SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K/A
(Amendment No. 1)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 2005
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
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
315 Park Avenue South
New York, New York 10010
(212) 460-1900
(Address, Including Zip Code, and Telephone Number, Including Area Code,
of Registrant's Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
--------------------------------------------------------------------------------
Common Shares, par value $1 per share New York Stock Exchange
7-3/4% Senior Notes due August 15, 2013 New York Stock Exchange
7-7/8% Senior Subordinated Notes due October 15, 2006 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None.
(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [x] No [ ]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [x]
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [x].
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large Accelerated Filer [x] Accelerated Filer [ ] Non-Accelerated Filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [x]
Aggregate market value of the voting stock of the registrant held by
non-affiliates of the registrant at June 30, 2005 (computed by reference to the
last reported closing sale price of the Common Shares on the New York Stock
Exchange on such date): $3,130,796,000.
On February 23, 2006, the registrant had outstanding 108,072,508 Common Shares.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the registrant's definitive proxy statement pursuant to
Regulation 14A of the Securities Exchange Act of 1934 in connection with the
2006 annual meeting of shareholders of the registrant are incorporated by
reference into Part III of this Report.
1
Explanatory Note
----------------
We inadvertently omitted (i) the signature of PricewaterhouseCoopers LLP
and (ii) the March 8, 2006 date from PricewaterhouseCoopers LLP's "Report of
Independent Registered Public Accounting Firm" included in Item 15 of our Form
10-K for the fiscal year ended December 31, 2005, which was filed with the
Securities and Exchange Commission ("SEC") on March 8, 2006 (the "Form 10-K").
In order to comply with certain technical requirements of the SEC's rules
in connection with the filing of this amendment on Form 10-K/A, we are (i)
setting forth in this amendment the complete text of Item 15 (Exhibits and
Financial Statement Schedule), as amended and (ii) adding, as exhibits, certain
current dated certifications of our principal executive and principal financial
officers.
Except for the matters described above, this amendment does not modify or
update disclosures in, or exhibits to, the Form 10-K originally filed on March
8, 2006. Furthermore, except for the matters described above, this amendment
does not change any previously reported financial results, nor does it reflect
events occurring after the date of the original Form 10-K.
2
PART IV
Item 15. Exhibits and Financial Statement Schedule.
-------- ------------------------------------------
(a)(1)(2) Financial Statements and Schedule.
Report of Independent Registered Public Accounting Firm..................................... F-1
Financial Statements:
Consolidated Balance Sheets at December 31, 2005 and 2004.................................. F-3
Consolidated Statements of Operations for the years ended December 31, 2005,
2004 and 2003........................................................................... F-4
Consolidated Statements of Cash Flows for the years ended December 31, 2005,
2004 and 2003........................................................................... F-5
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 2005, 2004 and 2003........................................................ F-7
Notes to Consolidated Financial Statements................................................. F-8
Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts............................................ F-49
(3) Executive Compensation Plans and Arrangements. See Item 15(b)
below for a complete list of Exhibits to this Report.
1999 Stock Option Plan (filed as Annex A to the Company's Proxy
Statement dated April 9, 1999 (the "1999 Proxy Statement")).
Form of Grant Letter for the 1999 Stock Option Plan (filed as
Exhibit 10.4 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2004 (the "2004 10-K").
Amended and Restated Shareholders Agreement dated as of June 30,
2003 among the Company, Ian M. Cumming and Joseph S. Steinberg
(filed as Exhibit 10.5 to the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2003 (the "2003 10-K")).
Leucadia National Corporation 2003 Senior Executive Annual
Incentive Bonus Plan, as amended May 17, 2005 (filed as Annex A to
the Company's Proxy Statement dated April 22, 2005 (the "2005
Proxy Statement")).
Employment Agreement made as of June 30, 2005 by and between the
Company and Ian M. Cumming (filed as Exhibit 99.1 to the Company's
Current Report on Form 8-K dated July 13, 2005 (the "July 13, 2005
8-K")).
Employment Agreement made as of June 30, 2005 by and between the
Company and Joseph S. Steinberg (filed as Exhibit 99.2 to the July
13, 2005 8-K).
(b) Exhibits.
We will furnish any exhibit upon request made to our Corporate
Secretary, 315 Park Avenue South, New York, NY 10010. We charge
$.50 per page to cover expenses of copying and mailing.
3.1 Restated Certificate of Incorporation (filed as Exhibit 5.1
to the Company's Current Report on Form 8-K dated July 14,
1993).*
3.2 Certificate of Amendment of the Certificate of
Incorporation dated as of May 14, 2002 (filed as Exhibit
3.2 to the 2003 10-K).*
3
3.3 Certificate of Amendment of the Certificate of
Incorporation dated as of December 23, 2002 (filed as
Exhibit 3.2 to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 2002 (the "2002
10-K")).*
3.4 Amended and Restated By-laws as amended through March 9,
2004 (filed as Exhibit 3.4 to the 2003 10-K).*
3.5 Certificate of Amendment of the Certificate of
Incorporation dated as of May 13, 2004 (filed as Exhibit
3.5 to the Company's 2004 10-K).*
3.6 Certificate of Amendment of the Certificate of
Incorporation dated as of May 17, 2005 (filed as Exhibit
3.6 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2005 (the "2005 10-K")).*
4.1 The Company undertakes to furnish the Securities and
Exchange Commission, upon written request, a copy of all
instruments with respect to long-term debt not filed
herewith.
10.1 1999 Stock Option Plan (filed as Annex A to the 1999 Proxy
Statement).*
10.2 Form of Grant Letter for the 1999 Stock Option Plan (filed
as Exhibit 10.4 to the Company's 2004 10-K).*
10.3 Amended and Restated Shareholders Agreement dated as of
June 30, 2003 among the Company, Ian M. Cumming and Joseph
S. Steinberg (filed as Exhibit 10.5 to the 2003 10-K).*
10.4 Form of Amended and Restated Revolving Credit Agreement
(the "Revolving Credit Agreement") dated as of March 11,
2003 between the Company, Fleet National Bank as
Administrative Agent, The Chase Manhattan Bank, as
Syndication Agent, and the Banks signatory thereto, with
Fleet Boston Robertson Stephens, Inc., as Arranger (filed
as Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the quarterly period ended March 31, 2003).*
10.5 Amendment, dated as of March 31, 2004, to the Revolving
Credit Agreement (filed as Exhibit 10.7 to the Company's
2004 10-K).*
10.6 Amendment, dated as of June 29, 2004, to the Revolving
Credit Agreement (filed as Exhibit 10.8 to the Company's
2004 10-K).*
10.7 Leucadia National Corporation 2003 Senior Executive Annual
Incentive Bonus Plan, as amended May 17, 2005 (filed as
Annex A to the 2005 Proxy Statement).*
10.8 Employment Agreement made as of June 30, 2005 by and
between the Company and Ian M. Cumming (filed as Exhibit
99.1 to the Company's July 13, 2005 8-K).*
10.9 Employment Agreement made as of June 30, 2005 by and
between the Company and Joseph S. Steinberg (filed as
Exhibit 99.2 to the July 13, 2005 8-K).*
10.10 Management Services Agreement dated as of February 26, 2001
among The FINOVA Group Inc., the Company and Leucadia
International Corporation (filed as Exhibit 10.20 to the
Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 2000).*
10.11 Voting Agreement, dated August 21, 2001, by and among
Berkadia LLC, Berkshire Hathaway Inc., the Company and The
FINOVA Group Inc. (filed as Exhibit 10.J to the Company's
Current Report on Form 8-K dated August 27, 2001).*
10.12 Second Amended and Restated Berkadia LLC Operating
Agreement, dated December 2, 2002, by and among BH Finance
LLC and WMAC Investment Corporation (filed as Exhibit 10.40
to the 2002 10-K).*
4
10.13 First Amended Joint Chapter 11 Plan of Reorganization of
Williams Communications Group, Inc. ("WCG") and CG Austria,
Inc. filed with the Bankruptcy Court as Exhibit 1 to the
Settlement Agreement (filed as Exhibit 99.3 to the Current
Report on Form 8-K of WCG dated July 31, 2002 (the "WCG
July 31, 2002 8-K")).*
10.14 Tax Cooperation Agreement between WCG and The Williams
Companies Inc. dated July 26, 2002, filed with the
Bankruptcy Court as Exhibit 7 to the Settlement Agreement
(filed as Exhibit 99.9 to the WCG July 31, 2002 8-K).*
10.15 Third Amended and Restated Credit And Guaranty Agreement,
dated as of September 8, 1999, as amended and restated as
of April 25, 2001, as further amended and restated as of
October 15, 2002, and as further amended and restated as of
September 24, 2004, among WilTel, WilTel Communications,
LLC, certain of its domestic subsidiaries, as loan parties,
the several banks and other financial institutions or
entities from time to time parties thereto as lenders,
Credit Suisse First Boston, acting through its Cayman
Islands branch, as administrative agent, as first lien
administrative agent and as second lien administrative
agent, and Wells Fargo Foothill, LLC, as syndication agent
(filed as Exhibit 99.1 to the Company's Current Report on
Form 8-K dated September 24, 2002 (the "Company's September
24, 2002 8-K")).*
10.16 First Amendment to Third Amended and Restated Credit And
Guaranty Agreement, dated September 2, 2005, by and among
WilTel Communications, LLC, WilTel Communications Group
LLC, the Subsidiary Guarantors (as defined), and the First
Lien Administrative Agent, the Second Lien Administrative
Agent and the Administrative Agent for the Lenders (filed
as Exhibit 99.1 to the Company's Current Report on Form 8-K
dated September 2, 2005).*
10.17 Second Amended and Restated Security Agreement, dated as of
April 23, 2001, as amended and restated as of October 15,
2002, and as further amended and restated as of September
24, 2004, among WilTel, WilTel Communications, LLC, and the
additional grantors party thereto in favor of Credit Suisse
First Boston, acting through its Cayman Islands branch, as
administrative agent, as first lien administrative agent
and as second lien administrative agent (filed as Exhibit
99.2 to the Company's September 24, 2002 8-K).*
10.18 Exhibit 1 to the Agreement and Plan of Reorganization
between the Company and TLC Associates, dated February 23,
1989 (filed as Exhibit 3 to Amendment No. 12 to the
Schedule 13D dated December 29, 2004 of Ian M. Cumming and
Joseph S. Steinberg with respect to the Company).*
10.19 Letter Agreement, dated February 3, 2005, between the
Company and Jefferies & Company, Inc. (filed as Exhibit
10.55 to the Company's 2004 10-K).*
10.20 Information Concerning Executive Compensation (filed as
Exhibit 10.1 to the Company's Current Report on Form 8-K
dated January 9, 2006).*
10.21 Compensation of Non-Employee Directors (filed as Exhibit
10.21 to the Company's 2005 10-K).*
10.22 Hotel Purchase Agreement, dated as of April 6, 2005, by and
between HWB 2507 Kalakaua, LLC and Gaylord Entertainment
Co. (filed as Exhibit 10.2. to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended March
31, 2005 (the "1st Quarter 2005 10-Q")).*
10.23 Stock Purchase Agreement, dated as of May 2, 2005, by and
among the Company and the individuals named therein (filed
as Exhibit 10.4 to the Company's 1st Quarter 2005 10-Q).*
10.24 Purchase Agreement, dated as of October 30, 2005, among the
Company, Baldwin Enterprises, Inc., Level 3 Communications,
LLC and Level 3 Communications, Inc. ("Level 3") (filed as
Exhibit 10.1 to the Company's Current Report on Form 8-K
dated October 30, 2005).*
5
10.25 Registration Rights and Transfer Restriction Agreement,
dated as of December 23, 2005, by and among Level 3, the
Company and Baldwin Enterprises, Inc. (filed as Exhibit
10.2 to Level 3's Current Report on Form 8-K dated December
23, 2005).*
10.26 Purchase and Sale Agreement ("Square 711 Purchase and Sale
Agreement"), dated as of November 14, 2005, between Square
711 Developer, LLC and Walton Acquisition Holdings V,
L.L.C., a Delaware limited liability company (filed as
Exhibit 10.26 to the Company's 2005 10-K).*
10.27 First Amendment to Square 711 Purchase and Sale Agreement,
dated as of December 14, 2005 (filed as Exhibit 10.27 to
the Company's 2005 10-K).*
10.28 Share Purchase Agreement, dated May 2, 2005, between Inmet
Mining Corporation, the Company and MK Resources Company
(filed as Exhibit 2 to Amendment No. 10 to the Schedule 13D
dated May 2, 2005 of the Company with respect to MK
Resources Company (the "MK 13D")).*
10.29 Agreement and Plan of Merger, dated as of May 2, 2005,
among the Company, Marigold Acquisition Corp. and MK
Resources Company (filed as Exhibit 3 to the MK 13D).*
10.30 Voting Agreement, dated as of May 2, 2005, between the
Company and Inmet Mining Corporation (filed as Exhibit 4 to
the MK 13D).*
10.31 Letter Agreement, dated March 30, 2005 between SBC
Services, Inc. ("SBC Services") and WilTel Communications,
LLC ("WCLLC") (filed as Exhibit 10.1 to the Company's 1st
Quarter 2005 10-Q).*
10.32 Letter Agreement, dated April 27, 2005 between SBC Services
and WCLLC (filed as Exhibit 10.3 to the Company's 1st
Quarter 2005 10-Q).*
10.33 Letter Agreement, dated May 25, 2005 between SBC Services
and WCLLC (filed as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarterly period ended June 30,
2005).*
10.34 Master Services Agreement dated June 15, 2005 among WilTel
Communications Group ("WCGLLC"), WilTel Local Network, LLC,
SBC Services. and SBC Communications Inc. ("SBC") (filed as
Exhibit 99.1 to the Company's Current Report on Form 8-K/A
dated June 15, 2005 (the "June 15, 2005 8-K/A")).*
10.35 Termination, Mutual Release and Settlement Agreement dated
June 15, 2005 among the Company, WCGLLC, WCLLC, SBC, SBC
Operations, Inc. and SBC Long Distance, LLC (filed as
Exhibit 99.2 to the Company's June 15, 2005 8-K/A).*
10.36 Debtors' Modified Second Amended Joint Plan of
Reorganization under chapter 11 of the Bankruptcy Code,
dated as of April 13, 2005, of ATX Communications, Inc.
(filed as Exhibit 99.1 to ATX Communication's Current
Report on Form 8-K dated April 20, 2005).*
10.37 Services Agreement, dated as of January 1, 2004, between
the Company and Ian M. Cumming (filed as Exhibit 10.37 to
the Company's 2005 10-K).*
10.38 Services Agreement, dated as of January 1, 2004, between
the Company and Joseph S. Steinberg (filed as Exhibit 10.38
to the Company's 2005 10-K).*
21 Subsidiaries of the registrant (filed as Exhibit 21 to the
Company's 2005 10-K).*
23.1 Consent of PricewaterhouseCoopers LLP with respect to the
incorporation by reference into the Company's Registration
Statement on Form S-8 (No. 2-84303), Form S-8 and S-3 (No.
33-6054), Form S-8 and S-3 (No. 33-26434), Form S-8 and S-3
(No. 33-30277), Form S-8 (No. 33-61682), Form S-8 (No.
33-61718), Form S-8 (No. 333-51494) and Form S-3 (No.
333-118102) (filed as Exhibit 23.1 to the Company's 2005
10-K).*
6
23.2 Consent of independent auditors from Ernst & Young LLP with
respect to the inclusion in this Annual Report on Form 10-K
of the financial statements of Berkadia LLC and with
respect to the incorporation by reference in the Company's
Registration Statements on Form S-8 (No. 2-84303), Form S-8
and S-3 (No. 33-6054), Form S-8 and S-3 (No. 33-26434),
Form S-8 and S-3 (No. 33-30277), Form S-8 (No. 33-61682),
Form S-8 (No. 33-61718), Form S-8 (No. 333-51494) and Form
S-3 (No. 333-118102).**
23.3 Consent of PricewaterhouseCoopers, with respect to the
inclusion in this Annual Report on Form 10-K the financial
statements of Olympus Re Holdings, Ltd. and with respect to
the incorporation by reference in the Company's
Registration Statements on Form S-8 (No. 2-84303), Form S-8
and S-3 (No. 33-6054), Form S-8 and S-3 (No. 33-26434),
Form S-8 and S-3 (No. 33-30277), Form S-8 (No. 33-61682),
Form S-8 (No. 33-61718), Form S-8 (No. 333-51494) and Form
S-3 (No. 333-118102). **
23.4 Consent of independent auditors from BDO Seidman, LLP with
respect to the inclusion in this Annual Report on Form 10-K
of the financial statements of EagleRock Capital Partners
(QP), LP and EagleRock Master Fund, LP and with respect to
the incorporation by reference in the Company's
Registration Statements on Form S-8 (No. 2-84303), Form S-8
and S-3 (No. 33-6054), Form S-8 and S-3 (No. 33-26434),
Form S-8 and S-3 (No. 33-30277), Form S-8 (No. 33-61682),
Form S-8 (No. 33-61718), Form S-8 (No. 333-51494) and Form
S-3 (No. 333-118102). **
23.5 Consent of independent auditors from Ernst & Young LLP with
respect to the inclusion in this Annual Report on Form 10-K
of the financial statements of WilTel Communications Group,
Inc. and with respect to the incorporation by reference in
the Company's Registration Statements on Form S-8 (No.
2-84303), Form S-8 and S-3 (No. 33-6054), Form S-8 and S-3
(No. 33-26434), Form S-8 and S-3 (No. 33-30277), Form S-8
(No. 33-61682), Form S-8 (No. 33-61718), Form S-8 (No.
333-51494) and Form S-3 (No. 333-118102) (filed as Exhibit
23.5 to the Company's 2005 10-K).*
23.6 Independent Auditors' Consent from KPMG LLP, with respect
to the inclusion in this Annual Report on Form 10-K of the
financial statements of Jefferies Partners Opportunity Fund
II, LLC and with respect to the incorporation by reference
into the Company's Registration Statements on Form S-8 (No.
2-84303), Form S-8 and S-3 (No. 33-6054), Form S-8 and S-3
(No. 33-26434), Form S-8 and S-3 (No. 33-30277), Form S-8
(No. 33-61682), Form S-8 (No. 33-61718), Form S-8 (No.
333-51494) and Form S-3 (No. 333-118102). **
23.7 Consent of PricewaterhouseCoopers LLP with respect to the
incorporation by reference into the Company's Registration
Statement on Form S-8 (No. 2-84303), Form S-8 and S-3 (No.
33-6054), Form S-8 and S-3 (No. 33-26434), Form S-8 and S-3
(No. 33-30277), Form S-8 (No. 33-61682), Form S-8 (No.
33-61718), Form S-8 (No. 333-51494) and Form S-3 (No.
333-118102).
31.1 Certification of Chairman of the Board and Chief Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 (filed as Exhibit 31.1 to the Company's 2005
10-K).*
31.2 Certification of President pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed as Exhibit 31.2 to the
Company's 2005 10-K).*
31.3 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (filed as
Exhibit 31.3 to the Company's 2005 10-K).*
31.4 Certification of Chairman of the Board and Chief Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.5 Certification of President pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.6 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
7
32.1 Certification of Chairman of the Board and Chief Executive
Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (previously furnished as Exhibit 32.1 to the
Company's 2005 10-K). *
32.2 Certification of President pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (previously furnished as Exhibit
32.2 to the Company's 2005 10-K).*
32.3 Certification of Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 (previously
furnished as Exhibit 32.3 to the Company's 2005 10-K).*
32.4 Certification of Chairman of the Board and Chief Executive
Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.***
32.5 Certification of President pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.***
32.6 Certification of Principal Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.***
(c) Financial statement schedules.
(1) Berkadia LLC financial statements for the years ended December 31,
2004 and 2003. **
(2) Olympus Re Holdings, Ltd. consolidated financial statements as of
December 31, 2005 and 2004 and for the years ended December 31,
2005, 2004 and 2003. **
(3) EagleRock Capital Partners (QP), LP financial statements as of
December 31, 2005 and 2004 and for the years ended December 31,
2005, 2004 and 2003 and EagleRock Master Fund, LP financial
statements as of December 31, 2005 and 2004 and for the years
ended December 31, 2005, 2004 and 2003. **
(4) WilTel Communications Group, Inc. consolidated financial
statements for the period from January 1, 2003 through November 5,
2003 (previously filed as financial statement schedule to the
Company's 2005 10-K).*
(5) Jefferies Partners Opportunity Fund II, LLC financial statements
as of December 31, 2005 and for the year ended December 31, 2005.
**
-----------------------------
* Incorporated by reference.
** To be filed by amendment pursuant to Item 3-09(b) of Regulation S-X.
*** Furnished herewith pursuant to item 601(b) (32) of Regulation S-K.
8
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
LEUCADIA NATIONAL CORPORATION
March 9, 2006 By: /s/ Barbara L. Lowenthal
--------------------------
Barbara L. Lowenthal
Vice President and Comptroller
9
Report of Independent Registered Public Accounting Firm
-------------------------------------------------------
To the Board of Directors and
Shareholders of Leucadia National Corporation:
We have completed integrated audits of Leucadia National Corporation's December
31, 2005 and 2004 consolidated financial statements and of its internal control
over financial reporting as of December 31, 2005, and an audit of its 2003
consolidated financial statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Our opinions, based on our
audits and the report of other auditors, are presented below.
Consolidated financial statements and financial statement schedule
In our opinion, based on our audits and the report of other auditors, the
consolidated financial statements listed in the index appearing under Item 15(a)
(1) (2) present fairly, in all material respects, the financial position of
Leucadia National Corporation and its subsidiaries at December 31, 2005 and
2004, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2005 in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the index appearing
under Item 15(a) (1) (2) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We did not audit the financial
statements of WilTel for the period from January 1, 2003 through November 5,
2003. For this period, WilTel was accounted for on the equity method and from
January 1, 2003 through November 5, 2003 had a net loss of approximately
$109,000,000, of which the Company's 47.4% share was approximately $52,000,000.
Those statements were audited by other auditors whose report thereon has been
furnished to us, and our opinion expressed herein, insofar as it relates to the
amounts included for WilTel, is based on the report of other auditors. We
conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit of
financial statements includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits and the report of other auditors provide a reasonable basis for our
opinion.
Internal control over financial reporting
Also, in our opinion, management's assessment, included in "Management's Report
on Internal Control Over Financial Reporting" appearing under Item 9A, that the
Company maintained effective internal control over financial reporting as of
December 31, 2005 based on criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), is fairly stated, in all material respects, based on those
criteria. Furthermore, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31,
2005, based on criteria established in Internal Control - Integrated Framework
issued by the COSO. The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based
on our audit. We conducted our audit of internal control over financial
reporting in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. An audit of internal control over financial reporting includes
obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
As described in "Management's Report on Internal Control Over Financial
Reporting", management has excluded Idaho Timber, ATX and NSW from its
assessment of internal control over financial reporting as of December 31, 2005,
because those entities were acquired by the Company during 2005. We have also
excluded Idaho Timber, ATX and NSW from our audit of internal control over
financial reporting. Idaho Timber, ATX and NSW are consolidated subsidiaries
whose total assets and total revenues represent 5.2% and 35.3%, respectively, of
the related consolidated financial statement amounts as of and for the year
ended December 31, 2005.
/s/ PricewaterhouseCoopers LLP
------------------------------
PricewaterhouseCoopers LLP
New York, New York
March 8, 2006
F-2
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2005 and 2004
(Dollars in thousands, except par value)
2005 2004
---- ----
ASSETS
------
Current assets:
Cash and cash equivalents $ 386,957 $ 277,238
Investments 1,323,562 1,084,745
Trade, notes and other receivables, net 377,216 160,234
Prepaids and other current assets 140,880 27,850
Current assets of discontinued operations -- 509,882
----------- -----------
Total current assets 2,228,615 2,059,949
Non-current investments 977,327 718,326
Notes and other receivables, net 22,747 16,906
Intangible assets, net and goodwill 85,083 1,472
Deferred tax asset, net 1,094,017 --
Other assets 240,601 272,867
Property, equipment and leasehold improvements, net 237,021 283,330
Investments in associated companies 375,473 460,794
Non-current assets of discontinued operations -- 986,759
----------- -----------
Total $ 5,260,884 $ 4,800,403
=========== ===========
LIABILITIES
-----------
Current liabilities:
Trade payables and expense accruals $ 259,778 $ 167,864
Other current liabilities 23,783 27,044
Customer banking deposits due within one year -- 18,472
Debt due within one year 175,664 64,799
Income taxes payable 15,171 17,690
Current liabilities of discontinued operations -- 363,468
----------- -----------
Total current liabilities 474,396 659,337
Other non-current liabilities 121,893 121,675
Long-term debt 986,718 1,067,123
Non-current customer banking deposits -- 6,119
Non-current liabilities of discontinued operations -- 669,221
----------- -----------
Total liabilities 1,583,007 2,523,475
----------- -----------
Commitments and contingencies
Minority interest 15,963 18,275
----------- -----------
SHAREHOLDERS' EQUITY
--------------------
Common shares, par value $1 per share, authorized 300,000,000 and 150,000,000
shares; 108,029,008 and 107,600,403 shares issued and outstanding, after
deducting 42,377,843 and 42,399,597 shares
held in treasury 108,029 107,600
Additional paid-in capital 609,943 598,504
Accumulated other comprehensive income (loss) (81,502) 136,138
Retained earnings 3,025,444 1,416,411
----------- -----------
Total shareholders' equity 3,661,914 2,258,653
----------- -----------
Total $ 5,260,884 $ 4,800,403
=========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended December 31, 2005, 2004 and 2003
(In thousands, except per share amounts)
2005 2004 2003
---- ---- ----
REVENUES AND OTHER INCOME:
--------------------------
Manufacturing $ 332,253 $ 64,055 $ 53,327
Healthcare 239,046 257,262 71,039
Telecommunications 111,192 -- --
Investment and other income 149,840 180,081 179,385
Net securities gains 208,816 136,564 9,928
----------- ---------- ----------
1,041,147 637,962 313,679
----------- ---------- ----------
EXPENSES:
---------
Cost of sales:
Manufacturing 281,451 45,055 38,998
Healthcare 203,149 216,333 61,280
Telecommunications 67,266 -- --
Interest 68,376 62,710 37,902
Salaries 102,236 48,334 39,094
Depreciation and amortization 26,767 19,625 18,132
Selling, general and other expenses 153,739 134,027 126,491
----------- ---------- ----------
902,984 526,084 321,897
----------- ---------- ----------
Income (loss) from continuing operations before income taxes, minority
expense of trust preferred securities and equity in income (losses) of
associated companies 138,163 111,878 (8,218)
----------- ---------- ----------
Income tax (benefit) provision:
Current 4,018 (27,434) (11,424)
Deferred (1,135,100) 7,242 (23,750)
----------- ---------- ----------
(1,131,082) (20,192) (35,174)
----------- ---------- ----------
Income from continuing operations before minority expense of trust
preferred securities and equity in income (losses) of associated
companies 1,269,245 132,070 26,956
Minority expense of trust preferred securities, net of taxes -- -- (2,761)
Equity in income (losses) of associated companies, net of taxes (45,133) 76,479 76,947
----------- ---------- ----------
Income from continuing operations 1,224,112 208,549 101,142
Income (loss) from discontinued operations, net of taxes 111,557 (64,862) (11,586)
Gain on disposal of discontinued operations, net of taxes 300,372 1,813 7,498
----------- ---------- ----------
Net income $ 1,636,041 $ 145,500 $ 97,054
=========== ========== ==========
Basic earnings (loss) per common share:
Income from continuing operations $11.36 $ 1.95 $ 1.10
Income (loss) from discontinued operations 1.03 (.61) (.12)
Gain on disposal of discontinued operations 2.79 .02 .08
------ ------ ------
Net income $15.18 $ 1.36 $ 1.06
====== ====== ======
Diluted earnings (loss) per common share:
Income from continuing operations $10.71 $ 1.90 $ 1.09
Income (loss) from discontinued operations .96 (.58) (.12)
Gain on disposal of discontinued operations 2.60 .02 .08
------ ------ -------
Net income $14.27 $ 1.34 $ 1.05
====== ====== =======
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 2005, 2004 and 2003
(In thousands)
2005 2004 2003
---- ---- ----
(Revised)
Net cash flows from operating activities:
-----------------------------------------
Net income $ 1,636,041 $ 145,500 $ 97,054
Adjustments to reconcile net income to net cash provided by (used for)
operations:
Deferred income tax provision (benefit) (1,135,100) 7,242 28,960
Depreciation and amortization of property, equipment and leasehold improvements 186,428 232,600 65,723
Other amortization 3,068 3,316 (4,624)
Provision for doubtful accounts 6,181 (5,366) 20,098
Net securities gains (212,299) (142,936) (9,953)
Equity in (income) losses of associated companies 44,403 (91,546) (146,989)
Distributions from associated companies 90,280 23,878 25,359
Net gains related to real estate, property and equipment, loan receivables and
other assets (29,386) (60,866) (23,429)
Gain on disposal of discontinued operations (300,372) (1,813) (7,498)
Investments classified as trading, net 18,022 (68,612) (8,133)
Net change in:
Trade, notes and other receivables 20,850 19,578 (18,086)
Prepaids and other assets (29,978) 11,491 (6,559)
Trade payables and expense accruals 54,344 19,654 (23,489)
Other liabilities (36,427) (52,250) (22,165)
Deferred revenue 10,553 9,945 9,854
Income taxes payable (2,537) 16,890 2,959
Other (2,961) 1,732 (2,344)
----------- ----------- ---------
Net cash provided by (used for) operating activities 321,110 68,437 (23,262)
----------- ----------- ---------
Net cash flows from investing activities:
-----------------------------------------
Acquisition of property, equipment and leasehold improvements (136,260) (97,412) (85,717)
Acquisition of and capital expenditures for real estate investments (26,053) (23,022) (67,925)
Proceeds from disposals of real estate, property and equipment, and other assets 33,722 123,302 111,134
Acquisitions, net of cash acquired (170,516) -- 114,524
Proceeds from disposal of discontinued operations, net of expenses and
cash of operations sold 459,094 22,311 (4,466)
Advances on loan receivables -- -- (2,981)
Principal collections on loan receivables 1,591 41,862 138,259
Proceeds from sale of loan receivables -- 157,134 --
Advances on notes receivables (100) (400) (2,279)
Collections on notes receivables 1,721 27,789 14,176
Investments in associated companies (34,466) (69,398) (22,350)
Capital distributions from associated companies 2,644 5,632 7,174
Purchases of investments (other than short-term) (3,350,651) (2,534,404) (1,655,480)
Proceeds from maturities of investments 1,262,577 869,707 555,148
Proceeds from sales of investments 1,979,288 1,460,181 683,752
----------- ----------- ---------
Net cash provided by (used for) investing activities 22,591 (16,718) (217,031)
----------- ----------- ---------
(continued)
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
For the years ended December 31, 2005, 2004 and 2003
(In thousands)
2005 2004 2003
---- ---- ----
(Revised)
Net cash flows from financing activities:
-----------------------------------------
Net change in customer banking deposits $ (24,565) $ (120,516) $ (245,845)
Issuance of long-term debt, net of issuance costs 82,753 438,393 304,509
Reduction of long-term debt (477,360) (92,454) (7,002)
Issuance of common shares 3,689 22,006 1,293
Purchase of common shares for treasury (167) -- (61)
Dividends paid (27,008) (26,901) (17,706)
---------- ---------- ----------
Net cash provided by (used for) financing activities (442,658) 220,528 35,188
---------- ---------- ----------
Effect of foreign exchange rate changes on cash (1,034) 311 895
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents (99,991) 272,558 (204,210)
Cash and cash equivalents at January 1, 486,948 214,390 418,600
---------- ---------- ----------
Cash and cash equivalents at December 31, $ 386,957 $ 486,948 $ 214,390
========== ========== ==========
Supplemental disclosures of cash flow information:
--------------------------------------------------
Cash paid during the year for:
Interest $ 96,958 $ 89,707 $ 40,856
Income tax payments (refunds), net $ 3,486 $(26,024) $ (5,098)
Non-cash investing activities:
-----------------------------
Common stock issued for acquisition of MK Resources Company in 2005 and
WilTel Communications Group, Inc. in 2003 $ 8,346 $ -- $422,830
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 2005, 2004 and 2003
(In thousands, except par value and per share amounts)
Series A
Non-Voting Common Accumulated
Convertible Shares Additional Other
Preferred $1 Par Paid-In Comprehensive Retained
Stock Value Capital Income (Loss) Earnings Total
----- ----- ------- ------------- -------- -----
Balance, January 1, 2003 $ 47,507 $ 87,403 $ 125,126 $ 56,025 $ 1,218,464 $1,534,525
----------
Comprehensive Income:
Net change in unrealized gain (loss)
on investments, net of taxes of $55,738 103,776 103,776
Net change in unrealized foreign exchange
gain (loss), net of taxes of $701 7,739 7,739
Net change in unrealized gain (loss) on
derivative instruments, net of taxes of $888 (1,650) (1,650)
Net change in minimum pension liability,
net of taxes of $7,345 (13,639) (13,639)
Net income 97,054 97,054
----------
Comprehensive income 193,280
----------
Issuance of common shares on acquisition of
WilTel Communications Group, Inc. 16,735 406,095 422,830
Conversion of convertible preferred shares into
common shares (47,507) 2,022 45,485 --
Exercise of options to purchase common shares 79 1,214 1,293
Purchase of common shares for treasury (4) (57) (61)
Dividends ($.17 per common share) (17,706) (17,706)
-------- --------- --------- -------- ----------- ----------
Balance, December 31, 2003 -- 106,235 577,863 152,251 1,297,812 2,134,161
----------
Comprehensive income:
Net change in unrealized gain (loss)
on investments, net of taxes of $0 (8,592) (8,592)
Net change in unrealized foreign exchange
gain (loss), net of taxes of $0 6,807 6,807
Net change in unrealized gain (loss) on
derivative instruments, net of taxes of $0 (355) (355)
Net change in minimum pension liability, net
of taxes of $0 (13,973) (13,973)
Net income 145,500 145,500
----------
Comprehensive income 129,387
----------
Exercise of warrants to purchase common shares 1,200 17,960 19,160
Exercise of options to purchase common shares 165 2,681 2,846
Dividends ($.25 per common share) (26,901) (26,901)
-------- --------- --------- -------- ----------- ----------
Balance, December 31, 2004 -- 107,600 598,504 136,138 1,416,411 2,258,653
---------
Comprehensive income:
Net change in unrealized gain (loss)
on investments, net of taxes of $0 (175,577) (175,577)
Net change in unrealized foreign exchange
gain (loss), net of taxes of $0 (17,199) (17,199)
Net change in unrealized gain (loss) on
derivative instruments, net of taxes of $0 2,747 2,747
Net change in minimum pension liability, net
of taxes of $0 (27,611) (27,611)
Net income 1,636,041 1,636,041
---------
Comprehensive income 1,418,401
---------
Issuance of common shares on acquisition of
minority interest in MK Resources Company 216 8,130 8,346
Exercise of options to purchase common shares 216 3,473 3,689
Purchase of common shares for treasury (3) (164) (167)
Dividends ($.25 per common share) (27,008) (27,008)
-------- --------- --------- -------- ----------- ----------
Balance, December 31, 2005 $ -- $ 108,029 $ 609,943 $(81,502) $ 3,025,444 $3,661,914
======== ========= ========= ======== =========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Nature of Operations:
---------------------
The Company is a diversified holding company engaged in a variety of businesses,
including manufacturing, healthcare services, telecommunications, real estate
activities, winery operations and residual banking and lending activities that
are in run-off, principally in markets in the United States. The Company also
owns equity interests in investment partnerships and in operating businesses
which are accounted for under the equity method of accounting. These equity
investments include development of a copper mine in Spain, real estate
activities and property and casualty reinsurance operations. The Company
continuously evaluates the retention and disposition of its existing operations
and investments and frequently investigates the acquisition of new businesses.
Changes in the mix of the Company's owned businesses and investments should be
expected.
The manufacturing operations are conducted through Idaho Timber Corporation
("Idaho Timber") and the Company's plastics manufacturing segment. Idaho Timber
primarily remanufactures dimension lumber, remanufactures and packages home
center boards to customer specifications, produces 5/4 inch radius-edge, pine
decking and manufactures or distributes a number of specialized wood products.
Idaho Timber operates ten facilities located throughout the United States, and
its remanufacturing business is principally derived from the purchase of bundles
of low-grade lumber on the spot market, and the conversion of that lumber into
higher-grade lumber through sorting and minor rework.
The plastics manufacturing operations manufacture and market lightweight plastic
netting used for a variety of purposes including, among other things, building
and construction, erosion control, agriculture, packaging, carpet padding,
filtration and consumer products. The plastics manufacturing segment has three
domestic manufacturing facilities, and it owns and operates a manufacturing and
sales facility in Belgium.
The healthcare services operations primarily provide contract therapy, long-term
care consulting and temporary staffing to skilled nursing facilities, hospitals,
sub-acute care centers, assisted living facilities, schools, and other
healthcare providers. Healthcare services are provided by subsidiaries of
Symphony Health Services, LLC ("Symphony").
The telecommunications operations are principally conducted through ATX
Communications, Inc. ("ATX"). ATX is an integrated communications provider that
offers local and long distance telephone services, data and Internet services,
and web development, collocation and managed services, principally to small to
medium sized businesses in the Mid-Atlantic region of the United States.
The domestic real estate operations include a mixture of commercial properties,
residential land development projects and other unimproved land, all in various
stages of development and all available for sale.
The winery operations consist of two wineries, Pine Ridge Winery in Napa Valley,
California and Archery Summit in the Willamette Valley of Oregon, which
primarily produce and sell wines in the luxury segment of the premium table wine
market.
During 2005, the banking and lending operations sold its remaining customer
deposits and surrendered its national bank charter. The remaining operating
activities are concentrated on collecting and servicing its remaining loan
portfolio.
F-8
1. Nature of Operations, continued:
--------------------
On December 23, 2005, the Company completed the sale of its largest
telecommunications subsidiary, WilTel Communications Group, LLC ("WilTel"), and
has reclassified WilTel as a discontinued operation in the Company's
consolidated financial statements, including the reclassification of prior
years' balance sheets. The Company has reclassified its prior years' balance
sheets because WilTel's balance sheets for the prior periods comprised a
significant portion of the Company's consolidated balance sheets. For more
information concerning the sale and the Company's other discontinued operations,
see Note 5.
Certain amounts for prior periods have been reclassified to be consistent with
the 2005 presentation.
The 2003 consolidated statement of cash flows was revised to combine the cash
flows from discontinued operations with cash flows from continuing operations.
The Company had previously reported the cash flows from discontinued operations
as a single line item.
2. Significant Accounting Policies:
--------------------------------
(a) Critical Accounting Estimates: The preparation of financial statements in
-----------------------------
conformity with accounting principles generally accepted in the United States
("GAAP") requires the Company to make estimates and assumptions that affect the
reported amounts in the financial statements and disclosures of contingent
assets and liabilities. On an on-going basis, the Company evaluates all of these
estimates and assumptions. The following areas have been identified as critical
accounting estimates because they have the potential to have a material impact
on the Company's financial statements, and because they are based on assumptions
which are used in the accounting records to reflect, at a specific point in
time, events whose ultimate outcome won't be known until a later date. Actual
results could differ from these estimates.
Income Taxes - The Company records a valuation allowance to reduce its deferred
tax asset to the amount that is more likely than not to be realized. If the
Company were to determine that it would be able to realize its deferred tax
asset in the future in excess of its net recorded amount, an adjustment would
increase income in such period. Similarly, if the Company were to determine that
it would not be able to realize all or part of its deferred tax asset in the
future, an adjustment would be charged to income in such period. The
determination of the amount of the valuation allowance required is based, in
significant part, upon the Company's projection of future taxable income at any
point in time. The Company also records reserves for contingent tax liabilities
based on the Company's assessment of the probability of successfully sustaining
its tax filing positions.
During 2005, as a result of the consummation of certain transactions and ongoing
operating profits, the Company prepared updated projections of future taxable
income. 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 a portion of the Company's net deferred tax asset;
accordingly, $1,135,100,000 of the deferred tax valuation allowance was reversed
as a credit to income tax expense.
Impairment of Long-Lived Assets - In accordance with Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"), 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.
F-9
2. Significant Accounting Policies, continued:
-------------------------------
As more fully discussed in Note 5, during 2005 an impairment loss of $42,400,000
was recorded to reduce the carrying amount of WilTel's former headquarters
facility to its estimated fair value.
Impairment of Securities - Investments with an impairment in value considered to
be other than temporary are written down to estimated fair value. The writedowns
are included in net securities gains in the consolidated statements of
operations. The Company evaluates its investments for impairment on a quarterly
basis.
The Company's determination of whether a security is other than temporarily
impaired incorporates both quantitative and qualitative information; GAAP
requires the exercise of judgment in making this assessment, rather than the
application of fixed mathematical criteria. The Company considers a number of
factors including, but not limited to, the length of time and the extent to
which the fair value has been less than cost, the financial condition and near
term prospects of the issuer, the reason for the decline in fair value, changes
in fair value subsequent to the balance sheet date, and other factors specific
to the individual investment. The Company's assessment involves a high degree of
judgment and accordingly, actual results may differ materially from the
Company's estimates and judgments.
Business Combinations - At acquisition, the Company allocates the cost of a
business acquisition to the specific tangible and intangible assets acquired and
liabilities assumed based upon their relative fair values. Significant judgments
and estimates are often made to determine these allocated values, and may
include the use of independent appraisals, consider market quotes for similar
transactions, employ discounted cash flow techniques or consider other
information the Company believes relevant. The finalization of the purchase
price allocation will typically take a number of months to complete, and if
final values are materially different from initially recorded amounts
adjustments are recorded. Any excess of the cost of a business acquisition over
the fair values of the net assets and liabilities acquired is recorded as
goodwill which is not amortized to expense. Recorded goodwill of a reporting
unit is required to be tested for impairment on an annual basis, and between
annual testing dates if events or circumstances change that would more likely
than not reduce the fair value of a reporting unit below its net book value.
Purchase price allocations for all of the Company's recent acquisitions have
been finalized. Adjustments to the initial purchase price allocations were not
material.
Accruals for Access Costs - ATX's access costs primarily include variable
charges paid to vendors to originate and/or terminate switched voice traffic,
which are based on actual usage at negotiated or regulated contract rates. At
the end of each reporting period, ATX's estimated accrual for incurred but not
yet billed costs is based on internal usage reports. The accrual is subsequently
reconciled to actual invoices as they are received, which is a process that can
take several months to complete. This process includes an invoice validation
procedure that normally identifies errors and inaccuracies in rate and/or volume
components of the invoices resulting in numerous invoice disputes. It is ATX's
policy to adjust the accrual for the probable amount it believes will ultimately
be paid on disputed invoices, a determination which requires significant
estimation and judgment. Due to the number of different negotiated and regulated
rates, constantly changing traffic patterns, uncertainty in the ultimate
resolution of disputes, the period of time required to complete the
reconciliation and delays in invoicing by access vendors, these estimates may
change.
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 December 31, 2005, the Company's accrual for contingent
losses was not material.
(b) Consolidation Policy: The consolidated financial statements include the
--------------------
accounts of the Company, all variable interest entities of which the Company or
a subsidiary is the primary beneficiary, and all majority-controlled entities
that are not variable interest entities. All intercompany transactions and
balances are eliminated in consolidation.
F-10
2. Significant Accounting Policies, continued:
-------------------------------
Associated companies are investments in equity interests that are accounted for
on the equity method of accounting. These include investments in corporations
that the Company does not control but has the ability to exercise significant
influence and investments in limited partnerships in which the Company's
interest is more than minor.
(c) Cash Equivalents: The Company considers short-term investments, which have
----------------
maturities of less than three months at the time of acquisition, to be cash
equivalents. Cash and cash equivalents include short-term investments of
$295,600,000 and $93,300,000 at December 31, 2005 and 2004, respectively.
(d) Investments: At acquisition, marketable debt and equity securities are
-----------
designated as either i) held to maturity, which are carried at amortized cost,
ii) trading, which are carried at estimated fair value with unrealized gains and
losses reflected in results of operations, or iii) available for sale, which are
carried at estimated fair value with unrealized gains and losses reflected as a
separate component of shareholders' equity, net of taxes. Equity securities that
do not have readily determinable fair values are carried at cost. The cost of
securities sold is based on average cost.
Held to maturity investments are made with the intention of holding such
securities to maturity, which the Company has the ability to do. Estimated fair
values are principally based on quoted market prices.
(e) Property, Equipment and Leasehold Improvements: Property, equipment and
----------------------------------------------
leasehold improvements are stated at cost, net of accumulated depreciation and
amortization. Depreciation and amortization are provided principally on the
straight-line method over the estimated useful lives of the assets or, if less,
the term of the underlying lease.
(f) Revenue Recognition: Revenues are recognized when the following conditions
-------------------
are met: (1) collectibility is reasonably assured; (2) title to the product has
passed or the service has been rendered and earned; (3) persuasive evidence of
an arrangement exists; and (4) there is a fixed or determinable price.
Manufacturing revenues are recognized when title passes, which for Idaho Timber
is generally upon the customer's receipt of the goods and for the plastics
segment upon shipment of goods. Revenue from the sale of real estate is
generally recognized when title passes; however, if the Company is obligated to
make improvements to the real estate subsequent to closing, revenues are
deferred and recognized under the percentage of completion method of accounting.
(g) Cost of Sale: Manufacturing cost of sales principally includes product and
------------
manufacturing costs, inbound and outbound shipping costs and handling costs.
Telecommunications cost of sales includes access costs paid to other
telecommunications providers, repairs and maintenance, rent, utilities and
property taxes of the telephone, Internet and data network, and salaries and
related expenses of network personnel. Telecommunications cost of sales are
recognized during the period in which revenue is recognized. Healthcare cost of
sales principally consists of employment costs and independent contractor costs
of the therapists providing the service. Any product installation costs of the
Company's operating subsidiaries are expensed when incurred.
(h) Income Taxes: The Company provides for income taxes using the liability
------------
method. The future benefit of certain tax loss carryforwards and future
deductions is recorded as an asset. A valuation allowance is provided if
deferred tax assets are not considered to be more likely than not to be
realized.
(i) Derivative Financial Instruments: The Company reflects its derivative
--------------------------------
financial instruments in its balance sheet at fair value. The Company has
utilized derivative financial instruments to manage the impact of changes in
interest rates on its customer banking deposits and certain debt obligations,
hedge net investments in foreign subsidiaries and manage foreign currency risk
on certain available for sale securities. Although the Company believes that
these derivative financial instruments are practical economic hedges of the
Company's risks, except for the hedge of the net investment in foreign
subsidiaries, they do not meet the effectiveness criteria under GAAP, and
therefore are not accounted for as hedges.
F-11
2. Significant Accounting Policies, continued:
-------------------------------
Amounts recorded as income to investment and other income as a result of
accounting for its derivative financial instruments were $1,700,000 and
$3,500,000 for the years ended December 31, 2005 and 2003, respectively, and not
material for 2004. Net unrealized losses on derivative instruments were
$1,000,000 and $3,800,000 at December 31, 2005 and 2004, respectively.
(j) Translation of Foreign Currency: Foreign currency denominated investments
-------------------------------
and financial statements are translated into U.S. dollars at current exchange
rates, except that revenues and expenses are translated at average exchange
rates during each reporting period; resulting translation adjustments are
reported as a component of shareholders' equity. Net foreign exchange
transaction losses were $2,700,000 for 2005 and not material for 2004 and 2003.
Net unrealized foreign exchange translation gains (losses) were $(2,900,000),
$14,300,000 and $7,500,000 at December 31, 2005, 2004 and 2003, respectively.
(k) Stock-Based Compensation: Statement of Financial Accounting Standards No.
------------------------
123, "Accounting for Stock-Based Compensation" ("SFAS 123"), establishes a fair
value method for accounting for stock-based compensation plans, either through
recognition in the statements of operations or disclosure. As permitted, the
Company applies APB Opinion No. 25 and related Interpretations in accounting for
its plans. Accordingly, no compensation cost has been recognized in the
statements of operations for its stock-based compensation plans.
Had compensation cost for the Company's stock option plans been recorded in the
statements of operations consistent with the provisions of SFAS 123, the Company
would have recognized compensation cost of $1,600,000, $1,000,000 and $800,000
in 2005, 2004 and 2003, respectively.
(l) Recently Issued Accounting Standards: In April 2005, the Securities and
------------------------------------
Exchange Commission amended the effective date of Statement of Financial
Accounting Standards No. 123R, "Share-Based Payment" ("SFAS 123R"), from the
first interim or annual period after June 15, 2005 to the beginning of the next
fiscal year that begins after June 15, 2005. SFAS 123R requires that the cost of
all share-based payments to employees, including grants of employee stock
options, be recognized in the financial statements based on their fair values.
That cost will be recognized as an expense over the vesting period of the award.
Pro forma disclosures previously permitted under SFAS 123 no longer will be an
alternative to financial statement recognition. In addition, the Company will be
required to determine fair value in accordance with SFAS 123R; the Company
intends to use the modified prospective method. The Company does not expect that
SFAS 123R will have a material impact on its consolidated financial statements
with respect to currently outstanding options.
In May 2005, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 154, "Accounting Changes and Error
Corrections-a replacement of APB Opinion No. 20 and FASB Statement No. 3" ("SFAS
154"), which is effective for accounting changes and corrections of errors made
in fiscal years beginning after December 15, 2005. SFAS 154 applies to all
voluntary changes in accounting principles, and changes the accounting and
reporting requirements for a change in accounting principle. SFAS 154 requires
retrospective application to prior periods' financial statements of a voluntary
change in accounting principle unless doing so is impracticable. APB 20
previously required that most voluntary changes in accounting principle be
recognized by including in net income of the period in which the change occurred
the cumulative effect of changing to the new accounting principle. SFAS 154 also
requires that a change in depreciation, amortization, or depletion method for
long-lived, nonfinancial assets be accounted for as a change in accounting
estimate effected by a change in accounting principle. SFAS 154 carries forward
without change the guidance in APB 20 for reporting the correction of an error
in previously issued financial statements, a change in accounting estimate and a
change in reporting entity, as well as the provisions of SFAS 3 that govern
reporting accounting changes in interim financial statements. The Company does
not expect that SFAS 154 will have a material impact on its consolidated
financial statements.
F-12
3. Acquisitions:
-------------
NSW, LLC U.S. ("NSW")
In February 2005, the plastics manufacturing segment acquired the assets of NSW
for a purchase price of approximately $26,600,000; based upon its allocation of
the purchase price the Company recorded an aggregate of $10,200,000 of
intangible assets and $8,200,000 of goodwill. NSW has a manufacturing and
distribution facility in Roanoke, Virginia, which manufactures a variety of
products including produce and packaging nets, header label bags, case liners
and heavy weight nets for drainage and erosion control purposes. The NSW
customer relationship intangible assets will be amortized on an accelerated
basis, and other intangible assets on a straight-line basis, over the following
average useful lives: customer relationships - 12 years, trademarks and
tradename - 15 years, patents - 15 years and other intangible assets - 5 years.
ATX
In December 2003, the Company purchased all of ATX's debt obligations under its
senior secured credit facility for $25,000,000, and ATX commenced a voluntary
Chapter 11 case to reorganize its financial affairs shortly thereafter. The
bankruptcy plan (the "Plan") of ATX was confirmed by the Bankruptcy Court for
the Southern District of New York and became effective on April 22, 2005, and
the Company has consolidated ATX since that date. As contemplated by the Plan,
in exchange for its investment in the credit facility the Company received
approximately 90% of the new common stock of the reorganized ATX and a new
$25,000,000 senior secured note which bears interest at 10%. In addition, the
Company provided ATX with $5,000,000 of debtor-in-possession financing and
$25,000,000 of exit financing to fund bankruptcy related payments and working
capital requirements. On behalf of ATX, the Company also obtained cash
collateralized letters of credit totaling $14,700,000 issued for the benefit of
one of ATX's vendors. The requirement to provide the letters of credit will
decline over a period of years, commencing in 2006. The aggregate purchase price
for ATX was $56,300,000, which includes all the financing provided to ATX by the
Company and acquisition expenses.
Based upon its allocation of the purchase price, the Company has recorded ATX
intangible assets of $19,400,000 and goodwill of $5,800,000. The customer
relationship intangible assets will be amortized on an accelerated basis, and
other intangible assets on a straight-line basis, over the following average
useful lives: trademarks - 10 years, customer relationships - 7 years, software
- 5 years, and other intangibles - 2 years.
Idaho Timber
In May 2005, the Company acquired Idaho Timber for total cash consideration of
$133,600,000, including working capital adjustments and expenses, and has
consolidated Idaho Timber from the date of acquisition. Based upon its
allocation of the purchase price, the Company recorded Idaho Timber intangible
assets of $45,100,000. The intangible assets will be amortized on a
straight-line basis over the following average useful lives: customer
relationships - 10 years, and other intangibles - 1 year.
Symphony
In September 2003, the Company acquired Symphony for approximately $36,700,000,
including expenses, of which approximately $29,200,000 was provided by financing
that is non-recourse to the Company but is fully collateralized by Symphony's
assets. In addition, at acquisition, the lender provided an additional
$5,000,000 of working capital financing to Symphony. The Company has
consolidated Symphony's financial condition and results of operations since
acquisition.
Unaudited pro forma operating results for the Company, assuming the acquisitions
of ATX and Idaho Timber had occurred as of the beginning of each year presented
below are as follows (in thousands, except per share amounts):
F-13
3. Acquisitions, continued:
------------
2005 2004
---- ----
Revenues $ 1,213,800 $ 1,210,000
Income before extraordinary items and cumulative
effect of a change in accounting principles $ 1,643,200 $ 175,700
Net income $ 1,643,200 $ 175,700
Per Share:
Basic $15.25 $1.65
Diluted $14.33 $1.61
Pro forma adjustments principally reflect the preliminary allocation of the
purchase price to the difference between the fair value and book value of
property and equipment, resulting in increases or decreases to historical
depreciation expense, and the allocation to identifiable intangible assets
discussed above, resulting in increased amortization expense. For ATX, the pro
forma adjustments also include the elimination of net reorganization items,
which principally resulted from a gain recognized upon the discharge of ATX
indebtedness in bankruptcy, fresh start accounting adjustments and bankruptcy
related professional fees, and the reversal of historical interest expense
related to indebtedness that was discharged in bankruptcy. The increase or
(decrease) to historical income from the pro forma adjustments is as follows (in
thousands):
2005 2004
---- ----
Depreciation and amortization expenses $ (6,000) $ (13,400)
Reorganization items $ (300) $ 24,300
The unaudited pro forma data is not indicative of future results of operations
or what would have resulted if the acquisitions of ATX and Idaho Timber had
actually occurred as of the beginning of the periods presented. Unaudited pro
forma income statement data for NSW and Symphony is not included as the amounts
were not material. Unaudited acquisition balance sheets are not included as
amounts were not material.
In July 2004, the Company invested $50,000,000 in INTL Consilium Emerging Market
Absolute Return Fund, LLC ("INTL"), a limited liability company that is invested
in a master fund which primarily invests in emerging markets debt and equity
securities. INTL and the master fund are managed and controlled by an investment
manager who has full discretion over investment and operating decisions. In
accordance with FASB Interpretation No. 46R, "Consolidation of Variable Interest
Entities", INTL is a variable interest entity and the Company is currently the
primary beneficiary; as a result, the Company accounts for its investment in
INTL as a consolidated subsidiary. In October 2004, the Company invested an
additional $25,000,000 in INTL. INTL plans to sell additional membership
interests in the future, which if accomplished could result in the Company no
longer accounting for INTL as a consolidated subsidiary. At December 31, 2005,
INTL had total assets of $105,100,000 which are reflected as investments in the
Company's consolidated balance sheet, and its liabilities were not material. The
creditors of INTL have recourse only to the assets of INTL and do not have
recourse to any other assets of the Company. The Company can generally withdraw
its capital account interest upon 90 days notice, subject to the manager's
ability to liquidate security positions in an orderly manner. The Company
recorded $9,900,000 and $2,200,000 of pre-tax income relating to INTL for the
years ended December 31, 2005 and 2004, respectively.
F-14
4. Investments in Associated Companies:
-----------------------------------
The Company has investments in several Associated Companies. The amounts
reflected as equity in income (losses) of associated companies in the
consolidated statements of operations are net of income tax provisions of
$700,000, $15,000,000 and $70,100,000 for the years ended December 31, 2005,
2004 and 2003, respectively. Included in consolidated retained earnings at
December 31, 2005 is approximately $42,800,000 of undistributed earnings of the
associated companies.
Cobre Las Cruces, S.A. ("CLC")
In August 2005, the Company consummated the merger with its then 72.1% owned
subsidiary, MK Resources Company ("MK"), whereby the Company acquired the
remaining outstanding MK common shares. The acquisition cost consisted of
approximately 216,000 of the Company's common shares (valued at $8,300,000), and
estimated cash amounts ($4,500,000 has been accrued) that will be paid to former
MK stockholders who perfected appraisal rights. As a result of the merger, MK is
now a wholly-owned subsidiary of the Company, and MK's securities are no longer
publicly traded.
Immediately following the merger, the Company sold to Inmet Mining Corporation
("Inmet"), a Canadian-based global mining company traded on the Toronto stock
exchange (Symbol: IMN), a 70% interest in CLC, a Spanish company that holds the
exploration and mineral rights to the Las Cruces copper deposit in the Pyrite
Belt of Spain. Inmet acquired the interest in CLC in exchange for 5,600,000
newly issued Inmet common shares, representing approximately 11.7% of the
outstanding Inmet common shares immediately following completion of the
transaction. The Inmet shares were recorded at their fair value of approximately
$78,000,000, and the Company recorded a pre-tax gain on the sale of $10,500,000,
which is reflected in the caption investment and other income. For more
information on the Inmet shares, see Note 6.
CLC has entered into an agreement with third party lenders for project financing
consisting of a ten year senior secured credit facility of up to $240,000,000
and a senior secured bridge credit facility of up to (euro)69,000,000 to finance
subsidies and value-added tax. The Company and Inmet have guaranteed 30% and
70%, respectively, of the obligations outstanding under both facilities until
completion of the project as defined in the project financing agreement. At
December 31, 2005, no amounts were outstanding under the facilities. The Company
and Inmet have also committed to provide financing to CLC which is estimated to
be $159,000,000, of which the Company's share will be 30% ($14,300,000 of which
has been loaned as of December 31, 2005). For the year ended December 31, 2005,
the Company recorded a pre-tax loss of $1,600,000 from this investment under the
equity method of accounting.
Union Square
Union Square, two entities in which the Company had non-controlling equity
interests, sold their respective interests in an office complex located on
Capitol Hill in Washington, D.C. during 2005. Including repayment of its
mortgage loans at closing, the Company's share of the net proceeds was
$73,200,000, and the Company recognized a pre-tax gain of $72,300,000.
JPOF II
During 2000, the Company invested $100,000,000 in the equity of a limited
liability company, Jefferies Partners Opportunity Fund II, LLC ("JPOF II"), that
is a registered broker-dealer. JPOF II is managed by Jefferies & Company, Inc.,
a full service investment bank to middle market companies. JPOF II invests in
high yield securities, special situation investments and distressed securities
and provides trading services to its customers and clients. For the years ended
December 31, 2005, 2004 and 2003, the Company recorded $23,600,000, $16,200,000
and $14,800,000, respectively, of pre-tax income from this investment under the
equity method of accounting. These earnings were distributed by JPOF II as
dividends shortly after the end of each year.
F-15
4. Investments in Associated Companies, continued:
----------------------------------
Olympus
In December 2001, the Company invested $127,500,000 for a 25% common stock
interest in Olympus Re Holdings, Ltd. ("Olympus"), a newly formed Bermuda
reinsurance company primarily engaged in the property excess, marine and
aviation reinsurance business. In June 2003, the Company sold 567,574 common
shares of Olympus back to Olympus for total proceeds of $79,500,000. The Company
recognized a $1,500,000 gain on the sale which is reflected in other income for
the year ended December 31, 2003. The shares were sold to Olympus as part of an
issuer tender offer available to all of its shareholders. After completion of
the tender, the Company's interest in Olympus declined from 25% to 16.1%.
Although the Company's equity interest declined below 20%, the Company continued
to account for its investment under the equity method of accounting because of
its ability to exercise significant influence. As a result of redemptions of
other investors' equity interests during 2004 and 2005, the Company's percentage
interest in Olympus increased to 20.1% as of December 31, 2005.
During 2005, Olympus recorded significant losses as a result of estimated
insurance claims from hurricanes Katrina, Rita and Wilma. In early 2006, Olympus
raised a significant amount of new equity to replace some, but not all of the
capital that was lost as a result of the 2005 hurricanes. Since the Company did
not invest additional capital in Olympus, its equity interest will be diluted
(to less than 4%) such that it will no longer apply the equity method of
accounting for this investment subsequent to December 31, 2005. For the years
ended December 31, 2005, 2004 and 2003, the Company recorded $(120,100,000),
$9,700,000 and $40,400,000, respectively, of pre-tax income (loss) from this
investment under the equity method of accounting. In addition, the Company
recorded an impairment loss of $3,700,000 to reduce the book value of its
investment to zero.
EagleRock
In December 2001, the Company invested $50,000,000 in EagleRock Capital Partners
(QP), LP ("EagleRock"), a limited partnership that invests and trades in
securities and other investment vehicles. At December 31, 2005, the book value
of the Company's equity investment in EagleRock was $75,500,000, which excludes
$16,600,000 that was received in January 2006 and is classified as a receivable
as of December 31, 2005. In August 2005, the Company notified EagleRock that it
determined to withdraw its entire interest on January 1, 2006. Discussions are
ongoing as to the timing and manner in which the Company's capital will be
remitted by EagleRock to the Company. Pre-tax income (losses) of $(28,900,000),
$29,400,000 and $49,900,000 for the years ended December 31, 2005, 2004 and
2003, respectively, were recorded from this investment under the equity method
of accounting. The results reported by the partnership since its inception
include both realized and changes in unrealized gains and losses in its
portfolio. In 2004, $3,700,000 was distributed by EagleRock to the Company.
HomeFed
In October 2002, the Company sold one of its real estate subsidiaries, CDS
Holding Corporation ("CDS"), to HomeFed Corporation ("HomeFed") for a purchase
price of $25,000,000, consisting of $1,000,000 in cash and 2,474,226 shares of
HomeFed's common stock, which represented approximately 30% of HomeFed's
outstanding common stock. At December 31, 2005 and 2004, the deferred gain on
this sale was $4,200,000 and $6,800,000, respectively, which is being recognized
into income as CDS's principal asset, the real estate project known as San Elijo
Hills, is developed and sold. For the years ended December 31, 2005, 2004 and
2003, the Company recorded $5,800,000, $10,000,000 and $16,200,000,
respectively, of pre-tax income from this investment under the equity method of
accounting. HomeFed is engaged, directly and through subsidiaries, in the
investment in and development of residential real estate projects in the State
of California. HomeFed is a public company traded on the NASD OTC Bulletin Board
(Symbol: HOFD).
As a result of a 1998 distribution to all of the Company's shareholders,
approximately 7.7% and 9.5% of HomeFed is owned by the Company's Chairman and
President, respectively. Both are also directors of HomeFed and the Company's
President serves as HomeFed's Chairman.
F-16
4. Investments in Associated Companies, continued:
-----------------------------------
Pershing
In January 2004, the Company invested $50,000,000 in Pershing Square, L.P.
("Pershing"), a limited partnership that is authorized to engage in a variety of
investing activities. The Company redeemed its interest as of December 31, 2004,
and the total amount due from Pershing of $71,300,000 (which was paid during the
first quarter of 2005) is included in trade, notes and other receivables, net at
December 31, 2004 in the Company's consolidated balance sheet.
The following table provides summarized data with respect to the Associated
Companies accounted for on the equity method of accounting included in results
of operations for the three years ended December 31, 2005, except for Berkadia
LLC ("Berkadia") which is separately summarized below, and except for WilTel
which was sold as discussed in Note 5. (Amounts are in thousands.)
2005 2004
---- ----
Assets $ 2,750,800 $ 2,247,000
Liabilities 1,873,300 969,200
----------- ------------
Net assets $ 877,500 $ 1,277,800
=========== ============
The Company's portion of the reported net assets $ 379,100 $ 440,200
=========== ============
2005 2004 2003
---- ---- ----
Total revenues $ 984,400 $ 914,500 $ 890,900
Income (loss) from continuing operations before
extraordinary items $ (484,200) $ 221,000 $ 374,700
Net income (loss) $ (484,200) $ 221,000 $ 374,700
The Company's equity in net income (loss) $ (44,400) $ 90,700 $ 119,900
Except for its investment in CLC, the Company has not provided any guarantees,
nor is it contingently liable for any of the liabilities reflected in the above
table. All such liabilities are non-recourse to the Company. The Company's
exposure to adverse events at the investee companies is limited to the book
value of its investment.
Berkadia
In August 2001, Berkadia, an entity jointly owned by the Company and Berkshire
Hathaway Inc., loaned $5,600,000,000 on a senior secured basis to FINOVA Capital
Corporation (the "Berkadia Loan"), the principal operating subsidiary of The
FINOVA Group Inc. ("FINOVA"), to facilitate a chapter 11 restructuring of the
outstanding debt of FINOVA and its principal subsidiaries. Berkadia also
received 61,020,581 newly issued shares of common stock of FINOVA (the "FNV
Shares"), representing 50% of the stock of FINOVA outstanding on a fully diluted
basis. Berkadia financed the Berkadia Loan with bank financing that was
guaranteed, 90% by Berkshire Hathaway and 10% by the Company (with the Company's
guarantee being secondarily guaranteed by Berkshire Hathaway). In February 2004,
FINOVA fully repaid the Berkadia Loan, and Berkadia fully repaid its bank
financing, thereby eliminating the Company's guaranty.
During 2001, Berkadia was paid a $60,000,000 commitment fee by FINOVA Capital
upon execution of the commitment and a $60,000,000 funding fee upon funding of
the Berkadia Loan. The Company's share of these fees, $60,000,000 in the
aggregate, was distributed to the Company shortly after the fees were received.
In addition, FINOVA entered into a ten-year management agreement with the
Company, for which the Company receives an annual fee of $8,000,000, which is
shared equally with Berkshire. The management agreement remains in effect even
though the Berkadia Loan has been repaid.
Under the agreement governing Berkadia, the Company and Berkshire Hathaway
agreed to equally share the commitment fee, funding fee and all management fees.
All income related to the Berkadia Loan, after payment of financing costs, was
shared 90% to Berkshire Hathaway and 10% to the Company.
F-17
4. Investments in Associated Companies, continued:
----------------------------------
In August 2001, Berkadia transferred $5,540,000,000 in cash to FINOVA Capital,
representing the $5,600,000,000 loan reduced by the funding fee of $60,000,000,
in exchange for a $5,600,000,000 note from FINOVA Capital and the FNV Shares.
Under GAAP, Berkadia was required to allocate the $5,540,000,000 cash
transferred, reduced by the previously received $60,000,000 commitment fee,
between its investment in the Berkadia Loan and the FNV Shares, based upon the
relative fair values of the securities received. Further, the fair value of the
FNV Shares was presumed to be equal to the trading price of the stock on the day
Berkadia received the FNV Shares, with only relatively minor adjustments allowed
for transfer restrictions and the inability of the traded market price to
account for a large block transfer. The requirement to use the trading price as
the basis for the fair value estimate resulted in an initial book value for the
FNV Shares of $188,800,000, which was far in excess of the $17,600,000 aggregate
book net worth of FINOVA on the effective date of the Plan, and was inconsistent
with the Company's view that the FINOVA common stock has a very limited value.
Based on this determination of fair value, Berkadia recorded an initial
investment in the FNV Shares of $188,800,000 and in the Berkadia Loan of
$5,291,200,000. The allocation of $188,800,000 to the investment in the common
stock of FINOVA, plus the $120,000,000 of cash fees received, were reflected as
a discount from the face amount of the Berkadia Loan. The discount was amortized
to income over the life of the Berkadia Loan under the effective interest
method.
During 2002, Berkadia gave its consent to FINOVA to use up to $300,000,000 of
cash to repurchase certain subordinated notes rather than make mandatory
prepayments of the Berkadia Loan. In consideration for its consent, FINOVA and
Berkadia agreed that they would share equally in the net interest savings
resulting from any repurchase. The Company's share of the net interest savings
is reflected in the table below.
Subsequent to acquisition, Berkadia accounted for its investment in the FINOVA
common stock under the equity method of accounting. During 2001, Berkadia
recorded its share of FINOVA's losses in an amount that reduced Berkadia's
investment in FINOVA's common stock to zero. Berkadia's recognition of any
future FINOVA losses was suspended at that time. Although the Company had no
cash investment in Berkadia, since it guaranteed 10% of the third party
financing provided to Berkadia, the Company recorded its share of any losses
recorded by Berkadia, up to the amount of the Company's guarantee. Berkadia
distributed all of its cash to its members during 2004 and has had no financial
statement activity since that distribution. For the years ended December 31,
2004 and 2003, the Company's equity in the income of Berkadia consists of the
following (in thousands):
2004 2003
---- ----
Net interest spread on the Berkadia Loan - 10% of total $ -- $ 2,400
Net interest savings 300 2,000
Amortization of Berkadia Loan discount related to cash fees -
50% of total 200 29,100
Amortization of Berkadia Loan discount related to FINOVA
stock - 50% of total 300 45,700
-------- --------
Equity in income of associated companies - Berkadia $ 800 $ 79,200
======== ========
The following table provides certain summarized data with respect to Berkadia
for the years ended December 31, 2004 and 2003. (Amounts are in thousands.)
F-18
4. Investments in Associated Companies, continued:
-----------------------------------
2004 2003
---- ----
Total revenues $ 2,400 $198,800
Income from continuing operations before extraordinary items
and cumulative effect of a change in accounting principle $ 2,200 $180,400
Net income $ 2,200 $180,400
5. Discontinued Operations:
-----------------------
WilTel
In December 2005, the Company sold WilTel to Level 3 Communications, Inc.
("Level 3") for aggregate cash consideration of $460,300,000 (net of estimated
working capital adjustments of approximately $25,500,000), and 115,000,000 newly
issued shares of Level 3 common stock. In connection with the sale, the Company
retained certain assets and liabilities of WilTel that were not purchased by
Level 3. The retained assets include (i) WilTel's headquarters building
(including the adjacent parking garage) located in Tulsa, Oklahoma, (ii) cash
and cash equivalents in excess of $100,000,000, (iii) corporate aircraft and
related capital lease obligations, and (iv) marketable securities. In addition,
the Company retained all of WilTel's right to receive certain cash payments from
SBC Communications Inc. ("SBC") totaling $236,000,000, of which $37,500,000 was
received prior to closing and the balance is due to be received during 2006.
Prior to the closing, WilTel repaid its long-term debt obligations using its
funds, together with $220,000,000 of funds advanced by the Company. The retained
liabilities also include WilTel's defined benefit pension plan and supplemental
retirement plan obligation and certain other employee related liabilities. The
agreement with Level 3 requires that all parties make the appropriate filings to
treat the purchase of WilTel as a purchase of assets for federal, state and
local income and franchise tax purposes. As a result, WilTel's net operating tax
loss carryforwards ("NOLs"), as well as any tax losses generated by the sale,
remained with the Company. For more information on the Company's NOLs, see Note
16.
The Company recorded a pre-tax gain on disposal of WilTel of $243,800,000. The
calculation of the gain on sale included: (1) the cash proceeds received from
Level 3, net of estimated working capital adjustments; (2) the fair value of the
Level 3 common shares of $339,300,000, based on the $2.95 per share closing
price of Level 3 common stock immediately prior to closing; (3) the amount of
the SBC cash payments that had not been previously accrued prior to closing
($175,900,000); (4) an impairment charge for WilTel's headquarters building
described below; and (5) the net book value of the net assets sold and estimated
expenses and other costs related to the transaction.
The Company concluded that the change in the use of WilTel's former headquarters
facility to a property held for investment was a change in circumstances which
indicated that the carrying amount of the facility might not be recoverable. On
the closing date of the sale to Level 3, the carrying amount of the facility was
$96,500,000; based on the assumptions discussed below the Company concluded that
the carrying amount was not recoverable, and an impairment loss of $42,400,000
was recorded reducing the gain on disposal of discontinued operations. At
December 31, 2005, the new cost basis and carrying amount of the facility
reflected in other assets is $54,100,000.
The facility is a fifteen story, 740,000 square foot office building located in
downtown Tulsa, Oklahoma for which construction was substantially completed in
2001, with a total of approximately 640,000 rentable square feet. Approximately
260,000 square feet of the rentable space is leased to Level 3 under short-term
leases that expire at the end of 2007, subject to Level 3 renewal options. Level
3 also has the right to vacate approximately 44,000 square feet every six months
commencing July 1, 2006. Approximately 23,500 square feet are leased to another
tenant also under a short-term lease that is subject to renewal options. The
building is considered to be Class A office space, and the Company believes that
the best value for the building would be obtained by selling the building to an
owner/occupant. The facility is being marketed for sale at a gross selling price
of $80,000,000, including furniture, fixtures and equipment.
F-19
5. Discontinued Operations, continued:
-----------------------
The Company utilized a discounted cash flow technique to determine the fair
value of the facility. In order to estimate the amount which could ultimately be
realized upon the sale of the facility, the Company had a market analysis
prepared of sales and leasing activity for the downtown Tulsa market. The
analysis identified the range of historical selling prices for properties of
comparable quality, including the age, size and occupancy rates of the
properties sold, properties currently available for sale or lease, current
market occupancy rates and recent leasing rates. Since the facility is being
marketed to an owner/occupant, the cash flow estimates reflect that it may take
from two to five years before a buyer is identified and the facility can be
sold. The cash flow estimates assume that Level 3 will only fulfill its minimum
rental commitment; the Company did not assume that space which is currently
vacant will be leased, which results in negative operating cash flow prior to
sale. The Company's cash flow estimates reflect a range of possible outcomes
since the timing of the sale and the ultimate price that the Company will
realize for the facility is uncertain.
During 2002, the Company acquired 47.4% of the outstanding common stock of
WilTel for aggregate cash consideration of $353,900,000, including expenses. In
November 2003, the Company consummated an exchange offer and merger agreement
pursuant to which WilTel became a wholly-owned subsidiary of the Company and
former WilTel public stockholders received an aggregate of 16,734,690 common
shares of the Company. The 2003 acquisition was wholly unrelated to the initial
acquisition in 2002; the Company's decision to acquire the remaining WilTel
shares was based upon developments subsequent to the initial 2002 purchase.
Prior to the merger, during 2003 the Company recorded its share of WilTel's
losses under the equity method of accounting in the amount of $52,100,000; such
amount is reflected in the 2003 statement of operations in the caption equity in
income (losses) of associated companies.
The aggregate purchase price for the 2003 acquisition was approximately
$425,300,000, consisting of $422,800,000 of Leucadia common shares and cash
expenses of $2,500,000. The execution of the merger agreement on August 21, 2003
created a measurement date for accounting purposes that was used to determine
the per share value of the Leucadia common shares issued. The Company averaged
the closing prices of its common shares for the five business day period
commencing two business days before and ending two business days after the
merger agreement was executed. That average, $25.27 per share, was used to
calculate the aggregate value of the Leucadia common shares issued.
Waikiki Beach Hotel
In May 2005, the Company sold its 716-room Waikiki Beach hotel and related
assets for an aggregate purchase price of $107,000,000, before closing costs and
other required payments. After satisfaction of mortgage indebtedness on the
hotel of $22,100,000 at closing, the Company received net cash proceeds of
approximately $73,000,000, and recorded a pre-tax gain of $56,600,000 (reflected
in discontinued operations). Historical operating results for the hotel are not
material.
WebLink Wireless, Inc. ("WebLink")
In December 2002, the Company entered into an agreement to purchase certain debt
and equity securities of WebLink, for an aggregate purchase price of
$19,000,000. WebLink operated in the wireless messaging industry, providing
wireless data services and traditional paging services. In the fourth quarter of
2003, WebLink sold substantially all of its operating assets to Metrocall, Inc.
for 500,000 shares of common stock of Metrocall, Inc.'s parent, Metrocall
Holdings, Inc. ("Metrocall"), an immediately exercisable warrant to purchase
25,000 shares of common stock of Metrocall at $40 per share, and a warrant to
purchase up to 100,000 additional shares of Metrocall common stock at $40 per
share, subject to certain vesting criteria.
Based upon the market price of the Metrocall stock received and the fair value
of the warrants received as of the date of sale, the Company reported a pre-tax
gain on disposal of discontinued operations of $11,500,000. The vesting criteria
for the remaining warrants were satisfied during 2004, and the Company recorded
$2,200,000 as gain on disposal of discontinued operations (net of minority
interest), which represented the estimated fair value of the warrants.
F-20
5. Discontinued Operations, continued:
-----------------------
During the fourth quarter of 2004, WebLink exercised all of its warrants and
subsequently tendered all of its Metrocall shares as part of a merger agreement
between Metrocall and Arch Wireless, Inc. WebLink received cash of $19,900,000
and 675,607 common shares of the new parent company (USA Mobility, Inc., which
had a fair market value of $25,000,000 when received), resulting in a pre-tax
gain of $15,800,000 that is included in net securities gains of continuing
operations. The Company's investment in the shares of USA Mobility at December
31, 2004 is classified as a non-current investment.
Other
In December 2005, the Company sold its interest in an Argentine shoe
manufacturer that had been acquired earlier in the year. Although there was no
material gain or loss on disposal, results of discontinued operations during
2005 include a pre-tax loss of $4,400,000.
In October 2004, the Company sold a commercial real estate property and
classified it as a discontinued operation. During the second quarter of 2004,
the Company recorded a non-cash charge of approximately $7,100,000 to reduce the
carrying amount of this property to its estimated fair value. The Company
recorded an additional pre-tax loss of $600,000 when the sale closed, resulting
principally from mortgage prepayment penalties incurred upon satisfaction of the
property's mortgage. Operating results for this property were not material in
prior years.
In the fourth quarter of 2004, the Company sold its geothermal power business
and classified it as a discontinued operation. The Company received proceeds of
$14,800,000, net of closing costs, and recognized a pre-tax gain of $200,000.
During 2003, the Company settled certain tax payment responsibilities with the
purchaser of Colonial Penn Insurance Company. Income from discontinued
operations for the year ended December 31, 2003 includes a payment of $1,800,000
from the purchaser to reimburse the Company for tax payments previously made.
A summary of the results of discontinued operations is as follows for the three
year period ended December 31, 2005 (in thousands):
2005 2004 2003
---- ---- ----
Revenues and other income:
Telecommunications revenues $ 1,743,938 $ 1,582,948 $ 231,930
Wireless messaging revenues -- -- 57,900
Investment and other income 114,980 41,270 11,007
Net securities gains 3,483 6,372 25
-------------- ------------ -----------
1,862,401 1,630,590 300,862
-------------- ------------ -----------
Expenses:
Telecommunications cost of sales 1,223,143 1,129,248 167,653
Wireless messaging network operating expenses -- -- 31,354
Interest 27,536 34,459 5,648
Salaries 150,000 139,546 29,247
Depreciation and amortization 162,694 207,829 41,642
Selling, general and other expenses 187,460 184,370 45,914
-------------- ------------ -----------
1,750,833 1,695,452 321,458
-------------- ------------ -----------
Income (loss) before income taxes 111,568 (64,862) (20,596)
Income tax provision (benefit) 11 -- (9,010)
-------------- ------------ -----------
Income (loss) from discontinued operations, net of taxes $ 111,557 $ (64,862) $ (11,586)
============== ============ ===========
F-21
6. Investments:
-----------
A summary of investments classified as current assets at December 31, 2005 and
2004 is as follows (in thousands):
2005 2004
------------------------------ ------------------------------
Carrying Value Carrying Value
Amortized and Estimated Amortized and Estimated
Cost Fair Value Cost Fair Value
---- ---------- ---- ----------
Investments available for sale $ 1,206,973 $ 1,206,195 $ 917,840 $ 918,064
Trading securities 103,978 105,541 148,602 159,616
Other investments, including accrued interest income 11,826 11,826 7,065 7,065
----------- ----------- ----------- -----------
Total current investments $ 1,322,777 $ 1,323,562 $ 1,073,507 $ 1,084,745
=========== =========== =========== ===========
The amortized cost, gross unrealized gains and losses and estimated fair value
of available for sale investments classified as current assets at December 31,
2005 and 2004 are as follows (in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
2005
----
Bonds and notes:
United States Government and agencies $ 818,967 $ 107 $ 597 $ 818,477
U.S. Government-Sponsored Enterprises 199,030 17 377 198,670
Foreign governments 1,503 17 -- 1,520
All other corporates 187,473 476 421 187,528
----------- ------- ------- -----------
Total $ 1,206,973 $ 617 $ 1,395 $ 1,206,195
=========== ======= ======= ===========
2004
----
Bonds and notes:
United States Government and agencies $ 736,529 $ 10 $ 935 $ 735,604
U.S. Government-Sponsored Enterprises 113,384 -- 191 113,193
All other corporates 67,927 1,666 326 69,267
----------- ------- ------- -----------
Total $ 917,840 $ 1,676 $ 1,452 $ 918,064
=========== ======= ======= ===========
Certain information with respect to trading securities at December 31, 2005 and
2004 is as follows (in thousands):
2005 2004
------------------------------ -------------------------------
Carrying Value Carrying Value
Amortized and Estimated Amortized and Estimated
Cost Fair Value Cost Fair Value
---------- ----------- --------- ----------
Fixed maturities - corporate bonds and notes $ -- $ -- $ 67,629 $ 77,288
Equity securities -- -- 1,413 1,585
Other investments 103,978 105,541 79,560 80,743
----------- -------- --------- ---------
Total trading securities $ 103,978 $105,541 $ 148,602 $ 159,616
=========== ======== ========= =========
Other investments classified as trading securities principally include INTL's
investment in a master fund.
A summary of non-current investments at December 31, 2005 and 2004 is as follows
(in thousands):
F-22
6. Investments, continued:
-----------
2005 2004
------------------------------ -------------------------------
Carrying Value Carrying Value
Amortized and Estimated Amortized and Estimated
Cost Fair Value Cost Fair Value
--------- ---------- --------- ----------
Investments available for sale $ 762,178 $ 825,716 $ 423,687 $ 667,595
Other investments 151,611 151,611 50,731 50,731
---------- ---------- ---------- ----------
Total non-current investments $ 913,789 $ 977,327 $ 474,418 $ 718,326
========== ========== ========== ==========
Other non-current investments include 5,600,000 common shares of Inmet, which
have a cost and carrying value of $78,000,000 at December 31, 2005. The Inmet
shares have the benefit of a registration rights agreement; however, the shares
may not be sold until the earlier of August 2009 or the date on which the
Company is no longer obligated under the guarantee of CLC's credit facilities.
At acquisition, the fair value of the Inmet common stock was determined to be
approximately 90% of the then current trading price as a result of these
transferability restrictions. The Inmet shares will be carried at the initially
recorded value (unless there is an other than temporary impairment) until one
year prior to the termination of the transfer restrictions. At December 31,
2005, the market value of the Inmet shares is approximately $142,100,000.
The amortized cost, gross unrealized gains and losses and estimated fair value
of non-current investments classified as available for sale at December 31, 2005
and 2004 are as follows (in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
----------- ---------- ---------- ----------
2005
----
Bonds and notes:
United States Government and agencies $ 39,037 $ 25 $ 584 $ 38,478
U.S. Government-Sponsored Enterprises 141,265 106 1,428 139,943
All other corporates 160,190 37,677 1,675 196,192
---------- ---------- ---------- ----------
Total fixed maturities 340,492 37,808 3,687 374,613
---------- ---------- ---------- ----------
Equity securities:
Preferred stocks 5,569 -- 118 5,451
Common stocks:
Banks, trusts and insurance companies 12,340 10,010 -- 22,350
Industrial, miscellaneous and all other 403,777 28,817 9,292 423,302
---------- ---------- ---------- ----------
Total equity securities 421,686 38,827 9,410 451,103
---------- ---------- ---------- ----------
$ 762,178 $ 76,635 $ 13,097 $ 825,716
========== ========== ========== ==========
2004
----
Bonds and notes:
United States Government and agencies $ 26,995 $ 19 $ 155 $ 26,859
U.S. Government-Sponsored Enterprises 115,178 28 925 114,281
States, municipalities and political subdivisions 7,610 -- -- 7,610
Foreign governments 1,507 79 -- 1,586
All other corporates 125,020 41,568 416 166,172
---------- ---------- ---------- ----------
Total fixed maturities 276,310 41,694 1,496 316,508
---------- ---------- ---------- ----------
Equity securities:
Preferred stocks 993 -- -- 993
Common stocks:
Banks, trusts and insurance companies 91,154 194,620 -- 285,774
Industrial, miscellaneous and all other 55,230 10,868 1,778 64,320
---------- ---------- ---------- ----------
Total equity securities 147,377 205,488 1,778 351,087
---------- ---------- ---------- ----------
$ 423,687 $ 247,182 $ 3,274 $ 667,595
========== ========== ========== ==========
F-23
6. Investments, continued:
-----------
The amortized cost and estimated fair value of non-current investments
classified as available for sale at December 31, 2005, by contractual maturity,
are shown below. Expected maturities are likely to differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
Estimated
Amortized Fair
Cost Value
---- -----
(In thousands)
Due after one year through five years $ 140,861 $ 177,331
Due after five years through ten years 18,585 18,112
Due after ten years 744 749
---------- ----------
160,190 196,192
Mortgage-backed securities 180,302 178,421
---------- ----------
$ 340,492 $ 374,613
========== ==========
Non-current available for sale equity securities include 115,000,000 shares of
Level 3 common stock received in connection with the sale of WilTel (see Note
5), with a cost of $339,300,000 and an estimated fair value of $330,100,000 at
December 31, 2005. Pursuant to a registration rights agreement entered into with
Level 3, Level 3 has filed a registration statement covering the shares and is
required to keep the registration statement effective for the shorter of two
years (or a longer period as set forth in the agreement), or until the
distribution of the shares is completed. The Level 3 common stock is subject to
a transfer restriction that limits the number of shares the Company can sell
(with certain exceptions) on any given day until May 22, 2006; thereafter there
is no restriction.
During 2005, the Company sold all 375,000 common shares of White Mountains
Insurance Group, Ltd. ("WMIG") that it owned, and recorded a security gain of
$146,000,000. The Company purchased the shares in 2001 for $75,000,000; at
December 31, 2004 the investment in WMIG, which was classified as a non-current
available for sale security, had a market value of $242,300,000.
Net unrealized gains (losses) on investments were $(22,400,000), $153,200,000
and $161,800,000 at December 31, 2005, 2004 and 2003, respectively.
Reclassification adjustments included in comprehensive income for the three year
period ended December 31, 2005 are as follows (in thousands):
2005 2004 2003
---- ---- ----
Unrealized holding gains (losses) arising during the period, net of
tax provision of $0, $0 and $56,896 $ 12,707 $ (26,623) $ 105,861
Less: reclassification adjustment for (gains) losses included in net
income, net of tax provision of $0, $0 and $1,158 (188,284) 18,031 (2,085)
----------- ---------- ----------
Net change in unrealized gain on investments, net of tax provision
of $0, $0 and $55,738 $ (175,577) $ (8,592) $ 103,776
=========== ========== ==========
The following table shows the Company's investments' gross unrealized losses and
fair value, aggregated by investment category, all of which have been in a
continuous unrealized loss position for less than 12 months, at December 31,
2005 (in thousands):
F-24
6. Investments, continued:
-----------
Unrealized
Description of Securities Fair Value Losses
------------------------- ---------- ----------
United States Government and agencies $ 518,329 $ 597
U.S. Government-Sponsored Enterprises 135,021 359
Mortgage-backed securities 113,840 1,567
Corporate bonds 170,093 1,985
Marketable equity securities 334,490 9,410
------------- ---------
Total temporarily impaired securities $ 1,271,773 $ 13,918
============= =========
The unrealized losses on the securities issued by the United States Government
and agencies, the U.S. Government-Sponsored Enterprises and the mortgage-backed
securities were caused by interest rate increases and were considered to be
minor (approximately .1%, .3% and 1.4%, respectively). The unrealized losses on
the securities issued by the United States Government and agencies relate to 14
securities which were purchased in 2005 and all of which mature in 2006. The
unrealized losses on the U.S. Government-Sponsored Enterprises relate to 20
securities which were primarily purchased in 2005 and all of which mature in
2006. The unrealized losses on the mortgage-backed securities (all of which are
issued by U.S. Government agencies and U.S. Government-Sponsored Enterprises)
relate to 27 securities substantially all of which were purchased in 2005. The
unrealized losses related to the corporate bonds are not considered to be an
other than temporary impairment. This determination is based on a number of
factors including, but not limited to, the length of time and 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 the fair value, changes
in fair value subsequent to the balance sheet date, and other factors specific
to the individual investment. The unrealized losses on marketable equity
securities primarily relates to the Company's investment in Level 3 common stock
which was acquired in December 2005.
At December 31, 2005, the Company's investments which have been in a continuous
unrealized loss position for 12 months or longer are comprised of 16 securities
which had aggregate gross unrealized losses of approximately $600,000 and an
aggregate fair value of approximately $60,200,000. These securities are
primarily mortgage-backed securities (all of which are issued by U.S. Government
agencies and U.S. Government-Sponsored Enterprises).
At December 31, 2005, the aggregate carrying amount of the Company's investment
in equity securities that are accounted for under the cost method totaled
$151,600,000. Of this amount, $78,000,000 relates to the Company's investment in
the Inmet common shares, which had a market value in excess of the carrying
amount. The fair value of the remaining cost method securities was not estimated
as there were no identified events or changes in circumstances that may have a
significant adverse effect on the fair value and it was not practicable to
estimate the fair value of these investments.
At December 31, 2004, securities with book values aggregating $7,100,000 were on
deposit with various regulatory authorities. Securities with book values of
$12,300,000 and $12,100,000 at December 31, 2005 and 2004, respectively,
collateralized certain swap agreements, and securities with a book value of
$11,100,000 and $11,000,000 at December 31, 2005 and 2004, respectively,
collateralized certain debt obligations and a related letter of credit.
F-25
7. Trade, Notes and Other Receivables, Net:
----------------------------------------
A summary of current trade, notes and other receivables, net at December 31,
2005 and 2004 is as follows (in thousands):
2005 2004
---- ----
Current trade, notes and other receivables, net:
Trade receivables (a) $ 115,538 $ 73,639
Receivable from SBC (b) 198,500 --
Federal income tax receivable -- 3,858
Receivable from Pershing -- 71,294
Receivable from EagleRock 16,636 --
Instalment loan receivables 1,257 2,035
Receivables related to securities 39,387 5,999
Receivables relating to real estate activities 5,602 2,988
Other 15,393 8,211
---------- ---------
392,313 168,024
Allowance for doubtful accounts (15,097) (7,790)
---------- ---------
Total current trade, notes and other receivables, net $ 377,216 $ 160,234
========== =========
(a) Includes $10,700,000 and $10,500,000 as of December 31, 2005 and 2004,
respectively, from Symphony's largest customer.
(b) Represents amounts due from SBC of which $11,000,000 was paid on January 4,
2006 and the balance is payable in ten equal monthly installments in
January 2006 through October 2006. See Note 5 for more information.
8. Intangible Assets, Net and Goodwill:
-----------------------------------
A summary of these assets at December 31, 2005 and 2004 is as follows (in
thousands):
2005 2004
---- ----
Intangibles:
Customer relationships, net of accumulated amortization of $6,686
and $491 $ 58,911 $ 1,472
Trademarks and tradename, net of accumulated amortization of $268 4,140 --
Software, net of accumulated amortization of $701 4,399 --
Patents, net of accumulated amortization of $142 2,188 --
Other, net of accumulated amortization of $1,488 1,446 --
Goodwill 13,999 --
----------- --------
$ 85,083 $ 1,472
=========== =========
During 2005, in connection with the acquisitions of NSW, Idaho Timber and ATX,
the Company recorded customer relationship intangible assets and other
intangible assets which are being amortized over their estimated useful lives,
and goodwill which is not being amortized. See Note 3 for more information. In
addition, during October 2005 the plastics manufacturing segment acquired the
manufacturing assets of a competitor for approximately $4,300,000, and allocated
$2,900,000 of the purchase price to customer relationships and $300,000 to
trademarks. Such amounts are being amortized on a straight-line basis over 10
years. During 2004, the Company recorded $1,900,000 of customer relationship
intangible assets in connection with an acquisition made by the plastics
manufacturing segment, which are being amortized on a straight-line basis over
an average useful life of approximately three years.
F-26
8. Intangible Assets, Net and Goodwill, continued:
-----------------------------------
Amortization expense on intangible assets was $8,800,000 for the year ended
December 31, 2005. The estimated aggregate future amortization expense for the
intangible assets for each of the next five years is as follows: 2006 -
$11,100,000; 2007 - $9,500,000; 2008 - $8,600,000; 2009 - $8,200,000; and 2010 -
$7,000,000.
9. Other Assets:
-------------
A summary of non-current other assets at December 31, 2005 and 2004 is as
follows (in thousands):
2005 2004
---- ----
Real Estate $ 166,188 $ 234,123
Unamortized debt expense 17,993 19,863
Restricted cash, (principally to secure outstanding letters of credits
of $23,000,000 and $2,000,000) 27,018 6,436
Deposits 488 5,565
Other 28,914 6,880
----------- -----------
$ 240,601 $ 272,867
=========== ===========
In the fourth quarter of 2005, 711 Developer, LLC ("Square 711"), a 90% owned
subsidiary of the Company, entered into an agreement to sell its interest in 8
acres of unimproved land in Washington, D.C. for aggregate cash consideration of
$121,900,000; the sale closed in February 2006. The land was acquired by the
Company in September 2003 for cash consideration of $53,800,000. After
satisfaction of mortgage indebtedness on the property of $32,000,000 and other
closing payments, the Company received net cash proceeds of approximately
$75,700,000, and expects to record a pre-tax gain of approximately $48,900,000.
10. Property, Equipment and Leasehold Improvements, Net:
----------------------------------------------------
A summary of property, equipment and leasehold improvements, net at December 31,
2005 and 2004 is as follows (in thousands):
Depreciable
Lives
(in years) 2005 2004
---------- ---- ----
Buildings and leasehold improvements 4-45 $ 136,460 $ 127,363
Machinery and equipment 2-25 93,740 77,686
Network equipment 5-7 14,524 --
Corporate aircraft 8-10 87,981 85,871
Mining properties and mineral rights N/A -- 92,384
Computer equipment and software 2-7 9,520 4,795
General office furniture and fixtures 2-13 8,933 6,840
Construction in progress N/A 4,978 1,591
Other 3-10 7,645 7,960
----------- ----------
363,781 404,490
Accumulated depreciation and amortization (126,760) (121,160)
----------- ----------
$ 237,021 $ 283,330
=========== ==========
In January 2004, the Company exercised an option to sell two of its corporate
aircraft for total proceeds of approximately $38,800,000. The option was
received in connection with the purchase of two new corporate aircraft. The
Company completed the sales in July 2004, and reported a pre-tax gain of
$11,300,000.
F-27
11. Trade Payables, Expense Accruals and Other Non-Current Liabilities:
-------------------------------------------------------------------
A summary of trade payables and expense accruals and other non-current
liabilities at December 31, 2005 and 2004 is as follows (in thousands):
2005 2004
---- ----
Trade payables and expense accruals:
Trade payables $ 26,080 $ 14,939
Payables related to securities 24,268 50,569
Accrued compensation, severance and other employee benefits 109,657 51,403
Taxes other than income 7,228 4,668
Accrued interest payable 21,997 20,572
Due to Level 3 25,490 --
Other 45,058 25,713
--------- ---------
$ 259,778 $ 167,864
========= =========
Other non-current liabilities:
Postretirement and postemployment benefits $ 8,165 $ 8,633
Pension liability 73,729 61,982
Liabilities related to real estate activities 4,334 6,841
Other 35,665 44,219
--------- ---------
$ 121,893 $ 121,675
========= =========
12. Indebtedness:
-------------
The principal amount, stated interest rate and maturity date of outstanding debt
at December 31, 2005 and 2004 are as follows (dollars in thousands):
2005 2004
---- ----
Parent Company Debt:
Senior Notes:
Bank credit facility $ -- $ --
7 3/4% Senior Notes due 2013, less debt discount of $395 and $431 99,605 99,569
7% Senior Notes due 2013, net of debt premium of $1,009 and $1,105 376,009 376,105
Subordinated Notes:
8 1/4% Senior Subordinated Notes due 2005 -- 19,101
7 7/8% Senior Subordinated Notes due 2006, less debt discount of $9 and $20 21,667 21,656
3 3/4% Convertible Senior Subordinated Notes due 2014 350,000 350,000
8.65% Junior Subordinated Deferrable Interest Debentures due 2027 98,200 98,200
Subsidiary Debt:
Repurchase agreements 92,094 21,012
Aircraft financing 43,448 45,562
Industrial Revenue Bonds (with variable interest) 9,815 9,815
Capital leases due 2006 through 2015 with a weighted average
interest rate of 12.1% 10,101 7,280
Symphony credit agreement 27,108 37,690
Other due 2006 through 2011 with a weighted average interest rate of 6.5% 34,335 45,932
---------- ------------
Total debt 1,162,382 1,131,922
Less: current maturities (175,664) (64,799)
---------- ------------
Long-term debt $ 986,718 $ 1,067,123
========== ============
F-28
12. Indebtedness, continued:
------------
Parent Company Debt:
At December 31, 2005, the Company had an unsecured bank credit facility of
$110,000,000, which bears interest based on the Eurocurrency Rate or the prime
rate and matures in 2007. At December 31, 2005, no amounts were outstanding
under this bank credit facility.
In April 2004, the Company sold $350,000,000 principal amount of its 3 3/4%
Convertible Senior Subordinated Notes due 2014 in a private placement
transaction. The notes are convertible into the Company's common shares at
$45.93 per share at any time before their maturity, subject to certain
restrictions contained in the notes, at a conversion rate of 21.7707 shares per
each $1,000 principal amount of notes subject to adjustment (an aggregate of
7,619,745 shares). The Company has a currently effective shelf registration
statement in respect of the notes and the common shares issuable upon conversion
of the notes.
In January 1997, the Company issued 8.65% trust issued preferred securities
("Trups") of its wholly-owned subsidiary, Leucadia Capital Trust I (the
"Trust"). As a result of the implementation of SFAS 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity", the
Company began classifying the Trups as liabilities on July 1, 2003, and
classifies dividends accrued for these securities as interest expense. SFAS 150
did not permit restatement of prior period amounts to reflect the new
classification. In 2004, the Company liquidated the Trust and distributed to the
Trups holders the 8.65% Junior Subordinated Deferrable Interest Debentures held
by the Trust in exchange for their Trups securities. The distribution had no
effect on the total debt of the Company.
Subsidiary Debt:
Debt due within one year includes $92,100,000 and $21,000,000 as of December 31,
2005 and 2004, respectively, relating to repurchase agreements. These fixed rate
repurchase agreements have a weighted average interest rate of approximately
3.95%, mature at various dates through April 2006 and are secured by investments
with a carrying value of $95,100,000.
During 2001, a subsidiary of the Company borrowed $53,100,000 secured by certain
of its corporate aircraft. This debt bears interest based on a floating rate,
requires monthly payments of principal and interest and matures in ten years.
The interest rate at December 31, 2005 was 8.4%. The subsidiary has entered into
an interest rate swap agreement for this financing, which fixed the interest
rate at approximately 5.7%. The subsidiary would have paid $700,000 and
$2,300,000 at December 31, 2005 and 2004, respectively, if the swap were
terminated. Changes in interest rates in the future will change the amounts to
be received under the agreement, as well as interest to be paid under the
related variable debt obligation. The Parent company has guaranteed this
financing.
Capital leases primarily consist of a sale-leaseback transaction related to
certain corporate aircraft originally entered into in May 2003, which was
amended in 2005 to among other matters extend the lease term through 2015.
Symphony has a $50,000,000 revolving credit facility, of which $27,100,000 and
$37,700,000 was outstanding at December 31, 2005 and 2004, respectively. This
financing, which is secured by all of Symphony's assets but otherwise is
non-recourse to the Company, matures in 2006 and bears interest based on LIBOR
plus 3.00%. At December 31, 2005, the interest rate on this facility was 7.39%.
Other subsidiary debt includes a mortgage financing related to Square 711 that
was repaid in connection with the sale of that property in February 2006. The
mortgage balance was $32,000,000 and $20,000,000 as of December 31, 2005 and
2004, respectively.
F-29
12. Indebtedness, continued:
------------
The Company's debt instruments require maintenance of minimum Tangible Net
Worth, limit distributions to shareholders and limit Indebtedness and Funded
Debt, all as defined in the agreements. In addition, the debt instruments
contain limitations on investments, liens, contingent obligations and certain
other matters. As of December 31, 2005, cash dividends of approximately
$556,600,000 would be eligible to be paid under the most restrictive covenants.
All of Symphony's assets (with an aggregate book value of $55,500,000) are
pledged as collateral under Symphony's revolving credit facility. Property,
equipment and leasehold improvements of the plastics manufacturing division
(with a net book value of $4,600,000) are pledged as collateral for Industrial
Revenue Bonds; and $229,600,000 of other assets (primarily property and
investments) are pledged for other indebtedness aggregating $178,100,000. In
addition, the Industrial Revenue Bond obligation is collateralized by a letter
of credit which is fully collateralized by securities with a book value of
$11,100,000.
Interest rate swap agreements were used to manage the potential impact of
changes in interest rates on customer banking deposits. Under interest rate swap
agreements, the Company had agreed with other parties to pay fixed rate interest
amounts and receive variable rate interest amounts calculated by reference to a
notional amount. The variable interest rate portion of the swaps was a specified
LIBOR interest rate. These interest rate swaps expired in 2003.
Counterparties to interest rate and currency swap agreements are major financial
institutions, that management believes are able to fulfill their obligations.
Management believes any losses due to default by the counterparties are likely
to be immaterial.
The aggregate annual mandatory redemptions of debt during the five year period
ending December 31, 2010 are as follows (in thousands): 2006 - $175,700; 2007 -
$12,900; 2008 - $4,700; 2009 - $3,000; and 2010 - $3,100.
The weighted average interest rate on short-term borrowings (consisting of
customer banking deposits (at December 31, 2004), repurchase agreements and
subsidiary revolving credit agreements) was 4.7% and 4.6% at December 31, 2005
and 2004, respectively.
13. Common Shares, Stock Options and Preferred Shares:
-------------------------------------------------
Pursuant to shareholder approval, during the second quarter of 2005 the
Company's authorized common shares were increased to 300,000,000.
The Board of Directors from time to time has authorized acquisitions of the
Company's common shares. In December 1999, the Company's Board of Directors
increased to 6,000,000 the maximum number of shares that the Company is
authorized to purchase. During the three year period ended December 31, 2005,
the Company acquired 6,071 common shares at an average price of $37.55 per
common share, all in connection with employees exercising stock options. At
December 31, 2005, the Company is authorized to repurchase 3,729,477 common
shares.
F-30
13. Common Shares, Stock Options and Preferred Shares, continued:
-------------------------------------------------
In December 2002, the Company completed a private placement of approximately
$150,000,000 of equity securities, based on a common share price of $23.50, to
mutual fund clients of Franklin Mutual Advisers, LLC, including the funds
comprising the Franklin Mutual Series Funds. The Company issued 4,361,399 of the
Company's common shares and newly authorized Series A Non-Voting Convertible
Preferred Stock, that were converted into 2,021,580 common shares in March 2003.
The Company has a fixed stock option plan which provides for grants of options
or rights to non-employee directors and certain employees up to a maximum grant
of 450,000 shares to any individual in a given taxable year. The maximum number
of common shares which may be acquired through the exercise of options or rights
under this plan cannot exceed 1,800,000. The plan provides for the issuance of
stock options and stock appreciation rights at not less than the fair market
value of the underlying stock at the date of grant. Options generally become
exercisable in five equal annual instalments starting one year from date of
grant. No stock appreciation rights have been granted.
During the second quarter of 2000, pursuant to shareholder approval, warrants to
purchase 600,000 common shares were issued to each of the Company's Chairman and
President. The warrants were exercisable through May 15, 2005 at an exercise
price of $15.97 per common share (105% of the closing price of a common share on
the date of grant). In June 2004, Joseph S. Steinberg, President of the Company,
sold all of his warrants to Jefferies & Company, Inc. ("Jefferies") based on the
value of $33.33 per Leucadia share. In September 2004, Ian M. Cumming, Chairman
of the Board of the Company, and others (principally family members) sold
warrants to purchase 361,500 of the Company's common shares to Jefferies based
on a value of $36.67 per Leucadia share. Jefferies exercised all of the warrants
during 2004. Additionally, in September 2004, Mr. Cumming and others
(principally family members) exercised warrants to purchase 238,500 shares at an
exercise price of $15.97 per share. During 2004, the Company filed two
registration statements covering the shares owned by Jefferies and each were
effective for a thirty day period.
A summary of activity with respect to the Company's stock options for the three
years ended December 31, 2005 is as follows:
Common Weighted Available
Shares Average Options For Future
Subject Exercise Exercisable Option
to Option Prices at Year-End Grants
--------- ------ ----------- ------
Balance at December 31, 2002 829,605 $18.14 122,318 867,075
========= ===========
Granted 6,000 $25.69
Exercised (78,525) $16.46
Cancelled (27,900) $19.10
-----------
Balance at December 31, 2003 729,180 $18.35 228,912 888,975
========= ===========
Granted 727,500 $43.35
Exercised (165,150) $17.25
Cancelled (14,100) $19.92
-----------
Balance at December 31, 2004 1,277,430 $32.72 254,430 175,575
========= ===========
Granted 6,000 $36.05
Exercised (215,800) $17.09
Cancelled (90,000) $43.51
-----------
Balance at December 31, 2005 977,630 $35.19 181,580 259,575
=========== ========= ===========
The weighted-average fair value of the options granted was $8.58 per share for
2005, $8.29 per share for 2004 and $6.29 per share for 2003 as estimated on the
date of grant using the Black-Scholes option-pricing model with the following
assumptions: (1) expected volatility of 23.6% for 2005, 19.1% for 2004 and 29.9%
for 2003; (2) risk-free interest rates of 3.8% for 2005, 3.3% for 2004 and 2.3%
for 2003; (3) expected lives of 4.3 years for 2005, 3.7 years for 2004 and 4.0
years for 2003; and (4) dividend yields of .7% for 2005, .4% for 2004 and .6%
for 2003.
F-31
13. Common Shares, Stock Options and Preferred Shares, continued:
-------------------------------------------------
The following table summarizes information about fixed stock options outstanding
at December 31, 2005:
Options Outstanding Options Exercisable
----------------------------------------------------- ---------------------------
Common Weighted Weighted Common Weighted
Shares Average Average Shares Average
Range of Subject Remaining Exercise Subject Exercise
Exercise Prices to Option Contractual Life Price to Option Price
--------------- --------- ---------------- ------------- --------- ---------
$15.08 59,630 0.4 years $15.08 59,630 $15.08
$20.49 262,500 2.5 years $20.49 112,200 $20.49
$22.09 3,375 0.4 years $22.09 3,375 $22.09
$23.49 4,125 1.4 years $23.49 2,625 $23.49
$25.69 4,875 2.4 years $25.69 1,875 $25.69
$31.12 8,625 3.4 years $31.12 1,875 $31.12
$36.05 6,000 4.4 years $36.05 -- $36.05
$43.51 628,500 5.0 years $43.51 -- $43.51
At December 31, 2005 and 2004, 1,237,205 and 1,453,005, respectively, of the
Company's common shares were reserved for stock options and 7,619,745 of the
Company's common shares were reserved for the 3 3/4% Convertible Senior
Subordinated Notes. At December 31, 2003, 1,200,000 of the Company's common
shares were reserved for warrants.
At December 31, 2005 and 2004, 6,000,000 of preferred shares (redeemable and
non-redeemable), par value $1 per share, were authorized and not issued.
14. Net Securities Gains:
---------------------
The following summarizes net securities gains for each of the three years in the
period ended December 31, 2005 (in thousands):
2005 2004 2003
---- ---- ----
Net realized gains on securities $ 222,258 $ 140,581 $ 15,737
Write-down of investments (a) (12,230) (4,589) (6,485)
Net unrealized gains (losses) on trading securities (1,212) 572 676
--------- --------- ---------
$ 208,816 $ 136,564 $ 9,928
========= ========= =========
(a) Includes a provision to write down investments in certain available for
sale securities in 2005, 2004 and 2003 and an investment in a non-public
security in 2003.
Proceeds from sales of investments classified as available for sale were
$1,979,300,000, $1,435,900,000 and $681,900,000 during 2005, 2004 and 2003,
respectively. Gross gains of $204,600,000, $135,900,000 and $17,700,000 and
gross losses of $2,400,000, $1,600,000 and $2,100,000 were realized on these
sales during 2005, 2004 and 2003, respectively.
F-32
15. Other Results of Operations Information:
----------------------------------------
Investment and other income for each of the three years in the period ended
December 31, 2005 consists of the following (in thousands):
2005 2004 2003
---- ---- ----
Interest on short-term investments $ 7,537 $ 1,693 $ 2,835
Dividend income 6,817 9,279 2,859
Interest on fixed maturities 46,440 25,606 13,633
Interest on notes receivable 1,880 945 4,657
Other investment income 1,164 1,749 3,605
Gains on sale or foreclosure of real estate or other assets,
net of costs 26,136 46,279 24,347
Banking and lending, including gains on sale of loan portfolios
of $16,304 in 2004 293 26,341 55,091
Rental income 11,870 23,176 20,123
MK product and service income 112 993 1,441
Refund of foreign taxes, not based on income, including accrued interest -- -- 5,295
Winery revenues 18,868 13,840 13,839
Other 28,723 30,180 31,660
---------- ---------- ----------
$ 149,840 $ 180,081 $ 179,385
========== ========== ==========
Taxes, other than income or payroll, amounted to $3,600,000, $2,900,000 and
$3,300,000 for the years ended December 31, 2005, 2004 and 2003, respectively.
Advertising costs amounted to $2,600,000, $2,100,000 and $1,100,000 for the
years ended December 31, 2005, 2004 and 2003, respectively.
16. Income Taxes:
------------
The principal components of deferred taxes at December 31, 2005 and 2004 are as
follows (in thousands):
2005 2004
---- ----
Deferred Tax Asset:
Securities valuation reserves $ 46,473 $ 18,614
Property and equipment 31,547 7,271
Other assets 35,224 20,450
NOL carryover 1,870,100 1,456,870
Other liabilities 60,622 44,469
Discontinued operations -- 789,395
------------ -----------
2,043,966 2,337,069
Valuation allowance (804,829) (2,185,275)
------------ -----------
1,239,137 151,794
------------ -----------
Deferred Tax Liability:
Unrealized gains on investments (21,947) (82,662)
Depreciation (30,241) (24,293)
Other (51,849) (44,839)
------------ -----------
(104,037) (151,794)
------------ -----------
Net deferred tax asset $ 1,135,100 $ --
============ ===========
F-33
16. Income Taxes, continued:
-------------
As of December 31, 2005, the Company had consolidated federal NOLs of
$600,000,000, none of which expire prior to 2023, that may be used to offset the
taxable income of any member of the Company's consolidated tax group. In
addition, the Company has $4,500,000,000 of federal NOLs, none of which expire
prior to 2015, that are only available to offset the taxable income of certain
subsidiaries. Capital loss carryforwards of $45,000,000, which expire in 2006
and 2007, and foreign NOLs of $6,000,000 are not reflected in the table since
the Company does not expect it will be able to use the carryforwards before they
expire. The Company also has various state NOLs that expire at different times.
Uncertainties that may affect the utilization of the Company's tax attributes
include future operating results, tax law changes, rulings by taxing authorities
regarding whether certain transactions are taxable or deductible and expiration
of carryforward periods.
As of December 31, 2004, the Company carried a valuation allowance that fully
reserved for its net deferred tax asset, because the Company could not
demonstrate it would have the future taxable income necessary to realize that
asset. During 2005, as a result of the consummation of certain transactions and
ongoing operating profits, the Company prepared updated projections of future
taxable income. 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 a portion of the Company's net deferred tax
asset; accordingly, $1,135,100,000 of the deferred tax valuation allowance was
reversed as a credit to income tax expense. In future years the Company will
record income tax provisions equal to its effective income tax rate, unless
there is a further adjustment to the valuation allowance.
The Company's conclusion that a portion of the deferred tax asset was more
likely than not to be realizable was strongly influenced by its historical
ability to generate significant amounts of taxable income. The Company's
estimate of future taxable income considered all available evidence, both
positive and negative, about its current operations and investments, included an
aggregation of individual projections for each material operation and investment
and included all future years that the Company estimated it would have available
NOLs. Over the projection period, the Company assumed that its readily available
cash, cash equivalents and marketable securities would provide returns
equivalent to the returns expected to be provided by the Company's existing
operations and investments, except for certain amounts assumed to be invested on
a short-term basis to meet the Company's liquidity needs. The Company believes
that its estimate of future taxable income is reasonable but inherently
uncertain, and if its current or future operations and investments generate
taxable income greater than the projected amounts, further adjustments to reduce
the valuation allowance are possible. Conversely, if the Company realizes
unforeseen material losses in the future, or its ability to generate future
taxable income necessary to realize a portion of the deferred tax asset is
materially reduced, additions to the valuation allowance could be recorded.
The Company's total comprehensive income in 2004 and 2003 enabled it to realize
certain acquired deferred tax assets which had been fully reserved for at
acquisition. The resulting reduction in the valuation allowance for deferred tax
assets ($22,300,000 in 2004 and $22,500,000 in 2003) was applied to reduce the
recorded amount of identifiable intangible assets to zero.
Under certain circumstances, the ability to use the NOLs and future deductions
could be substantially reduced if certain changes in ownership were to occur. In
order to reduce this possibility, the Company's certificate of incorporation
includes a charter restriction that prohibits transfers of the Company's common
stock under certain circumstances.
The provision (benefit) for income taxes for each of the three years in the
period ended December 31, 2005 was as follows, excluding amounts allocated to
equity in associated companies, trust preferred securities and discontinued
operations (in thousands):
F-34
16. Income Taxes, continued:
------------
2005 2004 2003
---- ---- ----
State income taxes $ 3,804 $ 3,418 $ (909)
Federal income taxes:
Current -- (31,143) (10,688)
Deferred -- 7,242 (23,750)
Reversal of valuation allowance (1,135,100) -- --
Currently payable foreign income taxes 214 291 173
------------- ---------- ----------
$ (1,131,082) $ (20,192) $ (35,174)
============= ========== ==========
The table below reconciles the expected statutory federal income tax to the
actual income tax benefit (in thousands):
2005 2004 2003
---- ---- ----
Expected federal income tax $ 48,357 $ 39,157 $ (2,876)
State income taxes, net of federal income tax benefit 2,473 2,222 545
Reversal of valuation allowance (1,135,100) -- --
Resolution of tax contingencies -- (27,300) (24,407)
Recognition of additional tax benefits -- -- (6,998)
Permanent differences -- (5,700) --
Federal income tax carryback refund -- (3,858) --
Recognition of acquired WilTel federal tax benefits (46,951) (6,481) --
Discontinued operations tax loss benefit -- (19,807) --
Other 139 1,575 (1,438)
------------- ---------- ----------
Actual income tax benefit $ (1,131,082) $ (20,192) $ (35,174)
============= ========== ==========
Reflected above as recognition of additional tax benefits and resolution of tax
contingencies are reductions to the Company's income tax provision for the
favorable resolution of certain federal and state income tax contingencies. The
Internal Revenue Service has completed its audit of the Company's consolidated
federal income tax returns for the years 1996 through 1999, without any material
payment required from the Company.
The statute of limitations with respect to the Company's federal income returns
have expired for all years through 2001. Prior to May 2001, WilTel was included
in the consolidated federal income tax return of its former parent, The Williams
Companies Inc. ("Williams"). Pursuant to a tax settlement agreement between
WilTel and Williams, the Company has no liability for any audit adjustments made
to Williams' consolidated tax returns; however, adjustments to Williams' prior
years tax returns could affect certain of the Company's tax attributes that
impact the calculation of alternative minimum taxable income.
17. Pension Plans and Postretirement Benefits:
------------------------------------------
The information presented below for defined benefit pension plans is presented
separately for the Company's plans and the plans formerly administered by
WilTel. Pursuant to the WilTel sale agreement the responsibility for WilTel's
defined benefit pension plans was retained by the Company. The Company presents
the information separately since the WilTel plan's investment strategies,
assumptions and results are significantly different than those of the Company.
The Company:
Prior to 1999, the Company maintained defined benefit pension plans covering
employees of certain units who also met age and service requirements. Effective
December 31, 1998, the Company froze its defined benefit pension plans. A
summary of activity with respect to the Company's defined benefit pension plan
for 2005 and 2004 is as follows (in thousands):
F-35
17. Pension Plans and Postretirement Benefits, continued:
-----------------------------------------
2005 2004
---- ----
Projected Benefit Obligation:
Projected benefit obligation at January 1, $ 58,286 $ 55,079
Interest cost (a) 2,951 3,173
Actuarial loss 2,314 5,263
Benefits paid (5,428) (5,229)
---------- ----------
Projected benefit obligation at December 31, $ 58,123 $ 58,286
========== ==========
Change in Plan Assets:
Fair value of plan assets at January 1, $ 47,643 $ 52,444
Actual return on plan assets 1,375 555
Employer contributions -- --
Benefits paid (5,428) (5,229)
Administrative expenses (114) (127)
---------- ----------
Fair value of plan assets at December 31, $ 43,476 $ 47,643
========== ==========
Funded Status $ (14,647) $ (10,643)
Unrecognized prior service cost 48 50
Unrecognized net loss from experience differences and
assumption changes 21,828 20,651
---------- ----------
Net amount recognized $ 7,229 $ 10,058
========== ==========
(a) Includes charges to expense of $900,000 and $800,000 for 2005 and 2004,
respectively, relating to discontinued operations obligations.
As of December 31, 2005 and 2004, $21,800,000 and $20,700,000, respectively, of
the net amount recognized in the consolidated balance sheet was reflected as a
charge to accumulated other comprehensive income and $14,600,000 and
$10,600,000, respectively, was reflected as accrued pension cost. Since the
Company froze its defined benefit pension plan, the accumulated benefit
obligation is the same as the projected benefit obligation. No employer
contributions are expected to be made in 2006 related to the Company's defined
benefit pension plan.
Pension expense related to the defined benefit pension plan charged to
operations included the following components (in thousands):
2005 2004 2003
---- ---- ----
Interest cost $ 2,045 $ 2,191 $ 2,247
Expected return on plan assets (905) (1,019) (1,947)
Actuarial loss 848 652 258
Amortization of prior service cost 3 3 3
--------- --------- ---------
Net pension expense $ 1,991 $ 1,827 $ 561
========= ========= =========
At December 31, 2005, the plan's assets consist of U.S. government and agencies
bonds (43%), investment grade bonds (24%), cash equivalents (32%) and other
(1%). At December 31, 2004, the plan's assets consisted of U.S. government and
agencies bonds (37%), U.S. Government-Sponsored Enterprises (6%), investment
grade bonds (28%) and cash equivalents (29%).
F-36
17. Pension Plans and Postretirement Benefits, continued:
-----------------------------------------
The defined benefit pension plan assets are invested in short-term investment
grade fixed income investments in order to maximize the value of its invested
assets by minimizing exposure to changes in market interest rates. This
investment strategy provides the Company with more flexibility in managing the
plan should interest rates rise and result in a decrease in the discounted value
of benefit obligations. The current investment strategy substantially requires
investments in investment grade securities, and a final average maturity target
for the portfolio of one and one-half years and a one year maximum duration.
To develop the assumption for the expected long-term rate of return on plan
assets, the Company considered the following underlying assumptions: 2% current
expected inflation, 1% real rate of return for risk-free investments (primarily
U.S. government and agency bonds) for the target duration and .25% default risk
premium for the portion of the portfolio invested in non-U.S. government and
agency bonds. The combination of these underlying assumptions resulted in the
selection of the 3.25% expected long-term rate of return assumption for 2005.
Because pension expense includes the cost of expected plan administrative
expenses, the 3.25% assumption is not reduced for such expenses.
Several subsidiaries provide certain health care and other benefits to certain
retired employees under plans which are currently unfunded. The Company pays the
cost of postretirement benefits as they are incurred. Amounts charged to expense
were not material in each of the three years ended December 31, 2005.
A summary of activity with respect to the Company's postretirement plans for
2005 and 2004 is as follows (in thousands):
2005 2004
---- ----
Accumulated postretirement benefit obligation at January 1, $ 4,715 $ 4,422
Interest cost 247 277
Contributions by plan participants 167 155
Actuarial loss 224 732
Benefits paid (580) (871)
------- -------
Accumulated postretirement benefit obligation at December 31, 4,773 4,715
Unrecognized prior service cost 387 476
Unrecognized net actuarial gain 640 922
------ ------
Accrued postretirement benefit obligation $ 5,800 $ 6,113
======= =======
The Company expects to spend $400,000 on postretirement benefits during 2006. At
December 31, 2005, the assumed health care cost trend rate for 2006 used in
measuring the accumulated postretirement benefit obligation is 9% and, at
December 31, 2004, such rate for 2005 was 10%. At December 31, 2005 and 2004,
the assumed health care cost trend rates were assumed to decline to an ultimate
rate of 5% by 2013. If the health care cost trend rates were increased or
decreased by 1%, the accumulated postretirement obligation as of December 31,
2005 would have increased or decreased by $200,000. The effect of these changes
on interest cost for 2005 would be immaterial.
F-37
17. Pension Plans and Postretirement Benefits, continued:
-----------------------------------------
The Company uses a December 31 measurement date for its plans. The assumptions
used relating to the defined benefit plan and postretirement plans are as
follows:
Pension Benefits Other Benefits
---------------- --------------
2005 2004 2005 2004
---- ---- ---- ----
Discount rate used to determine
benefit obligation at December 31, 4.87% 5.25% 5.25% 5.25%
Weighted-average assumptions used to determine
net cost for years ended December 31:
Discount rate 5.25% 5.75% 5.25% 6.00%
Expected long-term return on plan assets 3.25% 3.25% N/A N/A
The discount rate was selected to result in an estimated projected benefit
obligation on a plan termination basis, using current rates for annuity
settlements and lump sum payments weighted for the assumed elections of
participants.
The following benefit payments are expected to be paid (in thousands):
Pension Benefits Other Benefits
---------------- --------------
2006 $ 4,593 $ 427
2007 4,377 426
2008 4,567 427
2009 4,704 430
2010 4,054 415
2011 - 2015 21,547 1,822
WilTel:
Effective on the date of sale, the Company froze WilTel's defined benefit
pension plans. A summary of activity with respect to the plans for 2005 and 2004
is as follows (in thousands):
2005 2004
---- ----
Projected Benefit Obligation:
Projected benefit obligation at beginning of period $ 147,888 $ 129,912
Interest cost 9,410 7,829
Service cost 4,612 3,980
Actuarial loss 29,758 9,112
Curtailment gain (2,334) --
Benefits paid (3,280) (2,945)
---------- ----------
Projected benefit obligation at December 31, $ 186,054 $ 147,888
========== ==========
Change in Plan Assets:
Fair value of plan assets at beginning of period $ 74,601 $ 67,761
Actual return on plan assets 4,815 6,002
Employer contributions 21,769 3,783
Benefits paid (3,280) (2,945)
---------- ----------
Fair value of plan assets at December 31, $ 97,905 $ 74,601
========== ==========
Funded Status $ (88,149) $ (73,287)
Unrecognized net actuarial loss 40,739 14,572
---------- ----------
Net amount recognized $ (47,410) $ (58,715)
========== ==========
F-38
17. Pension Plans and Postretirement Benefits, continued:
-----------------------------------------
Since the Company froze the WilTel plans, the accumulated benefit obligation is
the same as the projected benefit obligation as of December 31, 2005. As of
December 31, 2004, the accumulated benefit obligation for the plan was
$147,600,000. As of December 31, 2005 and 2004, $40,700,000 and $14,300,000,
respectively, of the net amount recognized in the consolidated balance sheet was
reflected as a charge to accumulated other comprehensive income and $88,100,000
and $73,300,000, respectively, was reflected as accrued pension cost.
Employer contributions expected to be paid to the plan in 2006 are $29,100,000.
Pension expense for the WilTel plans charged to results of discontinued
operations included the following components (in thousands):
November 6, 2003
(date of acquisition)
2005 2004 to December 31, 2003
---- ---- --------------------
Interest cost $ 9,410 $ 7,829 $ 1,075
Service cost 4,612 3,980 575
Expected return on plan assets (6,509) (5,391) (640)
Actuarial loss 2,953 46 --
---------- -------- ---------
Net pension expense $ 10,466 $ 6,464 $ 1,010
========== ======== =========
The plans' assets consist of equity securities (70%), debt securities (28%) and
cash equivalents (2%) at December 31, 2005. At December 31, 2004, the plans'
assets consisted of equity securities (71%), debt securities (19%) and cash
equivalents (10%).
The investment objectives of the plans emphasize long-term capital appreciation
as a primary source of return and current income as a supplementary source.
In connection with freezing the plan, the Company is reviewing the target
allocation, which currently is as follows:
Target
Equity securities:
Large cap stocks 40%
Small cap stocks 10%
International stocks 20%
-----
Total equity securities 70%
Fixed income/bonds 30%
-----
Total 100%
=====
Investment performance objectives are based upon a benchmark index or mix of
indices over a market cycle. The investment strategy designates certain
investment restrictions for domestic equities, international equities and fixed
income securities. These restrictions include the following:
o For domestic equities, there will generally be no more than 5% of any
manager's portfolio at market in any one company and no more than 150%
of any one sector of the appropriate index for any manager's
portfolio. Restrictions are also designated on outstanding market
value of any one company at 5% for large to medium equities and 8% for
small to medium equities.
F-39
17. Pension Plans and Postretirement Benefits, continued:
-----------------------------------------
o For international equities, there will be no more than 8% in any one
company in a manager's portfolio, no fewer than three countries in a
manager's portfolio, no more than 10% of the portfolio in countries
not represented in the EAFE index, no more than 150% of any one sector
of the appropriate index and no currency hedging is permitted.
o Fixed income securities will all be rated BBB- or better at the time
of purchase, there will be no more than 8% at market in any one
security (U.S. government and agency positions excluded), no more than
a 30-year maturity in any one security and investments in standard
collateralized mortgage obligations are limited to securities that are
currently paying interest, receiving principal, do not contain
leverage and are limited to 10% of the market value of the portfolio.
The assumption for the expected long-term rate of return on plan assets
considered historical returns and future expectations, including a more
conservative expectation of future returns and asset allocation targets as the
participant population grows closer to retirement age. Based on this
information, a 7.0% expected long-term rate of return on plan assets was
selected for 2005 and 2004.
The measurement date for WilTel's plans is December 31. The assumptions used for
2005 and 2004 are as follows:
Pension Benefits
----------------
2005 2004
---- ----
Weighted-average assumptions used to determine
benefit obligation at December 31:
Discount rate 5.40% 5.75%
Rate of compensation increase 3.50% 3.50%
Weighted-average assumptions used to determine
net cost for the period ended December 31:
Discount rate 5.75% 6.00%
Expected long-term return on plan assets 7.00% 7.00%
Rate of compensation increase 3.50% 3.50%
The timing of expected future benefit payments was used in conjunction with the
Citigroup Pension Discount Curve to develop a discount rate that is
representative of the high quality corporate bond market, adjusted for current
rates which might be available for annuity settlements.
The following pension benefit payments are expected to be paid (in thousands):
2006 $ 3,309
2007 2,926
2008 3,381
2009 2,911
2010 3,396
2011 - 2015 22,976
The Company and its consolidated subsidiaries have defined contribution pension
plans covering certain employees. Contributions and costs are a percent of each
covered employee's salary. Amounts charged to expense related to such plans were
$1,700,000, $1,400,000 and $1,300,000 for the years ended December 31, 2005,
2004 and 2003, respectively.
F-40
18. Commitments:
-----------
The Company and its subsidiaries rent office space and office equipment under
noncancellable operating leases with terms varying principally from one to
twenty years. Rental expense (net of sublease rental income and unfavorable
contract amortization) was $8,100,000 in 2005, $7,600,000 in 2004 and $5,900,000
in 2003. Future minimum annual rentals (exclusive of month-to-month leases, real
estate taxes, maintenance and certain other charges) under these leases at
December 31, 2005 are as follows (in thousands):
2006 $ 10,415
2007 9,340
2008 7,127
2009 5,642
2010 3,615
Thereafter 7,862
---------
44,001
Less: sublease income (5,785)
---------
$ 38,216
=========
In connection with the sale of certain subsidiaries and certain non-recourse
financings, the Company has made or guaranteed the accuracy of certain
representations. No material loss is expected in connection with such matters.
Pursuant to an agreement that was entered into before the Company sold CDS to
HomeFed in 2002, the Company agreed to provide project improvement bonds for the
San Elijo Hills project. These bonds, which are for the benefit of the City of
San Marcos, California and other government agencies are required prior to the
commencement of any development at the project. CDS is responsible for paying
all third party fees related to obtaining the bonds. Should the City or others
draw on the bonds for any reason, CDS and one of its subsidiaries would be
obligated to reimburse the Company for the amount drawn. At December 31, 2005,
$29,500,000 was outstanding under these bonds, $800,000 of which expires in 2006
and the remainder thereafter.
Symphony is limited by debt agreements in the amount of dividends and other
transfers of funds that are available to the Company. Principally as a result of
such restrictions, the net assets of subsidiaries which are subject to
limitations on transfer of funds to the Company were approximately $8,800,000 at
December 31, 2005.
19. Litigation:
----------
The Company and its subsidiaries are parties to legal proceedings that are
considered to be either ordinary, routine litigation incidental to their
business or not material to the Company's consolidated financial position. The
Company does not believe that any of the foregoing actions will have a material
adverse effect on its consolidated financial position or liquidity.
20. Earnings (Loss) Per Common Share:
---------------------------------
For the year ended December 31, 2005, the numerators for basic and diluted per
share computations for income from continuing operations were $1,224,100,000 and
$1,238,300,000, respectively. For the year ended December 31, 2004, the
numerators for basic and diluted per share computations for income from
continuing operations were $208,500,000 and $214,800,000, respectively. The
calculations for diluted earnings (loss) per share assumes the 3 3/4%
Convertible Notes had been converted into common shares for the periods they
were outstanding and earnings increased for the interest on such notes.
F-41
20. Earnings (Loss) Per Common Share, continued:
--------------------------------
For the year ended December 31, 2003, there were no differences in the
numerators for the basic and diluted per share computations for income from
continuing operations; the numerator was $101,100,000. The denominators for
basic per share computations were 107,765,000, 106,692,000 and 91,896,000 for
2005, 2004 and 2003, respectively. The denominators for diluted per share
computations reflect the dilutive effect of 252,000, 779,000 and 656,000 options
and warrants for 2005, 2004 and 2003, respectively (the treasury stock method
was used for these calculations), and 7,620,000 and 5,275,000 shares related to
the 3 3/4% Convertible Notes for 2005 and 2004, respectively.
21. Fair Value of Financial Instruments:
------------------------------------
The following table presents fair value information about certain financial
instruments, whether or not recognized on the balance sheet. Fair values are
determined as described below. These techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows. The fair value amounts presented do not purport to represent and should
not be considered representative of the underlying "market" or franchise value
of the Company. The methods and assumptions used to estimate the fair values of
each class of the financial instruments described below are as follows:
(a) Investments: The fair values of marketable equity securities, fixed
maturity securities and investments held for trading purposes (which
include securities sold not owned) are substantially based on quoted market
prices, as disclosed in Note 6. The fair value of the Company's investment
in the Inmet common shares, all of which are restricted as discussed in
Note 6, is based on quoted market prices. The fair values of the Company's
other equity securities that are accounted for under the cost method
(aggregating $73,600,000) were not practicable to estimate; the fair values
were assumed to be the carrying amount.
(b) Cash and cash equivalents: For cash equivalents, the carrying amount
approximates fair value.
(c) Notes receivables: The fair values of variable rate notes receivable are
estimated to be the carrying amount.
(d) Loan receivables of banking and lending subsidiaries: The carrying amount
approximates fair value.
(e) Customer banking deposits: At December 31, 2004, the fair value of customer
banking deposits is estimated using rates currently offered for deposits of
similar remaining maturities.
(f) Long-term and other indebtedness: The fair values of non-variable rate debt
are estimated using quoted market prices and estimated rates which would be
available to the Company for debt with similar terms. The fair value of
variable rate debt is estimated to be the carrying amount.
(g) Derivative instruments: The fair values of the interest rate swap and
currency rate swap agreements are based on rates currently available for
similar agreements.
F-42
21. Fair Value of Financial Instruments, continued:
------------------------------------
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 2005 and 2004 are as follows (in thousands):
2005 2004
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Financial Assets:
Investments:
Current $ 1,323,562 $ 1,323,562 $ 1,084,745 $ 1,084,745
Non-current 977,327 1,041,446 718,326 718,326
Cash and cash equivalents 386,957 386,957 277,238 277,238
Notes receivable:
Current 6,413 6,413 1,697 1,697
Non-current 3,787 3,787 -- --
Loan receivables of banking and lending
subsidiary, net of allowance:
Current 1,056 1,056 1,733 1,733
Non-current 1,376 1,376 1,625 1,625
Financial Liabilities:
Customer banking deposits:
Current -- -- 18,472 18,658
Non-current -- -- 6,119 6,251
Debt:
Current 175,664 176,052 64,799 65,201
Non-current 986,718 1,038,252 1,067,123 1,180,371
Securities sold not owned 24,268 24,268 50,569 50,569
Derivative Instruments:
Interest rate swaps (677) (677) (2,342) (2,342)
Foreign currency swaps (2,546) (2,546) (5,878) (5,878)
22. Segment Information:
--------------------
The Company's reportable segments consist of its operating units, which offer
different products and services and are managed separately. The Company's
manufacturing operations are conducted through Idaho Timber and its plastics
manufacturing segment. Idaho Timber primarily remanufactures, manufactures
and/or distributes wood products. The Company's plastics manufacturing
operations manufacture and market lightweight plastic netting used for a variety
of purposes. The Company's healthcare services operations provide physical,
occupational and speech therapy services, healthcare staffing services and
Medicare consulting services. The Company's telecommunications operations are
principally conducted through ATX, an integrated communications provider that
offers a wide range of telecommunication services in the Mid-Atlantic region of
the United States. The Company's domestic real estate operations consist of a
variety of commercial properties, residential land development projects and
other unimproved land, all in various stages of development and all available
for sale. Other operations primarily consist of the Company's wineries and
residual banking and lending activities that are in run-off.
F-43
22. Segment Information, continued:
-------------------
Associated companies include equity interests in entities that the Company
accounts for on the equity method of accounting. Investments in associated
companies include CLC, Olympus, Berkadia, HomeFed, JPOF II and EagleRock. Both
JPOF II and EagleRock are entities engaged in investing and/or securities
transactions activities.
Corporate assets primarily consist of investments and cash and cash equivalents
and corporate revenues primarily consist of investment income and securities
gains and losses. Corporate assets, revenues, overhead expenses and interest
expense are not allocated to the operating units. The Company has a
manufacturing facility located in Belgium, which is the only foreign operation
with non-U.S. revenue or assets that the Company consolidates, and it is not
material. In addition to its investment in Bermuda-based Olympus, the Company
owns 36% of the principal electric utility in Barbados, and an interest, through
its 30% ownership of CLC, in a copper deposit in Spain. From time to time the
Company invests in the securities of non-U.S. entities or in investment
partnerships that invest in non-U.S. securities.
Certain information concerning the Company's segments for 2005, 2004 and 2003 is
presented in the following table. Consolidated subsidiaries are reflected as of
the date of acquisition, which was September 2003 for Symphony, April 2005 for
ATX and May 2005 for Idaho Timber. Associated Companies are only reflected in
the table below under identifiable assets employed.
F-44
22. Segment Information, continued:
-------------------
2005 2004 2003
---- ---- ----
(In millions)
Revenues and other income (a):
Manufacturing:
Idaho Timber $ 239.0 $ -- $ --
Plastics 93.6 64.4 54.1
Healthcare Services 239.9 258.4 71.1
Telecommunications 111.4 -- --
Domestic Real Estate 29.8 63.5 50.4
Other Operations 59.1 70.8 95.6
Corporate (b) 268.3 180.9 42.5
--------- --------- --------
Total consolidated revenues and other income $ 1,041.1 $ 638.0 $ 313.7
========= ========= =========
Income (loss) from continuing operations before income taxes, minority expense
of trust preferred securities and equity in income (losses) of associated
companies:
Manufacturing:
Idaho Timber $ 8.2 $ -- $ --
Plastics 14.2 7.9 4.4
Healthcare Services 3.3 5.1 (2.3)
Telecommunications (1.9) -- --
Domestic Real Estate 4.1 20.7 18.1
Other Operations 6.1 18.6 9.1
Corporate (b) 101.9 59.6 (37.5)
Elimination (c) 2.3 -- --
--------- --------- ---------
Total consolidated income (loss) from continuing operations before income
taxes, minority expense of trust preferred
securities and equity in income (losses) of associated companies $ 138.2 $ 111.9 $ (8.2)
========= ========= =========
Identifiable assets employed:
Manufacturing:
Idaho Timber $ 162.7 $ -- $ --
Plastics 81.9 50.4 50.8
Healthcare Services 55.5 65.6 54.6
Telecommunications 88.6 -- --
Domestic Real Estate 182.7 253.2 275.8
Other Operations 252.0 403.7 505.8
Investments in Associated Companies 375.5 460.8 430.9
Corporate 4,062.0 2,070.1 1,456.9
Assets of discontinued operations -- 1,496.6 1,622.4
--------- --------- ---------
Total consolidated assets $ 5,260.9 $ 4,800.4 $ 4,397.2
========= ========= =========
F-45
22. Segment Information, continued:
-------------------
(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) Net securities gains for Corporate aggregated $199,500,000 and $123,100,000
during 2005 and 2004, respectively, which primarily resulted from the sale
of publicly traded debt and equity securities that had been classified as
available for sale securities. Security gains in 2005 include a gain from
the sale of WMIG of $146,000,000. For 2005 and 2004, security gains include
provisions of $12,200,000 and $4,600,000, respectively, to write down
investments in certain available for sale securities. For 2003, security
gains include a provision of $6,500,000 to write down investments in
certain available for sale securities and an investment in a non-public
security. The write downs of the available for sale securities resulted
from declines in market value determined to be other than temporary.
(c) Eliminates services purchased by ATX from WilTel and recorded as a cost of
sales by ATX.
(d) For the years ended December 31, 2005, 2004 and 2003, income (loss) from
continuing operations has been reduced by depreciation and amortization
expenses of $41,300,000, $29,400,000 and $29,100,000, respectively; such
amounts are primarily comprised of Corporate ($10,700,000, $11,400,000 and
$11,700,000, respectively), manufacturing ($14,200,000, $5,200,000 and
$4,700,000, respectively), other operations ($5,500,000, $6,900,000 and
$7,800,000, respectively) and telecommunications ($7,500,000 in 2005).
Depreciation and amortization expenses for other segments are not material.
(e) For the years ended December 31, 2005, 2004 and 2003, income (loss) from
continuing operations has been reduced by interest expense of $68,400,000,
$62,700,000 and $37,900,000, respectively; such amounts are primarily
comprised of Corporate ($63,200,000, $55,300,000 and $26,000,000,
respectively), healthcare services ($2,800,000, $2,200,000 and $600,000,
respectively) and banking and lending, which is included in other
operations ($1,100,000, $2,700,000 and $8,800,000, respectively). Interest
expense for other segments is not material.
F-46
23. Selected Quarterly Financial Data (Unaudited):
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands, except per share amounts)
2005:
Revenues and other income $ 121,295 $ 258,665 $ 343,265 $ 317,922
========== =========== ========= ==========
Income (loss) from continuing operations $ (6,695) $ 1,205,266 $ 47,229 $ (21,688)
========== =========== ========= ==========
Income from discontinued operations, net of taxes $ 9,308 $ 11,267 $ 56,755 $ 34,227
========== =========== ========= ==========
Gain on disposal of discontinued operations, net of taxes $ -- $ 54,578 $ 130 $ 245,664
========== =========== ========= ==========
Net income $ 2,613 $ 1,271,111 $ 104,114 $ 258,203
========== =========== ========= ==========
Basic earnings (loss) per common share:
Income (loss) from continuing operations $(.06) $11.20 $.44 $(.20)
Income from discontinued operations .08 .10 .53 .32
Gain on disposal of discontinued operations -- .51 -- 2.27
----- ----- ----- -----
Net income $ .02 $11.81 $.97 $2.39
===== ====== ===== =====
Number of shares used in calculation 107,609 107,652 107,797 107,983
======= ======= ======= =======
Diluted earnings (loss) per common share:
Income (loss) from continuing operations $(.06) $10.46 $ .44 $ (.20)
Income from discontinued operations .08 .10 .49 .32
Gain on disposal of discontinued operations -- .47 -- 2.27
----- ------ ----- ------
Net income $ .02 $11.03 $ .93 $ 2.39
===== ====== ===== ======
Number of shares used in calculation 107,609 115,513 115,664 107,983
======= ======= ======= =======
2004:
Revenues and other income $ 124,083 $ 173,009 $ 202,653 $ 138,217
========== =========== ========= =========
Income from continuing operations $ 23,438 $ 60,895 $ 78,601 $ 45,615
========== =========== ========= =========
Income (loss) from discontinued operations, net of taxes $ (35,390) $ (29,157) $ (4,037) $ 3,722
========== =========== ========= =========
Gain (loss) on disposal of discontinued operations, net of taxes $ -- $ 2,237 $ -- $ (424)
========== =========== ========= =========
Net income (loss) $ (11,952) $ 33,975 $ 74,564 $ 48,913
========== =========== ========= =========
Basic earnings (loss) per common share:
Income from continuing operations $ .22 $ .57 $ .74 $ .43
Income (loss) from discontinued operations (.33) (.27) (.04) .03
Gain (loss) on disposal of discontinued operations -- .02 -- --
----- ----- ----- -----
Net income (loss) $(.11) $ .32 $ .70 $ .46
===== ===== ===== ======
Number of shares used in calculation 106,272 106,320 106,717 107,404
======= ======= ======= =======
Diluted earnings (loss) per common share:
Income from continuing operations $ .22 $ .55 $ .70 $ .41
Income (loss) from discontinued operations (.33) (.25) (.03) .03
Gain (loss) on disposal of discontinued operations -- .02 -- --
----- ----- ----- -----
Net income (loss) $ .11 $ .32 $ .67 $ .44
===== ===== ===== ======
Number of shares used in calculation 106,272 112,948 115,072 115,560
======= ======= ======= =======
Income from continuing operations includes credits to income tax expense of
$1,100,000,000 and $25,100,000 for the second and third quarters of 2005,
respectively, resulting from reversals of the deferred income tax valuation
allowance.
F-47
23. Selected Quarterly Financial Data (Unaudited), continued:
---------------------------------------------
The Internal Revenue Service has completed the audit of the Company's
consolidated federal income tax returns for the years 1996 through 1999, without
any material tax payment required from the Company. Income taxes reflect a
benefit for the favorable resolution of certain income tax contingencies for
which the Company had previously established reserves of $27,300,000 in the
third quarter of 2004. In addition, the fourth quarter of 2004 reflects a
benefit to record a federal income tax carryback refund of $3,900,000.
In 2005 and 2004, the totals of quarterly per share amounts do not equal annual
per share amounts because of changes in outstanding shares during the year.
F-48
Schedule II - Valuation and Qualifying Accounts
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
For the years ended December 31, 2005, 2004 and 2003
(In thousands)
Additions Deductions
-------------------------------- ---------------------------------
Charged
Balance at to Costs Balance
Beginning and Write Sale of at End
Description of Period Expenses Recoveries Other Offs Receivables Other of Period
----------- --------- -------- ---------- ----- ----- ----------- ----- ---------
2005
Loan receivables of
banking and lending
subsidiaries $ 946 $ (323) $ 90 $ -- $ 177 $ -- $ -- $ 536
Trade, notes and other
receivables 7,488 7,995 144 5,215 5,701 245 -- 14,896
---------- -------- ------- ---------- ------- ------- ---------- ----------
Total allowance for
doubtful accounts $ 8,434 $ 7,672 $ 234 $ 5,215 $ 5,878 $ 245 $ -- $ 15,432
========== ======== ======= ========== ======= ======= ========== ==========
Deferred tax asset
valuation allowance $2,185,275 $ -- $ -- $ -- $ -- $ -- $1,380,446(a) $ 804,829
========== ========= ======= ========== ======= ======= ========== ==========
2004
Loan receivables of
banking and lending
subsidiaries $ 24,236 $ (8,301) $11,215 $ -- $11,331 $14,873 $ -- $ 946
Trade, notes and other
receivables 2,268 4,967 4,860 -- 4,607 -- -- 7,488
---------- -------- ------- ---------- ------- ------- ---------- ----------
Total allowance for
doubtful accounts $ 26,504 $ (3,334) $16,075 $ -- $15,938 $14,873 $ -- $ 8,434
========== ======== ======= ========== ======= ======= ========== ==========
Deferred tax asset
valuation allowance $2,237,753 $ -- $ -- $ -- $ -- $ -- $ 52,478(b) $2,185,275
========== ======== ======= ========== ======= ======= ========== ==========
2003
Loan receivables of
banking and lending
subsidiaries $ 31,848 $ 16,411 $12,175 $ -- $36,198 $ -- $ -- $ 24,236
Trade, notes and other
receivables 883 3,319 123 -- 2,057 -- -- 2,268
---------- -------- ------- ---------- ------- ------- ---------- ----------
Total allowance for
doubtful accounts $ 32,731 $ 19,730 $12,298 $ -- $38,255 $ -- $ -- $ 26,504
========== ======== ======= ========== ======= ======= ========== ==========
Deferred tax asset
valuation allowance $ 49,551 $ -- $ -- $2,229,709(c)$ -- $ -- $ 41,507(d) $2,237,753
========== ======== ======= ============ ======== ======= ========== ==========
(a) During 2005, as a result of the consummation of certain transactions
and ongoing operating profits, the Company prepared updated
projections of future taxable income. 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 a portion of the Company's net deferred tax
asset; accordingly, $1,135,100,000 of the deferred tax valuation
allowance was reversed as a credit to income tax expense.
F-49
(b) Principally results from the recognition of acquired tax benefits, of
which $22,300,000 was applied to reduce the carrying amount of
acquired non-current intangible assets to zero, $3,900,000 resulted
from a carryback refund claim and $6,500,000 resulted from the use of
acquired tax attributes to offset the federal income tax provision
that would have otherwise been recorded during 2004.
(c) Additions represent acquired tax benefits, for which the Company
established a full valuation allowance at acquisition since the
Company was not able to demonstrate that it was more likely than not
that it will be able to realize such tax benefits.
(d) Principally results from the recognition of acquired tax benefits of
$22,500,000, which was applied to reduce the carrying amount of
acquired non-current intangible assets and a reclassification to other
liabilities.
F-50