January 17, 2007
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 November 3, 2006
Form 10-Q for the Quarter Ended September 30, 2006
Filed November 9, 2006
File No.: 1-5721
Dear Mr. Spirgel:
Reference is made to your letter of December 14, 2006 (the "December 14, 2006
Letter"). On behalf of Leucadia National Corporation ("Leucadia"), set forth
below is each numbered paragraph of the December 14, 2006 Letter followed by the
response of Leucadia to each comment contained in the December 14, 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
Form 10-K/A for the Fiscal Year Ended December 31, 2005
Parent Company Liquidity, pages 3 and 4
1. Please refer to prior comment 2. Based on your response, we have to
following comments.
o Please define "readily available" and disclose that this is a
non-GAAP measure.
Larry Spirgel
January 17, 2007
Page 2
o Please provide detailed disclosures why you believe that the
"readily available" liquidity measure is useful to investors. Your
discussion should, at a minimum, disclose: (1) the manner in which
management uses the non-GAAP measure to conduct or evaluate the
business; (2) the economic substance behind management's decision to
use such a measure; (3) the material limitations associated with the
use of the non-GAAP measure as compared to the use of the most
directly comparable GAAP measure, cash and cash equivalents; and (4)
the manner in which management compensates for these limitations
when using the non-GAAP financial measure.
o Please provide a reconciliation of the cash and short-term bonds and
notes of U.S. Government and its agencies of $1,198,700,000 to pages
F-3 and F-22, U.S. Government-Sponsored Enterprises of $261,300,000
to page F-22, the equity investment in Level 3 of $330,100,000 to
page F-23 and other publicly traded debt and equity securities of
$580,400,000 to pages F-22 and F-23.
The Company does not believe that its aggregation of three
line items reflected on the face of its consolidated balance
sheet (current investments, non-current investments and cash
and cash equivalents) is a non-GAAP measure because (1) such
amount can be readily computed from the financial statements,
and (2) limiting the Company's definition of liquidity to just
cash and cash equivalents would not be appropriate given the
nature of the investment portfolio and the nature of the
Company's business. If the Company requires funds to make
acquisitions, investments or to satisfy any of its
obligations, the vast majority of amounts classified as
investments (both current and long-term) are available to meet
those needs. Although securities classified as current and
non-current investments are not as immediately available to
satisfy the Parent's liquidity needs, they can be easily
converted to cash within a short period of time such that
there is no meaningful distinction for purposes of identifying
sources of liquidity. As a result of its conversations with
the Staff and to comply with this comment, the Company will
replace the second full paragraph under "Liquidity and Capital
Resources" of Item 7 in its Form 10-K/A with the new paragraph
attached as Exhibit A.
2. Please refer to prior comment 3. We note that the underlying agreement
with respect to the sale of the Level 3 stock included permissible block
trades. Because some portion of and the entire security holding can be
sold within one year and you considered this investment as "readily
available," it appears to us that the investment is a current asset.
Please revise or advise. Refer to footnote 2 and paragraph 17 of SFAS 115.
Footnote 5 to paragraph 17 of SFAS 115 indicates that "...the
term current assets is used to designate cash anzd other
assets or resources commonly identified as those which are
reasonably expected to be realized in cash or sold or consumed
Larry Spirgel
January 17, 2007
Page 3
during the normal operating cycle of the business." The
Company's policy is to classify unrestricted investments with
a maturity date of less than one year as current assets, and
to classify investments without a maturity date (principally
equity securities like the Level 3 stock) as non-current
investments, unless the Company reasonably expects to sell
such investments within one year from the balance sheet date.
With respect to the Level 3 stock, because the Company did not
reasonably expect to sell the shares within one year from the
balance sheet date, classification as a non-current available
for sale investment was deemed appropriate. The Company's
disclosure (as revised in Exhibit A) that it considers the
shares to be available to meet its liquidity needs means that
it could sell the shares at any time, but not that it
reasonably expects to. The Company believes that its
disclosure and classification is appropriate.
Consolidated Liquidity, page 6
- ------------------------------
3. Please refer to prior comment 4.
o In your response, you stated that the proceeds from SBC's funding of
WilTel's investing activities were $25,000,000. However, on page 6
of your Form 10-K/A, you disclosed that the "Net cash provided by
operating activities increased . . . . in 2004 . . . due principally
to funds provided by WilTel . . . of $189,600,000 (including
$25,000,000 of pre-funded capital expenditures from SBC). Please
revise your disclosure and your Statement of Cash Flows to present
the SBC pre-funded capital expenditures in investing activities.
o In the last paragraph of your response herein, you stated that "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." However, on page F-19 of your financial
statements, you disclosed that "prior to the closing, WilTel repaid
its long-term debt obligations using its funds, together with $220
million of funds advanced by the Company." Please tell us what
non-current liabilities remained with WilTel that the buyer
acquired.
In its response to prior comment 4, the Company did not intend
to suggest that the $25,000,000 received from SBC was
classified as a component of cash flows from investing
activities. As discussed on page 6 of the Company's Form
10-K/A, these funds are classified as a component of net cash
flows from operating activities in the consolidated statement
of cash flows for the year ended December 31, 2004.
SBC paid this amount in early 2004 pursuant to an agreement
that obligated WilTel to return the funds to SBC once WilTel
and SBC entered into a long term pricing agreement for voice
transport services. The payment was treated as additional
Larry Spirgel
January 17, 2007
Page 4
revenues from WilTel's largest customer, facilitating WilTel's
extension of its network into geographic regions that were
targeted by SBC as their new growth areas. The amount received
was deferred in other current liabilities as a customer
deposit on the Company's consolidated balance sheet until June
2005, and was always viewed as deferred revenue associated
with the ultimate delivery of services. In June 2005 the
agreement was amended to apply $18,000,000 of the pre-payment
against amounts SBC owed to WilTel for voice transport
services, with the remaining $7,000,000 retained by WilTel.
The retained $7,000,000 was included with other SBC settlement
amounts and amortized to revenue and other income until WilTel
was sold. The Company believes that its classification and
disclosure is appropriate.
Non-current liabilities that remained with the entity
purchased by Level 3 principally consisted of asset retirement
obligations, long-term deferred compensation, and unfavorable
contract commitments. In addition, WilTel had non-current
deferred revenue obligations that remained with the entity
purchased by Level 3. Additional information was previously
provided to the Staff on a supplemental basis in response to
comment 4.
Note 5. Discontinued Operations, pages F-19
- --------------------------------------------
4. Please refer to prior comment 6. After reviewing your response, we have
the following comments.
o Tell us the difference between the value received of $833,500 which
you referred to on page 4 of the Form 10-K/A and the gross
consideration of $799,600 from the sale of WilTel as disclosed in
Note 5 on page F-19.
o Tell us what you mean by the statement on page 4 of the Form 10-K/A
that you received value of $833,500, from the sale of WilTel,
including . . . the "net book value of the retained assets and
liabilities but reduced by the funds advanced to WilTel in 2005."
Please clarify if "retained assets and liabilities" pertain to those
assets and liabilities retained by you or WilTel.
o We note that the difference between the gross consideration from the
sale of WilTel ($799,300) and the net book value of WilTel assets
acquired by the buyer ($689,300) results in a gain of $110,300.
Please reconcile this to the $243,800 gain disclosed on page F-19.
o As previous requested, please disclose in a note to the financial
statements the carrying amounts of the major classes of assets and
liabilities included as part of a disposal group that cover the
period in which it is sold under paragraph 47(a) of SFAS 144. This
Larry Spirgel
January 17, 2007
Page 5
disclosure is required since major classes of assets and liabilities
are not set separately presented on the face of your balance sheet.
Based on your response, we understand that "WilTel's balance sheet
accounts were material."
The $799.6 million is the sum of the fair value of the Level 3
stock received ($339.3 million) and the cash paid by Level 3
($460.3 million, net of estimated working capital
adjustments). The $833.5 million is the sum of the $799.6
million, the net book value of the assets and liabilities
retained by Leucadia ($55.4 million) and the SBC receivable
($198.5 million), less the capital contribution the Company
made to WilTel in August 2005 to enable WilTel to pay off its
debt ($220 million).
As of December 31, 2005, the Company accrued $25.5 million for
estimated working capital adjustments that would have to be
paid to Level 3 during 2006. The amount accrued reduced the
gain on disposal of discontinued operations; however, the
accrual was reflected as an other current liability of the
Company, not of the disposal group. The Company believes that
its classification of the liability as part of continuing
operations of the Company is the appropriate classification,
because it is not a liability assumed by the buyer (reference
is made to footnote 4 of SFAS 144), and in any case is not
material to its consolidated balance sheet. In April 2006, the
Company paid Level 3 $27 million in full satisfaction of its
working capital adjustment and recorded a loss on disposal of
discontinued operations for the excess paid over the amount
accrued.
The retained assets and liabilities are the assets and
liabilities retained by the Company, which is stated in the
second sentence of the same paragraph on page 4. The
components of the $833.5 million are discussed above, and the
Company believes that all of those components had to be
aggregated and disclosed in order to fully explain the
financial impact resulting from the sale of WilTel.
As disclosed on page F-19, the gain on sale of WilTel also
included the portion of the SBC receivable not yet recognized
in income ($175.9 million), less the building impairment
charge ($42.4 million). The net of those two amounts ($133.5
million) accounts for the difference between the $110.3
million and the $243.8 million.
The Company believes that paragraph 47(a) of SFAS 144 requires
disclosure of the components of the assets and liabilities of
the disposal group if they are included in the Company's
consolidated balance sheets in the filing. The Company does
not believe that paragraph 47(a) requires disclosure of the
components of the assets and liabilities of the disposal group
as of the disposal date. Therefore, the period to which
paragraph 47(a) applies for this purpose is the Company's
December 31, 2004 consolidated balance sheet. The balance
sheet of the disposal group as of the disposal date was
Larry Spirgel
January 17, 2007
Page 6
previously provided to the Staff on a supplemental basis in
response to this comment.
With respect to WilTel's December 31, 2004 balance sheet, the
Company reclassified its 2004 consolidated 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-current assets
and liabilities. Although the Company recognizes that
paragraph 47(a) requires a further breakdown of the assets and
liabilities of the disposal group as of December 31, 2004, the
Company believes that its reclassification of the December 31,
2004 balance materially complies with the requirements of
paragraph 47(a), and that any further breakdown of the assets
and liabilities of the disposal group is not meaningful on a
qualitative or quantitative basis.
5. Please refer to prior comment 7. We note that the gain from the disposal
of discontinued operations includes a $42.4 million impairment charge for
the WilTel's headquarters building. Revise to include this charge in your
income (loss) from continuing operations. See paragraph 25 of SFAS 144.
Prior to and subsequent to Leucadia's acquisition of WilTel,
the headquarters facility functioned as WilTel's corporate
office and network operations center. No other Company
segments, operations or employees benefited from the use of
the building, nor did any other Company entity contribute to
the funding of the building's related costs. The Company did
not wish to retain the WilTel headquarters building and wished
to include it with the other assets being sold to Level 3;
however, Level 3 insisted that it be excluded from the
transaction as a condition of the sale agreement. The
Company's agreement to retain the building was a consequence
of its economic negotiations with Level 3; Level 3 did not
want a redundant corporate headquarters and network operations
center for a large telecommunications business (Level 3 has
its own), and the Company was aware that the building's fair
value was less than its carrying value if it was not part of a
larger held and used asset group. The Company sold all of
WilTel's operating business to Level 3, and the fact that the
headquarters facility was retained does not suggest or
indicate any continuing involvement in the disposed WilTel
business; all of the personnel and functions which conducted
WilTel's operations at the facility were transferred to Level
3. The Company has no further use for the building as an
operating property, or for any of its other operations.
Prior to its entry into the agreement to sell WilTel to Level
3, the headquarters facility was part of a broader held and
used asset group. As the negotiations with Level 3 reached a
conclusion, a concurrent decision was made by the Company to
sell WilTel's business to Level 3, and to retain the
Larry Spirgel
January 17, 2007
Page 7
headquarters facility at Level 3's insistence. This decision
removed the facility from the broader asset group; since the
headquarters facility could no longer be considered part of
that larger asset group it would have to be evaluated for
impairment and recoverability based on its own cash flows. The
Company anticipates selling the building; however, the
building does not presently meet all of the criteria in
paragraph 30 of SFAS 144 to be classified as held for sale. In
the interim, portions of the property are being rented
pursuant to agreements with Level 3 (to enable them to
transition operations-deemed insignificant under EITF 03-13)
and sublease agreements entered into with others before WilTel
was sold. The headquarters facility is classified on the
Company's consolidated balance sheet with other real estate
investments.
Entering into the agreement to sell WilTel to Level 3 was the
event that indicated and caused the carrying amount of the
facility to not be recoverable (reference is made to
paragraphs 8b and 8f of SFAS 144). The reason the building
became impaired and became classified as an investment
property is solely due to the agreement to sell WilTel to
Level 3; it was not triggered by anything that happened after
the sale to Level 3. The building was directly associated with
the historical operations of WilTel (the disposed component)
and has no association with the ongoing operations of the
Company. Therefore, the Company believes that its accounting
classification is in accordance with the criteria specified in
paragraph 43 of SFAS 144 to reflect the results of operations
of the disposed component, together with the direct impacts of
the disposal transaction, in results of discontinued
operations. In addition, the Company also considered paragraph
44 of SFAS 144, which discusses subsequent adjustments to
previously reported discontinued operations amounts, and
indicates that amounts directly related to the disposal
transaction should be classified as discontinued operations.
The Company considers the impairment of WilTel's former
headquarters facility to be directly associated with the
decision to dispose of WilTel's business. For similar reasons,
the Company also classified the income recognized from the
balance of the SBC receivable that had not previously been
recognized in earnings ($175.9 million) with the gain on
disposal in discontinued operations, even though that
receivable was not sold to Level 3, because the transaction
that gave rise to the SBC receivable was directly associated
with the historical operations of WilTel. The Company believes
that classification of the impact on its consolidated
statement of operations of the building impairment and the
income from the SBC receivable in discontinued operations is
appropriate to fairly state the accounting gain reported from
the WilTel sale and to fairly report the economic result
achieved by the Company from this investment, and results in
financial reporting that reflects the substance of the
transaction.
Accordingly, the Company concluded that classification of the
impairment loss in discontinued operations was appropriate in
the circumstances. The Company discussed this issue with
Larry Spirgel
January 17, 2007
Page 8
PricewaterhouseCooper's engagement partner, who consulted with
his National Office; all were in agreement with this
accounting treatment.
Should the facility become further impaired in the future, any
impairment charge would be reflected as a component of
continuing operations when recorded. However, when the
facility is ultimately sold, the Company will evaluate whether
it should then be considered a component of the entity as
defined in paragraph 41 of SFAS 144, and report any material
gain or loss on disposal accordingly.
Form 10-Q for Fiscal Quarter Ended September 30, 2006
- -----------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Conditions and
- ----------------------------------------------------------------------------
Results of Interim Operations, page 20
- --------------------------------------
6. We note that you are accounting for Premier under the equity method during
the pendency of its bankruptcy proceedings. Please tell us why your
accounting is appropriate under GAAP. Also, tell us how you will account
for Premier after the Court approves your $180 million
debtor-in-possession financing and the basis for your accounting. Include
in your response references to the appropriate accounting literature.
ARB 51, paragraph 2 precludes consolidation of a
majority-owned subsidiary where control does not rest with the
majority owners, for instance, where the subsidiary is in
legal reorganization or in bankruptcy. SFAS 94, paragraph 10
states that this provision was not reconsidered in SFAS 94. As
a result, Premier was deconsolidated as of the bankruptcy
filing date (September 19, 2006).
Paragraph 15(d) of SFAS 94 amends APB 18 to clarify that this
limitation to the application of consolidation accounting
should also be applied as a limitation to the application of
the equity method. However, the Company believes that
application of the equity method after the bankruptcy filing
is appropriate under our set of facts and circumstances. These
facts include:
o The Company will continue to operate Premier as
debtors-in-possession during the bankruptcy;
o All creditors are expected to be made whole during the
bankruptcy process, i.e., no adversely affected parties
are expected;
o Premier is expected to be in bankruptcy for a short
period of time;
o The Company is using the bankruptcy process to achieve
one narrow objective; obtaining access to the insurance
proceeds (being withheld by the bond trustee) to rebuild
the facility; and
Larry Spirgel
January 17, 2007
Page 9
o Premier expects to report losses during the bankruptcy
proceedings which would otherwise not be recorded by the
Company if it applied the cost method.
Once the court approves the debtor-in-possession financing,
the Company's accounting is not expected to change.
If you have any further questions or desire any additional information please
contact the undersigned at 212-460-1932.
Very truly yours,
Joseph A. Orlando
Vice President & Chief Financial Officer
cc: Kathryn Jacobson, Staff Accountant
Dean Suehiro, Senior Staff Accountant
Larry Spirgel
January 17, 2007
Page 10
EXHIBIT A
- ---------
In addition to cash and cash equivalents, the Company also considers investments
classified as current assets and investments classified as non-current assets on
the face of its consolidated balance sheet as being generally available to meet
its liquidity needs. Securities classified as current and non-current
investments are not as liquid as cash and cash equivalents, but they are
generally easily convertible into cash within a short period of time. As of
December 31, 2005, the sum of these amounts 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 available to meet the
Parent's liquidity needs. The $2,370,500,000 that is available is comprised of
cash and short-term bonds and notes of the United States Government and its
agencies, U.S. Government-Sponsored Enterprises, the equity investment in Level
3 and other publicly traded debt and equity securities. 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 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.