November 6, 2006
Securities and Exchange Commission
Division of Corporation Finance
450 Fifth Street, N.W.
Washington, D.C. 20549-0303
Attention: Larry Spirgel
Assistant Director
Mail Stop 3720
Re: Leucadia National Corporation
Form 10-K for the year ended December 31, 2005
Filed March 8, 2006
Form 10-K/A for Fiscal Year Ended December 31, 2005
Filed March 24, 2006
Form 10-Q for the Quarter Ended June 30, 2006
Filed August 9, 2006
File No.: 1-5721
Dear Mr. Spirgel:
Reference is made to your letter of October 27, 2006 (the "October 27, 2006
Letter"). On behalf of Leucadia National Corporation ("Leucadia"), set forth
below is each numbered paragraph of the October 27, 2006 Letter followed by the
response of Leucadia to each comment contained in the October 27, 2006 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, 2005
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1. We understand that you plan to amend your Form 10-K to comply with our
prior comments 1, 2 and 3. Please note our further comments below.
Please see our responses below.
Larry Spirgel
November 6, 2006
Page 2
Parent Company Liquidity, page 30
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2. Please refer to our comments 1 and 2. Tell us why you consider certain
non-current investments to be "readily available" to meet your liquidity
needs. Include in your response what you mean by "readily available."
Also, tell us the reason for the separate liquidity discussion of you and
your parent.
Non-current investments are considered "readily available" if they
are publicly traded securities and are not pledged as collateral or
held by subsidiaries that are party to agreements which restrict the
Company's ability to convert the investments into cash and deploy
the cash for any purpose. Such non-current investments are
considered available to meet liquidity needs because the Company
believes it has the ability to convert the investments into cash in
a timely, orderly manner and at a value not materially different
from the aggregate carrying value on the balance sheet. The Company
believes its definition of liquidity is consistent with Instruction
5 of Item 303(a) of Regulation S-K, and is important for readers of
the Company's financial statements to understand that it has the
ability to spend significant amounts on new acquisitions and
investments without having to incur the time and expense involved
with raising capital from other sources.
The business of the Company is the acquisition, management and
operation of disparate businesses and investments and, if the
Company considers it appropriate, the disposition of those
businesses or investments. Usually, acquisitions do not complement
existing operations, and often are in completely new industry
sectors. The Parent Company is the holding company for these
businesses and investments, and it is not unusual for the components
of the Company's continuing operations to change dramatically from
one year to the next. The purpose of the Parent Company Liquidity
discussion is to identify the funds available to make acquisitions
and investments, to report on changes in the make up of the
Company's operations and investments during the period, to report on
changes in the Parent's outstanding debt and equity securities
during the period, and to report on any other event that is material
to the Parent Company's liquidity. The Company believes that the
Parent Company Liquidity discussion is important to understanding
how quickly its underlying operations and investments have changed
and could change.
The purpose of the discussion in Consolidated Liquidity is
principally to explain the more significant changes and components
in the consolidated statement of cash flows, which was expanded in
the Form 10-K/A filed with the Commission on November 3, 2006, and
to discuss long-term debt obligations at the Company's subsidiaries.
Larry Spirgel
November 6, 2006
Page 3
3. We note that the Level 3 common stock is subject to a transfer restriction
that limits the number of shares the Company can sell on any given day
until May 22, 2006. However, we note that you sold all the shares during
the first quarter of 2006. Please tell us when and how the restrictions
were removed.
As disclosed on page 30, there were certain exceptions to the
transfer restriction, and one of these exceptions included certain
block trades. The Level 3 shares were sold pursuant to a permissible
block trade during the first quarter of 2006, so there was no need
to have any restriction removed. In the Form 10-K/A filed with the
Commission on November 3, 2006, the Company has disclosed that
certain block trades are not subject to the transfer restriction.
Consolidated Liquidity, page 32
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4. Refer to your response to prior comments 3, 4 and 5.
o It is unclear to us how a "decrease in the size of the Company's
trading portfolio" impacted your cash flows since all related notes
to the financial statements on pages F-22 and F-32 indicate that it
is not material. Please advise or revise.
o Please tell us why the increased cash flow was due to the plastics
manufacturing segment's "increased revenues" instead of operating
income.
o Please separately caption proceeds from the SBC funding of WilTel's
investing activities.
o In 2005, you attributed the reduction of long-term debt to a
"repayment of $442,500 of debt of operations sold." We note that the
2004 balance of non-current liabilities of discontinued operations
was $669 million. Please tell us where the balance of the
non-current liabilities is reflected in the statement of cash flows.
During 2004, the Company increased its investment in its
trading portfolio through its investment in INTL, an
investment which is disclosed in footnote 3 on page F-14. This
new investment accounts for substantially all of the use of
funds for investments classified as trading, net as reflected
on the consolidated statement of cash flows for the year ended
December 31, 2004. During 2005, the Company's net investment
in its trading portfolio (net of liabilities for short
positions) declined, even though the Company did not
experience material realized or unrealized losses. This
resulted from the sales of investments classified as trading.
Larry Spirgel
November 6, 2006
Page 4
Increased revenues at the plastics manufacturing segment were
the most significant reason for its increased operating
income. In the Form 10-K/A filed with the Commission on
November 3, 2006, the Company has revised the disclosure to
comply with this comment.
The proceeds from SBC's funding of WilTel's investing
activities were $25,000,000. In the Form 10-K/A filed with the
Commission on November 3, 2006, the Company has revised the
disclosure to comply with this comment.
As of the closing date of the sale of WilTel, the balance of
non-current liabilities of discontinued operations that
remained with WilTel were acquired by the buyer pursuant to
the stock purchase agreement. The transfer of these
liabilities did not result in a use of cash; therefore, as a
non-cash transaction, it is not directly reflected in the
statement of cash flows. The transfer of these liabilities is
a component of the gain on disposal and therefore is included
in net income; however, the entire gain on disposal was
deducted from net income to arrive at net cash provided by
operating activities.
Consolidated Balance Sheets, page F-3
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5. Please refer to prior comment 6. Please confirm to us that the inventory
costs included in your cost of sales are not material. Otherwise, disclose
your accounting policy for inventories.
Although the book value of manufacturing inventories has not
been material to current assets as of the balance sheet dates,
the inventory component of cost of sales is significant in
relation to cost of sales. Manufacturing inventories are
stated at the lower of cost or market, with cost determined
under the first-in-first-out method. The Company will disclose
its inventory accounting policy in its Annual Report on Form
10-K for the year ended December 31, 2006.
Note 5. Discontinued Operations, page F-19
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6. Please refer to prior comments 8 and 9. Based on your textual disclosures,
it is unclear to us how you calculated the gain from discontinued
operations which was material to your income statement. As required in
paragraph 47(a) of SFAS 144, and further explained in paragraph B119,
please separately present the carrying amount of the major classes of
assets and liabilities included as part of a disposal group in the
financial statements that cover the period in which it is sold and
disclose the related proceeds and/or consideration. Additionally, please
disclose parenthetically the related income taxes attributed to the income
and gain from discontinued operations.
Larry Spirgel
November 6, 2006
Page 5
With respect to WilTel, the second paragraph of footnote 5 on
page F-19 identifies and quantifies all of the components of
the gain except for the net book value of the assets sold and
expenses, which can be calculated from the information
presented. As of the closing date, the net book value of the
WilTel assets sold plus expenses aggregated $689,300,000. The
other component of the 2005 gain on disposal of discontinued
operations relates to the sale of the Waikiki Beach hotel,
which is disclosed in footnote 5 on page F-20. With respect to
the Waikiki Beach hotel, the selling price, net cash received
at closing and the gain are disclosed; the net book value of
the assets sold can be calculated from the information
presented. As of the closing date, the book value of the
Waikiki Beach assets sold plus expenses aggregated
$38,500,000. The Company believes that its disclosure of the
components of the gain on disposal of discontinued operations
and the related proceeds and/or consideration is adequate.
The Company did not have any assets or liabilities on its 2005
balance sheet that were classified as held for sale or
discontinued operations. With respect to WilTel, the Company
reclassified its 2004 balance sheet to deconsolidate WilTel's
balance sheet accounts into four categories that are reflected
directly on the face of the consolidated balance sheet,
current and non-currents assets and liabilities. The Company
disclosed the reclassification and its reason for doing so in
footnote 1 on page F-9. As previously discussed in response to
prior comment 8, the Company believes that the assets and
liabilities of the Waikiki Beach hotel are not material as of
December 31, 2004 and that no additional disclosure is needed.
The Company did consider the requirements of paragraph 47(a)
of FAS 144 as further explained in paragraph B119. The Company
deconsolidated WilTel's balance sheet as of December 31, 2004
because WilTel's balance sheet accounts were material to the
Company, and absent a deconsolidation a meaningful comparison
of the Company's 2005 and 2004 balance sheets would not have
been possible. However, since WilTel was sold prior to
December 31, 2005, the Company does not believe a further
breakdown of these four asset categories as of December 31,
2004 was material or meaningful. The Company also notes that
since WilTel was never classified as an asset held for sale,
the importance of segregating assets measured on different
methods of accounting referred to in paragraph B119 is not
applicable. The Company believes that its disclosure of the
December 31, 2004 assets and liabilities of discontinued
operations is adequate.
Income taxes related to income from discontinued operations is
disclosed in footnote 5 on page F-21 and are not material for
any period. Income taxes related to gain on disposal of
discontinued operations are zero for 2005 and not material for
other periods. Please see the response to comment 9 below for
a discussion of the related income taxes attributed to the
Larry Spirgel
November 6, 2006
Page 6
income and gain from discontinued operations for 2005. In
future filings with the Commission, the Company will
parenthetically disclose the after-tax gains related to
discontinued operations immediately next to its disclosure of
pre-tax gains.
7. Please refer to prior comments 11 and 12.
o It is unclear to us how the WilTel facility was accounted for in the
balance sheet. If it is currently for sale, tell us why it is not
reported separately as an asset held for sale. Refer to paragraphs
30 and 46 of FAS 144.
o Tell us your consideration of paragraphs 30(e) and B76 of FAS 144 in
determining the carrying amount of the WilTel facility.
As disclosed in footnote 5 on page F-19, the WilTel
headquarters facility is classified with other assets in the
Company's consolidated balance sheet, along with its other
real estate investments. As disclosed in footnote 5 on page
F-20, the Company believes it will take at least two years
before the facility can be sold; accordingly the Company
concluded that the WilTel facility did not meet the criteria
specified in paragraph 30(d) of FAS 144 for held for sale
classification (expectation for a completed sale within one
year). In addition, had the facility met the criteria for held
for sale classification, the carrying amount is not material
to non-current assets or total assets.
Since the facility does not meet all of the criteria specified
in paragraph 30(d) of FAS 144 for held for sale
classification, the Company did not consider paragraphs 30(e)
and B76 of FAS 144 in determining the carrying amount of the
facility. The Company used the expected present value
technique referenced in paragraph 23 of FAS 144 to determine
the fair value of the facility. In making that determination,
the Company developed multiple cash flow scenarios reflecting
a range of possible selling prices, including the current
asking price of $80,000,000.
Note 7. Trade, Notes and Other Receivables, Net, page F-26
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8. Please refer to prior comment 15. Tell us why it is appropriate to present
the $236 million settlement in continuing operations. Also, please confirm
to us that the revenues from SBC's minimum purchase commitment are
included in discontinued operations. If not, tell us why it is appropriate
to present these revenues in continuing operations.
The revenues from SBC's minimum purchase commitment are
included in discontinued operations. The income resulting from
the $236,000,000 SBC settlement is also included in
discontinued operations, for the reasons disclosed in our
Larry Spirgel
November 6, 2006
Page 7
response to prior comment 15. The December 31, 2005 balance of
the SBC receivable that was not yet paid ($198,500,000) is
classified as an asset of continuing operations since it is
payable to WilTel's immediate parent company, was not an asset
purchased by Level 3 and is not an asset held for sale.
Note 16. Income Taxes, page F-34
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9. Refer to your disclosure in the Form 10-Q for the fiscal quarter ended
June 30, 2005 in which you stated that your estimate of future taxable
income . . . "incorporated the assumptions used by WilTel for its
impairment analysis (updated for the new SBC agreements). . . If the
Company realizes . . . 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."
o Considering that a significant portion of your tax projections
appeared to have been premised on income streams from WilTel, please
tell us if your conclusions changed following the sale of WilTel and
whether additional valuation allowances were warranted as of the
2005 balance sheet date and the interim periods thereafter. If not,
tell us why.
o If you utilized some portion of your deferred tax asset in 2005 to
offset taxable income arising from WilTel's SBC arrangements, tell
us why you did not allocate some portion of the tax benefit (from
the reversal of the valuation allowance) towards income from
discontinued operations.
The Company did not change its conclusions about its ability
to realize the deferred tax asset as of the 2005 balance sheet
date or during subsequent interim periods. After the sale of
WilTel closed, WilTel's future taxable income that was
included in the Company's taxable income projections was
removed from its consolidated taxable income estimate;
however, such future amounts were offset by other changes in
projected taxable income, including the projected taxable
income expected to be generated from investment of the sales
proceeds received from Level 3. At December 31, 2005 and at
subsequent interim balance sheet dates, the Company has
assessed the differences between its actual and expected
earnings and changes in its operations in order to determine
if the magnitude of future taxable income had materially
changed. To date the Company's projection of future taxable
income has not materially changed.
The Company did allocate a portion of the reversal of the
valuation allowance to income from discontinued operations in
2005, in an amount equal to the tax provision that would have
been charged to discontinued operations had there been no
reversal of the valuation allowance. This resulted in the
booking of a net tax provision of zero against the gain on
Larry Spirgel
November 6, 2006
Page 8
disposal of discontinued operations. The after tax gain for
this caption as shown on the face of the consolidated
statement of operations is the same as the sum of the
individual pre-tax gains disclosed for each transaction in
footnote 5. With respect to the operating results of
discontinued operations prior to the sale, footnote 5 contains
a table showing a tax provision of $11,000 for the 2005
period, representing currently payable state income taxes.
Form 10-Q for Fiscal Quarter Ended June 30, 2006
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Note 10, page 11
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10. Please refer to prior comment 27. Tell us the nature and significant terms
of the underlying insurance contracts for which you pay variable insurance
premiums as they relate to the WilTel defined benefit pension plan. Refer
to paragraphs 5 and 7 of SFAS 88.
There are no insurance contracts that the Company or the
defined benefit pension plan has entered into. The variable
insurance premiums referred to in the response to prior
comment 27 are variable insurance premiums charged by the
Pension Benefit Guaranty Corporation to certain employee
benefit plans. Generally, the more underfunded a plan is the
higher the charge from this government agency. The Company's
Quarterly Report on Form 10-Q for the period ended September
30, 2006 will describe these premiums as government charged
variable insurance premiums.
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 & Chief Financial Officer
cc: Kathryn Jacobson, Staff Accountant
Dean Suehiro, Senior Staff Accountant