SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2008
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, a non-accelerated filer, or a smaller reporting company.
See the definitions of "large accelerated filer," "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer X Accelerated filer
----- -----
Non-accelerated filer Smaller reporting company
----- -----
(Do not check if a smaller reporting company)
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 November 3, 2008:
232,886,685.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, 2008 and December 31, 2007
(Dollars in thousands, except par value)
(Unaudited)
September 30, December 31,
2008 2007
------------ -----------
ASSETS
------
Current assets:
Cash and cash equivalents $ 162,073 $ 456,970
Investments 334,735 983,199
Trade, notes and other receivables, net 182,239 133,765
Prepaids and other current assets 222,238 146,199
----------- -----------
Total current assets 901,285 1,720,133
Non-current investments 2,109,813 2,776,521
Notes and other receivables, net 20,544 16,388
Intangible assets, net and goodwill 74,370 79,506
Deferred tax asset, net 1,571,012 1,113,925
Other assets 616,094 544,432
Property, equipment and leasehold improvements, net 527,233 512,804
Investments in associated companies ($1,419,700 measured using
fair value option at September 30, 2008) 2,588,818 1,362,913
----------- -----------
Total $ 8,409,169 $ 8,126,622
=========== ===========
LIABILITIES
-----------
Current liabilities:
Trade payables and expense accruals $ 190,834 $ 229,560
Deferred revenue 72,118 86,993
Other current liabilities 10,929 10,992
Debt due within one year 175,562 132,405
----------- -----------
Total current liabilities 449,443 459,950
Other non-current liabilities 64,879 71,061
Long-term debt 2,045,379 2,004,145
----------- -----------
Total liabilities 2,559,701 2,535,156
----------- -----------
Commitments and contingencies
Minority interest 21,416 20,974
----------- -----------
SHAREHOLDERS' EQUITY
--------------------
Common shares, par value $1 per share, authorized 600,000,000 shares;
232,886,685 and 222,574,440 shares issued and outstanding, after deducting
46,888,660 and 56,886,204 shares held in treasury 232,887 222,574
Additional paid-in capital 1,286,600 783,145
Accumulated other comprehensive income 538,741 975,365
Retained earnings 3,769,824 3,589,408
----------- -----------
Total shareholders' equity 5,828,052 5,570,492
----------- -----------
Total $ 8,409,169 $ 8,126,622
=========== ===========
See notes to interim consolidated financial statements.
2
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Operations
For the periods ended September 30, 2008 and 2007
(In thousands, except per share amounts)
(Unaudited)
For the Three Month For the Nine Month
Period Ended September 30, Period Ended September 30,
-------------------------- --------------------------
2008 2007 2008 2007
---- ---- ---- ----
Revenues and Other Income:
Manufacturing $ 91,027 $ 103,266 $ 274,482 $ 310,258
Telecommunications 106,678 112,271 334,992 255,986
Property management and service fees 44,346 40,259 122,686 58,604
Gaming entertainment 25,390 14,396 81,444 14,396
Investment and other income 49,722 37,331 138,635 143,307
Net securities gains (losses) (65,547) 23,626 (38,220) 89,787
--------- --------- ---------- ---------
251,616 331,149 914,019 872,338
--------- --------- ---------- ---------
Expenses:
Cost of sales:
Manufacturing 78,450 89,835 234,993 263,354
Telecommunications 91,429 96,737 291,438 218,581
Direct operating expenses:
Property management and services 34,229 28,815 92,117 40,705
Gaming entertainment 23,674 13,404 72,242 13,404
Interest 37,016 27,943 109,341 74,855
Salaries and incentive compensation 23,902 24,709 68,899 65,081
Depreciation and amortization 14,763 10,171 39,700 23,050
Selling, general and other expenses 57,110 50,403 182,737 156,361
--------- --------- ---------- ---------
360,573 342,017 1,091,467 855,391
--------- --------- ---------- ---------
Income (loss) from continuing operations before income taxes
and income related to associated companies (108,957) (10,868) (177,448) 16,947
Income tax (benefit) provision (38,753) (4,177) (297,814) 6,941
--------- --------- ---------- ---------
Income (loss) from continuing operations before income
related to associated companies (70,204) (6,691) 120,366 10,006
Income related to associated companies, net of taxes 159,666 8,778 60,050 26,257
--------- --------- ---------- ---------
Income from continuing operations 89,462 2,087 180,416 36,263
Income from discontinued operations, net of taxes -- 98 -- 307
Gain on disposal of discontinued operations, net of taxes -- 1,703 -- 1,991
--------- --------- ---------- ---------
Net income $ 89,462 $ 3,888 $ 180,416 $ 38,561
========= ========= ========== =========
Basic earnings per common share:
Income from continuing operations $.38 $.01 $.79 $.17
Income from discontinued operations -- -- -- --
Gain on disposal of discontinued operations -- .01 -- .01
---- ---- ---- ----
Net income $.38 $.02 $.79 $.18
==== ==== ==== ====
Diluted earnings per common share:
Income from continuing operations $.37 $.01 $.76 $.17
Income from discontinued operations -- -- -- --
Gain on disposal of discontinued operations -- .01 -- .01
---- ---- ---- ----
Net income $.37 $.02 $.76 $.18
==== ==== ==== ====
See notes to interim consolidated financial statements.
3
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the nine months ended September 30, 2008 and 2007
(In thousands)
(Unaudited)
2008 2007
---- ----
Net cash flows from operating activities:
Net income $ 180,416 $ 38,561
Adjustments to reconcile net income to net cash used for operations:
Deferred income tax (benefit) provision (269,748) 26,350
Depreciation and amortization of property, equipment and leasehold improvements 41,832 27,795
Other amortization 10,549 384
Share-based compensation 8,621 8,503
Excess tax benefit from exercise of stock options (1,821) (2,911)
Provision for doubtful accounts 405 210
Net securities (gains) losses 38,220 (89,787)
Income related to associated companies (93,231) (44,471)
Distributions from associated companies 81,314 53,310
Net gains related to real estate, property and equipment, and other assets (45,146) (24,035)
Gain on disposal of discontinued operations -- (3,372)
Investments classified as trading, net 60,056 35,265
Net change in:
Restricted cash 5,235 8,385
Trade, notes and other receivables 3 7,530
Prepaids and other assets (851) (1,939)
Trade payables and expense accruals (35,195) (9,008)
Other liabilities (1,188) (608)
Deferred revenue (15,652) (27,130)
Income taxes payable 1,558 (9,781)
Other (5,139) 1,649
----------- -----------
Net cash used for operating activities (39,762) (5,100)
----------- -----------
Net cash flows from investing activities:
Acquisition of property, equipment and leasehold improvements (69,143) (29,353)
Acquisitions of and capital expenditures for real estate investments (96,547) (59,872)
Proceeds from disposals of real estate, property and equipment, and other assets 7,302 24,926
Acquisitions, net of cash acquired -- (83,971)
Collection of Premier Entertainment Biloxi, LLC's insurance proceeds 11,089 --
Net change in restricted cash 105 (8,371)
Advances on notes and other receivables (17,116) (12,714)
Collections on notes, loan and other receivables 27,632 29,674
Investments in associated companies (889,705) (981,030)
Capital distributions from associated companies 165,238 46,662
Purchases of investments (other than short-term) (3,655,121) (2,985,445)
Proceeds from maturities of investments 342,980 533,168
Proceeds from sales of investments 3,726,005 2,709,272
Other (6,618) 426
----------- -----------
Net cash used for investing activities (453,899) (816,628)
----------- -----------
Net cash flows from financing activities:
Issuance of debt, net of issuance costs 89,389 978,106
Reduction of debt (5,810) (2,813)
Issuance of common shares 106,324 250,217
Purchase of common shares for treasury (122) (102)
Excess tax benefit from exercise of stock options 1,821 2,911
Other 7,315 1,322
----------- -----------
Net cash provided by financing activities 198,917 1,229,641
----------- -----------
Effect of foreign exchange rate changes on cash (153) 20
----------- -----------
Net increase (decrease) in cash and cash equivalents (294,897) 407,933
Cash and cash equivalents at January 1, 456,970 287,199
----------- -----------
Cash and cash equivalents at September 30, $ 162,073 $ 695,132
=========== ===========
See notes to interim consolidated financial statements.
4
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
For the nine months ended September 30, 2008 and 2007
(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, 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 $307,223 541,460 541,460
Net change in unrealized foreign exchange
gain (loss), net of taxes of $2,055 3,621 3,621
Net change in unrealized gain (loss) on
derivative instruments, net of taxes of $42 74 74
Net change in minimum pension liability and
postretirement benefits, net of taxes of $501 883 883
Net income 38,561 38,561
----------
Comprehensive income 584,599
----------
Share-based compensation expense 8,503 8,503
Issuance of common shares 5,500 236,500 242,000
Exercise of options to purchase common shares,
including excess tax benefit 539 10,589 11,128
Purchase of common shares for treasury (3) (99) (102)
-------- ---------- ---------- ---------- ----------
Balance, September 30, 2007 $222,387 $ 776,385 $ 541,312 $3,199,319 $4,739,403
======== ========== ========== ========== ==========
Balance, January 1, 2008 $222,574 $ 783,145 $ 975,365 $3,589,408 $5,570,492
----------
Comprehensive loss:
Net change in unrealized gain (loss) on
investments, net of taxes of $247,443 (432,664) (432,664)
Net change in unrealized foreign exchange
gain (loss), net of taxes of $2,890 (5,055) (5,055)
Net change in unrealized gain (loss) on
derivative instruments, net of taxes of $419 733 733
Net change in pension liability and
postretirement benefits, net of taxes of $206 362 362
Net income 180,416 180,416
----------
Comprehensive loss (256,208)
----------
Share-based compensation expense 7,494 7,494
Sale of common shares to Jefferies Group, Inc. 10,000 488,269 498,269
Issuance of common shares for debt conversion 3 3
Exercise of options to purchase common shares,
including excess tax benefit 315 7,809 8,124
Purchase of common shares for treasury (2) (120) (122)
-------- ---------- ---------- ---------- ----------
Balance, September 30, 2008 $232,887 $1,286,600 $ 538,741 $3,769,824 $5,828,052
======== ========== ========== ========== ==========
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, 2007, which are
included in the Company's Annual Report filed on Form 10-K, as amended, for
such year (the "2007 10-K"). Results of operations for interim periods are
not necessarily indicative of annual results of operations. The
consolidated balance sheet at December 31, 2007 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, 2008 (except as described below), the Company adopted
Statement of Financial Accounting Standards No. 157, "Fair Value
Measurements" ("SFAS 157"), and 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"). SFAS 157 defines fair value, establishes a framework for measuring
fair value, establishes a hierarchy that prioritizes inputs to valuation
techniques and expands disclosures about fair value measurements. The fair
value hierarchy gives the highest priority to unadjusted quoted prices in
active markets for identical assets or liabilities (Level 1), the next
priority to inputs that don't qualify as Level 1 inputs but are nonetheless
observable, either directly or indirectly, for the particular asset or
liability (Level 2), and the lowest priority to unobservable inputs (Level
3). The Company elected to defer the effectiveness of SFAS 157 for one year
only with respect to nonfinancial assets and nonfinancial liabilities that
are recognized or disclosed at fair value in the financial statements on a
nonrecurring basis. The adoption of SFAS 157 did not have any impact on the
Company's consolidated financial statements other than expanded
disclosures; however, fair value measurements for new assets or liabilities
and fair value measurements for existing nonfinancial assets and
nonfinancial liabilities may be materially different under SFAS 157.
SFAS 159 permits entities to choose to measure many financial instruments
and certain other items at fair value (the "fair value option"), and to
report unrealized gains and losses on items for which the fair value option
is elected in earnings. SFAS 159 identifies eligible items for which the
fair value option may be elected, specifies election dates for eligible
items (including all eligible items held as of January 1, 2008) and also
permits the election of the fair value option on an
instrument-by-instrument basis subject to certain exceptions. The Company
did not elect the fair value option as of January 1, 2008 for any eligible
items. However, for eligible items for which the accounting treatment
changes, or that are acquired or entered into after SFAS 159 was adopted or
otherwise become subject to a new election date, the Company intends to
make an assessment at such time as to whether to elect the fair value
option.
In 2008, the Company elected the fair value option for two of its
associated company investments, rather than apply the equity method of
accounting. Unrealized gains and losses from these investments are
reflected as a component of income (loss) related to associated companies
in the consolidated statement of operations. Dividends, if any, declared on
these investments will be recognized as a component of income (loss)
related to associated companies on the ex-dividend date. See Notes 15 and
16 for information concerning these investments.
In March 2008, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 161, "Disclosures about
Derivative Instruments and Hedging Activities - an amendment of FASB
Statement No. 133" ("SFAS 161"). SFAS 161, which is effective for fiscal
years beginning after November 15, 2008, requires enhanced disclosures
about an entity's derivative and hedging activities, including the
objectives and strategies for using derivatives, disclosures about fair
value amounts of, and gains and losses on, derivative instruments, and
disclosures about credit-risk-related contingent features in derivative
agreements. The Company is currently evaluating the impact of adopting SFAS
161 on its consolidated financial statements.
6
In December 2007, the FASB issued Statement of Financial Accounting
Standards No. 141R, "Business Combinations" ("SFAS 141R") and Statement of
Financial Accounting Standards No. 160, "Noncontrolling Interests in
Consolidated Financial Statements" ("SFAS 160"). SFAS 141R will change how
business combinations are accounted for and will impact financial
statements both on the acquisition date and in subsequent periods. SFAS 160
will change the accounting and reporting for minority interests, which will
be recharacterized as noncontrolling interests and classified as a
component of stockholders' equity. SFAS 141R and SFAS 160 are effective for
fiscal years beginning after December 15, 2008. The Company is currently
evaluating the impact of adopting SFAS 141R and SFAS 160 on its
consolidated financial statements, but expects they will have a material
impact on the accounting for future acquisitions and noncontrolling
interests.
Certain amounts for prior periods have been reclassified to be consistent
with the 2008 presentation.
2. 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. As required under GAAP, the
determination of the amount of the valuation allowance required is based,
in significant part, upon the Company's projection of future taxable
income, which the Company is required to periodically reassess as
circumstances warrant.
During the second quarter of 2008, the Company's revised projections of
future taxable income enabled it to conclude that it is more likely than
not that it will have future taxable income sufficient to realize an
additional portion of the Company's net deferred tax asset; accordingly,
$222,200,000 of the deferred tax valuation allowance was reversed as a
credit to income tax expense. The Company's conclusion that this additional
portion of the deferred tax asset is more likely than not to be realized
reflects, among other things, the projected income to be earned from the
sale of 10,000,000 common shares of the Company in April 2008, and is
strongly influenced by its historical ability to generate significant
amounts of taxable income and its projections of future taxable income. In
addition, as a result of the increased projected taxable income in certain
state and local taxing jurisdictions, during the second quarter the Company
recognized additional state and local net operating loss carryforward
benefits of $12,500,000 as a reduction to income tax expense. 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, estimates apportionment factors for state and
local taxing jurisdictions and includes all future years that the Company
estimated it would have available net operating loss carryforwards. As more
fully discussed below, the Company has large investments in certain
publicly traded companies, all of which have experienced significant market
price volatility subsequent to September 30, 2008. When evaluating its
projection of future taxable income, declines in market value represent
negative evidence the Company considers as it assesses the carrying amount
of the deferred tax valuation allowance. The Company believes that its
estimate of future taxable income is reasonable but inherently uncertain,
and 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 September 30, 2008, the balance
of the deferred tax valuation allowance was approximately $80,000,000,
principally to reserve for net operating losses that are not available to
offset income generated by other members of the Company's consolidated tax
return group.
3. 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 ResortQuest International, Inc. ("ResortQuest"). As
more fully discussed in the 2007 10-K, the gaming entertainment business
conducted by Premier Entertainment Biloxi, LLC ("Premier") has been
reflected as a consolidated subsidiary since its emergence from bankruptcy
in August 2007; for earlier 2007 periods Premier was classified as an
investment in an associated company. The primary measure of segment
operating results and profitability used by the Company is income (loss)
from continuing operations before income taxes and income (loss) related to
associated companies.
7
Certain information concerning the Company's segments for the three and
nine month periods ended September 30, 2008 and 2007 is presented in the
following table.
For the Three Month For the Nine Month
Period Ended September 30, Period Ended September 30,
-------------------------- --------------------------
2008 2007 2008 2007
---- ---- ---- ----
(In thousands)
Revenues and other income (a):
Manufacturing:
Idaho Timber $ 63,349 $ 75,250 $ 191,104 $ 230,937
Conwed Plastics 27,971 28,110 83,761 79,595
Telecommunications 106,804 112,782 335,533 257,076
Property Management and Services 44,617 40,659 123,202 59,144
Gaming Entertainment (b) 26,316 14,618 94,668 14,618
Domestic Real Estate 3,722 2,200 10,312 14,565
Medical Product Development 117 544 522 1,524
Other Operations (c) 11,640 10,993 40,111 40,275
Corporate (d) (32,920) 45,993 34,806 174,604
--------- --------- --------- ---------
Total consolidated revenues and other income $ 251,616 $ 331,149 $ 914,019 $ 872,338
========= ========= ========= =========
Income (loss) from continuing operations before income taxes
and income related to associated companies:
Manufacturing:
Idaho Timber $ 982 $ 2,012 $ 3,491 $ 10,822
Conwed Plastics 3,909 4,741 12,208 13,369
Telecommunications 4,337 6,243 11,428 15,598
Property Management and Services 4,131 3,874 9,046 5,408
Gaming Entertainment (4,254) (2,255) 4,512 (2,255)
Domestic Real Estate (5,724) (5,029) (11,279) (2,912)
Medical Product Development (8,216) (7,038) (24,165) (22,414)
Other Operations (c) (11,548) (5,982) (27,737) (8,808)
Corporate (d) (92,574) (7,434) (154,952) 8,139
--------- --------- --------- ---------
Total consolidated income (loss) from continuing
operations before income taxes and income
related to associated companies $(108,957) $ (10,868) $(177,448) $ 16,947
========= ========= ========= =========
(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 (losses) on the Company's consolidated statements of operations.
(b) For the nine month period ended September 30, 2008, the gaming
entertainment segment's revenues and other income includes a
$7,300,000 gain from the settlement of an insurance claim and for the
three and nine month periods ended September 30, 2008, $800,000 and
$5,600,000, respectively, resulting from capital contributions from
the minority interest. In prior periods, the Company recorded 100% of
the losses from this segment after cumulative loss allocations to the
minority interest had reduced the minority interest liability to zero.
Since the minority interest liability remains at zero after
considering the capital contributions, the entire capital contribution
was recorded as income, effectively reimbursing the Company for a
portion of the minority interest losses that were not previously
allocated to the minority interest.
(c) Other operations includes pre-tax losses of $9,100,000 and $4,100,000
for the three month periods ended September 30, 2008 and 2007,
respectively, and $23,500,000 and $2,700,000 for the nine month
periods ended September 30, 2008 and 2007, respectively, for the
investigation and evaluation of various energy related projects. For
the 2008 periods, there were no material operating revenues associated
with these activities. For the nine month period ended September 30,
2007, revenues and other income, and pre-tax income (loss) include
income of $8,500,000 related to the termination of a joint development
agreement with another party. This amount substantially reimbursed the
Company for its prior expenditures, which were fully expensed as
incurred.
8
(d) Corporate includes impairment charges for securities of $61,300,000
and $74,900,000 for the three and nine month periods ended September
30, 2008, respectively, and $400,000 and $900,000 for the three and
nine month 2007 periods, respectively. The impaired securities include
the Company's investment in an Argentine agricultural company that is
publicly traded in both the U.S. and Argentina (see Note 4 for more
information), various equity securities that are publicly traded in
Hong Kong and a number of other debt and equity securities some of
which are not publicly traded. The impairment charges result from
declines in fair values of securities believed to be other than
temporary, substantially all of which are for securities classified as
available for sale securities. In addition, the Company recorded an
impairment charge related to an investment in an associated company
that is not reflected in the table above; see Note 4 for more
information.
For the three month periods ended September 30, 2008 and 2007, income
(loss) from continuing operations has been reduced by depreciation and
amortization expenses of $19,900,000 and $14,800,000, respectively; such
amounts are primarily comprised of Corporate ($5,000,000 and $3,100,000,
respectively), manufacturing ($4,300,000 and $4,400,000, respectively),
gaming entertainment ($4,400,000 and $1,800,000, respectively), domestic
real estate ($2,500,000 and $1,500,000, respectively), property management
and services ($1,400,000 and $1,400,000, respectively) and other operations
($1,800,000 and $2,300,000, respectively). For the nine month periods ended
September 30, 2008 and 2007, income (loss) from continuing operations has
been reduced by depreciation and amortization expenses of $55,100,000 and
$36,800,000, respectively; such amounts are primarily comprised of
Corporate ($12,600,000 and $9,000,000, respectively), manufacturing
($13,100,000 and $13,500,000, respectively), gaming entertainment
($12,800,000 and $1,800,000, respectively), domestic real estate
($5,200,000 and $3,200,000, respectively), property management and services
($4,100,000 and $1,900,000, respectively) and other operations ($6,000,000
and $6,700,000, respectively). Depreciation and amortization expenses for
other segments are not material.
For the three month periods ended September 30, 2008 and 2007, income
(loss) from continuing operations has been reduced by interest expense of
$37,000,000 and $27,900,000, respectively; such amounts are primarily
comprised of Corporate ($35,100,000 and $27,600,000, respectively),
domestic real estate ($1,700,000 in 2008) and gaming entertainment
($200,000 in 2008). For the nine month periods ended September 30, 2008 and
2007, income (loss) from continuing operations has been reduced by interest
expense of $109,300,000 and $74,900,000, respectively; such amounts are
primarily comprised of Corporate ($105,600,000 and $74,400,000,
respectively), domestic real estate ($2,900,000 in 2008) and gaming
entertainment ($700,000 in 2008). Interest expense for other segments is
not material.
4. 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 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, 2008 (in thousands).
September 30, September 30,
2008 2007
------------ -----------
Pershing Square IV, L.P. ("Pershing Square"):
Total revenues $ (267,900) $ (99,100)
Loss from continuing operations before extraordinary items (276,200) (102,100)
Net loss (276,200) (102,100)
The Company's equity in net loss (27,800) (10,400)
HFH ShortPLUS Fund, L.P. ("Shortplus"):
Total revenues $ 55,000 $ 161,600
Income from continuing operations before extraordinary items 44,700 150,300
Net income 44,700 150,300
The Company's equity in net income 10,700 37,600
9
In March 2008, the Company increased its equity investment in the common
shares of IFIS Limited ("IFIS"), a private company that primarily invests
in operating businesses in Argentina, from approximately 3% to 26% for an
additional cash investment of $83,900,000. At September 30, 2008, the
Company's aggregate investment in IFIS was classified as an investment in
an associated company and is accounted for under the equity method of
accounting; the Company records its share of IFIS's results using a
quarterly reporting lag. At December 31, 2007, the Company's investment in
IFIS was classified as a non-current investment and was carried at cost.
IFIS owns a variety of investments, and its largest investment is
approximately 32% of the outstanding common shares of Cresud Sociedad
Anonima Comercial, Inmobiliaria, Financiera y Agropecuaria ("Cresud").
Cresud is an Argentine agricultural company involved in a range of
activities including crop production, cattle raising and milk production.
Cresud's common shares trade on the Buenos Aires Stock Exchange (Symbol:
CRES); in the U.S., Cresud trades as American Depository Shares or ADSs
(each of which represents ten common shares) on the NASDAQ Global Select
Market (Symbol: CRESY). Cresud is also indirectly engaged in the Argentine
real estate business through its approximate 42% interest in IRSA
Inversiones y Representaciones Sociedad Anonima ("IRSA"), a company engaged
in a variety of real estate activities in Argentina including ownership of
residential properties, office buildings, shopping centers and luxury
hotels. IRSA's common shares also trade on the Buenos Aires Stock Exchange
(Symbol: IRSA); in the U.S., IRSA trades as ADSs on the New York Stock
Exchange ("NYSE") (Symbol: IRS).
The Company also acquired a direct equity interest in Cresud for an
aggregate cash investment of $54,300,000. The Company owns 3,364,174 Cresud
ADSs, representing approximately 6.7% of Cresud's outstanding common
shares, and currently exercisable warrants to purchase 11,213,914 Cresud
common shares (or 1,121,391 Cresud ADSs) at an exercise price of $1.68 per
share. The warrants expire on May 22, 2015 and are exercisable during a six
day period from and including the 17th to the 22nd day of each February,
May, September and November. The Company's direct investment in Cresud is
classified as a non-current available for sale investment and carried at
fair value.
As a result of significant declines in quoted market prices for Cresud and
other investments of IFIS, combined with declines in worldwide food
commodity prices, the global mortgage and real estate crisis and political
and financial conditions in Argentina, the Company has determined that its
investments in IFIS and Cresud ADSs were impaired at September 30, 2008. As
of September 30, 2008, the fair value of the Company's investment in IFIS
was determined to be $41,800,000, resulting in an impairment charge of
$36,100,000 for the three and nine month periods ended September 30, 2008.
This charge is in addition to the Company's share of IFIS's operating
losses, which were $8,100,000 and $8,400,000 for the three and nine month
periods ended September 30, 2008, respectively. As of September 30, 2008,
the fair value of the Company's investment in Cresud ADSs was determined to
be $35,300,000, resulting in an impairment charge of $14,300,000 for the
three and nine month periods ended September 30, 2008.
The fair values of IFIS and Cresud's securities were determined using
quoted market prices at September 30, 2008, as required under GAAP.
Subsequent to September 30, 2008, these quoted market prices have continued
to decline, and if this decline in value continues or worsens through the
end of the year, the Company may record additional impairments during the
fourth quarter. If the Company had used quoted market prices on November 3,
2008 to calculate the impairment charges as of September 30, 2008 (which is
not permitted under GAAP), an additional charge of approximately
$44,200,000 would have been recorded.
10
5. A summary of investments at September 30, 2008 and December 31, 2007 is as
follows (in thousands):
September 30, 2008 December 31, 2007
---------------------------- --------------------------------
Carrying Value Carrying Value
Amortized and Estimated Amortized and Estimated
Cost Fair Value Cost Fair Value
---------- ------------ ---------- -------------
Current Investments:
Investments available for sale $ 295,294 $ 295,600 $ 897,470 $ 899,053
Trading securities 201 35,189 47,180 71,618
Other investments, including accrued interest income 3,946 3,946 12,528 12,528
---------- ---------- ---------- ----------
Total current investments $ 299,441 $ 334,735 $ 957,178 $ 983,199
========== ========== ========== ==========
Non-current Investments:
Investments available for sale $1,017,786 $2,005,616 $ 951,988 $2,618,648
Other investments 104,197 104,197 157,873 157,873
---------- ---------- ---------- ----------
Total non-current investments $1,121,983 $2,109,813 $1,109,861 $2,776,521
========== ========== ========== ==========
Non-current available for sale investments include 277,986,000 common
shares of Fortescue Metals Group Ltd ("Fortescue"), representing
approximately 9.9% of the outstanding Fortescue common stock. 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 on
the Australian Stock Exchange or in accordance with applicable securities
laws. The Fortescue shares have a cost of $246,300,000 and market values of
$1,026,500,000 and $1,824,700,000 at September 30, 2008 and December 31,
2007, respectively.
The market value of the Company's equity investment in FMG has decreased by
$798,200,000 since December 31, 2007, which has a significant impact on the
Company's reported shareholders' equity and non-current investment
portfolio. The decline in FMG's market value continued after the end of the
third quarter; as of November 3, 2008 the Company's position in FMG had an
aggregate market value of $560,300,000. Public securities markets
throughout the world have lost significant value and have been extremely
volatile during the second half of 2008, conditions which may continue in
the future.
During the three and nine month periods ended September 30, 2008, the
Company accrued $20,000,000 and $24,900,000, respectively, of other income
related to Fortescue's Pilbara iron ore and infrastructure project in
Western Australia. As more fully discussed in the 2007 10-K, the Company is
entitled to receive 4% of the revenue, net of government royalties,
invoiced from certain areas of Fortescue's project, which commenced
production in May 2008. Amounts are payable semi-annually within thirty
days of June 30th and December 31st of each year subject to restricted
payment provisions of Fortescue's debt agreements; payments are currently
being deferred pursuant to those agreements. Depreciation and amortization
expenses for the three and nine month periods ended September 30, 2008
include prepaid mining interest amortization of $1,300,000 and $1,600,000,
respectively, which is being amortized over time in proportion to the
amount of ore produced.
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 of
$78,000,000 and carrying values of $260,700,000 and $78,000,000 at
September 30, 2008 and December 31, 2007, respectively. As more fully
discussed in the 2007 10-K, the Inmet shares are restricted and may not be
sold until August 2009 or earlier under certain specified circumstances. As
required under GAAP, because of the transfer restriction the Inmet shares
were carried at the initially recorded value until one year prior to the
termination of the transfer restrictions; accordingly, starting in the
third quarter of 2008 the Inmet shares are carried at market value.
Subsequent to September 30, 2008, the aggregate market value of Company's
investment in Inmet declined to $128,300,000 as of November 3, 2008.
11
6. A summary of intangible assets, net and goodwill at September 30, 2008 and
December 31, 2007 is as follows (in thousands):
September 30, December 31,
2008 2007
------------ -----------
Intangibles:
Customer relationships, net of accumulated amortization of $25,402 and $19,472 $ 47,919 $ 52,362
Licenses, net of accumulated amortization of $832 and $361 11,106 11,527
Trademarks and tradename, net of accumulated amortization of $536 and $403 1,844 1,886
Patents, net of accumulated amortization of $572 and $453 1,788 1,907
Other, net of accumulated amortization of $2,259 and $2,048 3,562 3,673
Goodwill 8,151 8,151
-------- --------
$ 74,370 $ 79,506
======== ========
Amortization expense on intangible assets was $2,200,000 for each of the
three month periods ended September 30, 2008 and 2007, respectively, and
$6,900,000 and $6,100,000 for the nine month periods ended September 30,
2008 and 2007, respectively. The estimated aggregate future amortization
expense for the intangible assets for each of the next five years is as
follows (in thousands): 2008 (for the remaining three months) - $2,400;
2009 - $9,300; 2010 - $8,900; 2011 - $8,400; and 2012 - $7,800.
All of the goodwill in the above table relates to Conwed Plastics.
7. A summary of accumulated other comprehensive income (loss), net of taxes at
September 30, 2008 and December 31, 2007 is as follows (in thousands):
September 30, December 31,
2008 2007
----------- ------------
Net unrealized gains on investments $ 565,014 $ 997,678
Net unrealized foreign exchange gains 1,949 7,004
Net unrealized losses on derivative instruments (331) (1,064)
Net minimum pension liability (28,596) (29,023)
Net postretirement benefit 705 770
--------- ---------
$ 538,741 $ 975,365
========= =========
8. Investment and other income includes changes in the fair values of
derivative financial instruments of $(200,000) and $(700,000) for the three
month periods ended September 30, 2008 and 2007, respectively, and
$(600,000) and $(200,000) for the nine month periods ended September 30,
2008 and 2007, respectively.
9. Pension expense charged to operations for the three and nine month periods
ended September 30, 2008 and 2007 related to defined benefit pension plans
included the following components (in thousands):
For the Three Month For the Nine Month
Period Ended September 30, Period Ended September 30,
-------------------------- --------------------------
2008 2007 2008 2007
------ ------- ------ ------
Interest cost $ 3,074 $ 2,956 $ 9,266 $ 8,869
Expected return on plan assets (2,667) (2,666) (8,001) (7,999)
Actuarial loss 168 413 504 1,236
Amortization of prior service cost 1 1 3 2
------- ------- ------- -------
Net pension expense $ 576 $ 704 $ 1,772 $ 2,108
======= ======= ======= =======
12
The Company did not make any contributions to its defined benefit pension
plans during the nine month period ended September 30, 2008.
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 nine
month periods ended September 30, 2008 and 2007.
10. Salaries and incentive compensation expense included $2,900,000 and
$2,500,000, respectively, for the three month periods ended September 30,
2008 and 2007, and $8,600,000 and $8,500,000 for the nine month periods
ended September 30, 2008 and 2007, respectively, for share-based
compensation expense relating to grants principally made under the
Company's senior executive warrant plan and fixed stock option plan. During
the nine month 2008 period, 12,000 options were granted to non-employee
directors under the Company's stock option plan at an exercise price of
$53.72 per share, the market price on the grant date.
11. The aggregate amount of unrecognized tax benefits reflected in the
Company's consolidated balance sheet was $10,000,000 (including $2,600,000
for interest); if recognized, such amounts would lower the Company's
effective tax rate. During the nine month period ended September 30, 2008,
the Company recognized previously unrecognized federal and state tax
benefits of $4,100,000 as a result of the expiration of the applicable
statute of limitations. Over the next twelve months, the Company does not
expect that the aggregate amount of unrecognized tax benefits will change
by a material amount. The statute of limitations with respect to the
Company's federal income tax returns has expired for all years through
2004. The Company's New York State and New York City income tax returns are
currently being audited for the 2003 to 2005 period.
12. Basic earnings per share amounts are calculated by dividing net income by
the sum of the weighted average number of common shares outstanding. To
determine diluted earnings 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
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 per share amounts was 232,849,000 and
218,071,000 for the three month periods ended September 30, 2008 and 2007,
respectively, and 228,723,000 and 217,110,000 for the nine month periods
ended September 30, 2008 and 2007, respectively. The number of shares used
to calculate diluted earnings per share amounts was 249,452,000 and
219,411,000 for the three month periods ended September 30, 2008 and 2007,
respectively, and 245,499,000 and 217,832,000 for the nine month periods
ended September 30, 2008 and 2007, respectively. The denominator for
dilutive per share computations for the three and nine month periods ended
September 30, 2008 and 2007 reflects the effect of dilutive options and
warrants. For the three and nine month periods ended September 30, 2007,
the 3 3/4% Convertible Notes, which were convertible into 15,239,490 common
shares during those periods, were not included in the computation of
diluted earnings per share as the effect was antidilutive.
13. Cash paid for interest and income taxes (net of refunds) was $133,900,000
and $3,600,000, respectively, for the nine month period ended September 30,
2008 and $80,500,000 and $10,200,000, respectively, for the nine month
period ended September 30, 2007.
13
14. Debt due within one year includes $160,100,000 and $125,000,000 as of
September 30, 2008 and December 31, 2007, respectively, relating to
repurchase agreements. At September 30, 2008, these fixed rate repurchase
agreements have a weighted average interest rate of approximately 2.75%,
mature in October 2008 and are secured by non-current investments with a
carrying value of $172,300,000.
15. As of September 30, 2008, the Company had acquired approximately 28% of the
outstanding voting securities of AmeriCredit Corp. ("ACF"), a company
listed on the NYSE (Symbol: ACF), for aggregate cash consideration of
$405,300,000 ($70,100,000 was invested as of December 31, 2007). ACF is an
independent auto finance company that is in the business of purchasing and
servicing automobile sales finance contracts, predominantly to consumers
who are typically unable to obtain financing from other sources. ACF has
historically funded its auto lending activities through the transfer of
loans in securitization transactions. The Company has entered into a
standstill agreement with ACF for the two year period ending March 3, 2010,
pursuant to which the Company has agreed not to sell its shares if the
buyer would own more than 4.9% of the outstanding shares, unless the buyer
agreed to be bound by terms of the standstill agreement, to not increase
its ownership interest to more than 30% of the outstanding ACF common
shares, and received the right to nominate two directors to the board of
directors of ACF. At September 30, 2008, the Company's investment in ACF is
carried at fair value of $331,400,000; income related to associated
companies includes unrealized gains (losses) resulting from changes in the
fair value of ACF of $51,600,000 and $(73,900,000) for the three and nine
month periods ended September 30, 2008, respectively. At December 31, 2007,
the Company's investment in ACF was classified as non-current investments
and carried at fair value of $71,500,000.
The Company's investment in ACF is one of two eligible items for which the
fair value option identified in SFAS 159 can be elected, commencing on the
date the Company acquired the right to vote 20% of the ACF common stock and
the investment became subject to the equity method of accounting. If ACF
were accounted for under the equity method, the Company would have to
record its share of ACF's results of operations employing a quarterly
reporting lag because of ACF's own public reporting requirements. In
addition, electing the fair value option for ACF eliminates some of the
uncertainty involved with impairment considerations, since the quoted
market price for ACF common shares provides a readily determinable fair
value at each balance sheet date. For these reasons the Company elected the
fair value option for its investment in ACF.
Subsequent to September 30, 2008, the aggregate market value of the
Company's investment in ACF declined to $206,100,000 at November 3, 2008.
If the aggregate market value of the Company's investment in ACF remains
unchanged at December 31, 2008, this decline in market value would result
in the recognition of an unrealized loss during the fourth quarter of
$125,300,000. Further declines in market values are also possible, which
would result in the recognition of additional unrealized losses in the
consolidated statement of operations.
The relative significance of ACF to the Company could result in the Company
including separate audited financial statements for ACF in its Annual
Report on Form 10-K for the year ended December 31, 2008. The following
table provides summarized data with respect to ACF for the nine months
ended September 30, 2008 (in thousands):
Total revenues $1,803,200
Loss from continuing operations before extraordinary items (113,700)
Net loss (113,700)
16. In April 2008, the Company sold to Jefferies Group, Inc. ("Jefferies")
10,000,000 of the Company's common shares, and received 26,585,310 shares
of common stock of Jefferies and $100,021,000 in cash. The Jefferies common
shares were valued based on the closing price of the Jefferies common stock
on April 18, 2008, the last trading date prior to the acquisition
($398,248,000 in the aggregate). Including shares acquired in open market
purchases during 2008, as of September 30, 2008 the Company owns an
aggregate of 48,585,385 Jefferies common shares (approximately 30% of the
Jefferies outstanding common shares) for a total investment of
$794,400,000. At September 30, 2008, the Company's investment in Jefferies
is carried at fair value of $1,088,300,000, with unrealized gains of
$271,100,000 and $293,900,000 for the three and nine month 2008 periods,
respectively, included in income related to associated companies in the
consolidated statement of operations. Jefferies, a company listed on the
NYSE (Symbol: JEF), is a full-service global investment bank and
institutional securities firm serving companies and their investors.
14
The Jefferies shares acquired, together with the Company's representation
on the Jefferies board of directors, enables the Company to qualify to use
the equity method of accounting for this investment. The Company's
investment in Jefferies is one of two eligible items for which the fair
value option identified in SFAS 159 was elected, commencing on the date the
investment became subject to the equity method of accounting. The Company's
rationale for electing the fair value option for Jefferies is the same as
its rationale for its investment in ACF discussed above.
Subsequent to September 30, 2008, the aggregate market value of the
Company's investment in Jefferies declined to $773,500,000 at November 3,
2008. If the aggregate market value of the Company's investment in
Jefferies remains unchanged at December 31, 2008, this decline in market
value would result in the recognition of an unrealized loss during the
fourth quarter of $314,800,000. Further declines in market values are also
possible, which would result in the recognition of additional unrealized
losses in the consolidated statements of operations.
In addition, the Company entered into a standstill agreement, pursuant to
which for the two year period ending April 21, 2010, the Company agreed,
subject to certain provisions, to limit its investment in Jefferies to not
more than 30% of the outstanding Jefferies common shares and to not sell
its investment, and received the right to nominate two directors to the
board of directors of Jefferies. Jefferies also agreed to enter into a
registration rights agreement covering all of the Jefferies shares of
common stock owned by the Company.
The relative significance of Jefferies to the Company could result in the
Company including separate audited financial statements for Jefferies in
its Annual Report on Form 10-K for the year ended December 31, 2008. The
following table provides summarized data with respect to Jefferies for the
nine months ended September 30, 2008 (in thousands):
Total revenues $1,433,800
Loss from continuing operations before extraordinary items (96,200)
Net loss (96,200)
The Company's investment in HomeFed Corporation ("HomeFed") is the only
other investment in an associated company that is also a publicly traded
company but for which the Company did not elect the fair value option.
HomeFed's common stock is not listed on any stock exchange, and price
information for the common stock is not regularly quoted on any automated
quotation system. It is traded in the over-the-counter market with high and
low bid prices published by the National Association of Securities Dealers
OTC Bulletin Board Service; however, trading volume is minimal. For these
reasons the Company did not elect the fair value option for HomeFed.
17. Aggregate information concerning assets and liabilities at September 30,
2008 that are measured at fair value on a recurring basis is presented
below (dollars in thousands):
Fair Value Measurements Using (e)
---------------------------------
Quoted Prices in
Active Markets for
Identical Assets or Significant Other
Total Fair Value Liabilities Observable Inputs
Measurements (Level 1) (Level 2)
------------ ------------------ -----------------
Investments classified as current assets:
Investments available for sale $ 295,600 $ 291,700 $ 3,900
Trading securities (a) 34,900 -- 34,900
------------ ------------ ----------
330,500 291,700 38,800
------------ ------------ ----------
Non-current investments:
Investments available for sale 1,912,000 1,547,800 364,200
------------ ------------ ----------
Investments in associated companies (b) 1,419,700 1,419,700 --
------------ ------------ ----------
Total $ 3,662,200 $ 3,259,200 $ 403,000
============ ============ ==========
Other current liabilities (c) $ 2,100 $ 300 $ 1,800
Other non-current liabilities (d) 7,700 -- 7,700
------------ ------------ ----------
Total $ 9,800 $ 300 $ 9,500
============ ============ ==========
15
(a) During the three and nine month 2008 periods, changes in fair value of
$(4,600,000) and $10,600,000, respectively, are reflected in net
securities gains (losses) in the consolidated statements of
operations.
(b) During the three and nine month 2008 periods, changes in fair value of
$322,700,000 and $220,000,000, respectively, are reflected in income
related to associated companies in the consolidated statements of
operations. This is the aggregate change in the fair value of ACF and
Jefferies, the only eligible items identified in SFAS 159 for which
the Company has elected the fair value option.
(c) During the three and nine month 2008 periods, changes in fair value of
$300,000 and $700,000, respectively, are reflected in net securities
gains (losses) in the consolidated statements of operations.
(d) Comprised of currency swap and interest rate swap derivative financial
instruments. During the three and nine month periods ended September
30, 2008, changes in fair value of $(200,000) and $(600,000),
respectively, are reflected in investment and other income in the
consolidated statements of operations.
(e) At September 30, 2008, the Company did not have material fair value
measurements using unobservable inputs (Level 3).
18. In April 2008, the Lake Charles Harbor & Terminal District of Lake Charles,
Louisiana sold $1,000,000,000 in tax exempt bonds which will support the
development of a $1,600,000,000 petroleum coke gasification plant project
currently being developed by the Company's wholly-owned subsidiary, Lake
Charles Cogeneration LLC ("LCC"). The Lake Charles Cogeneration project is
a new chemical manufacturing project planning to use quench gasification
technology to produce energy products from low grade solid fuel sources
such as petroleum coke. The primary product to be produced by the Lake
Charles Cogeneration project will be substitute natural gas.
LCC does not currently have access to the bond proceeds, which are
currently being held in an escrow account by the bond trustee, and it will
not have access to the bond proceeds until certain conditions are
satisfied. The Company is not obligated to make equity contributions to LCC
to fund a portion of the project's costs until it completes its
investigation and the project is approved by the Company's board of
directors. Upon the completion of pending permitting, regulatory approval,
design engineering and the satisfaction of certain other conditions of the
financing agreements, the bonds will be remarketed for a longer term and
the proceeds will be released to LCC to use for the payment of development
and construction costs for the project. Once all conditions have been met
and LCC begins to draw down on the bond proceeds, any amounts drawn will be
recorded as long-term indebtedness of LCC.
19. In September 2008, the Company invested an additional $20,000,000 in
Sangart, Inc. ("Sangart") upon its exercise of certain existing warrants,
which increased its ownership interest to approximately 89%. The Company
expects to invest up to an additional $28,500,000 in late 2008 or early
2009 upon the exercise of its remaining warrants. When the Company
increases its investment in Sangart, the additional investment is accounted
for under the purchase method of accounting. Under the purchase method, the
price paid 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 was initially allocated to research and
development. However, since under current 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. The Company expensed acquired research and
development of $2,100,000 for the three and nine month 2008 periods and
$4,100,000 for the nine month 2007 period, which are included in the
caption selling, general and other expenses in the consolidated statements
of operations.
20. On October 22, 2008, options to purchase an aggregate of 867,500 shares of
common stock were granted to employees under the Company's stock option
plan at an exercise price of $27.88 per share, the then current market
price per share.
16
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 2007
10-K.
Liquidity and Capital Resources
General
The Company's investment portfolio, shareholders' equity and results of
operations can be significantly impacted by the changes in market values of
certain securities, particularly during times of increased volatility in
security prices. During the third quarter of 2008, there were significant
changes in the market prices of the Company's largest publicly traded equity
security investments, and the volatility in the market prices for these
investments has continued subsequent to September 30, 2008. The Company's
investment in FMG, which had an aggregate market value of $1,824,700,000 at
December 31, 2007 and $3,171,100,000 at June 30, 2008, declined to
$1,026,500,000 at September 30, 2008 and declined further to $560,300,000 at
November 3, 2008. The decline in FMG's aggregate market value during 2008 has a
significant impact on the Company's reported shareholders' equity and
non-current investment portfolio.
As more fully discussed above, SFAS 159 permits the Company to measure many
financial instruments and certain other items at fair value, with unrealized
gains and losses reported in the consolidated statements of operations. The
Company has only elected the fair value option for two eligible items during the
first nine months of 2008, the investments in Jefferies and ACF, and the
volatility in the market price of those investments, combined with the size of
the Company's ownership interest, has significantly increased the volatility of
the Company's earnings. The Company may also experience significant volatility
in future periods from its investments in Jefferies and ACF and/or from new
items for which the fair value option may be elected. During the three and nine
month periods ended September 30, 2008, the Company recognized unrealized gains
(losses) of $51,600,000 and $(73,900,000), respectively, related to its
investment in ACF, and unrealized gains of $271,100,000 and $293,900,000,
respectively, related to its investment in Jefferies.
Subsequent to September 30, 2008, the market prices of the Company's investments
in Jefferies and ACF have significantly declined. At November 3, 2008, the
aggregate market value of the Company's investment in Jefferies declined to
$773,500,000 and the aggregate market value of the Company's investment in ACF
declined to $206,100,000. If the aggregate market values of these investments
remains unchanged at December 31, 2008, these declines in market value would
result in the recognition of an aggregate unrealized loss during the fourth
quarter of $440,100,000. Further declines in market values are also possible,
which would result in the recognition of additional unrealized losses in the
consolidated statements of operations.
Parent Company Liquidity
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 convertible into cash within a short period of time. As of September
30, 2008, the sum of these amounts aggregated $2,606,600,000. However, since
$744,500,000 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 $1,862,100,000 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 $1,026,500,000 investment in Fortescue
common shares). 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.
17
From time to time in the past, the Company has accessed public and private
credit markets and raised capital in underwritten bond financings. The funds
raised have been used by the Company for general corporate purposes, including
for its existing businesses and new investment opportunities. However, given the
current ongoing turmoil in the credit markets, if the Company were to try to
raise funds through an underwritten bond offering it would be at a higher
interest rate than in the past, or with terms that the Company may not find
acceptable. The Company has no current intention to seek additional financing,
and will rely on its existing liquidity to fund corporate overhead expenses,
corporate interest payments and for investing opportunities. The Parent's senior
debt obligations are rated two levels below investment grade by Moody's
Investors Services and one level below investment grade by Standard & Poor's and
Fitch Ratings. Ratings issued by bond rating agencies are subject to change at
any time.
As of September 30, 2008, the Company had acquired approximately 28% of the
outstanding voting securities of ACF, a company listed on the NYSE, for
aggregate cash consideration of $405,300,000 ($70,100,000 was invested as of
December 31, 2007). ACF is an independent auto finance company that is in the
business of purchasing and servicing automobile sales finance contracts,
predominantly to consumers who are typically unable to obtain financing from
other sources. ACF has historically funded its auto lending activities through
the transfer of loans in securitization transactions. The Company has entered
into a standstill agreement with ACF for the two year period ending March 3,
2010, pursuant to which the Company has agreed not to sell its shares if the
buyer would own more than 4.9% of the outstanding shares, unless the buyer
agreed to be bound by terms of the standstill agreement, to not increase its
ownership interest to more than 30% of the outstanding ACF common shares, and
received the right to nominate two directors to the board of directors of ACF.
ACF also entered into a registration rights agreement covering all of the common
shares owned by the Company. At September 30, 2008, the Company's investment in
ACF is carried at fair value of $331,400,000; the investment in ACF is one of
two eligible items for which the Company elected the fair value option described
in SFAS 159.
In March 2008, the Company increased its equity investment in the common shares
of IFIS, a private company that primarily invests in operating businesses in
Argentina, from approximately 3% to 26% for an additional cash investment of
$83,900,000. At September 30, 2008, the Company's aggregate investment in IFIS
was classified as an investment in an associated company and is accounted for
under the equity method of accounting. IFIS owns a variety of investments, and
its largest investment is approximately 32% of the outstanding common shares of
Cresud, an Argentine agricultural company involved in a range of activities
including crop production, cattle raising and milk production. Cresud's common
shares trade on the Buenos Aires Stock Exchange (Symbol: CRES); in the U.S.,
Cresud trades as American Depository Shares or ADSs (each of which represents
ten common shares) on the NASDAQ Global Select Market (Symbol: CRESY). Cresud is
also indirectly engaged in the Argentine real estate business through its
approximate 42% interest in IRSA, a company engaged in a variety of real estate
activities in Argentina including ownership of residential properties, office
buildings, shopping centers and luxury hotels. IRSA's common shares also trade
on the Buenos Aires Stock Exchange (Symbol: IRSA); in the U.S., IRSA trades as
ADSs on the NYSE (Symbol: IRS).
The Company also acquired a direct equity interest in Cresud for an aggregate
cash investment of $54,300,000. The Company owns 3,364,174 Cresud ADSs,
representing approximately 6.7% of Cresud's outstanding common shares, and
currently exercisable warrants to purchase 11,213,914 Cresud common shares (or
1,121,391 Cresud ADSs) at an exercise price of $1.68 per share. The Company's
direct investment in Cresud is classified as a non-current available for sale
investment and carried at fair value.
As a result of significant declines in quoted market prices for Cresud and other
investments of IFIS, combined with declines in worldwide food commodity prices,
the global mortgage and real estate crisis and political and financial
conditions in Argentina, the Company has determined that its investments in IFIS
and Cresud ADSs were impaired at September 30, 2008. As of September 30, 2008,
the fair value of the Company's investment in IFIS was determined to be
$41,800,000, resulting in an impairment charge of $36,100,000 for the three and
nine month periods ended September 30, 2008. This charge is in addition to the
Company's share of IFIS's operating losses, which were $8,100,000 and $8,400,000
for the three and nine month periods ended September 30, 2008, respectively. As
of September 30, 2008, the fair value of the Company's investment in Cresud ADSs
was determined to be $35,300,000, resulting in an impairment charge of
$14,300,000 for the three and nine month periods ended September 30, 2008.
18
The fair values of IFIS and Cresud's securities were determined using quoted
market prices at September 30, 2008, as required under GAAP. Subsequent to
September 30, 2008, these quoted market prices have continued to decline, and if
these prices remain the same at December 31, 2008 the Company may record
additional impairments during the fourth quarter. If the Company had used quoted
market prices on November 3, 2008 to calculate the impairment charges as of
September 30, 2008 (which is not permitted under GAAP), an additional charge of
approximately $44,200,000 would have been recorded.
In April 2008, the Company sold to Jefferies 10,000,000 of the Company's common
shares, and received 26,585,310 shares of common stock of Jefferies and
$100,021,000 in cash. The Jefferies common shares were valued based on the
closing price of the Jefferies common stock on April 18, 2008, the last trading
date prior to the acquisition ($398,248,000 in the aggregate). Including shares
acquired in open market purchases during 2008, as of September 30, 2008 the
Company owns an aggregate of 48,585,385 Jefferies common shares (approximately
30% of the Jefferies outstanding common shares) for a total investment of
$794,400,000. At September 30, 2008, the Company's investment in Jefferies is
carried at fair value of $1,088,300,000. Jefferies, a company listed on the NYSE
(Symbol: JEF), is a full-service global investment bank and institutional
securities firm serving companies and their investors.
In addition, the Company entered into a standstill agreement, pursuant to which
for the two year period ending April 21, 2010, the Company agreed, subject to
certain provisions, to limit its investment in Jefferies to not more than 30% of
the outstanding Jefferies common shares and to not sell its investment, and
received the right to nominate two directors to the board of directors of
Jefferies. Jefferies also agreed to enter into a registration rights agreement
covering all of the Jefferies shares of common stock owned by the Company.
The Jefferies shares acquired, together with the Company's representation on the
Jefferies board of directors, enables the Company to qualify to use the equity
method of accounting for this investment. The Company's investment in Jefferies
is one of two eligible items for which the fair value option identified in SFAS
159 was elected, commencing on the date the investment became subject to the
equity method of accounting.
As more fully described in the 2007 10-K, during 2007 the Company and Jefferies
formed Jefferies High Yield Holdings, LLC ("JHYH"), a newly formed entity, and
the Company and Jefferies each committed to invest $600,000,000. The Company has
invested $350,000,000 in JHYH and was initially committed to an additional
investment of $250,000,000, subject to Jefferies prior request. Any request for
additional capital contributions from the Company will now require the consent
of the Company's designees to the Jefferies board.
As discussed above, in April 2008, the Lake Charles Harbor & Terminal District
of Lake Charles, Louisiana sold $1,000,000,000 in tax exempt bonds which will
support the development of a $1,600,000,000 petroleum coke gasification plant
project currently being developed by the Company's wholly-owned subsidiary, Lake
Charles Cogeneration LLC ("LCC"). LCC does not currently have access to the bond
proceeds, which are currently being held in an escrow account by the bond
trustee, and it will not have access to the bond proceeds until certain
conditions are satisfied. The Company is not obligated to make equity
contributions to LCC to fund a portion of the project's costs until it completes
its investigation and the project is approved by the Company's board of
directors. Upon the completion of pending permitting, regulatory approval,
design engineering and the satisfaction of certain other conditions of the
financing agreements, the bonds will be remarketed for a longer term and the
proceeds will be released to LCC to use for the payment of development and
construction costs for the project. Once all conditions have been met and LCC
begins to draw down on the bond proceeds, any amounts drawn will be recorded as
long-term indebtedness of LCC.
In September 2008, the Company invested an additional $20,000,000 in Sangart
upon its exercise of certain existing warrants, which increased its ownership
interest to approximately 89%. The Company expects to invest up to an additional
$28,500,000 in late 2008 or early 2009 upon the exercise of its remaining
warrants.
19
Consolidated Statements of Cash Flows
Net cash flows used for operations were $39,800,000 in the nine month period
ended September 30, 2008 as compared to $5,100,000 in the nine month period
ended September 30, 2007. The change reflects a use of funds for increased
interest expense payments, increased funds generated from the trading portfolio
and increased distributions of earnings from associated companies. Funds used
for operating activities during 2008 include the results of companies acquired
during 2007, STi Prepaid and ResortQuest, and the results of Premier following
its reconsolidation in the third quarter of 2007. STi Prepaid's
telecommunications operations generated funds from operating activities of
$12,600,000 and $23,200,000 during the 2008 and 2007 periods, respectively, the
Company's property management and services segment used funds of $4,600,000 and
$1,900,000 during the 2008 and 2007 periods, respectively, Premier generated
funds of $10,400,000 in 2008 and used funds of $11,400,000 in 2007 and the
Company's manufacturing segments generated funds of $23,000,000 and $15,300,000
in the 2008 and 2007 periods, respectively. The net change in restricted cash
principally results from the receipt of rental deposits at ResortQuest. Funds
used by Sangart, a development stage company, increased to $25,500,000 during
the 2008 period from $16,600,000 during the 2007 period. In 2008, distributions
from associated companies principally include earnings distributed by Shortplus
($50,000,000), JHYH ($4,300,000), Jefferies ($5,500,000) and Goober Drilling,
LLC ("Goober Drilling") ($12,800,000). In 2007, distributions from associated
companies principally include earnings distributed by Jefferies Partners
Opportunity Fund II, LLC ("JPOF II") ($29,200,000) and EagleRock Capital
Partners (QP), LP ("EagleRock") ($15,000,000).
Net cash flows used for investing activities were $453,900,000 in the nine month
period ended September 30, 2008 and $816,600,000 in the nine month period ended
September 30, 2007. During 2007, acquisitions, net of cash acquired, principally
include assets acquired by STi Prepaid ($84,900,000) and ResortQuest
($9,700,000) and cash acquired upon the reconsolidation of Premier
($19,900,000). Investments in associated companies include Jefferies
($396,100,000), ACF ($335,200,000), IFIS ($83,900,000) and Cobre Las Cruces,
S.A. ("CLC") ($35,900,000) in 2008 and JHYH ($250,000,000), Pershing Square
($200,000,000), Goober Drilling ($105,000,000), RCG Ambrose, L.P. ("Ambrose")
($75,000,000), Highland Opportunity Fund L.P. ("Highland Opportunity")
($74,000,000), Shortplus ($25,000,000), CLC ($36,700,000) and Premier
($160,500,000) in 2007. Capital distributions from associated companies include
$19,300,000 from Safe Harbor Domestic Partners L.P. ("Safe Harbor"), $27,200,000
from Goober Drilling, $40,000,000 from Highland Opportunity, $65,600,000 from
Ambrose and $12,500,000 from EagleRock in the 2008 period and $25,000,000 from
Safe Harbor in the 2007 period.
Net cash provided by financing activities was $198,900,000 in the nine month
period ended September 30, 2008 and $1,229,600,000 in the nine month period
ended September 30, 2007. 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 $500,000,000 principal amount of the
Company's 8 1/8% Notes (net of issuance expenses); the 2008 and 2007 periods
also reflect increases in repurchase agreements of $35,100,000 and $3,200,000,
respectively. Issuance of common shares for the nine month period ended
September 30, 2008 principally reflects cash consideration received on the sale
to Jefferies of 10,000,000 of the Company's common shares, which is discussed
above. Issuance of common shares for 2007 principally reflects the issuance and
sale of 5,500,000 of the Company's common shares. In addition, issuance of
common shares for 2008 and 2007 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.
20
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. As required under GAAP, the determination of the amount of the valuation
allowance required is based, in significant part, upon the Company's projection
of future taxable income, which the Company is required to periodically reassess
as circumstances warrant.
During the second quarter of 2008, the Company's revised projections of future
taxable income enabled it to conclude that it is more likely than not that it
will have future taxable income sufficient to realize an additional portion of
the Company's net deferred tax asset; accordingly, $222,200,000 of the deferred
tax valuation allowance was reversed as a credit to income tax expense. The
Company's conclusion that this additional portion of the deferred tax asset is
more likely than not to be realized reflects, among other things, the projected
income to be earned from the sale of 10,000,000 common shares of the Company in
April 2008, and is strongly influenced by its historical ability to generate
significant amounts of taxable income and its projections of future taxable
income. In addition, as a result of the increased projected taxable income in
certain state and local taxing jurisdictions, during the second quarter the
Company recognized additional state and local net operating loss carryforward
benefits of $12,500,000 as a reduction to income tax expense. 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, estimates apportionment factors for state and local taxing
jurisdictions and includes all future years that the Company estimated it would
have available net operating loss carryforwards. As more fully discussed above,
the Company has large investments in certain publicly traded companies, all of
which have experienced significant market price volatility subsequent to
September 30, 2008. When evaluating its projection of future taxable income,
declines in market value represent negative evidence the Company considers as it
assesses the carrying amount of the deferred tax valuation allowance. The
Company believes that its estimate of future taxable income is reasonable but
inherently uncertain, and 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 September 30, 2008, the balance of
the deferred tax valuation allowance was approximately $80,000,000, principally
to reserve for net operating losses that are not available to offset income
generated by other members of the Company's consolidated tax return group.
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 nine month periods ended
September 30, 2008 and 2007.
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 (losses) 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, the ability and intent to
hold investments to maturity, 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
$61,300,000 and $400,000 for the three month periods ended September 30, 2008
and 2007, respectively, and $74,900,000 and $900,000 for the nine month periods
ended September 30, 2008 and 2007, respectively.
21
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 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 statements 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.
Use of Fair Value Estimates - Substantially all of the Company's investment
portfolio is classified as either available for sale or as trading securities,
both of which are carried at estimated fair value in the Company's consolidated
balance sheet. The Company's investments in Jefferies and ACF are also carried
at fair value and are classified as investments in associated companies. The
estimated fair values are principally based on publicly quoted market prices,
which can rise or fall in reaction to a wide variety of factors or events, and
as such are subject to market-related risks and uncertainties. The Company also
invests in limited partnerships or limited liability companies which are
accounted for under the equity method of accounting. These investees hold
investments in publicly and non-publicly traded securities, and as such are also
subject to market-related risks and uncertainties and the risks inherent in
estimating the fair values of such securities. Since changes in the fair value
of all of these investments are recognized in the Company's consolidated balance
sheet, and with respect to trading securities, securities owned by certain
equity method investees and the Company's investments in Jefferies and ACF, also
in the Company's consolidated statements of operations, the Company is exposed
to volatility in securities markets.
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 September 30, 2008, the Company's accrual for
contingent losses was not material.
Results of Operations
The 2008 Periods Compared to the 2007 Periods
General
Substantially all of the Company's operating businesses sell products or
services that are impacted by general economic conditions in the U.S. and to a
lesser extent internationally. Poor general economic conditions can reduce the
demand for products or services sold by the Company's operating subsidiaries
and/or result in reduced pricing for products or services. Troubled industry
sectors, like the residential real estate market, can have an adverse direct
impact not only on the Company's real estate and property management and
services segments, but also can have an adverse indirect impact on some of the
Company's other operating segments, including manufacturing and gaming
entertainment. The discussions below and in the 2007 10-K concerning revenue and
profitability by segment consider current economic conditions and the impact
such conditions have on each segment; however, should general economic
conditions worsen and/or if the country experiences a prolonged recession, the
Company believes that all of its businesses would be adversely impacted.
22
The Company does not have any operating businesses that are participants in the
sub-prime real estate lending sector, though a tightening in consumer lending
standards has and will have a direct or indirect negative impact on certain of
the Company's operations. The Company's investment portfolio includes
mortgage-backed securities of $362,400,000 at September 30, 2008; however, all
of these securities are issued by United States Government agencies or U.S.
Government-Sponsored Enterprises. The Company has also invested in certain
investment partnerships that invest in securities whose values are directly
affected by the sub-prime lending crisis. The Company's exposure to changes in
their values is limited to the net book value of its investment in such
partnerships. At September 30, 2008, the aggregate book value of the Company's
investments in such partnerships was approximately $89,200,000.
Manufacturing - Idaho Timber
Revenues and other income for Idaho Timber were $63,300,000 and $75,300,000 for
the three months ended September 30, 2008 and 2007, respectively, and were
$191,100,000 and $230,900,000 for the nine months ended September 30, 2008 and
2007, respectively. Gross profit was $4,600,000 and $5,100,000 for the three
months ended September 30, 2008 and 2007, respectively, and $14,800,000 and
$23,100,000 for the nine months ended September 30, 2008 and 2007, respectively.
Salaries and incentive compensation expenses were $1,800,000 for each of the
three month periods ended September 30, 2008 and 2007, and $5,400,000 and
$6,400,000 for the nine months ended September 30, 2008 and 2007, respectively.
Depreciation and amortization expenses were $1,100,000 for each of the three
month periods ended September 30, 2008 and 2007, and $3,300,000 and $3,500,000
for the nine months ended September 30, 2008 and 2007, respectively. Pre-tax
income was $1,000,000 and $2,000,000 for the three months ended September 30,
2008 and 2007, respectively, and $3,500,000 and $10,800,000 for the nine months
ended September 30, 2008 and 2007, respectively.
Idaho Timber's revenues for the three and nine months ended September 30, 2008
continued to reflect the weak demand resulting from reductions in housing starts
and the abundant supply of high-grade lumber in the marketplace. Shipment volume
in the third quarter of 2008 was less than in the prior quarters of 2008.
Shipment volume in the three and nine month 2008 periods also declined
approximately 23% and 16%, respectively, as compared to the same periods in
2007; average selling prices did not significantly change in the 2008 periods as
compared to the 2007 periods. Idaho Timber expects that the abundance of
existing homes available for sale in the market will continue to negatively
impact housing starts and Idaho Timber's revenues during 2008 and 2009. Until
housing starts begin to increase, annual dimension lumber shipping volume may
remain flat or could decline further. Raw material cost per thousand board feet
did not significantly change in the 2008 periods as compared to the 2007
periods. 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 not necessarily the same. Spreads, which had
improved in the second quarter of 2008 as compared to the first quarter of 2008
(largely due to seasonality), declined in the third quarter of 2008 but remained
higher than for the first quarter.
One of Idaho Timber's largest home center board customers discontinued
purchasing pine boards through its vendor managed inventory program effective
July 1, 2008. Revenues from this customer pursuant to this program were
$8,000,000 for the six months ended June 30, 2008. Idaho Timber intends to
replace this lost business with new customers and/or may utilize its excess
production capacity for other products.
23
Manufacturing - Conwed Plastics
Pre-tax income for Conwed Plastics was $3,900,000 and $4,700,000 for the three
months ended September 30, 2008 and 2007, respectively, and $12,200,000 and
$13,400,000 for the nine month periods ended September 30, 2008 and 2007,
respectively. Its manufacturing revenues and other income were $28,000,000 and
$28,100,000 for the three month periods ended September 30, 2008 and 2007,
respectively, and $83,800,000 and $79,600,000 for the nine month periods ended
September 30, 2008 and 2007, respectively. Gross profits were $7,900,000 and
$8,400,000 for the three month periods ended September 30, 2008 and 2007,
respectively, and $24,700,000 and $23,800,000 for the nine month periods ended
September 30, 2008 and 2007, respectively. Revenues in the 2008 periods as
compared to the prior year primarily reflect increased revenues in the packaging
and filtration markets, largely due to acquisitions made in 2007, and for the
nine month 2008 period, increased revenues in European markets due to an
acquisition in 2007, new customers and the impact of foreign exchange. However,
Conwed Plastics' business continues to be adversely impacted in those markets
related to the housing industry. In addition, revenues from the erosion control
market declined in 2008 as some business was lost to competitors.
Raw material costs increased approximately 48% and 34%, respectively, in the
three and nine month periods ended September 30, 2008 as compared to the same
periods in 2007. The primary raw material in Conwed Plastics' products is a
polypropylene resin, which is a byproduct of the oil refining process, whose
price tends to fluctuate with the price of oil. Although raw material cost
increases and product mix had a negative affect on gross profits, gross profits
were modestly lower in the three month period and slightly greater in the nine
month period as compared to the same periods in 2007, primarily due to higher
selling prices, and for the nine month period, increased sales volume. Pre-tax
results for the three and nine month 2008 periods also reflect $300,000 and
$1,500,000, respectively, of higher salaries and incentive compensation expense
as compared to the 2007 periods principally due to an increase in estimated
incentive bonus expense, and for the nine month period, greater headcount
related to acquisitions.
Telecommunications
The telecommunications business of STi Prepaid has been consolidated by the
Company since March 2007. STi Prepaid's telecommunications revenues and other
income were $106,800,000 and $112,800,000 for the three months ended September
30, 2008 and 2007, respectively, and $335,500,000 and $257,100,000 for the nine
months ended September 30, 2008 and for the period from the asset acquisition
through September 30, 2007, respectively. Telecommunications cost of sales were
$91,400,000 and $96,700,000 for the three months ended September 30, 2008 and
2007, respectively, and $291,400,000 and $218,600,000 for the nine months ended
September 30, 2008 and for the period from the asset acquisition through
September 30, 2007, respectively. Salaries and incentive compensation expenses
were $2,900,000 and $2,200,000 for the three months ended September 30, 2008 and
2007, respectively, and $7,500,000 and $5,000,000 for the nine months ended
September 30, 2008 and for the period from the asset acquisition through
September 30, 2007, respectively. Selling, general and other expenses were
$7,800,000 and $7,500,000 for the three months ended September 30, 2008 and
2007, respectively, and $24,300,000 and $17,600,000 for the nine months ended
September 30, 2008 and for the period from the asset acquisition through
September 30, 2007, respectively. Pre-tax income was $4,300,000 and $6,200,000
for the three months ended September 30, 2008 and 2007, respectively, and
$11,400,000 and $15,600,000 for the nine months ended September 30, 2008 and for
the period from the asset acquisition through September 30, 2007, respectively.
Telecommunications revenues for the third quarter of 2008 declined 5% as
compared to the third quarter of 2007 principally due to reduced sales of
certain unprofitable prepaid calling cards and less sales of handsets. These
declines were partially offset by increased carrier wholesale service revenues.
Telecommunications revenues for the third quarter of 2008 declined slightly as
compared to the second quarter of 2008 and were approximately 11% lower than for
the first quarter of 2008. The decline with respect to the first quarter of 2008
reflects reduced sales of certain unprofitable prepaid calling cards and reduced
carrier wholesale service revenues principally due to the loss of a large
customer in the second quarter. Gross profit for the third quarter of 2008 was
largely unchanged as compared to the third quarter of 2007 and the second
quarter of 2008. Gross profit for the third quarter of 2008 increased as
compared to the first quarter of 2008 principally due to the reduction in
certain unprofitable prepaid calling card business, discussed above, and fewer
launches of new prepaid calling cards with low introductory rates, tempered by
greater handset losses.
24
Property Management and Services
The property management and services operations of ResortQuest have been
consolidated by the Company since June 2007. Property management and services
revenues and other income were $44,600,000 and $40,700,000 for the three month
periods ended September 30, 2008 and 2007, respectively, and $123,200,000 and
$59,100,000 for the nine months ended September 30, 2008 and for the period from
acquisition through September 30, 2007, respectively. Direct operating expenses
were $34,200,000 and $28,800,000 for the three month periods ended September 30,
2008 and 2007, respectively, and $92,100,000 and $40,700,000 for the nine months
ended September 30, 2008 and for the period from acquisition through September
30, 2007, respectively. Salaries and incentive compensation expenses were
$1,400,000 and $1,100,000 for the three month periods ended September 30, 2008
and 2007, respectively, and $4,100,000 and $2,400,000 for the nine months ended
September 30, 2008 and for the period from acquisition through September 30,
2007, respectively. Depreciation and amortization expenses were $1,400,000 for
each of the three month periods ended September 30, 2008 and 2007, and
$4,100,000 and $1,900,000 for the nine months ended September 30, 2008 and for
the period from acquisition through September 30, 2007, respectively. Selling,
general and other expenses were $3,500,000 and $5,400,000 for the three month
periods ended September 30, 2008 and 2007, respectively, and $13,800,000 and
$8,700,000 for the nine months ended September 30, 2008 and for the period from
acquisition through September 30, 2007, respectively. Pre-tax income was
$4,100,000 and $3,900,000 for the three month periods ended September 30, 2008
and 2007, respectively, and $9,000,000 and $5,400,000 for the nine months ended
September 30, 2008 and for the period from acquisition through September 30,
2007, respectively.
ResortQuest's business is seasonal; typically profits are the highest for the
third quarter as the beach and golf locations reach their peak in the summer
months. ResortQuest's occupancy percentages for the three and nine month 2008
periods did not significantly change from those for the comparable 2007 periods
(inclusive of the pre-acquisition period). However, its average daily rates
("ADR") for the three and nine month 2008 periods, particularly those for the
third quarter, declined compared to those for the same periods in 2007. ADR
declined approximately 13% in the third quarter of 2008 as compared to the same
period in 2007, primarily due to discounts given in certain beach locations,
including Northwest Florida (its largest market), resulting from increased
available properties and competition. In addition, ResortQuest rental management
properties in a golf location increased, which typically have a lower ADR than
beach locations. The Company has begun to see a decline compared to the same
period last year in advance reservations for the upcoming winter season. In the
three and nine month 2008 periods, ResortQuest recorded net real estate
brokerage revenues of $1,200,000 and $7,800,000, respectively, principally upon
the completion of certain large development projects. As more fully discussed in
the 2007 10-K, the real estate brokerage business has been and will continue to
be negatively impacted by the depressed real estate market.
Gaming Entertainment
As more fully discussed in the 2007 10-K, Premier was accounted for as a
consolidated subsidiary when acquired during 2006; however, while in bankruptcy
proceedings from September 19, 2006 to emergence on August 10, 2007, Premier was
accounted for under the equity method of accounting. Premier's casino and hotel
operations opened to the public on June 30, 2007; prior to opening, Premier's
activities principally consisted of rebuilding and repairing the hotel and
casino facilities that were severely damaged by Hurricane Katrina, and its
bankruptcy proceedings.
For the three and nine month periods ended September 30, 2008, Premier's
revenues and other income were $26,300,000 and $94,700,000, respectively, and
pre-tax income (loss) was $(4,300,000) and $4,500,000, respectively. Revenues
and other income for the nine month 2008 period include a $7,300,000 gain from
the settlement and collection of Premier's remaining insurance claim relating to
Hurricane Katrina and for the three and nine month 2008 periods, $800,000 and
$5,600,000, respectively, resulting from capital contributions from the minority
interest. In prior periods, the Company recorded 100% of the losses after
cumulative loss allocations to the minority interest had reduced the minority
interest liability to zero. Since the minority interest liability remains at
zero after considering the capital contributions, the entire capital
contribution was recorded as income, effectively reimbursing the Company for a
portion of the minority interest losses that were not previously allocated to
the minority interest. Premier's results for the three and nine month periods
ended September 30, 2008 also include direct operating expenses of $23,700,000
and $72,200,000, respectively, interest expense of $200,000 and $700,000,
respectively, salaries and incentive compensation expenses of $600,000 and
$1,900,000, respectively, depreciation and amortization expenses of $4,400,000
and $12,800,000, respectively, and selling, general and other expenses of
$1,700,000 and $2,500,000, respectively. Selling, general and other expenses for
the 2008 periods include $900,000 of charges relating to Hurricane Gustav,
primarily to write off damaged assets, for which there will not be any insurance
recovery. For the period from emergence from bankruptcy (August 10, 2007)
through September 30, 2007, Premier's revenues and other income were $14,600,000
and its pre-tax losses were $2,300,000. Premier's results for the 2007 periods
include direct operating expenses of $13,400,000, salaries and incentive
compensation expenses of $900,000, depreciation and amortization expenses of
$1,800,000, and selling, general and other expenses of $600,000.
25
Revenues for the third quarter of 2008 declined compared to the prior quarters
of 2008 but were higher than those for the fourth quarter of 2007. During the
third quarter, multiple hurricanes threatened the Mississippi Gulf Coast, one of
which caused Premier's closure over the Labor Day weekend, resulting in lost
business. Gaming revenues in the third quarter of 2008 were also negatively
impacted by greater winnings on amounts wagered by patrons on table games and
slots as compared to earlier periods. In addition, as part of its marketing
strategy to increase casino revenues, Premier offered more of its hotel rooms
for free to its customers, which resulted in a decrease in its hotel rooms
available for sale.
The Company's share of Premier's net loss under the equity method of accounting
was $2,900,000 for the period from July 1, 2007 through the date of emergence
and $22,300,000 for the period from January 1, 2007 to the date of emergence.
Domestic Real Estate
Pre-tax losses for the domestic real estate segment were $5,700,000 and
$5,000,000 for the three months ended September 30, 2008 and 2007, respectively,
and $11,300,000 and $2,900,000 for the nine months ended September 30, 2008 and
2007, respectively. Real estate revenues and other income for the nine month
2008 period include $400,000 of charges related to the accounting for the
mark-to-market value of an interest rate derivative relating to the Myrtle Beach
project's debt obligation; the amount for the three month 2008 period was not
material. Pre-tax results for the 2007 periods include $1,600,000 of incentive
compensation accruals related to the Myrtle Beach project.
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 $8,200,000 and
$7,000,000 for the three month periods ended September 30, 2008 and 2007,
respectively, and $24,200,000 and $22,400,000 for the nine month periods ended
September 30, 2008 and 2007, respectively. Sangart's losses for 2008 and 2007
reflect research and development costs (which are included in selling, general
and other expenses in the consolidated statements of operations) of $3,500,000
and $4,700,000 for the three month periods ended September 30, 2008 and 2007,
respectively, and $13,000,000 and $15,500,000 for the nine month periods ended
September 30, 2008 and 2007, respectively, and salaries and incentive
compensation expenses of $3,500,000 and $2,300,000 for the three month periods
ended September 30, 2008 and 2007, respectively, and $8,900,000 and $6,400,000
for the nine month periods ended September 30, 2008 and 2007, respectively. When
the Company increased its investment in Sangart in September 2008 and March
2007, the additional investments were accounted for under the purchase method of
accounting. Under the purchase method, the price paid 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 was initially
allocated to research and development. However, since under current 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. The Company expensed acquired research and development
of $2,100,000 for the three and nine month 2008 periods and $4,100,000 for the
nine month 2007 period, which are included in the caption selling, general and
other expenses in the consolidated statements of operations. The increase in
salaries and incentive compensation in the 2008 periods as compared to the same
periods in 2007 was principally due to increased headcount in connection with
the Phase III trials and development efforts, greater share-based compensation
expense, and for the three month 2008 period, compensation costs for a newly
hired officer.
Sangart is a development stage company that does not have any revenues from
product sales. Sangart's lead medical product candidate, Hemospan(R), may not be
marketed or sold without prior approval by applicable regulators. Earlier this
year Sangart completed patient enrollment in two Phase III clinical trials of
Hemospan in Europe. Data from those studies is currently being analyzed but
preliminary findings indicate that the safety and efficacy targets which those
trials were designed to demonstrate have been substantially met. Additional
analysis is required to determine whether the data received thus far is
sufficient to support regulatory approval or whether one or more additional
human clinical trials will be needed. Any additional human clinical trials could
be both expensive and time consuming. Until such time, if ever, that Sangart
obtains regulatory approval for Hemospan, the Company will report losses from
this segment. The Company expects to invest up to an additional $28,500,000 in
late 2008 or early 2009 upon its exercise of existing warrants. The Company is
unable to predict with certainty when, if ever, it will report operating profits
for this segment.
26
Corporate and Other Operations
Investment and other income increased by $10,900,000 in the three month period
ended September 30, 2008 as compared to the same period in 2007 and declined by
$12,000,000 in the nine month 2008 period as compared to the same period in
2007. Investment income declined $9,000,000 and $30,000,000 in the three and
nine month 2008 periods, respectively, principally due to lower interest rates
on a reduced amount of fixed income securities. Investment and other income for
the nine month 2007 period includes the receipt of escrowed proceeds from the
sale of an associated company in 2006 of $11,400,000 that had not been
previously recognized, and $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.
Investment and other income for the three and nine month 2008 periods include
$20,000,000 and $24,900,000, respectively, of income related to Fortescue's
Pilbara iron ore and infrastructure project in Western Australia. As more fully
discussed in the 2007 10-K, the Company is entitled to receive 4% of the
revenue, net of government royalties, invoiced from certain areas of Fortescue's
project, which commenced production in May 2008. Amounts are payable
semi-annually within thirty days of June 30th and December 31st of each year
subject to restricted payment provisions of Fortescue's debt agreements;
payments are currently being deferred pursuant to those agreements. Depreciation
and amortization expenses include prepaid mining interest amortization of
$1,300,000 and $1,600,000, respectively, for the three and nine month 2008
periods, which is being amortized over time in proportion to the amount of ore
produced. In addition, other income reflects an increase in the nine month 2008
period as compared to the 2007 period in income from purchased delinquent credit
card receivables of $7,700,000 (the change for the three month period was not
significant), and greater winery revenues of $1,700,000 and $2,100,000 for the
three and nine month 2008 periods, respectively, as compared to the 2007
periods. Other income for the three month 2008 period also reflects a decrease
in foreign exchange gains of $2,300,000 as compared to the 2007 period (the
change for the nine month 2008 period was not significant). Investment and other
income includes charges of $200,000 and $700,000 for the three month periods
ended September 30, 2008 and 2007, respectively, and $300,000 and $200,000 for
the nine month periods ended September 30, 2008 and 2007, respectively, related
to the accounting for mark-to-market values of Corporate derivatives.
Net securities gains (losses) for Corporate and Other Operations aggregated
$(65,500,000) and $23,600,000 for the three month periods ended September 30,
2008 and 2007, respectively, and $(38,200,000) and $89,800,000 for the nine
month periods ended September 30, 2008 and 2007, respectively. The Company's net
securities gains largely reflect realized gains from the sale of publicly traded
debt and equity securities that had been classified as Corporate available for
sale securities and unrealized gains on trading securities. Net securities gains
(losses) include provisions of $61,300,000 and $400,000 for the three month
periods ended September 30, 2008 and 2007, respectively, and $74,900,000 and
$900,000 for the nine month periods ended September 30, 2008 and 2007,
respectively, to write down the Company's investments in certain available for
sale securities. The impaired securities include the Company's investment in
Cresud, various equity securities that are publicly traded in Hong Kong and a
number of other debt and equity securities some of which are not publicly
traded. The impairment charges result from declines in fair values of securities
believed to be other than temporary, principally for securities classified as
available for sale securities.
The increase in interest expense during the three and nine month 2008 periods as
compared to the same periods in 2007 primarily reflects interest expense
relating to the 8 1/8% Senior Notes issued in September 2007 and for the nine
month 2008 period reflects interest relating to the 7 1/8% Senior Notes issued
in March 2007. Interest expense for the 2008 periods also reflects decreased
interest expense related to the fixed rate repurchase agreements.
27
Salaries and incentive compensation expense declined in the three and nine month
periods ended September 30, 2008 as compared to the same periods in 2007.
Salaries and incentive compensation expense included $2,500,000 for each of the
three month periods ended September 30, 2008 and 2007, and $7,500,000 and
$8,500,000 for the nine month periods ended September 30, 2008 and 2007,
respectively, relating to grants made under the Company's senior executive
warrant plan and fixed stock option plan. Share-based compensation expense in
the nine month 2007 period included the accelerated vesting of stock options of
an officer of the Company who resigned.
The increase in selling, general and other expenses of $5,700,000 and
$13,500,000 in the three and nine month 2008 periods as compared to the same
periods in 2007 primarily reflects greater expenses (largely professional fees
and other costs) related to the investigation and evaluation of energy projects,
and for the nine month 2008 period, severance expense. Expenses related to the
investigation and evaluation of energy projects were $8,600,000 and $3,500,000
for the three month 2008 and 2007 periods, respectively, and $21,800,000 and
$9,500,000 for the nine month 2008 and 2007 periods, respectively. Selling,
general and other expenses for the nine month 2008 period also include a loss of
$2,300,000 from asset disposals. Selling, general and other expenses for the
nine month 2007 period include a charge of $7,500,000 for the settlement of
litigation related to MK Resources Company, and greater legal fees, including
those incurred in connection with that litigation.
As discussed above, the income tax provision for the nine month 2008 period
reflects a credit of $222,200,000 as a result of the reversal of a portion of
the valuation allowance for the deferred tax asset. The Company adjusted the
valuation allowance since it believes it is more likely than not that it will
have future taxable income sufficient to realize that portion of the net
deferred tax asset. In addition, as a result of the increased projected taxable
income in certain state and local taxing jurisdictions, the Company recognized
additional state and local net operating loss carryforward benefits of
$12,500,000 as a reduction to income tax expense. The nine month 2008 period
also reflects the recognition of previously unrecognized tax benefits of
$4,100,000 as a result of the expiration of the applicable statute of
limitations.
For the three and nine month periods ended September 30, 2007, the Company's
effective income tax rates are higher than the federal statutory rate primarily
due to state income taxes.
Associated Companies
Income (losses) related to associated companies for the three and nine month
periods ended September 30, 2008 and 2007 includes the following (in thousands):
For the Three Month For the Nine Month
Period Ended September 30, Period Ended September 30,
-------------------------- --------------------------
2008 2007 2008 2007
------- ------- -------- ---------
Jefferies $ 271,100 $ -- $ 299,500 $ --
ACF 51,600 -- (73,900) --
EagleRock (2,200) (7,500) (11,700) (2,200)
IFIS (44,200) -- (44,500) --
Premier -- (2,900) -- (22,300)
JPOF II -- -- -- 3,000
JHYH (24,100) (2,600) (36,100) 6,300
HomeFed 400 800 200 1,100
Safe Harbor -- (300) -- 2,900
Wintergreen Partners Fund L.P. (7,600) 7,300 (19,800) 13,500
Highland Opportunity -- (11,800) (17,200) (9,200)
Shortplus 500 32,800 10,700 37,600
Pershing Square 4,100 (8,900) (27,800) (10,400)
RCG Ambrose, L.P. -- 1,100 (1,000) 1,100
Goober Drilling 7,200 1,900 20,700 7,500
CLC (8,400) 3,600 (3,900) 4,500
Other (400) 1,900 (2,000) 11,100
--------- -------- --------- ---------
Income related to associated
companies before income taxes 248,000 15,400 93,200 44,500
Income tax expense (88,300) (6,600) (33,100) (18,200)
--------- -------- --------- ---------
Income related to associated
companies, net of taxes $ 159,700 $ 8,800 $ 60,100 $ 26,300
========= ======== ========= =========
28
As discussed above, the Company elected the fair value option described in SFAS
159 for its investments in Jefferies and ACF, resulting in the recognition of an
unrealized gain or loss for the difference between the market value and the cost
of each investment.
As more fully discussed above, during the periods ended September 30, 2008 the
Company recorded an impairment charge related to its investment in IFIS of
$36,100,000.
Discontinued Operations
WilTel Communications Group, LLC
Gain on disposal of discontinued operations for the nine month 2007 period
includes a pre-tax gain of $500,000 from the resolution of a sale-related
contingency related to WilTel, which was sold in the fourth quarter of 2005.
Other
Gain on disposal of discontinued operations for the three and nine month 2007
periods includes a pre-tax gain of $2,900,000 ($1,700,000 after tax) related to
the collection of fully reserved notes receivable due from the buyer of the
Company's interest in an Argentine shoe manufacturer in 2005 for which
collection had been deemed uncertain.
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;
declines in the prices of base metals (primarily iron ore and copper);
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 2007 10-K, Part II, Item 1A. Risk Factors contained in the Form
10-Q filed for the quarter ended March 31, 2008 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.
29
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, 2007, 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 September 30, 2008. 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 September 30, 2008.
Changes in internal control over financial reporting
(b) The Company has not yet completed its evaluation of the internal controls
over financial reporting at STi Prepaid or ResortQuest, which were acquired
by the Company during 2007. Except for changes that result relating to
these entities, there has been no change 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
September 30, 2008, that has materially affected, or is reasonably likely
to materially affect, the Company's internal control over financial
reporting.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings.
In July 2008, IDT Telecom, Inc. and Union Telecard Alliance, LLC filed an action
in New York State Supreme Court entitled, IDT Telecom, Inc. and Union Telecard
Alliance, LLC v. Leucadia National Corporation, (No. 08602140, New York County)
against the Company alleging that the Company and its majority owned subsidiary,
STi Prepaid, LLC, unlawfully violated the consumer protection laws of several
states as a result of their alleged participation in allegedly fraudulent
marketing activities of the companies (collectively, the "Telco Group") from
which STi Prepaid acquired the assets of the business now conducted by STi
Prepaid. Plaintiffs seek unspecified monetary and equitable relief. Plaintiffs
previously filed a federal court action pending in the District of New Jersey
entitled, IDT Telecom and Union Telecard Alliance, LLC v. CVT Prepaid Solutions,
Inc., et al., (No. 07-1076, D.N.J.) containing substantially the same
allegations against STi Prepaid and the Telco Group, as well as alleging that
STi Prepaid's current business practices violate the federal Lanham Act and
consumer protection laws, seeking similar relief. Three purported class actions
arising out of similar conduct are also currently pending against STi Prepaid:
Soto v. STi Prepaid, LLC et al., Case No. GIC 868083 (Superior Ct. San Diego
County); Adighibe et al. v. Telco Group, Inc. et al., No. 07-CV-1206 (ILG)
(CLP); Ramirez et al. v. STi Prepaid, LLC et al., Civ. No. 08-1089 (SDW) (MCA)
(D.N.J.) (where the Company is also a defendant). The Company believes that the
material allegations against it and its subsidiary in these actions are without
merit and intends to defend these actions vigorously.
Item 1A. Risk Factors.
The Company has significant investments in publicly traded securities
(principally Fortescue, Jefferies, ACF and Inmet) and in investment partnerships
that invest in publicly traded securities. Changes in the market prices of these
securities have had a direct and material impact on shareholders' equity and,
for certain investments, on results of operations. Global securities markets
have been highly volatile to date, and continued volatility may have a material
negative impact on the Company's consolidated financial position and results of
operations.
30
Item 6. Exhibits.
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.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEUCADIA NATIONAL CORPORATION
(Registrant)
Date: November 6, 2008
By: /s/ Barbara L. Lowenthal
--------------------------
Barbara L. Lowenthal
Vice President and Comptroller
(Chief Accounting Officer)
32
Exhibit Index
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.
33