Jefferies Financial Group - 10-K annual report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

The Company is a diversified holding company engaged in a variety of businesses, including manufacturing, telecommunications, land based contract oil and gas drilling, property management and services, gaming entertainment, real estate activities, medical product development and winery operations.  The Company also has significant investments in the common stock of two public companies that are accounted for at fair value, one of which is a full service investment bank and the other an independent auto finance company.  The Company also owns equity interests in operating businesses and investment partnerships which are accounted for under the equity method of accounting, including a broker-dealer engaged in making markets and trading of high yield and special situation securities and an operating copper mine in Spain.  The Company concentrates on return on investment and cash flow to maximize long-term shareholder value.  Additionally, the Company 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.

The worldwide recession, turmoil in public securities markets and lack of liquidity in the credit markets have put a strain on many businesses and caused great uncertainty about asset values in nearly all industry sectors.  If these economic and market conditions continue for some time, the Company expects that some extraordinary investment opportunities will be available.  However, it also expects that financing these investment opportunities may be difficult.  The Company has available liquidity on its balance sheet and could dispose of existing businesses or investments if additional internal liquidity is needed to take advantage of investment opportunities.  Although no assurance can be given that the Company will be successful in acquiring new businesses, making new investments or in raising sufficient capital for any such opportunities, the Company does intend to pursue those opportunities that it considers to be the most compelling.

Shareholders’ equity has grown from a deficit of $7,700,000 at December 31, 1978 (prior to the acquisition of a controlling interest in the Company by the Company’s Chairman and President), to a positive shareholders’ equity of $4,361,600,000 at December 31, 2009, equal to a book value per common share of the Company (a “common share”) of negative $.04 at December 31, 1978 and $17.93 at December 31, 2009.  Shareholders’ equity and book value per share amounts have been reduced by the $811,900,000 special cash dividend paid in 1999.

In December 2009, Berkadia Commercial Mortgage LLC (“Berkadia”), a joint venture between Berkshire Hathaway Inc. (“Berkshire Hathaway”) and the Company, acquired the North American commercial mortgage origination and servicing business of Capmark Financial Group Inc. (“Capmark”).  The Company and Berkshire Hathaway each have a 50% equity interest in Berkadia, and each party contributed $217,200,000 of equity capital.

The Company’s manufacturing operations are conducted through Idaho Timber, LLC (“Idaho Timber”) and Conwed Plastics, LLC (“Conwed Plastics”).  Acquired in May 2005, Idaho Timber is headquartered in Boise, Idaho and primarily remanufactures dimension lumber and remanufactures, packages and/or produces other specialized wood products.  Conwed Plastics manufactures and markets lightweight plastic netting used for a variety of purposes including, among other things, building and construction, erosion control, packaging, agricultural, carpet padding, filtration and consumer products.

The Company’s telecommunications operations are conducted through its 75% owned subsidiary, STi Prepaid, LLC (“STi Prepaid”), which acquired the assets of Telco Group, Inc. and its affiliates (“Telco”) in March 2007.  STi Prepaid is a provider of international prepaid phone cards and other telecommunications services in the U.S.

The Company’s land based contract oil and gas drilling operations are conducted by Keen Energy Services, LLC (“Keen”), formerly known as Goober Drilling, LLC.  In November 2009, the Company acquired the remaining equity interests in Keen that it did not previously own and Keen became a consolidated subsidiary.

The Company’s property management and services operations are conducted through ResortQuest International, Inc. (“ResortQuest”).  Acquired in June 2007, ResortQuest is engaged in offering property management and other services to vacation properties in beach and mountain resort locations in the continental U.S.

The Company’s gaming entertainment operations are conducted through its controlling interest in Premier Entertainment Biloxi, LLC (“Premier”), which is the owner of the Hard Rock Hotel & Casino Biloxi (“Hard Rock Biloxi”), located in Biloxi, Mississippi.

The Company’s domestic real estate operations include a mixture of commercial properties, residential land development projects and other unimproved land, all in various stages of development.

The Company’s medical product development operation is conducted through Sangart, Inc. (“Sangart”), which became a majority-owned subsidiary in 2005.  Sangart is developing a product called MP4OX, formerly known as Hemospan®, which is a solution of cell-free hemoglobin administered intravenously to provide rapid oxygen delivery to oxygen deprived tissues.

The Company’s winery operations consist of Pine Ridge Vineyards in Napa Valley, California, Archery Summit in the Willamette Valley of Oregon, Chamisal Vineyards in the Edna Valley of California and a vineyard development project in the Columbia Valley of Washington.  The wineries primarily produce and sell wines in the premium, ultra premium and luxury segments of the premium table wine market.

The Company owns approximately 25% of the outstanding common shares of AmeriCredit Corp. (“ACF”), a company listed on the New York Stock Exchange, Inc. (“NYSE”) (Symbol: ACF).  ACF is an independent auto finance company that is in the business of purchasing and servicing automobile sales finance contracts, historically for consumers who are typically unable to obtain financing from other sources.  The Company accounts for its investment in ACF at fair value, which was $639,800,000 at December 31, 2009 market prices; unrealized gains or losses are reflected in the Company’s consolidated statements of operations.

The Company owns approximately 29% of the outstanding common shares of Jefferies Group, Inc. (“Jefferies”), a company listed on the NYSE (Symbol: JEF).  Jefferies is a full-service global investment bank and institutional securities firm serving companies and their investors.  The Company accounts for its investment in Jefferies at fair value, which was $1,152,900,000 at December 31, 2009 market prices; unrealized gains or losses are reflected in the Company’s consolidated statements of operations.

In 2007, the Company and Jefferies expanded and restructured the Company’s equity investment in Jefferies Partners Opportunity Fund II, LLC (“JPOF II”) and formed Jefferies High Yield Holdings, LLC (“JHYH”).  Through its wholly-owned subsidiary, JHYH makes markets in high yield and special situation securities and provides research coverage on these types of securities.

The Company owns 30% of Cobre Las Cruces, S.A. (“CLC”), a former subsidiary of the Company that owns the Las Cruces copper mine in the Pyrite Belt of Spain.  During 2005, the Company sold a 70% interest in CLC to Inmet Mining Corporation (“Inmet”), a Canadian-based global mining company, in exchange for 5,600,000 newly issued Inmet common shares, representing approximately 9.98% of Inmet’s current outstanding common shares.  CLC is currently producing copper cathode and expects to reach commercial production (approximately 60% of design capacity) in May 2010.  The market value of the Inmet common shares was $339,100,000 at December 31, 2009.

In August 2006, pursuant to a subscription agreement with Fortescue Metals Group Ltd (“Fortescue”) and its subsidiary, FMG Chichester Pty Ltd (“FMG”), the Company invested in Fortescue’s Pilbara iron ore and infrastructure project in Western Australia.  Fortescue is a publicly traded company on the Australian Stock Exchange (Symbol:  FMG); after considering the sale of 30,000,000 common shares for net cash proceeds of $121,500,000 during the first quarter of 2010, the Company currently owns 247,986,000 common shares of Fortescue (approximately 8% of the outstanding shares).  The Company also owns a $100,000,000 note of FMG that matures in August 2019; interest on the note is calculated as 4% of the revenue, net of government royalties, invoiced from the iron ore produced from two specified project areas.  The market value of the Fortescue common shares was $1,108,000,000 at December 31, 2009, including the shares sold in 2010.

The Company and certain of its subsidiaries have substantial federal net operating loss carryforwards (“NOLs”) of approximately $5,985,000,000 at December 31, 2009.  The Company has recorded a valuation allowance to fully reserve for substantially all of its net deferred tax asset, which includes the NOLs.

As used herein, the term “Company” refers to Leucadia National Corporation, a New York corporation organized in 1968, and its subsidiaries, except as the context otherwise may require.

The Company is subject to the informational requirements of the Securities Exchange Act of 1934 (the “Exchange Act”).  Accordingly, the Company files periodic reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”).  Such reports, proxy statements and other information may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, N.E., Washington, D.C. 20549 or by calling the SEC at 1-800-SEC-0330.  In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements and other information regarding the Company and other issuers that file electronically.  Material filed by the Company can also be inspected at the offices of the NYSE, 20 Broad Street, New York, NY 10005, on which the Company’s common shares are listed.  The Company has submitted to the NYSE a certificate of the Chief Executive Officer of the Company, dated May 11, 2009, certifying that he is not aware of any violations by the Company of NYSE corporate governance listing standards.

The Company’s website address is www.leucadia.com.  The Company makes available, without charge through its website, copies of its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after such reports are filed with or furnished to the SEC.

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.

At December 31, 2009, the Company and its consolidated subsidiaries had 3,340 full-time employees.

Idaho Timber, which was acquired in May 2005, is headquartered in Boise, Idaho and is engaged in the manufacture and/or distribution of various wood products.  Idaho Timber’s principal product lines include remanufacturing dimension lumber; remanufacturing, bundling and bar coding of home center boards for large retailers; and production of 5/4” radius-edge, pine decking.  Idaho Timber also manufactures and/or distributes a number of other specialty wood products.  Idaho Timber has over 30 years of operating experience in its industry.  The net book value of the Company’s investment in Idaho Timber was $88,100,000 at December 31, 2009.

Remanufactured dimension lumber is Idaho Timber’s largest product line.  Dimension lumber is used for general construction and home improvement, remodeling and repair projects, the demand for which is normally a function of housing starts and home size.  All dimension lumber is assigned a quality grade, based on the imperfections in the wood, and higher-grade lumber is sold at a higher price than lower-grade lumber.  Idaho Timber purchases low-grade dimension lumber from sawmills located in North America and Europe and upgrades it into higher-grade dimension lumber products.  The remanufacturing process includes ripping, trimming and planing lumber to reduce imperfections and produce a variety of lumber sizes.  These products are produced at plants located in Florida, North Carolina, Texas, Idaho and New Mexico.  Each plant distributes its product primarily by truck to lumber yards and contractors within a 300 mile shipping radius from the plant site.

Home center board products are principally sold to large home improvement retailers.  Idaho Timber purchases high-grade boards from sawmills in the western U.S., South America and New Zealand (primarily pine but other wood species are also used), performs minor re-work on those boards to upgrade the quality, and then packages and bar codes those boards according to customer specifications.  Production takes place in an owned plant in Idaho.  Idaho Timber also operates a sawmill in Arkansas to produce its 5/4” radius-edge, pine decking products.  Idaho Timber performs traditional sawmill processes (cutting, drying and planing) to manufacture these products.

Idaho Timber owns and operates seven plants, one sawmill that principally produces decking products and one sawmill that produces split-rail fencing.  These nine facilities in the aggregate have approximately 746,000 square feet of manufacturing and office space, covering approximately 154 acres.  One plant is principally dedicated to home center board products and the remaining plants principally produce remanufactured dimension lumber products.  All plant locations can produce and distribute specialty wood products.  Idaho Timber has the capacity to ship approximately 62 million board feet per month on a one shift basis; during 2009 actual shipments averaged approximately 31 million board feet per month.

The customer base for the dimension lumber business is much less concentrated; no customer accounts for more than 10% of revenue.  Idaho Timber’s sales are somewhat concentrated in regions where its facilities are located, with the largest being Florida, 16%; North Carolina, 14%; and Texas, 11%.

Idaho Timber sells commodity products, and operates in an industry that is currently oversupplied and very competitive.  Idaho Timber competes against domestic and foreign sawmills and intermediate distributors for its dimension lumber and decking products.  In some cases, Idaho Timber competes on a limited basis with the same sawmills that are a source of supply of low-grade dimension lumber.  The home center board business has many competitors, and suppliers to large home centers are always under pressure to reduce prices.

Idaho Timber also competes for raw material purchases needed for its remanufactured dimension lumber and home center board products, and in the past the availability and pricing of certain raw materials has been adversely affected by export charges (tariffs) imposed on Canadian exports, the largest source of these supplies.  A decades old trade dispute between the U.S. and Canada resurfaced with the expiration of the Softwood Lumber Agreement in 2001.  In October 2006, the trade dispute was resolved and a new Softwood Lumber Agreement between Canada and the U.S. became effective.  The agreement has a seven year term and may be extended for an additional two years.  Currently, restrictions on Canadian exports are not significantly adversely affecting Idaho Timber’s operations; however, if tariffs continue beyond the current term of the Softwood Lumber Agreement or further import limitations are imposed in the future, it is possible that raw material costs could increase or supplies could be constrained.  During 2009, the export charge was at the maximum level for the entire year.  Idaho Timber is examining alternative sources of supply to increase its raw material purchasing flexibility.

Lumber and decking are identified at Idaho Timber facilities with a grade stamp that shows the grade, moisture content, mill number, species and grading agency.  All lumber is graded in compliance with the National Grading Rule for Dimension Lumber, which is published by the U.S. Department of Commerce.  Idaho Timber facilities are subject to regular inspection by agencies approved by the American Lumber Standards Committee.   Idaho Timber believes that its procedure for grading lumber is highly accurate; however, Idaho Timber could be exposed to product liability claims if it can be demonstrated its products are inappropriately rated.

Since Idaho Timber’s sawmills do not treat its wood with chemicals, and since timber deeds purchased from private land owners do not impose a re-planting obligation, Idaho Timber does not have any unusual environmental compliance issues.

Through Conwed Plastics, which was acquired in March 1985, the Company manufactures and markets lightweight plastic netting used for a variety of purposes including, among other things, building and construction, erosion control, packaging, agricultural, carpet padding, filtration and consumer products.  These products are primarily used for containment purposes, reinforcement of other products, packaging for produce and meats, various types of filtration and erosion prevention.  Conwed Plastics believes it is a market leader in netting products used in carpet cushion, turf reinforcement, erosion control and packaging.  Agricultural, erosion control and building and construction markets tend to be seasonal, with peak periods in the second and third quarters of the calendar year.  Packaging is seasonal with the second quarter being the slowest period in this market.  Carpet padding, filtration and consumer product markets are not usually subject to seasonal fluctuations resulting in sales that tend to be evenly spread throughout the year.   The net book value of the Company’s investment in Conwed Plastics was $59,200,000 at December 31, 2009.

Certain products of Conwed Plastics are proprietary, protected by patents and/or trade secrets.  The Company holds patents on certain improvements to the basic manufacturing processes it uses and on applications thereof.  The Company believes that the expiration of these patents, individually or in the aggregate, is unlikely to have a material effect on its operations.

Products are marketed both domestically and internationally, with approximately 22% of 2009 revenues generated by customers from Europe, Latin America, Japan and Australia.  Products are sold primarily through an employee sales force, located in the U.S. and Europe.  Conwed Plastics emphasizes development of new products and new applications of existing products to grow its revenues.  New product development focuses on market niches where proprietary technology and expertise can lead to sustainable competitive economic advantages.  Conwed Plastics has completed eight acquisitions since 2004 and continues to look for additional acquisition opportunities.  These acquisitions have provided synergies with existing customers, manufacturing capacity, an expanded customer base and/or product lines.

Approximately half of Conwed Plastics’ revenues are generated on a make to order basis.  The remainder of Conwed Plastics’ sales requires a more substantial investment in inventory that is stored at various locations to service customers with short lead time requirements.  In the aggregate, inventory is turned over between 6 and 8 times per year.  The top 10 customers with multiple locations typically represent approximately 30% - 37% of total sales.  The largest single customer typically represents 5% - 8% of total sales; for the year ended December 31, 2009, the largest single customer represented approximately 6% of total sales.  Order backlog generally ranges from 6% - 12% of annual sales throughout the year.

Conwed Plastics is subject to domestic and international competition, generally on the basis of price, service and quality.  Conwed Plastics has 3 to 5 competitors in most of its market segments but the size and type of its competition varies by market segment.  Additionally, certain products are dependent on cyclical industries, including the construction industry.  The cost of the principal raw material used in its products, polypropylene, has increased by approximately 42% from 2002.  Conwed Plastics has been able to raise prices to its customers during this period to offset some of the increase in raw material costs.  The volatility of oil and natural gas prices along with current general economic conditions worldwide make it difficult to predict future raw material costs.  Historically, declining oil and natural gas prices combined with reduced demand have usually resulted in reduced raw material costs.

 

STi Prepaid purchased 75% of the assets of Telco in March 2007; the remaining Telco assets were contributed to STi Prepaid by the former owner in exchange for a 25% interest in STi Prepaid.  At December 31, 2009, STi Prepaid’s consolidated liabilities exceeded its consolidated assets; as a result, the Company has a negative net investment in STi Prepaid of $21,100,000.

STi Prepaid, headquartered in New York, New York, is a facilities-based provider of long-distance wireline and wireless telecommunications services.  STi Prepaid’s principal product line is prepaid international long distance calling cards; STi Prepaid also generates revenues by providing carrier wholesale services and selling prepaid wireless products and related services.

For the year ended December 31, 2009, prepaid calling card sales accounted for approximately 87% of STi Prepaid’s revenues.  Consumers located in the U.S. who make international phone calls often use calling cards because they provide lower rates than those offered by traditional long distance providers.  Through its portfolio of calling cards, STi Prepaid provides international service to over 200 destinations.  STi Prepaid currently offers over 500 different calling cards in various denominations that are sold through a wide variety of retail stores and on the Internet, targeted to appeal to a wide variety of consumers.  STi Prepaid’s calling cards are primarily marketed to ethnic communities in urban areas.

To activate a card and initiate a call, a card customer will dial either a local access or toll-free telephone number that accesses STi Prepaid’s interactive voice response unit on its network.  Once a card is activated, calls are routed to one of STi Prepaid’s termination vendors, then ultimately to the consumer’s dialed party.  STi Prepaid’s switching network currently handles almost 60 million outbound calls and over 600 million minutes per month.  STi Prepaid operates a customer care center in the Dominican Republic with over 100 operators to support its prepaid business.

Carrier wholesale, which is a business-to-business service, accounted for approximately 12% of STi Prepaid’s revenues in 2009.  STi Prepaid enters into wholesale service agreements with other telecommunication service providers pursuant to which STi Prepaid becomes the terminating vendor for international calls.  Services provided to other carriers are highly automated and do not require much support labor since calls simply pass through STi Prepaid’s switches and utilize excess capacity.

STi Prepaid operates its prepaid mobile business as a Mobile Virtual Network Operator (“MVNO”).  MVNOs are entities that do not own their own wireless network; rather they enter into agreements to resell minutes from an established facilities based wireless carrier such as Sprint or Verizon Wireless.  However, unlike wireless resellers that simply earn commissions for selling the products of large facilities based wireless companies, MVNO operators have their own brand name and directly maintain customer relationships including activities related to rate plans, billing, and general customer service.  STi Prepaid’s brand name for this product is STi Mobile.

STi Prepaid primarily distributes its prepaid calling cards primarily through distributors who resell the cards to retailers throughout the U.S.  A significant portion of the calling cards are marketed to ethnic communities that shop at small retailers or smaller chains that do not receive attention from large telecommunication providers.  STi Prepaid’s relationships with its distributors are critical to serving these market segments and maintaining and growing prepaid calling card market share.  In 2008, STi Prepaid completed the acquisition of Sprint’s prepaid card division, providing it with a distribution channel into retail stores nationwide. STi Prepaid also sells prepaid calling cards through its websites, www.stiprepaid.com and www.stiphonecard.com.

The carrier wholesale business sales group focuses on establishing relationships with leading telecommunication carriers.  STi Prepaid markets its STi Mobile wireless products and services through national, regional and local retail outlets in the U.S., internet resellers and the division’s website, www.stimobile.com.  STi Mobile provides prepaid wireless services to consumers who may not have the credit rating required to qualify for a post-paid plan, prefer to pay as they go in order to control expenses or do not use sufficient minutes to justify the cost of a post-paid plan.

Prepaid calling cards are marketed by a wide range of telecommunication providers from large national inter-exchange carriers to small local and regional resellers.  STi Prepaid’s calling card products compete in markets where consumers’ decisions are primarily based on price and service quality.  The emergence and growth of wholesale carriers using voice over internet protocol, privatization and deregulation has contributed to a decline in international call pricing which is likely to continue.  STi Prepaid will need to rely on its network operation expertise and quality of service to compete in the markets it serves.

STi Prepaid is subject to significant federal, state and local laws, regulations and orders that affect the rates, terms and conditions of certain of its service offerings, its costs and other aspects of its operations.  Regulation of the telecommunications industry varies from state to state and it changes regularly in response to technological developments, competition, government policies and judicial proceedings.  The Company cannot predict the impact, nor give any assurances about the materiality of any potential impact, that any adverse changes may have on STi Prepaid’s business or results of operations, nor can it be sure that regulatory authorities will not take action against STi Prepaid regarding its compliance with applicable laws and regulations.

The Federal Communications Commission (“FCC”) has jurisdiction over STi Prepaid’s facilities and services to the extent those facilities are used in the provision of interstate telecommunications services (services that originate and terminate in different states).  State regulatory commissions generally have jurisdiction over facilities and services to the extent the facilities are used in intrastate telecommunications services.

The Communications Act of 1934.  The Communications Act of 1934, as amended (the “Communications Act”) grants the FCC authority to regulate interstate and foreign communications by wire or radio.  The Telecommunications Act of 1996 (the “1996 Act”) establishes a framework for fostering competition in the provision of local and long distance telecommunications services.  STi Prepaid is regulated by the FCC as a non-dominant interstate and international telecommunication provider and is therefore subject to less comprehensive regulation than dominant carriers under the Communications Act.  The FCC reviews its rules and regulations from time to time, and STi Prepaid may be subject to those new or changed rules.

STi Prepaid has registered with the FCC as a provider of domestic interstate long distance services.  STi Prepaid believes that it is in material compliance with applicable federal laws and regulations, but cannot be sure that the FCC or third parties will not raise issues regarding its compliance with applicable laws or regulations.

Universal Service.  Pursuant to the 1996 Act, in 1997 the FCC established a significantly expanded universal service regime to subsidize the cost of telecommunications services to high-cost areas, to low income customers, and to qualifying schools, libraries and rural health care providers.  Providers of interstate and international telecommunications services, and certain other entities, must pay for these programs by contributing to a Universal Service Fund (the “Fund’’).  The rules concerning which services are considered when determining how much an entity is obligated to contribute to the Fund are complex; however, many of the services sold by STi Prepaid are included in the calculation.  Current rules require contributors to make quarterly and annual filings reporting their revenues, and the Universal Service Administrative Company issues monthly bills for the required contribution amounts, based on a quarterly contribution factor approved by the FCC.  STi Prepaid also contributes to other funds mandated by the FCC including Interstate Telecommunication Service Provider Regulatory Fees, Telecommunication Relay Service and Local Number Portability.  STi Prepaid and other contributors to the Fund may recover their contribution costs through their end-user rates or a billing line item.

Customer Propriety Network Information (“CPNI”). CPNI is defined as information that relates to the quantity, technical configuration, type, destination, location, and amount of use of a telecommunications service subscribed to by any customer of a telecommunications carrier, and that is made available to the carrier by the customer solely by virtue of the carrier-customer relationship.  Section 222 of the 1996 Act requires telecommunications carriers to take specific steps to ensure that CPNI is adequately protected from unauthorized disclosure.  In 2007, the FCC issued its Report and Order and Further Notice of Proposed Rulemaking strengthening these privacy rules by adopting additional safeguards to protect customers’ CPNI.  STi Prepaid believes that it has developed policies that meet the FCC’s requirements to protect CPNI.

State Regulation of Telecommunications Services.  STi Prepaid is certified to provide telecommunication services in 50 states.  State public utility commissions (“PUCs”) are permitted to regulate STi Prepaid’s telecommunication services to the extent that such services originate and terminate within the same state.  The PUCs may also impose tariff and filing requirements, consumer protection measures and obligations to contribute to state universal service and other funds.

For a description of certain litigation involving STi Prepaid, see Item 3, Legal Proceedings in this Report.

During 2006, the Company acquired a 30% limited liability company interest in Keen for aggregate consideration of $60,000,000, excluding expenses, and agreed to lend to Keen, on a senior secured basis, up to $126,000,000 to finance new rig equipment purchases and construction costs and to repay existing debt.  During 2007, the Company increased its equity interest to 50% for additional payments aggregating $45,000,000.  In addition, the credit facility was amended to increase the borrowing capacity to $138,500,000, and the Company provided Keen with two additional secured credit facilities aggregating $60,000,000.  When the Company increased its investment in Keen to 50%, the terms of the limited liability agreement were amended to provide that in the event of a dissolution, liquidation or termination of Keen, available cash or assets would first be used to pay all of Keen’s debts (including loans made by the Company), then distributed to the Company as a liquidation preference until it had received a return of its equity investment ($105,000,000), before any payments were made to the other equity owner of Keen.

During 2009, the Company believes it became apparent to the other equity owner of Keen that Keen would not be able to make scheduled debt payments to the Company, and that the resulting payment default could result in a liquidation of Keen.  In that event, the Company’s liquidation preference over equity distributions would result in very little, if any, distributions to the other equity owner of Keen.  In November 2009, the Company purchased the other 50% equity interest that it did not own plus a secured note payable to the other equity owner of Keen for aggregate cash consideration of $15,000,000.  The Company believes it was able to acquire the remaining 50% equity interest at this distressed price because of the expected payment default on Keen’s senior secured debt owed to the Company and the Company’s $105,000,000 preferred equity distribution in the event Keen was liquidated.  At December 31, 2009, the Company owns all of Keen’s equity interests and the net book value of its investment in Keen’s debt and equity securities aggregated $231,500,000.

When the Company acquired the controlling interest in Keen in November 2009 it became a consolidated subsidiary; prior to that time the investment in Keen was classified as an investment in an associated company.  Under generally accepted accounting principles (“GAAP”), upon consolidation the Company is required to record Keen’s assets and liabilities at fair value, and is required to adjust the carrying value of the Company’s equity investment immediately prior to the acquisition to fair value.  Due to the unique circumstances surrounding the Company’s 2009 acquisition described above, the fair value of the net assets acquired exceeded the amount paid by $49,300,000; the bargain purchase was recognized as a gain on the date of acquisition and included in investment and other income.  However, the fair value of the Company’s equity interest immediately prior to the acquisition was less than its carrying value ($85,900,000); accordingly the Company included a charge of $36,500,000 in income (losses) related to associated companies to write down the pre-acquisition carrying value of its investment in Keen to fair value.

Keen is a land based contract oil and gas drilling company based in Stillwater, Oklahoma that provides drilling services to independent oil and natural gas exploration and production companies in the Mid-Continent Region of the U.S.  Keen currently operates drilling rigs in Oklahoma, Texas and Arkansas.  Keen, which has been in business since 1991, typically generates revenues through drilling contracts based on daily rates (daywork contracts), footage (charged by depth of the well) or based on a turnkey contract (fixed price to drill a well).  Keen supplies the drilling rig, all ancillary equipment and drilling personnel.  The majority of wells drilled by Keen are natural gas wells in unconventional basins that are characterized by complex geological formations often requiring higher horsepower, premium rigs and/or experienced crews to reach targeted depths.  In 2009, the majority of drilling services were performed pursuant to daywork contracts.

Each of Keen’s drilling rigs consists of engines, drawworks, a mast, pumps, blowout preventers, a drill string and ancillary equipment.  Keen’s drilling rigs can operate 24 hours a day, seven days a week and are generally staffed with crews of four to six persons.  Once Keen has drilled a well for a customer, the drilling rig will be moved off of the well and another service provider will use a service rig (a smaller rig) that is built for completions, which brings the well into production.  Keen does not provide completion services.   The intended well depth and the geological formation of the drilling site are the principal factors that determine the size and type of rig most suitable for a particular drilling job.  All of Keen’s rigs are capable of drilling horizontal and directional wells.

At December 31, 2009, Keen has 38 drilling rigs in its fleet that have rated maximum depth capabilities ranging from 6,500 feet to 22,000 feet.  Keen’s employees perform periodic maintenance and routine repair work on the drilling rigs; the bulk of major repair and overhaul work is done by various oilfield service companies.  Keen also owns and operates a fleet of trucks, trailers and other construction equipment used to transport its rigs and to construct or take down its rigs at drilling locations.  By owning its own equipment, Keen believes it is able to better manage the cost of moving its rigs, reduce the downtime between moves and minimize the general wear and tear on drilling rigs.  Keen’s customers are not required to use Keen’s equipment or trucks to move Keen’s drilling rigs.

Keen’s revenue volume and profitability are significantly affected by the actual and anticipated price of natural gas and levels of natural gas in storage.  The natural gas exploration and production industry is cyclical and the level of exploration and production activity has historically been very volatile.  During periods of lower levels of drilling activity, price competition for drilling services tends to increase, which may result in reduced revenues and profitability; conversely, during periods of increased drilling activity drilling rigs are in demand often resulting in higher prices and contractual commitments from customers to obtain exclusive use of a particular rig for a longer term.  During 2009, Keen experienced a period of low natural gas prices and rising levels of natural gas storage, which adversely impacted Keen’s revenues and profitability.  Seasonality does not significantly impact Keen’s business or operations.

Additionally, the drilling activity of oil and natural gas exploration and production companies is strongly affected by their ability to access the capital markets.  Beginning the second half of 2008 there was a substantial reduction of liquidity in the capital markets due to the deteriorating global economic environment.  Many of Keen’s customers reduced their spending plans for exploration, production and development activities resulting in decreased demand for Keen’s rigs.  Decreases in drilling activity and spending for any sustained period of time causes a reduction in Keen’s daily rates, utilization rates and profitability.

Keen markets its drilling rigs to a number of independent oil and gas companies.  Most of Keen’s contracts are with established customers on a competitive bid or negotiated basis and may cover one well, a multi-well project or are entered into for a specified period of time.  At December 31, 2009, Keen has 4 drilling rigs under contract for a remaining term of 1 to 3 years, 2 rigs are operating under term contracts that will expire within the next 12 months, 7 are under well-to-well contracts with specific customers, and 25 are not currently under contract.

Keen’s business is fairly concentrated with its top five customers accounting for over 75% of 2009 drilling revenues.  One customer accounted for over 30% of 2009 drilling revenues and 3 other customers each exceeded 10% of 2009 drilling revenues.  Since Keen only became a consolidated subsidiary of the Company in November 2009, its revenues for 2009 are only reflected in the consolidated financial statements from the date of acquisition.

Customers award contracts to contract drillers based on factors such as price, rig availability, quality of service, proximity to the well site, experience with the specific geological formation, condition and type of equipment, reputation, safety of operations and customer relationships.  Contracts for drilling services may be awarded based solely on price.  There is currently an oversupply of drilling rigs in the market, and at such times price is the primary determinant by which customers award contracts.  Although contract drilling companies generally compete on a regional basis, drilling rigs can be moved from one market to another in response to market conditions which can have the effect of increasing competition.

ResortQuest, which was acquired in June 2007, is headquartered in Fort Walton Beach, Florida and provides vacation rental management services to vacation properties in beach and mountain resort locations, homeowner association management to resort communities and real estate brokerage services for the residential property market in resort locations.  The net book value of the Company’s investment in the property management and services segment was $23,500,000 at December 31, 2009.

Vacation rental management service for homeowners is ResortQuest’s largest service offering representing 96% of ResortQuest’s 2009 revenue.  ResortQuest contracts with each property owner to market and manage the rental of their vacation property, generally for a percentage of the rent and/or fees collected.  Services provided include marketing to potential guests, performing routine maintenance, providing housekeeping services and providing guests access to additional activities such as golf, watersports, tennis or skiing.  ResortQuest provides services in Northwest Florida, Delaware, South Carolina, Colorado, Idaho and Utah.  ResortQuest’s rental management services are somewhat geographically concentrated in the Northwest Florida market, which accounts for 44% of its rental management services revenue.

ResortQuest’s business is seasonal with beach areas reaching their peak in the summer months and ski areas reaching their peak in the winter months.  Since ResortQuest’s properties are in markets that guests must travel to get to, high fuel prices, airline flight availability, less disposable income and poor weather conditions can have an unfavorable impact on its business.

ResortQuest provides real estate brokerage services in the Northwest Florida and Delaware beach markets.  ResortQuest provides real estate brokerage services to resort developers on new construction projects, and also represents other sellers and buyers in the resort and residential resale market.  ResortQuest’s revenues from these activities tend to be cyclical, and experience the same volatility that residential real estate and new construction markets experience.  Since acquisition, the residential real estate markets in Northwest Florida and Delaware, like elsewhere in the U.S., have suffered from oversupply and declining prices that have adversely affected ResortQuest’s business.

ResortQuest is in the services business with minimal working capital needs, minimal investment in property, plant and equipment and relatively little expenditures required for technology.  The vast majority of ResortQuest’s expenses relates to employees’ compensation and benefits, or to service providers when ResortQuest chooses to outsource to a vendor.

ResortQuest serves five types of customers: owners of individual vacation rental homes, guests staying in those homes, owners selling their homes, clients buying homes and homeowner association boards.  ResortQuest markets homeowner properties via the internet, direct mail and publications.  Marketing includes promoting ResortQuest as a provider of quality management services and promoting the homeowners’ properties as attractive places to vacation.  Marketing to rental property guests and potential home buyers occurs at local, regional and national levels depending on the location.  Community presence and reputation are also an important part of ResortQuest’s marketing programs.

ResortQuest’s competition is fragmented and varies by service and location.  Vacation rental management competitors include other homeowner vacation rental management companies similar to ResortQuest, developers that manage their own resort properties and homeowners that market their property directly to the consumer.  When residential real estate market conditions change, the composition of ResortQuest’s competition can also change.  In some locations developers have opted out of the vacation rental business, providing greater opportunities for ResortQuest.  In other locations, market conditions have encouraged new competitors to enter the market, including the direct homeowner rental management business, which allows homeowners to market their own homes on websites.  These types of websites provide a low cost of entry to market rental properties and relative ease in handling a potential guest.  Real estate brokerage service competitors are national, regional and local real estate brokerage companies and developers that market their own projects.

Acquired during 2006, the Company owns approximately 61% of Premier’s common units and all of Premier’s preferred units, which accrue an annual preferred return of 17%.  The Company also acquired Premier’s junior subordinated note due August 2012 during 2006, and during 2007 provided Premier with a $180,000,000 senior secured credit facility to partially fund Premier’s bankruptcy plan of reorganization (discussed below).  At December 31, 2009, the net book value of the Company’s aggregate investment in Premier was $236,700,000.  At acquisition, the Company consolidated Premier as a result of its controlling voting interest; during the pendency of bankruptcy proceedings Premier was deconsolidated and accounted for under the equity method of accounting.

Premier owns the Hard Rock Hotel & Casino Biloxi, located in Biloxi, Mississippi, which opened to the public on June 30, 2007.  The Hard Rock Biloxi was scheduled to open to the public on August 31, 2005; however, two days prior to opening, Hurricane Katrina hit the Mississippi Gulf Coast and severely damaged the hotel and related structures and completely destroyed the casino.  On September 19, 2006, Premier and its subsidiary filed voluntary petitions for reorganization under chapter 11 of title 11 of the United States Bankruptcy Code.  Premier filed its petitions in order to seek the court’s assistance in gaining access to Hurricane Katrina-related insurance proceeds (an aggregate of $161,200,000) which had been denied to Premier by its pre-petition secured bondholders.

Premier filed an amended disclosure statement and plan of reorganization on February 22, 2007, which provided for the payment in full of all of Premier's creditors, including payment of principal and accrued interest due to the holders of Premier's 10 3/4% senior secured notes at par (the “Premier Notes”).  On July 30, 2007, the court entered an order confirming the plan, subject to a modification which Premier filed on August 1, 2007; Premier emerged from bankruptcy and once again became a consolidated subsidiary of the Company on August 10, 2007.  The plan was funded in part with the $180,000,000 senior secured credit facility provided by a subsidiary of the Company.  The credit facility matures on February 1, 2012, bears interest at 10 3/4%, is prepayable at any time without penalty, and contains other covenants, terms and conditions similar to those contained in the indenture governing the Premier Notes.

The former holders of the Premier Notes argued that they were entitled to liquidated damages under the indenture governing the Premier Notes, and as such are entitled to more than the principal amount of the notes plus accrued interest that was paid to them at emergence.  Although the Company does not agree with the position taken by the Premier noteholders, in order to have the plan confirmed so that Premier could complete reconstruction of its property and open its business without further delay, the Company agreed to fund an escrow account to cover the Premier noteholders’ claim for additional damages in the amount of $13,700,000, and a second escrow account for the trustee’s reasonable legal fees and expenses in the amount of $1,000,000.  The trial before the bankruptcy court to determine entitlement to the escrowed funds has been scheduled to commence on March 16, 2010.  The Company believes it is probable that the court will approve payment of legal fees and expenses and has fully reserved for that contingency.  The Company believes it is reasonably possible that the bankruptcy court will find in favor of the Premier noteholders with respect to the additional damages escrow; however, any potential loss can not be reasonably estimated.  Accordingly, the Company has not accrued a loss for the additional damages contingency.

The Hard Rock Hotel & Casino is located on an 8.5 acre site on the Mississippi Gulf Coast and has approximately 1,215 slot machines, 52 table games, six live poker tables, five restaurants (including a Hard Rock Café and Ruth’s Chris Steakhouse), a full service spa, a 5,200 square foot pool area, 3,000 square feet of retail space, an eleven-story hotel with 318 rooms and suites and a Hard Rock Live! entertainment venue with a capacity of 1,500 persons.

Premier’s marketing strategy is to position the resort as a full service gaming, boutique hotel and entertainment resort catering to the Mississippi Gulf Coast marketplace and the southern region of the U.S.  The Mississippi Gulf Coast region is located along the Interstate 10 corridor and is within a ninety minute drive from the New Orleans metropolitan area, Mobile, Alabama and the Florida panhandle.  Premier’s primary means of marketing utilizes its database of customers for direct mail campaigns and promotional giveaways designed to reward customers and generate loyalty and repeat visits.  In addition, Premier benefits from the “Hard Rock” brand name which appeals to a broad range of customers and from its superior location, which is within walking distance of the Beau Rivage, an MGM Mirage property and the largest hotel and casino in the Mississippi Gulf Coast market.

Premier’s current insurance policy provides up to $235,000,000 in coverage for damage to real and personal property including business interruption coverage.  The coverage is provided by a panel of insurers based out of the U.S., Bermuda, and London and is comprised of a $50,000,000 primary layer and three excess layers. The coverage is syndicated through several insurance carriers, each with an A.M. Best Rating of A- (Excellent) or better.  Although the insurance policy is an all risk policy, any loss resulting from a weather catastrophe occurrence, which is defined to include damage caused by a named storm, is sublimited to $100,000,000 with a deductible of $5,000,000.

Premier faces significant competition primarily from nine other gaming operations in the Mississippi Gulf Coast gaming market and secondarily from gaming operations in Baton Rouge and New Orleans, Louisiana as well as from a Native American casino in Atmore, Alabama.  Other competition comes from gaming operations in Lake Charles, Bossier City and Shreveport, Louisiana; Tunica and Philadelphia, Mississippi; Montgomery, Alabama; Tampa and Hollywood, Florida and other states.  Such competition may increase if gaming operations grow in these markets or if legalized gaming expands to nearby states.  Many of Premier’s competitors are larger and have greater marketing and financial resources.

The gaming industry in Mississippi is highly regulated.  Premier, its ownership and management are subject to findings of suitability reviews by the Mississippi Gaming Commission.  In addition, the laws, rules and regulations of state and local governments in Mississippi require Premier to hold various licenses, registrations and permits and to obtain various approvals for a variety of matters.  In order to continue operating, Premier must remain in compliance with all laws, rules and regulations and pay gaming taxes on its gross gaming revenues.  Failure to maintain such approvals or obtain renewals when due, or failure to comply with new laws or regulations or changes to existing laws and regulations would have an adverse effect on Premier’s business.   Premier believes it is in compliance with all governmental rules and regulations.

At December 31, 2009, the Company’s aggregate net investment in all domestic real estate projects was $202,200,000.  The real estate operations include a mixture of commercial properties, residential land development projects and other unimproved land, all in various stages of development.  Certain of the Company’s real estate investments and their respective book values as of December 31, 2009 include: approximately 60 acres of land used by the automobile dealership joint venture, Garcadia, which is described below ($50,500,000);  approximately 76 acres of land located on the island of Islesboro, Maine (approved for 13 residential waterfront lots) and 46 fully developed residential lots on approximately 120 acres of land located in Rockport, Maine on Penobscot Bay, ($43,400,000 in the aggregate); a 15 acre, unentitled air rights parcel above the train tracks behind Union Station in Washington, D.C. ($11,300,000); and an operating shopping center on Long Island, New York that has 71,000 square feet of retail space ($12,700,000).  None of these projects are secured by any indebtedness.

One of the Company’s real estate subsidiaries (MB1) is the owner and developer of a 12 acre mixed use real estate project located in Myrtle Beach, South Carolina.  The project is comprised of a retail center with approximately 346,000 square feet of retail space, 41,000 square feet of office space and 195 residential apartment rental units.  The acquisition and construction costs were funded by capital contributed by the Company and nonrecourse indebtedness with a balance of $100,500,000 at December 31, 2009, that is collateralized by the real estate.  If MB1 is unable to make debt service or principal payments on the loan the Company is under no obligation to make those payments.

Current economic conditions have adversely impacted the majority of the retail tenants at the retail center.  Over 20 retail tenants have requested reductions in rent payments, some of which have been granted; certain other tenants are not paying the full amount of rent due while their leases are being renegotiated.  During the second quarter of 2009, MB1 was unable to make scheduled payments under its interest rate swap agreement and received several default notices under its bank loan.  These events constituted a change in circumstances that caused the Company to conclude that the carrying amount of MB1’s real estate asset was not recoverable; accordingly, the Company recorded an impairment charge of $67,800,000 (classified as selling, general and other expenses), which reduced the carrying amount of MB1’s real estate to its fair value.  Although MB1’s bank loan matured in October 2009, it was not repaid since MB1 did not have sufficient funds and the Company is under no obligation and has no intention to provide the funds to pay off the loan.  MB1 received an additional default notice for failure to repay the bank loan but its lenders have not commenced foreclosure proceedings.  If MB1’s bank lenders foreclose in the future, the Company would record a gain equal to the excess of the loan balance over the then book value of the real estate.  At December 31, 2009, the carrying value of MB1’s real estate was $69,400,000.

The Company also owns 46 acres of land adjacent to the Myrtle Beach project which is planned for 1,151 residential units, including a mixture of single family homes, townhouses and condominium units, and a 15 acre parcel that is planned for 181,000 square feet of retail space (aggregate book value of $14,700,000).  The land and the residential units are not collateral for MB1’s indebtedness.

Residential property sales volume, prices and new building starts have declined significantly in many U.S. markets, including markets in which the Company has real estate projects in various stages of development.  The slowdown in residential sales has been exacerbated by the turmoil in the mortgage lending and credit markets, which has resulted in stricter lending standards and reduced liquidity for prospective home buyers.  The Company is not actively soliciting bids for developed and undeveloped lots in Maine, and has deferred its development plans for certain other projects as well.  The Company intends to wait for market conditions to improve before marketing certain of its projects for sale.

In October 2007, the Company entered into an agreement with the Panama City-Bay County Airport and Industrial District of Panama City, Florida to purchase approximately 708 acres of land which currently houses the Panama City-Bay County International Airport.  The Company has placed $56,500,000 into escrow; the transaction will close and title to the land will pass only after the city completes construction of a new airport and moves the airport operations to its new location.  Prior to closing, all interest earned on the escrow account is for the benefit of the Company and may be withdrawn at any time.  Construction on the new airport has begun; the Company has the right to terminate the agreement and receive a full refund of the escrowed funds if the closing hasn’t occurred by April 2012.  If the transaction closes, the Company intends to develop the property into a mixed use community with residential, retail, commercial, educational and office sites.   

The Company owns approximately 31.4% of the outstanding common stock of HomeFed.  In addition, as a result of a 1998 distribution to all of the Company’s shareholders, approximately 7.8% and 9.4% of HomeFed is owned by the Company’s Chairman and President, respectively.  HomeFed is currently engaged, directly and through subsidiaries, in the investment in and development of residential real estate projects in California.  Its current development projects consist of two master-planned communities located in San Diego County, California:  San Elijo Hills and a portion of the larger Otay Ranch planning area.  The Company accounts for its investment in HomeFed under the equity method of accounting.  At December 31, 2009, its investment had a carrying value of $45,000,000, which is included in investments in associated companies.  HomeFed is a public company traded on the NASD OTC Bulletin Board (Symbol: HOFD).

The real estate development industry is subject to substantial environmental, building, construction, zoning and real estate regulations that are imposed by various federal, state and local authorities.  In order to develop its properties, the Company must obtain the approval of numerous governmental agencies regarding such matters as permitted land uses, density, the installation of utility services (such as water, sewer, gas, electric, telephone and cable television) and the dedication of acreage for various community purposes.  Furthermore, changes in prevailing local circumstances or applicable laws may require additional approvals or modifications of approvals previously obtained.  Delays in obtaining required approvals and authorizations could adversely affect the profitability of the Company’s projects.

At December 31, 2009, the Company owned approximately 92% of Sangart, a biopharmaceutical company principally engaged in developing medicines designed to enhance the oxygenation of oxygen deprived tissues through targeted oxygen delivery.  From 2003 through December 31, 2009, the Company invested an aggregate of $146,200,000 in Sangart, principally to help fund Sangart’s ongoing product development activities (as a development stage company, Sangart does not have any revenues from product sales).  Since inception, the Company has recorded Sangart losses of $128,000,000, resulting from product development expenses and Sangart’s overhead costs.  Sangart became a consolidated subsidiary in 2005; the net book value of the Company’s investment in Sangart was $17,600,000 at December 31, 2009.

In 2002, Sangart commenced human clinical trials of MP4OX, a solution of cell-free hemoglobin administered intravenously to provide rapid oxygen delivery to ischemic (oxygen deprived) tissues.  The basis for Sangart’s technology is the result of more than 20 years of research in the understanding of how hemoglobin (the oxygen carrier in red blood cells) functions outside of red blood cells in a cell-free environment and how it can be used in conjunction with normal red blood cells to enhance oxygen delivery to organ tissue.  MP4 products are made from purified human hemoglobin that is extracted from fully screened and tested outdated human blood obtained from accredited blood centers, which is then bound to polyethylene glycol molecules using Sangart’s proprietary processes.  Sangart’s manufacturing process is able to generate approximately four units of MP4OX using a single unit of blood.  Sangart owns or exclusively licenses sixteen U.S. patents and has more than thirty applications pending worldwide covering product composition, manufacturing or methods of use.   Patents applicable to the MP4 technology do not begin to expire until 2017.

Sangart has previously completed six Phase I and Phase II human clinical studies designed to assess product safety and gather preliminary indications of the product’s effectiveness.  In 2007 and 2008, Sangart conducted two Phase III clinical trials that involved a total of 850 hip replacement surgery patients in Europe.  These studies demonstrated MP4OX’s effectiveness in preventing and treating low blood pressure during orthopedic hip replacement surgeries without significant safety concerns being identified, though in one of the Phase III studies there was a slightly higher incidence of adverse events in the MP4OX-treated patients than in the control group.  However, because these Phase III trials were conducted in a patient population having a relatively low incidence of medical complications, Sangart has decided not to apply for marketing approval to use MP4OX in orthopedic hip replacement surgeries at this time.

Sangart is currently conducting a Phase II proof of concept clinical trial of MP4OX in trauma patients in Europe and South Africa, which is expected to complete enrollment by the third quarter of 2010.  If this study is successful, Sangart plans to conduct a larger Phase II clinical study and then a Phase III clinical study in trauma patients.  These trauma studies will take several years to complete at substantial cost.  Until these Phase II and Phase III studies are successfully completed, Sangart will not be able to request marketing approval and generate revenues from sales in the trauma market.

Sangart is also exploring the application of the MP4 technology in additional therapeutic areas.  One area of interest is sickle cell disease, for which Sangart’s MP4CO product was recently granted orphan drug designation by the European Commission.  This designation will provide MP4CO with ten years of market exclusivity in the European Union if Sangart is able to successfully obtain marketing approval.  Multiple human clinical trials demonstrating the safety and efficacy of MP4CO in the treatment of sickle cell disease would need to be successfully completed before marketing approval can be obtained and revenues from MP4CO sales can be generated.  Such studies would take several years to complete at substantial cost.

Substantially all of the funding needed for MP4 development has come from sales of Sangart’s equity securities.  Sangart’s existing cash reserves are expected to provide Sangart with sufficient capital to fund activities into the third quarter of 2010.  Thereafter, significant additional funding will be needed for product development and clinical trial activities prior to regulatory approval and commercial launch; the source of such funding has not as yet been determined.

MP4 products are intended to be used as oxygen therapeutic agents in clinical and trauma situations where tissues are at risk of inadequate blood flow and oxygenation.  Currently there are no similar products approved for sale in the U.S. or the European Union; however, other companies are developing products that could potentially compete with MP4.

Any successful commercialization of MP4 products will depend on an adequate supply of raw materials, principally human red blood cells and polyethylene glycol, at an acceptable quality, quantity and price.  Sangart has contracted for commercial launch quantities of human red blood cells, though commitments for commercial-scale quantities of polyethylene glycol have not yet been secured.  Sangart leases a 56,700 square foot combination office and manufacturing facility that currently produces MP4 products for its clinical trials.  Sangart believes that its current manufacturing facility would have adequate capacity to support a commercial launch, but significant capital improvements would be required or an alternative manufacturing site would need to be acquired for commercial production.  In addition to obtaining requisite regulatory approvals and increasing manufacturing capacity for the manufacture and sale of MP4 products, Sangart would have to create sales, marketing and distribution capabilities prior to any commercial launch of this product, either directly or in partnership with a service provider.

As a product intended for medical use, clinical trials, marketing approval, manufacturing and distribution of MP4 is highly regulated.  An application for marketing approval may only be made after the safety and effectiveness of the product has been demonstrated, including through human clinical trial data.  In the U.S., the U.S. Food and Drug Administration regulates medical products, including the category known as “biologics”, which includes MP4 products.  The Federal Food, Drug and Cosmetic Act and the Public Health Service Act govern the testing, manufacture, safety, effectiveness, labeling, storage, record keeping, approval, advertising and promotion of MP4 products.

In Europe, each country has its own agency that regulates clinical trials.  However, the Committee for Medicinal Products for Human Use (“CHMP”), which is administered by the European Agency for the Evaluation of Medicinal Products, is an EU-wide regulatory body.  Following completion of clinical trials, marketing approval can be granted either by a centralized application through CHMP, or on a decentralized basis by one or more selected countries.

The Company’s winery operations are managed under the umbrella name, Crimson Wine Group (“Crimson”).  Crimson is engaged in the production and sale of premium, ultra premium and luxury wines (i.e., wines that retail for $10 - $14, $14 - $25 and over $25 per 750ml bottle, respectively).  Crimson is headquartered in Napa, California and owns three wineries, Pine Ridge Vineyards in Napa Valley, California, Archery Summit in the Willamette Valley of Oregon and Chamisal Vineyards in the Edna Valley of California.  Pine Ridge was acquired in 1991 and has been conducting operations since 1978, the Company started Archery Summit in 1993 and Chamisal Vineyards was acquired during 2008 and has been conducting operations since 1973.  The Company’s investment in Crimson has grown, principally to fund the acquisition of land for vineyard development, construct and develop Archery Summit, acquire Chamisal Vineyards, launch new brands and increase production capacity and storage facilities at the wineries.  Crimson controls approximately 204 acres of vineyards in Napa Valley, California, 119 acres of vineyards in the Willamette Valley of Oregon and 97 acres of vineyards in the Edna Valley of California, substantially all of which are owned and producing grapes.  Crimson believes that its vineyards are located in some of the most highly regarded appellations and areas of the Napa, Willamette and Edna Valleys. At December 31, 2009, the net book value of the Company’s aggregate investment in Crimson was $87,300,000.  Crimson sold approximately 92,000 9-liter equivalent cases of wine generating revenues of $19,800,000 during 2009 and 90,000 9-liter equivalent cases of wine generating revenues of $20,900,000 during 2008.  Additionally, in 2005 and 2006, the Company acquired an aggregate of 611 acres of land in the Horse Heaven Hills of Washington’s Columbia Valley, of which approximately 85 acres have been developed into producing vineyards.  At December 31, 2009, the net book value of the Company’s investment in the Washington vineyard property was $7,500,000.

Crimson is expanding its product offerings in the premium and ultra premium segments of the very competitive premium table wine market, including developing new brands at lower price points.  The combination of the competitive economic environment and many lower priced wines will require Crimson to increase its promotional expenditures, which will include various sales and marketing efforts to reach new customers and expand distribution of its products.  Crimson’s wines are primarily sold to distributors, who then sell to retailers and restaurants.  As permitted under federal and local regulations, Crimson has also been placing increasing emphasis on sales direct to consumers, which they are able to do through the internet, wine clubs and at the wineries’ tasting rooms.  During 2009, direct sales to consumers represented 24% of case sales and 56% of wine revenues.  Wholesale sales of the Company’s wines in California (excluding direct sales to consumers) amounted to approximately 24% of 2009 wholesale wine revenues.

Crimson’s wines compete with small and large producers in the U.S., as well as with imported wines, and the ultimate consumer has many choices.  Demand for wine in the premium, ultra premium and luxury market segments can rise and fall with general economic conditions, and is also significantly affected by grape supply.  The demand for Crimson’s products is also affected by the ratings given the wines in industry and consumer publications.  In the current economic climate, consumer demand has shifted away from the higher-priced luxury segment to wines in the lower-priced premium and ultra premium categories.  While Crimson’s current vineyard holdings in the Napa, Willamette and Edna valleys continue to be a substantial source for its wine products, Crimson has and will continue to acquire more purchased fruit as it shifts its product offerings to the lower-priced wine segments.

The wineries’ production, sales and distribution activities are subject to regulation by agencies of both federal and state governments.  State regulations that prohibited or restricted sales of wine direct to consumers by producers that are located in another state continue to be amended or overturned to permit increased direct sales to consumers in other states.  For the year ended December 31, 2009, the Company sold wine direct to consumers in 43 states across the U.S.

During the past few years, the Company has been incurring costs to investigate and evaluate the development of a number of large scale domestic energy projects.  Certain of the large scale projects employ gasification technology to convert different types of low grade fossil fuels into clean energy products.  The Company has also invested in certain energy projects that do not employ gasification technologies, one of which is described below.  The Company has expensed costs to investigate, evaluate and obtain various permits and approvals for its various energy projects of $25,300,000, $33,400,000 and $20,800,000 during the years ended December 31, 2009, 2008 and 2007, respectively.

Although there are a number of large scale projects the Company is currently investigating, the Company is not obligated to develop any of the projects, and no assurance can be given that the Company will be successful in fully developing any of these projects.  Any project that the Company might develop would likely require a significant equity investment, which the Company presently does not intend to fund by itself, the acquisition of substantial non-recourse borrowings to build the projects (total development costs for these types of projects range from $1 billion to $3 billion), the procurement of purchase commitments for long-term supplies of feedstock, long-term commitments from purchasers of the output, and significant technological and engineering expertise to implement.  The investigation, evaluation and financing of these large scale projects will take years to complete.

The Company is currently evaluating a gasification project, which would be built in Louisiana.  In April 2008, the Lake Charles Harbor and Terminal District of Lake Charles, Louisiana sold $1,000,000,000 in tax exempt bonds to support the development of a $1,900,000,000 petroleum coke gasification plant project by the Company’s wholly-owned subsidiary, Lake Charles Cogeneration LLC (“LCC”).  The bond proceeds were initially escrowed and held by the bond trustee; however, during the first quarter of 2009 the bond trustee used the escrowed funds to fully redeem the bonds.  Pursuant to LCC’s agreements with the local municipality, upon the completion of pending permitting, regulatory approval, design engineering and the satisfaction of certain other conditions of the financing agreements, the bonds will be marketed on a long-term basis and the proceeds will be released to LCC to use for the payment of development and construction costs for the project.  The Company is not obligated to make equity contributions to LCC until it completes its investigation and the project is approved by the Company’s board of directors.  The Lake Charles Cogeneration project is a new chemical manufacturing project that plans to use quench gasification technology to produce energy products from low grade solid fuel sources such as petroleum coke.  LCC is evaluating the primary product options to be produced by the Lake Charles Cogeneration project including substitute natural gas, methanol and hydrogen.

 In July 2009, two of the Company’s other prospective gasification projects were selected by the U.S. Department of Energy (“DOE”) to proceed to detailed due diligence and negotiations of terms and conditions necessary for the DOE to issue conditional commitments for loan guarantees aggregating up to $3,600,000,000.  While these commitments represent important milestones in the selection process, the guarantees are subject to detailed and extensive due diligence by the DOE and no assurance can be given that a loan guaranty for either project will ultimately be given.  As discussed above, construction of these projects is also subject to obtaining third-party equity and debt financing.

A subsidiary of the Company has acquired a leasehold interest and certain permits to construct and operate an onshore liquefied natural gas (“LNG”) receiving terminal and associated facilities on the Skipanon Peninsula near the confluence of the Skipanon and Columbia Rivers in Warrenton, Clatsop County, Oregon.  The project includes construction of an offshore dock and berth for offloading LNG carriers, onshore facilities to receive and store up to 480,000 cubic meters of LNG and vaporizers to regasify LNG at a baseload rate of 1 billion standard cubic feet per day (“bscfd”) with a peak rate of 1.5 bscfd.  The current plan includes construction of an approximate 121 mile long 36-inch diameter natural gas pipeline to transport regasified natural gas to the U.S. natural gas transmission grid, which in turn will interconnect with other natural gas pipelines, including the interstate transmission system of Williams Northwest Pipeline at the Molalla Gate Station in Molalla, Oregon.  In addition, a new 10 mile long 24-inch diameter lateral pipeline will be constructed to connect the pipeline to a local storage facility.  Numerous regulatory permits and approvals and acquisitions of rights of way for the pipeline will be required before project construction can commence; construction of the receiving terminal and associated facilities is expected to begin in the third quarter of 2012 and construction of the pipeline is expected to begin in the third quarter of 2014.  Completion of the project is also subject to obtaining significant financing from third parties, which has not been arranged; the current estimated project cost is $1,300,000,000.

In December 2009, Berkadia, a joint venture between Berkshire Hathaway and the Company, acquired the North American commercial mortgage origination and servicing business of Capmark.  The Company and Berkshire Hathaway each have a 50% equity interest in Berkadia, and each party contributed $217,200,000 of equity capital to fund the acquisition.  In addition, a subsidiary of Berkshire Hathaway provided Berkadia with a five-year, $1 billion secured credit facility, which was used to purchase outstanding mortgage loans and servicer advances from Capmark.  The credit facility may be used to fund mortgage loans and servicer advances, to purchase mortgage servicing rights and for working capital needs.  The Company has guaranteed Berkadia’s repayment of 50% of the credit facility when due.

Berkadia acquired the commercial mortgage origination and servicing business from Capmark pursuant to an Asset Put Agreement (“APA”) entered into between Berkadia and certain Capmark entities in September 2009.  Capmark paid Berkadia $40,000,000 for the right to require Berkadia to purchase the commercial mortgage origination and mortgage servicing business pursuant to the terms of the APA.  Capmark subsequently filed for bankruptcy protection under chapter 11 of title 11 of the United States Bankruptcy Code and exercised the put option.  Although there were other parties interested in purchasing portions of the commercial mortgage origination and servicing business, Berkadia’s offer was the only offer for the entire business, which eliminated Capmark’s risk of disposing of the remaining business.  In addition, Berkadia’s offer included a provision to hire the Capmark employees operating the business, thereby saving Capmark material employment related expenses.

The Company accounts for Berkadia as an investment in an associated company and applies the equity method of accounting.  Berkadia applied the acquisition method to account for the purchase of the commercial mortgage origination and servicing business and recorded the assets and liabilities acquired at fair value, which were principally mortgage servicing rights, mortgage loans and servicer advances.  The fair values of the net assets acquired exceeded the amount paid, principally due to the amount received as a put premium and the reasons identified above.  This excess is treated as a bargain purchase that is recognized as a gain on the date of acquisition and included in Berkadia’s results of operations.  For the period ended December 31, 2009, the Company recorded income from Berkadia of $20,800,000 under the equity method of accounting, of which $24,400,000 represented the Company’s share of the bargain purchase.  At December 31, 2009, the carrying amount of the Company’s investment in Berkadia was $240,000,000.

The commercial mortgage servicing business provides primary, master and special servicing activities for commercial mortgage-backed securities (“CMBS”).  In addition, Berkadia carries out servicing activities on a contracted basis for third parties such as insurance companies, banks and other financial institutions.  Berkadia is an approved servicer of loans for Fannie Mae, Freddie Mac, Ginnie Mae and the FHA, and is one of the largest servicers of commercial real estate loans in the U.S.  As of December 31, 2009, Berkadia had a servicing portfolio of approximately 33,000 loans with an unpaid principal balance of $236.7 billion summarized as follows (dollars in thousands):

A primary servicer of a loan is the primary contact with the borrower and is generally responsible for carrying out all cash management functions relating to the loan, including providing monthly billing statements to the borrower and collecting and applying payments on the loan; administering reserve and escrow funds for repairs, tenant improvements, taxes and insurance; obtaining and analyzing operating and financial statements of the borrower and performing periodic property inspections; preparing and providing periodic reports and remittances to the master servicer or other designated persons; administering lien filings; and other specified functions.

A master servicer is responsible for administration of a pool of loans that is transferred to a trust or other special purpose entity in connection with a securitization transaction pursuant to a pooling and servicing agreement.  A master servicer is responsible for ensuring that primary servicers act in a diligent manner when carrying out their collection and administration activities, and is also required to handle all remittance and reporting activities required by the pooling and servicing agreement.  While some master servicer functions may be sub-contracted and performed by a primary servicer, as a master servicer Berkadia is ultimately responsible for the performance of any functions that have been sub-contracted to a primary servicer.

Master servicers are generally required to advance funds to cover any delinquent payments on the securitized loans and any taxes and insurance premiums not covered by borrowers’ escrow funds if it is determined that the advances will be recoverable in the future.  These “servicing advances,” along with accrued interest, are treated as having priority over the rights of other investors in the securitization.  In certain circumstances, Berkadia may have similar obligations to advance funds in connection with loans under which it is a primary servicer.

A special servicer is a specialist in dealing with defaulted loans and is usually selected by the holder of the subordinated interest in a securitization vehicle.  Typically, a loan may be transferred from the master servicer to a special servicer if it is more than 60 days delinquent, a borrower files for bankruptcy or the master servicer determines a default is imminent.  Once a loan is transferred to special servicing, asset managers take steps to bring the account to a performing status or exercise other remedies, including loan modification, foreclosure, a negotiated pay-off or a sale of the loan.  Special servicers are generally paid higher monthly servicing fees and resolution fees in connection with the loans that they service.

Fee-for-service customers generally require the same type of collection, monitoring and reporting services as other programs; however, since the customer retains ownership of the loan there are no third party bondholders or investors.  In addition, the mortgage servicing rights are not purchased, instead the customer contracts with Berkadia to service its loans.  The contract usually has a defined term and may be terminated on short notice.

As a servicer, Berkadia is frequently responsible for managing, on behalf of its investors, the balances that are maintained in custodial accounts for the purposes of collecting and distributing principal and interest and for funding repairs, tenant improvements, taxes and insurance related to the mortgaged properties it services.  Berkadia derives certain economic benefits associated with a portion of these balances.  Such balances totaled in excess of $4 billion as of December 31, 2009.

Berkadia originates commercial real estate loans for Fannie Mae, Freddie Mac, Ginnie Mae and the FHA using their underwriting guidelines, and will typically sell the loan shortly after it is funded.  Provided Berkadia adheres to the underwriting guidelines, these government related entities must purchase the loan at the face amount plus accrued interest; Berkadia retains the mortgage servicing rights.  In addition, as a condition to Fannie Mae’s delegation of responsibility for underwriting, originating and servicing of loans, Berkadia assumes a limited first-dollar loss position throughout the term of each loan sold to Fannie Mae.

Berkadia is required under its servicing agreements to maintain certain minimum servicer ratings or qualifications from the rating agencies.  A downgrade below a certain level may give rise to the right of a customer or trustee of a securitized transaction to terminate Berkadia as servicer.  Berkadia currently maintains approvals or ratings from Moody’s Investors Service, Fitch Ratings, Standard & Poor’s and Dominion Bond Rating Services.  These ratings currently exceed the minimum ratings required by the related servicing agreements.  Ratings issued by the rating agencies can be withdrawn or lowered at any time.  In addition, Fannie Mae and Freddie Mac retain broad discretion to terminate Berkadia as a seller/servicer without cause upon notice.

As of December 31, 2009, the Company had acquired approximately 25% of the outstanding common shares of ACF for aggregate cash consideration of $418,600,000.  ACF is an independent auto finance company that is in the business of purchasing and servicing automobile sales finance contracts, historically for consumers who are typically unable to obtain financing from other sources.  The Company’s investment in ACF is classified as an investment in an associated company and carried at fair value, which was $639,800,000 at December 31, 2009 market prices.

The Company has entered into a standstill agreement with ACF for the two year period ending March 3, 2010, pursuant to which the Company has agreed not to sell its shares if the buyer would own more than 4.9% of the outstanding shares, unless the buyer agreed to be bound by terms of the standstill agreement, to not increase its ownership interest to more than 30% of the outstanding ACF common shares, and received the right to nominate two directors to the board of directors of ACF.  The Company and ACF have entered into a registration rights agreement covering all of the ACF shares of common stock owned by the Company.

As permitted under GAAP, the Company is permitted to choose to measure many financial instruments and certain other items at fair value (the “fair value option”), and to report unrealized gains and losses on items for which the fair value option is elected in earnings.  The Company elected the fair value option for its investment in ACF, rather than apply the equity method of accounting.  Income (losses) related to associated companies includes unrealized gains (losses) resulting from changes in the fair value of ACF of $376,500,000 in 2009 and $(155,300,000) in 2008.

In April 2008, the Company sold to Jefferies 10,000,000 of the Company’s common shares, and received 26,585,310 shares of common stock of Jefferies and $100,021,000 in cash.  The Jefferies common shares were valued based on the closing price of the Jefferies common stock on April 18, 2008, the last trading date prior to the acquisition ($398,248,000 in the aggregate).  Including shares acquired in open market purchases during 2008, as of December 31, 2009, the Company owns an aggregate of 48,585,385 Jefferies common shares (approximately 29% of the Jefferies outstanding common shares) for a total investment of $794,400,000.  The Company’s investment in Jefferies is classified as an investment in an associated company and is carried at fair value, which was $1,152,900,000 at December 31, 2009 market prices.  The Company elected the fair value option to account for its investment in Jefferies rather than the equity method of accounting; income (losses) related to associated companies includes unrealized gains (losses) resulting from changes in the fair value of Jefferies of $469,800,000 in 2009 and $(111,200,000) in 2008.  Jefferies is a full-service global investment bank and institutional securities firm serving companies and their investors.

The Company has entered into a standstill agreement with Jefferies, pursuant to which for the two year period ending April 21, 2010, the Company agreed, subject to certain provisions, to limit its investment in Jefferies to not more than 30% of the outstanding Jefferies common shares and to not sell its investment, and received the right to nominate two directors to the board of directors of Jefferies.  Jefferies also agreed to enter into a registration rights agreement covering all of the Jefferies shares of common stock owned by the Company.

During 2007, the Company and Jefferies formed JHYH and each initially committed to invest $600,000,000.  The Company invested $250,000,000 in cash plus its $100,000,000 investment in JPOF II during 2007; any request for additional capital contributions from the Company will now require the consent of the Company’s designees to the Jefferies board.  The Company does not anticipate making additional capital contributions in the near future.  JHYH owns Jefferies High Yield Trading, LLC (“JHYT”), a registered broker-dealer that is engaged in the secondary sales and trading of high yield securities and special situation securities, including bank debt, post-reorganization equity, public and private equity, equity derivatives, credit default swaps and other financial instruments.  JHYT makes markets in high yield and distressed securities and provides research coverage on these types of securities.  JHYT does not invest or make markets in sub-prime residential mortgage securities.

Jefferies and the Company each have the right to nominate two of a total of four directors to JHYH’s board, and each own 50% of the voting securities.  The organizational documents also permit passive investors to invest up to $800,000,000 in JHYH.  Jefferies also received additional JHYH securities entitling it to 20% of the profits.  The voting and non-voting interests are entitled to a pro rata share of the balance of the profits of JHYH, and are mandatorily redeemable in 2013, with an option to extend up to three additional one-year periods.  JHYH is considered a variable interest entity that is consolidated by Jefferies, since Jefferies is the primary beneficiary.  For the years ended December 31, 2009, 2008 and 2007, the Company recorded pre-tax income (losses) from this investment of $37,200,000, $(69,100,000) and $4,300,000, respectively, under the equity method of accounting; at December 31, 2009, the Company’s investment in JHYH was $318,000,000.

For the period from January 1, 2007 through March 31, 2007, the Company recorded income under the equity method of accounting from its investment in JPOF II of $3,000,000, which was distributed to the Company shortly after the end of the period.  Over the seven years the Company had its investment in JPOF II, the weighted average return on investment was approximately 20% per year.

The Company invested an aggregate of $452,200,000 in Fortescue’s Pilbara iron ore and infrastructure project in Western Australia, including expenses.  In exchange for its cash investment, the Company received 277,986,000 common shares of Fortescue, and a $100,000,000 note of FMG that matures in August 2019.  In the first quarter of 2010, the Company sold 30,000,000 common shares for net cash proceeds of $121,500,000, reducing its interest in Fortescue to approximately 8% of the outstanding shares.  Interest on the note is calculated as 4% of the revenue, net of government royalties, invoiced from the iron ore produced from the project’s Cloud Break and Christmas Creek areas.  The note is unsecured and subordinate to the project’s senior secured debt referred to below.  Fortescue is a publicly traded company on the Australian Stock Exchange, and the shares acquired by the Company may be sold without restriction on the Australian Stock Exchange or in accordance with applicable securities laws.  The Company’s investment in the Fortescue common shares is classified as a non-current available for sale investment and carried at market value as of each balance sheet date.  At December 31, 2009, the market value of the Fortescue common shares was $1,108,000,000, including the shares sold in 2010.

For accounting purposes, the Company allocated its initial Fortescue investment to the common shares acquired (based on the market value at acquisition), a 13 year zero-coupon note and a prepaid mining interest.  The zero-coupon note was recorded at an estimated initial fair value of $21,600,000, representing the present value of the principal amount discounted at 12.5%.  The prepaid mining interest of $184,300,000 was initially classified with other non-current assets, and is being amortized to expense as the 4% of revenue is earned.  The prepaid mining interest balance was $174,300,000 at December 31, 2009.  Interest is payable semi-annually within 30 days of June 30th and December 31st of each year; however, cash interest payments on the note are currently being deferred due to covenants contained in the project’s senior secured debt.  Any interest payment that is deferred earns simple interest at an annual rate of 9.5%; the aggregate accrued interest receivable balance was $106,500,000 at December 31, 2009.  The ultimate value of the note will depend on the volume of iron ore shipped and iron ore prices over the remaining term of the note, which can fluctuate widely.

The project information presented in the paragraphs below was obtained from Fortescue’s website, (http://www.fmgl.com.au/), which contains substantial additional information about Fortescue, its operating activities and the project.  Fortescue shipped its first iron ore in May 2008 and announced Project Completion on July 18, 2008, a milestone defined in its debt agreements that includes mining, railing, and shipping a minimum of 2 million metric tons of product within a four week period.  For the year ending December 31, 2009, Fortescue mined 34.9 million metric tons of iron ore, processed 33.9 million metric tons and shipped 32.8 million metric tons.  Fortescue’s total revenue from iron ore sales for the year ending December 31, 2009 was $1,696,500,000 or $51.72 per metric ton shipped.

Fortescue announced reserve estimates for the Cloud Break and Christmas Creek areas include 143 million metric tons of proved iron ore reserves and 1.48 billion metric tons of probable iron ore reserves, in accordance with the Australasian Joint Ore Reserves Committee code.  This reserve estimate is solely for these two areas, which cover an area of approximately 770 square kilometers.  Fortescue has additional tenements in the Pilbara region of Western Australia and has since announced reserve estimates for some of its other tenements.  Although Fortescue has received all major approvals required under the various governmental, environmental, and native title processes for the Cloud Break and Christmas Creek tenements, it does not possess all of the approvals or financing necessary for mining activities at its other tenements.  Mining revenues derived from tenements other than Cloud Break and Christmas Creek do not increase the interest payable to the Company on the FMG note.

Fortescue’s initial feasibility study was commissioned to identify a quantity and quality of iron ore that would support an initial mine plan that produces 45 million metric tons per annum (“mtpa”) for a 20 year period.  Fortescue has since launched a self-funded expansion program to increase its base mining plan to 55 million mtpa.  Fortescue has announced agreements with third parties, including relationships with the largest Chinese steel mills, which intend to purchase all of Fortescue’s production volume.  Historically, the pricing for these agreements was based on the first negotiated benchmark price between the world’s largest steel mills and the world’s three largest iron ore producers.  However, in 2009 these parties failed to announce a benchmark price and Fortescue independently negotiated prices directly with its customers.

In addition to the Company’s investment and equity investments from other parties, Fortescue raised $2,051,000,000 of senior secured debt to fund the construction of its infrastructure, which includes a 260 kilometer railroad, port and related port infrastructure at Port Hedland, Australia, as well as a crushing and screening plant, access roads and other infrastructure at the mine site.

Inmet has reported that the Las Cruces deposit contains approximately 8.1 million metric tons of proven reserves and 8.4 million metric tons of probable reserves of copper ore at an average grade of 6.3% copper.  The reserve estimates are for the entire deposit, not just the Company’s share, assume a copper price of $2.00 per pound, an exchange rate €1.00 = U.S.$1.28, incorporate losses for mining dilution and recovery, an open pit cut-off grade of 1 percent copper and an underground cut-off grade of 3 percent copper.  The capital costs to build the project were €504,000,000 ($694,000,000 at exchange rates in effect on February 16, 2010).  Cash operating costs per pound of copper produced over the life of the mine are expected to average €0.48 per pound ($0.66 per pound) of copper produced.  The project’s capital and operating costs are paid for in euros, while copper revenues during the life of the mine are currently based on the U.S. dollar.

The Company has entered into a joint venture agreement with Garff Enterprises, Inc. (“Garff”) pursuant to which the joint venture has acquired various automobile dealerships (“Garcadia”).  The joint venture agreement specifies that the Company and Garff shall have equal board representation and equal votes on all matters affecting Garcadia, and that all cash flows from the joint venture will be allocated 65% to the Company and 35% to Garff, which reflects that the Company made a larger equity investment.  Garcadia’s strategy is to acquire automobile dealerships in secondary market locations meeting its specified return criteria.  As of December 31, 2009, Garcadia owned 15 dealerships comprised of domestic and foreign automobile makers.  The Company has received cash distributions of fees and earnings aggregating $6,100,000, $6,500,000 and $4,900,000 for the years ended December 31, 2009, 2008 and 2007, respectively.  In addition, the Company owns the land for certain dealerships and leases it to the dealerships for rent aggregating $5,000,000, $3,800,000 and $1,800,000 for the years ended December 31, 2009, 2008 and 2007, respectively.  At December 31, 2009, the Company’s investment in Garcadia (excluding the land) was classified as an investment in associated company with a carrying value of $35,400,000.

During 2009, the Company’s equity in losses of Garcadia includes impairment charges for goodwill and other intangible assets aggregating $32,300,000.  Garcadia’s automobile dealerships have been adversely impacted by general economic conditions, and the bankruptcy filings by two of the three largest U.S. automobile manufacturers was a change in circumstances that caused Garcadia to evaluate the recoverability of its goodwill and other intangible assets.  None of Garcadia’s automobile dealerships are expected to close as a result of the restructuring of the U.S. automobile manufacturers.

In June 2007, the Company invested $200,000,000 to acquire a 10% limited partnership interest in Pershing Square, a newly-formed private investment partnership whose investment decisions are at the sole discretion of Pershing Square’s general partner.  The stated objective of Pershing Square is to create significant capital appreciation by investing in Target Corporation.  The Company recorded losses under the equity method of accounting from this investment of $3,200,000, $77,700,000 and $85,500,000 in 2009, 2008 and 2007, respectively, principally resulting from declines in the market value of Target Corporation’s common stock.  At December 31, 2009, the book value of the Company’s investment in Pershing Square was $33,500,000.

The Company owns approximately 39% of the common stock of Light & Power Holdings Ltd., the parent company of The Barbados Light and Power Company Limited, the primary generator and distributor of electricity in Barbados.  At December 31, 2009, the Company’s investment of $18,800,000 was accounted for on the cost method of accounting, due to currency exchange restrictions and stock transfer restrictions.

The Company beneficially owns equity interests representing more than 5% of the outstanding capital stock of each of the following domestic public companies at February 16, 2010 (determined in accordance with Rule 13d-3 of the Securities Exchange Act of 1934):  Jefferies (29.3%), ACF (25.1%), HomeFed (31.4%), International Assets Holding Corporation (7.9%), Essex Rental Corp. (7.9%) and Rand Logistics, Inc. (5.8%).  In addition to the Company’s equity interests in Fortescue and Inmet discussed above, the Company also owns a 7.0% equity interest in JZ Capital Partners Limited, a British company traded on the London Stock Exchange.

For further information about the Company’s business, including the Company’s investments, reference is made to Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Report and Notes to Consolidated Financial Statements.

Our business is subject to a number of risks.  You should carefully consider the following risk factors, together with all of the other information included or incorporated by reference in this Report, before you decide whether to purchase our common stock.  The risks set out below are not the only risks we face.  If any of the following risks occur, our business, financial condition and results of operations could be materially adversely affected.  In such case, the trading price of our common stock could decline, and you may lose all or part of your investment.

Future acquisitions and dispositions of our operations and investments are possible, changing the components of our assets and liabilities, and if unsuccessful could reduce the value of our common shares.  Any future acquisitions or dispositions may result in significant changes in the composition of our assets and liabilities. Consequently, our financial condition, results of operations and the trading price of our common shares may be affected by factors different from those affecting our financial condition, results of operations and trading price at the present time.

We are dependent on certain key personnel.  We are dependent on the services of Ian M. Cumming and Joseph S. Steinberg, our Chairman of the Board and President, respectively.  Messrs. Cumming’s and Steinberg’s employment agreements with us expire June 30, 2015.  These individuals are also significant shareholders of our Company.  As of February 16, 2010, Messrs. Cumming and Steinberg and trusts for the benefit of their respective families (excluding certain private charitable foundations) beneficially owned approximately 9.8% and 11.1% of our outstanding common shares, respectively.  Accordingly, Messrs. Cumming and Steinberg exert significant influence over all matters requiring approval by our shareholders, including the election or removal of directors and the approval of mergers or other business combination transactions.

We operate in a variety of industries and market sectors, all of which are very competitive and susceptible to economic downturns and are adversely affected by the current recession.  A worsening of general economic or market conditions may result in lower valuations for our businesses or investments or have a negative impact on the credit quality of our assets.  The current economic recession has adversely affected operating results in the manufacturing, telecommunications, oil and gas drilling services, property management and services, gaming entertainment and domestic real estate segments, which is likely to continue until the economy recovers.

Declines in the U.S. housing market have reduced revenues and profitability of the manufacturing businesses and may continue to do so.  Our manufacturing operations, in particular Idaho Timber, have generated significant revenues when the U.S. housing market was strong.  The weak U.S. housing market during the last few years has resulted in fewer new housing starts, which has adversely impacted revenues and profitability at Idaho Timber.  Idaho Timber does not expect to return to prior levels of profitability until the U.S. housing market recovers.

The prices and availability of key raw materials affects the profitability of our manufacturing operations, and also impacts Sangart’s ability to conduct its clinical trials.  Although the Company’s operating subsidiaries are not currently experiencing any shortage of raw materials, if the subsidiaries experience shortages, revenues and profitability of the manufacturing subsidiaries would decline.  Sangart has access to sufficient raw materials to conduct its clinical trials; however, it has not secured commitments for sufficient raw materials for a commercial launch, which would also require additional investments in manufacturing capacity.  In addition, the cost of the principal raw material used by Conwed Plastics, polypropylene, has increased by approximately 42% from 2002, principally driven by the volatility of oil and natural gas prices.

Pricing on STi Prepaid’s prepaid phone card business is highly sensitive to price declines and subject to intense competition.  We believe in some instances our competitors offer or appear to offer rates to consumers that are below their cost in order to gain market share.  In addition, the emergence of competition using voice over internet protocol has further increased competition and reduced prices.   The impact of lower pricing and new competitors has had and may continue to have an adverse effect on our revenues and profits.

STi Prepaid primarily relies on independent distributors to generate revenues, who may not devote sufficient efforts to promote and sell our products rather than the products of our competitors.  STi Prepaid primarily relies on independent distributors to generate revenues.  Should distributors promote other products at the expense of STi Prepaid’s products, revenues and profitability would decline.

ResortQuest’s vacation rental management services revenues have been adversely impacted by current economic conditions and its real estate brokerage revenues have declined as a result of the depressed real estate development market.  Poor general economic conditions have caused a decrease in ResortQuest’s advance reservations, as its customers reduce amounts spent on discretionary items.  ResortQuest has had to provide discounts to customers and has exited certain unprofitable locations.  Its real estate brokerage business has experienced significant declines in revenues, which reflect the depressed real estate market.  Until general economic conditions and the real estate market improve, ResortQuest could continue to experience declines in revenues and profitability.

Increases in mortgage interest rate levels, the lack of available consumer credit and the depressed real estate market have reduced and may continue to reduce consumer demand for certain of our real estate development projects and result in impairment charges.  Due to current depressed economic conditions in the national real estate market, most of the Company’s real estate development projects are not being marketed for sale.  If the Company begins to market its development projects in the future, the ability to successfully attract customers will be highly dependent upon consumers’ ability to finance real estate purchases with affordable loans.  If the Company is unable to realize its projected cash flows for its development projects, impairment charges are likely.

Sangart is subject to extensive government regulation, cannot generate any revenue without regulatory approval of its products and is also subject to all of the risks inherent in establishing a new business.  The Company has invested approximately $146,200,000 in Sangart, principally to help fund Sangart’s product development activities.  While these funds are generally expensed by Sangart when spent, the Company cannot be assured that it will ever receive a return on its investment due to the risky nature of Sangart’s development activities.  Clinical trials of Sangart’s product candidates are not complete, the products have not been approved for sale by regulatory authorities and there is a risk that its products may never prove effective or be approved.

There are other companies developing products for the same market that Sangart is targeting, and if they are successful in bringing their product to market before Sangart it may significantly impair Sangart’s ability to compete in the same market segment.  Even if Sangart is successful in obtaining regulatory approval to sell its products, competitors may receive approval prior to Sangart and/or have more effective products which could reduce demand for Sangart’s products.

Sangart’s success depends on its ability to obtain, maintain and defend patent protection for its products and technologies, preserve trade secrets and operate without infringing the intellectual property rights of others.  The patent positions of biopharmaceutical companies, such as Sangart, are generally uncertain and involve complex legal and factual questions.  If Sangart’s intellectual property positions are challenged, invalidated, circumvented or expire, or if Sangart fails to maintain its third-party intellectual property licenses in good standing, its ability to successfully bring MP4 products to market would be adversely affected, it could incur monetary liabilities or be required to cease using the technology or product in dispute.

Sangart will require significant additional funding for product development and clinical trial activities prior to regulatory approval and commercial launch; the source of such funding has not been identified.  Sangart’s existing cash reserves are expected to be sufficient to fund activities into the third quarter of 2010.   Sangart has had discussions with third-party investors; however, no agreements have been reached and if such agreements are entered into it would likely result in significant dilution of the Company’s interest.  The Company has not determined if it will provide additional funds to Sangart.  If Sangart is not provided with additional funds from either the Company or other sources when needed, it is unlikely that the Company will ever realize a full return of its invested capital.

Keen’s revenues and profitability are impacted by natural gas supplies and prices and the supply of drilling rigs in the marketplace.   During periods of decreased demand for natural gas, Keen’s rig utilization will decline and its competitors may also have excess capacity in the marketplace, which adversely impacts Keen’s revenues and profitability.  Although there has been recent improvement in natural gas prices, Keen’s profitability will not significantly improve without increased natural gas demand to sustain the rise in natural gas prices.  Increased industrial demand for natural gas, which is tied to achieving economic recovery, is required to significantly improve demand.

The lack of liquidity in the capital markets has and could continue to adversely affect exploration, production and development activities of Keen’s customers, which causes a reduction in Keen’s rig utilization and profitability.  The combination of low oil and natural gas prices and the lack of liquidity in the capital markets has forced Keen’s customers to reduce drilling programs, impaired their ability to sustain their current level of operations and could adversely impact their ability to meet their cash obligations.  In addition to reduced rig utilization and profitability, which could result in impairment charges for certain rigs, the difficulties being experienced by Keen’s customers could increase Keen’s bad debt expense.

The nature of Keen’s operating activities can be hazardous, and accidents can cause personal injury or death, damage to Keen’s equipment and/or environmental damage.   These hazards are inherent in the contract drilling business, and if Keen is not fully protected through insurance coverage or indemnification from its customers any such accidents could adversely impact Keen’s profitability.  Keen maintains insurance coverage and has indemnification agreements with many of its customers; however, there is no assurance that such insurance or indemnification agreements would adequately protect Keen against liability or loss from all consequences of any accidents.  Additionally, there can be no assurance that adequate insurance can be purchased economically.

New technologies could cause Keen’s drilling equipment and methods to become less competitive, resulting in reduced profitability or a requirement to make significant capital investments to remain competitive.  Improvements in drilling technology could cause Keen to become less competitive, lose business, suffer reduced profitability or result in impairment charges to its drilling equipment.

When drilling pursuant to footage or turnkey contracts, Keen could incur unexpected cost overruns which could negatively impact Keen’s profitability.  Keen typically provides contract drilling services under daywork contracts under which Keen’s customers assume most of the risks associated with drilling operations.  If Keen enters footage or turnkey contracts, Keen is paid a fixed amount, regardless of the time required or operational problems encountered. Keen typically pays more of the out-of-pocket operating costs on a footage or turnkey contract versus daywork contract.

If Berkadia does not maintain certain specified ratings from the credit rating agencies it could lose its mortgage servicing rights.  Berkadia is required to maintain specified ratings from the credit rating agencies, and failure to do so would give its customers the right to terminate their mortgage servicing agreements.  If mortgage servicing agreements were terminated as a result of a credit ratings downgrade, the Company could lose its entire equity investment and may be exposed to loss for some or all of its guaranty on the Berkshire credit facility.

When Berkadia originates loans for Fannie Mae, it is often required to share in the losses on such loans, which could be in excess of reserved amounts.  Berkadia carries a reserve on its balance sheet for contingent losses on loans originated for Fannie Mae that have loss sharing requirements.  If actual losses exceed amounts reserved, Berkadia’s profitability will be reduced.

The loss of or changes in Berkadia’s relationships with U.S. Government-Sponsored Enterprises (“GSEs”) and federal agencies would have an adverse effect on Berkadia’s business.  Berkadia’s status as an approved seller/servicer for Fannie Mae and Freddie Mac and its status as an FHA-approved mortgagee and issuer of Ginnie Mae mortgage-backed securities afford Berkadia a number of advantages.  Berkadia’s failure to comply with the applicable GSE or agency standards (financial and otherwise) may result in its termination as an approved seller/servicer, mortgagee or issuer.  The loss of any such status could have a material adverse impact on Berkadia’s results of operations, could result in a loss of similar approvals from other GSEs or federal agencies and could have other adverse consequences to the business.  Fannie Mae and Freddie Mac retain broad discretion to terminate Berkadia as a seller/servicer without cause upon notice.

Changes in existing government-sponsored and federal mortgage programs could negatively affect Berkadia’s business.  Berkadia’s ability to generate income through mortgage sales to institutional investors depends in part on programs sponsored by Fannie Mae, Freddie Mac and the FHA, which facilitate the issuance of mortgage-backed securities in the secondary market.  These programs have been reduced in recent periods due to current economic conditions.  Any discontinuation of, or significant reduction in, the operation of those programs could have a material adverse effect on Berkadia’s loan origination and servicing business and results of operations.  Also, any significant adverse change in the level of activity in the secondary market or the underwriting criteria of these entities could negatively impact Berkadia’s results of operations and cash flow.

Berkadia’s business is significantly affected by general economic conditions, particularly in the commercial real estate industry, and could be harmed in the event of a continued prolonged economic slowdown or recession or a market downturn or disruption.  Berkadia’s business and earnings are sensitive to changes in government policies and regulations, changes in interest rates, inflation, deflation, oversupply of real estate properties, fluctuations in the real estate and debt capital markets and developments in national and local economies.  Unfavorable economic conditions could have an adverse effect on Berkadia’s business, including decreasing the demand for new loans and the servicing of loans originated by third parties.

The Company has a substantial investment in Jefferies, an investment banking and securities firm whose operating results are greatly affected by the economy and financial markets.  Although Jefferies’ operating results showed great improvement in 2009, during 2008, turmoil in the equity and credit markets had an adverse effect on the volume and size of transactions Jefferies executed for its customers, resulting in reduced revenues and profitability in its investment banking, asset management and trading activities, as well as losses in its principal trading activities.  Future declines in Jefferies operating results caused by these or other conditions could adversely affect the value of the Company’s investment.

From time to time the Company may invest in illiquid securities that are subject to standstill agreements or otherwise restricted.  The Company’s investment in ACF is subject to a standstill agreement that expires in March 2010, and the Company’s investment in Jefferies is subject to a standstill agreement that expires in April 2010.  Should the Company need to generate liquidity quickly, the standstill agreements would limit the Company’s ability to dispose of these investments while the agreements are effective.

The Company has significant investments in publicly traded securities and in entities that invest in publicly traded securities, and changes in the market prices of these securities, particularly during times of increased volatility in security prices, can have a material impact on the Company’s investment portfolio, equity and, for certain investments, on results of operations.  The Company has significant investments in publicly traded securities (principally Fortescue, Jefferies, ACF and Inmet) and in investment partnerships or other entities that invest in publicly traded securities (including JHYH).  Changes in the market values of publicly traded available for sale securities, such as Fortescue and Inmet, are reflected in other comprehensive income (loss) and equity but not in the consolidated statement of operations.  However, changes in the market prices of investments for which the Company has elected the fair value option (Jefferies and ACF), and declines in the fair values of public and non-public securities that the Company deems to be other than temporary are reflected in the consolidated statements of operations and equity.  Profits or losses related to the Company’s share of its investments in investment partnerships or other entities that are accounted for under the equity method of accounting are reflected in the consolidated statement of operations.  Changes in market values of these entities’ investments are reflected in their earnings, which increases the Company’s exposure to volatility in the public securities markets.  Global securities markets have been highly volatile, and continued volatility may have a material negative impact on the Company’s consolidated financial position and results of operations.

Current economic conditions have adversely affected most of the Company’s operations and investments.  A worsening of current economic conditions or a prolonged recession could cause a decline in estimated future cash flows expected to be generated by certain of the Company’s operations and investments, potentially resulting in impairment charges for long-lived assets.  Certain of the Company’s operating businesses and investments have significant investments in long-lived assets, in particular manufacturing, oil and gas drilling services and gaming entertainment.  Current economic conditions have resulted in declining revenues for these operations and their property and equipment is not being fully utilized.  The Company has reviewed certain of these assets and investments for potential impairment, and except as otherwise disclosed has concluded that the book values of these long-lived assets are recoverable.  If the operating revenues of these businesses deteriorate in the future, and/or the Company lowers its estimates of future cash flows, impairment charges might have to be recorded.

The Company has incurred costs to investigate and evaluate the development of a number of large scale energy projects; however, development of these projects is subject to obtaining significant third-party debt and equity financing and regulatory approvals.  Although the Company has spent material amounts in the investigation of large scale energy projects, it will not be able to develop these projects without financing from other sources and various regulatory approvals.  The timing of the commencement of construction of any project is also dependent upon the receipt of financing and regulatory approvals.  If the Company is unable to obtain such financing or approvals, it will not be able to recover its investment.

The Company has substantial investments in Fortescue, Inmet and CLC, entities which are engaged in the mining of base metals (principally iron ore and copper), the prices of which have been volatile and can reduce the value of the Company’s investments.  The value of the Company’s investment in the base mining sector rise and fall with the changes in the underlying base metal prices.  In addition, mining operations are often subject to delay and regulatory scrutiny, which can increase costs or delay bringing mines into full production.  Pricing changes and mining delays have a direct impact on the value of the Company’s investments, and could adversely impact results of operations and equity.

We could experience significant increases in operating costs and reduced profitability due to competition for skilled management and staff employees in our operating businesses.  The Company competes with many other entities for skilled management and staff employees, including entities that operate in different market sectors than the Company.  Costs to recruit and retain adequate personnel could adversely affect results of operations.

From time to time we are subject to litigation, for which we may be unable to accurately assess our level of exposure and which if adversely determined, may have a material adverse effect on our consolidated financial condition or results of operations.  The Company and its subsidiaries are or may become parties to legal proceedings that are considered to be either ordinary, routine litigation incidental to their business or not material to the Company’s consolidated financial position or liquidity.  However, adverse determinations in specific legal matters could have a material adverse impact on the Company’s consolidated financial position or results of operations.

We may not be able to generate sufficient taxable income to fully utilize our NOLs.  At December 31, 2009, the Company has recorded a valuation allowance against substantially all of the net deferred tax asset due to the uncertainty about its ability to generate future taxable income to utilize that asset.

We may not be able to insure certain risks economically.  We cannot be certain that we will be able to insure all risks that we desire to insure economically or that all of our insurers or reinsurers will be financially viable if we make a claim.  If an uninsured loss or a loss in excess of insured limits should occur, or if the Company is required to pay a deductible for an insured loss, results of operations could be adversely affected.  Premier has been severely damaged by hurricanes in the past, and it is possible that storms could cause significant damage in the future.  Damages from storms could result in Premier closing its facility to make repairs, resulting in lost business and adversely affecting results of operations.

We did not pay dividends on our common shares in 2009 or 2008 and the payment of dividends in the future is subject to the discretion of our Board of Directors.

Our common shares are subject to transfer restrictions.  We and certain of our subsidiaries have significant NOLs and other tax attributes, the amount and availability of which are subject to certain qualifications, limitations and uncertainties.  In order to reduce the possibility that certain changes in ownership could result in limitations on the use of the tax attributes, our certificate of incorporation contains provisions that generally restrict the ability of a person or entity from acquiring ownership (including through attribution under the tax law) of 5% or more of our common shares and the ability of persons or entities now owning 5% or more of our common shares from acquiring additional common shares.  The restriction will remain until the earliest of (a) December 31, 2024, (b) the repeal of Section 382 of the Internal Revenue Code (or any comparable successor provision) and (c) the beginning of our taxable year to which these tax attributes may no longer be carried forward. The restriction may be waived by our Board of Directors.  Shareholders are advised to carefully monitor their ownership of our common shares and consult their own legal advisors and/or us to determine whether their ownership of our common shares approaches the proscribed level.

Not applicable.

Real estate investments that are part of the Company’s Domestic Real Estate segment are described in Item 1 of this Report.  Idaho Timber’s plants and sawmills, which are the principal properties used in its business are described in Item 1 of this Report.

Through its various subsidiaries, the Company owns and utilizes facilities in Salt Lake City, Utah for corporate office space and other activities (totaling approximately 21,800 square feet).  Subsidiaries of the Company own facilities primarily used for plastics manufacturing located in Georgia, Virginia and Genk, Belgium (totaling approximately 457,300 square feet), facilities and land in California, Oregon and Washington used for winery operations (totaling approximately 160,300 square feet and 1,138 acres, respectively), facilities and land in Florida, South Carolina and Colorado used for property management and services (totaling approximately 60,800 square feet and 13 acres, respectively), and facilities and land in Oklahoma used for oil and gas drilling services (totaling approximately 33,100 square feet and 36 acres, respectively).

Premier’s Hard Rock Hotel & Casino facility is approximately 592,000 square feet and is located on an 8.5 acre site which includes land that is owned by Premier and adjacent water bottom which is leased from the State of Mississippi. 

The Company and its subsidiaries lease numerous manufacturing, warehousing, office and headquarters facilities.  The facilities vary in size and have leases expiring at various times, subject, in certain instances, to renewal options.  A subsidiary of the Company also leases space in New York, New York for corporate and other activities (approximately 32,600 square feet).  See Notes to Consolidated Financial Statements.

The Company and its subsidiaries are parties to legal proceedings that are considered to be either ordinary, routine litigation incidental to their business or not material to the Company’s consolidated financial position or liquidity.

Reference is made to the disclosure of certain legal proceedings contained in the Company’s Annual Report to Shareholders on Form 10-K for the year ended December 31, 2008 (the “2008 Form 10-K”) and in the Company’s Form 10-Qs for the quarters ending March 31, 2009, June 30, 2009 and September 30, 2009.

The previously disclosed action, IDT Telecom and Union Telecard Alliance, LLC v. CVT Prepaid Solutions, Inc., et al., (No. 07-1076, D.N.J.), pending in the District of New Jersey federal court is currently scheduled to go to trial on March 1, 2010.  On December 28, 2009, the court granted the summary judgment motion of STi Prepaid, LLC, the Company’s majority controlled subsidiary.  As a result, all claims asserted against STi Prepaid have been dismissed.  On January 11, 2010, Plaintiffs in this action moved to have the Court certify its summary judgment motion decision for appeal.  This motion was subsequently withdrawn without prejudice.

STi Prepaid is also a defendant in a class action entitled Ramirez et al. v. STi Prepaid, LLC et al., Civ. No. 08-1089 (SDW) (MCA) (D.N.J.). The Company believes that the material allegations in this action, which arise out of conduct similar to conduct underlying the IDT action, are without merit and is defending this action vigorously. The parties have been discussing a settlement of this action and on January 8, 2010, the plaintiffs filed a motion to enforce the purported settlement and for preliminary approval of the settlement.  The parties are continuing settlement negotiations while the motion is being briefed.  If the action does not settle, the Company believes that it is reasonably possible that a loss that could be material could be incurred; however, any potential loss can not be reasonably estimated.  Another class action entitled, Soto v. STi Prepaid, LLC et al. was settled on terms that did not involve any material payment by the Company or its subsidiaries.

The Company and its subsidiaries are also parties to legal proceedings that are considered to be either ordinary, routine litigation incidental to their business or not material to the Company's consolidated financial position or liquidity.

Not applicable.

All executive officers of the Company are elected at the organizational meeting of the Board of Directors of the Company held annually and serve at the pleasure of the Board of Directors.  As of February 16, 2010, the executive officers of the Company, their ages, the positions held by them and the periods during which they have served in such positions were as follows:

Mr. Cumming has served as a director and Chairman of the Board of the Company since June 1978.  Mr. Cumming has also been a director of Skywest, Inc., a Utah-based regional air carrier, since June 1986 and a director of HomeFed since May 1999.  Mr. Cumming has been a director of ACF since March 2008 and a director of Jefferies since April 2008.  Mr. Cumming has been a director of Fortescue since August 2009.  Since August 2001, Mr. Cumming served as a director and Chairman of the Board of The FINOVA Group Inc. (“FINOVA”), formerly a middle market lender that was dissolved in November 2009.

Mr. Steinberg has served as a director of the Company since December 1978 and as President of the Company since January 1979.  In addition, he has served as a director of HomeFed since August 1998 (Chairman since December 1999) and Jefferies since April 2008.  Mr. Steinberg was a director of Fortescue from August 2006 to August 2009 and is an alternate director of Fortescue should Mr. Cumming be unavailable to vote on Fortescue board matters.  Since August 2001, Mr. Steinberg served as a director of FINOVA.

Mr. Mara joined the Company in April 1977 and was elected Vice President of the Company in May 1977.  He has served as Executive Vice President of the Company since May 1980 and as Treasurer of the Company from January 1993 to May 2007.  In addition, he has served as a director of Inmet since August 2005 and as a director and Chief Executive Officer of FINOVA since September 2002.

Mr. Orlando, a certified public accountant, has served as Chief Financial Officer of the Company since April 1996 and as Vice President of the Company since January 1994.

Ms. Lowenthal, a certified public accountant, has served as Vice President and Comptroller of the Company since April 1996.

Mr. Wheeler joined the Company in March 2000, and has served in a variety of capacities in the Company’s subsidiaries and as Vice President of the Company since October 2006.  In addition, he has served as a director of ACF since March 2008 and as a director of International Assets Holding Corporation since November 2004.

Mr. O’Connor joined the Company in August 2001 and has served as Vice President of the Company since May 2007.

Mr. Nittoli joined the Company in September 1997, and has served in a variety of capacities in the Company’s subsidiaries and as Treasurer of the Company since May 2007, and as Vice President of the Company since September 2007.

The common shares of the Company are traded on the NYSE under the symbol LUK.  The following table sets forth, for the calendar periods indicated, the high and low sales price per common share on the consolidated transaction reporting system, as reported by the Bloomberg Professional Service provided by Bloomberg L.P.

As of February 16, 2010, there were approximately 2,284 record holders of the common shares.

The Company did not pay any cash dividends in 2009 or 2008 and paid cash dividends of $0.25 per common share in 2007.  The payment of dividends in the future is subject to the discretion of the Board of Directors and will depend upon general business conditions, legal and contractual restrictions on the payment of dividends and other factors that the Board of Directors may deem to be relevant.

Certain subsidiaries of the Company have significant NOLs and other tax attributes, the amount and availability of which are subject to certain qualifications, limitations and uncertainties.  In order to reduce the possibility that certain changes in ownership could result in limitations on the use of the Company’s tax attributes, 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.

The Company did not purchase any of its common shares during the fourth quarter of 2009.

The Board of Directors from time to time has authorized acquisitions of the Company’s common shares.  At December 31, 2009, the Company is authorized to purchase 11,992,829 common shares.

Stockholder Return Performance Graph

Set forth below is a graph comparing the cumulative total stockholder return on our common shares against the cumulative total return of the Standard & Poor’s 500 Stock Index and the Standard & Poor’s 1500 Industrial Conglomerates Index for the period commencing December 31, 2004 to December 31, 2009.  Index data was furnished by Standard & Poor’s Capital IQ.  The graph assumes that $100 was invested on December 31, 2004 in each of our common stock, the S&P 500 Index, and the S&P 1500 Industrial Conglomerates Index and that all dividends were reinvested.

 

 

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, related footnote disclosures and “Cautionary Statement for Forward-Looking Information,” which appear elsewhere in this Report.

The Company’s investment portfolio, equity and results of operations can be significantly impacted by the changes in market values of certain securities, particularly during times of increased volatility in security prices.  Changes in the market values of publicly traded available for sale securities are reflected in other comprehensive income (loss) and equity.  However, changes in the market prices of investments for which the Company has elected the fair value option, declines in the fair values of equity securities that the Company deems to be other than temporary and declines in the fair values of debt securities related to credit losses are reflected in the consolidated statements of operations and equity.  The Company also has non-controlling investments in entities that are engaged in investing and/or securities transactions activities that are accounted for on the equity method of accounting (classified as investments in associated companies), for which the Company records its share of the entities’ profits or losses in its consolidated statements of operations.  These entities typically invest in public securities, with changes in market values reflected in their earnings, which increases the Company’s exposure to volatility in the public securities markets.

The Company’s largest publicly traded available for sale equity securities with changes in market values reflected in other comprehensive income (loss) are Fortescue and Inmet.  During the year ended December 31, 2009, the market value of the Company’s investment in the common shares of Fortescue increased from $377,000,000 to $1,108,000,000, and the market value of the Company’s investment in Inmet increased from $90,000,000 to $339,100,000.  The market values of the Company’s investments in ACF and Jefferies, for which the fair value option was elected, increased during the year with unrealized gains reflected in operations as a component of income related to associated companies.  During the year ended December 31, 2009, the Company recognized unrealized gains related to its investments in ACF and Jefferies of $376,500,000 and $469,800,000, respectively.  During 2009, the Company also recorded impairment losses for declines in value of securities deemed to be other than temporary in its consolidated statement of operations of $31,400,000, reflected as a component of net securities gains (losses).

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, further acquisitions, divestitures, investments and changes in capital structure are possible.  Its principal sources of funds are its available cash resources, liquid investments, 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 well as dispositions of existing businesses and investments.

 

The Parent’s only long-term cash requirement is to make principal payments on its long-term debt ($1,628,700,000 principal outstanding as of December 31, 2009), of which $439,400,000 is due in 2013, $97,600,000 is due in 2014, $500,000,000 is due in 2015, $500,000,000 is due in 2017 and $91,700,000 is due in 2027.  Historically, the Parent has used its available liquidity to make acquisitions of new businesses and other investments, but, except as disclosed in this Report, the timing of any future investments and the cost can not be predicted.

From time to time in the past, the Company has accessed public and private credit markets and raised capital in underwritten bond financings.  The funds raised have been used by the Company for general corporate purposes, including for its existing businesses and new investment opportunities.  However, given the recent illiquidity in the credit markets, if the Company were to try to raise funds through an underwritten bond offering it may be at a higher interest rate than in the past, or with terms that the Company may not find acceptable.  The Company has no current intention to seek additional bond financing, and will rely on its existing liquidity to fund corporate overhead expenses and corporate interest payments and, to fund new investing opportunities, it may also dispose of existing businesses and investments.  The Parent’s senior debt obligations are rated two levels below investment grade by Moody’s Investors Services and one level below investment grade by Standard & Poor’s and Fitch Ratings.  Ratings issued by bond rating agencies are subject to change at any time.

In June 2009, the Company terminated its $100,000,000 bank credit facility; no amounts were outstanding under this facility.

In November 2009, the Company purchased the other 50% equity interest in Keen that it did not own plus a secured note payable to the other equity owner of Keen for aggregate cash consideration of $15,000,000.  When the Company acquired the controlling interest in Keen in November 2009 it became a consolidated subsidiary; prior to that time the investment in Keen was classified as an investment in an associated company.

In December 2009, Berkadia acquired the North American commercial mortgage origination and servicing business of Capmark.  The Company and Berkshire Hathaway each have a 50% equity interest in Berkadia, and each party contributed $217,200,000 of equity capital to fund the acquisition.  In addition, a subsidiary of Berkshire Hathaway provided Berkadia with a five-year $1 billion secured credit facility, which was used to purchase outstanding mortgage loans and servicer advances from Capmark.  The credit facility may be used to fund mortgage loans and servicer advances, to purchase mortgage servicing rights and for working capital needs.  The Company has guaranteed Berkadia’s repayment of 50% of the credit facility when due ($580,500,000 was outstanding under the facility at December 31, 2009).

As of December 31, 2009, the Company had acquired approximately 25% of the outstanding common shares of ACF for aggregate cash consideration of $418,600,000.  The Company’s investment in ACF is classified as an investment in an associated company and carried at fair value, which was $639,800,000 at December 31, 2009 market prices.  As of December 31, 2009, the Company had acquired approximately 29% of the outstanding common shares of Jefferies for cash and common shares of the Company aggregating $794,400,000.  The Company’s investment in Jefferies is classified as an investment in an associated company and carried at fair value, which was $1,152,900,000 at December 31, 2009 market prices.  The Company’s investment in ACF is subject to a standstill agreement which expires in March 2010 and its investment in Jefferies is subject to a standstill agreement which expires in April 2010.

During the years ended December 31, 2009 and 2008, the Company received distributions totaling $11,300,000 and $44,900,000, respectively, from its subsidiary, Empire Insurance Company (“Empire”), which has been undergoing a voluntary liquidation since 2001.  The Company had classified Empire as a discontinued operation in 2001 and fully wrote-off its remaining book value based on its expected future cash flows at that time.  Although Empire no longer writes any insurance business, its orderly liquidation over the years has resulted in reductions to its estimated claim reserves that enabled Empire to pay the distributions, with the approval of the New York Insurance Department.  Since future distributions from Empire, if any, are subject to New York insurance law or the approval of the New York Insurance Department, income will only be recognized when received.

In February 2010, the Company sold 30,000,000 common shares of Fortescue for net cash proceeds of $121,500,000, which will result in the recognition of a net securities gain of $94,900,000 in the first quarter of 2010.

In March 2007, the Board of Directors increased the number of the Company’s common shares that the Company is authorized to purchase.  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 notice.  During the three year period ended December 31, 2009, the only common shares acquired by the Company were in connection with the exercise of stock options.  As of February 16, 2010, the Company is authorized to repurchase 11,992,829 common shares.

The Company and certain of its subsidiaries have substantial NOLs and other tax attributes.  The amount and availability of the 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.  For more information about the NOLs and other tax attributes, see Note 17 of Notes to Consolidated Financial Statements.

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.  Except as otherwise disclosed herein, the Company’s operating businesses do not generally 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 of $133,400,000 was used for operating activities in 2009 as compared to $8,800,000 of net cash provided by operating activities in 2008.  The change in operating cash flows reflects decreased funds generated from activity in the trading portfolio and decreased distributions of earnings from associated companies.  STi Prepaid’s telecommunications operations generated funds from operating activities of $3,400,000 during 2009 as compared to $5,900,000 generated during 2008.  The funds used by the Company’s property management and services segment during 2009 were not material and were $7,800,000 during 2008, primarily reflecting reduced receivables; Premier generated funds of $21,900,000 and $13,300,000 during 2009 and 2008, respectively, primarily reflecting increased operating results; Keen used funds of $5,400,000 during the period from acquisition through December 31, 2009; and the Company’s manufacturing segments generated funds from operating activities of $30,300,000 and $36,900,000 in 2009 and 2008, respectively, primarily reflecting decreased operating results.  Funds used by Sangart, a development stage company, decreased to $20,300,000 during 2009 from $35,000,000 during 2008.  In 2009, distributions from associated companies principally include earnings distributed by HFH ShortPLUS Fund, L.P. (“Shortplus”) ($14,500,000), Keen ($8,400,000) and Garcadia ($11,100,000).  Funds provided by operating activities include $11,300,000 and $44,900,000 in 2009 and 2008, respectively, from funds distributed by Empire, a discontinued operation.  In 2008, distributions from associated companies principally include earnings distributed by Shortplus ($50,000,000), JHYH ($4,300,000), Jefferies ($5,500,000), Keen ($16,100,000) and Garcadia ($10,300,000).

Net cash of $8,800,000 was provided by operating activities in 2008 as compared to $18,400,000 of net cash used for operating activities in 2007.  The change reflects increased funds generated from the trading portfolio, increased distributions of earnings from associated companies and a use of funds for increased interest expense payments.  Funds used for operating activities during 2008 include the results of companies acquired during 2007, STi Prepaid and ResortQuest, and the results of Premier following its reconsolidation in the third quarter of 2007.  STi Prepaid’s telecommunications operations generated funds from operating activities of $5,900,000 and $26,700,000 during the 2008 and 2007, respectively, the Company’s property management and services segment used funds of $7,800,000 in 2008 and generated funds from operating activities of $4,000,000 in 2007, Premier generated funds of $13,300,000 in 2008 and used funds of $30,100,000 in 2007 and the Company’s manufacturing segments generated funds of $36,900,000 and $30,400,000 in 2008 and 2007, respectively.  The decrease in funds generated by STi Prepaid principally reflects reduced operating profits and additional investments in net working capital of acquired businesses.  The reduction in Premier’s use of funds principally reflects cash used in 2007 for bankruptcy and reconstruction related items.  The decrease in operating cash flows at the property management and services segment principally results from the net change in restricted cash at ResortQuest.  Funds used by Sangart increased to $35,000,000 during 2008 from $24,800,000 during 2007.  Funds provided by operating activities in 2008 also include $44,900,000 of funds distributed by Empire.  In 2007, distributions from associated companies principally include earnings distributed by JPOF II ($29,200,000), EagleRock Capital Partners (QP), LP (“EagleRock”) ($15,000,000) and Garcadia ($6,700,000).

Net cash of $72,000,000 was provided by investing activities in 2009 as compared to net cash flows used for investing activities of $403,000,000 in 2008 and $957,400,000 in 2007.  During 2008, funds used for acquisitions of and capital expenditures for real estate investments principally relate to the Myrtle Beach project ($67,000,000), land used by certain Garcadia dealerships ($20,400,000) and the real estate development projects in Maine ($7,500,000).  During 2007, funds provided by the disposal of real estate, property and equipment and other assets include the sale of the former headquarters building of WilTel Communications Group, LLC (“WilTel”) for $53,500,000.  WilTel was sold in 2005 but the headquarters building was not included in the sale.  During 2008, acquisitions, net of cash acquired principally include an acquisition by the wineries ($19,200,000) and various small acquisitions by STi Prepaid.  During 2007, acquisitions, net of cash acquired principally include assets acquired by STi Prepaid from Telco ($85,400,000) and ResortQuest ($9,700,000) and cash acquired upon the reconsolidation of Premier ($17,300,000).  During 2007, the change in restricted cash principally results from the $56,500,000 escrow deposit made in connection with the Panama City real estate project.

Investments in associated companies include CLC ($43,300,000), ACF ($13,300,000) and Berkadia ($217,200,000) in 2009, Jefferies ($396,100,000), ACF ($335,200,000), IFIS Limited (“IFIS”) ($83,900,000), CLC ($56,700,000) and Garcadia ($34,000,000) in 2008, JHYH ($250,000,000), Pershing Square ($200,000,000), Keen ($108,000,000), RCG Ambrose, L.P. (“Ambrose”) ($75,000,000), Highland Opportunity Fund, L.P. (“Highland Opportunity”) ($74,000,000), Shortplus ($25,000,000), CLC ($53,500,000) and Premier ($160,500,000) in 2007.  Capital distributions from associated companies include Keen ($28,300,000), Wintergreen Partners Fund, L.P. (“Wintergreen”) ($39,000,000), Shortplus  ($24,900,000) and Starboard Value Opportunity Partners, LP ($11,500,000) in 2009, Safe Harbor Domestic Partners L.P. (“Safe Harbor”) ($19,300,000), Keen ($36,000,000), Highland Opportunity ($40,000,000), Ambrose ($72,900,000) and EagleRock ($12,500,000) in 2008 and Keen ($33,200,000) and Safe Harbor ($25,000,000) in 2007.

Net cash of $21,900,000 was used for financing activities in 2009 as compared to net cash provided by financing activities of $174,800,000 in 2008 and $1,145,500,000 in 2007.  Issuance of long-term debt for 2009 and 2008 primarily reflects the increase in repurchase agreements (discussed below) of $47,500,000 and $26,100,000, respectively, and $2,600,000 and $62,400,000, respectively, for MB1’s debt obligation.  During 2007, issuance of debt, net of expenses, includes $500,000,000 principal amount of 7 1/8% Senior Notes and $500,000,000 principal amount of 8 1/8% Senior Notes.  Reduction of debt for 2009 includes $29,600,000 for the buyback of $35,600,000 principal amount of the 7% Senior Notes and $5,800,000 for the buyback of $6,500,000 principal amount of the 8.65% Junior Subordinated Deferrable Interest Debentures.  Reduction of debt in 2008 includes the termination of a capital lease obligation upon the Company’s exercise of its right to purchase corporate aircraft secured by a capital lease ($8,200,000).  The reduction of debt during 2007 principally relates to the repurchase agreements.  Issuance of common shares for 2008 principally reflects cash consideration received on the sale of common shares to Jefferies.  Issuance of common shares for 2007 principally reflects the issuance and sale of 5,500,000 of the Company’s common shares.  In addition, issuance of common shares reflects the exercise of employee stock options for all periods.

Debt due within one year includes $198,600,000 and $151,100,000 as of December 31, 2009 and 2008, 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 0.3%, mature in January 2010 and are secured by non-current investments with a carrying value of $210,400,000 at December 31, 2009.  Debt due within one year also includes $100,500,000 related to MB1’s debt obligation, discussed above.

 

The Company’s senior note indentures contain covenants that restrict its ability to incur more Indebtedness or issue Preferred Stock of Subsidiaries unless, at the time of such incurrence or issuance, the Company meets a specified ratio of Consolidated Debt to Consolidated Tangible Net Worth, limit the ability of the Company and Material Subsidiaries to incur, in certain circumstances, Liens, limit the ability of Material Subsidiaries to incur Funded Debt in certain circumstances, and contain other terms and restrictions all as defined in the senior note indentures.  The Company has the ability to incur substantial additional indebtedness or make distributions to its shareholders and still remain in compliance with these restrictions.  If the Company is unable to meet the specified ratio, the Company would not be able to issue additional Indebtedness or Preferred Stock, but the Company’s inability to meet the applicable ratio would not result in a default under its senior note indentures.  Certain of the debt instruments of subsidiaries of the Company require that collateral be provided to the lender; principally as a result of such requirements, the assets of subsidiaries which are subject to limitations on transfer of funds to the Company were approximately $328,600,000 at December 31, 2009.  For more information, see Note 13 of Notes to Consolidated Financial Statements.

As shown below, at December 31, 2009, the Company’s contractual cash obligations totaled $2,999,810,000.

The estimated interest expense on debt includes interest related to variable rate debt which the Company determined using rates in effect at December 31, 2009.  Estimated payments related to a currency swap agreement are based on the currency rate in effect at December 31, 2009.  Amounts related to the Company’s consolidated pension liability ($68,200,000) are included in the table in the less than 1 year period ($16,500,000) and the remainder in the 1-3 year period; however, the exact timing of those cash payments is uncertain.  The above amounts do not include liabilities for unrecognized tax benefits as the timing of payments, if any, is uncertain.  Such amounts aggregated $9,600,000 at December 31, 2009; for more information, see Note 17 of Notes to Consolidated Financial Statements.

The Company maintained defined benefit pension plans covering certain operating units prior to 1999, and WilTel also maintained defined benefit pension plans that were not transferred in connection with the sale of WilTel.  At December 31, 2009, the Company had recorded a liability of $68,200,000 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 unfunded benefit obligation are expected to principally result from benefit payments, changes in the market value of plan assets, differences between actuarial assumptions and actual experience and interest rates.

The Company is in the process of seeking approval from various government entities to terminate the Company’s (not WilTel’s) frozen defined benefit pension plan; the Company anticipates it will terminate this plan in the fourth quarter of 2010.  If terminated, the Company expects it will have to contribute an additional $10,500,000 to the plan.  The Company also expects to make substantial contributions to the segregated trust account for the WilTel defined benefit pension plan in the future to reduce its plan liabilities and reduce administrative and insurance costs associated with the plan.  The Company expects to contribute $6,000,000 to WilTel’s defined benefit pension plan in 2010.  The tax deductibility of these contributions is not a primary consideration, principally due to the availability of the Company’s NOLs to otherwise reduce taxable income.  Other than these aggregate $16,500,000 expected 2010 contributions, the timing and amount of additional contributions are uncertain.

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 plan, 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 plan, 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.

These discount rates will be used to determine pension expense in 2010.  Holding all other assumptions constant, a 0.25% change in these discount rates would affect aggregate pension expense by $500,000 and the aggregate benefit obligation by $8,000,000.

The deferred losses in other comprehensive income (loss) primarily result from differences between the actual and assumed return on plan assets and changes in actuarial assumptions, including changes in discount rates and changes in interest credit rates.  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 $27,800,000 at December 31, 2009 for all plans.  A portion of these excess deferred losses will be amortized to expense during 2010 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 18 of Notes to Consolidated Financial Statements.  Prior to 2008, differences between the actual and expected rates of return on plan assets have not been material.  During 2008, the fair value of the WilTel plan assets declined significantly due to the decline in securities markets worldwide.  This decline is the reason for the significant increase in the balance sheet liability for the WilTel plan during 2008.

At December 31, 2009, the Company’s off-balance sheet arrangements consist of guarantees and letters of credit aggregating $387,500,000.  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, 2009, the amount of outstanding bonds was $5,000,000, almost all of which expires in 2010.  Subsidiaries of the Company have outstanding letters of credit aggregating $20,200,000 at December 31, 2009, principally to secure various obligations.  Substantially all of these letters of credit expire before 2012.

As discussed above, the Company has also guaranteed 30% of the amounts outstanding under CLC’s intercompany loan from Inmet.  At December 31, 2009, $240,100,000 was outstanding under the intercompany loan; accordingly, the Company’s outstanding guaranty at that date was $72,000,000.

As discussed above the Company has also guaranteed Berkadia’s repayment of 50% of the five-year credit facility issued by a subsidiary of Berkshire Hathaway.  At December 31, 2009, the amount outstanding under the facility was $580,500,000; accordingly, the Company’s outstanding guaranty at that date was $290,300,000.

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.

During the second half of 2008 the Company recorded significant unrealized losses on many of its largest investments, recognized other than temporary impairments for a number of other investments and reported reduced profitability from substantially all of its operating businesses, all of which contributed to the recognition of a pre-tax loss of $859,500,000 in the consolidated statement of operations and a pre-tax loss in other comprehensive income (loss) of $1,579,200,000 for the year ended December 31, 2008.  The worldwide economic downturn has adversely affected many of the Company’s operating businesses and investments, and the nature of the current economic difficulties make it impossible to reliably project how long the downturn will last. Additionally, the 2008 losses recognized by the Company resulted in a cumulative loss in total comprehensive income (loss) during the three year period ending December 31, 2008.  In assessing the realizability of the net deferred tax asset at December 31, 2008, the Company concluded that its recent operating loss and the then current economic conditions worldwide be given more weight than its projections of future taxable income during the period that it has NOLs available (until 2030), and be given more weight than the Company’s long track record of generating taxable income.  As a result, the Company concluded that a valuation allowance was required against substantially all of the net deferred tax asset, and increased its valuation allowance in 2008 by $1,672,100,000 with a corresponding charge to income tax expense.

Prior to 2008, the Company’s long track record of generating taxable income, its cumulative taxable income for the then recent prior periods and its projections of future taxable income were the most heavily weighted factors considered when determining how much of the net deferred tax asset was more likely than not to be realizable.  As a result, during 2005 the Company concluded that it was more likely than not that it would 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.  An additional $542,700,000 of the valuation allowance was reversed as a credit to income tax expense in 2007.  The Company’s estimate of future taxable income considered all available evidence, both positive and negative, about its operating businesses and investments, included an aggregation of individual projections for each material operating business and investment, estimated apportionment factors for state and local taxing jurisdictions and included all future years that the Company estimated it would have available NOLs.

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.

Current economic conditions have adversely affected most of the Company’s operations and investments.  A worsening of current economic conditions or a prolonged recession could cause a decline in estimated future cash flows expected to be generated by the Company’s operations and investments.  If future undiscounted cash flows are estimated to be less than the carrying amounts of the asset groups used to generate those cash flows in subsequent reporting periods, particularly for those with large investments in property and equipment (for example, manufacturing, gaming entertainment, land based oil and gas drilling operations, real estate and certain associated company investments), impairment charges would have to be recorded.

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, the Company’s equity in losses of IFIS includes impairment charges of $63,300,000.  IFIS is a private Argentine company that owns a variety of investments, and its largest investment is ownership of common shares of Cresud Sociedad Anonima Comercial, Inmobiliaria, Financiera y Agropecuaria (“Cresud”), an agricultural company primarily based in Argentina.  As a result of significant declines in quoted market prices for Cresud and other investments of IFIS, combined with declines in worldwide food commodity prices, the global mortgage and real estate crisis and political and financial conditions in Argentina, the Company determined that its investment in IFIS was impaired.  The fair value of the Company’s investment in IFIS was principally determined using quoted market prices of IFIS’s investments.  In January 2009, IFIS raised a significant amount of new equity in a rights offering in which the Company did not participate.  As a result, the Company’s ownership interest in IFIS was reduced to 8% and the Company no longer applies the equity method of accounting for this investment.  At December 31, 2009, the Company’s investment in IFIS was classified as a non-current investment.

During 2006, the Company acquired a 30% limited liability company interest in Keen for aggregate consideration of $60,000,000, excluding expenses, and agreed to lend to Keen, on a senior secured basis, up to $126,000,000 to finance new rig equipment purchases and construction costs and to repay existing debt.  During 2007, the Company increased its equity interest to 50% for additional payments aggregating $45,000,000.  In addition, the credit facility was amended to increase the borrowing capacity to $138,500,000, and the Company provided Keen with two additional secured credit facilities aggregating $60,000,000.  When the Company increased its investment in Keen to 50%, the terms of the limited liability agreement were amended to provide that in the event of a dissolution, liquidation or termination of Keen, available cash or assets would first be used to pay all of Keen’s debts (including loans made by the Company), then distributed to the Company as a liquidation preference until it had received a return of its equity investment ($105,000,000), before any payments were made to the other equity owner of Keen.

During 2009, the Company believes it became apparent to the other equity owner of Keen that Keen would not be able to make scheduled debt payments to the Company, and that the resulting payment default could result in a liquidation of Keen.  In that event, the Company’s liquidation preference over equity distributions would result in very little, if any, distributions to the other equity owner of Keen.  In November 2009, the Company purchased the other 50% equity interest that it did not own plus a secured note payable to the other equity owner of Keen for aggregate cash consideration of $15,000,000.  The Company believes it was able to acquire the remaining 50% equity interest at this distressed price because of the expected payment default on Keen’s senior secured debt owed to the Company and the Company’s $105,000,000 preferred equity distribution in the event Keen was liquidated.

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.  Estimating the ultimate impact of litigation matters is inherently uncertain, in particular because the ultimate outcome will rest on events and decisions of others that may not be within the power of the Company to control.  The Company does not believe that any of its current litigation will have a material adverse effect on its consolidated financial position, results of operations or liquidity; however, if amounts paid at the resolution of litigation are in excess of recorded reserve amounts, the excess could be material to results of operations for that period.  As of December 31, 2009, the Company’s accrual for contingent losses was not material.

A summary of results of continuing operations for the Company for the three years in the period ended December 31, 2009 is as follows (in thousands):

A summary of results of operations for Idaho Timber for the three years in the period ended December 31, 2009 is as follows (in thousands):

Idaho Timber’s revenues for 2009 continued to reflect the weak demand resulting from reductions in housing starts and the excess supply of high-grade lumber in the marketplace.  Shipment volume and average selling prices decreased approximately 32% and 9%, respectively, in 2009 as compared to 2008.  Idaho Timber expects that the abundance of existing homes available for sale in the market will continue to negatively impact housing starts and Idaho Timber’s revenues during 2010.  Until housing starts begin to increase, annual dimension lumber shipping volume may remain flat or could decline further.  Curtailment of production at primary sawmills due to their operating losses could reduce excess supply to some degree; however, spread (as discussed below) may not improve since price pressure for low-grade lumber may increase if supplies are further reduced.  Idaho Timber’s revenues for 2009 also reflect the loss of a large home center board customer, which discontinued purchasing pine boards through its vendor managed inventory program effective July 1, 2008.  Revenues from this customer pursuant to this program were $8,000,000 during 2008.  Idaho Timber’s 2008 revenues and other income include $4,200,000 from the settlement of an insurance claim.

The weak demand resulting from reductions in housing starts and the abundant supply of high-grade lumber in the marketplace also impacted Idaho Timber’s revenues for 2008.  Shipment volume in 2008 declined by 20% as compared to 2007; average selling prices did not significantly change in 2008 as compared to 2007.

While raw material costs declined for 2008 as compared to 2007, principally due to the same market conditions that negatively impacted revenues, raw material cost per thousand board feet did not significantly change for 2008 as compared to 2007.  The spread for 2008 declined by 14% as compared to 2007.

Salaries and incentive compensation expense declined in 2009 as compared to 2008 and in 2008 as compared to 2007 principally due to a decrease in estimated incentive bonus expense.  Selling, general and other expenses for 2009 reflect impairment losses on long-lived assets related to one of Idaho Timber’s plants of $2,100,000.  During 2009, Idaho Timber discontinued remanufacturing of dimension lumber and experienced declining sales of certain specialty wood products at that plant, and as a result has decided to close this plant.

A summary of results of operations for Conwed Plastics for the three years in the period ended December 31, 2009 is as follows (in thousands):

Revenues declined in substantially all of Conwed Plastics’ markets in 2009 as compared to 2008.  Conwed Plastics’ revenues in 2009 were particularly adversely impacted in those markets related to the housing industry, which include the carpet cushion, building and construction, erosion control and turf reinforcement markets.  In addition, revenues from the erosion control, packaging and carpet cushion markets declined in 2009 as some business was lost to competitors.  Conwed Plastics expects revenues to continue to be adversely impacted in those markets related to housing, and also expects that the poor domestic and international economic conditions will continue to adversely affect its other markets.

While Conwed Plastics’ revenues from the packaging and filtration markets increased during 2008 largely due to acquisitions made in 2007, and in the European markets due to an acquisition in 2007, new customers and the impact of foreign exchange, its business continued to be adversely impacted in those markets related to the housing industry.

The primary raw material in Conwed Plastics’ products is a polypropylene resin, which is a byproduct of the oil refining process, whose price tends to fluctuate with the price of oil.  Prices for polypropylene declined in 2009 as compared to 2008 improving gross margins; prices for polypropylene resin were higher in 2008 than 2007.  The volatility of oil and natural gas prices along with current general economic conditions worldwide make it difficult to predict future raw material costs.  In addition to managing resin purchases, Conwed Plastics has improved its ability to reduce and/or reuse scrap and continues to seek further improvements in order to increase raw material utilization.

Gross margins improved in 2009 as compared to 2008 primarily due to decreased raw material costs and lower labor costs due to headcount reductions.  Gross margins declined in 2008 as compared to 2007 principally due to product mix and raw material cost increases.

Pre-tax results for 2009 reflect a decline in salaries and incentive compensation expense principally due to a decrease in headcount and a related reduction in estimated incentive bonus expense, and a decline in selling, general and other expenses primarily due to lower professional and legal fees.  Selling, general and other expenses for 2009 also reflect impairment losses on long-lived assets of $400,000.  Pre-tax results for 2008 reflect $1,100,000 of higher salaries and incentive compensation expense as compared to 2007 principally due to an increase in estimated incentive bonus expense and greater headcount related to acquisitions.

A summary of results of operations for STi Prepaid for the two years in the period ended December 31, 2009 and for the period from the date of acquisition (March 2007) through December 31, 2007 is as follows (in thousands):

Prepaid calling card revenue, which increased from $342,600,000 in 2008 to $369,100,000 in 2009, includes $91,900,000 of revenues from acquisitions.  STi Prepaid believes that the decline in prepaid calling card revenues in 2009 (exclusive of the revenues from acquisitions) as compared to 2008 reflects poor economic conditions in the markets that STi Prepaid operates, strong industry competition and the growth of wireless service providers and software applications that use voice over internet protocol for international long distance calls.  Gross margins did not significantly change in 2009 as compared to 2008.  Carrier wholesale service business, which has lower gross margins than the prepaid calling card business, decreased from $79,800,000 in 2008 to $51,700,000 in 2009 primarily due to reduced business from a large customer during the current year and the loss of a large customer in the second quarter of 2008.  Salaries and incentive compensation expense declined in 2009 (exclusive of amounts related to businesses acquired) principally due to a reduction in estimated incentive bonus expense.  Salaries and incentive compensation expense for 2009 includes $4,100,000 related to businesses acquired.  The increase in selling, general and other expenses for 2009 principally reflects $7,600,000 related to businesses acquired and greater regulatory fees of $5,500,000.

Prepaid calling card revenue, which increased from $316,700,000 for the 2007 period to $342,600,000 for the year ended December 31, 2008, includes $18,800,000 of revenues from acquisitions made by STi Prepaid during 2008.  While prepaid calling card revenues either declined or were largely flat throughout most of 2008 (exclusive of the revenues from acquisitions), and declined compared to those for the fourth quarter of 2007, gross margins improved principally due to fewer launches of new prepaid calling cards with low introductory rates and a reduction in certain unprofitable prepaid calling card business.  Carrier wholesale service business increased from $29,700,000 for the 2007 period to $79,800,000 for the year ended December 31, 2008.  Pre-tax results for 2008 also reflect $2,900,000 of higher selling, general and other expenses and $1,100,000 of higher salaries and incentive compensation expense from the acquisitions.

A summary of results of operations for Keen for the period from the date of acquisition (November 2009) through December 31, 2009 is as follows (in thousands).  As more fully discussed above, prior to the date of acquisition Keen was accounted for under the equity method of accounting.

As more fully discussed above, other income includes a gain of $49,300,000 resulting from the bargain purchase.  Keen’s revenue volume and profitability are significantly affected by the actual and anticipated price of natural gas and levels of natural gas in storage.  The natural gas exploration and production industry is cyclical and the level of exploration and production activity has historically been very volatile.  During periods of lower levels of drilling activity, price competition for drilling services tends to increase which may result in reduced revenues and profitability; conversely, during periods of increased drilling activity drilling rigs are in demand often resulting in higher prices and contractual commitments from customers to obtain exclusive use of a particular rig for a longer term.  During 2009, low natural gas prices, rising levels of natural gas storage and tight credit markets forced many of Keen’s customers to make significant reductions in their drilling programs, which adversely impacted Keen’s revenues and profitability.  Although there has been recent improvement in natural gas prices, Keen’s profitability will not significantly improve without increased natural gas demand to sustain the rise in natural gas prices.  Increased industrial demand for natural gas, which is tied to achieving economic recovery, is required to significantly improve demand.  In the short term, a colder than average winter can also impact demand for natural gas.

A summary of results of operations for the property management and services segment for the two years in the period ended December 31, 2009 and for the period from the date of acquisition (June 2007) through December 31, 2007 is as follows (in thousands):

The decline in ResortQuest’s revenues and other income in 2009 as compared to 2008 primarily reflects lower average daily rates (“ADR”) and the exiting of certain rental management locations.  ResortQuest’s ADR declined approximately 13% in 2009 as compared to 2008, principally due to discounts given in all markets due to competition and excess availability, fewer reservations for its ski locations, which typically have higher ADRs than beach locations and a decrease in ResortQuest’s rental management properties in certain locations that typically have higher ADRs.  ResortQuest’s occupancy percentage for 2009 was moderately lower as compared to 2008.  Subsequent to year-end, ResortQuest has continued to see a decline in advance reservations for its ski locations and many of its beach locations.  ResortQuest believes that the decline in advance reservations is largely due to the adverse economic conditions and with respect to its fly to markets, fewer scheduled flights at increased fares.

ResortQuest’s net real estate brokerage revenues were $4,000,000 in 2009 and $8,700,000 in 2008.  The 2008 revenue was principally recorded upon the completion of certain large development projects.  Its real estate brokerage services, which are concentrated in Northwest Florida and Delaware, tend to be cyclical, and experience the same volatility that residential real estate and new construction markets experience.  Since acquisition, its real estate brokerage business has been and will continue to be negatively impacted by the depressed real estate market.

While ResortQuest’s occupancy percentage for the year ended December 31, 2008 did not significantly change as compared to that for 2007 (inclusive of the pre-acquisition period), its occupancy percentage for the fourth quarter of 2008 declined as compared to the fourth quarter of 2007.  In addition, ADRs for 2008, particularly those for the fourth quarter, declined compared to those for the same periods in 2007.  The declines in occupancy and ADRs primarily reflect fewer reservations for its ski locations, an increase in available properties in certain beach locations, as well as rate discounts given on properties due to competition and excess availability.  Reservations did increase at beach and golf locations but not enough to offset the overall decline in occupancy percentage.

The decline in direct operating expenses in 2009 as compared to 2008 principally reflects workforce reductions and other related cost saving initiatives, and the exiting of certain rental management locations.  The reduction in selling, general and other expenses in 2009 primarily reflects lower advertising costs.

As more fully discussed above, Premier was accounted for as a consolidated subsidiary when acquired during 2006; however, while in bankruptcy proceedings from September 19, 2006 to emergence on August 10, 2007, Premier was accounted for under the equity method of accounting.  Upon emergence from bankruptcy, Premier was once again consolidated by the Company.  Premier’s casino and hotel operations opened to the public on June 30, 2007; prior to opening, Premier’s activities principally consisted of rebuilding and repairing the hotel and casino facilities that were severely damaged by Hurricane Katrina, and its bankruptcy proceedings.

A summary of results of operations for Premier for the two years in the period ended December 31, 2009 and for the period from emergence from bankruptcy (date of reconsolidation) through December 31, 2007 is as follows (in thousands):

A summary of results of operations for the domestic real estate segment for the three years in the period ended December 31, 2009 is as follows (in thousands):

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, pre-tax results for this segment for any particular period are not predictable and do not follow any consistent pattern.

Revenues and other income for 2009 and 2007 include real estate sales of $12,400,000 and $10,700,000, respectively; the Company did not have any major real estate sales during 2008.  Real estate revenues and other income for 2008 include income of $3,700,000 from the favorable settlement of a lawsuit.  Real estate revenues and other income include $1,000,000, $(4,600,000) and $(3,900,000) for the years ended December 31, 2009, 2008 and 2007, respectively, of income (charges) related to the accounting for the mark-to-market value of an interest rate derivative (which was terminated during the second quarter of 2009) relating to MB1’s debt obligation.

As discussed above, during the second quarter of 2009, the Company determined that the carrying amount of MB1’s mixed use real estate project located in Myrtle Beach, South Carolina was not fully recoverable and recorded an impairment charge of $67,800,000, which is included in other operating expenses.  In addition, other operating expenses for 2009 include impairment charges aggregating $3,600,000 for certain other real estate properties and a charge of $1,400,000 representing the net book value of land and buildings that was contributed to a local municipality.  Other operating expenses for 2008 include an impairment charge of $1,300,000 for certain real estate properties held for sale.  Pre-tax results for 2007 include $1,600,000 of incentive compensation accruals related to the Myrtle Beach project.

Residential property sales volume, prices and new building starts have declined significantly in many U.S. markets, including markets in which the Company has real estate operations in various stages of development.  The slowdown in residential sales has been exacerbated by the turmoil in the mortgage lending and credit markets during the past two years, which has resulted in stricter lending standards and reduced liquidity for prospective home buyers.  The Company has deferred its development plans for certain of its real estate development projects, and is not actively soliciting bids for its fully developed projects.  The Company intends to wait for market conditions to improve before marketing certain of its projects for sale.

A summary of results of operations for Sangart for the three years in the period ended December 31, 2009 is as follows (in thousands):

A summary of results of operations for other operations for the three years in the period ended December 31, 2009 is as follows (in thousands):

Corporate

The increase in selling, general and other expenses in 2008 as compared to 2007 primarily reflects $16,200,000 of expenses incurred relating to the induced conversion of $128,887,000 principal amount of the Company’s 3¾% Convertible Senior Subordinated Notes during the fourth quarter of 2008 and $6,100,000 of severance expense.  Selling, general and other expenses for 2007 include a charge of $7,500,000 for the settlement of litigation related to MK Resources Company, greater legal fees, including those incurred in connection with that litigation, and higher professional fees.