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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K/A
(AMENDMENT NO. 3)
[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 Incorporation (I.R.S. Employer
or Organization) Identification No.)
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
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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:
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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.
EXPLANATORY NOTE
This report on Form 10-K/A amends and restates in its entirety Item 7
of the Annual Report on Form 10-K, as amended, of Leucadia National Corporation
(the "Company") for the fiscal year ended December 31, 2005 (the "2005 10-K"),
and also amends and restates in its entirety Item 15 of the Company's 2005 10-K
to reflect that the financial statements referred to in Item 15(c)(6) have been
filed herewith pursuant to Item 3-09(b) of Regulation S-X:
PART II
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The purpose of this section is to discuss and analyze the Company's
consolidated financial condition, liquidity and capital resources and results of
operations. This analysis should be read in conjunction with the consolidated
financial statements and related notes which appear elsewhere in this Report.
Liquidity and Capital Resources
Parent Company Liquidity
Leucadia National Corporation (the "Parent") is a holding company whose
assets principally consist of the stock of its direct subsidiaries, cash and
cash equivalents and other non-controlling investments in debt and equity
securities. The Parent continuously evaluates the retention and disposition of
its existing operations and investments and investigates possible acquisitions
of new businesses in order to maximize shareholder value. Accordingly, while the
Parent does not have any material arrangement, commitment or understanding with
respect thereto (except as disclosed in this Report), further acquisitions,
divestitures, investments and changes in capital structure are possible. Its
principal sources of funds are its available cash resources, liquid investments,
bank borrowings, public and private capital market transactions, repayment of
subsidiary advances, funds distributed from its subsidiaries as tax sharing
payments, management and other fees, and borrowings and dividends from its
subsidiaries.
As reflected on the Company's December 31, 2005 consolidated balance
sheet, the sum of the Company's cash and cash equivalents, investments
classified as current assets and non-current investments aggregated
$2,687,800,000. However, since $317,300,000 of this amount is pledged as
collateral pursuant to various agreements, represents investments in non-public
securities or is held by subsidiaries that are party to agreements which
restrict the Company's ability to use the funds for other purposes (including
the Inmet shares discussed below), the Company does not consider those amounts
to be readily available to meet the Parent's liquidity needs. The $2,370,500,000
that is readily available is comprised of cash and short-term bonds and notes of
the United States Government and its agencies of $1,198,700,000 (50.6%), U.S.
Government-Sponsored Enterprises of $261,300,000 (11.0%), the equity investment
in Level 3 of $330,100,000 (13.9%), and other publicly traded debt and equity
securities aggregating $580,400,000 (24.5%). Pursuant to a registration rights
agreement entered into with Level 3, Level 3 has filed a registration statement
covering the Level 3 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, including any single trade
with one or more counterparties of at least five million shares of Level 3
common stock) on any given day until May 22, 2006; thereafter there is no
restriction. The investment income realized from the Parent's readily available
cash, cash equivalents and marketable securities is used to meet the Parent
company's short-term recurring cash requirements, which are principally the
payment of interest on its debt and corporate overhead expenses.
The Parent's only long-term cash requirement is to make principal
payments on its long-term debt ($944,900,000 outstanding as of December 31,
2005), of which $21,700,000 is due in 2006, $475,000,000 is due in 2013,
$350,000,000 is due in 2014 and $98,200,000 is due in 2027. Historically, the
Parent has used its available liquidity to make acquisitions of new businesses
and other investments, but the timing of any future investments and the cost can
not be predicted. Should the Company require additional liquidity for an
investment or any other purpose, the Parent also has an unsecured bank credit
facility of $110,000,000 that matures in 2007 and bears interest based on the
Eurocurrency Rate or the prime rate. No amounts are currently outstanding under
the bank credit facility. In addition, based on discussions with commercial and
investment bankers, the Company believes that it has the ability to raise
additional funds under acceptable conditions for use in its existing businesses
or for appropriate investment opportunities. The Parent's senior debt
obligations are rated two levels below investment grade by Moody's Investors
Services and Standard & Poor's, and one level below investment grade by Fitch
Ratings. Ratings issued by bond rating agencies are subject to change at any
time.
3
In December 2005, the Company sold WilTel to Level 3 for aggregate cash
consideration of $460,300,000 (net of estimated working capital adjustments),
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 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 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 Company has reclassified
WilTel's balance sheet amounts in prior years to assets and liabilities of
discontinued operations.
In the aggregate, the Company received value of $833,500,000 from the
sale of WilTel, including the consideration paid by Level 3 and the net book
value of the retained assets and liabilities, but reduced by the funds advanced
to WilTel in 2005. In addition, 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 NOLs, as well as any tax losses generated by the
sale, remained with the Company. For more information about the Company's NOLs
and tax attributes, see Note 16 of Notes to Consolidated Financial Statements.
In June 2005, the Company's 8 1/4% Senior Subordinated Notes, which had
an outstanding principal amount of $19,100,000, matured. The Company repaid
these notes and the related accrued interest with available cash resources.
In February 2005, the plastics manufacturing segment acquired the assets
of NSW for approximately $26,600,000, including working capital adjustments. In
April 2005, the Company acquired ATX upon the effectiveness of its bankruptcy
plan for approximately $56,300,000, including expenses, of which $25,300,000 was
spent in 2005 and the balance was spent during 2003 and 2004. In May 2005, the
Company acquired Idaho Timber for total cash consideration of $133,600,000,
including working capital adjustments and expenses. The plastics manufacturing
segment also acquired certain assets of a competitor in October 2005 for
approximately $4,300,000. Each of these acquisitions is reflected in the
Company's consolidated financial statements from the date of acquisition. In the
aggregate, the purchase price allocation for these acquisitions resulted in the
recognition of amortizable intangible assets of $78,400,000 and goodwill of
$14,000,000, which is not subject to amortization. For more information
concerning these acquisitions, see Notes 3 and 8 of Notes to Consolidated
Financial Statements. The funds for these acquisitions were provided from the
Company's available cash resources.
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.
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. in May 2005. Including repayment of its
mortgage loans at closing, the Company's share of the net proceeds was
$73,200,000.
4
In August 2005, the Company consummated the merger with MK, its then
72.1% owned subsidiary, 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.
Immediately following the merger, the Company sold to Inmet, a
Canadian-based global mining company, 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.
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 under the project
financing. 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).
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
($78,000,000) 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.
In the fourth quarter of 2005, 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.
The amount and availability of the Company's NOLs and other tax
attributes are subject to certain qualifications, limitations and uncertainties.
In order to reduce the possibility that certain changes in ownership could
impose limitations on the use of the NOLs, the Company's certificate of
incorporation contains provisions which generally restrict the ability of a
person or entity from acquiring ownership (including through attribution under
the tax law) of five percent or more of the common shares and the ability of
persons or entities now owning five percent or more of the common shares from
acquiring additional common shares. The restrictions will remain in effect until
the earliest of (a) December 31, 2024, (b) the repeal of Section 382 of the
Internal Revenue Code (or any comparable successor provision) or (c) the
beginning of a taxable year of the Company to which certain tax benefits may no
longer be carried forward.
As of February 23, 2006, the Company is authorized to repurchase
3,729,477 common shares. Such purchases may be made from time to time in the
open market, through block trades or otherwise. Depending on market conditions
and other factors, such purchases may be commenced or suspended at any time
without prior notice. Except in connection with employees using common shares to
pay the exercise price of employee stock options, the Company has not
repurchased any common shares during the three year period ended December 31,
2005.
5
Consolidated Liquidity
As discussed above, the Company relies on the Parent's available
liquidity to meet its short-term and long-term needs, and to make acquisitions
of new businesses and investments. The Company has no current plans to raise
additional capital in the public or private markets, but it believes it could
raise additional capital if necessary. The Company's operating businesses do not
require material funds from the Parent to support their operating activities,
and the Parent does not depend on positive cash flow from its operating segments
to meet its liquidity needs. The components of the Company's operating
businesses and investments change frequently as a result of acquisitions or
divestitures, the timing of which is impossible to predict but which often have
a material impact on the Company's consolidated statements of cash flows in any
one period. Further, the timing and amounts of distributions from certain of the
Company's investments in partnerships accounted for under the equity method are
generally outside the control of the Company. As a result, reported cash flows
from operating, investing and financing activities do not generally follow any
particular pattern or trend, and reported results in the most recent period
should not be expected to recur in any subsequent period.
Net cash provided by operating activities increased by $252,700,000 in
2005 as compared to the prior year, due principally to increased distributions
of earnings from associated companies, a decrease in the size of the Company's
investment in its trading portfolio and increased cash flow from the Company's
operating units, principally WilTel and the manufacturing businesses. As
discussed above, WilTel was sold at the end of 2005; WilTel's 2005 cash flow
from operating activities prior to the sale was $256,800,000. The increased cash
flow from the Company's manufacturing units reflect Idaho Timber, which was
acquired during 2005, and increased operating income at the plastics
manufacturing segment resulting from an acquisition and growth in most of its
markets. The increased distributions from associated companies principally
resulted from the proceeds received from Union Square, which is discussed above.
Net cash provided by operating activities increased by $91,700,000 in 2004 as
compared to 2003, due principally to funds provided by WilTel, which became a
consolidated subsidiary in November 2003, of $189,600,000 (including $25,000,000
of pre-funded capital expenditures from SBC) and a net refund of Corporate
income tax payments of $26,900,000. WilTel's cash flow from operating activities
did not increase the liquidity available to the Parent (as defined above), since
WilTel's debt agreements prohibited the payment of dividends.
Net cash flows from investing activities increased by $39,300,000 in
2005 as compared to 2004 and by $200,300,000 in 2004 as compared to 2003. During
2005, proceeds from the disposal of discontinued operations net of expenses and
cash sold were $459,100,000, reflecting the sale of WilTel and the Waikiki Beach
hotel, as compared to $22,300,000 in 2004. The use of funds during 2005 for
acquisitions (net of cash acquired) totaled $170,500,000 for the acquisitions of
NSW, ATX and Idaho Timber. There was not a comparable use of funds during 2004;
in 2003 the amount principally reflects the cash held by WilTel on the date of
acquisition, reduced by the net cash expended to acquire Symphony. Funds used
for WilTel's acquisition of property, equipment and leasehold improvements
totaled $96,100,000 in 2005 and $73,200,000 in 2004; as a result of the sale of
WilTel the Company's use of funds for property, equipment and leasehold
improvements is expected to decline significantly. During 2004 and 2003, net
cash was provided from principal collections on loan receivables, and in 2004
from the sale of substantially all of the Company's remaining consumer loan
portfolio; as discussed below banking and lending operations have been in
run-off for the past few years.
During 2005, net cash used for financing activities was $442,700,000, as
compared to net cash provided by financing activities of $220,500,000 in 2004
and $35,200,000 in 2003. During the last three years, funds were used to retire
customer banking deposits of the banking and lending operations as they became
due; in 2005 the remaining deposits were sold. Issuance of long-term debt during
2005 principally relates to repurchase agreements which are discussed below. In
2004, the Company sold $100,000,000 principal amount of its 7% Senior Notes and
$350,000,000 principal amount of its 3 3/4% Convertible Senior Subordinated
Notes; in 2003 the Company sold $275,000,000 principal amount of its 7% Senior
Notes. Proceeds received from the sale of all the Notes can be used by the
Company for investing or general corporate purposes. The reduction of long-term
6
debt during 2005 includes the repayment of $442,500,000 of debt of operations
sold (WilTel and Waikiki Beach hotel) and the maturity of the Company's 8 1/4%
Senior Subordinated Notes.
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 (with
an aggregate book value of $55,500,000) but otherwise is non-recourse to the
Company, matures in 2006 and bears interest based on LIBOR plus 3%. At December
31, 2005, the interest rate on this facility was 7.39%.
Debt due within one year includes $92,100,000 and $21,000,000 as of
December 31, 2005 and December 31, 2004, respectively, relating to repurchase
agreements of one of the Company's subsidiaries. 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, of which $43,400,000 is currently
outstanding. Capital leases of another subsidiary aggregating $9,900,000 consist
of a sale-leaseback transaction related to other corporate aircraft. The Parent
company has guaranteed these financings.
The Company's debt instruments require maintenance of minimum Tangible
Net Worth, limit distributions to shareholders and limit Indebtedness and Funded
Debt (as such terms are defined in the agreements). In addition, the debt
instruments contain limitations on investments, liens, contingent obligations
and certain other matters. The Company is in compliance with all of these
restrictions, and the Company has the ability to incur additional indebtedness
or make distributions to its shareholders and still remain in compliance with
these restrictions. Certain of the debt instruments of subsidiaries of the
Company also contain restrictions which require the maintenance of financial
covenants, impose restrictions on the ability of such subsidiaries to pay
dividends to the Company and/or provide collateral to the lender. Principally as
a result of such restrictions, the assets of subsidiaries which are subject to
limitations on transfer of funds to the Company were approximately $289,700,000
at December 31, 2005. For more information, see Note 12 of Notes to Consolidated
Financial Statements.
As shown below, at December 31, 2005, the Company's contractual cash
obligations totaled $1,836,612,000.
Payments Due by Period (in thousands)
--------------------------------------------------------------
Less than 1
Total Year 1-3 Years 4-5 Years
---------- ---------- ---------- ----------
CONTRACTUAL CASH OBLIGATIONS AFTER 5 YEARS
Long-term debt $1,162,382 $ 175,664 $ 17,639 $ 6,106 $ 962,973
Estimated interest expense on long-term
debt 577,088 65,445 120,548 118,982 272,113
Estimated payments related to derivative
financial instruments 23,670 5,540 10,288 7,158 684
Planned funding of pension and post-
retirement obligations 33,014 29,494 853 845 1,822
Operating leases, net of sublease
income 38,216 8,274 13,218 8,862 7,862
Asset purchase obligations 1,361 783 578 -- --
Operations and maintenance obligations 881 881 -- -- --
---------- ---------- ---------- ---------- ----------
Total Contractual Cash Obligations $1,836,612 $ 286,081 $ 163,124 $ 141,953 $1,245,454
========== ========== ========== ========== ==========
7
The estimated interest expense on long-term debt includes estimated
interest related to variable rate debt which the Company determined using rates
in effect at December 31, 2005. Estimated payments related to a currency swap
agreement are based on the currency rate in effect at December 31, 2005. Except
for expected funding of $29,100,000 in 2006, the Company's consolidated pension
liability is excluded from the table because the timing of cash payments is
uncertain.
At December 31, 2005, the Company had recorded a liability of
$102,800,000 on its consolidated balance sheet for its unfunded defined benefit
pension plan obligations. This amount represents the difference between the
present value of amounts owed to current and former employees (referred to as
the projected benefit obligation), and the market value of plan assets set aside
in segregated trust accounts. Since the benefits in these plans have been
frozen, future changes to the benefit obligation are expected to principally
result from benefit payments, differences between actuarial assumptions and
actual experience and interest costs.
In recent years, the Company's determination to make contributions to
the pension trust accounts in excess of minimum required amounts was influenced
by the tax deductibility of the contribution, a consideration that is no longer
important because of the Company's NOLs. The Company is currently analyzing the
administrative and insurance costs associated with these plans and will make
substantial contributions to the segregated trust accounts to reduce its plan
liabilities. The timing and amount of additional contributions are uncertain;
however, the Company believes it will make substantial additional contributions
over the next few years to reduce, but not to entirely eliminate, its defined
pension benefit plan liability.
The Company maintained defined benefit pension plans covering certain
operating units prior to 1999, and WilTel also maintained defined pension
benefit plans that were not transferred in connection with the sale of WilTel.
As of December 31, 2005, certain amounts for these plans are reflected
separately in the table below (dollars in thousands):
---------------------------------------------------------------- ------------- --------
The Company's WilTel's
Plans Plans
---------------------------------------------------------------- ------------- --------
Projected benefit obligation $58,123 $186,054
---------------------------------------------------------------- ------------- --------
Funded status - balance sheet liability at December 31, 2005 14,647 88,149
---------------------------------------------------------------- ------------- --------
Deferred losses included in other comprehensive income 21,828 40,739
---------------------------------------------------------------- ------------- --------
Discount rate used to determine the projected benefit obligation 4.87% 5.40%
---------------------------------------------------------------- ------------- --------
Calculations of pension expense and projected benefit obligations are
prepared by actuaries based on assumptions provided by management. These
assumptions are reviewed on an annual basis, including assumptions about
discount rates, interest credit rates and expected long-term rates of return on
plan assets. For the Company's plans, a 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. For the WilTel plans, 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.
These discount rates will be used to determine pension expense in 2006.
Holding all other assumptions constant, a 0.25% change in these discount rates
would affect pension expense by $2,000,000 and the benefit obligation by
$10,000,000.
8
The deferred losses in other comprehensive income primarily result from
changes in actuarial assumptions, including changes in discount rates, changes
in interest credit rates and differences between the actual and assumed return
on plan assets. Deferred losses are amortized to expense if they exceed 10% of
the greater of the projected benefit obligation or the market value of plan
assets as of the beginning of the year; such amount aggregated $36,700,000 at
December 31, 2005 for all plans. A portion of these excess deferred losses will
be amortized to expense during 2006, based on an amortization period of twelve
years.
The assumed long-term rates of return on plan assets are based on the
investment objectives of the specific plan, which are more fully discussed in
Note 17 of Notes to Consolidated Financial Statements. Differences between the
actual and expected rates of return on plan assets have not been material.
OFF-BALANCE SHEET ARRANGEMENTS
At December 31, 2005, the Company's off-balance sheet arrangements
consist of guarantees and letters of credit aggregating $85,100,000. Pursuant to
an agreement that was entered into before the Company sold CDS Holding
Corporation ("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, the amount of outstanding bonds was $29,500,000, $800,000
of which expires in 2006, $27,300,000 in 2007 and the remainder in 2009.
Subsidiaries of the Company have outstanding letters of credit aggregating
$23,600,000 at December 31, 2005, principally to secure various obligations.
Substantially all of these letters of credit expire before 2009. The Company's
remaining guarantee at December 31, 2005 is a $32,000,000 indemnification given
to a lender to a certain real estate property. The property was sold in early
2006 and the Company was released from its indemnification obligation.
As discussed above, the Company has also guaranteed certain amounts
under CLC's credit facilities; however, no amounts were borrowed by CLC at
December 31, 2005.
CRITICAL ACCOUNTING ESTIMATES
The Company's discussion and analysis of its financial condition and
results of operations are based upon its consolidated financial statements,
which have been prepared in accordance with GAAP. The preparation of these
financial statements requires the Company to make estimates and assumptions that
affect the reported amounts in the financial statements and disclosures of
contingent assets and liabilities. On an on-going basis, the Company evaluates
all of these estimates and assumptions. The following areas have been identified
as critical accounting estimates because they have the potential to have a
material impact on the Company's financial statements, and because they are
based on assumptions which are used in the accounting records to reflect, at a
specific point in time, events whose ultimate outcome won't be known until a
later date. Actual results could differ from these estimates.
Income Taxes - The Company records a valuation allowance to reduce its
deferred tax asset to the amount that is more likely than not to be realized. If
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.
9
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.
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 generally 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. At December 31, 2005, the balance of the deferred valuation allowance
was $804,800,000.
The Company is required to record the adjustment to the deferred tax
asset valuation allowance under GAAP. While the adjustment significantly
increases the Company's net worth, there is no current cash benefit to the
Company. The adjustment will also result in the recording of material federal
income tax expense in the future, even though no material cash expenditure for
federal income taxes is expected. Further, while the adjustment results from the
projection of taxable income over a long period of time, under GAAP the expected
future tax savings are not discounted. As a result, this adjustment increases
the Company's net worth attributable to tax savings before the Company has
generated the taxable income necessary to realize those tax savings; when the
tax savings are actually realized over time, net worth will be reduced by the
recording of a deferred tax provision. Reflecting tax savings before the tax is
actually saved results in the Company's balance sheet being less conservative
than the Company would want it to be. However, this accounting policy is
mandated by GAAP.
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.
As discussed above, WilTel's former headquarters building, including the
adjacent parking garage, was not included in the sale to Level 3 and has been
retained by the Company. The Company concluded that the change in the manner in
which the asset was being used, from a headquarters facility of an operating
subsidiary 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
10
discontinued operations. At December 31, 2005, the new cost basis and carrying
amount of the facility 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.
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.
The Company does not believe that there is any set of reasonable
assumptions it could have made resulting in a conclusion that the facility was
not impaired. However, since the amount of the impairment recorded is greatly
impacted by the estimated range of selling prices and the timing of the sale,
the actual gain or loss recognized upon ultimate disposition of the facility is
uncertain. If the market for this type of property declines in the future or the
Company lowers its estimate of the future cash flows for other reasons, further
reductions to the carrying amount of the facility could be required.
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. The Company recorded impairment charges for
securities of $12,200,000, $4,600,000 and $6,500,000 for the years ended
December 31, 2005, 2004 and 2003, respectively.
Business Combinations - At acquisition, the Company allocates the cost
of a business acquisition to the specific tangible and intangible assets
acquired and liabilities assumed based upon their relative fair values.
Significant judgments and estimates are often made to determine these allocated
values, and may include the use of independent appraisals, consider market
quotes for similar transactions, employ discounted cash flow techniques or
11
consider other information the Company believes relevant. The finalization of
the purchase price allocation will typically take a number of months to
complete, and if final values are materially different from initially recorded
amounts adjustments are recorded. Any excess of the cost of a business
acquisition over the fair values of the net assets and liabilities acquired is
recorded as goodwill which is not amortized to expense. Recorded goodwill of a
reporting unit is required to be tested for impairment on an annual basis, and
between annual testing dates if events or circumstances change that would more
likely than not reduce the fair value of a reporting unit below its net book
value.
Subsequent to the finalization of the purchase price allocation, any
adjustments to the recorded values of acquired assets and liabilities would be
reflected in the Company's consolidated statement of operations. Once final, the
Company is not permitted to revise the allocation of the original purchase
price, even if subsequent events or circumstances prove the Company's original
judgments and estimates to be incorrect. In addition, long-lived assets like
property and equipment, amortizable intangibles and goodwill may be deemed to be
impaired in the future resulting in the recognition of an impairment loss;
however, under GAAP the methods, assumptions and results of an impairment review
are not the same for all long-lived assets. The assumptions and judgments made
by the Company when recording business combinations will have an impact on
reported results of operations for many years into the future.
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.
RESULTS OF OPERATIONS
Manufacturing - Idaho Timber
Revenues and other income for Idaho Timber from the date of acquisition
(May 2005) through December 31, 2005 were $239,000,000; gross profit was
$22,000,000, salaries and incentive compensation expenses were $6,300,000,
depreciation and amortization expenses were $4,200,000, and pre-tax income was
$8,200,000. Idaho Timber's revenues reflect an oversupply in its dimension
lumber and home center board markets, resulting partially from increased foreign
imports and an easing of transportation bottlenecks that existed in the past.
The increased supply to the U.S. market has resulted in lower selling prices;
however, Idaho Timber's shipment volume of 500 million board feet remained level
with the comparable pre-acquisition period in the prior year. The steady demand
was due in part to continued strong housing and home improvement markets during
2005.
12
Selling prices declined during 2005; however, reductions in raw material
costs, the largest component of cost of sales (approximately 85% of cost of
sales), generally lagged behind the reduction in selling prices. The difference
between Idaho Timber's selling price and raw material cost per thousand board
feet (spread) is closely monitored, and the rate of change in pricing and cost
is typically not the same. During 2005, spread compressed from the very high
level achieved in the prior year, negatively impacting gross profits and pre-tax
results. With the current oversupply in the market, Idaho Timber intends to
focus on developing new higher margin products, diversifying its supply chain,
improving cost control and solidifying customer relationships, in an effort to
maximize gross margins and pre-tax results.
Manufacturing - Plastics
Pre-tax income for the plastics manufacturing segment was $14,200,000,
$7,900,000 and $4,400,000 for the years ended December 31, 2005, 2004 and 2003,
respectively. Its revenues were $93,300,000, $64,100,000 and $53,300,000, and
gross profits were $28,900,000, $19,000,000 and $14,300,000 for the years ended
December 31, 2005, 2004 and 2003, respectively. Revenues increased by 46% in
2005, 20% in 2004 and 5% in 2003, each as compared to the prior year.
The increase in revenues in 2005 reflects NSW's revenues since
acquisition of $17,500,000, and increases in most of the segment's markets.
Sales increases result from a variety of factors including the strong housing
market, new products developed late in 2004, and the impact of price increases
implemented during the second half of 2004 and in the first and fourth quarters
of 2005.
Raw material costs increased by approximately 19% in 2005 as compared
to the same period in 2004; however, the segment was able to increase selling
prices in most markets, which along with increased sales and production volumes
resulted in greater gross margins than in 2004. The primary raw material in the
division's products is a polypropylene resin, which is a byproduct of the oil
refining process, whose price tends to increase and decrease with the price of
oil. There is relatively little direct labor or other raw material costs in the
division's products. In addition to managing resin purchases, the division also
has initiatives to reduce and/or reuse scrap thereby increasing raw material
utilization. Gross margins also reflect $1,300,000 of greater amortization
expense on intangible assets resulting from acquisitions.
Pre-tax results for 2005 include higher salaries, incentive compensation
expense and sales commissions primarily related to NSW. During 2005, the
division realized cost efficiencies resulting from its acquisition of NSW,
principally in administration and overhead expense and raw material purchasing.
In the future, the division will look to make other strategic acquisitions of
smaller entities that serve the same markets as NSW, primarily those that supply
package netting and filtration products. Pre-tax results for 2005 also reflect a
charge of $200,000 resulting from the sale of certain assets related to a former
product line of NSW.
Manufacturing revenues in 2004 increased in substantially all of the
division's markets. The Company believes that these increases result from a
variety of factors including an improved economy, new product development and
the acquisition in the first quarter of 2004 of customer receivables and
inventory of a competitor that was exiting certain markets. Although raw
material costs increased significantly in 2004, this was more than offset by
increased selling prices, sales and production volumes in most markets,
resulting in increased gross profit and gross profit margins as compared to
2003. Pre-tax results for 2004 also reflect greater salaries expense, due to
higher bonuses attributable to the division's improved performance, and include
a gain of $300,000 resulting from the sale of certain assets related to a former
product line.
Healthcare Services
Pre-tax income (loss) of the healthcare services segment was $3,300,000
and $5,100,000 for the years ended December 31, 2005 and 2004, respectively, and
$(2,300,000) for the four month period from acquisition through December 31,
2003. For the 2005, 2004 and 2003 periods, healthcare services revenues were
13
$239,000,000, $257,300,000 and $71,000,000, respectively, and cost of sales,
which primarily consist of salaries and employee benefits, were $203,100,000,
$216,300,000 and $61,300,000, respectively. For the 2005, 2004 and 2003 periods,
pre-tax results reflect aggregate interest, depreciation and amortization
expenses of $4,000,000, $2,800,000 and $700,000, respectively.
As described above, regulatory changes that went into effect on January
1, 2006 concerning Medicare reimbursement for therapy services are likely to
have some negative impact on Symphony's future revenues and profitability,
particularly in 2006. The Medicare Part A prospective payment system was changed
to add new categories of services which effectively shifted the allocation of
reimbursable services away from the services that Symphony provides. To the
extent that Symphony's customer contracts are linked to these categories of
services, revenues and gross margins will decline unless Symphony is successful
in renegotiating its customer contracts to address this regulatory change.
Although Symphony has successfully renegotiated many of its contracts with
respect to this matter, Part A revenues for certain customers could decline.
With respect to Medicare Part B therapy services, most of these services became
subject to an annual limitation per beneficiary of $1,740 for physical therapy
and speech-language pathology and $1,740 for occupational therapy services,
subject to an exception process developed by CMS for services deemed medically
appropriate. The CMS exception process is retroactive to January 1, 2006, and is
to be fully implemented no later than March 13, 2006. Under the guidance CMS
published, the majority of Symphony's patients will qualify for an automatic
exception to the therapy cap limits. Those who do not qualify for the automatic
exception are still eligible to obtain a manual exception, subject to CMS
approval. While the exception process was under development, it created
uncertainty among Symphony's staff and customers which limited Symphony's
services to Part B patients. Symphony is currently training operating and
clinical staff on the new exception process, so that services can be provided
when medically necessary, and expects that once training is complete revenues
for Medicare Part B therapy services will increase. However, Symphony does not
expect that revenues for Part B Medicare therapy services will increase to the
level that they would have been absent implementation of the caps.
Beginning in 2004, Symphony performed an evaluation of its customer
base to identify those customers and markets where Symphony could deliver the
highest level of service and that should be the focus of customer retention
efforts, as well as identifying those customers that should be terminated.
Symphony is also seeking to grow its profitable businesses, which includes
expanding its service offerings to existing customers. The ability of Symphony
to grow its business depends heavily upon its ability to attract, develop and
retain qualified therapists. There is a current shortage of qualified therapists
industry-wide, and Symphony has open positions to provide service to new
customers, provide additional service offerings for existing customers and as a
result of normal employee turnover. The tight labor market causes Symphony and
others in its industry to, at times, hire independent contractors to perform
required services, which may increase costs and reduce margins, and can also
result in lost revenue opportunities if skilled independent contractors are not
available at an acceptable cost.
The decrease in healthcare revenues in 2005 as compared to 2004
principally resulted from Symphony's termination of certain underperforming
customers, customer attrition and the sale of Symphony's respiratory line of
business in the second quarter of 2005. During the 2005, 2004 and 2003 periods,
one customer accounted for approximately 14%, 16% and 14%, respectively, of
Symphony's revenues.
Gross margins declined in 2005 as compared to 2004, which reflects the
revenue changes discussed above, higher hourly wages and benefits paid to
attract and retain therapists and greater amounts incurred for independent
contractors, both due to a shortage of licensed therapists in the marketplace,
partially offset by improved therapist efficiency and reduced field management
costs. Pre-tax results for 2005 also reflect higher borrowing costs, greater
professional fees for certain outsourced services and expenditures for hiring,
training and automation, which Symphony hopes will help offset the increase in
the costs of therapists, and higher depreciation expense. Pre-tax results also
reflect aggregate gains of $800,000 from the sale of certain property and the
respiratory line of business.
14
Excluding charges for depreciation, amortization and interest expense,
profits for the fourth quarter of 2005 were approximately $1,900,000 despite a
16% decline in revenues from the comparable period in the prior year and
industry-wide labor cost increases. Symphony is beginning to realize the
benefits of its efforts to invest in automation to improve efficiency and reduce
expenses, and to enhance its service offerings and terminate unprofitable
contracts.
Symphony's margins for 2004 reflect higher hourly wages and benefits
paid to attract and retain its therapists, and increased costs to hire
independent contractors as a result of hiring needs for both full-time and
part-time professionals. Pre-tax results for 2004 also reflect approximately
$3,300,000 from the collection of receivables in excess of their carrying
amounts, a decrease in estimated liabilities for employee health insurance costs
and other third party claims of approximately $1,700,000, and a gain of
$1,000,000 from the sale of certain property. In addition, pre-tax results for
2004 reflect approximately $3,900,000 of costs, principally severance for
Symphony's former chief executive officer and others due to reorganizing and
consolidating certain field operations and closing offices.
Telecommunications - ATX
ATX has been consolidated by the Company since April 22, 2005, the
effective date of its bankruptcy plan. From acquisition through December 31,
2005, ATX telecommunications revenues and other income were $111,400,000,
telecommunications cost of sales were $69,600,000, salaries and incentive
compensation expense was $17,700,000, depreciation and amortization expenses
were $7,500,000, selling, general and other expenses were $18,400,000 and ATX
had a pre-tax loss from continuing operations of $1,900,000. ATX's cost of sales
in 2005 reflects the migration of portions of its network to lower cost
providers, the favorable resolution of an access cost dispute and a favorable
rate change for unbundled local circuits; however, these cost reductions were
offset by UNE-P and Entrance Facility rate increases from Verizon. ATX had a
pre-tax loss from discontinued operations of $200,000 in 2005.
As discussed above, ATX's ability to provide quality services at
competitive prices to its customers is significantly dependent upon its ability
to use or purchase various components of an ILEC's network and infrastructure.
However, ATX does own certain equipment and facilities that help mitigate its
reliance upon ILECs and reduce its costs. The enactment of the Telecom Act
enabled ATX to purchase ILEC services at favorable rates; however, certain
subsequent regulatory action has resulted in more flexibility for the ILEC in
determining what products and services it provides and the rates it can charge.
In certain instances, regulatory action is shifting the determination of these
rates from regulatory jurisdiction towards commercial negotiation between the
parties, generally resulting in ILEC price increases. For some stand-alone
product lines, in particular local telephone services, ATX does not expect it
will be able to offer a competitive product because its charges from the ILEC
have risen, resulting in a price increase for ATX's customers. ATX has been and
continues to restructure its operations to meet the changing competitive and
regulatory environment and increased cost of services; however, ATX's future
profitability is uncertain.
Domestic Real Estate
Pre-tax income for the domestic real estate segment was $4,100,000,
$20,700,000 and $18,100,000 for the years ended December 31, 2005, 2004 and
2003, respectively. Pre-tax results for the domestic real estate segment are
largely dependent upon the performance of the segment's operating properties,
the current status of the Company's real estate development projects and
non-recurring gains or losses recognized when real estate assets are sold. As a
result, the results of operations for this segment in the aggregate for any
particular year are not predictable and do not follow any consistent pattern.
In 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. The Company recorded a pre-tax gain of $56,600,000,
which is reflected in gain on disposal of discontinued operations. Historical
operating results for the hotel have not been material.
15
In 2004, the Company sold 92 lots of its 95-lot development project in
South Walton County, Florida for aggregate sales proceeds of approximately
$50,000,000, recognized pre-tax profits of $15,800,000 and deferred recognition
of pre-tax profits of $10,200,000. During 2005, the Company recognized
$7,000,000 of the deferred profit related to this project, upon completion of
certain required improvements to the property.
Revenues and pre-tax results for this segment increased in 2004 as
compared to 2003, primarily due to the South Walton County project sale
discussed above. In addition, revenues during 2004 reflect the sale of certain
unimproved land for cash proceeds of $8,800,000, which resulted in a pre-tax
gain of $7,600,000. Revenues during 2004 also reflect decreased gains from
property sales at the Company's other residential and commercial project in the
Florida panhandle as the lots had largely been sold, and less amortization of
deferred gains from sales of real estate in prior years. Pre-tax results for
2004 also reflect due diligence expenses for a real estate development project
that the Company decided not to develop.
During 2003, the Company recognized $11,100,000 of deferred gains from
sales of real estate in prior years.
Banking and Lending
As stated previously, the Company's banking and lending operations have
been in run-off, and during 2005 the Company's banking and lending subsidiary
filed a formal plan with the Office of the Comptroller of the Currency to
liquidate its operations, sold its remaining customer deposits and surrendered
its national bank charter. As a result, revenues and expenses included in the
Company's 2005 consolidated statements of operations are not material and are
not discussed below. Pre-tax results for banking and lending of $1,400,000,
$22,000,000 and $8,400,000 for the years ended December 31, 2005, 2004 and 2003,
respectively, have been classified with other operations.
During 2004, the Company sold its subprime automobile and collateralized
consumer loan portfolios representing approximately 97% of its total outstanding
loans (net of unearned finance charges) and certain loan portfolios that had
been substantially written-off for aggregate pre-tax gains of $16,300,000, which
is reflected in investment and other income. Finance revenues of $10,000,000 in
2004 and $55,100,000 in 2003 reflect this decreasing level of consumer
instalment loans. Although finance revenues decreased in 2004 as compared to
2003, pre-tax results increased due to gains from the loan portfolios sales, a
decline in the provision for loan losses of $24,700,000, reductions in interest
expense of $6,000,000 principally resulting from reduced customer banking
deposits, less interest paid on interest rate swaps and lower salaries expense
and operating costs resulting from the segment's restructuring efforts. All of
these changes reflected the ongoing reduction in the amount of loan assets under
management, including as a result of the loan portfolios sales.
Pre-tax results for the banking and lending segment include income of
$3,100,000 for the year ended December 31, 2003, resulting from mark-to-market
changes on interest rate swaps. The Company had used interest rate swaps to
manage the impact of interest rate changes on its customer banking deposits; all
of the interest rate swap agreements matured in 2003.
Corporate and Other Operations
Investment and other income increased in 2005 as compared to 2004
primarily due to the $10,500,000 gain on the sale of 70% of the Company's
interest in CLC to Inmet, greater investment income of $24,200,000 reflecting a
larger amount of invested assets and higher interest rates, and increased sales
at the wineries of $5,000,000. Available corporate cash is generally invested on
a short-term basis until such time as investment opportunities require an
expenditure of funds.
Investment and other income increased in 2004 as compared to 2003
primarily due to the pre-tax gain of $11,300,000 from the sale of two of the
Company's older corporate aircraft, greater dividend and interest income of
16
$12,400,000 and miscellaneous other income. Investment and other income for 2003
included $5,300,000 of income related to a refund of foreign taxes not based on
income.
Net securities gains for Corporate and Other Operations aggregated
$208,800,000, $136,100,000 and $10,600,000 for the years ended December 31,
2005, 2004 and 2003, respectively. During 2005 and 2004, the Company's net
securities gains largely reflect realized gains from the sale of publicly traded
debt and equity securities that had been classified as Corporate available for
sale securities. Included in net securities gains for the 2005 periods is a gain
of $146,000,000 from the sale of 375,000 shares of WMIG common stock. Net
securities gains for 2005, 2004 and 2003 include provisions of $12,200,000,
$4,600,000 and $6,500,000, respectively, to write down the Company's investments
in certain available for sale securities and an investment in a non-public
security in 2003. The write down of the securities resulted from a decline in
market value determined to be other than temporary.
The Company's decision to sell securities and realize security gains or
losses is generally based on its evaluation of an individual security's value at
the time and the prospect for changes in its value in the future. The decision
could also be influenced by the status of the Company's tax attributes or
liquidity needs; however, sales in recent years have not been influenced by
these considerations. Therefore, the timing of realized security gains or losses
is not predictable and does not follow any pattern from year to year.
The increase in interest expense during 2005 as compared to 2004
primarily reflects interest expense relating to $100,000,000 principal amount of
7% Senior Notes and $350,000,000 principal amount of 3 3/4% Convertible Senior
Subordinated Notes issued in April 2004. The increase in interest expense during
2004 as compared to 2003 primarily reflects the issuance of the bonds in 2004,
interest expense relating to $275,000,000 aggregate principal amount of 7%
Senior Notes issued during 2003, and dividends accrued on its trust issued
preferred securities, which commencing July 1, 2003 are classified as interest
expense (shown as minority interest in prior periods).
Salaries and incentive compensation expense increased by $31,300,000 in
2005 as compared to 2004, and by $2,400,000 in 2004 as compared to 2003,
principally due to increased bonus expense.
Selling, general and other expenses increased by $14,600,000 in 2005 as
compared to 2004, primarily due to higher minority interest expense relating to
MK prior to its merger of $4,200,000, greater foreign exchange losses of
$2,700,000, higher professional fees of $4,400,000 that principally relate to
due diligence expenses for potential investments and investment management fees,
an impairment loss for the remaining book value of the investment in Olympus of
$3,700,000, greater employee benefit expenses and operating expenses of a
subsidiary engaged in the development of a new medical product.
Selling, general and other expenses increased by $19,700,000 in 2004 as
compared to 2003, primarily due to greater professional and other fees of
$8,500,000, which largely relate to due diligence expenses for potential
investments, greater professional fees for existing investments and fees
relating to the implementation of the Sarbanes-Oxley Act of 2002, and $3,600,000
of expenses related to the proposed public offering of MK's equity that did not
go forward due to unfavorable market conditions. In addition, the increase
reflects greater employee benefit expenses, higher insurance costs and greater
amortization of debt issuance costs related to the 7% Senior Notes and 3 3/4%
Convertible Notes.
As more fully discussed above, during 2005 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.
The income tax provision reflects the reversal of tax reserves
aggregating $27,300,000 and $24,400,000 for the years ended December 31, 2004
and 2003, respectively, as a result of the favorable resolution of various state
17
and federal income tax contingencies. In addition, in 2004 the tax provision
reflects a benefit to record a federal income tax carryback refund of
$3,900,000.
In 2003, the Company established a valuation allowance that fully
reserved for all of WilTel's net deferred tax assets, reduced by an amount equal
to the Company's current and deferred federal income tax liabilities as of the
date of acquisition. The valuation allowance was required because, on a pro
forma combined basis, the Company was not able to demonstrate that it is more
likely than not that it would be able to realize the deferred tax asset.
Subsequent to the acquisition of WilTel, during 2004 and 2003 any benefit
realized from WilTel's deferred tax asset reduced the valuation allowance for
the deferred tax asset; however, that reduction was first applied to reduce the
carrying amount of the acquired non-current intangible assets of WilTel rather
than to reduce the income tax provision of any component of total comprehensive
income.
As a result, the various components of comprehensive income include an
aggregate federal income tax provision of $22,300,000 in 2004 and $22,500,000 in
2003 (for the period subsequent to the acquisition of WilTel), even though no
federal income tax for those periods was due. During 2004, the effect of
recording this tax provision and the resulting reduction to the valuation
allowance was to reduce the carrying amount of the acquired non-current
intangible assets to zero. Income tax expense for 2003 also includes the
Company's actual income tax expense for the period prior to the acquisition of
WilTel.
Associated Companies
Equity in income (losses) of associated companies includes the following
for the years ended December 31, 2005, 2004 and 2003 (in thousands):
2005 2004 2003
--------- --------- ---------
Olympus $(120,100) $ 9,700 $ 40,400
EagleRock (28,900) 29,400 49,900
HomeFed 5,800 10,000 16,200
JPOF II 23,600 16,200 14,800
Union Square 72,800 1,300 100
Pershing Square, L.P. -- 21,300 --
Berkadia 800 79,200
WilTel -- -- (52,100)
Other 2,400 2,800 (1,500)
--------- --------- ---------
Equity in income (losses) before
income taxes (44,400) 91,500 147,000
Income tax expense (700) (15,000) (70,100)
--------- --------- ---------
Equity in income (losses), net of taxes $ (45,100) $ 76,500 $ 76,900
========= ========= =========
The Company's equity in losses from Olympus for 2005 reflects its share
of Olympus' estimated losses from hurricanes Katrina, Rita and Wilma. Effective
January 1, 2006, Olympus received new capital which reduced the Company's equity
interest to less than 4%. As a result, the Company will not apply the equity
method of accounting for this investment in the future. At December 31, 2005,
the book value of the Company's investment in Olympus had been written down to
zero.
As described above, the Company owns approximately 30% of HomeFed, a
California real estate development company, which it acquired in 2002. The
Company's share of HomeFed's reported earnings fluctuates with the level of real
estate sales activity at HomeFed's development projects.
The Company's share of JPOF II's earnings was distributed to the Company
shortly after the end of each year.
18
The equity in income (losses) of EagleRock results from both realized
and changes in unrealized gains (losses) in its portfolio. The partnership
distributed $16,600,000 to the Company in 2006 and $3,700,000 in 2004.
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.
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 effective
December 31, 2004; $71,300,000 was distributed to the Company in early 2005.
Since the Berkadia loan was fully repaid during the first quarter of
2004, the Company will no longer have any income related to the Berkadia loan in
the future. The Company's income from this investment is expected to be limited
to its share ($4,000,000) of the annual management fee received from FINOVA
while such fee remains in effect. The Company does not believe that its share of
the FINOVA common stock will ever result in any cash value, and is reflected at
a zero book value. The Company has received total net cash proceeds of
$95,200,000 from this investment since 2001, including the commitment and
financing fees, management fees and interest payments related to its share of
the Berkadia loan.
The table above includes amounts related to WilTel prior to
consolidation in November 2003 when it was accounted for under the equity method
of accounting.
Discontinued Operations
WilTel
As discussed above, the Company sold WilTel to Level 3 in December 2005
and recognized a pre-tax gain on disposal of $243,800,000. The calculation of
the gain on sale included: (1) the cash proceeds received from Level 3 of
$460,300,000, which is net of estimated working capital adjustments of
$25,500,000; (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 of approximately $42,400,000; and (5) the net
book value of the net assets sold and estimated expenses and other costs related
to the transaction. The Company reclassified WilTel's consolidated historical
results of operations prior to the sale to income (loss) from discontinued
operations. WilTel's income (loss) from discontinued operations was
$116,000,000, $(56,600,000) and $(15,300,000) for the years ended December 31,
2005, 2004 and 2003, respectively.
Wireless Messaging
In December 2002, the Company entered into an agreement to purchase
certain debt and equity securities of WebLink Wireless, Inc. ("WebLink"), for an
aggregate purchase price of $19,000,000. 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. Due to
19
WebLink's large net operating loss carryforwards, these gains were not reduced
for any federal income tax expense.
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 USA Mobility shares were sold during 2005.
In return for the Company's $19,000,000 investment in WebLink, the
Company received aggregate cash proceeds of $48,900,000, net of minority
interest and residual liabilities.
Domestic Real Estate
As discussed above, in 2005 the Company sold its 716-room Waikiki Beach
hotel and related assets and recorded a pre-tax gain of $56,600,000, which is
reflected in gain on disposal of discontinued operations.
In the fourth quarter of 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 $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,
principally relating to mortgage prepayment penalties incurred upon satisfaction
of the property's mortgage. Operating results for this property were not
material in prior years.
Other Operations
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 an operating loss of $4,400,000.
In the fourth quarter of 2004, the Company sold its geothermal power
generation business for $14,800,000, net of closing costs, and recognized a
pre-tax gain of $200,000. For the years ended December 31, 2004 and 2003, the
Company recorded pre-tax losses from discontinued operations relating to this
business of $1,500,000 and $2,300,000, respectively.
Recently Issued Accounting Standards
In April 2005, the SEC 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
20
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.
Cautionary Statement for Forward-Looking Information
Statements included in this Report may contain forward-looking
statements. Such statements may relate, but are not limited, to projections of
revenues, income or loss, development expenditures, plans for growth and future
operations, competition and regulation, as well as assumptions relating to the
foregoing. Such forward-looking statements are made pursuant to the safe-harbor
provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are inherently subject to risks and
uncertainties, many of which cannot be predicted or quantified. When used in
this Report, the words "estimates," "expects," "anticipates," "believes,"
"plans," "intends" and variations of such words and similar expressions are
intended to identify forward-looking statements that involve risks and
uncertainties. Future events and actual results could differ materially from
those set forth in, contemplated by or underlying the forward-looking
statements.
Factors that could cause actual results to differ materially from any
results projected, forecasted, estimated or budgeted or may materially and
adversely affect the Company's actual results include, but are not limited to,
those set forth in Item 1A. Risk Factors and elsewhere in this Report and in the
Company's other public filings with the Securities and Exchange Commission.
Undue reliance should not be placed on these forward-looking statements,
which are applicable only as of the date hereof. The Company undertakes no
obligation to revise or update these forward-looking statements to reflect
events or circumstances that arise after the date of this Report or to reflect
the occurrence of unanticipated events.
21
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).
22
(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 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 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).*
23
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).*
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).*
24
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).*
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).*
25
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 he 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 (File No. 2-84303), Form S-8 and S-3
(File No. 33-6054), Form S-8 and S-3 (File No. 33-26434),
Form S-8 and S-3 (File No. 33-30277), Form S-8 (File No.
33-61682), Form S-8 (File No. 33-61718), Form S-8 (File No.
333-51494) and Form S-3 (File No. 333-118102) (filed as
Exhibit 23.1 to the Company's 2005 10-K).*
23.2 Consent of Ernst & Young LLP with respect to the inclusion
in this Annual Report on Form 10-K/A 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 (File No.
333-118102) (filed as Exhibit 23.2 to the Company's Annual
Report on Form 10-K/A dated March 24, 2006 (the "March 24,
2006 10-K/A)).*
23.3 Consent of PricewaterhouseCoopers, with respect to the
inclusion in this Annual Report on Form 10-K/A 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 (File No. 333-118102) (filed as Exhibit 23.3 to the
Company's March 24, 2006 10-K/A).*
26
23.4 Consent of independent auditors from BDO Seidman, LLP with
respect to the inclusion in this Annual Report on Form
10-K/A 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 (File No. 333-118102) (filed as Exhibit 23.4 to the
Company's March 24, 2006 10-K/A).*
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 (File No. 333-118102) (filed as
Exhibit 23.5 to the Company's 2005 10-K).*
23.6 Independent Registered Public Accountants' Consent from
KPMG LLP, with respect to the inclusion in this Annual
Report on Form 10-K/A of their report on the financial
statements of Jefferies Partners Opportunity Fund II, LLC
and with respect to the incorporation by reference of such
report 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 (File No. 333-118102) (filed
as Exhibit 23.6 to the Company's March 24, 2006 10-K/A).*
23.7 Consent of PricewaterhouseCoopers LLP with respect to the
incorporation by reference into the Company's Registration
Statement on Form S-8 (File No. 2-84303), Form S-8 and S-3
(File No. 33-6054), Form S-8 and S-3 (File No. 33-26434),
Form S-8 and S-3 (File No. 33-30277), Form S-8 (File No.
33-61682), Form S-8 (File No. 33-61718), Form S-8 (File No.
333-51494) and Form S-3 (File No. 333-118102) (filed as
Exhibit 23.7 to the Company's Annual Report on Form 10-K/A
dated March 9, 2006). *
31.1 Certification of Chairman of the Board and Chief Executive
Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Certification of President pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.3 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chairman of the Board and Chief Executive
Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.**
32.2 Certification of President pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.**
32.3 Certification of 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 (previously filed
as financial statement schedule to the Company's
March 24, 2006 10-K/A).*
27
(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
(previously filed as financial statement schedule to
the Company's March 24, 2006 10-K/A).*
(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 (previously filed
as financial statement schedule to the Company's
March 24, 2006 10-K/A).*
(4) WilTel Communications Group, Inc. consolidated
financial statements as of November 5, 2003
(Successor Company), and for the periods from
January 1, 2003 through November 5, 2003, and
November 1, 2002 through December 31, 2002
(Successor Company) and the periods January 1, 2002
through October 31, 2002 (Predecessor Company)
(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 (previously filed
as financial statement schedule to the Company's
March 24, 2006 10-K/A)*.
(6) Jefferies Partners Opportunity Fund II, LLC
financial statements for the years ended December
31, 2004 and 2003.
-----------------------------
* Incorporated by reference.
** Furnished herewith pursuant to item 601(b) (32) of Regulation S-K.
28
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
November 3, 2006 By: /s/ Barbara L. Lowenthal
--------------------------------
Barbara L. Lowenthal
Vice President and Comptroller
29
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Unaudited Financial Statements
December 31, 2004 and 2003
30
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Statements of Financial Condition
December 31, 2004 and 2003
Unaudited
2004 2003
------------ ------------
ASSETS
Cash and cash equivalents $ 58,933,824 59,494,963
Receivable from affiliated brokers and dealers 19,898,579 6,084,642
Securities owned 78,430,501 91,758,964
Securities borrowed 1,323,070 1,642,040
Other assets 653,263 2,567,342
------------ ------------
Total assets $159,239,237 161,547,951
============ ============
LIABILITIES AND MEMBERS' EQUITY
Securities sold, not yet purchased $ 3,505,517 2,601,400
Payable to affiliated brokers and dealers 3,611,924 9,194,501
Payable to Jefferies & Company, Inc. 360,403 639,504
Accrued expenses and other liabilities 500,232 201,740
------------ ------------
Total liabilities 7,978,076 12,637,145
------------ ------------
Members' equity:
Members' capital, net 126,255,099 126,255,099
Retained earnings 25,006,062 22,655,707
------------ ------------
Total members' equity 151,261,161 148,910,806
------------ ------------
Total liabilities and members' equity $159,239,237 161,547,951
============ ============
See accompanying unaudited notes to financial statements.
31
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Statements of Earnings
Years ended December 31, 2004 and 2003
Unaudited
2004 2003
----------- -----------
Revenues:
Principal transactions (net of direct trading expenses) 21,984,146 17,319,861
Interest 4,089,426 6,326,007
----------- -----------
Total revenues 26,073,572 23,645,868
----------- -----------
Expenses:
General and administrative 1,124,743 1,015,358
Management fee 968,639 1,061,434
Interest 579,297 518,539
----------- -----------
Total expenses 2,672,679 2,595,331
----------- -----------
Net earnings $23,400,893 21,050,537
=========== ===========
See accompanying unaudited notes to financial statements.
32
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Statements of Changes in Members' Equity
Years ended December 31, 2004 and 2003
Unaudited
TOTAL
MEMBERS' RETAINED MEMBERS'
CAPITAL, NET EARNINGS EQUITY
------------ ------------ ------------
Balance, December 31, 2002 $126,255,099 23,395,141 149,650,240
Distributions -- (21,789,971) (21,789,971)
Net earnings -- 21,050,537 21,050,537
------------ ------------ ------------
Balance, December 31, 2003 $126,255,099 22,655,707 148,910,806
Distributions -- (21,050,538) (21,050,538)
Net earnings -- 23,400,893 23,400,893
------------ ------------ ------------
Balance, December 31, 2004 $126,255,099 25,006,062 151,261,161
============ ============ ============
See accompanying unaudited notes to financial statements.
33
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Statements of Cash Flows
Years ended December 31, 2004 and 2003
Unaudited
2004 2003
------------ ------------
Cash flows from operating activities:
Net earnings $ 23,400,893 21,050,537
------------ ------------
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Amortization of financing costs 107,644 107,644
Changes in assets and liabilities:
(Increase) decrease in receivable from affiliated brokers and dealers (13,813,937) 2,265,176
Decrease in securities owned 13,328,463 14,612,942
Decrease (increase) in securities borrowed 318,970 (1,317,260)
Decrease (increase) in other assets 1,806,435 (1,169,205)
Increase in securities sold, not yet purchased 904,117 693,814
Decrease in payable to affiliated brokers and dealers (5,582,577) (7,079,865)
(Decrease) increase in payable to Jefferies & Company, Inc. (279,101) 99,426
Increase in accrued expenses and other liabilities 298,492 99,393
------------ ------------
(2,911,494) 8,312,065
------------ ------------
Net cash provided by operating activities 20,489,399 29,362,602
------------ ------------
Cash flows from financing activities:
Proceeds from bank loans -- 5,625,000
Repayment of bank loans -- (5,625,000)
Distributions (21,050,538) (21,789,971)
------------ ------------
Net cash used in financing activities (21,050,538) (21,789,971)
------------ ------------
Net (decrease) increase in cash and cash equivalents (561,139) 7,572,631
Cash and cash equivalents at beginning of year 59,494,963 51,922,332
------------ ------------
Cash and cash equivalents at end of year $ 58,933,824 59,494,963
============ ============
Supplemental disclosures of cash flow information - Cash paid
during the year for interest $ 496,359 441,255
See accompanying unaudited notes to financial statements.
34
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Unaudited Notes to Financial Statements
December 31, 2004 and 2003
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Jefferies Partners Opportunity Fund II, LLC (the "Fund") is a Delaware
limited liability company. The Fund commenced operations on January 19,
2000. The investment objective of the Fund is to generate returns for its
members by making, holding, and disposing of a diverse portfolio of
primarily below investment grade debt and equity investments. The Fund
was established to offer members the opportunity to participate in the
trading, investment, and brokerage activities of the High Yield
Department of Jefferies & Company, Inc. ("Jefferies"). The Fund employs a
trading and investment strategy substantially similar to that
historically employed by Jefferies' High Yield Department. The Fund
acquires, actively manages, and trades a diverse portfolio of primarily
non-investment grade investments consisting of the following three asset
groups: High Yield Debt, Special Situation Investments, and, to a lesser
extent, Bank Loans. The Fund has appointed Jefferies to serve as manager
to the Fund (the "Manager"). The Fund participates in the non-syndicate
trading and investment activities of the High Yield Department on a pari
passu basis with Jefferies. To permit such participation, the Fund has
been registered as a broker dealer under the Securities Exchange Act of
1934 and with the National Association of Securities Dealers. Although
this entity is often referred to as a fund, it is a "broker dealer" in
accordance with the American Institute of Certified Public Accountants
("AICPA") Audit and Accounting Guide, "Brokers and Dealers in Securities"
(the "Guide").
The Fund will be in effect until January 18, 2007, unless extended for up
to three successive one-year terms by the vote of the Manager and a
majority of the member interests.
The Fund, in connection with its activities as a broker dealer, does not
hold funds or securities for customers. Accordingly, the computation for
determination of reserve requirements pursuant to Rule 15c3-3 has been
omitted.
(a) CASH AND CASH EQUIVALENTS
Cash equivalents consist of money market funds, which are part of
the cash management activities of the Fund, and generally mature
within 90 days. At December 31, 2004 and 2003, such cash
equivalents amounted to $57,637,717 and $57,820,030, respectively.
(b) FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all of the Fund's financial instruments are carried
at fair value or amounts approximating fair value. Assets,
including cash and cash equivalents, securities borrowed, and
certain receivables, are carried at fair value or contracted
amounts which approximate fair value due to the short period to
maturity. Similarly, liabilities, including certain payables, are
carried at amounts approximating fair value.
Securities and other inventory positions owned and securities and
other inventory positions sold, but not yet purchased (all of
which are recorded on a trade-date basis) are valued at market or
fair value, as appropriate, with unrealized gains and losses
reflected in Principal transactions in the Statement of Earnings.
The Fund follows the AICPA Guide when determining market or fair
value for financial instruments. Market value generally is
determined based on listed prices or broker quotes. In certain
instances, such price quotations may be deemed unreliable when the
instruments are thinly traded or when the Fund holds a substantial
block of a particular security and the listed price is not deemed
to be readily realizable. In accordance with the AICPA Guide, in
these instances, the Fund determines fair value based on
(Continued)
35
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Unaudited Notes to Financial Statements
December 31, 2004 and 2003
management's best estimate, giving appropriate consideration to
reported prices and the extent of public trading in similar
securities, the discount from the listed price associated with the
cost at the date of acquisition, and the size of the position held
in relation to the liquidity in the market, among other factors.
When the size of the holding of a listed security is likely to
impair the Fund's ability to realize the quoted market price, the
Fund records the position at a discount to the quoted price
reflecting management's best estimate of fair value. In such
instances, the Fund generally determines fair value with reference
to the discount associated with the acquisition price of the
security. When listed prices or broker quotes are not available,
the Fund determines fair value based on pricing models or other
valuation techniques, including the use of implied pricing from
similar instruments. The Fund typically uses pricing models to
derive fair value based on the net present value of estimated
future cash flows including adjustments, when appropriate, for
liquidity, credit and/or other factors.
(c) SECURITIES TRANSACTIONS
The Fund records its securities transactions on a trade-date
basis. Securities owned and securities sold, not yet purchased,
are valued at market, and unrealized gains or losses are reflected
in revenues from principal transactions in the statements of
earnings.
(d) CONTRIBUTIONS
Capital contributions are recorded net of the Fund's closing costs
and placement fees. Each member is charged a one-time placement
fee of 1% of gross contributions.
(e) FEDERAL AND STATE INCOME TAXES
Under current federal and applicable state limited liability
company laws and regulations, limited liability companies are
treated as partnerships for tax reporting purposes and,
accordingly, are not subject to income taxes. Therefore, no
provision for income taxes has been made in the Fund's financial
statements. For tax purposes, income or losses are included in the
tax returns of the members.
(f) ALLOCATION OF INCOME AND EXPENSE
Income and expense are allocated 100% to the members based on the
pro rata share of their capital contributed to the Fund, until the
total allocation equals the aggregate member preferred return of
8% of contributed capital. All remaining income and expense are
allocated 80% to the members and 20% to the Manager.
(g) USE OF ESTIMATES
Management of the Fund has made a number of estimates and
assumptions relating to the reporting of assets and liabilities,
the disclosure of contingent assets and liabilities, and the
reported amounts of revenues and expenses to prepare these
financial statements in conformity with generally accepted
accounting principles. Actual results could differ from those
estimates.
(Continued)
36
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Unaudited Notes to Financial Statements
December 31, 2004 and 2003
(2) RECEIVABLE FROM, AND PAYABLE TO, AFFILIATED BROKERS AND DEALERS
The following is a summary of the major categories of receivable from,
and payable to, affiliated brokers and dealers as of December 31, 2004
and 2003:
2004 2003
----------- -----------
Receivable from affiliated brokers
and dealers:
Securities failed to deliver $ 7,719,379 4,742,178
Other 12,179,200 1,342,464
----------- -----------
$19,898,579 6,084,642
=========== ===========
Payable to affiliated brokers
and dealers:
Securities failed to receive $ 3,401,175 9,159,503
Other 210,749 34,998
----------- -----------
$ 3,611,924 9,194,501
=========== ===========
(3) SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED
The following is a summary of the market value of major categories of
securities owned and securities sold, not yet purchased, as of December
31, 2004 and 2003:
At December 31, 2004:
SECURITIES
SOLD,
SECURITIES NOT YET
OWNED PURCHASED
----------- -----------
Corporate debt securities $60,364,458 3,505,517
Corporate equity securities 18,066,043 --
----------- -----------
$78,430,501 3,505,517
=========== ===========
At December 31, 2003:
SECURITIES
SOLD,
SECURITIES NOT YET
OWNED PURCHASED
----------- -----------
Corporate debt securities $76,461,843 2,601,400
Corporate equity securities 15,297,121 --
----------- -----------
$91,758,964 2,601,400
=========== ===========
(4) REVOLVING CREDIT FACILITY
In June 2004, the Fund renewed a revolving credit facility agreement with
an unaffiliated third party to be used in connection with the Fund's
investing activities. At December 31, 2004 and 2003, $85,200,000 was
available under the terms of the revolving credit facility agreement. The
(Continued)
37
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Unaudited Notes to Financial Statements
December 31, 2004 and 2003
revolving credit facility expires in June 2005, but provides for annual
extensions. Advances under this facility bear interest at the lender's
commercial paper rate plus 115 basis points. The Fund incurs a liquidity
fee on the total amount available under the revolving credit facility.
For the years ended December 31, 2004 and 2003, the Fund was charged a
liquidity fee of $324,825 and $323,938, respectively, a program fee of
$230,589 and $159,273, respectively, and an administrative fee of $0 and
$278, respectively, which are included in interest expense. During the
year ended December 31, 2004, the Fund did not borrow under the revolving
credit facility. During the year ended December 31, 2003, the Fund
borrowed, and subsequently repaid, $5,625,000 under the revolving credit
facility. For the years ended December 31, 2004 and 2003, the Fund was
charged interest of $0 and $15,501, respectively, on balances borrowed
under the revolving credit facility. At December 31, 2004 and 2003, there
were no outstanding balances under the revolving credit facility.
The Fund incurred costs in securing the revolving credit facility. These
costs have been capitalized and are being amortized over seven years. At
December 31, 2004 and 2003, the net unamortized costs of $224,259 and
$331,903, respectively, are included in other assets. For the years ended
December 31, 2004 and 2003, amortization expense of $107,644 and
$107,644, respectively, is included in general and administrative
expenses.
(5) RELATED PARTY TRANSACTIONS
At December 31, 2004 and 2003, members' capital included an investment in
the Fund by Jefferies of $27,159,268. Additionally, Jefferies, in its
capacity as Manager, contributed $1,000 of capital for the right to
participate in 20% of the Fund's earnings in excess of an 8% preferred
return paid to the members.
At December 31, 2004 and 2003, receivable from and payable to affiliated
brokers and dealers are for amounts due from and due to Jefferies.
For the years ended December 31, 2004 and 2003, interest income included
$2,200 and $2,347, respectively, of income received from Jefferies
Execution Services, Inc. related to stock borrow transactions. During the
years ended December 31, 2004 and 2003, Jefferies Execution Services,
Inc. was the sole counterparty to all of the Fund's stock borrow
transactions.
At December 31, 2004 and 2003, payable to Jefferies of $360,403 and
$639,504, respectively, is for amounts due for direct trading expenses,
general and administrative expenses, and management fees. For the years
ended December 31, 2004 and 2003, direct trading expenses of $4,482,141
and $5,817,297, respectively, is net against principal transactions
revenue. The Fund reimburses Jefferies for general and administrative
expenses based on the Fund's pro rata portion of actual charges incurred.
For the years ended December 31, 2004 and 2003, reimbursed expenses of
$549,660 and $598,679, respectively, are included in general and
administrative expenses.
For the years ended December 31, 2004 and 2003, the Fund was charged
interest of $23,882 and $19,549, respectively, by Jefferies related to
securities failed to receive.
(Continued)
38
JEFFERIES PARTNERS OPPORTUNITY FUND II, LLC
Unaudited Notes to Financial Statements
December 31, 2004 and 2003
Jefferies, in its capacity as Manager, receives a management fee equal to
1% per annum of the sum of 100% of the average balance of securities
owned and 98% of the average balance of securities sold, not yet
purchased. At December 31, 2004 and 2003, accrued management fees of
$73,715 and $90,918, respectively, were included in payable to Jefferies.
(6) FINANCIAL INSTRUMENTS
(a) OFF-BALANCE SHEET RISK
The Fund has contractual commitments arising in the ordinary
course of business for securities sold, not yet purchased. These
financial instruments contain varying degrees of off-balance sheet
risk whereby the market values of the securities underlying the
financial instruments may be in excess of, or less than, the
contract amount. The settlement of these transactions is not
expected to have a material effect upon the Fund's financial
statements.
(b) CREDIT RISK
In the normal course of business, the Fund is involved in the
execution, settlement, and financing of various principal
securities transactions. Securities transactions are subject to
the risk of counterparty nonperformance. However, transactions are
collateralized by the underlying security, thereby reducing the
associated risk to changes in the market value of the security
through settlement date.
The Fund seeks to control the risk associated with these
transactions by establishing and monitoring collateral and
transaction levels daily.
(c) CONCENTRATION OF CREDIT RISK
The Fund's activities are executed exclusively with Jefferies.
Concentrations of credit risk can be affected by changes in
economic, industry, or geographical factors. The Fund seeks to
control its credit risk and the potential risk concentration
through a variety of reporting and control procedures including
those described in the preceding discussion of credit risk.
(7) NET CAPITAL REQUIREMENT
The Fund is subject to the Securities and Exchange Commission Uniform Net
Capital Rule (Rule 15c3-1), which requires the maintenance of minimum net
capital. The Fund has elected to use the alternative method permitted by
Rule 15c3-1, which requires that the Fund maintain minimum net capital,
as defined, equal to the greater of $250,000 or 2% of aggregate debit
balances arising from customer transactions, as defined.
At December 31, 2004, the Fund had net capital of $99,913,043, which was
$99,663,043 in excess of required net capital.
(8) SUBSEQUENT EVENT
On February 15, 2005, the Fund made a distribution to the Fund members of
$23,400,893.
39