LEUCADIA NATIONAL CORPORATION
315 Park Avenue South
New York, New York 10010-3607
(212)-460-1900
Fax: (212)-598-3242
April 8, 2009
BY EDGAR
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Securities and Exchange Commission
Division of Corporation Finance
450 Fifth Street, N.W.
Washington, D.C. 20549-7010
Attention: John Hartz
Senior Assistant Chief Accountant
Re: Leucadia National Corporation
Form 10-K for the fiscal year ended December 31, 2008
Filed February 27, 2009
File #1-5721
Dear Mr. Hartz:
Reference is made to your letter of March 26, 2009 addressed to me (the "March
26, 2009 Letter"). On behalf of Leucadia National Corporation ("Leucadia" or the
"Company"), set forth below is each numbered paragraph of the March 26, 2009
Letter followed by the response of Leucadia to each comment contained in the
March 26, 2009 Letter. The number of each response corresponds to the number of
the comment in your letter.
Form 10-K for the Fiscal Year ended December 31, 2008
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General
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1. Given the nature of Leucadia's assets, income and activities, please
explain why the company should not be considered an "investment
company" within the meaning of Section 3 of the Investment Company Act
of 1940.
Leucadia is not an "investment company" within the meaning of
Section 3 of the Investment Company Act of 1940 (the "Act").
Section 3 of the Act provides two definitions of "investment
company" that could potentially relate to Leucadia. Section
3(a)(1)(A), a subjective test, applies to those issuers who
intend to be investment companies and who are, or hold themselves
out as being, primarily engaged in the business of investing in
securities. This definition does not apply to Leucadia because
Leucadia is not primarily engaged in the business of investing in
securities, and does not hold itself out as such. Leucadia has
historically and consistently described itself in its public
filings as a diversified holding company engaged in various
businesses. As set forth in Leucadia's Form 10-K for the year
ended December 31, 2008 ("2008 10-K"), Leucadia describes itself
as "...a diversified holding company engaged in a variety of
businesses, including manufacturing, telecommunications, property
management and services, gaming entertainment, real estate
activities, medical product development and winery operations."
Additionally, in the 2008 10-K Leucadia states that it
"...continuously evaluates the retention and disposition of its
existing operations and investigates possible acquisitions of new
businesses. In identifying possible acquisitions, the Company
tends to seek assets and companies that are out of favor or
troubled and, as a result, are selling substantially below the
values the Company believes to be present." This strategy of
acquiring businesses and operating them has been followed by
Leucadia for more then 30 years under the direction of its
Chairman and President. Although the businesses owned over those
years have varied as to size and industry, Leucadia has owned its
businesses to engage in, and profit from, the operation of those
businesses.
John Hartz
Page 2
The second definition of "investment company," Section
3(a)(1)(C), is an objective test and applies to any issuer that
is engaged in the business of investing, owning, holding, or
trading "investment securities" having a value in excess of 40%
of the issuer's total assets (exclusive of Government securities
and cash items). For purposes of that definition, the term
"investment securities" excludes majority-owned subsidiaries that
are not themselves investment companies. The statutory definition
has been supplemented by Rule 3a-1 under the Act. It provides in
relevant part, that an issuer will not be deemed an investment
company if no more that 45% of the issuer's total assets
(exclusive of Government securities and cash items) consists of,
and no more than 45% of the issuer's net income after taxes is
derived from, securities other than certain enumerated
securities, including companies that are: 1) primarily controlled
by the issuer; 2) through which the issuer engages in a business
other than investing in securities; and 3) which are not
themselves investment companies. Leucadia monitors its status
under Section 3(a)(1)(C) and Rule 3a-1 carefully, and in close
consultation with its outside counsel expert in investment
company status questions.
Under that analysis, our assets are dominated by wholly-owned
subsidiaries (as defined in the Act) including Idaho Timber
Corporation, Conwed Plastics, ResortQuest, Crimson Wine Group and
those subsidiaries engaged in real estate operations. Our
majority-owned subsidiaries (as defined in the Act) are Sangart,
STi Prepaid, Premier Entertainment Biloxi, Goober Drilling,
Garcadia and Jefferies High Yield Holdings. Companies that
qualify as "primarily controlled" by us include Jefferies Group,
Inc. and AmeriCredit Corp. As of December 31, 2008, no more than
25% of Leucadia's assets (exclusive of government securities and
cash items) consisted of securities other than wholly-owned
subsidiaries, majority-owned subsidiaries and primarily
controlled companies. For the four fiscal quarters ended December
31, 2008, Leucadia had a net loss after taxes, both from its
operating assets and from its investment securities holdings (as
defined in the Act), and less than 10% of its net loss was
derived from securities other than government securities,
wholly-owned subsidiaries, majority-owned subsidiaries, and
primarily controlled companies. As a consequence, Leucadia is not
an investment company under either definition in Section 3 of the
Investment Company Act.
Finally, we note that an issuer that otherwise falls within the
definition of investment company in Section 3(a)(1)(C)
nonetheless is excluded from the definition of investment company
by Section 3(b)(1) of the Act if it is primarily engaged,
directly or through a wholly-owned subsidiary or subsidiaries, in
a business or businesses other than that of investing,
reinvesting, owning, holding, or trading in securities. See, SEC
v. National Presto Ind., Inc., 486 F.3d 305, 312-315 (7th Cir.
2007). The determination of a company's primary business is made
by application of a five factor test. Id. at 313. Applying that
test to Leucadia, it is clear that Leucadia is primarily engaged
in the business of its subsidiary companies as evidenced by its
historical development, its public representations about its
business, the day-to-day activities of its officers and
directors, the sources of its income and the nature of its
assets. In summary, Leucadia's assets and activities reasonably
lead investors to treat the company as an operating enterprise,
and not an investment vehicle.
John Hartz
Page 3
Risk Factors, page 24
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2. In future filings, please consider expanding your risk factor
disclosure to capture all material risks that the company faces
because of current market conditions and predicted volatility. Please
try to avoid overly broad and boilerplate disclosure and provide more
specific information to focus on actual risks which underlie most of
your MD&A disclosure.
The Company believes it has identified all material risks in the
Risk Factors section of its 2008 10-K. We will consider expanding
our risk factor disclosure when we file our 2009 Annual Report on
Form 10-K ("2009 10-K"), as appropriate. In addition, the Company
will comply with this comment in future quarterly filings with
respect to new material risks or material changes to existing
risk factors.
3. In the second paragraph of your Business discussion on page 2, you
state that in order to generate additional liquidity to take advantage
of an investment opportunity, the company may dispose of existing
businesses or investments. We also note that your investments in ACF
and Jefferies are subject to standstill agreements which limit your
ability to dispose of these two investments. Given that you are in the
business of making investments, in future filings please consider
adding a risk factor disclosure which alerts investors to any material
risks associated with the illiquidity of your interests in ACF,
Jefferies and any other investment that are or may become subject to
standstill agreements.
The investments in Jefferies and ACF are the only investments
that are subject to standstill agreements. The Jefferies
standstill agreement requires the Company to obtain approval of
the disinterested directors of Jefferies (as defined in the
standstill agreement) prior to the sale of any shares until April
21, 2010, other than sales of shares that are part of a tender or
exchange offer initiated by a third party. The ACF standstill
agreement requires the Company to obtain approval of the
disinterested directors of ACF (as defined in the standstill
agreement) if a sale of shares would be to an individual or group
who would then own in excess of 4.9% of ACF's common shares,
unless such individual or group enters a substantially similar
standstill agreement with ACF or the sale is part of a tender or
exchange offer initiated by a third party. The ACF restriction
expires on March 3, 2010. In addition, pursuant to the
registration rights agreement covering the Inmet common shares,
the Company is restricted from selling the Inmet common shares
until August 2009. The restrictions for ACF, Jefferies and Inmet
are disclosed in MD&A and in the notes to the financial
statements.
We will add a risk factor disclosure to our 2009 10-K that alerts
the reader about the illiquidity resulting from these agreements,
as appropriate, and, if the Company enters into additional
standstill or other restrictive agreements in the future, it will
include appropriate risk factor disclosure.
4. The two opening paragraphs of your Liquidity and Capital Resources
discussion on page 32 of the MD&A stress how the changes in the market
value of your investment securities have impacted, among other things,
your shareholder equity and results of operations. Since a significant
number of your investments are carried at fair market value and
represent publicly traded securities, in future filings please add
appropriate risk factor disclosure to address how the market
volatility negatively impacts the value of your investments.
We will comply with the comment in future filings.
John Hartz
Page 4
5. We note your impairment disclosure starting on page F-9 of Note 2 to
the consolidated financial statements, and in particular, the
disclosure in the second paragraph of your Impairment of Long-Lived
Assets discussion. Because of current economic trends, in future
filings please add appropriate risk factor disclosure addressing these
apparent impairment risks.
In its 2008 10-K, the Company disclosed specific risk factors
concerning impairment of long-lived assets for the gaming
entertainment segment and Goober Drilling. We will comply with
this comment in future filings by including a specific risk
factor for the long-lived assets of the manufacturing segment or
any other segment, as appropriate.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
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of Operations, page 32
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Liquidity, page 33
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6. Given the importance of available funding to your business, please
revise future filings to include a more specific and comprehensive
discussion of the terms of the significant covenants within your debt
agreements. In addition, if you believe that it is reasonably likely
that you will not meet any significant debt covenant, please revise
future filings to also present, for your most significant covenants,
your actual ratios and other actual amounts versus the minimum/maximum
ratios/amounts permitted as of each reporting date. Such presentation
will allow an investor to easily understand your current status in
meeting your financial covenants.
Although the Company has raised funds in the public credit
markets in the past, as disclosed on page 33 of MD&A the Company
has no current plans to seek additional financing. The Company
intends to rely on its existing liquidity to fund corporate
overhead and corporate interest payments. The Company may also
dispose of existing businesses and investments if it needs funds
for new investment opportunities over and above its existing
liquidity.
The Company has debt covenants in its public bond indentures and
in its private $100 million bank credit facility. The bank credit
facility expires in June 2011, the Company has not borrowed under
the facility since August 2000 and the facility can be terminated
at any time if no amounts are outstanding. If the covenants in
the bank credit facility restricted the Company's ability to
raise funds in the capital markets, the Company would simply
terminate the facility. As a result the Company does not consider
the bank credit facility covenants to be material to its
operations.
Although the Company's public bond indentures contain restrictive
numerical covenants, if the Company were unable to meet these
covenants it would not result in a default. Failure to meet the
covenants would mean that the Company could not incur more
indebtedness or issue preferred stock of subsidiaries. Under the
most restrictive of these indentures, the Company could incur
additional indebtedness of approximately $2.4 billion at December
31, 2008 and still remain in compliance. The Company's
consolidated tangible net worth (as defined) would have to
decline by approximately $1.4 billion before it would be unable
to incur additional indebtedness under the most restrictive bond
indenture. The Company does not believe it is reasonably likely
it will fail to meet the bond indenture covenants, which failure
would only preclude its issuance of additional indebtedness or
preferred stock of subsidiaries.
The Company believes that its disclosure concerning its debt
covenants on pages 37 and F-28 is appropriate.
John Hartz
Page 5
Critical Accounting Estimates, page 40
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General
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7. Please provide us, and include in future filings, a comprehensive
discussion of how you have considered whether an other than temporary
impairment has occurred on your equity method investments. Reference
paragraph 6b of APB 18.
In accordance with paragraph 6b of APB 18, the Company evaluates
equity method investments for impairment when operating losses or
other factors may indicate a decrease in value which is other
than temporary.
For investments in investment partnerships that are accounted for
under the equity method, the Company obtains from the investment
partnership financial statements, net asset values and other
information on a quarterly basis and annual audited financial
statements. On a quarterly basis, the Company also makes
inquiries and discusses with investment managers whether there
were significant procedural, valuation, composition and other
changes at the investee. Since these investment partnerships
record their underlying investments at fair value, after
application of the equity method the carrying value of the
Company's investment is equal to its share of the investees'
underlying net assets at their fair values. Absent any unusual
circumstances or restrictions concerning these investments, which
would be separately evaluated, it is unlikely that any additional
impairment charge would be required.
For equity method investments in operating businesses, the
Company considers a variety of factors including economic
conditions nationally and in their geographic areas of operation,
adverse changes in the industry in which they operate, declines
in business prospects, deterioration in earnings, increasing
costs of operations and other relevant factors specific to the
investee. Whenever the Company believes conditions or events
indicate that one of these investments might be materially
impaired, the Company will obtain from such investee updated cash
flow projections and impairment analyses of the investee assets.
The Company will use this information and, together with
discussions with the investee's management, evaluate if the book
value of its investment exceeds its fair value, and if so and the
situation is deemed other than temporary, record an impairment
charge.
During 2008, conditions warranted that the Company review four of
its larger equity method investees in operating businesses for
impairment: Goober Drilling, Garcadia, IFIS Limited and HomeFed
Corporation. Goober Drilling and Garcadia were reviewed because
of deteriorating industry conditions; however each investment has
been profitable and generated positive operating cash flows to
the Company since inception.
With respect to Goober Drilling, assumptions concerning rig
utilization and rig rates over the useful lives of the rigs have
the greatest impact on cash flows, and rig utilization and rig
rates decline when natural gas prices decline. Current low
natural gas prices are expected to negatively impact rig
utilization and rig rates over the next couple of years but are
projected to rise in the future in line with historical trends
and current futures contract prices. The Company's estimate of
fair value significantly exceeded the book value of its
investment in Goober Drilling and the Company concluded that its
investment was not impaired.
New and used car sales at Garcadia's automobile dealerships
declined significantly during 2008, with individual dealerships
experiencing annual sales declines of up to 36%. Garcadia cash
flow models were prepared assuming worst, most likely and best
case scenarios. The projected cash flows under the worst case
scenario assume there will be no improvement in market conditions
or revenue growth at Garcadia's dealerships through 2010. The
estimated fair value of the Company's investment in these
dealerships (utilizing the worst case scenario) exceeded the
carrying value of its investment and, therefore, the Company
concluded that its investment was not impaired.
John Hartz
Page 6
HomeFed was reviewed for impairment because of deteriorating
industry conditions, recent operating losses and a decline in its
stock price. HomeFed is traded on the NASD OTC Bulletin Board,
and in November 2008 the trading price per share dropped below
the Company's book value per share. At December 31, 2008, the
book value of the Company's investment in HomeFed exceeded the
market value by approximately $3,300,000. HomeFed prepared cash
flow analyses which the Company used to determine an estimated
fair value for its investment in HomeFed. The Company relied upon
its estimate of fair value rather than the stock price since the
stock is thinly traded and the trading value had been less than
the book value for fewer than two months at December 31, 2008.
Based on its calculation of HomeFed's fair value the Company
concluded that its investment was not impaired. In addition, the
difference between the market value and carrying value was not
deemed material at December 31, 2008.
IFIS was reviewed for impairment because of local economic
conditions and because substantially all of its assets are
comprised of positions in a small number of publicly traded
securities, and the values of those securities had declined
significantly. As disclosed in the 2008 10-K, the Company
recorded impairment charges for its investment in IFIS of
$63,300,000, based substantially upon the market values of IFIS's
underlying assets.
In future filings, the Company will amend its critical accounting
estimates disclosure to include a discussion of the conditions
and procedures employed to determine whether an equity method
investment needs to be reviewed for impairment. For any material
equity method investments that are impaired, the Company will
provide additional disclosure describing the circumstances and
procedures applied to the particular investee. In addition, the
Company will provide similar disclosures and details for material
equity method investments that were reviewed for impairment and
determined to be unimpaired, but for which the impairment
analysis is sensitive to particular assumptions or was close to
being impaired.
Impairment of Long-Lived Assets, page 41
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8. With a view towards future disclosure, please provide us with a more
specific and comprehensive discussion of your impairment policy.
Reference SFAS 144. In this regard, please address the following
items:
o Include a qualitative and quantitative description of the
material assumptions used in your impairment analysis and a
sensitivity analysis of those assumptions based upon reasonably
likely changes.
o Discuss the nature of the assets for which you recorded an
impairment charge of $3.2M.
o Discuss how you have considered the fact that your investment in
STi Prepaid has a negative net balance.
o Discuss how you have considered the overall decline in the real
estate market in your valuation of your domestic real estate
assets. While we note your disclosure on page 15 that you are
waiting for market conditions to improve before moving ahead with
certain of your projects, it is unclear how you have considered
whether the current carrying value of these assets is impaired.
During the year ended December 31, 2008, impairment charges for
long-lived assets was comprised of the following:
o Held for sale real estate - $1,300,000
o Wine futures contracts - $1,000,000
o Gaming equipment - $800,000
o Vineyard improvements - $100,000
STi Prepaid's negative net worth did not cause impairment
concerns and was not considered in any impairment analysis. At
acquisition, the liabilities assumed by STi Prepaid exceeded the
assets acquired, principally due to the deferred revenue
obligation. As disclosed in Note 3 to the 2008 10-K, a
substantial portion of the purchase price paid for STi Prepaid
was allocated to the Company's deferred tax assets, and not to
assets on STi Prepaid's balance sheet. Since acquisition, STi
Prepaid's cash distributions to the Company have exceeded its
earnings, causing an increase in its negative net worth. Since
STi Prepaid had a negative net worth at acquisition, which has
grown only because its cash distributions to the Company have
exceeded its earnings, the negative net worth was not deemed to
be an indication of a potential impairment.
John Hartz
Page 7
The discussion below concerns the impairment reviews performed by
the Company during 2008 for certain long-lived assets and real
estate assets. In future filings, when the Company records
material impairment charges it will provide relevant information
similar to the discussion below, subject to the particular facts
and circumstances of the specific asset that is impaired. In
addition, the Company will provide similar disclosures and
details for long-lived and real estate assets that were reviewed
for impairment and determined to be unimpaired, but for which the
impairment analysis is sensitive to particular assumptions or was
close to being impaired.
As required by SFAS 144 paragraph 8, the Company evaluates
long-lived assets for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be
recoverable. For the year ended December 31, 2008, the Company
reviewed net property, plant and equipment of Premier
Entertainment Biloxi for impairment but concluded that the
carrying amount of the asset was recoverable. As disclosed in the
2008 10-K, Premier is a new business that did not open for
business until July 2007. Although Premier generated positive
cash flow from operations during 2008 of approximately
$13,300,000, it is taking more time than originally expected for
Premier to build its customer base and grow its revenues. This
combined with poor economic conditions locally and nationally and
generally poor industry conditions required a review of the
recoverability of Premier's net property, plant and equipment
asset group. The Company prepared three cash flow models for its
impairment review. The first model assumed that Premier would not
increase its revenues or operating cash flows above 2008 actual
results for the entire remaining useful life of its net property,
plant and equipment asset (38 years). Two other models assumed
revenue and operating cash flow growth over the next three and
five years, with an assumed sale at the end of the respective
three or five year period at a price equal to the final year's
operating cash flow times an industry multiple. All three models
resulted in sufficient operating cash flows for the Company to
conclude that Premier's assets were not impaired. Given the short
period of time that Premier has been in business the Company does
not believe it is reasonably likely that Premier won't be able to
at least maintain its current level of revenues and operating
cash flows; the Company believes it is reasonably likely that
Premier will grow its business. The Company believes that a model
which assumes no growth in revenues or operating cash flows is
very conservative.
As events and changes in circumstances warrant, the Company
prepares updated cash flow projections for all of its material
real estate projects. The Company considered the overall decline
in the real estate market as well as local market conditions
where its development projects are located in preparing updated
cash flow projections during the fourth quarter of 2008. At
reduced selling prices, the projected cash flows for these
projects continue to be sufficient for the Company to conclude
that its real estate projects are not impaired.
The Company has three development projects in Maine; the largest
project is the only one which has fully entitled residential
lots. As a result of the decline in the real estate market, the
Company updated its cash flow projection for this project during
the fourth quarter of 2008 and reduced its estimated selling
prices by approximately 15%. The revised projected net cash flows
are significantly higher than the Company's investment; there is
sufficient excess projected cash flow such that the project would
remain unimpaired if currently projected revenues were reduced by
an additional 38%. The Company is not marketing these lots for
sale in the current environment so they are not considered "held
for sale" as that term is defined in SFAS 144. The Company
expects prices will at least partially recover over the next
couple of years, and it can best maximize value by not marketing
the properties for sale at the present time. The Company's other
development projects in Maine are smaller and are not yet
entitled for development to commence; however, current estimates
of future cash flows exceed their respective book values.
John Hartz
Page 8
The Company also prepared updated cash flow analyses for its
Myrtle Beach project, a mixed-use project of retail and office
space that is substantially leased and a residential lot
development project that is nearly fully developed with lot sales
ongoing. The residential lots continued to be developed and sold
at prices which enable the Company to recover its investment in
the residential portion of the project and recognize substantial
profit. The retail and office space portion of the project
generated cash flows from leases sufficient to recover the
investment in that part of the project, and additional cash flows
are expected from rental income of apartment units and certain
office space. Based on its cash flow analysis the Company
concluded that its Myrtle Beach project was not impaired at
December 31, 2008.
The Company did record impairment charges in 2008 for two other
real estate properties located in different states that are being
marketed for sale whose carrying values were in excess of
estimated net selling prices.
Impairment of Securities, page 41
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9. With a view towards future disclosure, please provide us with a more
specific and comprehensive discussion of your impairment policy.
Reference SAB Topic 5M and FSP 115-1 and 124-1. In this regard, please
address the following items:
o Include a qualitative and quantitative description of the
material assumptions used in your impairment analysis and a
sensitivity analysis of those assumptions based upon reasonably
likely changes.
o A discussion of the nature of the securities for which you
recorded an other than temporary impairment and specifically why
you concluded that such a charge was necessary.
o A discussion of the nature of any securities for which you have
significant unrealized losses but have not recorded an other than
temporary impairment and specifically why you concluded that such
a charge was not necessary.
The impaired securities consisted of the Company's investment in
publicly traded debt and equity securities ($99,600,000), private
equity funds and non-public securities ($29,700,000), and a
portfolio of non-agency mortgage backed bond securitizations
where the underlying assets are various individual mortgage loans
($14,100,000). The various factors that the Company considered in
making its determination were specific to each investment and
included those discussed in SAB Topic 5M and FSP 115-1 and 124-1.
The Company evaluated and impaired a large number of securities,
and as the causes were specific to each security, the Company
disclosed a number of the most common factors it considered and
indicated that these factors were not all inclusive. The Company
disclosed these factors under "Critical Accounting
Estimates--Impairment of Securities" on page 41 and page F-9 of
its 2008 10-K. The impairment charge for publicly traded
securities was calculated using closing market prices. The
impairment charges recorded for investments in private equity
funds and non-public securities was based upon issuer financial
statements, net asset values, and/or other information obtained
from fund managers or investee companies, and impairment charges
for investments in non-agency mortgage backed bond
securitizations were based upon estimated future cash flows.
The Company did not have significant unrealized losses on
securities, either individually or in the aggregate, for which an
other than temporary impairment was not recorded. At December 31,
2008, as disclosed in Note 6 on page F-24, the Company had
$10,122,000 of gross unrealized losses for its investments that
had been in a continuous unrealized loss position for less than
12 months and $1,200,000 of gross unrealized losses for its
investments that had been in a continuous unrealized loss
position for 12 months or longer. In Note 6 the Company also
disclosed the factors that it considered in reaching its
determination that these securities were not impaired. The
Company considers these disclosures to be appropriate given the
relative immateriality of the unrealized losses.
John Hartz
Page 9
In future filings, the Company will amend its critical accounting
estimates disclosure to expand its discussion of security
impairments as detailed below. In addition, if material, the
Company will add disclosure to quantify the impairment charge by
type of security, identify the information used to calculate the
impairment charge, and, if applicable, include a discussion of
investments with significant unrealized losses that were not
impaired and the reasons why an impairment charge was not deemed
necessary.
Impairment of Securities - Investments with an impairment
in value considered to be other than temporary are written
down to estimated fair value. The write-downs are included
in net securities gains (losses) in the consolidated
statements of operations. The Company evaluates its
investments for impairment on a quarterly basis.
The Company's determination of whether a security is other
than temporarily impaired incorporates both quantitative
and qualitative information; GAAP requires the exercise of
judgment in making this assessment, rather than the
application of fixed mathematical criteria. The various
factors that the Company considers in making its
determination are specific to each investment. For
publicly traded debt and equity securities, the Company
considers a number of factors including, but not limited
to, the length of time and the extent to which the fair
value has been less than cost, the financial condition and
near term prospects of the issuer, the reason for the
decline in fair value, changes in fair value subsequent to
the balance sheet date, the ability and intent to hold
investments to maturity, and other factors specific to the
individual investment. For investments in private equity
funds and non-public securities, the Company bases its
determination upon financial statements, net asset values
and/or other information obtained from fund managers or
investee companies, and for investments in non-agency
mortgage backed bond securitizations, the Company bases
its determination upon estimates of future cash flows.
Impairment charges recorded for publicly traded securities are
calculated using the market price on the date the security is
impaired. For certain of the Company's larger investments in
equity securities the Company has disclosed in MD&A and in the
Notes to the financial statements material declines in market
values subsequent to the balance sheet date. In future filings
the Company will consider providing sensitivity analyses for
impairment charges recorded on its bond securitization portfolio
or other cost method investments, if material and appropriate for
the specific investment.
Results Of Operations, page 43
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General
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10. Please revise future filings to include a tabular presentation of your
financial information both on a segment and consolidated level. Such
an approach may allow for a more clear and concise understanding of
your results. Reference Release No. 33-8350.
The Company will comply with this comment in future filings.
11. We note that you have identified several factors that have impacted
your results including product mix, volume, acquisitions, raw material
costs, foreign exchange, new customers and competitors. Please revise
future filings to include a more quantified discussion of the impact
of these factors on your results where practicable.
The Company will comply with this comment in future filings.
John Hartz
Page 10
Note 4. Investments in Associated Companies, page F-14
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12. Please supplementally tell us how you have considered Rule 3-09 in
determining whether separate audited financial statements of your
Associated Companies are required to be filed. In this regard, please
tell us what consideration you have given to any impairments of your
investments.
Neither the first condition nor third condition under Rule
1-02(w), substituting 20% for 10% under Rule 3-09, were met with
respect to any of the Company's associated company investments
for 2008. At December 31, 2008, 20% of the Company's consolidated
total assets were approximately $1,039,699,000. At December 31,
2008, the Company's largest investment in an associated company
was its $683,111,000 investment in Jefferies Group, Inc., and
this amount is less than the applicable Rule 3-09 threshold. For
the year ended December 31, 2008, 20% of the Company's
consolidated pre-tax loss from continuing operations was
approximately $180,677,000. (This amount was computed as follows:
2008 loss from continuing operations before income taxes and
losses related to associated companies of $366,568,000, plus 2008
pre-tax losses related to associated companies of $536,816,000,
resulting in an aggregate pre-tax loss of $903,384,000,
multiplied by 20% equals $180,677,000.) For the year ended
December 31, 2008, the largest loss or income related to an
associated company (including impairment charges, if applicable)
was that of AmeriCredit Corp ($155,344,000), and this loss was
less than the applicable Rule 3-09 threshold.
13. Please supplementally provide us, and include in future filings, a
tabular presentation of the individual value of each of your
investments in associated companies with a total that reconciles to
your balance sheet. Please also include a comparison of the cost and
carrying value of each entity and an explanation regarding how you
have accounted for any losses. Given that you have a number of
investments, such presentation will allow for an easier understanding
of the significance of each investment.
In future filings, we will provide the information in the table
below on a comparative bassis. The amounts below are as of
December 31, 2008 (in thousands):
Investments in Associated Companies accounted for
under the equity method of accounting (a):
Jefferies High Yield Holdings, LLC $ 280,923
Goober Drilling, LLC 252,362
Cobre Las Cruces, S.A. 165,227
Garcadia 72,135
HomeFed Corporation 44,093
Wintergreen Partners Fund, L.P. 42,895
Pershing Square IV, L.P. 36,731
HFH ShortPLUS Fund L.P. 39,942
IFIS Limited 14,590
EagleRock Capital Partners (QP), LP 2,000
Brooklyn Renaissance Plaza 31,217
Other 91,402
------------
Total accounted for under the equity method of accounting 1,073,517
Investments in Associated Companies
carried at fair value under SFAS 159 (b):
Jefferies Group, Inc. 683,111
AmeriCredit Corp. 249,946
------------
Total investments accounted for at fair value 933,057
------------
$ 2,006,574
============
(a) Investments accounted for under the equity method of
accounting are initially recorded at their original cost and
subsequently increased for the Company's share of the investees'
earnings, decreased for the Company's share of the investees'
losses, reduced for dividends received and impairment charges
recorded, if any, and increased for any additional investment of
capital.
(b) These investments are carried at fair value in
accordance with SFAS 159. The original cost for the Jefferies
Group, Inc. shares was $794,400,000 and the original cost for the
AmeriCredit Corp. shares was $405,300,000.
John Hartz
Page 11
Note 6. Investments, page F-21
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14. With a view towards future disclosure, please provide us a more
specific and comprehensive discussion of all of your significant
available-for-sale investments.
The Company believes that its disclosures with respect to
available-for-sale investments comply with the requirements of
SFAS 115 paragraphs 19 to 22. On page F-21 the Company provides a
table disclosing the components of available-for-sale investments
classified as current assets, and on page F-23 a similar table is
provided for non-current available-for-sale investments. The
disclosure on page F-22 includes a discussion of the Company's
two largest equity investments, Fortescue and Inmet, which
account for 83% of the total available-for-sale equity
securities. In addition, on page F-15 the Company discusses its
next largest available-for-sale security, Cresud, which when
combined with Fortescue and Inmet accounts for over 88% of the
total available-for-sale equity securities. Other equity
securities are not considered individually significant to warrant
specific disclosure.
The Company believes its disclosure is appropriate.
15. We note your disclosure that it is not practicable to estimate the
fair value of certain of your cost method investments. With a view
towards future disclosure, please provide us with the following
information:
o A discussion of the nature of these investments.
o Information pertinent to estimating the fair value of the
investments. Reference paragraph 14a of FAS 107.
o A discussion of why it is not practicable to estimate the fair
value of these investments. Reference paragraph 14b of FAS 107.
o A discussion of how you have considered whether these investments
are impaired.
We propose to include the following disclosure in our 2009 10-K
with respect to other investments accounted for under the cost
method of accounting. The amounts in the proposed disclosure are
as of December 31, 2008.
Other investments include private equity fund investments
where the Company's voting interest isn't large enough to
apply the equity method of accounting ($52,111,000 in the
aggregate), a portfolio of non-agency mortgage backed bond
securitizations where the underlying assets are various
individual mortgage loans ($43,165,000 in the aggregate),
the FMG note discussed above ($28,656,000), a stock interest
in the Light and Power Holdings, Ltd. ("LPH"), the electric
utility in Barbados ($18,759,000), and various other
non-publicly traded interests in equity and debt securities.
The Company receives regular reports from private equity
funds that provide it with a current net asset value. Other
debt and equity securities that are not publicly traded do
not have readily determinable fair values but the Company
believes that fair values would not be materially different
than the carrying amounts based on its analyses of cash
flows and/or other information obtained from investee
companies. The FMG note is a zero coupon note that accretes
interest at 12.5%, and the Company believes that its
carrying amount approximates its fair value. Although LPH
trades publicly in Barbados, the volume is too low for the
market to be considered active. The fair value of the
investment in LPH is also not practicable to estimate
because of transfer restrictions and currency exchange
restrictions. For the past two years the Company has
received annual dividends from LPH of $1,200,000.
The investments in bond securitizations are acquisitions of
impaired loans, generally at a significant discount to face
amounts, and are accounted for under AICPA Statement of
Position 03-3. The Company estimates the future cash flows
for the securitization interests to determine the accretable
yield, and any increases in estimated cash flows are
accounted for as a yield adjustment on a prospective basis.
The market for these securities is highly illiquid and they
rarely trade. On a regular basis the Company re-estimates
future cash flows and records impairment charges if
appropriate.
John Hartz
Page 12
For the investments in private equity funds, LPH, the FMG note and
other non-public debt and equity securities the Company primarily
reviews issuer financial statements to determine if impairment charges
are required. We also engage the management of these companies in
conversations about their results of operations, prospects and
valuations. For the year ended December 31, 2008, the Company recorded
impairment charges of $29,700,000 for its investments in private
equity funds and other non-public securities. For the bond
securitization portfolio, future cash flows are re-estimated on a
regular basis for each security to determine if impairment charges are
required. For the year ended December 31, 2008, the Company recorded
impairment charges of $14,100,000 for this portfolio.
The Company's disclosure that it is not practicable to estimate the
fair value of other securities should have only referenced $26,200,000
of non-publicly traded investments and the investment in LPH. In the
2009 10-K, or in future quarterly filings if required, the Company
will disclose the estimated fair values of its cost method investments
if practicable, provide a description of the methods and significant
assumptions used to determine the estimated fair values and provide a
discussion of why it is not practicable to estimate the fair value of
any other material cost method investment.
Note 8. Inventory, page F-25
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16. Please revise future filings to present the amounts related to your
major classes of inventory for each period presented. Reference Item
5-02 of Regulation S-X.
We will comply with this comment in future filings.
Note 21. Earnings (Loss) Per Common Share, page F-42
- -----------------------------------------------------
17. Please revise future filings to present your disclosures in a tabular
format. Reference paragraph 40 of SFAS 128.
We will comply with this comment in future filings.
* * * *
In connection with our filings and in response to the March 26, 2009 Letter, the
Company acknowledges and agrees that:
o The Company is responsible for the adequacy and accuracy of the
disclosure in its filings;
o Staff comments or changes to disclosure in response to staff comments
do not foreclose the Commission from taking any action with respect to
the filing; and
o The Company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the federal
securities laws of the United States.
If you have any further questions or desire any additional information please
contact the undersigned at 212-460-1932.
Very truly yours,
/s/ Joseph A. Orlando
Joseph A. Orlando
Vice President and Chief
Financial Officer
cc: Tricia Armelin, Staff Accountant
Era Anagnosti, Staff Attorney
Pam Long, Assistant Director