increase income in such period or, if such determination were made in connection
with an acquisition, an adjustment would be made in connection with the
allocation of the purchase price to acquired assets and liabilities. If in the
future the Company were to determine that it would not be able to realize all or
part of its deferred tax asset, an adjustment would be charged to income in such
period. The determination of the amount of the valuation allowance required is
based, in significant part, upon the Company's projection of future taxable
income at any point in time. The Company also records reserves for contingent
tax liabilities based on the Company's assessment of the probability of
successfully sustaining its tax filing positions.
The Company's conclusion that a portion of the deferred tax asset is more likely
than not to be realized is strongly influenced by its historical ability to
generate significant amounts of taxable income and its projections of future
taxable income. The Company's estimate of future taxable income considers all
available evidence, both positive and negative, about its current operations and
investments, includes an aggregation of individual projections for each material
operation and investment, and includes all future years that the Company
estimated it would have available net operating losses. The Company believes
that its estimate of future taxable income is reasonable but inherently
uncertain, and if its current or future operations and investments generate
taxable income greater than the projected amounts, further adjustments to reduce
the valuation allowance are possible. Conversely, if the Company realizes
unforeseen material losses in the future, or its ability to generate future
taxable income necessary to realize a portion of the deferred tax asset is
materially reduced, additions to the valuation allowance could be recorded. At
June 30, 2007, the balance of the deferred valuation allowance was approximately
$800,000,000.
17
Impairment of Long-Lived Assets - In accordance with Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets", the Company evaluates its long-lived assets for impairment whenever
events or changes in circumstances indicate, in management's judgment, that the
carrying value of such assets may not be recoverable. When testing for
impairment, the Company groups its long-lived assets with other assets and
liabilities at the lowest level for which identifiable cash flows are largely
independent of the cash flows of other assets and liabilities (or asset group).
The determination of whether an asset group is recoverable is based on
management's estimate of undiscounted future cash flows directly attributable to
the asset group as compared to its carrying value. If the carrying amount of the
asset group is greater than the undiscounted cash flows, an impairment loss
would be recognized for the amount by which the carrying amount of the asset
group exceeds its estimated fair value. The Company did not recognize any
impairment losses on long-lived assets during the six month periods ended June
30, 2007 and 2006.
Impairment of Securities - Investments with an impairment in value considered to
be other than temporary are written down to estimated fair value. The
write-downs are included in net securities gains in the consolidated statements
of operations. The Company evaluates its investments for impairment on a
quarterly basis.
The Company's determination of whether a security is other than temporarily
impaired incorporates both quantitative and qualitative information; GAAP
requires the exercise of judgment in making this assessment, rather than the
application of fixed mathematical criteria. The Company considers a number of
factors including, but not limited to, the length of time and the extent to
which the fair value has been less than cost, the financial condition and near
term prospects of the issuer, the reason for the decline in fair value, changes
in fair value subsequent to the balance sheet date, and other factors specific
to the individual investment. The Company's assessment involves a high degree of
judgment and accordingly, actual results may differ materially from the
Company's estimates and judgments. The Company recorded impairment charges for
securities of $300,000 and $1,700,000 for the three month periods ended June 30,
2007 and 2006, respectively, and $500,000 and $2,600,000 for the six month
periods ended June 30, 2007 and 2006, respectively.
Business Combinations - At acquisition, the Company allocates the cost of a
business acquisition to the specific tangible and intangible assets acquired and
liabilities assumed based upon their relative fair values. Significant judgments
and estimates are often made to determine these allocated values, and may
include the use of independent appraisals, consider market quotes for similar
transactions, employ discounted cash flow techniques or consider other
information the Company believes relevant. The finalization of the purchase
price allocation will typically take a number of months to complete, and if
final values are materially different from initially recorded amounts
adjustments are recorded. Any excess of the cost of a business acquisition over
the fair values of the net assets and liabilities acquired is recorded as
goodwill, which is not amortized to expense. Recorded goodwill of a reporting
unit is required to be tested for impairment on an annual basis, and between
annual testing dates if events or circumstances change that would more likely
than not reduce the fair value of a reporting unit below its net book value.
Subsequent to the finalization of the purchase price allocation, any adjustments
to the recorded values of acquired assets and liabilities would be reflected in
the Company's consolidated statement of operations. Once final, the Company is
not permitted to revise the allocation of the original purchase price, even if
subsequent events or circumstances prove the Company's original judgments and
estimates to be incorrect. In addition, long-lived assets like property and
equipment, amortizable intangibles and goodwill may be deemed to be impaired in
the future resulting in the recognition of an impairment loss; however, under
GAAP the methods, assumptions and results of an impairment review are not the
same for all long-lived assets. The assumptions and judgments made by the
Company when recording business combinations will have an impact on reported
results of operations for many years into the future.
Contingencies - The Company accrues for contingent losses when the contingent
loss is probable and the amount of loss can be reasonably estimated. Estimates
of the likelihood that a loss will be incurred and of contingent loss amounts
normally require significant judgment by management, can be highly subjective
and are subject to material change with the passage of time as more information
becomes available. As of June 30, 2007, the Company's accrual for contingent
losses was not material.
18
Results of Operations
The 2007 Periods Compared to the 2006 Periods
Manufacturing - Idaho Timber
Revenues and other income for Idaho Timber were $83,200,000 and $91,700,000 for
the three months ended June 30, 2007 and 2006, respectively, and $155,700,000
and $184,300,000 for the six months ended June 30, 2007 and 2006, respectively.
Gross profit was $9,000,000 and $9,400,000 for the three months ended June 30,
2007 and 2006, respectively, and $18,000,000 and $21,200,000 for the six months
ended June 30, 2007 and 2006, respectively. Salaries and incentive compensation
expenses were $2,300,000 and $2,600,000 for the three months ended June 30, 2007
and 2006, respectively, and $4,600,000 and $5,200,000 for the six months ended
June 30, 2007 and 2006, respectively. Depreciation and amortization expenses
were $1,200,000 for each of the three months ended June 30, 2007 and 2006, and
$2,400,000 and $2,500,000 for the six months ended June 30, 2007 and 2006,
respectively. Pre-tax income was $4,600,000 and $4,300,000 for the three months
ended June 30, 2007 and 2006, respectively, and $8,800,000 and $11,500,000 for
the six months ended June 30, 2007 and 2006, respectively.
Idaho Timber's revenues declined during the 2007 periods as compared to the
comparable periods in the prior year, reflecting both reduced shipment volumes
and lower average selling prices. While shipment volume increased in the 2007
quarters as compared to the fourth quarter of 2006, and average selling prices
in the second quarter of 2007 modestly increased, Idaho Timber continues to
experience weakened demand resulting from reductions in housing starts and the
abundant supply of high-grade lumber in the marketplace.
Raw material costs, the largest component of cost of sales (approximately 82%
for the six month period), have declined during the 2007 periods as compared to
the comparable periods in 2006 principally due to the same market conditions
that have negatively impacted revenues. Raw material costs in the second quarter
of 2007 were largely unchanged as compared to the fourth quarter of 2006 but
increased since the first quarter of 2007 reflecting less availability of
low-grade lumber due to increased shipments to Asia and Europe. The difference
between Idaho Timber's selling price and raw material cost per thousand board
feet (spread) is closely monitored, and the rate of change in pricing and cost
is typically not the same. Spreads improved for the 2007 periods as compared to
the fourth quarter of 2006, but were lower than those for the comparable periods
of 2006 and were lower in the second quarter than the first quarter of 2007.
Idaho Timber intends to continue to focus on developing new higher margin
products, diversifying its supply chain, improving cost control and solidifying
customer and supplier relationships, in an effort to maximize gross margins and
pre-tax results.
Manufacturing - Conwed Plastics
Pre-tax income for Conwed Plastics was $5,300,000 and $5,000,000 for the three
month periods ended June 30, 2007 and 2006, respectively, and $8,600,000 and
$10,200,000 for the six month periods ended June 30, 2007 and 2006,
respectively. Its manufacturing revenues and other income were $27,300,000 and
$27,100,000 for the three month periods ended June 30, 2007 and 2006,
respectively, and $51,500,000 and $54,200,000 for the six month periods ended
June 30, 2007 and 2006, respectively. Gross profits were $8,600,000 and
$8,700,000 for the three month periods ended June 30, 2007 and 2006,
respectively, and $15,500,000 and $17,800,000 for the six month periods ended
June 30, 2007 and 2006, respectively. For the three and six month 2007 periods,
the slowdown in housing starts and, for the six month 2007 period, a slow start
in road construction due to weather conditions, were principally responsible for
the declines in revenue in most of Conwed Plastics' markets, particularly carpet
cushion, building and construction, erosion control and turf reinforcement. In
addition, increased competition in the erosion control market adversely affected
revenue in the second quarter of 2007. Revenues for the 2007 periods also
reflect the removal of netting as a component of a customer's bedding product.
Conwed Plastics did realize increased revenues from its packaging market,
principally due to acquisitions in May 2006 and in February 2007.
19
The decline in gross margin in the six month 2007 period as compared to the same
period in 2006 primarily reflects the product mix, lower sales volume and
greater depreciation and amortization expense related to acquisitions and
equipment upgrades. Pre-tax results for the three and six month 2007 periods
also reflect $800,000 and $900,000, respectively, of lower salaries and
incentive compensation expense than for the comparable periods in 2006.
Telecommunications
The telecommunications business of STi Prepaid has been consolidated by the
Company since March 2007. For the three month period ended June 30, 2007 and for
the period from the asset acquisition through June 30, 2007, STi Prepaid's
telecommunications revenues and other income were $111,500,000 and $144,300,000,
respectively, telecommunications cost of sales were $94,200,000 and
$121,800,000, respectively, salaries and incentive compensation expenses were
$2,400,000 and $2,900,000, respectively, selling, general and other expenses
were $8,300,000 and $10,100,000, respectively, and STi Prepaid had pre-tax
income of $6,500,000 and $9,400,000, respectively.
Property Management and Services
The property management and services operations of ResortQuest have been
consolidated by the Company since June 2007. For the 2007 periods, property
management and services revenues and other income were $18,500,000, direct
operating expenses were $11,900,000, salaries and incentive compensation
expenses were $1,300,000, selling, general and other expenses were $3,300,000
and pre-tax income was $1,500,000.
Domestic Real Estate
Pre-tax income for the domestic real estate segment was $3,600,000 and
$3,200,000 for the three month periods ended June 30, 2007 and 2006,
respectively, and $2,100,000 and $51,000,000 for the six month periods ended
June 30, 2007 and 2006, respectively. Pre-tax income for the six month period
ended June 30, 2006 principally reflects the sale by Square 711, which resulted
in a pre-tax gain of $48,900,000.
Pre-tax results for the domestic real estate segment are largely dependent upon
the performance of the segment's operating properties, the current status of the
Company's real estate development projects and non-recurring gains or losses
recognized when real estate assets are sold. Accordingly, pre-tax results for
this segment for any particular period are not predictable and do not follow any
consistent pattern or trend.
Medical Product Development
Pre-tax losses (net of minority interest) for Sangart were $7,000,000 and
$2,800,000 for the three month periods ended June 30, 2007 and 2006,
respectively, and $15,400,000 and $8,400,000 for the six month periods ended
June 30, 2007 and 2006, respectively. Sangart's losses reflect research and
development costs of $4,800,000 and $1,600,000 for the three month periods ended
June 30, 2007 and 2006, respectively, and $10,800,000 and $6,200,000 for the six
month periods ended June 30, 2007 and 2006, respectively, and salaries and
incentive compensation expenses of $2,100,000 and $1,500,000 for the three month
periods ended June 30, 2007 and 2006, respectively, and $4,200,000 and
$2,800,000 for the six month periods ended June 30, 2007 and 2006, respectively.
When the Company increased its investment in Sangart in March 2007, the
additional investment was accounted for under the purchase method of accounting.
Under the purchase method, the price paid was allocated to Sangart's individual
assets and liabilities based on their relative fair values; in Sangart's case, a
portion of the fair value of assets acquired was initially allocated to research
and development. However, since under GAAP the Company is not permitted to
recognize research and development as an asset under the purchase method, any
amounts initially allocated to research and development are immediately
expensed. For the six month periods ended June 30, 2007 and 2006, the Company
expensed acquired research and development of $4,000,000 and $3,400,000,
respectively, which is included in the caption selling, general and other
expenses in the consolidated statement of operations. The increase in salaries
and incentive compensation in 2007 as compared to 2006 was due to increased
headcount in connection with the commencement of the Phase III trials.
20
As more fully discussed in the 2006 10-K, Sangart is a development stage company
that does not have any revenues from product sales. Since inception, it has been
developing its current product candidate, Hemospan, and is currently conducting
clinical trials in the U.S. (a Phase II trial) and Europe (two Phase III
trials). It does not expect to complete its clinical trials until 2008, and if
they are successful it will then seek approval with the appropriate regulatory
authorities to market its product. Until such time, if ever, that Sangart
obtains regulatory approval for Hemospan, the Company will report losses from
this segment. U.S. or foreign regulatory agencies could also require Sangart to
perform more clinical trials, which could be both expensive and time consuming.
The Company is unable to predict with certainty when, if ever, it will report
operating profits for this segment.
Corporate and Other Operations
Investment and other income decreased in the three and six month periods ended
June 30, 2007 as compared to the same periods in 2006. Investment and other
income for the six month period ended June 30, 2006 reflects $34,700,000 related
to the sales of two associated companies; investment and other income for the
six month period ended June 30, 2007 reflects the receipt of escrowed proceeds
from one of those sales of $11,400,000 ($1,300,000 for the three month 2007
period) that had not been previously recognized. In addition, investment and
other income for the three and six month 2006 periods reflect $7,100,000 from
the recovery of a bankruptcy claim as well as greater interest income than the
comparable 2007 periods of $8,700,000 and $6,100,000, respectively. The decline
in investment income during 2007 is principally due to increased investments in
associated companies and noninterest bearing securities during the second half
of 2006 and in 2007. For the 2007 periods, investment and other income includes
$8,500,000 related to the termination of a joint development agreement with
another party. The amount recorded in other income substantially reimbursed the
Company for its prior expenditures, which were fully expensed as incurred.
Included in investment and other income is income of $600,000 and $800,000 for
the three month periods ended June 30, 2007 and 2006, respectively, and $500,000
and $1,800,000 for the six month periods ended June 30, 2007 and 2006,
respectively, related to the accounting for mark-to-market values of Corporate
derivatives.
Net securities gains for Corporate and Other Operations aggregated $50,200,000
and $44,400,000 for the three month periods ended June 30, 2007 and 2006,
respectively, and $66,200,000 and $83,100,000 for the six month periods ended
June 30, 2007 and 2006, respectively. Net securities gains include provisions of
$300,000 and $1,700,000 for the three month periods ended June 30, 2007 and
2006, respectively, and $500,000 and $2,600,000 for the six month periods ended
June 30, 2007 and 2006, respectively, to write down the Company's investments in
certain available for sale securities. The write down of the securities resulted
from a decline in market value determined to be other than temporary.
The increase in interest expense during the three and six month periods ended
June 30, 2007 as compared to the same periods in 2006 primarily reflects
interest expense relating to the 7 1/8% Senior Notes issued in March 2007 and
the fixed rate repurchase agreements. The 2006 periods also include interest on
the Company's 7 7/8% subordinated notes, which subsequently matured in 2006.
Salaries and incentive compensation expense decreased by $8,300,000 and
$4,900,000 in the three and six month periods ended June 30, 2007 as compared to
the same periods in 2006 principally due to less share-based compensation
expense. Salaries and incentive compensation expense included $2,600,000 and
$9,000,000 for the three month periods ended June 30, 2007 and 2006,
respectively, and $6,000,000 and $9,400,000 for the six month periods ended June
30, 2007 and 2006, respectively, relating to grants made under the Company's
senior executive warrant plan and fixed stock option plan. The decrease in
share-based compensation expense in the three and six month 2007 periods largely
related to grants made under the warrant plan in 2006 for which a portion vested
upon issuance. This decrease was partially offset by increased expenses relating
to the stock option plan principally for the six month 2007 period due to the
accelerated vesting of stock options of an officer of the Company who resigned.
Salaries and incentive compensation expense for the 2007 periods also reflects a
decrease in estimated incentive bonus expense as compared to the same periods in
2006.
The increase in selling, general and other expenses of $7,900,000 and
$20,100,000 in the three and six month periods ended June 30, 2007 as compared
to the same periods in 2006 primarily reflects higher professional fees and
other costs, which largely relate to potential investments and projects and
existing investments, and greater foreign exchange losses from foreign currency
denominated securities and, for the six month period, increased legal fees,
including those incurred in connection with the MK Resources litigation, and a
$7,500,000 accrual for the settlement of litigation related to MK Resources.
21
For the three and six month periods ended June 30, 2007 and 2006, the Company's
effective income tax rate is higher than the federal statutory rate primarily
due to state income taxes.
Associated Companies
Equity in income (losses) of associated companies for the three and six month
periods ended June 30, 2007 and 2006 includes the following (in thousands):
For the Three Month For the Six Month
Period Ended June 30, Period Ended June 30,
------------------------ -------------------------
2007 2006 2007 2006
------ ------ ------ ------
EagleRock $ (1,100) $ 2,500 $ 5,400 $ 12,000
Premier (12,500) -- (19,400) --
JPOF II 100 14,100 3,000 19,700
JHYH 8,900 -- 8,900 --
HomeFed Corporation 100 200 200 900
Safe Harbor (1,100) (4,600) 3,300 (3,500)
Wintergreen 3,300 -- 6,200 1,600
Highland Opportunity 1,100 -- 2,500 --
Shortplus (500) -- 4,800 --
Pershing Square (1,500) -- (1,500) --
Goober Drilling 3,000 500 5,700 500
CLC 900 400 900 1,900
Other 6,000 2,000 9,100 4,500
--------- -------- -------- --------
Equity in income before income taxes 6,700 15,100 29,100 37,600
Income tax expense 2,100 5,600 11,600 14,300
--------- -------- -------- --------
Equity in income, net of taxes $ 4,600 $ 9,500 $ 17,500 $ 23,300
========= ======== ======== ========
Discontinued Operations
Healthcare Services
As more fully discussed in the 2006 10-K, in July 2006 the Company sold Symphony
Healthcare Services, LLC and classified its historical operating results as a
discontinued operation. Pre-tax income of the healthcare services segment was
$1,700,000 and $200,000 for the three and six month periods ended June 30, 2006,
respectively.
Telecommunications - ATX
As more fully discussed in the 2006 10-K, in September 2006 the Company sold ATX
Communications, Inc. and classified its historical operating results as a
discontinued operation. ATX reported pre-tax income of $2,100,000 and $2,000,000
for the three and six month periods ended June 30, 2006, respectively.
WilTel
Gain (loss) on disposal of discontinued operations for the six month period
ended June 30, 2007 reflects the resolution of a sale-related contingency
related to WilTel, which was sold in the fourth quarter of 2005, and for the
2006 periods principally reflects working capital adjustments and the resolution
of certain sale-related obligations related to WilTel.
22
Cautionary Statement for Forward-Looking Information
Statements included in this Report may contain forward-looking statements. Such
statements may relate, but are not limited, to projections of revenues, income
or loss, development expenditures, plans for growth and future operations,
competition and regulation, as well as assumptions relating to the foregoing.
Such forward-looking statements are made pursuant to the safe-harbor provisions
of the Private Securities Litigation Reform Act of 1995.
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.
Factors that could cause actual results to differ materially from any results
projected, forecasted, estimated or budgeted or may materially and adversely
affect the Company's actual results include but are not limited to the
following: potential acquisitions and dispositions of our operations and
investments could change our risk profile; dependence on certain key personnel;
economic downturns; changes in the U.S. housing market; changes in
telecommunications laws and regulations; risks associated with the increased
volatility in raw material prices and the availability of key raw materials;
compliance with government laws and regulations; changes in mortgage interest
rate levels or changes in consumer lending practices; a decrease in consumer
spending or general increases in the cost of living; proper functioning of our
information systems; intense competition in the operation of our businesses; our
ability to generate sufficient taxable income to fully realize our deferred tax
asset; weather related conditions and significant natural disasters, including
hurricanes, tornadoes, windstorms, earthquakes and hailstorms; our ability to
insure certain risks economically; reduction or cessation of dividend payments
on our common shares. For additional information see Part I, Item 1A. Risk
Factors in the 2006 10-K and Part II, Item 1A. Risk Factors contained herein.
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 3. Quantitative and Qualitative Disclosures About Market Risk.
Information required under this Item is contained in Item 7A of the Company's
Annual Report on Form 10-K for the year ended December 31, 2006, and is
incorporated by reference herein.
Item 4. Controls and Procedures.
Evaluation of disclosure controls and procedures
(a) The Company's management evaluated, with the participation of the Company's
principal executive and principal financial officers, the effectiveness of
the Company's disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")), as of June 30, 2007. Based on their
evaluation, the Company's principal executive and principal financial
officers concluded that the Company's disclosure controls and procedures
were effective as of June 30, 2007.
Changes in internal control over financial reporting
(b) As discussed elsewhere herein, during the six months ended June 30, 2007
the Company acquired ResortQuest and the assets of Telco (now STi Prepaid).
Each of ResortQuest and STi Prepaid have their own distinct internal
controls over financial reporting; therefore, such internal controls
represent a new component part of the Company's consolidated internal
control over financial reporting. The Company has not yet completed its
evaluation of the internal controls over financial reporting at ResortQuest
or STi Prepaid, although these entities have or are expected to have
financial statement amounts which are material to the Company's
consolidated financial statements. Except for changes that result from the
acquisition of ResortQuest and STi Prepaid, there have been no changes in
the Company's internal control over financial reporting (as defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during
the Company's fiscal quarter ended June 30, 2007, that has materially
affected, or is reasonably likely to materially affect, the Company's
internal control over financial reporting.
23
Part II - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company and a subsidiary are defendants in Special Situations Fund III,
L.P., et al. v. Leucadia National Corporation, et al., a consolidated action
involving a petition for appraisal and a class action pending in the Delaware
Chancery Court related to our 2005 acquisition of the minority interest in MK
Resources. The appraisal proceeding seeks a judicial determination of the fair
value of 3,979,400 shares of MK Resources' common stock as of August 19, 2005,
the date of the merger of one of our subsidiaries into MK Resources (the "MK
Merger"). The class action alleges breach of fiduciary duty by the former MK
Resources directors and the Company and seeks compensatory damages in an
unspecified amount, costs, disbursements and any further relief that the court
may deem just and proper and, in the alternative, seeks rescissory damages, in
each case taking into account the $1.27 per share in Company stock paid in the
MK Merger to the minority stockholders of MK Resources who did not seek
appraisal.
The parties have entered into a settlement agreement to settle these lawsuits
for complete releases and a dismissal with prejudice in exchange for an
aggregate settlement payment by the Company of approximately $13,800,000
(including a payment in the appraisal proceeding of approximately $5,000,000
that the appraisal petitioners would have received (based on the value at the
merger date of Company shares issued in the merger) had they participated in the
MK Merger). The settlement agreement is subject to court approval, which is not
expected to be received before the fourth quarter of 2007.
Item 1A. Risk Factors.
The Company is adding to its risk factors the item listed below that is specific
to ResortQuest. ResortQuest provides management services to vacation properties
located in areas that can be adversely impacted by weather conditions.
ResortQuest provides services to vacation properties in locations that are
vulnerable to hurricanes and to other properties located in mountain areas that
are dependent upon good skiing conditions to attract visitors. Poor weather
conditions at locations where ResortQuest provides property management services
could adversely impact demand for its managed properties resulting in lost
revenue and profits for ResortQuest.
Item 4. Submission of Matters to a Vote of Security Holders.
The following matters were submitted to a vote of shareholders at the
Company's 2007 Annual Meeting of Shareholders held on May 15, 2007.
a) Election of directors.
Number of Shares
----------------
For Withheld
--- --------
Ian M. Cumming 195,139,996 604,760
Paul M. Dougan 195,201,424 543,332
Lawrence D. Glaubinger 193,984,226 1,760,530
Alan J. Hirschfield 195,349,544 395,212
James E. Jordan 193,897,444 1,847,312
Jeffrey C. Keil 189,620,733 6,124,023
Jesse Clyde Nichols, III 193,484,490 2,260,266
Joseph S. Steinberg 195,249,643 495,113
24
b) Approval of an amendment to the Company's certificate of
incorporation to increase the number of the Company's common
shares, par value $1.00 per share, authorized for issuance to
600,000,000 common shares.
For 188,524,304
Against 7,085,618
Abstentions 134,834
Broker non-votes --
c) Ratification of PricewaterhouseCoopers LLP, as independent
auditors for the year ended December 31, 2007.
For 195,024,329
Against 529,522
Abstentions 190,905
Broker non-votes --
Item 6. Exhibits.
10.1 Stock Purchase Agreement by and among BEI-RZT Corporation,
Gaylord Hotels, Inc. and Gaylord Entertainment Company
(Mainland Agreement), dated June 1, 2007.
31.1 Certification of Chairman of the Board and Chief Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification of President pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.3 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chairman of the Board and Chief Executive
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of President pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.3 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEUCADIA NATIONAL CORPORATION
(Registrant)
Date: August 8, 2007 By: /s/ Barbara L. Lowenthal
------------------------
Barbara L. Lowenthal
Vice President and Comptroller
(Chief Accounting Officer)
26
Exhibit Index
10.1 Stock Purchase Agreement by and among BEI-RZT Corporation,
Gaylord Hotels, Inc. and Gaylord Entertainment Company
(Mainland Agreement), dated June 1, 2007.
31.1 Certification of Chairman of the Board and Chief Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification of President pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.3 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chairman of the Board and Chief Executive
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of President pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.3 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
27