e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended May 31, 2010
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the transition period from
to
Commission file number 1-14947
JEFFERIES GROUP, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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95-4719745 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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520 Madison Avenue, 10th Floor, New York, New York
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10022 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code: (212) 284-2550
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
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Large
accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of the registrants class of common stock, as of the
latest practicable date. 171,687,451 shares as of the close of business June 30, 2010.
JEFFERIES GROUP, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
MAY 31, 2010
Page 2 of 90
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
(Dollars in thousands, except per share amounts)
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May 31, |
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December 31, |
|
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2010 (1) |
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2009 |
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ASSETS |
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|
|
|
|
|
|
Cash and cash equivalents (including $116,130 from VIEs) |
|
$ |
994,284 |
|
|
$ |
1,853,167 |
|
Cash and securities segregated and on deposit for regulatory
purposes or deposited with clearing and depository organizations |
|
|
1,412,894 |
|
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|
1,089,803 |
|
Financial instruments owned, at fair value, including securities pledged
of $10,418,125 and $5,623,345 in 2010 and 2009, respectively: |
|
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|
|
|
|
|
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Corporate equity securities (including $75,477 from VIEs) |
|
|
1,617,779 |
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|
|
1,500,042 |
|
Corporate debt securities (including $602,512 from VIEs) |
|
|
3,484,643 |
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|
2,421,704 |
|
Government, federal agency and other sovereign obligations |
|
|
3,836,649 |
|
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|
1,762,643 |
|
Mortgage- and asset-backed securities (including $30,327 from VIEs) |
|
|
4,058,278 |
|
|
|
3,079,865 |
|
Loans and other receivables (including $443,394 from VIEs) |
|
|
563,965 |
|
|
|
591,208 |
|
Derivatives (including $5,665 from VIEs) |
|
|
63,695 |
|
|
|
62,117 |
|
Investments, at fair value (including $14,706 from VIEs) |
|
|
75,020 |
|
|
|
70,156 |
|
|
|
|
|
|
|
|
Total financial instruments owned, at fair value (including $1,172,081 from
VIEs) |
|
|
13,700,029 |
|
|
|
9,487,735 |
|
Investments in managed funds |
|
|
123,597 |
|
|
|
115,774 |
|
Other investments |
|
|
223,050 |
|
|
|
193,628 |
|
Securities borrowed |
|
|
7,298,528 |
|
|
|
8,237,998 |
|
Securities purchased under agreements to resell |
|
|
3,188,239 |
|
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|
3,515,247 |
|
Securities received as collateral |
|
|
116,919 |
|
|
|
68,494 |
|
Receivables: |
|
|
|
|
|
|
|
|
Brokers, dealers and clearing organizations (including $434,379 from VIEs) |
|
|
2,194,590 |
|
|
|
1,504,480 |
|
Customers (including $42 from VIEs) |
|
|
1,555,755 |
|
|
|
1,020,480 |
|
Fees, interest and other (including $2,904 from VIEs) |
|
|
157,787 |
|
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|
108,749 |
|
Premises and equipment |
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|
136,882 |
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|
140,132 |
|
Goodwill |
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|
363,144 |
|
|
|
364,795 |
|
Other assets (including $4,471 from VIEs) |
|
|
651,260 |
|
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|
488,789 |
|
|
|
|
|
|
|
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Total assets (including $1,730,007 from VIEs) |
|
$ |
32,116,958 |
|
|
$ |
28,189,271 |
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|
|
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|
Continued on next page.
Page 3 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED) CONTINUED
(Dollars in thousands, except per share amounts)
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May 31, |
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December 31, |
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2010 (1) |
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|
2009 |
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
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Financial instruments sold, not yet purchased, at fair value: |
|
|
|
|
|
|
|
|
Corporate equity securities (including $35,015 from VIEs) |
|
$ |
1,636,638 |
|
|
$ |
1,360,528 |
|
Corporate debt securities (including $421,535 from VIEs) |
|
|
2,480,790 |
|
|
|
1,909,781 |
|
Government, federal agency and other sovereign obligations |
|
|
3,146,505 |
|
|
|
1,735,861 |
|
Mortgage- and asset-backed securities |
|
|
34,416 |
|
|
|
21,474 |
|
Loans (including $370,332 from VIEs) |
|
|
386,343 |
|
|
|
363,080 |
|
Derivatives |
|
|
67,920 |
|
|
|
18,427 |
|
|
|
|
|
|
|
|
Total financial instruments sold, not yet purchaed, at fair value (including
$826,882 from VIEs) |
|
|
7,752,612 |
|
|
|
5,409,151 |
|
Securities loaned (including $115,000 from VIEs) |
|
|
2,945,756 |
|
|
|
3,592,836 |
|
Securities sold under agreements to repurchase |
|
|
9,959,947 |
|
|
|
8,239,117 |
|
Obligation to return securities received as collateral |
|
|
116,919 |
|
|
|
68,494 |
|
Payables: |
|
|
|
|
|
|
|
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Brokers, dealers and clearing organizations (including $286,564 from VIEs) |
|
|
1,289,713 |
|
|
|
889,687 |
|
Customers |
|
|
3,358,800 |
|
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|
3,246,485 |
|
Accrued expenses and other liabilities (including $1,167 from VIEs) |
|
|
931,276 |
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|
941,210 |
|
Long-term debt |
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|
2,731,195 |
|
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|
2,729,117 |
|
Mandatorily redeemable convertible preferred stock |
|
|
125,000 |
|
|
|
125,000 |
|
Mandatorily redeemable preferred interest of consolidated subsidiaries
(including $303,494 from VIEs) |
|
|
303,494 |
|
|
|
318,047 |
|
|
|
|
|
|
|
|
Total liabilities (including $1,533,107 from VIEs) |
|
|
29,514,712 |
|
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|
25,559,144 |
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|
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STOCKHOLDERS EQUITY |
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Common stock, $.0001 par value. Authorized 500,000,000 shares;
issued 198,041,635 shares in 2010 and 187,855,347 shares in 2009 |
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|
20 |
|
|
|
19 |
|
Additional paid-in capital |
|
|
2,065,425 |
|
|
|
2,036,087 |
|
Retained earnings |
|
|
786,088 |
|
|
|
698,488 |
|
Less: |
|
|
|
|
|
|
|
|
Treasury stock, at cost, 26,451,028 shares in 2010 and
22,217,793 shares in 2009 |
|
|
(490,860 |
) |
|
|
(384,379 |
) |
Accumulated other comprehensive loss: |
|
|
|
|
|
|
|
|
Currency translation adjustments |
|
|
(65,352 |
) |
|
|
(34,369 |
) |
Additional minimum pension liability |
|
|
(7,257 |
) |
|
|
(7,257 |
) |
|
|
|
|
|
|
|
Total accumulated other comprehensive loss |
|
|
(72,609 |
) |
|
|
(41,626 |
) |
|
|
|
|
|
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|
Total common stockholders equity |
|
|
2,288,064 |
|
|
|
2,308,589 |
|
Noncontrolling interests |
|
|
314,182 |
|
|
|
321,538 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
2,602,246 |
|
|
|
2,630,127 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
32,116,958 |
|
|
$ |
28,189,271 |
|
|
|
|
|
|
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|
(1) |
|
Upon adoption of accounting changes described in ASC 810 effective January 1, 2010, we
are required to separately identify the amounts included in our assets and liabilities
that are attributed to consolidated variable interest entities (VIEs). We have chosen to
present these amounts parenthetically in the financial statement line item for assets and
liabilities at May 31, 2010. No comparative separate identification has been provided for
assets and liabilities of consolidated VIEs at December 31, 2009. |
See accompanying unaudited notes to consolidated financial statements.
Page 4 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(In thousands, except per share amounts)
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
Five Months |
|
|
Six Months |
|
|
|
Three Months Ended |
|
|
Ended |
|
|
Ended |
|
|
|
May 31, 2010 |
|
|
June 30, 2009 |
|
|
May 31, 2010 |
|
|
June 30, 2009 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions |
|
$ |
146,001 |
|
|
$ |
135,466 |
|
|
$ |
228,956 |
|
|
$ |
267,285 |
|
Principal transactions |
|
|
155,581 |
|
|
|
250,236 |
|
|
|
249,755 |
|
|
|
372,613 |
|
Investment banking |
|
|
255,958 |
|
|
|
120,831 |
|
|
|
352,257 |
|
|
|
157,917 |
|
Asset management fees and investment
income from managed funds |
|
|
13,929 |
|
|
|
556 |
|
|
|
11,018 |
|
|
|
519 |
|
Interest |
|
|
150,187 |
|
|
|
150,599 |
|
|
|
250,065 |
|
|
|
252,686 |
|
Other |
|
|
18,984 |
|
|
|
9,888 |
|
|
|
27,363 |
|
|
|
22,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
740,640 |
|
|
|
667,576 |
|
|
|
1,119,414 |
|
|
|
1,073,480 |
|
Interest expense |
|
|
71,110 |
|
|
|
77,383 |
|
|
|
120,042 |
|
|
|
141,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
|
669,530 |
|
|
|
590,193 |
|
|
|
999,372 |
|
|
|
932,150 |
|
Interest on mandatorily redeemable preferred
interest of consolidated subsidiaries |
|
|
2,018 |
|
|
|
12,327 |
|
|
|
2,513 |
|
|
|
7,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues, less mandatorily redeemable
preferred interest |
|
|
667,512 |
|
|
|
577,866 |
|
|
|
996,859 |
|
|
|
925,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation and benefits |
|
|
384,311 |
|
|
|
348,207 |
|
|
|
568,407 |
|
|
|
561,588 |
|
Floor brokerage and clearing fees |
|
|
35,849 |
|
|
|
19,628 |
|
|
|
54,458 |
|
|
|
33,330 |
|
Technology and communications |
|
|
41,932 |
|
|
|
37,582 |
|
|
|
68,054 |
|
|
|
68,367 |
|
Occupancy and equipment rental |
|
|
19,056 |
|
|
|
17,751 |
|
|
|
31,015 |
|
|
|
34,047 |
|
Business development |
|
|
15,215 |
|
|
|
9,535 |
|
|
|
24,985 |
|
|
|
18,980 |
|
Professional services |
|
|
11,284 |
|
|
|
10,790 |
|
|
|
21,694 |
|
|
|
21,010 |
|
Other |
|
|
14,532 |
|
|
|
12,045 |
|
|
|
27,820 |
|
|
|
16,294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses |
|
|
522,179 |
|
|
|
455,538 |
|
|
|
796,433 |
|
|
|
753,616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
145,333 |
|
|
|
122,328 |
|
|
|
200,426 |
|
|
|
171,510 |
|
Income tax expense |
|
|
56,836 |
|
|
|
48,333 |
|
|
|
77,893 |
|
|
|
65,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
88,497 |
|
|
|
73,995 |
|
|
|
122,533 |
|
|
|
106,421 |
|
Net earnings to noncontrolling interests |
|
|
3,665 |
|
|
|
12,095 |
|
|
|
3,994 |
|
|
|
6,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings to common shareholders |
|
$ |
84,832 |
|
|
$ |
61,900 |
|
|
$ |
118,539 |
|
|
$ |
100,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.42 |
|
|
$ |
0.31 |
|
|
$ |
0.58 |
|
|
$ |
0.49 |
|
Diluted |
|
$ |
0.41 |
|
|
$ |
0.30 |
|
|
$ |
0.58 |
|
|
$ |
0.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
196,944 |
|
|
|
201,902 |
|
|
|
197,759 |
|
|
|
202,485 |
|
Diluted |
|
|
201,064 |
|
|
|
206,027 |
|
|
|
201,881 |
|
|
|
202,505 |
|
See accompanying unaudited notes to consolidated financial statements.
Page 5 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
(Unaudited)
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
Five Months Ended |
|
|
Year Ended |
|
|
|
May 31, 2010 |
|
|
December 31, 2009 |
|
Common stock, par value $0.0001 per share |
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
$ |
19 |
|
|
$ |
17 |
|
Issued |
|
|
1 |
|
|
|
2 |
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
20 |
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
2,036,087 |
|
|
|
1,870,120 |
|
Benefit plan share activity (1) |
|
|
5,700 |
|
|
|
16,499 |
|
Share-based expense, net of forfeitures and clawbacks |
|
|
15,455 |
|
|
|
125,127 |
|
Proceeds from exercise of stock options |
|
|
108 |
|
|
|
69 |
|
Contingent consideration |
|
|
419 |
|
|
|
(2,710 |
) |
Tax benefit (deficiency) for issuance of share-based awards |
|
|
2,608 |
|
|
|
(14,606 |
) |
Equity component of convertible debt issuance, net of tax |
|
|
|
|
|
|
41,588 |
|
Dividend equivalents on share-based plans |
|
|
5,048 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
2,065,425 |
|
|
|
2,036,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings |
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
698,488 |
|
|
|
418,445 |
|
Net earnings to common shareholders |
|
|
118,539 |
|
|
|
280,043 |
|
Dividends |
|
|
(30,939 |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
786,088 |
|
|
|
698,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock, at cost |
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
(384,379 |
) |
|
|
(115,190 |
) |
Purchases |
|
|
(103,336 |
) |
|
|
(263,794 |
) |
Returns / forfeitures |
|
|
(3,145 |
) |
|
|
(8,105 |
) |
Issued |
|
|
|
|
|
|
2,710 |
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
(490,860 |
) |
|
|
(384,379 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive (loss) income |
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
(41,626 |
) |
|
|
(52,121 |
) |
Currency adjustment |
|
|
(30,983 |
) |
|
|
9,306 |
|
Pension adjustment, net of tax |
|
|
|
|
|
|
1,189 |
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
(72,609 |
) |
|
|
(41,626 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total common stockholders equity |
|
|
2,288,064 |
|
|
|
2,308,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interests |
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
321,538 |
|
|
|
287,805 |
|
Net earnings to noncontrolling interests |
|
|
3,994 |
|
|
|
36,537 |
|
Contributions |
|
|
46 |
|
|
|
2,860 |
|
Distributions |
|
|
(14,454 |
) |
|
|
(5,664 |
) |
Adoption of accounting changes to ASC 810 |
|
|
3,058 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
314,182 |
|
|
|
321,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
$ |
2,602,246 |
|
|
$ |
2,630,127 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes grants related to the Incentive Plan, Deferred
Compensation Plan and Directors Plan. |
See
accompanying unaudited notes to consolidated financial
statements.
Page 6 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Five Months Ended |
|
|
Six Months Ended |
|
|
|
May 31, 2010 |
|
|
June 30, 2009 |
|
|
May 31, 2010 |
|
|
June 30, 2009 |
|
Net earnings to common shareholders |
|
$ |
84,832 |
|
|
$ |
61,900 |
|
|
$ |
118,539 |
|
|
$ |
100,237 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation adjustments |
|
|
16,600 |
|
|
|
16,979 |
|
|
|
30,983 |
|
|
|
13,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive loss (1) |
|
|
16,600 |
|
|
|
16,979 |
|
|
|
30,983 |
|
|
|
13,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
101,432 |
|
|
$ |
78,879 |
|
|
$ |
149,522 |
|
|
$ |
113,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Total other comprehensive loss, net of tax, is attributable to Jefferies Group. No other
comprehensive loss is attributable to noncontrolling interests. |
See accompanying unaudited notes to consolidated financial statements.
Page 7 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Five Months Ended |
|
|
Six Months Ended |
|
|
|
May 31, 2010 |
|
|
June 30, 2009 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
122,533 |
|
|
$ |
106,421 |
|
|
|
|
|
|
|
|
Adjustments to reconcile net earnings to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
14,720 |
|
|
|
15,635 |
|
Gain on repurchase of long-term debt |
|
|
|
|
|
|
(7,673 |
) |
Fees related to assigned management agreements |
|
|
(1,587 |
) |
|
|
|
|
Interest on mandatorily redeemable preferred interests of consolidated
subsidiaries |
|
|
2,513 |
|
|
|
7,024 |
|
Accruals related to various benefit plans, stock issuances, net of forfeitures |
|
|
18,011 |
|
|
|
(336 |
) |
(Increase) decrease in cash and securities segregated and on deposit for
regulatory purposes or deposited with clearing and depository organizations |
|
|
(323,250 |
) |
|
|
101,278 |
|
Increase in receivables: |
|
|
|
|
|
|
|
|
Brokers, dealers and clearing organizations |
|
|
(741,789 |
) |
|
|
(776,358 |
) |
Customers |
|
|
(552,492 |
) |
|
|
(401,763 |
) |
Fees, interest and other |
|
|
(50,866 |
) |
|
|
(6,998 |
) |
Decrease in securities borrowed |
|
|
855,241 |
|
|
|
134,271 |
|
Increase in financial instruments owned |
|
|
(4,329,765 |
) |
|
|
(3,629,761 |
) |
Increase in other investments |
|
|
(29,762 |
) |
|
|
(22,432 |
) |
Increase in investments in managed funds |
|
|
(7,823 |
) |
|
|
(9,354 |
) |
Decrease (increase) in securities purchased under agreements to resell |
|
|
302,795 |
|
|
|
(2,061,546 |
) |
(Increase) decrease in other assets |
|
|
(184,375 |
) |
|
|
137,745 |
|
Increase in payables: |
|
|
|
|
|
|
|
|
Brokers, dealers and clearing organizations |
|
|
440,825 |
|
|
|
64,546 |
|
Customers |
|
|
114,208 |
|
|
|
973,855 |
|
(Decrease) increase in securities loaned |
|
|
(572,148 |
) |
|
|
416,457 |
|
Increase in financial instruments sold, not yet purchased |
|
|
2,474,499 |
|
|
|
2,040,203 |
|
Increase in securities sold under agreements to repurchase |
|
|
1,737,028 |
|
|
|
2,424,846 |
|
Increase (decrease) in accrued expenses and other liabilities |
|
|
23,583 |
|
|
|
(74,849 |
) |
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(687,901 |
) |
|
|
(568,789 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchase of premises and equipment |
|
|
(10,136 |
) |
|
|
(13,208 |
) |
Business acquisition |
|
|
|
|
|
|
(38,760 |
) |
Cash received from contingent consideration |
|
|
925 |
|
|
|
|
|
Cash paid for contingent consideration |
|
|
(6,997 |
) |
|
|
(22,829 |
) |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(16,208 |
) |
|
|
(74,797 |
) |
|
|
|
|
|
|
|
Continued on next page.
Page 8 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED
(Unaudited)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Five Months Ended |
|
|
Six Months Ended |
|
|
|
May 31, 2010 |
|
|
June 30, 2009 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Excess tax benefits from the issuance of share-based awards |
|
$ |
1,994 |
|
|
$ |
6,918 |
|
Net (payments on) proceeds from: |
|
|
|
|
|
|
|
|
Issuance of senior notes, net of issuance costs |
|
|
|
|
|
|
392,744 |
|
Repurchase of long-term debt |
|
|
|
|
|
|
(12,796 |
) |
Mandatorily redeemable preferred interest of consolidated subsidiaries |
|
|
(17,066 |
) |
|
|
|
|
Noncontrolling interest |
|
|
(14,408 |
) |
|
|
(922 |
) |
Repurchase of common stock |
|
|
(103,336 |
) |
|
|
(77,016 |
) |
Dividends |
|
|
(12,957 |
) |
|
|
|
|
Exercise of stock options, not including tax benefits |
|
|
108 |
|
|
|
69 |
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(145,665 |
) |
|
|
308,997 |
|
|
|
|
|
|
|
|
|
Effect of foreign currency translation on cash and cash equivalents |
|
|
(9,109 |
) |
|
|
4,285 |
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(858,883 |
) |
|
|
(330,304 |
) |
Cash and cash equivalents at beginning of period |
|
|
1,853,167 |
|
|
|
1,294,329 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
994,284 |
|
|
$ |
964,025 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid (received) during the period for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
101,031 |
|
|
$ |
140,577 |
|
Income taxes |
|
|
84,090 |
|
|
|
(79,152 |
) |
Acquisitions: |
|
|
|
|
|
|
|
|
Fair value of assets acquired, including goodwill |
|
|
|
|
|
|
53,104 |
|
Liabilities assumed |
|
|
|
|
|
|
(14,344 |
) |
|
|
|
|
|
|
|
|
Cash paid for acquisition |
|
|
|
|
|
|
38,760 |
|
See accompanying unaudited notes to consolidated financial statements.
Page 9 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Index
|
|
|
|
|
|
|
Page |
|
|
|
|
11 |
|
|
|
|
18 |
|
|
|
|
19 |
|
|
|
|
30 |
|
|
|
|
34 |
|
|
|
|
35 |
|
|
|
|
41 |
|
|
|
|
43 |
|
|
|
|
43 |
|
|
|
|
44 |
|
|
|
|
44 |
|
|
|
|
45 |
|
|
|
|
45 |
|
|
|
|
49 |
|
|
|
|
51 |
|
|
|
|
52 |
|
|
|
|
53 |
|
|
|
|
54 |
|
|
|
|
55 |
|
Page 10 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
Note 1. Organization and Summary of Significant Accounting Policies
Organization
The accompanying unaudited consolidated financial statements include the accounts of Jefferies
Group, Inc. and all its subsidiaries (together, we or us), including Jefferies & Company, Inc.
(Jefferies), Jefferies Execution Services, Inc., (Jefferies Execution), Jefferies International
Limited, Jefferies Asset Management, LLC, Jefferies Financial Products, LLC and all other entities
in which we have a controlling financial interest or are the primary beneficiary, including
Jefferies High Yield Holdings, LLC (JHYH), Jefferies Special Opportunities Partners, LLC (JSOP)
and Jefferies Employees Special Opportunities Partners, LLC (JESOP). The accompanying unaudited
consolidated financial statements have been prepared in accordance with U.S. generally accepted
accounting principles for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by U.S generally accepted accounting principles for complete financial
statements. All adjustments (consisting of normal recurring accruals) considered necessary for
fair presentation have been included. These unaudited consolidated financial statements should be
read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2009.
On April 19, 2010, our Board of Directors approved a change to our fiscal year end from a calendar
year basis to a fiscal year ending on November 30. Our 2010 second quarter consists of the three
months ended May 31, 2010 and our results included within this report on Form 10-Q reflect the five
months ended May 31, 2010. Our report on Form 10-Q for the third quarter will include results for
the three months and eight months ended August 31, 2010 and our 2010 fiscal year will consist of
the eleven month transition period beginning January 1, 2010 through November 30, 2010. Financial
statements for 2009 continue to be presented on the basis of our previous calendar year end.
Reclassifications
Prior to October 1, 2009, commissions and commission equivalents earned on certain over-the-counter
equity securities trades were reported within Principal transactions revenue. As of October 1,
2009, these revenues are included within Commission revenue on the Consolidated Statements of
Earnings. Previously presented financial statements have been adjusted to change these revenues
from Principal transactions revenue to Commissions revenue. The impact of these changes is to
increase Commissions revenue for the three and six months ended June 30, 2009 by $32.9 million and
$62.9 million, respectively, from $102.5 million and $204.4 million, respectively, to $135.5
million and $267.3 million, respectively, and conversely to decrease Principal transactions by
$32.9 million and $62.9 million, respectively, from $283.2 million and $435.5 million,
respectively, to $250.2 million and $372.6 million, respectively, for transactions during the three
and six months ended June 30, 2009 previously presented in our Quarterly Report on Form 10-Q, as
filed on August 6, 2009. There was no impact on Total revenues, Net revenues, Net earnings or
Earnings per share for the three and six months ended June 30, 2009 due to these changes.
Summary of Significant Accounting Policies
Principles of Consolidation
Our policy is to consolidate all entities in which we own more than 50% of the outstanding voting
stock and have control. In addition, we consolidate entities which lack characteristics of an
operating entity or business for which we are the primary beneficiary. The primary beneficiary is
the party who has the power to direct the activities of a variable interest entity that most
significantly impact the entitys economic performance and who has an obligation to absorb losses
of the entity or a right to receive benefits from the entity that could potentially be significant
to the entity. In situations where we have significant influence but not control of an entity that
does not qualify as a variable interest entity, we apply the equity method of accounting or fair
value accounting. We also have formed nonconsolidated investment vehicles with third-party
investors that are typically organized as partnerships or limited liability companies. We act as
general partner or managing member for these investment vehicles and have generally provided the
third-party investors with termination or kick-out rights.
Page 11 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
All material intercompany accounts and transactions are eliminated in consolidation.
Revenue Recognition
Commissions. All customer securities transactions are reported on the Consolidated Statements of
Financial Condition on a settlement date basis with related income reported on a trade-date basis.
Under clearing agreements, we clear trades for unaffiliated correspondent brokers and retain a
portion of commissions as a fee for our services. Correspondent clearing revenues are included in
Other revenue. We permit institutional customers to allocate a portion of their gross commissions
to pay for research products and other services provided by third parties. The amounts allocated
for those purposes are commonly referred to as soft dollar arrangements. Soft dollar expenses
amounted to $11.3 million and $8.0 million for the three months ended May 31, 2010 and June 30,
2009, respectively, and $17.1 million and $15.1 million for the five months ended May 31, 2010 and
six months ended June 30, 2009, respectively. We account for the cost of these arrangements on an
accrual basis. As we are not the primary obligor for these arrangements, expenses relating to soft
dollars are netted against commission revenues.
Principal Transactions. Financial instruments owned, securities pledged and Financial
instruments sold, but not yet purchased (all of which are recorded on a trade-date basis) are
carried at fair value with unrealized gains and losses reflected in principal transactions in the
Consolidated Statements of Earnings on a trade date basis, except for unrealized gains and losses
on financial instruments held by consolidated asset management entities, which are presented in
Asset management fees and investment income (loss) from managed funds.
Investment Banking. Underwriting revenues and fees from mergers and acquisitions, restructuring and
other investment banking advisory assignments or engagements are recorded when the services related
to the underlying transactions are completed under the terms of the assignment or engagement.
Expenses associated with such assignments are deferred until reimbursed by the client, the related
revenue is recognized or the engagement is otherwise concluded. Out-of-pocket expenses are
recorded net of client reimbursements. Revenues are presented net of related out-of-pocket
unreimbursed expenses. Unreimbursed out-of-pocket expenses with no related revenues are included
in Business development and Professional services expenses in the Consolidated Statements of
Earnings.
Asset Management Fees and Investment Income (Loss) From Managed Funds. Asset management fees and
investment income (loss) from managed funds include revenues we earn from management,
administrative and performance fees from funds managed by us, revenues from management and
performance fees we earn from third-party managed funds and investment income (loss) from our
investments in these funds. We earn fees in connection with management and investment advisory
services performed for various funds and managed accounts. These fees are based on the value of
assets under management and may include performance fees based upon the performance of the funds.
Management and administrative fees are generally recognized over the period that the related
service is provided based upon the beginning or ending net asset value of the relevant period.
Generally, performance fees are earned when the return on assets under management exceeds certain
benchmark returns, high-water marks or other performance targets. Performance fees are accrued on
a monthly basis and are not subject to adjustment once the measurement period ends (annually) and
performance fees have been realized.
Interest Revenue and Expense. We recognize contractual interest on financial instruments owned and
financial instruments sold, but not yet purchased, on an accrual basis as a component of interest
revenue and expense. Interest flows on derivative trading transactions and dividends are included
as part of the fair valuation of these contracts in principal transactions in the Consolidated
Statements of Earnings and are not recognized as a component of interest revenue or expense. We
account for our short-term, long-term borrowings and our mandatorily redeemable convertible
preferred stock on an accrual basis with related interest recorded as interest expense. In
addition, we recognize interest revenue related to our securities borrowed and securities purchased
under agreements to resell activities and interest expense related to our securities loaned and
securities sold under agreements to repurchase activities on an accrual basis.
Page 12 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
Cash Equivalents
Cash equivalents include highly liquid investments not held for resale with original maturities of
three months or less.
Cash and Securities Segregated and on Deposit for Regulatory Purposes or Deposited With Clearing
and Depository Organizations
In accordance with Rule 15c3-3 of the Securities Exchange Act of 1934, Jefferies as a broker-dealer
carrying client accounts, is subject to requirements related to maintaining cash or qualified
securities in a segregated reserve account for the exclusive benefit of its clients. In addition,
certain financial instruments used for initial and variation margin purposes with clearing and
depository organizations are recorded in this caption.
Foreign Currency Translation
Assets and liabilities of foreign subsidiaries having non-U.S. dollar functional currencies are
translated at exchange rates at the end of a period. Revenues and expenses are translated at
average exchange rates during the period. The gains or losses resulting from translating foreign
currency financial statements into U.S. dollars, net of hedging gains or losses and taxes, if any,
are included in Other comprehensive income. Gains or losses resulting from foreign currency
transactions are included in principal transactions in the Consolidated Statements of Earnings.
Financial Instruments
Financial instruments owned and Financial instruments sold, not yet purchased are recorded at fair
value, either as required by accounting pronouncements or through the fair value option election.
These instruments primarily represent our trading activities and include both cash and derivative
products. Gains and losses are recognized in Principal transactions in our Consolidated
Statements of Earnings. The fair value of a financial instrument is the amount that would be
received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date (the exit price).
Fair Value Hierarchy
In determining fair value, we maximize the use of observable inputs and minimize the use of
unobservable inputs by requiring that observable inputs be used when available. Observable inputs
are inputs that market participants would use in pricing the asset or liability based on market
data obtained from independent sources. Unobservable inputs reflect our assumptions that market
participants would use in pricing the asset or liability developed based on the best information
available in the circumstances. We apply a hierarchy to categorize our fair value measurements
broken down into three levels based on the transparency of inputs as follows:
Level 1: |
|
Quoted prices are available in active markets for identical
assets or liabilities as of the reported date. |
|
Level 2: |
|
Pricing inputs are other than quoted prices in active markets,
which are either directly or indirectly observable as of the
reported date. The nature of these financial instruments include
cash instruments for which quoted prices are available but traded
less frequently, derivative instruments whose fair value have
been derived using a model where inputs to the model are directly
observable in the market, or can be derived principally from or
corroborated by observable market data, and instruments that are
fair valued using other financial instruments, the parameters of
which can be directly observed. |
Page 13 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
Level 3: |
|
Instruments that have little to no pricing observability as of
the reported date. These financial instruments are measured
using managements best estimate of fair value, where the inputs
into the determination of fair value require significant
management judgment or estimation. |
The availability of observable inputs can vary and is affected by a wide variety of factors,
including, for example, the type of financial instrument and market conditions. To the extent that
valuation is based on models or input that are less observable or unobservable in the market, the
determination of fair value requires more judgment. Accordingly, the degree of judgment exercised
in determining fair value is greatest for instruments categorized in Level 3.
We use prices and inputs that are current as of the measurement date. As the observability of
prices and inputs may change for a financial instrument from period to period, this condition may
cause a transfer of an instrument among the fair value hierarchy levels. Transfers among the
levels are recognized at the beginning of each period.
Valuation Process for Financial Instruments
Financial instruments are valued at quoted market prices, if available. Certain financial
instruments have bid and ask prices that can be observed in the marketplace. For financial
instruments whose inputs are based on bid-ask prices, we allow for mid-market pricing and adjust to
the point within the bid-ask range that meets our best estimate of fair value. For offsetting
positions in the same financial instrument, the same price within the bid-ask spread is used to
measure both the long and short positions.
For financial instruments that do not have readily determinable fair values using quoted market
prices, the determination of fair value is based upon consideration of available information,
including types of financial instruments, current financial information, restrictions on
dispositions, fair values of underlying financial instruments and quotations for similar
instruments. The valuation process for financial instruments may include the use of valuation
models and other techniques. Adjustments to valuations (such as counterparty, credit,
concentration or liquidity) derived from valuation models may be made when, in managements
judgment, either the size of the position in the financial instrument in a nonactive market or
other features of the financial instrument such as its complexity, or the market in which the
financial instrument is traded require that an adjustment be made to the value derived from the
models. An adjustment may be made if a financial instrument is subject to sales restrictions that
would result in a price less than the quoted market price. Adjustments from the price derived from
a valuation model reflect managements judgment that other participants in the market for the
financial instrument being measured at fair value would also consider in valuing that same
financial instrument and are adjusted for assumptions about risk uncertainties and market
conditions. Results from valuation models and valuation techniques in one period may not be
indicative of future period fair value measurements.
See Note 3, Financial Instruments, for a description of valuation techniques applied to the classes
of financial instruments at fair value.
Investments in Managed Funds
Investments in managed funds include our investments in funds managed by us and our investments in
third-party managed funds in which we are entitled to a portion of the management and/or
performance fees. Investments in nonconsolidated managed funds are accounted for on the equity
method or fair value. Gains or losses on our investments in managed funds are included in Asset
management fees and investment income (loss) from managed funds in the Consolidated Statements of
Earnings.
Other Investments
Other investments includes investments entered into where we exercise significant influence over
operating and capital decisions in private equity and other operating entities in connection with
our capital market activities and loans issued in connection with such activities. Other
investments are accounted for on the equity method or at cost,
Page 14 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
as appropriate. Gains and losses on
Other investments are included in Principal transactions in the Consolidated Statement of Earnings.
Receivable from and Payable to Customers
Receivable from and payable to customers includes amounts receivable and payable on cash and margin
transactions. Securities owned by customers and held as collateral for these receivables are not
reflected in the accompanying consolidated financial statements. Receivable from officers and
directors included within this financial statement line item represents balances arising from their
individual security transactions. These transactions are subject to the same regulations as
customer transactions and are provided on substantially the same terms.
Securities Borrowed and Securities Loaned
Securities borrowed and securities loaned are carried at the amounts of cash collateral advanced
and received in connection with the transactions and accounted for as collateralized financing
transactions. In connection with both trading and brokerage activities, we borrow securities to
cover short sales and to complete transactions in which customers have failed to deliver securities
by the required settlement date, and lend securities to other brokers and dealers for similar
purposes. We have an active securities borrowed and lending matched book business in which we
borrow securities from one party and lend them to another party. When we borrow securities, we
generally provide cash to the lender as collateral, which is reflected in our Consolidated
Statements of Financial Condition as Securities
borrowed. We earn interest revenues on this cash collateral. Similarly, when we lend securities to
another party, that party provides cash to us as collateral, which is reflected in our Consolidated
Statements of Financial Condition as Securities loaned. We pay interest expense on the cash
collateral received from the party borrowing the securities. A substantial portion of our interest
revenues and interest expenses results from this matched book activity. The initial collateral
advanced or received approximates or is greater than the fair value of the securities borrowed or
loaned. We monitor the fair value of the securities borrowed and loaned on a daily basis and
request additional collateral or return excess collateral, as appropriate.
Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase
Securities purchased under agreements to resell and Securities sold under agreements to repurchase
(collectively repos) are accounted for as collateralized financing transactions and are recorded
at their contracted repurchase amount. We earn net interest revenues from this activity which is
reflected in our Consolidated Statements of Earnings. We monitor the fair value of the underlying
securities daily versus the related receivable or payable balances. Should the fair value of the
underlying securities decline or increase, additional collateral is requested or excess collateral
is returned, as appropriate. We carry repos on a net basis by counterparty when appropriate.
Premises and Equipment
Premises and equipment are depreciated using the straight-line method over the estimated useful
lives of the related assets (generally three to ten years). Leasehold improvements are amortized
using the straight-line method over the term of the related leases or the estimated useful lives of
the assets, whichever is shorter.
Goodwill
At least annually, and more frequently if warranted, we assess whether goodwill has been impaired
by comparing the estimated fair value, calculated based on earnings and book value multiples, of
each reporting unit with its estimated net book value, by estimating the amount of stockholders
equity required to support each reporting unit. Periodically estimating the fair value of a
reporting unit requires significant judgment and often involves the use of significant estimates
and assumptions. These estimates and assumptions could have a significant effect on whether or not
an impairment charge is recorded and the magnitude of such a charge. We completed our annual
assessment of goodwill as of September 30, 2009 and no impairment was identified.
Page 15 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
Income Taxes
We file a consolidated U.S. federal income tax return, which includes all of our qualifying
subsidiaries. We also are subject to income tax in various states and municipalities and those
foreign jurisdictions in which we operate. Amounts provided for income taxes are based on income
reported for financial statement purposes and do not necessarily represent amounts currently
payable. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and for tax loss carry-forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date. Deferred income taxes are provided for temporary differences in
reporting certain items, principally, share-based compensation, deferred compensation, unrealized
gains and losses on investments and tax amortization on intangible assets. The realization of
deferred tax assets is assessed and a valuation allowance is recorded to the extent that it is more
likely than not that any portion of the deferred tax asset will not be realized.
The tax benefit related to dividends and dividend equivalents paid on nonvested share based payment
awards and outstanding equity options is recognized as an increase to additional paid in capital.
These amounts are included in tax benefits for issuance of share-based awards on the Consolidated
Statement of Changes in Stockholders Equity.
Legal Reserves
We recognize a liability for a contingency when it is probable that a liability has been incurred
and when the amount of loss can be reasonably estimated. When a range of probable loss can be
estimated, we accrue the most likely amount of such loss, and if such amount is not determinable,
then we accrue the minimum of the range of probable loss.
We record reserves related to legal proceedings in accrued expenses and other liabilities to the
extent such losses are probable and can be estimated. The determination of these reserve amounts
requires significant judgment on the part of management. We consider many factors including, but
not limited to: the amount of the claim; the basis and validity of the claim; previous results in
similar cases; and legal precedents and case law. Each legal proceeding is reviewed with counsel in
each accounting period and the reserve is adjusted as deemed appropriate by management.
Share-Based Compensation
Share-based awards are measured based on the grant-date fair value of the award and recognized over
the period from the service inception date through the date the employee is no longer required to
provide service to earn the award. Expected forfeitures are included in determining share-based
compensation expense.
Earnings per Common Share
Basic earnings per share (EPS) is computed by dividing net earnings (loss) available to common
shareholders by the weighted average number of common shares outstanding and certain other shares
committed to be, but not yet issued. Net earnings (loss) available to common shareholders
represent net earnings (loss) to common shareholders reduced by the allocation of earnings to
participating securities. Losses are not allocated to participating securities. Common shares
outstanding and certain other shares committed to be, but not yet issued, include restricted stock
and restricted stock units for which no future service is required. Diluted EPS is computed by
dividing net earnings available to common shareholders plus dividends on dilutive mandatorily
redeemable convertible preferred stock by the weighted average number of common shares outstanding
and certain other shares committed to be, but not yet issued, plus all dilutive common stock
equivalents outstanding during the period.
Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and, therefore, are included in
the earnings allocation in computing earnings per share under the two-class method of earning per
share. We grant restricted stock and restricted stock
Page 16 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
units as part of our share-based
compensation that contain nonforfeitable rights to dividends and dividend equivalents,
respectively, and therefore, prior to the requisite service being rendered for the right to retain
the award, restricted stock and restricted stock units meet the definition of a participating
security. As such, we calculate Basic and Diluted
earnings per share under the two-class method. All prior-period earnings per share data presented
have been adjusted to include participating securities in the earnings per share computation using
the two-class method.
Securitization Activities
We engage in securitization activities related to mortgage-backed and other asset-backed
securities. Such transfers of financial assets are accounted for as sales when we have relinquished
control over the transferred assets. The gain or loss on sale of such financial assets depends, in
part, on the previous carrying amount of the assets involved in the transfer allocated between the
assets sold and the retained interests, if any, based upon their respective fair values at the date
of sale. We may retain interests in the securitized financial assets as one or more tranches of
the securitization. These retained interests are included within Financial instruments owned in the
Consolidated Statement of Financial Condition at fair value. Any changes in the fair value of such
retained interests are recognized within Principal transactions revenues in the Consolidated
Statement of Earnings.
Accounting Developments
The following is a summary of Accounting Standards Codification (ASC) Topics that have impacted
or will impact our disclosures and/or accounting policies for financial statements issued for
interim and annual periods:
Consolidation
We have adopted accounting changes described in ASC Topic 810, Consolidation, as of January 1,
2010, which require that the party who has the power to direct the activities of a variable
interest entity that most significantly impact the entitys economic performance and who has an
obligation to absorb losses of the entity or a right to receive benefits from the entity that could
potentially be significant to the entity consolidate the variable interest entity. The changes to
ASC 810, effective as of January 1, 2010, eliminate the quantitative approach previously applied to
assessing whether to consolidate a variable interest entity and require ongoing reassessments for
consolidation. Upon adoption of these accounting changes on January 1, 2010, we consolidated
certain CLOs and other investment vehicles. We applied the fair value option as our transition
method to consolidate these entities. The following table presents the effect of the consolidation
of these entities on our assets, liabilities and stockholders equity on January 1, 2010 (in
thousands):
|
|
|
|
|
Cash and cash equivalents |
|
$ |
66,254 |
|
Financial instruments owned, at fair value: |
|
|
|
|
Corporate debt securities |
|
|
30,393 |
|
Loans and other receivables |
|
|
1,523,566 |
|
Investments, at fair value |
|
|
2,990 |
|
|
|
|
|
Total financial instruments owned, at fair value |
|
|
1,556,949 |
|
Investments in managed funds |
|
|
(7,273 |
) |
Receivable from customers |
|
|
(13,317 |
) |
Receivable from fees, interest and other |
|
|
4,265 |
|
|
|
|
|
Total assets |
|
$ |
1,606,878 |
|
|
|
|
|
|
|
|
|
|
Accrued expenses and other liabilities |
|
$ |
2,886 |
|
Long-term debt |
|
|
1,600,934 |
|
|
|
|
|
Total liabilities |
|
|
1,603,820 |
|
|
|
|
|
|
|
|
|
|
Noncontrolling interests |
|
|
3,058 |
|
|
|
|
|
Total stockholders equity |
|
|
3,058 |
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
1,606,878 |
|
|
|
|
|
Page 17 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
On January 29, 2010, we sold and assigned our management agreements for the CLOs to a third
party; thus, we no longer have the power to direct the most significant activities of the CLOs.
Upon the assignment of the management agreements in the first quarter of 2010, we deconsolidated
the CLOs and account for our remaining interests in the CLOs at fair value.
Transfers and Servicing
We adopted further accounting changes described in ASC Topic 860, Transfers and Servicing, as of
January 1, 2010, which eliminate the concept of a qualifying special purpose entity, require that a
transferor consider all arrangements made contemporaneously with, or in contemplation of, a
transfer of assets when determining whether derecognition of a financial asset is appropriate,
clarify the requirement that a transferred financial asset be legally isolated from the transferor
and any of its consolidated affiliates, stipulate that constraints on a transferees ability to
freely pledge or exchange transferred assets causes the transfer to fail sale accounting, and
define participating interests and provides guidance on derecognizing participating interests. The
adoption did not have an effect on our financial condition, results of operations or cash flows.
Use of Estimates
We have made a number of estimates and assumptions relating to the reporting of assets and
liabilities and the disclosure of contingent assets and liabilities to prepare these financial
statements in conformity with U.S. generally accepted accounting principles. The most important of
these estimates and assumptions relate to fair value measurements and compensation and benefits.
Although these and other estimates and assumptions are based on the best available information,
actual results could be materially different from these estimates. Current economic conditions
increased the risks and complexity of the judgments in these estimates.
Note 2. Cash, Cash Equivalents and Short-Term Investments
We generally invest our excess cash in money market funds and other short-term investments. Cash
equivalents include highly liquid investments not held for resale with original maturities of three
months or less. The following are financial instruments that are cash and cash equivalents that are
deemed by us to be generally readily convertible into cash as of May 31, 2010 and December 31, 2009
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
May 31, 2010 |
|
|
December 31, 2009 |
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Cash in banks |
|
$ |
469,431 |
|
|
$ |
196,189 |
|
Money market investments |
|
|
524,853 |
|
|
|
1,656,978 |
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
|
994,284 |
|
|
|
1,853,167 |
|
Cash and securities segregated (1) |
|
|
1,412,894 |
|
|
|
1,089,803 |
|
|
|
|
|
|
|
|
|
|
$ |
2,407,178 |
|
|
$ |
2,942,970 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consists of deposits at exchanges and clearing organizations, as well as deposits in
accordance with Rule 15c3-3 of the Securities Exchange Act of 1934, which subjects
Jefferies, as a broker dealer carrying client accounts, to requirements related to
maintaining cash or qualified securities in a segregated reserve account for the exclusive
benefit of its clients. |
Page 18 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
Note 3. Financial Instruments
The following is a summary of our financial assets and liabilities that are accounted for at fair
value on a recurring basis as of May 31, 2010 and December 31, 2009 by level within the fair value
hierarchy (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of May 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Counterparty |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and Cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral |
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Netting |
|
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments owned: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate equity securities |
|
$ |
1,398,909 |
|
|
$ |
196,952 |
|
|
$ |
21,918 |
|
|
$ |
|
|
|
$ |
1,617,779 |
|
Corporate debt securities |
|
|
11,635 |
|
|
|
3,359,417 |
|
|
|
100,275 |
|
|
|
|
|
|
|
3,471,327 |
|
Collateralized debt obligations |
|
|
|
|
|
|
3 |
|
|
|
13,313 |
|
|
|
|
|
|
|
13,316 |
|
U.S.
government and federal agency securities |
|
|
1,276,154 |
|
|
|
447,451 |
|
|
|
|
|
|
|
|
|
|
|
1,723,605 |
|
U.S. issued municipal securities |
|
|
|
|
|
|
369,747 |
|
|
|
436 |
|
|
|
|
|
|
|
370,183 |
|
Sovereign obligations |
|
|
939,355 |
|
|
|
803,506 |
|
|
|
|
|
|
|
|
|
|
|
1,742,861 |
|
Residential mortgage-backed securities |
|
|
|
|
|
|
3,600,990 |
|
|
|
148,833 |
|
|
|
|
|
|
|
3,749,823 |
|
Commercial mortgage-backed securities |
|
|
|
|
|
|
253,361 |
|
|
|
1,000 |
|
|
|
|
|
|
|
254,361 |
|
Other asset-backed securities |
|
|
|
|
|
|
53,725 |
|
|
|
369 |
|
|
|
|
|
|
|
54,094 |
|
Loans and other receivables |
|
|
|
|
|
|
418,784 |
|
|
|
145,181 |
|
|
|
|
|
|
|
563,965 |
|
Derivatives |
|
|
224,679 |
|
|
|
117,604 |
|
|
|
|
|
|
|
(278,588 |
) |
|
|
63,695 |
|
Investments at fair value |
|
|
|
|
|
|
2,723 |
|
|
|
72,297 |
|
|
|
|
|
|
|
75,020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial instruments owned |
|
$ |
3,850,732 |
|
|
$ |
9,624,263 |
|
|
|
503,622 |
|
|
$ |
(278,588 |
) |
|
$ |
13,700,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in Managed Funds |
|
|
|
|
|
|
|
|
|
|
8,644 |
|
|
|
|
|
|
|
|
|
Level 3 assets for which the firm does not bear
economic exposure (1) |
|
|
|
|
|
|
|
|
|
|
(152,611 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 assets for which the firm bears
economic exposure |
|
|
|
|
|
|
|
|
|
$ |
359,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments sold,
not yet purchased: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate equity securities |
|
$ |
1,604,770 |
|
|
$ |
31,830 |
|
|
$ |
38 |
|
|
$ |
|
|
|
$ |
1,636,638 |
|
Corporate debt securities |
|
|
762 |
|
|
|
2,465,663 |
|
|
|
14,365 |
|
|
|
|
|
|
|
2,480,790 |
|
U.S. government and federal agency
securities |
|
|
1,335,139 |
|
|
|
191 |
|
|
|
|
|
|
|
|
|
|
|
1,335,330 |
|
U.S. issued municipal securities |
|
|
|
|
|
|
1,382 |
|
|
|
|
|
|
|
|
|
|
|
1,382 |
|
Sovereign obligations |
|
|
780,059 |
|
|
|
1,029,734 |
|
|
|
|
|
|
|
|
|
|
|
1,809,793 |
|
Residential mortgage-backed securities |
|
|
|
|
|
|
34,232 |
|
|
|
|
|
|
|
|
|
|
|
34,232 |
|
Commercial mortgage-backed securities |
|
|
|
|
|
|
184 |
|
|
|
|
|
|
|
|
|
|
|
184 |
|
Loans |
|
|
|
|
|
|
318,101 |
|
|
|
68,242 |
|
|
|
|
|
|
|
386,343 |
|
Derivatives |
|
|
217,574 |
|
|
|
145,732 |
|
|
|
1,271 |
|
|
|
(296,657 |
) |
|
|
67,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial instruments sold,
not yet purchased |
|
$ |
3,938,304 |
|
|
$ |
4,027,049 |
|
|
$ |
83,916 |
|
|
$ |
(296,657 |
) |
|
$ |
7,752,612 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consists of Level 3 assets which are attributable to third party and employee noncontrolling
interests in certain consolidated entities. |
Page 19 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Counterparty |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and Cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral |
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Netting |
|
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments owned: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate equity securities |
|
$ |
1,419,019 |
|
|
$ |
37,981 |
|
|
$ |
43,042 |
|
|
$ |
|
|
|
$ |
1,500,042 |
|
Corporate debt securities |
|
|
|
|
|
|
2,295,486 |
|
|
|
116,648 |
|
|
|
|
|
|
|
2,412,134 |
|
Collateralized debt obligations |
|
|
|
|
|
|
|
|
|
|
9,570 |
|
|
|
|
|
|
|
9,570 |
|
U.S. government and federal agency securities |
|
|
821,323 |
|
|
|
367,642 |
|
|
|
|
|
|
|
|
|
|
|
1,188,965 |
|
U.S. issued municipal securities |
|
|
|
|
|
|
127,346 |
|
|
|
420 |
|
|
|
|
|
|
|
127,766 |
|
Sovereign obligations |
|
|
71,199 |
|
|
|
374,517 |
|
|
|
196 |
|
|
|
|
|
|
|
445,912 |
|
Residential mortgage-backed securities |
|
|
|
|
|
|
2,578,796 |
|
|
|
136,496 |
|
|
|
|
|
|
|
2,715,292 |
|
Commercial mortgage-backed securities |
|
|
|
|
|
|
307,068 |
|
|
|
3,215 |
|
|
|
|
|
|
|
310,283 |
|
Other asset-backed securities |
|
|
|
|
|
|
54,180 |
|
|
|
110 |
|
|
|
|
|
|
|
54,290 |
|
Loans and other receivables |
|
|
|
|
|
|
84,666 |
|
|
|
506,542 |
|
|
|
|
|
|
|
591,208 |
|
Derivatives |
|
|
219,067 |
|
|
|
102,357 |
|
|
|
1,909 |
|
|
|
(261,216 |
) |
|
|
62,117 |
|
Investments at fair value |
|
|
|
|
|
|
4,592 |
|
|
|
65,564 |
|
|
|
|
|
|
|
70,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial instruments owned |
|
$ |
2,530,608 |
|
|
$ |
6,334,631 |
|
|
|
883,712 |
|
|
$ |
(261,216 |
) |
|
$ |
9,487,735 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 assets for which the firm does not bear
economic exposure (1) |
|
|
|
|
|
|
|
|
|
|
(379,153 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 assets for which the firm bears
economic exposure |
|
|
|
|
|
|
|
|
|
$ |
504,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments sold,
not yet purchased: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate equity securities |
|
$ |
1,350,125 |
|
|
$ |
10,403 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,360,528 |
|
Corporate debt securities |
|
|
|
|
|
|
1,909,781 |
|
|
|
|
|
|
|
|
|
|
|
1,909,781 |
|
U.S. government and federal agency securities |
|
|
1,350,155 |
|
|
|
1,911 |
|
|
|
|
|
|
|
|
|
|
|
1,352,066 |
|
U.S. issued municipal securities |
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
10 |
|
Sovereign obligations |
|
|
150,684 |
|
|
|
233,101 |
|
|
|
|
|
|
|
|
|
|
|
383,785 |
|
Residential mortgage-backed securities |
|
|
|
|
|
|
21,474 |
|
|
|
|
|
|
|
|
|
|
|
21,474 |
|
Loans |
|
|
|
|
|
|
10,660 |
|
|
|
352,420 |
|
|
|
|
|
|
|
363,080 |
|
Derivatives |
|
|
225,203 |
|
|
|
100,731 |
|
|
|
4,926 |
|
|
|
(312,433 |
) |
|
|
18,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial instruments sold,
not yet purchased |
|
$ |
3,076,167 |
|
|
$ |
2,288,071 |
|
|
$ |
357,346 |
|
|
$ |
(312,433 |
) |
|
$ |
5,409,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consists of Level 3 assets which are attributable to third party and employee
noncontrolling interests in certain consolidated entities. |
We elected to apply the fair value option to loans and loan commitments made in connection
with our investment banking and sales and trading activities and certain investments held by
subsidiaries that are not registered broker-dealers. Loans and investments at fair value are
included in Financial instruments owned and loan commitments are included in Financial instruments
sold, not yet purchased derivatives on the Consolidated Statements of Financial Condition. The
fair value option was elected for loans and loan commitments and investments held by subsidiaries
that are not registered broker-dealers because they are risk managed by us on a fair value basis.
Cash and cash equivalents, the cash component of cash and securities segregated and on deposit for
regulatory purposes or deposited with clearing and depository organizations, receivables brokers,
dealers and clearing organizations, receivables customers, receivables fees, interest and
other, payables brokers, dealers and clearing organizations and payables
Page 20 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
customers, are not accounted for at fair value; however, the recorded amounts approximate fair
value due to their liquid or short-term nature.
The following is a description of the valuation basis, including valuation techniques and inputs,
used in measuring our financial assets and liabilities that are accounted for at fair value on a
recurring basis:
Corporate Equity Securities
|
|
Exchange Traded Equity Securities: Exchange-traded equity securities are measured
based on quoted exchange prices, which are generally obtained from pricing services, and are
categorized as Level 1 in the fair value hierarchy. |
|
|
|
Non-exchange Traded Equity Securities: Non-exchange traded equity securities are
measured primarily using broker quotations, pricing service data from external providers and
prices observed for recently executed market transactions and are categorized within Level 2
of the fair value hierarchy. Where such information is not available, non-exchange traded
equity securities are categorized as Level 3 financial instruments and measured using
valuation techniques involving quoted prices of or market data for comparable companies,
similar company ratios and multiples (e.g., price/EBITDA, price/book value), discounted cash
flow analyses and transaction prices observed for subsequent financing or capital issuance by
the company. When using pricing data of comparable companies, judgment must be applied to
adjust the pricing data to account for differences between the measured security and the
comparable security (e.g., issuer market capitalization, yield, dividend rate, geographical
concentration). |
|
|
|
Equity warrants: Non-exchange traded equity warrants are generally classified
within Level 3 of the fair value hierarchy and are measured using the Black-Scholes model with
key inputs impacting the valuation including the underlying security price, implied
volatility, dividend yield, interest rate curve, strike price and maturity date. |
Corporate Debt Securities
|
|
Corporate Bonds: Corporate bonds are measured primarily using broker quotations
and pricing service data from external providers, where available, prices observed for
recently executed market transactions of comparable size, and bond spreads or credit default
swap spreads of the issuer adjusted for basis differences between the swap curve and the bond
curve. Corporate bonds measured using these valuation methods are categorized within Level 2
of the fair value hierarchy. If broker quotes, pricing data or spread data is not available,
alternative valuation techniques are used including cash flow models incorporating interest
rate curves, single name or index credit default swap curves for comparable issuers and
recovery rate assumptions. Corporate bonds measured using alternative valuation techniques
are classified within Level 3 of the fair value hierarchy and comprise a limited portion of
our corporate bonds. |
|
|
|
High Yield Corporate and Convertible Bonds: A significant portion of our high
yield corporate and convertible bonds are classified within Level 2 of the fair value
hierarchy and are measured primarily using broker quotations and pricing service data from
external providers, where available, and prices observed for recently executed market
transactions of comparable size. Where pricing data is less observable, valuations are
classified in Level 3 and are based on pending transactions involving the issuer or comparable
issuers, prices implied from an issuers subsequent financings or recapitalizations, models
incorporating financial ratios and projected cash flows of the issuer and market prices for
comparable issuers. |
|
|
|
Auction Rate Securities: Auction rate securities (ARS) included within corporate
debt securities include ARS backed by pools of student loans and auction rate preferred
securities issued by closed end mutual funds. ARS are measured using market data provided by
external service providers, as available. The fair value of ARS is also determined by
benchmarking to independent market data and adjusting for projected cash flows, level of
seniority in the capital structure, leverage, liquidity and credit rating, as appropriate.
ARS are classified within Level 3 of the fair value hierarchy based on our assessment of the
transparency of the external market data received. |
Page 21 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
Collateralized Debt Obligations
Collateralized debt obligations are measured based on valuations received from third party brokers
and classified within Level 3 of the fair value hierarchy due to the unobservable nature of the
pricing inputs underlying the broker valuations.
U.S. Government and Federal Agency Securities
|
|
U.S. Treasury Securities: U.S. Treasury securities are measured based on quoted
market prices and categorized in Level 1 of the fair value hierarchy. |
|
|
|
U.S. Agency Issued Debt Securities: Callable and non-callable U.S. agency issued
debt securities are measured primarily based on quoted market prices obtained from external
pricing services. Non-callable U.S. agency securities are generally classified within Level 1
of the fair value hierarchy and callable U.S. agency securities are classified within Level 2. |
Municipal Securities
Municipal securities are measured based on quoted prices obtained from external data providers and
generally classified within Level 2 of the fair value hierarchy.
Sovereign Obligations
|
|
G-7 Government and non-G-7 Government Bonds: G-7 government and non-G-7 government
bonds are measured based on quoted market prices obtained from external pricing services.
G-7 government bonds are categorized within Level 1 of the fair value hierarchy and non-G-7
government bonds are categorized within Level 2. |
|
|
|
Emerging Market Sovereign Debt Securities: Valuations are primarily based on
market price quotations from external data providers, where available, or recently executed
independent transactions of comparable size. To the extent market price quotations are not
available or recent transactions have not been observed, valuation techniques incorporating
foreign currency curves, interest rate yield curves and country spreads for bonds of similar
issuers, seniority and maturity are used to determine fair value. Emerging market sovereign
debt securities are generally classified within Level 2 of the fair value hierarchy. |
Residential Mortgage-Backed Securities
|
|
Agency Residential Mortgage-Backed Securities: Agency residential mortgage-backed
securities include mortgage pass-through securities (fixed and adjustable rate),
collateralized mortgage obligations, interest-only and principal-only securities and
to-be-announced securities and are generally measured using market price quotations from
external data providers and categorized within Level 2 of the fair value hierarchy. |
|
|
|
Agency Residential Inverse Interest-Only Securities (Agency Inverse IOs): The
fair value of agency inverse IOs is estimated using expected future cash flow techniques that
incorporate prepayment models and other prepayment assumptions to amortize the underlying
mortgage loan collateral. We use prices observed for recently executed transactions to
develop market-clearing spread and yield curve assumptions. Valuation inputs with regard to
underlying collateral incorporate weighted average coupon, loan-to-value, credit scores,
geographic location, maximum and average loan size, originator, servicer, and weighted average
loan age. Agency inverse IOs are categorized within Level 2 of the fair value hierarchy. We
also use vendor data in developing assumptions, as appropriate. |
|
|
|
Non-Agency Residential Mortgage-Backed Securities: Fair values are determined
primarily using discounted cash flow methodologies and securities are categorized within Level
2 or Level 3 of the fair value hierarchy based on the observability of the pricing inputs
used. Performance attributes of the underlying mortgage loans are evaluated to estimate
pricing inputs, such as prepayment rates, default rates and the severity of credit losses.
Attributes of the underlying mortgage loans that affect the pricing inputs include, but are
not limited to, weighted
|
Page 22 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
|
|
average coupon; average and maximum loan size; loan-to-value; credit scores; documentation
type; geographic location; weighted average loan age; originator; servicer; historical
prepayment, default and loss severity experience of the mortgage loan pool; and delinquency
rate. Yield curves used in the discounted cash flow models are based on observed market
prices for comparable securities and published interest rate data to estimate market yields. |
Commercial Mortgage-Backed Securities
|
|
Agency Commercial Mortgage-Backed Securities: GNMA project loan bonds and FNMA DUS
mortgage-backed securities are generally measured by using prices observed for recently
executed market transactions to estimate market-clearing spread levels for purposes of
estimating fair value. GNMA project loan bonds and FNMA DUS mortgage-backed securities are
categorized within Level 2 of the fair value hierarchy. |
|
|
|
Non-Agency Commercial Mortgage-Backed Securities: Non-agency commercial
mortgage-backed securities are measured using pricing data obtained from third party services
and prices observed for recently executed market transactions and are categorized within Level
2 and Level 3 of the fair value hierarchy. |
Other Asset-Backed Securities
Other asset-backed securities include, but are not limited to, securities backed by auto loans,
credit card receivables and student loans and are categorized within Level 2 of the fair value
hierarchy. Valuations are determined using pricing data obtained from third party services and
prices observed for recently executed market transactions.
Loans and Other Receivables
|
|
Corporate Loans: Corporate loans categorized within Level 2 of the fair value
hierarchy are measured based on market price quotations from external data providers where
sufficient observability exists as to the extent of market transaction data supporting the
pricing data. Corporate loans categorized within Level 3 are measured based on market price
quotations that are considered to be less transparent, market prices for debt securities of
the same creditor, and estimates of future cash flow incorporating assumptions regarding
creditor default and recovery rates and consideration of the issuers capital structure. |
|
|
|
Participation Certificates in GNMA Project and Construction Loans: Valuations of
participation certificates in GNMA project and construction loans are based on observed market
prices of recently executed purchases of similar loans which are then used to derive a market
implied spread. The market implied spread is used as the primary input in estimating the fair
value of loans at the measurement date. The loan participation certificates are categorized
within Level 2 of the fair value hierarchy given the observability and volume of recently
executed transactions. |
|
|
|
Escrow and Trade Claim Receivables: Escrow and trade claim receivables are
categorized within Level 3 of the fair value hierarchy with fair value estimated based on
reference to market prices and implied yields of debt securities of the same or similar
issuers. |
Derivatives
|
|
Listed Derivative Contracts: Listed derivative contracts are measured based on
quoted exchange prices, which are generally obtained from pricing services, and are
categorized as Level 1 in the fair value hierarchy. |
|
|
|
OTC Derivative Contracts: OTC derivative contracts are generally valued using
models, whose inputs reflect assumptions that we believe market participants would use in
valuing the derivative in a current period transaction. Inputs to valuation models are
appropriately calibrated to market data. For many OTC derivative contracts, the valuation
models do not involve material subjectivity as the methodologies do not entail significant
judgment and the inputs to valuation models do not involve a high degree of subjectivity as
the valuation model inputs are readily observable or can be derived from actively quoted
markets. OTC derivative contracts are primarily categorized in Level 2 of the fair value
hierarchy given the observability of the inputs to the valuation models. |
Page 23 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
|
|
OTC options include OTC equity and commodity options measured using Black-Scholes models
with key inputs impacting the valuation including the underlying security or commodity price,
implied volatility, dividend yield, interest rate curve, strike price and maturity date.
Discounted cash flow models are utilized to measure certain OTC derivative contracts including
the valuations of our interest rate swaps, which incorporate observable inputs related to
interest rate curves, and valuations of our foreign exchange forwards and swaps, which
incorporate observable inputs related to foreign currency spot rates and forward curves. Credit
defaults swaps include both index and single-name credit default swaps. External prices are
available as inputs in measuring index credit default swaps. For single-name credit default
swaps, fair value is determined based on valuation statements provided by the counterparty. For
commodity and equity total return swaps, market prices are observable for the underlying asset
and used as the basis for measuring the fair value of the derivative contracts. Total return
swaps executed on other underlyings are measured based on valuations received from third
parties. |
Investments at Fair Value
Investments at fair value include primarily investments in hedge funds, fund of funds and private
equity funds, which are measured based on the net asset value of the funds provided by the fund
managers and categorized within Level 3 of the fair value hierarchy. Additionally, investments at
fair value include direct equity investments in private companies, which are measured using
valuation techniques involving quoted prices of or market data for comparable companies, similar
company ratios and multiples (e.g., price/EBITDA, price/book value), discounted cash flow analyses
and transaction prices observed for subsequent financing or capital issuance by the company.
Direct equity investments in private companies are categorized within Level 3 of the fair value
hierarchy.
Investments in Managed Funds
Investments in managed funds that are accounted for at fair value consist of interests in
collateralized loan obligations, are measured based on valuations received from third parties and
are categorized in Level 3 of the fair value hierarchy.
At May 31, 2010 and December 31, 2009, our Financial instruments owned and Financial instruments
sold, not yet purchased are measured using different valuation bases as follows:
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
|
|
|
Financial |
|
Instruments Sold, |
|
|
Valuation Basis at |
|
Instruments |
|
Not Yet |
|
|
May 31, 2010 |
|
Owned |
|
Purchased |
|
|
Exchange closing prices |
|
10 |
% |
21 |
% |
|
Recently observed transaction prices |
|
1 |
% |
1 |
% |
|
Data providers/pricing services |
|
66 |
% |
56 |
% |
|
Broker quotes |
|
15 |
% |
21 |
% |
|
Valuation techniques |
|
8 |
% |
1 |
% |
|
|
|
|
|
|
|
|
|
|
100 |
% |
100 |
% |
|
|
|
|
|
|
| |
Page 24 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial |
|
Valuation Basis at |
|
Financial |
|
|
Instruments Sold, |
|
December 31, 2009 |
|
Instruments Owned |
|
|
Not Yet Purchased |
|
Exchange closing prices |
|
|
15 |
% |
|
|
25 |
% |
Recently observed transaction prices |
|
|
2 |
% |
|
|
2 |
% |
Data providers/pricing services |
|
|
55 |
% |
|
|
48 |
% |
Broker quotes |
|
|
12 |
% |
|
|
23 |
% |
Valuation techniques |
|
|
16 |
% |
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
Pricing information obtained from external data providers may incorporate a range of market quotes
from dealers, recent market transactions and benchmarking model derived prices to quoted market
prices and trade data for comparable securities. External pricing data is subject to evaluation
for reasonableness using a variety of means including comparisons of prices to those of similar
product types, quality and maturities, consideration of the narrowness or wideness of the range of
prices obtained, knowledge of recent market transactions and an assessment of the similarity in
prices to comparable dealer offerings in a recent time period.
The following is a summary of changes in fair value of our financial assets and liabilities that
have been classified as Level 3 for the three months ended May 31, 2010 and June 30, 2009 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unrealized gains/ |
|
|
|
Balance, |
|
|
Total gains/ losses |
|
|
Purchases, sales, |
|
|
Transfers |
|
|
|
|
|
|
Balance, |
|
|
(losses) relating to |
|
|
|
February 28, |
|
|
(realized and |
|
|
settlements, and |
|
|
into |
|
|
Transfers out of |
|
|
May 31, |
|
|
instruments still held at |
|
|
|
2010 |
|
|
unrealized) (1) |
|
|
issuances |
|
|
Level 3 |
|
|
Level 3 |
|
|
2010 |
|
|
May 31, 2010 (1) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments owned: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate equity
securities |
|
$ |
35,314 |
|
|
$ |
(15,909 |
) |
|
$ |
3,138 |
|
|
$ |
111 |
|
|
$ |
(736 |
) |
|
$ |
21,918 |
|
|
$ |
(15,853 |
) |
Corporate debt securities |
|
|
123,083 |
|
|
|
2,590 |
|
|
|
(5,373 |
) |
|
|
263 |
|
|
|
(20,288 |
) |
|
|
100,275 |
|
|
|
1,205 |
|
Collateralized debt
obligations |
|
|
12,860 |
|
|
|
453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,313 |
|
|
|
332 |
|
U.S. issued municipal
securities |
|
|
420 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
436 |
|
|
|
|
|
Residential
mortgage-backed
securities |
|
|
170,689 |
|
|
|
(2,168 |
) |
|
|
643 |
|
|
|
718 |
|
|
|
(21,049 |
) |
|
|
148,833 |
|
|
|
(5,852 |
) |
Commercial
mortgage-backed
securities |
|
|
730 |
|
|
|
(249 |
) |
|
|
391 |
|
|
|
858 |
|
|
|
(730 |
) |
|
|
1,000 |
|
|
|
(249 |
) |
Other asset-backed
securities |
|
|
110 |
|
|
|
(30 |
) |
|
|
289 |
|
|
|
|
|
|
|
|
|
|
|
369 |
|
|
|
(30 |
) |
Loans and other
receivables |
|
|
300,557 |
|
|
|
8,466 |
|
|
|
9,930 |
|
|
|
|
|
|
|
(173,772 |
) |
|
|
145,181 |
|
|
|
4,640 |
|
Investments at fair value |
|
|
65,780 |
|
|
|
5,405 |
|
|
|
1,359 |
|
|
|
7 |
|
|
|
(254 |
) |
|
|
72,297 |
|
|
|
4,638 |
|
|
Investments in managed
funds |
|
$ |
8,630 |
|
|
$ |
14 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
8,644 |
|
|
$ |
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments sold,
not yet purchased: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate equity
securities |
|
$ |
38 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
38 |
|
|
|
|
|
Corporate debt securities |
|
|
|
|
|
|
(935 |
) |
|
|
15,300 |
|
|
|
|
|
|
|
|
|
|
|
14,365 |
|
|
|
(935 |
) |
Net derivatives (2) |
|
|
1,663 |
|
|
|
(392 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,271 |
|
|
|
(392 |
) |
Loans |
|
|
283,396 |
|
|
|
|
|
|
|
32,829 |
|
|
|
|
|
|
|
(247,983 |
) |
|
|
68,242 |
|
|
|
|
|
|
|
|
(1) |
|
Realized and unrealized gains/ (losses) are reported in Principal transactions in the
Consolidated Statements of Earnings. |
|
(2) |
|
Net Derivatives represent Financial instruments owned derivatives and Financial
instruments sold, not yet purchased derivatives. |
Page 25 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
During the three months ended May 31, 2010, we had transfers of assets of $2.0 million from
Level 2 to Level 3, which are primarily attributed to transfers of non-agency mortgage-backed
securities for which no recent trade activity was observed for purposes of determining observable
inputs. Transfers of assets from Level 3 to Level 2 during the three months ended May 31, 2010
were $216.8 million and are primarily attributed to corporate loans, for which we obtained
additional market pricing data from third party sources during the quarter that provided additional
transparency into the valuation process for these assets; residential mortgage-backed securities,
for which market trades were observed in the period for either identical or similar securities; and
corporate debt securities, for which market transactions were announced or market data on
comparable securities used as a valuation benchmark became more transparent.
Transfers of liabilities from Level 2 to Level 3 were $-0- and transfers of liabilities from Level
3 to Level 2 were $248.0 million and for the three months ended May 31, 2010. Transfers of
liabilities from Level 3 to Level 2 during the three months ended May 31, 2010 are primarily due to
transfers of corporate loans, for which we obtained additional market pricing data from third party
sources during the quarter that provided additional transparency into the valuation process for
these liabilities.
Net losses on Level 3 assets were $1.4 million and net loss on Level 3 liabilities were $1.3
million for the three months ended May 31, 2010. Net losses on Level 3 assets were attributed to
corporate equity securities due to market volatility impacting the valuation of equity warrants and
declines in commodity prices underlying certain equity valuations, partially offset by net gains on
loans and investments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unrealized gains/ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(losses) relating |
|
|
|
|
|
|
|
|
|
|
|
Purchases, sales, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to instruments |
|
|
|
Balance, March |
|
|
Total gains/ (losses) (realized |
|
|
settlements, and |
|
|
Transfers into |
|
|
Transfers out of |
|
|
Balance, June 30, |
|
|
still held at June |
|
|
|
31, 2009 |
|
|
and unrealized) (1) |
|
|
issuances |
|
|
Level 3 |
|
|
Level 3 |
|
|
2009 |
|
|
30, 2009 (1) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments owned: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate equity
securities |
|
$ |
22,253 |
|
|
$ |
(3,304 |
) |
|
$ |
207 |
|
|
$ |
4,205 |
|
|
$ |
(3,064 |
) |
|
$ |
20,297 |
|
|
$ |
(3,598 |
) |
Corporate debt securities |
|
|
223,364 |
|
|
|
(15,864) |
(2) |
|
|
2,860 |
|
|
|
8,967 |
|
|
|
(54,861 |
) |
|
|
164,466 |
|
|
|
(16,666 |
) |
Collateralized debt
obligations |
|
|
2,179 |
|
|
|
(60 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,119 |
|
|
|
(60 |
) |
U.S. issued municipal
securities |
|
|
403 |
|
|
|
(50) |
(2) |
|
|
156 |
|
|
|
|
|
|
|
|
|
|
|
509 |
|
|
|
(50 |
) |
Sovereign obligations |
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
67 |
|
|
|
|
|
|
|
78 |
|
|
|
11 |
|
Residential
mortgage-backed
securities |
|
|
92,249 |
|
|
|
9,573 |
|
|
|
(43,225 |
) |
|
|
76,243 |
|
|
|
(17,080 |
) |
|
|
117,760 |
|
|
|
(2,888 |
) |
Commercial
mortgage-backed
securities |
|
|
322 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(322 |
) |
|
|
|
|
|
|
|
|
Other asset-backed
securities |
|
|
1,914 |
|
|
|
(376 |
) |
|
|
1,765 |
|
|
|
|
|
|
|
(1,881 |
) |
|
|
1,422 |
|
|
|
(343 |
) |
Derivatives |
|
|
3,087 |
|
|
|
2,459 |
|
|
|
(47 |
) |
|
|
|
|
|
|
|
|
|
|
5,499 |
|
|
|
2,459 |
|
Loans and other
receivables |
|
|
160,282 |
|
|
|
2,275 |
|
|
|
113,137 |
|
|
|
|
|
|
|
|
|
|
|
275,694 |
|
|
|
631 |
|
Investments at fair value |
|
|
71,348 |
|
|
|
2,688 |
|
|
|
(551 |
) |
|
|
|
|
|
|
(44 |
) |
|
|
73,441 |
|
|
|
2,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
577,401 |
|
|
$ |
(2,648 |
) |
|
$ |
74,302 |
|
|
$ |
89,482 |
|
|
$ |
(77,252 |
) |
|
$ |
661,285 |
|
|
$ |
(17,999 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments sold,
not yet purchased: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities |
|
$ |
|
|
|
$ |
203 |
|
|
$ |
1,647 |
|
|
$ |
2,952 |
|
|
|
|
|
|
$ |
4,802 |
|
|
$ |
125 |
|
Derivatives |
|
|
3,873 |
|
|
|
3,645 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
7,538 |
|
|
|
3,645 |
|
Loans |
|
|
58,681 |
|
|
|
(165 |
) |
|
|
170,922 |
|
|
|
|
|
|
|
|
|
|
|
229,438 |
|
|
|
|
|
Other |
|
|
225 |
|
|
|
|
|
|
|
(225 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
62,779 |
|
|
$ |
3,683 |
|
|
$ |
172,364 |
|
|
$ |
2,952 |
|
|
|
|
|
|
$ |
241,778 |
|
|
$ |
3,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 26 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
|
|
|
(1) |
|
Realized and unrealized gains/ (losses) are reported in principal transactions in the
Consolidated Statements of Earnings. |
|
(2) |
|
During the three months ended June 30, 2009, we changed our valuation methodology for
auction rate securities, which are included within corporate debt securities and U.S. issued
municipal securities. Previously, auction rate securities were valued based on an internal
model based on projected cash flows for the securities discounted for lack of liquidity. As
of June 30, 2009, auction rate securities are valued using a valuation technique that
benchmarks the securities to transactions and market prices of comparable securities,
adjusting for projected cash flows and security structure, where appropriate. |
During the three months ended June 30, 2009, we had transfers of assets of $89.5 million from
Level 2 to Level 3 and transfers of $77.3 million from Level 3 to Level 2. During the three months
ended June 30, 2009, we had transfers of liabilities of $3.0 million from Level 2 to Level 3 and
transfers of liabilities of $-0- from Level 3 to Level 2. Net losses on Level 3 assets of $2.6
million for the three months ended June 30, 2009 and net losses on Level 3 liabilities were $3.7
million for the three months ended June 30, 2009.
The following is a summary of changes in fair value of our financial assets and liabilities that
have been classified as Level 3 for the five months ended May 31, 2010 and the six months ended
June 30, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Months Ended May 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unrealized gains/ |
|
|
|
|
|
|
|
Total gains/ losses |
|
|
Purchases, sales, |
|
|
|
|
|
|
|
|
|
|
Balance, |
|
|
(losses) relating to |
|
|
|
Balance, |
|
|
(realized and |
|
|
settlements, and |
|
|
Transfers into |
|
|
Transfers out of |
|
|
May 31, |
|
|
instruments still held |
|
|
|
December 31, 2009 |
|
|
unrealized) (1) |
|
|
issuances |
|
|
Level 3 |
|
|
Level 3 |
|
|
2010 |
|
|
at May 31, 2010 (1) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments
owned: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate equity
securities |
|
$ |
43,042 |
|
|
$ |
(21,841 |
) |
|
$ |
2,984 |
|
|
$ |
681 |
|
|
$ |
(2,948 |
) |
|
$ |
21,918 |
|
|
$ |
(21,610 |
) |
Corporate debt securities |
|
|
116,648 |
|
|
|
(159 |
) |
|
|
(3,632 |
) |
|
|
110 |
|
|
|
(12,692 |
) |
|
|
100,275 |
|
|
|
1,788 |
|
Collateralized debt
obligations |
|
|
9,570 |
|
|
|
3,743 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,313 |
|
|
|
3,743 |
|
U.S. issued municipal
securities |
|
|
420 |
|
|
|
16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
436 |
|
|
|
16 |
|
Sovereign obligations |
|
|
196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(196 |
) |
|
|
|
|
|
|
|
|
Residential
mortgage-backed
securities |
|
|
136,496 |
|
|
|
8,971 |
|
|
|
15,801 |
|
|
|
6,223 |
|
|
|
(18,658 |
) |
|
|
148,833 |
|
|
|
(207 |
) |
Commercial
mortgage-backed
securities |
|
|
3,215 |
|
|
|
(237 |
) |
|
|
(901 |
) |
|
|
858 |
|
|
|
(1,935 |
) |
|
|
1,000 |
|
|
|
(248 |
) |
Other asset-backed
securities |
|
|
110 |
|
|
|
(30 |
) |
|
|
289 |
|
|
|
|
|
|
|
|
|
|
|
369 |
|
|
|
(30 |
) |
Loans and other
receivables |
|
|
506,542 |
|
|
|
9,142 |
|
|
|
9,504 |
|
|
|
|
|
|
|
(380,007 |
) |
|
|
145,181 |
|
|
|
5,173 |
|
Investments at fair value |
|
|
65,564 |
|
|
|
5,511 |
|
|
|
(1,190 |
) |
|
|
2,412 |
|
|
|
|
|
|
|
72,297 |
|
|
|
4,620 |
|
|
Investments in managed
funds |
|
$ |
|
|
|
$ |
1,372 |
|
|
$ |
|
|
|
$ |
7,272 |
|
|
$ |
|
|
|
$ |
8,644 |
|
|
$ |
1,372 |
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments sold,
not yet purchased: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate equity
securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
38 |
|
|
$ |
|
|
|
$ |
38 |
|
|
$ |
|
|
Corporate debt securities |
|
|
|
|
|
|
(935 |
) |
|
|
15,300 |
|
|
|
|
|
|
|
|
|
|
|
14,365 |
|
|
|
(935 |
) |
Net derivatives (2) |
|
|
6,835 |
|
|
|
(3,655 |
) |
|
|
|
|
|
|
|
|
|
|
(1,909 |
) |
|
|
1,271 |
|
|
|
(3,655 |
) |
Loans |
|
|
352,420 |
|
|
|
|
|
|
|
44,566 |
|
|
|
|
|
|
|
(328,744 |
) |
|
|
68,242 |
|
|
|
|
|
|
|
|
(1) |
|
Realized and unrealized gains/ (losses) are reported in Principal transactions in the
Consolidated Statements of Earnings. |
|
(2) |
|
Net Derivatives represent Financial instruments owned derivatives and Financial
instruments sold, not yet purchased derivatives. |
During the five months ended May 31, 2010, we had transfers of assets of $17.6 million from
Level 2 to Level 3, which are primarily attributed to transfers of non-agency mortgage-backed
securities for which no recent trade activity was observed for purposes of determining observable
inputs. Additionally, transfers of assets from Level 2 to Level 3 are attributed to certain
investments at fair value and investments in managed funds, which have little to no
Page 27 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
transparency as
to trade activity. Transfers of assets from Level 3 to Level 2 during the five months ended May
31, 2010 were $416.4 million primarily attributed to corporate loans, for which we obtained
additional market pricing data from third party sources during the quarter that provided additional
transparency into the valuation process for these assets; residential mortgage-backed securities,
for which market trades were observed in the period for either identical or similar securities; and
corporate debt securities, for which market transactions were announced or market data on
comparable securities used as a benchmark became more observable.
Transfers of liabilities from Level 2 to Level 3 were $0.04 million and transfers of liabilities
from Level 3 to Level 2 were $330.7 million for the five months ended May 31, 2010. Transfers of
liabilities from Level 3 to Level 2 during the three and five months ended May 31, 2010 are
primarily due to transfers of corporate loans, for which we obtained additional market pricing data
from third party sources during the quarter that provided additional transparency into the
valuation process for these liabilities.
Net gains on Level 3 assets were $6.5 million and net loss on Level 3 liabilities were $4.6 million
for the five months ended May 31, 2010. Net losses on Level 3 assets were attributed to corporate
equity securities due to market volatility impacting the valuation of equity warrants and declines
in commodity prices underlying certain equity valuations, partially offset by net gains on loans
and investments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unrealized gains/ |
|
|
|
Balance, December |
|
|
Total gains/ (losses) |
|
|
Purchases, sales, |
|
|
Transfers into |
|
|
Transfers out of |
|
|
Balance, |
|
|
(losses) relating to |
|
|
|
31, 2008 |
|
|
(realized and |
|
|
settlements, and |
|
|
Level 3 |
|
|
Level 3 |
|
|
June 30, |
|
|
instruments still held |
|
|
|
|
|
|
|
unrealized) (1) |
|
|
issuances |
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
at June 30, 2009 (1) |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments
owned: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate equity
securities |
|
$ |
41,351 |
|
|
$ |
(13,382 |
) |
|
$ |
(9,279 |
) |
|
$ |
4,810 |
|
|
$ |
(3,203 |
) |
|
$ |
20,297 |
|
|
$ |
(15,261 |
) |
Corporate debt securities |
|
|
177,603 |
|
|
|
(42,902 |
) |
|
|
58,927 |
|
|
|
33,890 |
|
|
|
(63,052 |
) |
|
|
164,466 |
|
|
|
(42,144 |
) |
Collateralized debt
obligations |
|
|
2,179 |
|
|
|
(60 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,119 |
|
|
|
(60 |
) |
U.S. issued municipal
securities |
|
|
|
|
|
|
(50 |
) |
|
|
559 |
|
|
|
|
|
|
|
|
|
|
|
509 |
|
|
|
(50 |
) |
Sovereign obligations |
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
67 |
|
|
|
|
|
|
|
78 |
|
|
|
11 |
|
Residential mortgage
backed
securities |
|
|
63,065 |
|
|
|
12,129 |
|
|
|
(12,377 |
) |
|
|
76,243 |
|
|
|
(21,300 |
) |
|
|
117,760 |
|
|
|
3,989 |
|
Commercial mortgage
backed
securities |
|
|
|
|
|
|
|
|
|
|
322 |
|
|
|
|
|
|
|
(322 |
) |
|
|
|
|
|
|
|
|
Other asset backed
securities |
|
|
2,089 |
|
|
|
(583 |
) |
|
|
1,797 |
|
|
|
|
|
|
|
(1,881 |
) |
|
|
1,422 |
|
|
|
(343 |
) |
Derivatives |
|
|
|
|
|
|
5,546 |
|
|
|
(47 |
) |
|
|
|
|
|
|
|
|
|
|
5,499 |
|
|
|
7,932 |
|
Loans and other
receivables |
|
|
108,029 |
|
|
|
(2,254 |
) |
|
|
169,919 |
|
|
|
|
|
|
|
|
|
|
|
275,694 |
|
|
|
(3,868 |
) |
Investments at fair value |
|
|
75,059 |
|
|
|
(3,786 |
) |
|
|
2,206 |
|
|
|
6 |
|
|
|
(44 |
) |
|
|
73,441 |
|
|
|
(4,308 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
469,375 |
|
|
$ |
(45,331 |
) |
|
$ |
212,027 |
|
|
$ |
115,016 |
|
|
$ |
(89,802 |
) |
|
$ |
661,285 |
|
|
$ |
(54,102 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments sold,
not yet purchased: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate debt securities |
|
$ |
3,515 |
|
|
$ |
203 |
|
|
$ |
1,647 |
|
|
$ |
2,952 |
|
|
$ |
(3,515 |
) |
|
$ |
4,802 |
|
|
$ |
(295 |
) |
Derivatives |
|
|
8,197 |
|
|
|
(679 |
) |
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
7,538 |
|
|
|
1,753 |
|
Loans |
|
|
|
|
|
|
|
|
|
|
229,438 |
|
|
|
|
|
|
|
|
|
|
|
229,438 |
|
|
|
|
|
Other |
|
|
|
|
|
|
225 |
|
|
|
(225 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
11,712 |
|
|
$ |
(251 |
) |
|
$ |
230,880 |
|
|
$ |
2,952 |
|
|
$ |
(3,515 |
) |
|
$ |
241,778 |
|
|
$ |
1,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Realized and unrealized gains/ (losses) are reported in principal transactions in
the Consolidated Statements of Earnings. |
During the six months ended June 30, 2009, we had transfers of assets of $115.0 million from
Level 2 to Level 3 and transfers of $89.8 million from Level 3 to Level 2. During the six months
ended June 30, 2009, we had transfers of
Page 28 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
liabilities of $3.0 million from Level 2 to Level 3 and
transfers of liabilities of $3.5 million from Level 3 to Level 2. Net losses on Level 3 assets of
$45.3 million for the six months ended June 30, 2009 and net gains on Level 3 liabilities were $0.3
million for the six months ended June 30, 2009.
Level 3 cash instruments are frequently hedged with instruments classified within Level 1 and Level
2, and accordingly, gains or losses that have been reported in Level 3 are frequently offset by
gains or losses attributable to instruments classified within Level 1 or Level 2 or by gains or
losses on derivative contracts classified in Level 3 of the fair value hierarchy.
The following tables provide further information about our investments in entities that have the
characteristics of an investment company at May 31, 2010 and December 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2010 |
|
|
|
|
|
|
|
Unfunded |
|
|
Redemption Frequency |
|
|
|
Fair Value |
|
|
Commitments |
|
|
(if currently eligible) |
|
Equity Long/Short Hedge Funds (a) (i) |
|
$ |
18,432 |
|
|
$ |
|
|
|
Quarterly, Semiannually |
Equity Long/Short Hedge Funds International(b) (i) |
|
|
32 |
|
|
|
|
|
|
|
|
|
High Yield Hedge Funds(c) (i) |
|
|
996 |
|
|
|
|
|
|
|
|
|
High Yield Hedge Funds International(d) (i) |
|
|
733 |
|
|
|
|
|
|
|
|
|
Fund of Funds(e) (i) |
|
|
2,784 |
|
|
|
163 |
|
|
Annually, GP Consent Required |
Private Equity Funds(f) (i) |
|
|
10,825 |
|
|
|
3,053 |
|
|
|
|
|
Private Equity Funds International(g) |
|
|
11,325 |
|
|
|
4,616 |
|
|
|
|
|
Other Investments(h) |
|
|
7,298 |
|
|
|
|
|
|
At Will |
|
|
|
|
|
|
|
|
|
|
|
Total(j) |
|
$ |
52,425 |
|
|
$ |
7,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
Unfunded |
|
|
Redemption Frequency |
|
|
|
Fair Value |
|
|
Commitments |
|
|
(if currently eligible) |
|
Equity Long/Short Hedge Funds (a) (i) |
|
$ |
16,210 |
|
|
$ |
|
|
|
Quarterly, Semiannually |
Equity Long/Short Hedge Funds International(b) (i) |
|
|
71 |
|
|
|
|
|
|
|
|
|
High Yield Hedge Funds(c) (i) |
|
|
1,022 |
|
|
|
|
|
|
|
|
|
High Yield Hedge Funds International(d) (i) |
|
|
1,114 |
|
|
|
|
|
|
|
|
|
Fund of Funds(e) (i) |
|
|
6,497 |
|
|
|
166 |
|
|
Annually, GP Consent Required |
Private Equity Funds(f) (i) |
|
|
10,407 |
|
|
|
3,150 |
|
|
|
|
|
Private Equity Funds International(g) |
|
|
6,979 |
|
|
|
5,081 |
|
|
|
|
|
Other Investments(h) |
|
|
5,113 |
|
|
|
|
|
|
At Will |
|
|
|
|
|
|
|
|
|
|
|
Total(j) |
|
$ |
47,413 |
|
|
$ |
8,397 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
This category includes investments in hedge funds that invest in both long and short equity
securities in both domestic and international markets. These hedge funds may invest in
securities in both public and private sectors. Investments representing approximately 2% of
fair value cannot be redeemed as they are in liquidation and distributions will be received
through the liquidation of the underlying assets of the funds. We are unable to estimate when
the underlying assets will be liquidated. At May 31, 2010 and December 31, 2009, investments
representing approximately 30% and 31%, respectively, of fair value cannot be redeemed until
the lock-up period expires on December 31, 2010. At May 31, 2010 and December 31, 2009,
investments representing approximately 68% and 67%, respectively, of the fair value in this
category are redeemable with 60 90 days prior written notice. |
Page 29 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
(b) |
|
This category includes an investment in a hedge fund that invests in foreign technology
equity securities, which has no redemption provisions. Distributions are received through the
liquidation of the underlying assets of the fund, which is estimated to be within one to two
years. |
|
(c) |
|
This category includes investments in funds that invest in U.S. public high yield debt,
private high yield investments, senior bank loans, public leveraged equities, distressed debt,
private equity investments and emerging markets debt. There are no redemption provisions and
distributions are received through the liquidation of the underlying assets of the funds.
These funds are currently in liquidation; however, we are unable to estimate when the
underlying assets will be fully liquidated. |
|
(d) |
|
This category includes an investment in a hedge fund that invests in Russian fixed income
instruments. |
|
(e) |
|
This category includes investments in funds of funds that invest in various private equity
funds. At May 31, 2010 and December 31, 2009, approximately 93% and 40%, respectively, of the
fair value of the investments is managed by us and has no redemption provisions.
Distributions are received through the liquidation of the underlying assets of the fund of
funds, which are estimated to be liquidated in one to three years. At December 31, 2009,
investments representing approximately 60% of the fair value of the investments in this
category were approved for redemption and the funds net asset values were received in the
first quarter of 2010. Investments representing approximately 7% at May 31, 2010 of the fair
value of the investments in this category have been redeemed and the remaining funds are
expected to be received within the year. |
|
(f) |
|
This category includes investments in private equity funds that invest in the equity of
various U.S. private companies in the energy, technology, internet service and
telecommunication service industries including acquired or restructured companies. These
investments can never be redeemed; distributions are received through the liquidation of the
underlying assets of the funds. At May 31, 2010 and December 31, 2009, investments
representing approximately 94% of fair value are expected to liquidate in one to eleven years.
At May 31, 2010 and December 31, 2009, an investment representing approximately 6% of the
total fair value in this category is currently in liquidation; however, we are unable to
estimate when the underlying assets will be fully liquidated. |
|
(g) |
|
This category includes investments in private equity funds that invest in the equity of
foreign private companies. At May 31, 2010 and December 31, 2009, investments representing
approximately 55% and 74%, respectively, of fair value are Israeli private equity funds that
invest in service companies. The fair values of these investments have been estimated using
the net asset value derived from each of the funds partner capital statements. These
investments can never be redeemed; distributions are received through the liquidation of the
underlying assets of the fund, which are estimated to be liquidated in two to five years. At
May 31, 2010 and December 31, 2009 the fair value of investments representing approximately
45% and 26%, respectively, of the fair value are private equity funds that invest in Croatian
and Vietnamese companies. |
|
(h) |
|
At May 31, 2010 and December 31, 2009 investments representing approximately 79% and 67%,
respectively, of the fair value of investments are held on behalf of a Jefferies deferred
compensation plan measured at net asset value. At May 31, 2010 and December 31, 2009
investments representing approximately 21% and 33%, respectively, of fair value are
closed-ended funds that invest in Vietnamese equity and debt instruments. |
|
(i) |
|
Fair value has been estimated using the net asset value derived from each of the funds
partner capital statements. |
|
(j) |
|
Investments at fair value, in the Consolidated Statements of Financial Condition at May 31,
2010 and December 31, 2009 include $22.6 million and $22.7 million, respectively, of direct
investments which are not investment companies and therefore are not part of this disclosure
table. |
Note 4. Derivative Financial Instruments
Off-Balance Sheet Risk
We have contractual commitments arising in the ordinary course of business for securities loaned or
purchased under agreements to resell, repurchase agreements, future purchases and sales of foreign
currencies, securities transactions
on a when-issued basis and underwriting. Each of these financial instruments and activities
contains varying degrees of off-balance sheet risk whereby the fair values of the securities
underlying the financial instruments may be in excess of, or less than, the contract amount. The
settlement of these transactions is not expected to have a material effect upon our consolidated
financial statements.
Page 30 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
Derivative Financial Instruments
Our derivative activities are recorded at fair value in the Consolidated Statements of Financial
Condition, with realized and unrealized gains and losses recognized in Principal transactions in
the Consolidated Statements of Earnings on a trade date basis and as a component of cash flows from
operating activities in the Consolidated Statements of Cash Flows. Acting in a trading capacity, we
may enter into derivative transactions to satisfy the needs of our clients and to manage our own
exposure to market and credit risks resulting from our trading activities.
Derivatives are subject to various risks similar to other financial instruments, including market,
credit and operational risk. In addition, we may be exposed to legal risks related to derivative
activities. The risks of derivatives should not be viewed in isolation, but rather should be
considered on an aggregate basis along with our other trading-related activities. We manage the
risks associated with derivatives on an aggregate basis along with the risks associated with
proprietary trading as part of our firmwide risk management policies. In connection with our
derivative activities, we may enter into master netting agreements and collateral arrangements with
counterparties. These agreements provide us with the ability to offset a counterpartys rights and
obligations, request additional collateral when necessary or liquidate the collateral in the event
of counterparty default.
A portion of our derivative activities is performed by Jefferies Financial Products, LLC (JFP), a
market maker in commodity index products and a trader in commodity futures and options. JFP
maintains credit intermediation facilities with highly rated European banks (the Banks), which
allow JFP customers that require a counterparty with a high credit rating for commodity index
transactions to transact with the Banks. The Banks simultaneously enter into offsetting
transactions with JFP and receive a fee from JFP for providing credit support. In certain cases,
JFP is responsible to the Banks for the performance of JFPs customers.
The fair value of derivative assets and derivative liabilities are presented on the Consolidated
Statements on Financial Condition in Financial Instruments Owned Derivatives and Financial
Instruments Sold, Not Yet Purchased Derivatives net of cash paid or received under credit support
agreements and on a net counterparty basis when a legal right to offset exists under a master
netting agreement. Net unrealized and realized gains and losses on derivative contracts are
recognized within Principal transactions revenue in our Consolidated Statements of Earnings. (See
Notes 3 and 16 for additional disclosures about derivative instruments.)
The following table presents the fair value and related number of derivative contracts at May 31,
2010 and December 31, 2009 categorized by predominant risk exposure. The fair value of
assets/liabilities related to derivative contracts represents our receivable/payable for derivative
financial instruments, gross of counterparty netting and cash collateral received and pledged
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2010 |
|
|
|
Assets |
|
|
Liabilities |
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Number of |
|
|
|
Fair Value |
|
|
Contracts |
|
|
Fair Value |
|
|
Contracts |
|
Interest rate contracts |
|
$ |
35,772 |
|
|
|
43,663 |
|
|
$ |
67,179 |
|
|
|
34,525 |
|
Foreign exchange contracts |
|
|
18,807 |
|
|
|
660 |
|
|
|
22,530 |
|
|
|
636 |
|
Equity contracts |
|
|
218,726 |
|
|
|
1,254,797 |
|
|
|
223,625 |
|
|
|
2,156,748 |
|
Commodity contracts |
|
|
37,383 |
|
|
|
56,862 |
|
|
|
35,968 |
|
|
|
39,505 |
|
Credit contracts |
|
|
31,595 |
|
|
|
23 |
|
|
|
15,275 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
342,283 |
|
|
|
1,356,005 |
|
|
|
364,577 |
|
|
|
2,231,426 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Counterparty/cash-collateral netting |
|
|
(278,588 |
) |
|
|
|
|
|
|
(296,657 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total per Consolidated
Statement of
Financial Condition |
|
$ |
63,695 |
|
|
|
|
|
|
$ |
67,920 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 31 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
Assets |
|
|
Liabilities |
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Number of |
|
|
|
Fair Value |
|
|
Contracts |
|
|
Fair Value |
|
|
Contracts |
|
Interest rate contracts |
|
$ |
27,415 |
|
|
|
42,898 |
|
|
$ |
24,068 |
|
|
|
40,864 |
|
Foreign exchange contracts |
|
|
2,637 |
|
|
|
67 |
|
|
|
7,470 |
|
|
|
98 |
|
Equity contracts |
|
|
222,311 |
|
|
|
898,472 |
|
|
|
228,403 |
|
|
|
1,954,260 |
|
Commodity contracts |
|
|
54,257 |
|
|
|
58,434 |
|
|
|
57,237 |
|
|
|
32,245 |
|
Credit contracts |
|
|
16,713 |
|
|
|
10 |
|
|
|
13,682 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
323,333 |
|
|
|
999,881 |
|
|
|
330,860 |
|
|
|
2,027,475 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Counterparty/cash-collateral netting |
|
|
(261,216 |
) |
|
|
|
|
|
|
(312,433 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total per Consolidated
Statement of
Financial Condition |
|
$ |
62,117 |
|
|
|
|
|
|
$ |
18,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table presents unrealized and realized gains and losses on derivative contracts
for the three months ended May 31, 2010 and June 30, 2009 and the five and six months ended May 31,
2010 and June 30, 2009, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Months |
|
|
Six Months |
|
|
|
Three Months Ended |
|
|
Ended |
|
|
Ended |
|
|
|
May 31, 2010 |
|
|
June 30, 2009 |
|
|
May 31, 2010 |
|
|
June 30, 2009 |
|
|
|
Gain (Loss) |
|
|
Gain (Loss) |
|
|
Gain (Loss) |
|
|
Gain (Loss) |
|
Interest rate contracts |
|
$ |
(11,293 |
) |
|
$ |
(2,337 |
) |
|
$ |
(36,759 |
) |
|
$ |
(7,347 |
) |
Foreign exchange contracts |
|
|
2,457 |
|
|
|
173 |
|
|
|
816 |
|
|
|
(948 |
) |
Equity contracts |
|
|
(22,067 |
) |
|
|
(17,056 |
) |
|
|
(47,268 |
) |
|
|
(208,539 |
) |
Commodity contracts |
|
|
7,469 |
|
|
|
(1,311 |
) |
|
|
3,732 |
|
|
|
(4,867 |
) |
Credit contracts |
|
|
(27,614 |
) |
|
|
10,265 |
|
|
|
(50,762 |
) |
|
|
17,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(51,048 |
) |
|
$ |
(10,266 |
) |
|
$ |
(130,241 |
) |
|
$ |
(204,221 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The following tables set forth the remaining contract maturity of the fair value of OTC derivative
assets and liabilities as of May 31, 2010 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTC derivative assets (1) (2) (4) |
|
|
|
|
|
|
|
|
|
|
|
Greater Than |
|
|
Cross-Maturity |
|
|
|
|
|
|
0 12 Months |
|
|
1 5 Years |
|
|
5 Years |
|
|
Netting (3) |
|
|
Total |
|
Commodity swaps |
|
$ |
8,136 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
8,136 |
|
Commodity options |
|
|
18,252 |
|
|
|
650 |
|
|
|
|
|
|
|
(828 |
) |
|
|
18,074 |
|
Credit default swaps |
|
|
|
|
|
|
4,016 |
|
|
|
17,763 |
|
|
|
(2,893 |
) |
|
|
18,886 |
|
Total return swaps |
|
|
614 |
|
|
|
1,091 |
|
|
|
|
|
|
|
|
|
|
|
1,705 |
|
Fx forwards and swaps |
|
|
12,053 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,053 |
|
Interest rate swaps |
|
|
|
|
|
|
|
|
|
|
4,466 |
|
|
|
|
|
|
|
4,466 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
39,055 |
|
|
$ |
5,757 |
|
|
$ |
22,229 |
|
|
$ |
(3,721 |
) |
|
$ |
63,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
At May 31, 2010, we held exchange traded derivative assets of $11.5 million. |
|
(2) |
|
Option and swap contracts in the table above are gross of collateral received.
Option and swap contracts are recorded net of collateral received on the Consolidated
Statement of Financial Condition. At May 31, 2010, collateral received was $11.1 million. |
Page 32 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
|
|
|
(3) |
|
Amounts represent the netting of receivable balances with payable balances for the
same counterparty across maturity categories. |
|
(4) |
|
Derivative fair values include counterparty netting. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTC derivative liabilities (1) (2) (4) |
|
|
|
|
|
|
|
|
|
|
|
Greater Than |
|
|
Cross-Maturity |
|
|
|
|
|
|
0 12 Months |
|
|
1 5 Years |
|
|
5 Years |
|
|
Netting (3) |
|
|
Total |
|
Commodity swaps |
|
$ |
1,194 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
1,194 |
|
Commodity options |
|
|
26,463 |
|
|
|
913 |
|
|
|
|
|
|
|
(828 |
) |
|
|
26,548 |
|
Equity options |
|
|
|
|
|
|
823 |
|
|
|
|
|
|
|
|
|
|
|
823 |
|
Credit default swaps |
|
|
|
|
|
|
|
|
|
|
5,731 |
|
|
|
(2,893 |
) |
|
|
2,838 |
|
Total return swaps |
|
|
3,234 |
|
|
|
516 |
|
|
|
|
|
|
|
|
|
|
|
3,750 |
|
Fx forwards and swaps |
|
|
15,564 |
|
|
|
213 |
|
|
|
|
|
|
|
|
|
|
|
15,777 |
|
Interest rate swaps |
|
|
|
|
|
|
20,889 |
|
|
|
18,472 |
|
|
|
|
|
|
|
39,361 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
46,455 |
|
|
$ |
23,354 |
|
|
$ |
24,203 |
|
|
$ |
(3,721 |
) |
|
$ |
90,291 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
At May 31, 2010, we held exchange traded derivative liabilities of $6.8 million. |
|
(2) |
|
Option and swap contracts in the table above are gross of collateral pledged.
Option and swap contracts are recorded net of collateral pledged on the Consolidated
Statement of Financial Condition. At May 31, 2010, collateral pledged was $29.2 million. |
|
(3) |
|
Amounts represent the netting of receivable balances with payable balances for
the same counterparty across maturity categories. |
|
(4) |
|
Derivative fair values include counterparty netting. |
At May 31, 2010, the counterparty credit quality with respect to the fair value of our OTC
derivatives assets was as follows (in thousands):
|
|
|
|
|
Counterparty credit quality: |
|
|
|
|
A or higher |
|
$ |
61,168 |
|
Unrated |
|
|
2,152 |
|
|
|
|
|
Total |
|
$ |
63,320 |
|
|
|
|
|
Contingent Features
Certain of our derivative instruments contain provisions that require our debt to maintain an
investment grade credit rating from each of the major credit rating agencies. If our debt were to
fall below investment grade, it would be in violation of these provisions, and the counterparties
to the derivative instruments could request immediate payment or demand immediate and ongoing full
overnight collateralization on our derivative instruments in liability positions. The aggregate
fair value of all derivative instruments with such credit-risk-related contingent features that are
in a liability position at May 31, 2010 and December 31, 2009, is $30.8 million and $12.2 million,
respectively, for which we have posted collateral of $26.5 million and $18.9 million, respectively,
in the normal course of business. If the credit-risk-related contingent features underlying these
agreements were triggered on May 31, 2010 and December 31, 2009, we would have been required to
post an additional $4.8 million and $4.6 million, respectively, of collateral to our
counterparties.
Page 33 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
Note 5. Collateralized Transactions
We receive securities in connection with resale agreements and securities borrowings and generally
provide cash to the resale counterparty or lender, respectively, as collateral. At May 31, 2010
and December 31, 2009, the approximate fair value of securities received by us that may be sold or
repledged by us related to resale agreements and securities borrowings was $17.0 billion and
$15.6 billion, respectively. At May 31, 2010 and December 31, 2009, a substantial portion of the
securities received by us had been sold or repledged. Additionally, we receive securities as
collateral in connection with customer margin loans.
We engage in securities for securities transactions in which we are the borrower of securities and
provide other securities as collateral rather than cash. As no cash is provided under these types
of transactions, we, as borrower, should treat these as noncash transactions and should not
recognize assets or liabilities on the Consolidated Statements of Financial Condition. The
securities pledged as collateral under these transactions are included within the total amount of
Financial instruments owned and noted as Securities pledged to creditors on our Consolidated
Statement of Financial Condition. At December 31, 2009, certain securities for securities
transactions of borrowed fixed income securities were recorded as an asset on our Consolidated
Statement of Financial Condition within Securities borrowed and the fixed income securities pledged
as collateral to the lender were recorded as a liability within Securities loaned on the
Consolidated Statement of Financial Condition. The December 31, 2009 Consolidated Statement of
Financial Condition has not been adjusted for this accounting treatment as the impact on the
consolidated financial statements is not material. At May 31, 2010, we have appropriately not
recognized these transactions on the Consolidated Statement of Financial Condition.
We pledge securities in connection with repurchase agreements, securities lending agreements and
other secured arrangements, including clearing arrangements. The pledge of our securities is in
connection with our mortgage-backed securities, corporate bond, government and agency securities
and equities businesses. Securities pledged to creditors are included within Financial instruments
owned on our Consolidated Statements of Financial Condition. Counterparties generally have the
right to sell or repledge the collateral. The following is a summary of the carrying value of the
major categories of securities pledged to creditors, including amounts pledged as collateral where
we have borrowed securities, as of May 31, 2010 and December 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
May 31, 2010 |
|
|
December 31, 2009 |
|
Equity securities |
|
$ |
1,128,139 |
|
|
$ |
658,959 |
|
Fixed income securities |
|
|
9,289,986 |
|
|
|
4,964,386 |
|
|
|
|
|
|
|
|
|
|
$ |
10,418,125 |
|
|
$ |
5,623,345 |
|
|
|
|
|
|
|
|
At May 31, 2010 and December 31, 2009, of the total securities pledged to creditors, $2.2
billion and $1.6 billion, respectively, were pledged to counterparties in connection with clearing
arrangements utilized by us, which includes margin loans provided to us. Under the terms of our
arrangements that allow us to offset our payables with other activity with the clearing
counterparty, we had no liabilities outstanding on our Consolidated Statement of Financial
Condition associated with these clearing arrangements at May 31, 2010 and December 31, 2009.
We also engage in securities for securities transactions in which we are the lender of securities
and receive other securities as collateral rather than cash. In instances where we are permitted
to sell or repledge these securities, we report the fair value of the collateral received and the
related obligation to return the collateral in the Consolidated Statements of Financial Condition.
At May 31, 2010 and December 31, 2009, $116.9 million and $68.5 million, respectively, were
reported as Securities received as collateral and as Obligation to return securities received as
collateral.
Page 34 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
Note 6. Securitization Activities and Variable Interest Entities
Securitization Activities
We engage in securitization activities related to mortgage-backed and other asset-backed
securities. In our securitization activities, we use special purpose entities (SPEs). Prior to
January 1, 2010, we did not consolidate our securitization vehicles as they met the criteria of
qualifying special purpose entities (QSPEs). QSPEs were not subject to consolidation prior to
January 1, 2010. With the removal of the QSPE concept and the exception from applying the
consolidation requirements for VIEs under the accounting changes to ASC Topic 860, Transfers and
Servicing, and ASC Topic 810, Consolidations, effective January 1, 2010, our securitization
vehicles generally meet the criteria of variable interest entities; however we do not consolidate
our securitization vehicles as we do not meet the characteristics of the primary beneficiary for
these vehicles. See Variable Interest Entities in this footnote for further discussion on
variable interest entities and our determination of the primary beneficiary.
We derecognize financial assets transferred in securitizations when we have relinquished control
over such assets. Transferred assets are carried at fair value prior to securitization, with
unrealized gains and losses reflected in Principal transactions in the Consolidated Statements of
Earnings. We act as placement or structuring agent in connection with the beneficial interests
issued by securitization vehicles. Net revenues are recognized in connection with these activities.
Our continuing involvement in securitization vehicles to which we have transferred assets is
limited to holding beneficial interests in these vehicles (i.e., securities issued by these
vehicles), which are included within Financial instruments owned on the Consolidated Statements of
Financial Condition, and servicing rights over certain transferred assets (i.e., project loans),
which are included within Other assets on the Consolidated Statements of Financial Condition. We
apply fair value accounting to the securities and the servicing rights are amortized over the
period of the estimated net servicing income. We have not provided financial or other support to
these securitization vehicles during the five months ended May 31, 2010 and the six months ended
June 30, 2009. We have no explicit or implicit arrangements to provide additional financial support
to these securitization vehicles and have no liabilities related to these securitization vehicles
at May 31, 2010 and December 31, 2009. Although not obligated, we may make a market in the
securities issued by these securitization vehicles. In these market-making transactions, we buy
these securities from and sell these securities to investors. Securities purchased through these
market-making activities are not considered to be continuing involvement in these vehicles,
although the securities are included in Financial instruments owned mortgage- and asset-backed
securities.
During the three and five months ended May 31, 2010, we transferred assets of $3,166.7 million and
$5,257.1 million, respectively, as part of our securitization activities in which we had continuing
involvement, received cash proceeds of $2,684.1 million and $4,271.2 million, respectively,
beneficial interests of $500.7 million and $1,036.9 million, respectively, servicing rights of $0.1
million and $0.1 million, respectively, and recognized Net revenues of $32.8 million and $51.4,
million, respectively. During the three and six months ended June 30, 2009, we transferred assets
of $1,976.9 million and $3,055.0 million, respectively, as part of our securitization activities in
which we had continuing involvement, received cash proceeds of $1,992.7 million and $3,072.8
million, respectively, beneficial interests of $282.3 million and $414.5 million, respectively, and
recognized Net revenues of $15.8 million and $18.4 million, respectively. These transfers were
accounted for as sales of assets. Assets received in the form of securities issued in these
transfers were initially categorized as Level 2 within the fair value hierarchy. For further
information on fair value measurements and the fair value hierarchy, refer to Note 1, Organization
and Summary of Significant Accounting Policies, and Note 3, Financial Instruments.
Page 35 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
The following tables present the total information regarding securitization vehicles to which
we, acting as transferor, have transferred assets and for which we received sale accounting
treatment at May 31, 2010 and December 31, 2009 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets obtained |
|
As of May 31, 2010 |
Securitization Type |
|
as proceeds |
|
Total Assets (6) |
|
Assets Retained |
Residential mortgage-backed securities |
|
$ |
1,022.9 |
(3) |
|
$ |
4,291.9 |
|
|
$ |
280.0 |
(1)(2) |
Commercial mortgage-backed securities |
|
|
14.1 |
(3) |
|
|
889.2 |
|
|
|
15.8 |
(1)(2) |
Project loans |
|
|
0.1 |
(4) |
|
|
107.8 |
|
|
|
0.1 |
(5) |
|
|
|
(1) |
|
At May 31, 2010, 100% of these securities issued in these securitizations are AAA-rated and
are comprised of government agency securities. |
|
(2) |
|
A significant portion of these securities have been subsequently sold in secondary-market
transactions to third parties. As of July 7, 2010, we continue to hold approximately $171.1
million and $10.3 million of these Residential mortgage-backed securities and Commercial
mortgage-backed securities, respectively, in inventory. |
|
(3) |
|
Initial fair value of securities received on date of asset transfer that were issued by
securitization vehicles. |
|
(4) |
|
Initial fair value of servicing rights received on transferred project loans. |
|
(5) |
|
Represents unamortized servicing rights on transferred project loans. |
|
(6) |
|
Represents unpaid principal amount of assets in the securitization vehicles. |
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 |
Securitization Type |
|
Total Assets |
|
Securities (1)(2) |
Residential mortgage-backed securities |
|
$ |
1,483.5 |
|
|
$ |
104.8 |
|
Commercial mortgage-backed securities |
|
|
641.7 |
|
|
|
9.2 |
|
|
|
|
(1) |
|
At December 31, 2009, 100% of these securities issued in these securitizations are
AAA-rated. |
|
(2) |
|
A significant portion of these securities have been subsequently sold in secondary market
transactions to third parties. As of July 7, 2010, we continue to hold approximately $20.7
million and $-0- of these Residential mortgage-backed securities and Commercial
mortgage-backed securities, respectively, in inventory. |
The following table presents cash flows received during the three and five months ended May
31, 2010 and three and six months ended June 30, 2009 related to securitization vehicles to which
we have transferred assets and received sale accounting (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Months |
|
Six Months |
|
|
Three months ended (1) |
|
Ended |
|
Ended |
|
|
May 31, 2010 |
|
June 30, 2009 |
|
May 31, 2010 (1) |
|
June 30, 2009 (1) |
Residential mortgage-backed securities |
|
|
8.6 |
|
|
|
|
|
|
$ |
12.7 |
|
|
$ |
0.4 |
|
Commercial mortgage-backed securities |
|
|
0.2 |
|
|
|
|
|
|
|
0.7 |
|
|
|
|
|
|
|
|
(1) |
|
There were no cash flows received on beneficial interests in securitization vehicles of
project loans for the three and five months ended May 31, 2010 and the three and six months
ended June 30, 2009. |
Page 36 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
Variable Interest Entities
Variable interest entities (VIEs) are entities in which equity investors lack the characteristics
of a controlling financial interest or do not have sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support. VIEs are consolidated by
the primary beneficiary. Effective January 1, 2010, the primary beneficiary is the party who has
the power to direct the activities of a variable interest entity that most significantly impact the
entitys economic performance and who has an obligation to absorb losses of the entity or a right
to receive benefits from the entity that could potentially be significant to the entity. Prior to
January 1, 2010, the primary beneficiary was the party that absorbs a majority of the entitys
expected losses, receives a majority of its expected residual returns, or both, as a result of
holding variable interests, direct or implied.
We initially determine whether we are the primary beneficiary of a VIE upon our initial involvement
with the VIE. Effective January 1, 2010, we reassess whether we are the primary beneficiary of a
VIE on an ongoing basis rather than upon the occurrence of certain events. Prior to January 1,
2010, we were required to reassess whether we were the primary beneficiary of a VIE only upon the
occurrence of certain reconsideration events.
Our determination of whether we are the primary beneficiary of a VIE is based upon the facts and
circumstances for each VIE and requires significant judgment. In determining whether we are the
party with the power to direct the VIEs most significant activities, we first identify the
activities of the VIE that most significantly impact its economic performance. Our considerations
in determining the VIEs most significant activities primarily include, but are not limited to, the
VIEs purpose and design and the risks passed through to investors. We then assess whether we have
the power to direct those significant activities. Our considerations in determining whether have
the power to direct the VIEs most significant activities include, but are not limited to, voting
interests of the VIE, management, service and/ or other agreements of the VIE, involvement in the
VIEs initial design and the existence of explicit or implicit financial guarantees. In situations
where we have determined that the power over the VIEs most significant activities is shared, we
assess whether we are the party with the power over the majority of the significant activities. If
we are the party with the power over the majority of the significant activities, we meet the
power criteria of the primary beneficiary. If we do not have the power over a majority of the
significant activities or we determine that decisions require consent of each sharing party, we do
not meet the power criteria of the primary beneficiary.
We assess our variable interests in a VIE both individually and in aggregate to determine whether
we have an obligation to absorb losses of or a right to receive benefits from the VIE that could
potentially be significant to the VIE. The determination of whether our variable interest is
significant to the VIE requires significant judgment. In determining the significance of our
variable interest, we consider the terms, characteristics and size of the variable interests, the
design and characteristics of the VIE, our involvement in the VIE and our market-making activities
related to the variable interests.
VIEs Where We Are The Primary Beneficiary
The following tables present information about the assets and liabilities of our consolidated VIEs
which are presented within our Consolidated Statements of Financial Condition in the respective
asset and liability categories, as of May 31, 2010 and December 31, 2009 (in millions). The assets
and liabilities in the tables below are presented prior to consolidation and thus a portion of
these assets and liabilities are eliminated in consolidation. We have aggregated our consolidated
VIEs based upon principal business activity.
Page 37 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated VIE Assets |
|
|
|
May 31, 2010 |
|
|
December 31, 2009 |
|
|
|
High Yield |
|
|
Other |
|
|
High Yield |
|
|
Other |
|
Cash |
|
$ |
115.1 |
|
|
$ |
|
|
|
$ |
190.9 |
|
|
$ |
|
|
Financial instruments owned |
|
|
1,155.1 |
|
|
|
19.9 |
|
|
|
1,100.1 |
|
|
|
|
|
Securities borrowed |
|
|
473.3 |
|
|
|
|
|
|
|
559.9 |
|
|
|
|
|
Receivable from brokers and dealers |
|
|
434.4 |
|
|
|
|
|
|
|
340.5 |
|
|
|
|
|
Other |
|
|
327.7 |
|
|
|
|
|
|
|
47.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,505.6 |
|
|
$ |
19.9 |
|
|
$ |
2,238.4 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated VIE Liabilities |
|
|
|
May 31, 2010 |
|
|
December 31, 2009 |
|
|
|
High Yield |
|
|
Other |
|
|
High Yield |
|
|
Other |
|
Financial instruments sold,
not yet purchased |
|
$ |
826.9 |
|
|
$ |
|
|
|
$ |
893.2 |
|
|
$ |
|
|
Securities loaned |
|
|
115.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Payable to brokers and dealers |
|
|
286.5 |
|
|
|
|
|
|
|
326.5 |
|
|
|
|
|
Mandatorily redeemable interests (1) |
|
|
1,047.9 |
|
|
|
|
|
|
|
964.2 |
|
|
|
|
|
Promissory note (2) |
|
|
|
|
|
|
4.3 |
|
|
|
|
|
|
|
|
|
Other |
|
|
39.8 |
|
|
|
|
|
|
|
9.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,316.1 |
|
|
$ |
4.3 |
|
|
$ |
2,193.7 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
After consolidation, which eliminates our interests and the interests of our
consolidated subsidiaries, JSOP and JESOP, the carrying amount of the mandatorily
redeemable financial interests pertaining to the above VIEs included within Mandatorily
redeemable preferred interests of consolidated subsidiaries in the Consolidated Statements
of Financial Condition was approximately $303.5 million and $318.0 million at May 31, 2010
and December 31, 2009, respectively. |
|
(2) |
|
The promissory note represents an amount due to us and is eliminated in
consolidation. |
High Yield. We conduct our high yield secondary market trading activities through Jefferies
High Yield Trading, LLC (JHYT), Jefferies High Yield Finance, LLC (JHYF), and Jefferies
Leveraged Credit Products, LLC (JLCP). JHYT is a registered broker-dealer 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 and other
financial instruments. JHYT makes markets in high yield and distressed securities and provides
research coverage on these types of securities. JHYF is engaged in the trading of total return
swaps. JLCP is engaged in the trading of bank debt, credit default swaps and trade claims. JHYT,
JHYF and JLCP are wholly-owned subsidiaries of JHYH.
We own voting and non-voting interests in JHYH and have entered into management, clearing, and
other services agreements with JHYH. We and Leucadia National Corporation (Leucadia), a
significant shareholder of our common stock, each have the right to nominate two of a total of four
directors to JHYHs board of directors. Two funds managed by us, JSOP and JESOP, are also investors
in JHYH. The arrangement term is through April 2013, with an option to extend. As a result of
agreements entered into with Leucadia in April 2008, any request to Leucadia for additional capital
investment in JHYH requires the unanimous consent of our Board of Directors, including the consent
of any Leucadia designees to our board. We determined that JHYH, JSOP and JESOP meet the
definition of a variable interest entity. We are the primary beneficiary of JHYH, JSOP and JESOP
and accordingly consolidate JHYH (and the assets, liabilities and results of operations of its
wholly-owned subsidiaries JHYT, JHYF and JLCP), JSOP and JESOP.
Page 38 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
At May 31 2010 and December 31, 2009, the carrying amount of our variable interests was $314.7
million and $329.8 million, respectively, which consist of our debt, equity and partnership
interests in JHYH, JSOP and JESOP, which are eliminated in consolidation. In addition, the high
yield secondary market trading activity conducted through JHYT, JHYF and JLCP is a significant
component of our overall brokerage platform, and while not contractually obligated, could require
us to provide additional financial support and/ or expose us to further losses of JHYH, JSOP and
JESOP. The assets of these VIEs are available for the benefit of the mandatorily redeemable
interest holders and equity holders. The creditors of these VIEs do not have recourse to our
general credit.
There have been no changes in our conclusion to consolidate JHYH, JSOP and JESOP since formation.
Other. We are the primary beneficiary of certain investment vehicles set up for the benefit of our
employees or clients. We manage and invest alongside our employees or clients in these vehicles.
The assets of these VIEs consist of private equity and debt securities, and are available for the
benefit of the entities debt and equity holders. Our variable interests in these vehicles consist of equity securities and promissory notes. The
creditors of these VIEs do not have recourse to our general credit.
We did not previously consolidate these investment vehicles as we are not the party that absorbs
(receives) a majority of the expected losses (returns) or because these entities did not previously
meet the characteristics of a VIE and we provide the nonvoting investors with kick-out rights.
No gain or loss was recognized upon the initial consolidation of these VIEs.
VIEs Where We Have a Variable Interest
We also hold variable interests in VIEs in which we are not the primary beneficiary and accordingly
do not consolidate. We do not consolidate these VIEs as we do not have the power to direct the
activities that most significantly impact their economic performance. We have not provided
financial or other support to these VIEs during the three months ended May 31, 2010 or year ended
December 31, 2009. We have no explicit or implicit arrangements to provide additional financial
support to these VIEs and have no liabilities related to these VIEs at May 31, 2010 and December
31, 2009.
We have aggregated certain nonconsolidated VIEs based upon principal business activity. The
following tables presents the total assets of nonconsolidated VIEs in which we hold variable
interests, our maximum exposure to loss from these nonconsolidated VIEs, and the carrying amount of
our interests in these nonconsolidated VIEs at May 31, 2010 and December 31, 2009 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2010 |
|
|
|
|
|
|
|
Maximum exposure to |
|
|
|
|
|
|
|
|
|
|
loss in non- |
|
|
|
|
|
|
VIE Assets |
|
|
consolidated VIEs |
|
|
Carrying Amount |
|
Collateralized loan obligations |
|
$ |
1,880.2 |
|
|
$ |
28.6 |
(2) |
|
$ |
28.6 |
|
Mortgage- and asset-backed vehicles Non-agency (1) |
|
|
69,375.1 |
|
|
|
556.5 |
(2) |
|
|
556.5 |
|
Mortgage- and asset-backed vehicles Agency (1) |
|
|
10,659.1 |
|
|
|
1,418.1 |
(2) |
|
|
1,418.1 |
|
Asset management vehicle |
|
|
636.2 |
|
|
|
16.1 |
(2) |
|
|
16.1 |
|
Private equity vehicle |
|
|
71.6 |
|
|
|
60.0 |
(3) |
|
|
60.0 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
82,622.2 |
|
|
$ |
2,079.3 |
|
|
$ |
2,079.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
VIE assets represent the unpaid principal balance of the assets in these vehicles at May 31, 2010. |
|
(2) |
|
Our maximum exposure to loss in these non-consolidated VIEs is limited to our investment. |
|
(3) |
|
Our maximum exposure to loss in this non-consolidated VIE is limited to our loan commitment. |
Page 39 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
Maximum exposure to |
|
|
|
|
|
|
|
|
|
|
loss in non- |
|
|
|
|
|
|
VIE Assets |
|
|
consolidated VIEs |
|
|
Carrying Amount |
|
Collateralized loan obligations |
|
$ |
1,862.6 |
|
|
$ |
21.7 |
(2) |
|
$ |
21.7 |
|
Mortgage- and asset-backed vehicles Non-agency (1) |
|
|
123,560.0 |
|
|
|
488.7 |
(2) |
|
|
488.7 |
|
Private equity vehicle |
|
|
52.3 |
|
|
|
50.0 |
(3) |
|
|
45.7 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
125,474.9 |
|
|
$ |
560.4 |
|
|
$ |
556.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
VIE assets represent the unpaid principal balance of the assets in these vehicles at December 31, 2009. |
|
(2) |
|
Our maximum exposure to loss in these non-consolidated VIEs is limited to our investment. |
|
(3) |
|
Our maximum exposure to loss in this non-consolidated VIE is limited to our loan commitment. |
Collateralized Loan Obligations. We own variable interests in collateralized loan obligations
(CLOs) previously managed by us. These CLOs have assets consisting primarily of senior secured
loans, unsecured loans and high yield bonds. Effective with the adoption of accounting changes to
ASC Topic 810, Consolidation, on January 1, 2010, we concluded that we were the primary beneficiary
on January 1, 2010 given our management rights over and interests in debt securities issued by the
CLOs. Accordingly, we consolidated the assets and liabilities of these CLOs on January 1, 2010.
No gain or loss was recognized upon the initial consolidation of these CLOs. Subsequently, we sold
and assigned our management agreements for the CLOs to a third party; thus we no longer have the
power to direct the most significant activities of the CLOs. Upon the assignment of the management
agreements in the first quarter of 2010, we deconsolidated the CLOs. Our remaining variable
interests in the CLOs subsequent to the assignment of our management agreement consist of debt
securities and a right to a portion of the CLOs management and incentive fees. The debt
securities are accounted for at fair value and are included in Investments in managed funds on our
Consolidated Statements of Financial Condition. The carrying amount of the debt securities was
$8.6 million and $7.3 million at May 31, 2010 and December 31, 2009, respectively. The management
and incentives fees are accrued as the amounts become realizable. Our exposure to loss in these
CLOs is limited to our investments in the debt securities.
In addition, we have variable interests in Babson Loan Opportunity CLO, Ltd., a third party managed
CLO. This VIE has assets consisting primarily of senior secured loans, unsecured loans and high
yield bonds. Our variable interests in this VIE consists of debt securities. The fair value of our
interests in this VIE consist of a direct interest and an indirect interest via Jefferies Finance,
LLC. The direct investment is accounted for at fair value and included in Financial instruments
owned in our Consolidated Statements of Financial Condition. Our exposure to loss is limited to
our investments in the debt securities.
Mortgage- and Asset-Backed Vehicles. We purchase and sell variable interests in VIEs, which
primarily issue mortgage-backed and other asset-backed securities, in connection with our trading
and market-making activities. Our variable interests in these VIEs consist of mortgage and
asset-backed securities and are accounted for at fair value and included in Financial instruments
owned on our Consolidated Statements of Financial Condition. Prior to January 1, 2010, we
determined that agency mortgage- and asset-backed vehicles met the criteria of a QSPE, which were
not subject to consolidation. As of January 1, 2010, we now include our variable interests in
agency mortgage- and asset-backed vehicles in the disclosure of our variable interests in VIEs.
Asset Management Vehicle. We manage the Jefferies Umbrella Fund, an umbrella structure company
that enables investors to choose between one or more investment objectives by investing in one or
more sub-funds within the same structure. The assets of the Jefferies Umbrella Fund primarily
consist of convertible bonds. Accounting changes to consolidation standards under generally
accepted accounting principles have been deferred for entities that are considered to be investment
companies; accordingly, consolidation continues to be determined under a risk and reward model. The
Jefferies Umbrella Fund is subject to the deferral guidance and we are not the primary beneficiary
as of May 31, 2010 under the risk and reward model. Our variable interests in the Jefferies
Umbrella Fund consist of equity interests, management fees and performance fees. The equity
interests are accounted for on the equity method
Page 40 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
and included in Investments in managed funds on our Consolidated Statements of Financial
Condition. The management and performance fees are accrued as the amounts become realizable.
Private Equity Vehicle. We entered into a Credit Agreement with JCP Fund V Bridge Partners, LLC
(the Borrower or JCP V), pursuant to which we may make loans to the Borrower in an aggregate
principal amount of up to $50.0 million. On May 3, 2010, we and the Borrower amended the Credit
Agreement and extended the final maturity date to September 30, 2010 and increased our commitment
to make loans to the Borrower by $10.0 million to an aggregate principal amount of up to $60.0
million. As of May 31, 2010 and December 31, 2009, we funded approximately $60.0 million and $45.7
million, respectively, of the aggregate principal balance leaving approximately $-0- and $4.3
million, respectively, unfunded. Our loan to the Borrower is recorded in Other investments on the
Consolidated Statements of Financial Condition. (See Note 19 for additional discussion of the
credit agreement with JCP V.)
Note 7. Acquisitions
Depfa
On March 27, 2009, we acquired 100% of the membership interests of Depfa First Albany Securities
LLC (Depfa), a leading New York City-based municipal securities broker-dealer that provides
integrated investment banking, advisory, and sales and trading services. As of March 31, 2009,
Depfa has been merged into Jefferies.
The Depfa acquisition was accounted for under the acquisition method of accounting. Accordingly,
the purchase price was allocated to the acquired assets and liabilities based on their estimated
fair values at acquisition date as summarized in the following table. Goodwill of $568,000 is
measured as the excess of the cash consideration over fair value of net assets acquired, including
identified intangible assets, and represents the value expected from the synergies and economies of
scale created from combining Depfas municipal securities business with our full-service sales and
trading, and investment banking capabilities. All goodwill is assigned to our capital markets
segment and is expected to be deductible for income tax purposes.
The following table presents the consideration paid for Depfa and the amounts of the assets
acquired and liabilities assumed at the acquisition date (in thousands):
|
|
|
|
|
Cash consideration |
|
$ |
38,760 |
|
|
|
|
|
|
|
|
|
|
Recognized assets and assumed liabilities: |
|
|
|
|
Cash |
|
$ |
300 |
|
Financial instruments owned |
|
|
31,458 |
|
Receivable from broker |
|
|
16,691 |
|
Premises and equipment |
|
|
155 |
|
Intangible assets |
|
|
1,151 |
|
Other assets |
|
|
2,781 |
|
Financial instruments sold, not yet purchased |
|
|
(1,084 |
) |
Other liabilities |
|
|
(13,260 |
) |
|
|
|
|
Total identifiable net assets |
|
$ |
38,192 |
|
|
|
|
|
Page 41 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
Goodwill
The following is a summary of goodwill activity for the five months ended May 31, 2010 (in
thousands):
|
|
|
|
|
|
|
Five Months Ended |
|
|
|
May 31, 2010 |
|
Balance, at beginning of period |
|
$ |
364,795 |
|
Add: Contingent consideration |
|
|
782 |
|
Less: Translation adjustments |
|
|
(2,433 |
) |
|
|
|
|
Balance, at end of period |
|
$ |
363,144 |
|
|
|
|
|
Acquisitions of LongAcre Partners, Helix Associates, and Randall & Dewey executed in prior years,
each contained a five-year contingency for additional consideration to the selling owners, based on
future revenues. This additional consideration is paid annually. There was no contractual dollar
limit to the potential of additional consideration except for LongAcre Partners which is a fixed
sum. The last period for additional contingent consideration based upon revenue performance has
expired. During the five months ended May 31, 2010, we paid approximately $7.0 million in cash
related to contingent consideration that had been earned during prior periods.
Mortgage Servicing Rights
In December 2009, we acquired servicing rights to certain military housing mortgage loans, which
are accounted for as an intangible asset and included within Other assets in the Consolidated
Statements of Financial Condition. The mortgage servicing rights are amortized over the period of
the estimated net servicing income, which is reported in Other income in the Consolidated
Statements of Earnings. We provide no credit support in connection with the servicing of these
loans and are not required to make servicing advances on the loans in the underlying portfolio. We
determined that the servicing rights acquired in December 2009 represent one class of servicing
rights based on the availability of market inputs to measure the fair value of the asset and our
treatment of the asset as one aggregate pool for risk management purposes. We earned $1.0 million
and $1.7 million in fees related to these servicing rights during the three and five months ended
May 31, 2010, respectively. The following presents the activity in the balance of these servicing
rights for the five months ended May 31, 2010 (in thousands):
|
|
|
|
|
|
|
Five Months Ended |
|
|
|
May 31, 2010 |
|
Balance, beginning of period |
|
$ |
8,500 |
|
Add: Acquisition |
|
|
87 |
|
Less: Amortization |
|
|
147 |
|
|
|
|
|
Balance, end of period |
|
$ |
8,440 |
|
|
|
|
|
The fair value of these servicing rights was $14.7 million and $8.5 million at May 31, 2010
and December 31, 2009, respectively. Mortgage servicing rights do not trade in an active, open
market with readily observable prices. Accordingly, the fair value of servicing rights is estimated
using a discounted cash flow model, which projects future cash flows discounted at a risk-adjusted
rate based on recently observed transactions for interest-only bonds backed by military housing
mortgages. Estimated future cash flows consider contracted servicing fees and costs to service.
Given the underlying asset class, assumptions regarding prepayment and delinquencies are not
significant to the fair value.
Page 42 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
Note 8. Short-Term Borrowings
Bank loans represent short-term borrowings that are payable on demand and generally bear interest
at a spread over the federal funds rate. Unsecured bank loans are typically overnight loans used to
finance securities owned or clearing related balances. We had no outstanding unsecured or secured
bank loans as of May 31, 2010 and December 31, 2009. Average daily bank loans for the five months
ended May 31, 2010 and the year ended December 31, 2009 were $47.6 million and $24.2 million,
respectively.
Note 9. Long-Term Debt
The following summarizes our long-term debt carrying values (including unamortized discounts and
premiums) at May 31, 2010 and December 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
May 31, 2010 |
|
|
December 31, 2009 |
|
7.75% Senior Notes, due 2012 |
|
$ |
306,436 |
|
|
$ |
306,811 |
|
5.875% Senior Notes, due 2014 |
|
|
248,928 |
|
|
|
248,831 |
|
5.5% Senior Notes, due 2016 |
|
|
348,762 |
|
|
|
348,865 |
|
8.5% Senior Notes, due 2019 |
|
|
708,834 |
|
|
|
709,193 |
|
6.45% Senior Debentures, due 2027 |
|
|
346,486 |
|
|
|
346,439 |
|
3.875%
Convertible Senior Debentures, due, 2029 |
|
|
279,156 |
|
|
|
276,433 |
|
6.25% Senior Debentures, due 2036 |
|
|
492,593 |
|
|
|
492,545 |
|
|
|
|
|
|
|
|
|
|
$ |
2,731,195 |
|
|
$ |
2,729,117 |
|
|
|
|
|
|
|
|
In June and September 2009, we issued 8.5% Senior Notes, due in 2019, with a par amount of
$400 million and $300 million, respectively, and received proceeds of $393.9 million and $321.0
million, respectively. During the year ended December 31, 2009, we repurchased approximately $20.3
million of our outstanding long-term debt, resulting in a gain on debt extinguishment of $7.7
million, which was recognized in Other income on the Consolidated Statements of Earnings.
On October 26, 2009, we issued 3.875% convertible senior debentures (the debentures), maturing in
2029, with an aggregate principal amount of $345.0 million, each $1,000 debenture convertible into
25.5076 shares of our common stock (equivalent to a conversion price of approximately $39.20 per
share of common stock). We received net proceeds of $339.6 million in connection with the offering.
Approximately $275.0 million of the net proceeds was allocated to Long-term debt, approximately
$5.0 million was allocated to Other assets as debt issuance costs and approximately $42.0 million
was allocated to Additional paid-in capital, net of deferred taxes of $27.0 million, on the
Consolidated Statements of Financial Condition. In addition to ordinary interest, beginning on
November 1, 2017, contingent interest will accrue at 0.375% if the average trading price of a
debenture for 5 trading days ending on and including the third trading day immediately preceding a
six-month interest period equals or exceed $1,200 per $1,000 debenture. The debentures are
convertible at the holders option any time beginning on August 1, 2029 and convertible at any time
if 1) our common stock price is greater than 130% of the conversion price for at least 20 trading
days in a period of 30 consecutive trading days; 2) if the trading price per debenture is less than
95% of the price of our common stock times the conversion ratio for any 10 consecutive trading
days; 3) if the debentures are called for redemption; or 4) upon the occurrence of specific
corporate actions. We may redeem the debentures for par, plus accrued interest, on or after
November 1, 2012 if the price of our common stock is greater than 130% of the
conversion price for at least 20 days in a period of 30 consecutive trading days and we may redeem
the debentures for par, plus accrued interest, at our election any time on or after November 1,
2017. Holders may require us to repurchase the debentures for par, plus accrued interest, on
November 1, 2017, 2019 and 2024.
Subsequent to May 31, 2010 we issued 6.875% Senior Notes, due in 2021, with a par amount of $400
million and received proceeds of $394.2 million.
Page 43 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
We previously entered into a fair value hedge with no ineffectiveness using interest rate
swaps in order to convert $200 million aggregate principal amount of unsecured 7.75% senior notes
due March 15, 2012 into floating rates based upon LIBOR. During the third quarter of 2007, we
terminated these interest rate swaps and received cash consideration $8.5 million, net of accrued
interest. The $8.5 million basis is being amortized as a reduction in Interest expense of
approximately $1.9 million per year over the remaining life of the notes through March 2012.
Note 10. Mandatorily Redeemable Convertible Preferred Stock
In February 2006, MassMutual purchased $125.0 million of our Series A convertible preferred stock
in a private placement. Our Series A convertible preferred stock has a 3.25% annual, cumulative
cash dividend and is currently convertible into 4,105,138 shares of our common stock at an
effective conversion price of approximately $30.45 per share. The preferred stock is callable
beginning in 2016 and will mature in 2036. As of May 31, 2010, 10,000,000 shares of preferred stock
were authorized and 125,000 shares of preferred stock were issued and outstanding. The dividend is
recorded as a component of Interest expense as the Series A convertible preferred stock is treated
as debt for accounting purposes. The dividend is not deductible for tax purposes because the Series
A convertible preferred stock is considered equity for tax purposes.
Note 11. Noncontrolling Interests and Mandatorily Redeemable Preferred Interests of Consolidated
Subsidiaries
Noncontrolling Interests
Noncontrolling interests represents equity interests in consolidated subsidiaries that are not
attributable, either directly or indirectly, to us (i.e., minority interests). Noncontrolling
interests includes the minority equity holders proportionate share of the equity of JSOP, JESOP
and other consolidated entities. The following table presents our noncontrolling interests at May
31, 2010 and December 31, 2009 (in millions):
|
|
|
|
|
|
|
|
|
|
|
May 31, 2010 |
|
|
December 31, 2009 |
|
JSOP |
|
$ |
272.2 |
|
|
$ |
282.7 |
|
JESOP |
|
|
31.5 |
|
|
|
33.2 |
|
Other (1) |
|
|
10.5 |
|
|
|
5.6 |
|
|
|
|
|
|
|
|
Noncontrolling interests |
|
$ |
314.2 |
|
|
$ |
321.5 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Other includes consolidated asset management entities and investment vehicles set up for the
benefit of our employees or clients. |
Ownership interests in subsidiaries held by parties other than our common shareholders are
presented as noncontrolling interests within stockholders equity, separately from our own equity.
Revenues, expenses, net income or loss, and other comprehensive income or loss are reported in the
consolidated financial statements at the consolidated amounts, which includes amounts attributable
to both owners of the parent and noncontrolling interests. Net income or loss and other
comprehensive income or loss is then attributed to the parent and noncontrolling interests. Net
earnings to noncontrolling interests is deducted from Net earnings to determine Net earnings to
common shareholders. There has been no other comprehensive income or loss attributed to
noncontrolling interests for the three months ended May 31, 2010 and June 30, 2009 and the five and
six months ended May 31, 2010 and June 30, 2009, respectively, because all other comprehensive
income or loss is attributed to us.
Mandatorily Redeemable Interests of Consolidated Subsidiaries
Certain interests in consolidated subsidiaries meet the definition of a mandatorily redeemable
financial instrument and require liability classification and remeasurement at the estimated amount
of cash that would be due and payable to settle such interests under the applicable entitys
organization agreement. These mandatorily redeemable financial instruments represent interests
held in Jefferies High Yield Holdings, LLC (JHYH), which are entitled to a pro rata share of the
profits and losses of JHYH and are scheduled to terminate in 2013, with an option to extend up to
three additional one-year periods. Financial instruments issued by a subsidiary that are classified
as equity in the
Page 44 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
subsidiarys financial statements are treated as noncontrolling interests in the consolidated
financial statements. Therefore, these mandatorily redeemable financial instruments are reported
within liabilities as Mandatorily redeemable preferred interests of consolidated subsidiaries on
our Consolidated Statements of Financial Condition. In addition, changes to these mandatorily
redeemable financial instruments of JHYH are reported in net revenues and are reflected as Interest
on mandatorily redeemable preferred interest of consolidated subsidiaries on our Consolidated
Statements of Earnings. The carrying amount of the mandatorily redeemable interests of
consolidated subsidiaries was approximately $303.5 million and $318.0 million at May 31, 2010 and
December 31, 2009, respectively.
Note 12. Benefit Plans
We have a defined benefit pension plan, Jefferies Employees Pension Plan, which covers certain of
our employees. The plan is subject to the provisions of the Employee Retirement Income Security
Act of 1974. Benefits are based on years of service and the employees career average pay. Our
funding policy is to contribute to the plan at least the minimum amount required for funding
purposes under the Internal Revenue Code. Differences in each year, if any, between expected and
actual returns in excess of a 10% corridor are amortized in net periodic pension calculations.
Effective December 31, 2005, benefits under the pension plan have been frozen. Accordingly, there
are no further benefit accruals for future service after December 31, 2005.
The following summarizes the net periodic pension cost for the three months ended May 31, 2010 and
June 30, 2009 and the five and six months ended May 31, 2010 and June 30, 2009, respectively (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Five Months Ended |
|
|
Six Months Ended |
|
|
|
May 31, 2010 |
|
|
June 30, 2009 |
|
|
May 31, 2010 |
|
|
June 30, 2009 |
|
Net pension cost included the
following components: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost (1) |
|
$ |
50 |
|
|
$ |
50 |
|
|
$ |
83 |
|
|
$ |
100 |
|
Interest cost on projected
benefit obligation |
|
|
616 |
|
|
|
658 |
|
|
|
1,027 |
|
|
|
1,316 |
|
Expected return on plan assets |
|
|
(656 |
) |
|
|
(614 |
) |
|
|
(1,093 |
) |
|
|
(1,228 |
) |
Net amortization |
|
|
176 |
|
|
|
229 |
|
|
|
293 |
|
|
|
458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
186 |
|
|
$ |
323 |
|
|
$ |
310 |
|
|
$ |
646 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Service cost relates to administrative expenses incurred during the periods. |
We did not contribute to our pension plan during the five months ended May 31, 2010 and a
contribution to our plan during the fiscal year has not yet been determined.
Note 13. Compensation Plans
We sponsor the following share-based compensation plans: incentive compensation plan, director
plan, employee stock purchase plan and the deferred compensation plan. The fair value of share
based awards is estimated on the date of grant based on the market price of our common stock less
the impact of selling restrictions subsequent to vesting, if any, and is amortized as compensation
expense over the related requisite service periods.
Total compensation cost related to share-based compensation plans amounted to $42.9 million and
$38.0 million for the three months ended May 31, 2010 and June 30, 2009, respectively, and $58.6
million and $55.3 million for the five months ended May 31, 2010 and six months ended June 30,
2009, respectively. The net tax benefit (deficiency) related to share-based compensation plans
recognized in additional paid-in capital was $0.3 million and $1.1 million during the three months
ended May 31, 2010 and June 30, 2009, respectively, and $2.6 million and $(17.8) million during the
five months ended May 31, 2010 and six months ended June 30, 2009, respectively. Cash flows
resulting from tax deductions in excess of the grant-date fair value of share-based awards are
included in cash flows from financing activities; accordingly, we reflected the excess tax benefit
of $2.0 million and $6.9 million related to share-based compensation in cash flows from financing
activities for the five months ended May 31, 2010 and six months ended June 30, 2009, respectively.
We expect to change our tax year-end to coincide with the recent change in our
Page 45 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
fiscal year-end. As a result of this expected change, the timing of certain deductions
related to share-based compensation plans have changed in certain jurisdictions. Consequently,
during the three-months ended May 31, 2010, we reversed a net tax benefit related to share-based
compensation plans of $15.4 million initially recorded to additional paid-in capital during the
first three months of 2010. We expect to recognize this net tax benefit, along with an additional
net tax benefit of $3.8 million related to share-based compensation awards that vested during April
and May 2010 in additional paid-in capital during the three month period ending February 28, 2011.
As of May 31, 2010, we had $141.0 million of total unrecognized compensation cost related to
nonvested share based awards, which is expected to be recognized over a remaining weighted-average
vesting period of approximately 3.6 years. We have historically and generally expect to issue new
shares of common stock when satisfying our issuance obligations pursuant to share based awards, as
opposed to reissuing shares from our treasury stock.
In addition, we sponsor non-share based compensation plans. Non-share based compensation plans
sponsored by us include an employee stock ownership plan and a profit sharing plan.
The following are descriptions of the compensation plans sponsored by us and the activity of such
plans for the three and five months ended May 31, 2010, and three and six months ended June 30,
2009:
Incentive Compensation Plan. We have an Incentive Compensation Plan (Incentive Plan) which allows
awards in the form of incentive stock options (within the meaning of Section 422 of the Internal
Revenue Code), nonqualified stock options, stock appreciation rights, restricted stock,
unrestricted stock, performance awards, restricted stock units, dividend equivalents or other
share-based awards. The plan imposes a limit on the number of shares of our common stock that may
be subject to awards. An award relating to shares may be granted if the aggregate number of shares
subject to then-outstanding awards (as defined in the Incentive Plan) plus the number of shares
subject to the award being granted do not exceed 30% of the number of shares issued and outstanding
immediately prior to the grant.
Restricted Stock and Restricted Stock Units
The Incentive Plan allows for grants of restricted stock awards, whereby employees are granted
restricted shares of common stock subject to forfeiture. The Incentive Plan also allows for grants
of restricted stock units. Restricted stock units give a participant the right to receive fully
vested shares at the end of a specified deferral period. One advantage of restricted stock units,
as compared to restricted stock, is that the period during which the award is deferred as to
settlement can be extended past the date the award becomes non-forfeitable, allowing a participant
to hold an interest tied to common stock on a tax deferred basis. Prior to settlement, restricted
stock units carry no voting or dividend rights associated with the stock ownership, but dividend
equivalents are accrued to the extent there are dividends declared on our common stock.
We grant restricted stock and restricted stock units as part of year-end compensation and to new
employees as sign-on awards. Restricted stock and restricted stock units granted as part of
year-end compensation are not subject to service requirements that employees must fulfill in
exchange for the right to those awards. As such, employees who terminate their employment or are
terminated without cause may continue to vest in year-end compensation awards, so long as the
awards are not forfeited as a result of the other forfeiture provisions of those awards (e.g.
competition). We determined that the service inception date precedes the grant date for restricted
stock and restricted stock units granted as part of year-end compensation, and, as such, the
compensation expense associated with these awards is accrued over the one-year period prior to the
grant date. We accrued compensation expense of approximately $34.1 million and $46.3 million for
the three months ended May 31, 2010 and June 30, 2009, respectively, and $43.0 million and $62.7
million for the five months ended May 31, 2010 and six months ended June 30, 2009, respectively,
related
to restricted stock and restricted stock units expected to be granted as part of our year-end
compensation. Sign-on awards are generally subject to annual ratable vesting upon a four year
service requirement and are amortized as compensation expense on a straight-line basis over the
related four years. Additionally, we grant restricted stock and restricted stock units with both
performance and service conditions to certain senior executives. We amortize these awards over the
service period as we have determined it is probable that the performance condition will be
achieved.
Page 46 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
The total compensation cost associated with restricted stock and restricted stock units
amounted to $42.8 million and $37.9 million for the three months ended May 31, 2010 and June 30,
2009, respectively, and $58.5 million and $55.0 million for the five months ended May 31, 2010 and
six months ended June 30, 2009, respectively. Total compensation cost includes estimated year-end
compensation and the amortization of sign-on and senior executive awards, less forfeitures and
clawbacks.
The following table details the activity of restricted stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Period Ended |
|
|
Average Grant |
|
|
|
May 31, 2010 |
|
|
Date Fair Value |
|
|
|
(Shares in 000s) |
|
|
|
|
|
Restricted stock |
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
2,216 |
|
|
$ |
20.01 |
|
Grants |
|
|
1,111 |
(1) |
|
$ |
25.64 |
|
Forfeited |
|
|
(40 |
) |
|
$ |
24.82 |
|
Fulfillment of service requirement |
|
|
(117) |
(1) |
|
$ |
13.41 |
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
3,170 |
(2) |
|
$ |
22.16 |
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes approximately 16,500 shares of restricted stock granted with
no future service requirement during the five months ended May 31,
2010. As such, these shares are shown as granted and vested during
the period. |
|
(2) |
|
Represents restricted stock with a future service requirement. |
The following table details the activity of restricted stock units:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
Period Ended |
|
|
Average Grant |
|
|
|
May 31, 2010 |
|
|
Date Fair Value |
|
|
|
(Shares in 000s) |
|
|
|
|
|
|
|
|
|
Future |
|
|
No Future |
|
|
Future |
|
|
No Future |
|
|
|
Service |
|
|
Service |
|
|
Service |
|
|
Service |
|
|
|
Required |
|
|
Required |
|
|
Required |
|
|
Required |
|
Restricted stock units |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
936 |
|
|
|
26,468 |
|
|
$ |
17.07 |
|
|
$ |
14.84 |
|
Grants |
|
|
3,174 |
|
|
|
197 |
(1) |
|
$ |
25.64 |
|
|
$ |
24.76 |
|
Distribution of underlying shares |
|
|
|
|
|
|
(1,900 |
) |
|
$ |
|
|
|
$ |
17.72 |
|
Forfeited |
|
|
(4 |
) |
|
|
(174 |
) |
|
$ |
12.84 |
|
|
$ |
17.50 |
|
Fulfillment of service requirement |
|
|
(130 |
) |
|
|
130 |
|
|
$ |
13.68 |
|
|
$ |
13.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
3,976 |
|
|
|
24,721 |
|
|
$ |
24.02 |
|
|
$ |
14.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents dividend equivalents on restricted stock units declared
during the five months ended May 31, 2010. |
The aggregate fair value of restricted stock and restricted stock units upon the awards
vesting during the five months ended May 31, 2010 and six months ended June 30, 2009 was $6.2
million and $3.4 million. In addition, we granted restricted stock units with no future service
period during the first half of 2009 with an aggregate fair value of $1.5 million. We had no
grants of restricted stock units with no future service period, other than dividend equivalents,
during the five months ended May 31, 2010.
Stock Options
The fair value of all option grants were estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for all fixed option
grants in 2004: dividend yield of 0.9%; expected volatility of 32.6%; risk-free interest rates of
3.0%; and expected lives of 4.8 years. There are no option
Page 47 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
grants subsequent to 2004. A summary of our stock option activity for the five months ended
May 31, 2010 is presented below (amounts in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Five Months Ended May 31, 2010 |
|
|
|
|
|
|
|
Weighted Average |
|
|
|
Options |
|
|
Exercise Price |
|
Outstanding at beginning of period |
|
|
48 |
|
|
$ |
7.65 |
|
Exercised |
|
|
(22 |
) |
|
$ |
4.99 |
|
|
|
|
|
|
|
|
|
Outstanding at end of period |
|
|
26 |
|
|
$ |
9.89 |
|
|
|
|
|
|
|
|
|
Options exercisable at end of
period |
|
|
26 |
|
|
$ |
9.89 |
|
The total intrinsic value of stock options exercised during the five months ended May 31, 2010
and six months ended June 30, 2009 was $449,000 and $94,000, respectively. Cash received from the
exercise of stock options during the five months ended May 31, 2010 and six months ended June 30,
2009 totaled $108,000 and $69,000, respectively. We did not realize a tax benefit related to stock
options exercised during the five months ended May 31, 2010, and expect to realize a tax benefit of
$183,000 related to these exercises during the first quarter of 2011. The tax benefit realized
from stock options exercised during the six months ended June 30, 2009 was $37,000.
The table below provides additional information related to stock options outstanding at May 31,
2010:
Dollars and shares in thousands, except per share data
|
|
|
|
|
|
|
|
|
|
|
Outstanding, |
|
|
|
|
|
|
Net of Expected |
|
|
Options |
|
May 31, 2010 |
|
Forfeitures |
|
|
Exercisable |
|
Number of options |
|
|
26 |
|
|
|
26 |
|
Weighted-average exercise price |
|
|
9.89 |
|
|
|
9.89 |
|
Aggregate intrinsic value |
|
|
347 |
|
|
|
347 |
|
Weighted-average remaining contractual term, in years |
|
|
5.16 |
|
|
|
5.16 |
|
At May 31, 2010, the intrinsic value of vested options was approximately $347,000 for which tax
benefits expected to be recognized in equity upon exercise are approximately $142,000.
Directors Plan. We have a Directors Stock Compensation Plan (Directors Plan) which provides
for an annual grant to each non-employee director of $100,000 of restricted stock or deferred
shares (which are similar to restricted stock units). These grants are made automatically on the
date directors are elected or reelected at our annual shareholders meeting. These grants vest
three years after the date of grant and are expensed over the requisite service period.
Additionally, the Directors Plan permits each non-employee director to elect to be paid annual
retainer fees, meeting fees and fees for service as chairman of a Board committee in the form of
cash, deferred cash or deferred shares. If deferred cash is elected, interest is credited to such
deferred cash at the prime interest rate in effect at the date of each annual meeting of
stockholders. If deferred shares are elected, dividend equivalents equal to dividends declared and
paid on our common stock are credited to a Directors account and reinvested as additional deferred
shares.
Employee Stock Purchase Plan. We also have an Employee Stock Purchase Plan (ESPP) which we
consider non-compensatory effective January 1, 2007. All regular full-time employees and employees
who work part-time over 20 hours per week are eligible for the ESPP. Annual employee contributions
are limited to $21,250, are voluntary and are made via payroll deduction. The employee
contributions are used to purchase our common stock. The stock price used is 95% of the closing
price of our common stock on the last day of the applicable session (monthly).
Deferred Compensation Plan. We also have a Deferred Compensation Plan, which was established in
2001. In 2010 and 2009, employees with annual compensation of $200,000 or more were eligible to
defer compensation on a pre-tax
Page 48 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
basis by investing in our common stock at a discount (DCP shares) and/or stock options
(prior to 2004) or by specifying the return in other alternative investments. We often invest
directly, as a principal, in such investment alternatives related to our obligations to perform
under the Deferred Compensation Plan. The compensation deferred by our employees is expensed in the
period earned. The change in fair value of the specified other alternative investments are
recognized in Principal transactions and changes in the corresponding deferral compensation
liability are reflected as Compensation and benefits expense in our Consolidated Statements of
Earnings.
Additionally, we recognize compensation cost related to the discount provided to employees in
electing to defer compensation in DCP shares. This compensation cost was approximately $67,000 and
$125,000 for the three months ended May 31, 2010 and June 30, 2009, respectively, and $67,000 and
$335,000 for the five months ended May 31, 2010 and six months ended June 30, 2009, respectively.
As of May 31, 2010, there were 2,881,000 DCP shares issuable under the Plan.
Employee Stock Ownership Plan. We have an Employee Stock Ownership Plan (ESOP) which was
established in 1988. We had no contributions and no compensation cost related to the ESOP during
the three and five months ended May 31, 2010 and three and six months ended June 30, 2009.
Profit Sharing Plan. We have a profit sharing plan, covering substantially all employees, which
includes a salary reduction feature designed to qualify under Section 401(k) of the Internal
Revenue Code. The compensation cost related to this plan was $1.0 million and $0.8 million for the
three months ended May 31, 2010 and June 30, 2009, respectively, and $3.5 million and $3.0 million
for the five months ended May 31, 2010 and six months ended June 30, 2009, respectively.
Note 14. Earnings Per Share
The following is a reconciliation of the numerators and denominators of the Basic and Diluted
earnings per common share computations for the three and five months ended May 31, 2010 and the
three and six months ended June 30, 2009 (in thousands, except per share amounts):
Page 49 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Five Months Ended |
|
|
Six Months Ended |
|
|
|
May 31, 2010 |
|
|
June 30, 2009 |
|
|
May 31, 2010 |
|
|
June 30, 2009 |
|
Earnings for basic earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
88,497 |
|
|
$ |
73,995 |
|
|
$ |
122,533 |
|
|
$ |
106,421 |
|
Net earnings to noncontrolling interests |
|
|
3,665 |
|
|
|
12,095 |
|
|
|
3,994 |
|
|
|
6,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings to common shareholders |
|
|
84,832 |
|
|
|
61,900 |
|
|
|
118,539 |
|
|
|
100,237 |
|
Less: Allocation of earnings to participating
securities (1) |
|
|
2,875 |
|
|
|
236 |
|
|
|
3,754 |
|
|
|
240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings available to common shareholders |
|
$ |
81,957 |
|
|
$ |
61,664 |
|
|
$ |
114,785 |
|
|
$ |
99,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings for diluted earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
88,497 |
|
|
$ |
73,995 |
|
|
$ |
122,533 |
|
|
$ |
106,421 |
|
Net earnings to noncontrolling interests |
|
|
3,665 |
|
|
|
12,095 |
|
|
|
3,994 |
|
|
|
6,184 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings to common shareholders |
|
|
84,832 |
|
|
|
61,900 |
|
|
|
118,539 |
|
|
|
100,237 |
|
Add: Convertible preferred stock dividends |
|
|
1,016 |
|
|
|
1,016 |
|
|
|
1,693 |
|
|
|
|
|
Less: Allocation of earnings to participating
securities (1) |
|
|
2,863 |
|
|
|
235 |
|
|
|
3,752 |
|
|
|
240 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings available to common shareholders |
|
$ |
82,985 |
|
|
$ |
62,681 |
|
|
$ |
116,480 |
|
|
$ |
99,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares used in basic computation |
|
|
196,944 |
|
|
|
201,902 |
|
|
|
197,759 |
|
|
|
202,485 |
|
Stock options |
|
|
15 |
|
|
|
20 |
|
|
|
17 |
|
|
|
20 |
|
Mandatorily redeemable convertible preferred stock |
|
|
4,105 |
|
|
|
4,105 |
|
|
|
4,105 |
|
|
|
|
|
Convertible debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares used in diluted computation |
|
|
201,064 |
|
|
|
206,027 |
|
|
|
201,881 |
|
|
|
202,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.42 |
|
|
$ |
0.31 |
|
|
$ |
0.58 |
|
|
$ |
0.49 |
|
Diluted |
|
$ |
0.41 |
|
|
$ |
0.30 |
|
|
$ |
0.58 |
|
|
$ |
0.49 |
|
|
|
|
(1) |
|
Represents dividends declared during the period on participating securities plus an
allocation of undistributed earnings to participating securities. Losses are not allocated
to participating securities. Participating securities represent restricted stock and
restricted stock units for which requisite service has not yet been rendered and amounted
to weighted average shares of 6,780,000 and 774,000 for the three months ended May 31, 2010
and June 30, 2009, respectively, and 6,270,000 and 486,000 for the five months ended May
31, 2010 and six months ended June 30, 2009, respectively. Dividends declared on
participating securities during the three and five months ended May 31, 2010 amounted to
approximately $568,000 and $1,062,000, respectively. No dividends were declared during
2009. Undistributed earnings are allocated to participating securities based upon their
right to share in earnings if all earnings for the period had been distributed. |
The following security was considered antidilutive and, therefore, not included in the
computation of Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Number of securities outstanding at |
|
|
|
May 31, 2010 |
|
|
June 30, 2009 (1) |
|
Mandatorily redeemable convertible preferred stock |
|
|
|
|
|
|
4,105,138 |
|
|
|
|
(1) |
|
Mandatorily redeemable convertible preferred stock was considered antidilutive for the
six-months ended June 30, 2009. There were no antidilutive securities for the three-months
ended June 30, 2009. |
The only restrictions on our present ability to pay dividends on our common stock are the
dividend preference terms of our Series A convertible preferred stock and the governing provisions
of the Delaware General Corporation Law.
Page 50 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
Dividends per Common Share (declared):
|
|
|
|
|
|
|
|
|
|
|
1st Quarter |
|
|
2nd Quarter |
|
2010 |
|
$ |
0.075 |
|
|
$ |
0.075 |
|
2009 |
|
|
|
|
|
|
|
|
On June 15, 2010, a quarterly dividend per common share of $0.075 was paid to shareholders of
record as of May 14, 2010.
On June 21, 2010, a quarterly dividend was declared of $0.075 per share of common stock payable on
August 16, 2010 to stockholders of record as of July 15, 2010.
Note 15. Income Taxes
As of May 31, 2010 and December 31, 2009, we had approximately $28.3 million and $24.2 million,
respectively, of total gross unrecognized tax benefits. The total amount of unrecognized benefits
that, if recognized, would favorably affect the effective tax rate in future periods was $18.4
million and $15.7 million (net of federal benefit of state taxes) at May 31, 2010 and December 31,
2009, respectively.
We are currently under examination by the Internal Revenue Service and other major tax
jurisdictions. We do not expect that conclusion of these examinations will have a material effect
on the Consolidated Statement of Financial Condition, but could have a material impact on the
Consolidated Statement of Earnings for the period in which conclusion occurs. The table below
summarizes the earliest tax years that are subject to examination in the major tax jurisdictions in
which we operate:
|
|
|
|
|
Jurisdiction |
|
Tax Year |
|
United States |
|
|
2006 |
|
United Kingdom |
|
|
2007 |
|
New Jersey |
|
|
2005 |
|
New York State |
|
|
2001 |
|
New York City |
|
|
2003 |
|
We recognize interest accrued related to unrecognized tax benefits in interest expense. Penalties,
if any, are recognized in other expenses in the Consolidated Statement of Earnings. As of May 31,
2010 and December 31, 2009, we have accrued interest related to unrecognized tax benefits of
approximately $5.3 million and $4.4 million, respectively. No penalties were accrued at May 31,
2010 and December 31, 2009.
Page 51 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
Note 16. Commitments, Contingencies and Guarantees
The following table summarizes our commitments and guarantees at May 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity Date |
|
|
|
Notional / |
|
|
|
|
|
|
|
|
|
|
2012 |
|
|
2014 |
|
|
2016 |
|
|
|
Maximum |
|
|
|
|
|
|
|
|
|
|
and |
|
|
and |
|
|
and |
|
|
|
Payout |
|
|
2010 |
|
|
2011 |
|
|
2013 |
|
|
2015 |
|
|
Later |
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Millions) |
|
|
|
|
|
|
|
|
|
Bank credit |
|
$ |
34.5 |
|
|
$ |
23.0 |
|
|
$ |
7.7 |
|
|
$ |
3.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity commitments |
|
$ |
161.8 |
|
|
|
|
|
|
$ |
0.7 |
|
|
$ |
2.2 |
|
|
$ |
12.8 |
|
|
$ |
146.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan commitments |
|
$ |
330.8 |
|
|
$ |
240.0 |
|
|
|
|
|
|
$ |
17.0 |
|
|
$ |
73.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-related
commitments |
|
$ |
881.2 |
|
|
$ |
590.0 |
|
|
$ |
240.0 |
|
|
$ |
51.2 |
|
|
|
|
|
|
|
|
|
|
Underwriting commitments |
|
$ |
12.1 |
|
|
$ |
12.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts - non-credit related |
|
$ |
25,135.1 |
|
|
$ |
19,353.0 |
|
|
$ |
5,769.9 |
|
|
$ |
12.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts credit related: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single name credit default swaps |
|
$ |
10.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10.0 |
|
|
|
|
|
Index credit default swaps |
|
$ |
130.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
100.0 |
|
|
$ |
30.0 |
|
The following table summarizes the external credit ratings of the underlyings or referenced
assets for credit related commitments, guarantees and derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External Credit Rating |
|
|
|
Notional / |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below |
|
|
|
|
|
|
Maximum |
|
|
AAA/ |
|
|
|
|
|
|
|
|
|
|
Investment |
|
|
|
|
|
|
Payout |
|
|
Aaa |
|
|
AA/Aa |
|
|
BBB/Baa |
|
|
Grade |
|
|
Unrated |
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Millions) |
|
|
|
|
|
|
|
|
|
Bank credit |
|
$ |
34.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
34.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan commitments |
|
$ |
330.8 |
|
|
|
|
|
|
|
|
|
|
$ |
56.9 |
|
|
$ |
33.8 |
|
|
$ |
240.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts- credit related: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single name credit default swaps |
|
$ |
10.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10.0 |
|
|
|
|
|
Index credit default swaps |
|
$ |
130.0 |
|
|
$ |
20.0 |
|
|
$ |
10.0 |
|
|
|
|
|
|
|
|
|
|
$ |
100.0 |
|
Bank Credit. As of May 31, 2010, we had outstanding guarantees of $36.0 million relating to
bank credit obligations ($1.5 million of which is undrawn) of associated investment vehicles in
which we have an interest.
Equity Commitments. On October 7, 2004, we entered into an agreement with Babson Capital and
MassMutual to form Jefferies Finance LLC, a joint venture entity created for the purpose of
offering senior loans to middle market and growth companies. The total committed equity
capitalization by the partners to Jefferies Finance, LLC is $500 million as of May 31, 2010. Loans
are originated primarily through the investment banking efforts of
Jefferies with Babson Capital providing primary credit analytics and portfolio management services. As of May 31,
2010, we have funded $107.5 million of our aggregate $250.0 million commitment leaving $142.5
million unfunded.
Page 52 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
As of May 31, 2010, we have an aggregate commitment to invest equity of approximately $11.6 million
in Jefferies Capital Partners IV L.P. and its related parallel fund, a private equity fund managed
by a team led by Brian P. Friedman (one of our directors and Chairman, Executive Committee).
As of May 31, 2010, we had other equity commitments to invest up to $7.7 million in various other
investments.
Loan Commitments. From time to time we make commitments to extend credit to investment banking and
other clients in loan syndication, acquisition finance and securities transactions. These
commitments and any related drawdowns of these facilities typically have fixed maturity dates and
are contingent on certain representations, warranties and contractual conditions applicable to the
borrower. As of May 31, 2010, we had $330.8 million of loan commitments outstanding to clients.
Mortgage-Related Commitments. We enter into forward contracts to purchase mortgage
participation certificates and mortgage-backed securities. The mortgage participation certificates
evidence interests in mortgage loans insured by the Federal Housing Administration and the
mortgage-backed securities are insured or guaranteed by the Federal National Mortgage Association
(Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac) or the Government National
Mortgage Association (Ginnie Mae). We frequently securitize the mortgage participation
certificates and mortgage-backed securities.
Underwriting Commitments. In connection with investment banking activities, we may from time to
time provide underwriting commitments to our clients in connection with capital raising
transactions.
Derivative Contracts. We disclose certain derivative contracts meeting the definition of a
guarantee under U.S. generally accepted accounting principles. Such derivative contracts include
credit default swaps (whereby a default or significant change in the credit quality of the
underlying financial instrument may obligate us to make a payment) and written equity put options.
At May 31, 2010, the maximum payout value of derivative contracts deemed to meet the definition of
a guarantee was approximately $25,275.0 million. For purposes of determining maximum payout,
notional values are used; however, we believe the fair value of these contracts is a more relevant
measure of these obligations because we believe the notional amounts overstate our expected payout.
At May 31, 2010, the fair value of such derivative contracts approximated $(157.0) million. In
addition, the derivative contracts deemed to meet the definition of a guarantee under U.S.
generally accepted accounting principles are before consideration of hedging transactions. We
substantially mitigate our risk on these contracts through hedges, such as other derivative
contracts and/or cash instruments. We manage risk associated with derivative contracts meeting the
definition of a guarantee consistent with our risk management policies.
Jefferies Financial Products, LLC. JFP maintains a credit intermediation facility with a highly
rated European bank (the Bank), which allow JFP customers that require a counterparty with a high
credit rating for commodity index transactions to transact with the Bank. The Bank simultaneously
enters into offsetting transactions with JFP and receives a fee from JFP for providing credit
support.
Other Guarantees. In the normal course of business we provide guarantees to securities
clearinghouses and exchanges. These guarantees generally are required under the standard membership
agreements, such that members are required to guarantee the performance of other members. To
mitigate these performance risks, the exchanges and clearinghouses often require members to post
collateral. Our obligations under such guarantees could exceed the collateral amounts posted;
however, the potential for us to be required to make payments under such guarantees is deemed
remote.
Note 17. Net Capital Requirements
As broker-dealers registered with the SEC and member firms of the Financial Industry Regulatory
Authority (FINRA), Jefferies, Jefferies Execution and Jefferies High Yield Trading are subject to
the Securities and Exchange Commission Uniform Net Capital Rule (Rule 15c3-1), which requires the
maintenance of minimum net capital and which may limit distributions from the broker-dealers.
Jefferies, Jefferies Execution and Jefferies High Yield Trading have elected to use the alternative
method permitted by the Rule. FINRA serves as our primary self-regulatory organization.
Page 53 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
As of May 31, 2010, Jefferies, Jefferies Execution and Jefferies High Yield Tradings net capital
and excess net capital were as follows (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excess Net |
|
|
|
Net Capital |
|
|
Capital |
|
Jefferies |
|
$ |
766,818 |
|
|
$ |
702,399 |
|
Jefferies Execution |
|
$ |
9,961 |
|
|
$ |
9,711 |
|
Jefferies High Yield Trading |
|
$ |
356,176 |
|
|
$ |
355,926 |
|
Certain non-U.S. subsidiaries are subject to capital adequacy requirements as prescribed by the
regulatory authorities in their respective jurisdictions, including Jefferies International Limited
which is subject to the regulatory supervision and requirements of the Financial Services Authority
in the United Kingdom. The subsidiaries consistently operate in excess of the net capital
requirements.
Note 18. Segment Reporting
The Capital Markets reportable segment includes our traditional securities brokerage trading
activities, including the results of our high yield secondary market trading activities, and
investment banking activities. The Capital Markets reportable segment is managed as a single
operating segment that provides the sales, trading and origination effort for various fixed income,
equity and advisory products and services. The Capital Markets segment comprises a number of
interrelated divisions. In addition, we choose to voluntarily disclose the Asset Management segment
even though it is currently an immaterial non-reportable segment.
Our reportable business segment information is prepared using the following methodologies:
|
|
|
Net revenues and expenses directly associated with each reportable business segment are
included in determining earnings before taxes. |
|
|
|
|
Net revenues and expenses not directly associated with specific reportable business
segments are allocated based on the most relevant measures applicable, including each
reportable business segments net revenues, headcount and other factors. |
|
|
|
|
Reportable business segment assets include an allocation of indirect corporate assets that
have been fully allocated to our reportable business segments, generally based on each
reportable business segments capital utilization. |
Our net revenues, expenses, and total assets by segment are summarized below for the three months
and five months ended May 31, 2010 and the three and six months ended June 30, 2009 (in millions):
Page 54 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital |
|
|
Asset |
|
|
|
|
|
|
Markets |
|
|
Management |
|
|
Total |
|
Three months ended May 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
655.6 |
|
|
$ |
13.9 |
|
|
$ |
669.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
$ |
511.1 |
|
|
$ |
11.1 |
|
|
$ |
522.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five months ended May 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
988.4 |
|
|
$ |
11.0 |
|
|
$ |
999.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
$ |
780.6 |
|
|
$ |
15.8 |
|
|
$ |
796.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets |
|
$ |
31,987.0 |
|
|
$ |
130.0 |
|
|
$ |
32,117.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
589.7 |
|
|
$ |
0.5 |
|
|
$ |
590.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
$ |
450.9 |
|
|
$ |
4.6 |
|
|
$ |
455.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six months ended June 30, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
931.7 |
|
|
$ |
0.5 |
|
|
$ |
932.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
$ |
743.3 |
|
|
$ |
10.3 |
|
|
$ |
753.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment assets |
|
$ |
26,140.0 |
|
|
$ |
123.5 |
|
|
$ |
26,263.5 |
|
|
|
|
|
|
|
|
|
|
|
Net Revenues by Geographic Region
Net revenues are recorded in the geographic region in which the senior coverage banker is located
in the case of investment banking or where the position was risk-managed within Capital Markets or
the location of the investment advisor in the case of Asset Management. In addition, certain
revenues associated with U.S. financial instruments and services that result from relationships
with non-U.S. clients have been classified as non-U.S. revenues using an allocation consistent with
our internal reporting. The following table presents Net revenues by geographic region for the
three months and five months ended May 31, 2010 and the three and six months ended June 30, 2009
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Five Months Ended |
|
|
Six Months Ended |
|
|
|
May 31, 2010 |
|
|
June 30, 2009 |
|
|
May 31, 2010 |
|
|
June 30, 2009 |
|
Americas (1) |
|
$ |
592,229 |
|
|
$ |
525,674 |
|
|
$ |
870,904 |
|
|
$ |
831,907 |
|
Europe (2) |
|
|
76,334 |
|
|
|
65,009 |
|
|
|
128,930 |
|
|
|
100,569 |
|
Asia (including Middle East) |
|
|
967 |
|
|
|
(490 |
) |
|
|
(462 |
) |
|
|
(327 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues |
|
$ |
669,530 |
|
|
$ |
590,193 |
|
|
$ |
999,372 |
|
|
$ |
932,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Substantially all relates to U.S. results.
|
|
(2) |
|
Substantially all relates to U.K. results. |
Note 19. Related Party Transactions
On August 11, 2008, we entered into a Credit Agreement (the Credit Facility) with JCP Fund V
Bridge Partners, LLC, a Delaware limited liability company (the Borrower), pursuant to which we
may make loans to the Borrower in an aggregate principal amount of up to $50.0 million. The
Borrower is owned by its two managing members,including Brian P. Friedman, one of our directors and
Chairman, Executive Committee. The loan proceeds may be
Page 55 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
used by the Borrower to make investments that are expected to be sold to Jefferies
Capital Partners V, L.P. (Fund V) upon its capitalization by third party investors. Fund V will
be managed by a team led by Mr. Friedman.
In July of 2009, the Borrower exercised its right to extend the final maturity date of the Credit
Facility from August 12, 2009 to January 11, 2010; and in October 2009, we and the Borrower agreed
to extend the final maturity date to June 30, 2010. On May 3, 2010, we and the Borrower extended
the final maturity date of the Credit Facility to September 30, 2010 and increased our commitment
to make loans to the Borrower by $10.0 million to an aggregate principal amount of up to $60.0
million. The interest rate on any loans made under the Credit Facility is the Prime Rate (as
defined in the Credit Facility) plus 200 basis points, payable at the final maturity date, or upon
repayment of any principal amounts, as applicable. The obligations of the Borrower under the Credit
Facility are secured by its interests in each investment. As of May 31, 2010 and December 31, 2009,
loans in the aggregate principal amount of approximately $60.0 million and $45.7 million,
respectively, were outstanding under the Credit Facility and recorded in Other investments on the
Consolidated Statements of Financial Condition. Subsequent to May 31, 2010, a portion of the loan
was repaid and the remaining balance was reduced to $38.4 million.
At May 31, 2010, we have commitments to purchase $227.9 million in agency commercial
mortgage-backed securities from Berkadia Commercial Mortgage, LLC, which is partially owned by
Leucadia.
Page 56 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations
This report contains or incorporates by reference forward-looking statements within the meaning
of the safe harbor provisions of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Forward-looking statements include statements about our future
and statements that are not historical facts. These forward-looking statements are usually
preceded by the words believe, intend, may, will, or similar expressions. Forward-looking
statements may contain expectations regarding revenues, earnings, operations and other financial
projections, and may include statements of future performance, plans and objectives.
Forward-looking statements also include statements pertaining to our strategies for future
development of our business and products. Forward-looking statements represent only our belief
regarding future events, many of which by their nature are inherently uncertain and outside of our
control. It is possible that the actual results may differ, possibly materially, from the
anticipated results indicated in these forward-looking statements. Information regarding important
factors that could cause actual results to differ, perhaps materially, from those in our
forward-looking statements is contained in this report and other documents we file. You should
read and interpret any forward-looking statement together with these documents, including the
following:
|
|
|
the description of our business and risk factors contained in our annual report
on Form 10-K for the fiscal year ended December 31, 2009 and filed with the SEC
on February 26, 2010 and additional risk factors contained in this report; |
|
|
|
|
the discussion of our analysis of financial condition and results of operations
contained in this report under the caption Managements Discussion and Analysis
of Financial Condition and Results of Operations; |
|
|
|
|
the notes to the consolidated financial statements contained in this report; and |
|
|
|
|
cautionary statements we make in our public documents, reports and announcements. |
Any forward-looking statement speaks only as of the date on which that statement is made. We will
not update any forward-looking statement to reflect events or circumstances that occur after the
date on which the statement is made.
Critical Accounting Policies
The consolidated financial statements are prepared in conformity with U.S. generally accepted
accounting principles (GAAP), which require management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and related notes. Actual
results can and may differ from estimates. These differences could be material to the financial
statements.
We believe our application of GAAP and the associated estimates are reasonable. Our accounting
policies and estimates are constantly re-evaluated, and adjustments are made when facts and
circumstances dictate a change. Historically, we have found our application of accounting policies
to be appropriate, and actual results have not differed materially from those determined using
necessary estimates.
We believe our critical accounting policies (policies that are both material to the financial
condition and results of operations and require our most subjective or complex judgments) are our
valuation of financial instruments, assessment of goodwill and our use of estimates related to
compensation and benefits during the year. For further discussion of these and other significant
accounting policies, see Note 1, Organization and Summary of Significant Accounting Policies, in
our consolidated financial statements.
Page 57 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
Valuation of Financial Instruments
Financial instruments owned and financial instruments sold, not yet purchased are recorded at fair
value. The fair value of a financial instrument is the amount that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date (the exit price). Unrealized gains or losses are recognized in Principal
transactions in our Consolidated Statements of Earnings.
The following is a summary of the fair value of major categories of Financial instruments owned and
Financial instruments sold, not yet purchased, as of May 31, 2010 and December 31, 2009 (in
thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2010 |
|
|
December 31, 2009 |
|
|
|
|
|
|
|
Financial |
|
|
|
|
|
|
Financial |
|
|
|
|
|
|
|
Instruments |
|
|
|
|
|
|
Instruments |
|
|
|
Financial |
|
|
Sold, |
|
|
Financial |
|
|
Sold, |
|
|
|
Instruments |
|
|
Not Yet |
|
|
Instruments |
|
|
Not Yet |
|
|
|
Owned |
|
|
Purchased |
|
|
Owned |
|
|
Purchased |
|
Corporate equity securities |
|
$ |
1,617,779 |
|
|
$ |
1,636,638 |
|
|
$ |
1,500,042 |
|
|
$ |
1,360,528 |
|
Corporate debt securities |
|
|
3,484,643 |
|
|
|
2,480,790 |
|
|
|
2,421,704 |
|
|
|
1,909,781 |
|
Government, federal agency
and other sovereign obligations |
|
|
3,836,649 |
|
|
|
3,146,505 |
|
|
|
1,762,643 |
|
|
|
1,735,861 |
|
Mortgage- and asset-backed securities (1) |
|
|
4,058,278 |
|
|
|
34,416 |
|
|
|
3,079,865 |
|
|
|
21,474 |
|
Loans and other receivables |
|
|
563,965 |
|
|
|
386,343 |
|
|
|
591,208 |
|
|
|
363,080 |
|
Derivatives |
|
|
63,695 |
|
|
|
67,920 |
|
|
|
62,117 |
|
|
|
18,427 |
|
Investments |
|
|
75,020 |
|
|
|
|
|
|
|
70,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13,700,029 |
|
|
$ |
7,752,612 |
|
|
$ |
9,487,735 |
|
|
$ |
5,409,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
A portion of our mortgage- and asset-backed securities inventory has been economically
hedged through the forward sale of such securities with the execution of to-be-announced
(TBA) securities with a notional amount outstanding of $1,398.8 million and $881.8 million
at May 31, 2010 and December 31, 2009, respectively. TBA securities had a net asset fair
value of $(5.1) million and $18.0 million at May 31, 2010 and December 31, 2009, respectively,
and are included in Financial instruments owned and Financial instruments sold, not yet
purchased in our Consolidated Statements of Financial Condition. |
Fair Value Hierarchy In determining fair value, we maximize the use of observable
inputs and minimize the use of unobservable inputs by requiring that observable inputs be used when
available. Observable inputs are inputs that market participants would use in pricing the asset or
liability based on market data obtained from independent sources. Unobservable inputs reflect our
assumptions that market participants would use in pricing the asset or liability developed based on
the best information available in the circumstances. We apply a hierarchy to categorize our fair
value measurements broken down into three levels based on the transparency of inputs, where Level 1
uses observable prices in active markets and Level 3 uses valuation techniques that incorporate
significant unobservable inputs and broker quotes that are considered less observable. Greater use
of management judgment is required in determining fair value when inputs are less observable or
unobservable in the marketplace, such as when the volume or level of trading activity for a
financial instrument has decreased and when certain factors suggest that observed transactions may
not be reflective of orderly market transactions. Judgment must be applied in determining the
appropriateness of available prices, particularly in assessing whether available data reflects
current prices and/or reflects the results of recent market transactions. Prices or quotes are
weighed when estimating fair value with greater reliability placed on information from transactions
that are considered to be representative of orderly market transactions.
Fair value is a market-based measure; therefore, when market observable inputs are not available,
our judgment is applied to reflect those judgments that a market participant would use in valuing
the same asset or liability. The availability of observable inputs can vary for different products.
We use prices and inputs that are current as of the measurement date even in periods of market
disruption or illiquidity. The valuation of financial instruments classified in Level 3 of the
fair value hierarchy involves the greatest amount of management judgment. For further information
Page 58 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
on the fair value definition, Level 1, Level 2, Level 3 and related valuation techniques, see Notes
1 and 3 to the consolidated financial statements.
Level 3 Assets and Liabilities Total level 3 assets were $503.6 million and $883.7
million as of May 31, 2010 and December 31, 2009, respectively, and represented approximately 4%
and 9%, respectively, of total Financial instruments owned. Level 3 assets, for which the firm
bears economic exposure, were $360.0 million and $504.6 million as of May 31, 2010 and December 31,
2009, respectively. Level 3 liabilities were $83.9 million and $357.3 million as of May 31, 2010
and December 31, 2009, respectively, and represented approximately 1% and 7%, respectively, of
total Financial instruments sold, not yet purchased. While our Financial instruments sold, not yet
purchased, which are included within liabilities on our Consolidated Statement of Financial
Condition, are accounted for at fair value, we do not account for any of our other liabilities at
fair value. At May 31, 2010 and December 31, 2009, Level 3 financial instruments were comprised of
the following asset and liability classes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial Instruments Sold, |
|
|
|
Financial Instruments Owned |
|
|
Not Yet Purchased |
|
|
|
May 31, |
|
|
December 31, |
|
|
May 31, |
|
|
December 31, |
|
(in thousands) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Residential mortgage-backed securities |
|
$ |
148,833 |
|
|
$ |
136,496 |
|
|
$ |
|
|
|
$ |
|
|
Loans and other receivables |
|
|
145,181 |
|
|
|
506,542 |
|
|
|
68,242 |
|
|
|
352,420 |
|
Corporate debt securities |
|
|
100,275 |
|
|
|
116,648 |
|
|
|
14,365 |
|
|
|
|
|
Investments |
|
|
72,297 |
|
|
|
65,564 |
|
|
|
|
|
|
|
|
|
Corporate equity securities |
|
|
21,918 |
|
|
|
43,042 |
|
|
|
38 |
|
|
|
|
|
Collateralized debt obligations |
|
|
13,313 |
|
|
|
9,570 |
|
|
|
|
|
|
|
|
|
Commercial mortgage-backed securities |
|
|
1,000 |
|
|
|
3,215 |
|
|
|
|
|
|
|
|
|
U.S. issued municipal securities |
|
|
436 |
|
|
|
420 |
|
|
|
|
|
|
|
|
|
Other asset-backed securities |
|
|
369 |
|
|
|
110 |
|
|
|
|
|
|
|
|
|
Derivatives |
|
|
|
|
|
|
1,909 |
|
|
|
1,271 |
|
|
|
4,926 |
|
Sovereign obligations |
|
|
|
|
|
|
196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Level 3 financial instruments |
|
|
503,622 |
|
|
|
883,712 |
|
|
|
83,916 |
|
|
|
357,346 |
|
Investments in Managed Funds |
|
|
8,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Level 3 assets |
|
|
512,266 |
|
|
|
883,712 |
|
|
|
83,916 |
|
|
|
357,346 |
|
|
Level 3 assets for which the firm bears no
economic exposure (1) |
|
|
(152,611 |
) |
|
|
(379,153 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 assets for which the firm bears
economic exposure |
|
$ |
359,655 |
|
|
$ |
504,559 |
|
|
$ |
83,916 |
|
|
$ |
357,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2) |
|
Consists of Level 3 assets which are attributable to third party and employee
noncontrolling interests in certain consolidated entities. |
During the three and five months ended May 31, 2010, we had transfers of assets of $2.0
million and $17.6 million, respectively, from Level 2 to Level 3. Transfers of assets from Level 3
to Level 2 were $216.8 million and $416.4 million for the three and five months ended May 31, 2010,
respectively. During the three and five months ended May 31, 2010 we had transfers of liabilities
from Level 2 to Level 3 of $-0- and $0.04 million, respectively, and transfers of liabilities from
Level 3 to Level 2 were $248.0 million and $330.7 million, respectively. Net losses on Level 3
assets were $1.4 million and net gains on Level 3 assets were $6.5 million for the three and five
months ended May 31, 2010, respectively. Net losses on Level 3 liabilities were $1.3 million and
$4.6 million, respectively, for the three and five months ended May 31, 2010. During the three and
six months ended June 30, 2009, we had transfers of assets of $89.5 million and $115.0 million,
respectively, from Level 2 to Level 3 and transfers of $77.3 million and $89.8 million,
respectively, from Level 3 to Level 2. During the three and six months ended June 30, 2009, we had
transfers of liabilities of $3.0 million and $3.0 million, respectively, from Level 2 to Level 3
and transfers of liabilities of $-0- and $3.5 million from Level 3 to Level 2. Net losses on Level
3 assets of $2.6 million and $45.3 million for the three
Page 59 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
and six months ended June 30, 2009, respectively, and net losses on Level 3 liabilities were $3.7 million for the three months ended
June 30, 2009 while net gains on Level 3 liabilities were $0.3 million for the six months ended
June 30, 2009.
See Note 3, Financial Instruments, in the consolidated financial statements for additional
discussion on transfers of assets and liabilities among the fair value hierarchy levels.
Level 3 cash instruments are frequently hedged with instruments classified within Level 1 and Level
2, and accordingly, gains or losses that have been reported in Level 3 are frequently offset by
gains or losses attributable to instruments classified within Level 1 or Level 2 or by gains or
losses on derivative contracts classified in Level 3 of the fair value hierarchy.
Controls Over the Valuation Process for Financial Instruments Our valuation team,
independent of the trading function, plays an important role in determining that our financial
instruments are appropriately valued and that fair value measurements are reliable. This is
particularly important where prices or valuations that require inputs are less observable. In the
event that observable inputs are not available, the control processes are designed to assure that
the valuation approach utilized is appropriate and consistently applied and that the assumptions
are reasonable. Where a pricing model is used to determine fair value, these control processes
include reviews of the pricing models theoretical soundness and appropriateness by risk management
personnel with relevant expertise who are independent from the trading desks. In addition, recently
executed comparable transactions and other observable market data are considered for purposes of
validating assumptions underlying the model.
Goodwill
At least annually, we are required to assess goodwill for impairment by comparing the estimated
fair value of the operating segment with its net book value. Periodically estimating the fair
value of the Capital Markets segment requires significant judgment. We estimate the fair value of
the operating segment based on valuation methodologies we believe market participants would use,
including consideration of control premiums for recent acquisitions observed in the marketplace.
We completed our annual impairment test as of September 30, 2009 and no impairment was identified.
Compensation and Benefits
The use of estimates is important in determining compensation and benefits expenses for interim
periods. A portion of our compensation and benefits represents discretionary bonuses, which are
finalized at year end. In addition to the level of net revenues, our overall compensation expense
in any given year is influenced by prevailing labor markets, revenue mix, profitability, individual
and business performance metrics, and our use of share-based compensation programs. We believe the
most appropriate way to allocate estimated annual total compensation among interim periods is in
proportion to projected net revenues earned. Consequently, during the year we accrue compensation
and benefits based on annual targeted compensation ratios, taking into account the mix of our
revenues and the timing of expense recognition.
Page 60 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
Consolidated Results of Operations
On April 19, 2010, our Board of Directors approved a change to our fiscal year end from a calendar
year basis to a fiscal year ending on November 30. Our 2010 second quarter consists of the three
months ended May 31, 2010 and our results included within this report on Form 10-Q reflect the five
months ended May 31, 2010. Our report on Form 10-Q for the third quarter will include results for
the three months and eight months ended August 31, 2010 and our 2010 fiscal year will consist of
the eleven month transition period beginning January 1, 2010 through November 30, 2010. Financial
statements for 2009 continue to be presented on the basis of our previous calendar year end.
The following table provides an overview of our consolidated results of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Five Months Ended |
|
|
Six Months Ended |
|
(Dollars in Thousands, except for per
share amounts) |
|
May 31, 2010 |
|
|
June 30, 2009 |
|
|
May 31, 2010 |
|
|
June 30, 2009 |
|
Net revenues, less mandatorily redeemable
preferred interest |
|
$ |
667,512 |
|
|
$ |
577,866 |
|
|
$ |
996,859 |
|
|
$ |
925,126 |
|
Non-interest expenses |
|
|
522,179 |
|
|
|
455,538 |
|
|
|
796,433 |
|
|
|
753,616 |
|
Earnings before income taxes |
|
|
145,333 |
|
|
|
122,328 |
|
|
|
200,426 |
|
|
|
171,510 |
|
Income tax expense |
|
|
56,836 |
|
|
|
48,333 |
|
|
|
77,893 |
|
|
|
65,089 |
|
Net earnings |
|
|
88,497 |
|
|
|
73,995 |
|
|
|
122,533 |
|
|
|
106,421 |
|
Net earnings to noncontrolling interests |
|
|
3,665 |
|
|
|
12,095 |
|
|
|
3,994 |
|
|
|
6,184 |
|
Net earnings to common shareholders |
|
|
84,832 |
|
|
|
61,900 |
|
|
|
118,539 |
|
|
|
100,237 |
|
Earnings per diluted common share |
|
$ |
0.41 |
|
|
$ |
0.30 |
|
|
$ |
0.58 |
|
|
$ |
0.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate |
|
|
39 |
% |
|
|
40 |
% |
|
|
39 |
% |
|
|
38 |
% |
Net revenues, less mandatorily redeemable preferred interest, for the three months ended May 31,
2010 increased 16% to $667.5 million as compared to $577.9 million for the three months ended June
30, 2009 primarily due to record quarterly investment banking revenues and strong equities
revenues. For the five months ended May 31, 2010, net revenues, less mandatorily redeemable
preferred interest, were $996.9 million as compared to $925.1 million for the six month period
ended June 30, 2009. The increase in revenues for the five month period ended May 31, 2010 as
compared to the six month period ended June 30, 2009 was similarly driven by much higher investment
banking revenues and enhanced equities revenues.
Non-interest expenses of $522.2 million for the three months ended May 31, 2010 reflected an
increase of 15% over the comparable 2009 period primarily attributable to an increase in
compensation and benefits due to increased revenues and employee levels as well as increased floor
brokerage and clearing fees. Non-interest expenses were $796.4 million for the five months ended
May 31, 2010 as compared to $753.6 million for the six months ended June 30, 2009. Compensation
costs for the five month period ended May 31, 2010 were lower as a percentage of net revenues as
compared to the six month period ended June 30, 2009. This was partially offset as a component of
total non-interest expenses by an increase in floor brokerage and clearing fees due to increased
business activity and our $6.8 million donation to various Haiti earthquake charities.
The effective tax rate was 39% for both the three and five months ended May 31, 2010 as compared to
an effective tax rate of 40% and 38% for the three and six months ended June 30, 2009,
respectively.
Effective June 18, 2009, Jefferies & Company, our wholly-owned subsidiary and a U.S. regulated
broker-dealer, was designated a Primary Dealer by the Federal Reserve Bank of New York (FRBNY).
As a Primary Dealer, Jefferies & Company, is a counterparty to the FRBNY in its open market
operations, participates directly in U.S. Treasury auctions and provides market information and
analysis to the trading desks at the FRBNY. Similarly, during the
Page 61 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
second half of 2009 and early 2010, Jefferies International Limited, our wholly-owned subsidiary
and a U.K. regulated broker-dealer, was designated in similar capacities for government bond issues
in the United Kingdom, Germany, the Netherlands and Portugal, further expanding our global rates
business. Additionally, in June 2010, Jefferies International Limited was appointed as a member of
the Auction Panel for the Republic of Austria Government Bonds.
At May 31, 2010, we had 2,821 employees globally, compared to 2,307 at June 30, 2009 and 2,628 at
December 31, 2009.
Our business, by its nature, does not produce predictable or necessarily recurring earnings. Our
results in any given period can be materially affected by conditions in global financial markets,
economic conditions generally and our own activities and positions. For a further discussion of
the factors that may affect our future operating results, see Risk Factors in Part I, Item IA of
our Annual Report on Form 10-K for the year ended December 31, 2009.
Revenues by Source
The Capital Markets reportable segment includes our traditional securities trading activities and
our investment banking and capital raising activities. The Capital Markets reportable segment is
managed as a single operating segment that provides the sales, trading and origination effort for
various equity, fixed income and advisory services. The Capital Markets segment comprises many
businesses, with many interactions among them. In addition, we separately discuss our Asset
Management business.
For presentation purposes, the remainder of Results of Operations is presented on a detailed
product and expense basis rather than on a business segment basis. Net revenues presented for our
equity and fixed income businesses include allocations of interest income and interest expense as
we assess the profitability of these businesses inclusive of the net interest revenue or expense
generated by the respective sales and trading activities, which is a function of the mix of each
business assets and liabilities and the underlying funding requirements of such positions. Prior
to the first quarter of 2010, we separately presented revenues attributed from our high yield
business within our Revenues by Source statement. As our firm has continued to expand,
particularly geographically, in the first quarter we begun to integrate our high yield platforms
within our overall fixed income business and are now presenting our high yield net revenues within
fixed income net revenues as of the first quarter of 2010. Reclassifications have been made to our
previous presentation of Revenues by Source for the three and six months ended June 30, 2009 to
conform to the current presentation.
The composition of our net revenues has varied over time as financial markets and the scope of our
operations have changed. The composition of net revenues can also vary over the shorter term due
to fluctuations in economic and market conditions and our own performance. The following provides
a summary of Revenues by Source for the three months May 31, 2010 and June 30, 2009 and the five
and six months ended May 31, 2010 and June 30, 2009, respectively:
Page 62 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
May 31, 2010 |
|
|
June 30, 2009 |
|
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
(in thousands) |
|
Amount |
|
|
Revenues |
|
|
Amount |
|
|
Revenues |
|
Equities |
|
$ |
168,730 |
|
|
|
25 |
% |
|
$ |
123,070 |
|
|
|
21 |
% |
Fixed income |
|
|
230,913 |
|
|
|
35 |
|
|
|
344,098 |
|
|
|
58 |
|
Other |
|
|
|
|
|
|
|
|
|
|
1,638 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales and Trading |
|
|
399,643 |
|
|
|
60 |
|
|
|
468,806 |
|
|
|
79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
55,064 |
|
|
|
8 |
|
|
|
38,645 |
|
|
|
7 |
|
Debt |
|
|
128,380 |
|
|
|
19 |
|
|
|
45,572 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital markets |
|
|
183,444 |
|
|
|
27 |
|
|
|
84,217 |
|
|
|
15 |
|
Advisory |
|
|
72,514 |
|
|
|
11 |
|
|
|
36,614 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking |
|
|
255,958 |
|
|
|
38 |
|
|
|
120,831 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset management fees and investment
income from managed funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset management fees |
|
|
7,165 |
|
|
|
1 |
|
|
|
3,714 |
|
|
|
1 |
|
Investment income (loss) from managed funds |
|
|
6,764 |
|
|
|
1 |
|
|
|
(3,158 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
13,929 |
|
|
|
2 |
|
|
|
556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
|
669,530 |
|
|
|
100 |
% |
|
|
590,193 |
|
|
|
100 |
% |
Interest on mandatorily redeemable
preferred interest of consolidated subsidiaries |
|
|
2,018 |
|
|
|
|
|
|
|
12,327 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues, less mandatorily redeemable
preferred interest |
|
$ |
667,512 |
|
|
|
|
|
|
$ |
577,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Months Ended |
|
|
Six Months Ended |
|
|
|
May 31, 2010 |
|
|
June 30, 2009 |
|
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
(in thousands) |
|
Amount |
|
|
Revenues |
|
|
Amount |
|
|
Revenues |
|
Equities |
|
$ |
276,306 |
|
|
|
28 |
% |
|
$ |
222,306 |
|
|
|
24 |
% |
Fixed income |
|
|
359,791 |
|
|
|
36 |
|
|
|
543,736 |
|
|
|
58 |
|
Other |
|
|
|
|
|
|
|
|
|
|
7,672 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales and Trading |
|
|
636,097 |
|
|
|
64 |
|
|
|
773,714 |
|
|
|
83 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
64,406 |
|
|
|
6 |
|
|
|
40,429 |
|
|
|
5 |
|
Debt |
|
|
177,531 |
|
|
|
18 |
|
|
|
58,360 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital markets |
|
|
241,937 |
|
|
|
24 |
|
|
|
98,789 |
|
|
|
11 |
|
Advisory |
|
|
110,320 |
|
|
|
11 |
|
|
|
59,128 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking |
|
|
352,257 |
|
|
|
35 |
|
|
|
157,917 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset management fees and investment
income from managed funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset management fees |
|
|
6,440 |
|
|
|
1 |
|
|
|
7,476 |
|
|
|
1 |
|
Investment income (loss) from managed funds |
|
|
4,578 |
|
|
|
|
|
|
|
(6,957 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
11,018 |
|
|
|
1 |
|
|
|
519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
|
999,372 |
|
|
|
100 |
% |
|
|
932,150 |
|
|
|
100 |
% |
Interest on mandatorily redeemable
preferred interest of consolidated subsidiaries |
|
|
2,513 |
|
|
|
|
|
|
|
7,024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues, less mandatorily redeemable
preferred interest |
|
$ |
996,859 |
|
|
|
|
|
|
$ |
925,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 63 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
Net Revenues
Net revenues, before interest on mandatorily redeemable preferred interests, for the three months
ended May 31, 2010 were $669.5 million, an increase of 13%, as compared to net revenues of $590.2
million for the three months ended June 30, 2009. The increase for the most recent period was
primarily due to record quarterly investment banking revenues, which were more than double from the
three months ended June 30, 2009. The increase in revenues for the three months ended May 31, 2010
as compared to the three months ended June 30, 2009 was also driven by strong equities revenues of
$168.7 million, a 37% increase over the 2009 comparable period, partially offset by reduced fixed
income revenues.
Net revenues, before interest on mandatorily redeemable preferred interests, for the five months
ended May 31, 2010 were $999.4 million, an increase of 7%, as compared to net revenues of $932.1
million for the six months ended June 30, 2009. The increase in net revenues is attributed to
investment banking revenues, which were more than double for the five months ended May 31, 2010 as
compared to the six months ended June 30, 2009. The increase in net revenues from our investment
banking activities was partially offset by a decline in net revenues from our sales and trading
activities. Sales and trading revenues were $636.1 million for five months for the period ended
May 31, 2010 as compared to sales and trading revenues of $773.7 million generated over a six month period for the
2009 reported results, reflective of relatively consistent sales and trading revenues on a basis of
the number of trading days in the periods presented.
The following reflects the number of trading days in the respective operational periods:
|
|
|
|
|
|
|
Three Months Ended |
|
Three Months Ended |
|
Five Months Ended |
|
Six Months Ended |
May 31, 2010 |
|
June 30, 2009 |
|
May 31, 2010 |
|
June 30, 2009 |
64 days
|
|
63 days
|
|
102 days
|
|
124 days |
Interest on mandatorily redeemable preferred interests of consolidated subsidiaries represents the
allocation of earnings and losses from our consolidated high yield business to third party
noncontrolling interest holders invested in that business through mandatorily redeemable preferred
securities.
Equities Revenue
Equities revenue is comprised of equity commissions and principal transactions revenue,
correspondent clearing, prime brokerage services, electronic trading and execution product revenues
and alternative investment revenues.
Total equities revenue was $168.7 million and $123.1 million for the three months ended May 31,
2010 and June 30, 2009, respectively, representing a 37% increase from the 2009 period, primarily
driven by gains in alternative investments revenue and other strategic positions and strong results
from certain strategic investment strategies particularly given increased market volatility during
the three months ended May 31, 2010. Growth in our international cash equities platform, an
increased client base and balances in our prime brokerage business, increased financing provided by
our securities lending business, and stronger commission revenue generated by our electronic
trading and equity derivatives business with the current periods market volatility also
contributed to an increase in equities revenue over the prior period. The favorable comparison in
equities revenue is also affected by net inventory writedowns recognized on our auction rate
securities portfolio during the three months ended June 30, 2009. The increase in revenues from
these equities businesses were partially offset by declines in U.S. cash equities revenue and
trading losses experienced by certain strategies.
Total equities revenue was $276.3 million and $222.3 million for the five months ended May 31, 2010
and the six months ended June 30, 2009, respectively, representing a 24% increase in revenues,
primarily driven by growth in our international cash equities and equity derivatives trading
business as market share continued to expand and driven by trading results from certain strategic
investment strategies. Results generated by certain strategic investment strategies were also
comparatively improved given losses experienced by this business in the first half of 2009.
Revenue during the five months ended May 31, 2010 also reflects a substantial contribution from our
investment in the Jefferies Finance joint venture and also benefited from several block trading
opportunities. Revenue increases from these
Page 64 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
business activities were partially offset by a decrease in revenue generated by our U.S. cash equities business. Equities revenues in the first
half of 2009 also included net inventory writedowns recognized on our auction rate securities
portfolio in that period.
Fixed Income Revenue
Fixed income revenue is primarily comprised of commissions, principal transactions and net interest
revenue from investment grade corporate bonds, mortgage- and asset-backed securities, government
and agency securities, municipal bonds, emerging markets debt, convertible securities, high yield
and distressed securities, bank loans and commodities trading activities.
Fixed income market conditions during the three and five month periods ended May 31, 2010 were
characterized by tightening credit spreads and Treasury yields as well as concerns over world
economic conditions, particularly in the Eurozone. This is compared with fixed income market
conditions for the three and six month periods ended June 30, 2009, which were considered more
favorable for fixed income trading, including widening spreads, and a more favorable competitive
landscape. Fixed income revenue for the three and five month periods ended May 31, 2010 as
compared to the three and six month periods ended June 30, 2009 reflect the impact of the change in
market conditions.
Fixed income revenue was $230.9 million for the three months ended May 31, 2010, down 33% from
revenue of $344.1 million for the three months ended June 30, 2009. The decline in revenue for the
three months ended May 31, 2010 as compared to the three months ended June 30, 2009 is largely
attributed to declines in revenue from our corporate bond, U.S. government and agencies, and high
yield, convertible and emerging markets debt trading activities. Declines in fixed income revenue
generated for the three months ended May 31, 2010 versus the three months ended June 30, 2009 were
partially offset by increases in revenues from our mortgage-backed securities and European
government trading businesses and continued improved performance from our commodities trading
activities.
Revenues from our corporate bond and emerging markets debt trading activities for the three months
ended May 31, 2010 were negatively affected by tightening credit spreads and the difficult
conditions in world credit markets during the period, particularly in the Eurozone, which dampened
client confidence in the market and client trade flow. This is compared to a period of
historically wide credit spreads during the three months ended June 30, 2009 and market volatility
in the credit markets resulting in a considerably strong performance from our corporate bond
trading business in the 2009 period. High yield revenues were down as compared to revenues for the
three months ended June 30, 2009 as the 2009 period reflected fairly strong contributions from our
bank loan trading activities. The three months ended June 30, 2009 also benefited from significant
principal transaction trading opportunities. Similarly, our convertible debt trading business
reflected improved performance in the three months ended June 30, 2009 given the recovering market
conditions in that period versus weaker relative results for the 2010 period. Continued tightening
in Treasury yields and declining market volatility in the three months ended May 31, 2010
contributed to the decline in trading revenues from our U.S. government and agencies business as
compared to a favorable trading environment in the 2009 period. Mortgage-backed securities
revenue increase modestly during the 2010 period over the comparable 2009 period due to increased
activity in the new issuance market and the growth in our European mortgage capabilities.
Increases in revenue related to these mortgage-backed securities sales and trading activities in
comparing the 2010 period over the comparable 2009 are also affected by certain principal
transaction gains recognized during the three months ended June 30, 2009. The continued expansion
of our European rates platform produced significant fixed income revenue over prior periods with
increased customer flow.
Fixed income revenue was $359.8 million for the five months ended May 31, 2010, as compared to
revenue of $543.7 million for the six months ended June 30, 2009. The decrease in revenue for the
first five months of 2010 reflects the challenging market conditions given economic disruption in
certain world markets and the continued tightening of corporate bond and Treasury spreads. These
factors had a dampening effect on customer flow in our corporate bond, emerging markets debt,
international convertible securities and U.S. government and agencies trading businesses. The
decrease in fixed income revenue was also attributable to net principal transaction losses on
certain debt block trading positions during the five months ended May 31, 2010. Revenue
performance from our high yield trading business was stable on a relative basis over the five month
2010 period as compared to the six month 2009 period as increased sales
Page 65 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
volumes generated higher commission revenue, partially offset by losses on credit hedges. Revenue declines were partially
offset by increased revenues in our commodities and European government securities businesses. Our
commodities trading activities reflected significantly improved performance in comparing the five
months ended May 31, 2010 to the six months ended June 30, 2009. The expansion of our government
and agencies platform in Europe, assisted by our appointment in several European jurisdictions as
dealers for government bond issues, resulted in additional fixed income revenue generation for the
first five months of 2010 with increased customer flow volume. Mortgage-backed securities revenue
was consistent on a relative basis when considering number of trading days among the five months
ended May 31, 2010 and the six months ended June 30, 2009 and included the further development of
our international mortgage trading capabilities.
Of the results recognized in Jefferies High Yield Holdings, LLC (our high yield and distressed
securities and bank loan trading and investment business), which are included in our fixed income
results, approximately 66% of such results for the three and five months ended May 31, 2010,
respectively, and the three and six months ended June 30, 2009, respectively, are allocated to the
minority investors and are presented within Interest on mandatorily redeemable preferred interests
and Net earnings to noncontrolling interests in our Consolidated Statements of Earnings.
Investment Banking Revenue
We provide a full range of financial advisory services to our clients across nearly all industry
sectors, as well as debt, equity and equity-linked capital raising services, and encompasses both
U.S. and international capabilities. Capital markets revenue includes underwriting revenue related
to debt, equity and convertible financing services. Advisory
revenue is generated from our advisory services with respect to merger, acquisition and
restructuring transactions and fund placement activities. The following table sets forth our
investment banking revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
|
Five Months Ended |
|
|
Six Months Ended |
|
|
|
|
(in thousands) |
|
May 31, 2010 |
|
|
June 30, 2009 |
|
|
% Change |
|
|
May 31, 2010 |
|
|
June 30, 2009 |
|
|
% Change |
|
Equity |
|
$ |
55,064 |
|
|
$ |
38,645 |
|
|
|
42 |
% |
|
$ |
64,406 |
|
|
$ |
40,429 |
|
|
|
59 |
% |
Debt |
|
|
128,380 |
|
|
|
45,572 |
|
|
|
182 |
% |
|
|
177,531 |
|
|
|
58,360 |
|
|
|
204 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital markets |
|
|
183,444 |
|
|
|
84,217 |
|
|
|
118 |
% |
|
|
241,937 |
|
|
|
98,789 |
|
|
|
145 |
% |
Advisory |
|
|
72,514 |
|
|
|
36,614 |
|
|
|
98 |
% |
|
|
110,320 |
|
|
|
59,128 |
|
|
|
87 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
255,958 |
|
|
$ |
120,831 |
|
|
|
112 |
% |
|
$ |
352,257 |
|
|
$ |
157,917 |
|
|
|
123 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking revenues were a quarterly record $256.0 million for the three months ended
May 31, 2010 as compared to revenues of $120.8 million for the three months ended June 30, 2009.
Capital markets produced revenue of $183.4 million for the three months ended May 31, 2010,
compared to $84.2 million for the three months ended June 30, 2009, reflective of an improved
market environment for debt and equity underwritings. Capital markets revenue contributions were
strongest in the healthcare, energy, and mortgage sectors. Revenue from our advisory business of
$72.5 million for the three months ended May 31, 2010 increased as compared to the three months
ended June 30, 2009 revenue of $36.6 million, reflective of our increasing share of the overall
improving market for mergers and acquisitions activity.
Our capital markets business produced revenue of $241.9 million for the five months ended May 31,
2010, compared to $98.8 million for the six months ended June 30, 2009, reflective of the improved
market environment for debt and equity underwritings. Revenue from our advisory business of $110.3
million for the five months ended May 31, 2010 increased as compared to the six months ended June
30, 2009 revenue of $59.1 million, reflective of the overall strengthened market for mergers and
acquisitions activity and the improved market outlook.
Asset Management Fees and Investment Income (Loss) from Managed Funds
Asset management revenue includes revenues from management, administrative and performance fees
from funds and accounts managed by us, revenue from asset management and performance fees from
third-party managed funds and investment income (loss) from our investments in these funds. The
following summarizes revenue from asset
Page 66 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
management fees and investment income (loss) for the three
months ended May 31, 2010 and June 30, 2009 and the five and six months ended May 31, 2010 and June
30, 2009, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Five Months Ended |
|
|
Six Months Ended |
|
|
|
May 31, 2010 |
|
|
June 30, 2009 |
|
|
May 31, 2010 |
|
|
June 30, 2009 |
|
Asset management fees: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income |
|
$ |
1,050 |
|
|
$ |
1,223 |
|
|
$ |
1,587 |
|
|
$ |
2,944 |
|
Equities |
|
|
1,651 |
|
|
|
796 |
|
|
|
1,927 |
|
|
|
1,462 |
|
Convertibles |
|
|
2,576 |
|
|
|
1,452 |
|
|
|
475 |
|
|
|
2,827 |
|
Commodities |
|
|
1,888 |
|
|
|
243 |
|
|
|
2,451 |
|
|
|
243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,165 |
|
|
|
3,714 |
|
|
|
6,440 |
|
|
|
7,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income (loss)
from managed funds (1) |
|
|
6,764 |
|
|
|
(3,158 |
) |
|
|
4,578 |
|
|
|
(6,957 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
13,929 |
|
|
$ |
556 |
|
|
$ |
11,018 |
|
|
$ |
519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Of the total investment income (loss) from managed funds, approximately $-0- and $(0.2)
million is attributed to noncontrolling interest holders for the three months ended May 31,
2010 and June 30, 2009, respectively, and approximately $(0.2) million and $(0.2) million is
attributed to noncontrolling interest holders for the five months ended May 31, 2010 and the
six months ended June 30, 2009, respectively. |
Asset management fees increased to $7.2 million for the three months ended May 31, 2010 as
compared to asset management fees of $3.7 million for the three months ended June 30, 2009,
primarily as a result of performance fee revenue generated by our global convertible bond fund
business, our fixed income bank loan fund and commodity managed accounts. Investment income from
managed funds totaled $6.8 million for the three months ended May 31, 2010 as compared to an
investment loss of $3.2 million for the second quarter of 2009 primarily due to improved asset
valuations within our investment in managed collateralized loan obligations (CLOs) and our
private equity investment in Jefferies Capital Partners IV L.P.
Asset management fees were $6.4 million for the five months ended May 31, 2010 as compared to asset
management fees of $7.5 million for the six months ended June 30, 2009, primarily as a result of
quality performance fee revenue generated on new managed commodity accounts opened in the second
half of 2009, partially offset by a decline in fee revenue generated by our global convertible bond
fund business for the six month 2009 period. Investment income from managed funds totaled $4.6
million for the first five months of 2010 as compared to an investment loss of $7.0 million for the
first six months of 2009 primarily due to improved asset valuations within our investment in
managed CLOs and our private equity investment, partially offset by a decline in asset valuations
in our bank loan fund for the five months ended May 31, 2010 as compared to the six months ended
June 30, 2009.
Page 67 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
Assets under Management
Period end assets under management by predominant asset strategy were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
May 31, 2010 |
|
|
June 30, 2009 |
|
Assets under management (1)(3): |
|
|
|
|
|
|
|
|
Fixed Income |
|
$ |
|
|
|
$ |
1,480 |
|
Equities |
|
|
80 |
|
|
|
73 |
|
Convertibles |
|
|
1,645 |
|
|
|
1,479 |
|
|
|
|
|
|
|
|
|
|
|
1,725 |
|
|
|
3,032 |
|
|
|
|
|
|
|
|
Assets under management by third
parties (2): |
|
|
|
|
|
|
|
|
Fixed Income (3) |
|
|
1,600 |
|
|
|
|
|
Private Equity (4) |
|
|
600 |
|
|
|
600 |
|
|
|
|
|
|
|
|
|
|
|
2,200 |
|
|
|
600 |
|
|
|
|
|
|
|
|
Total |
|
$ |
3,925 |
|
|
$ |
3,632 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Assets under management include assets actively managed by us including hedge funds and
managed accounts. Assets under management do not include the assets of funds that are
consolidated due to the level or nature of our investment in such funds. |
|
(2) |
|
Third party managed funds in which we have a 50% or less interest in the entities that
manage these assets or otherwise receive a portion of the management fees. |
|
(3) |
|
Assets under management are based on the fair value of the assets. |
|
(4) |
|
Assets under management represent the capital commitment to the fund as management fees are
calculated on this basis. |
On January 29, 2010, contracts to manage CLOs, which were included as assets under management
at June 30, 2009, were sold to Babson Capital Management, LLC. We no longer manage the CLOs, but
are entitled to receive a portion of the asset management fees for the remaining life of the
contracts; accordingly, we have included the fair value of the assets of the CLOs at May 31, 2010
as a component of Assets under management by third parties.
Change in Assets under Management
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Months |
|
|
Six Months |
|
|
|
|
|
|
Three Months Ended |
|
|
|
|
|
Ended |
|
|
Ended |
|
|
|
|
(in millions) |
|
May 31, 2010 |
|
|
June 30, 2009 |
|
|
%
Change |
|
|
May 31, 2010 |
|
|
June 30, 2009 |
|
|
%
Change |
|
Balance, beginning of period |
|
$ |
3,986 |
|
|
|
3,242 |
|
|
|
23 |
% |
|
$ |
4,024 |
|
|
$ |
3,491 |
|
|
|
15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flow in (out) |
|
|
47 |
|
|
|
(9 |
) |
|
|
|
|
|
|
33 |
|
|
|
(400 |
) |
|
|
|
|
Net market (depreciation) appreciation |
|
|
(108 |
) |
|
|
399 |
|
|
|
|
|
|
|
(132 |
) |
|
|
541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(61 |
) |
|
|
390 |
|
|
|
|
|
|
|
(99 |
) |
|
|
141 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
3,925 |
|
|
$ |
3,632 |
|
|
|
8 |
% |
|
$ |
3,925 |
|
|
$ |
3,632 |
|
|
|
8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The net decrease in assets under management of $61 million during the three months ended May
31, 2010 is primarily attributable to market depreciation of the underlying assets in our global
convertible bond funds and in third-party managed CLOs and increases in customer investments in our
global convertible bond funds. The net increase in assets under management of $390 million for the
three months ended June 30, 2009 is primarily due to customer redemptions from our global
convertible bond funds, partially offset by market appreciation in managed CLOs.
The net decrease in assets under management of $99 million during the five months ended May
31, 2010 is primarily attributable to market depreciation of the underlying assets in our global
convertible bond funds. The net increase in assets under management of $141 million for the six
months ended June 30, 2009 is primarily attributable to market appreciation of the underlying assets in our global convertible bond fund and in managed CLOs,
partially offset by redemptions from our managed convertible bond funds in the first quarter of 2009.
Page 68 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
We manage certain portfolios as mandated by client arrangements and management fees are assessed
based upon an agreed upon notional account value. Managed accounts based on this measure by
predominant asset strategy were as follows (in millions):
|
|
|
|
|
|
|
|
|
(notional account value) |
|
May 31, 2010 |
|
|
June 30, 2009 |
|
Managed Accounts: |
|
|
|
|
|
|
|
|
Equities |
|
$ |
151 |
|
|
$ |
40 |
|
Commodities |
|
|
466 |
|
|
|
110 |
|
|
|
|
|
|
|
|
|
|
$ |
617 |
|
|
$ |
150 |
|
|
|
|
|
|
|
|
Change in Managed Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Months |
|
|
Six Months |
|
(notional account value) |
|
Three Months Ended |
|
|
Ended |
|
|
Ended |
|
(in millions) |
|
May 31, 2010 |
|
|
June 30, 2009 |
|
|
May 31, 2010 |
|
|
June 30, 2009 |
|
Balance, beginning of period |
|
$ |
544 |
|
|
$ |
|
|
|
$ |
560 |
|
|
$ |
|
|
Net account additions |
|
|
99 |
|
|
|
150 |
|
|
|
99 |
|
|
|
150 |
|
Net account depreciation |
|
|
(26 |
) |
|
|
|
|
|
|
(42 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
617 |
|
|
$ |
150 |
|
|
$ |
617 |
|
|
$ |
150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in the notional account value of managed accounts for the three months and five months
ended May 31, 2010 is primarily attributed to the additions of new equity accounts where the
management fees are assessed on the agreed upon notional account value, partially offset by
declines in the value of certain commodity managed accounts. The change in notional account value
of managed accounts for the three months and six months ended June 30, 2009 is attributed to
additions of new equity accounts where the management fees are assessed on the agreed upon notional
account value.
The following table presents our invested capital in managed funds at May 31, 2010 and December 31,
2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
May 31, 2010 |
|
|
December 31, 2009 |
|
Unconsolidated funds (1) |
|
$ |
123,026 |
|
|
$ |
115,009 |
|
Consolidated funds (2) |
|
|
51,838 |
|
|
|
44,441 |
|
|
|
|
|
|
|
|
Total |
|
$ |
174,864 |
|
|
$ |
159,450 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Our invested capital in unconsolidated funds is reported within Investments in managed
funds on the Consolidated Statement of Financial Condition. |
|
(2) |
|
Assets under management include assets actively managed by us and third parties including
hedge funds, CLOs, managed accounts and other private investment funds. Due to the level or
nature of our investment in such funds, certain funds are consolidated and the assets and
liabilities of these funds are reflected in our consolidated financial statements primarily
within financial instruments owned or financial instruments sold, not yet purchased. We do not
recognize asset management fees for funds that we have consolidated. |
Page 69 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
Compensation and Benefits
Compensation and benefits expense consists primarily of salaries, benefits, cash bonuses,
commissions, accruals for annual share-based compensation awards, the amortization of certain
non-annual share-based compensation to employees and the amortization of performance share-based
compensation to certain of our senior executives. Share-based awards to employees as a part of
year-end compensation contain provisions such that employees who terminate their employment or are
terminated without cause may continue to vest in their awards, so long as those awards are not
forfeited as a result of other forfeiture provisions of those awards. Accordingly, the
compensation expense for awards granted at year-end as part of annual compensation is accrued
throughout the year. We believe the provisions incorporated into our year-end share based
compensation awards better manage our employee compensation expense with the related production of
revenues by our businesses.
Compensation and benefits totaled $384.3 million and $568.4 million for the three and five months
ended May 31, 2010, respectively, compared to $348.2 million and $561.6 million for the three and
six months ended June 30, 2009, respectively. Our ratio of compensation and benefits to net
revenues for the second quarter of 2010 was 57% as compared to 59% for the second quarter of 2009
and 57% and 60% for the first five months of 2010 and the first six months of 2009, respectively.
Employee headcount increased to 2,821 total global employees at May 31, 2010 as compared to 2,307
employees at June 30, 2009. The increase in compensation and benefits expense for the three and
five months ended May, 31 2010 as compared to the three and six months ended June 30, 2009 period
is consistent with the revenue increase across the periods as reflected in a relatively consistent
ratio of compensation to net revenues. Compensation costs also increased due to increased
headcount as we continue to expand our trading capabilities, both in the U.S. and internationally,
added significant healthcare investment banking capabilities and added support personnel to support
our business growth. Compensation costs also increased due to share-based amortization expense for
senior executive awards granted in January 2010.
Non-Compensation Expenses
Non-compensation expenses were $137.9 million and $228.0 million for the three and five months
ended May 31, 2010, respectively, versus $107.3 million and $192.0 million for the three and six
months ended June 30, 2009, respectively, an increase of 28% and 19%. Non-compensation expenses
for the three months ended May, 31 2010 as compared to the three months ended June 30, 2009 reflect
an increase in floor brokerage and clearing fees due to the level of trading volumes with added
business platforms, an increase in technology and communications costs as the expansion of our
personnel and business platforms has increased the demand for market data and technology
connections and an increase in business development expense commensurate with our focused efforts
of strengthening our presence and broadening our client base.
Non-compensation expenses for the five months ended May, 31 2010 as compared to the six months
ended June 30, 2009 reflect an increase in floor brokerage and clearing fees due to the increased
levels of trading volumes with added business platforms, an increase in business development
expense commensurate with our focused efforts of strengthening our presence and globalizing our
client base and an increase in professional services as we build out our infrastructure to support
our business growth. Other non-interest expenses for the first five months of 2010 also include
our donation to Haiti earthquake related charities in January 2010, of which $6.8 million is
reflected in Other expenses, an increase in assessments from SIPC consistent with SIPC rate
increases for the overall industry and the write-off of certain trade and loan receivables.
Earnings Before Income Taxes
Earnings before income taxes was $145.3 million for the three months ended May 31, 2010 up from
earnings before income taxes of $122.3 million for the three months ended June 30, 2009. For the
five months ended May 31, 2010, we recorded earnings before income taxes of $200.4 million as
compared to $171.5 million for the six months ended June 30, 2009.
Page 70 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
Income Taxes
Income tax expense was $56.8 million and $48.3 million and the effective tax rate was 39% and 40%
for the three months ended May 31, 2010 and June 30, 2009, respectively. Income tax expense was
$77.9 million and $65.1 million and the effective tax rate was 39% and 38% for the five and six
months ended May 31, 2010 and June 30, 2009, respectively.
Earnings per Common Share
Diluted earnings per common share was $0.41 for the three months ended May 31, 2010 on 201,064,000
shares compared to diluted earnings per common share of $0.30 for the three months ended June 30,
2009 on 206,027,000 shares. Diluted earnings per common share was $0.58 for the first five months
of 2010 on 201,881,000 shares compared to diluted earnings per common share of $0.49 for the six
months ended June 30, 2009 on 202,505,000 shares. Convertible preferred stock dividends were not
included in the calculation of diluted earnings per common share for the six months ended June 30,
2009 due to their anti-dilutive nature. See Note 14, Earnings Per Share, in our consolidated
financial statements for further information regarding the calculation of earnings per common
share.
Mortgage and Loan Inventory Exposures
We have exposure to mortgage- and asset-backed securities through our fixed income mortgage- and
asset-backed sales and trading business and exposure to other credit products through our corporate
lending and investing activities.
The following table provides a summary of these exposures as of May 31, 2010 and December 31, 2009
(in millions):
|
|
|
|
|
|
|
|
|
|
|
May 31, 2010 |
|
|
December 31, 2009 |
|
Residential mortgage-backed agency securities (1) |
|
$ |
3,305 |
|
|
$ |
2,579 |
|
TBA securities (2) |
|
|
(1,399 |
) |
|
|
(882 |
) |
|
|
|
|
|
|
|
Net agency mortgage-backed security exposure (2) |
|
|
1,906 |
|
|
|
1,697 |
|
|
|
|
|
|
|
|
|
|
Prime mortgage-backed securities (3) |
|
|
153 |
|
|
|
66 |
|
Alt-A mortgage-backed securities (4) |
|
|
289 |
|
|
|
239 |
|
Subprime mortgage-backed securities (4) |
|
|
49 |
|
|
|
50 |
|
Commercial mortgage-backed securities (5) |
|
|
134 |
|
|
|
85 |
|
Collateralized debt obligations |
|
|
5 |
|
|
|
|
|
Other mortgage- and asset-backed securities |
|
|
106 |
|
|
|
60 |
|
|
|
|
|
|
|
|
Total nonagency mortgage- and asset-backed security exposure |
|
|
736 |
|
|
|
500 |
|
|
|
|
|
|
|
|
Total net mortgage- and asset-backed security exposure |
|
$ |
2,642 |
|
|
$ |
2,197 |
|
|
|
|
|
|
|
|
Mortgage loans and mortgage participation certificates (6) |
|
$ |
62 |
|
|
$ |
66 |
|
Corporate loans (7) |
|
|
454 |
|
|
|
509 |
|
Collateralized loan obligation (CLOs) certificates (8) |
|
|
22 |
|
|
|
17 |
|
Additionally, we have executed interest rate derivatives to reduce certain interest rate risk
exposure arising from the above instruments.
|
|
|
(1) |
|
Residential mortgage-backed agency securities are represented at fair value and classified
within Financial instruments owned in our Consolidated Statements of Financial Condition and
primarily represent securities issued by government sponsored entities backed by mortgage
loans with an implicit guarantee from the U.S. government as to payment of principal and
interest. These assets are classified primarily within Level 2 of the fair value hierarchy. |
|
(2) |
|
Our exposure to mortgage-backed agency securities is reduced through the forward sale of such
securities as represented by the notional amount of outstanding TBA securities at May 31, 2010 and
December 31, 2009. Such contracts are accounted for at a net asset fair value of $(5.1) million
and $18.0 million at May 31, 2010 and December 31, 2009, respectively, which are |
Page 71 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
|
|
|
|
|
included in Financial instruments owned and Financial instruments sold, not yet purchased
in our Consolidated Statements of Financial Condition and are classified in Level 2 of the
fair value hierarchy. |
|
(3) |
|
Prime mortgage-backed securities are presented at fair value, are primarily classified within
Level 2 of the fair value hierarchy and included within Financial instruments owned in our
Consolidated Statements of Financial Condition. |
|
(4) |
|
Alt-A mortgage-backed securities are backed by mortgage loans which are categorized between
prime mortgage loans and subprime mortgage loans due to certain underwriting and other loan
characteristics. Subprime mortgage-backed securities are backed by mortgage loans secured by
real property made to a borrower with diminished, impaired or limited credit history. Amounts
at May 31, 2010 and December 31, 2009 are presented at their fair value, are generally
classified within Level 2 and Level 3 of the fair value hierarchy and included within
Financial instruments owned in our Consolidated Statements of Financial Condition. |
|
(5) |
|
Commercial mortgage-backed securities are presented at fair value, are classified within
Level 2 and Level 3 of the fair value hierarchy and included within Financial instruments
owned in our Consolidated Statements of Financial Condition. |
|
(6) |
|
Mortgage loans and mortgage participation certificates are presented at fair value, are
classified within Level 2 of the fair value hierarchy and included within Financial
instruments owned in our Consolidated Statements of Financial Condition. A portion of the
participation certificates represent interests in mortgage loans that are U.S. government
agency insured. |
|
(7) |
|
Corporate loans represent primarily senior unsecured bank loans purchased or issued in
connection with our trading and investing activities are presented at fair value as included
within Financial instruments owned in our Consolidated Statements of Financial Condition and
are classified within Level 2 and Level 3 of the fair value hierarchy. |
|
(8) |
|
We own interests consisting of various classes of senior, mezzanine and subordinated notes in
CLO vehicles which are comprised of corporate senior secured loans, unsecured loans and high
yield bonds, of which $13.3 million and $9.6 million are reported at fair value and included
within Financial instruments owned in our Consolidated Statements of Financial Condition and
classified within Level 3 of the fair value hierarchy at May 31, 2010 and December 31, 2009,
respectively, and $8.6 million and $7.3 million are accounted for at fair value and included
in Investments in managed funds in our Consolidated Statements of Financial Condition at May
31, 2010 and December 31, 2009, respectively. |
Of our prime, Alt-A and subprime mortgage-backed securities and other asset-backed securities
at May 31, 2010, the following table provides further information regarding the credit ratings of
the securities and the issue date of the securities:
Credit Ratings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Below |
|
|
|
|
|
|
|
|
|
|
|
|
|
AA+ to |
|
|
|
|
|
|
BBB+ to |
|
|
Investment |
|
|
Private |
|
|
Total |
|
Vintage year |
|
AAA |
|
|
AA- |
|
|
A+ to A- |
|
|
BBB- |
|
|
Grade |
|
|
Placement |
|
|
Fair Value |
|
2010 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
2009 |
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
2008 |
|
|
55 |
|
|
|
6 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
66 |
|
2007 |
|
|
56 |
|
|
|
3 |
|
|
|
19 |
|
|
|
13 |
|
|
|
76 |
|
|
|
3 |
|
|
|
170 |
|
2006 and prior |
|
|
87 |
|
|
|
21 |
|
|
|
36 |
|
|
|
54 |
|
|
|
269 |
|
|
|
30 |
|
|
|
497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
201 |
|
|
$ |
30 |
|
|
$ |
60 |
|
|
$ |
67 |
|
|
$ |
345 |
|
|
$ |
33 |
|
|
$ |
736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 72 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
Liquidity, Financial Condition and Capital Resources
Our Chief Financial Officer and Treasurer are responsible for developing and implementing our
liquidity, funding and capital management strategies. These policies are determined by the nature
and needs of our day to day business operations, business opportunities, regulatory obligations,
and liquidity requirements.
Market conditions, which had been volatile throughout 2008, began to stabilize in the second
quarter of 2009, resulting in some tightening of credit spreads and improvements in market
liquidity. In June 2009, Jefferies & Company, Inc, our U.S. registered broker-dealer, was named
as a Primary Dealer by the Federal Reserve Bank of New York. Since September 2009, Jefferies
International, Ltd., our U.K. regulated broker-dealer, has been designated in a similar capacity in
five countries in Europe. As a result of these designations, our strong financial results and
generally improving market conditions, over the past twelve months, we have experienced a
significant increase in financing lines being made available to us in both the repurchase and
securities finance markets.
During 2009, we issued $700 million in ten-year notes and $345 million in convertible senior
debentures. As of May 31, 2010, our long-term debt has an average maturity of 11.2 years, we have
no scheduled debt maturities until 2012, we have no unsecured short-term borrowings and we have
significant cash balances on hand. In June 2010, we issued $400 million with maturities of
approximately 11 years. We continue to actively manage our liquidity profile and counterparty
relationships to enable ongoing access to both short and longer-term funding.
Our actual levels of capital, total assets, and financial leverage are a function of a number of
factors, including, asset composition, business initiatives and opportunities, regulatory
requirements and cost and availability of both long term and short term funding. We have
historically maintained a highly liquid balance sheet, with a substantial portion of our total
assets consisting of cash, liquid marketable securities and short-term receivables, arising
principally from traditional securities brokerage activity. The liquid nature of these assets
provides us with flexibility in financing and managing our business.
Liquidity
The following are financial instruments that are cash and cash equivalents or are deemed by
management to be generally readily convertible into cash, marginable or accessible for liquidity
purposes within a relatively short period of time (in thousands):
|
|
|
|
|
|
|
|
|
|
|
May 31, 2010 |
|
|
December 31, 2009 |
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Cash in banks |
|
$ |
469,431 |
|
|
$ |
196,189 |
|
Money market investments |
|
|
524,853 |
|
|
|
1,656,978 |
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
|
994,284 |
|
|
|
1,853,167 |
|
Cash and securities segregated (1) |
|
|
1,412,894 |
|
|
|
1,089,803 |
|
|
|
|
|
|
|
|
|
|
$ |
2,407,178 |
|
|
$ |
2,942,970 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consists of deposits at exchanges and clearing organizations, as well as deposits in
accordance with Rule 15c3-3 of the Securities Exchange Act of 1934, which subjects
Jefferies, as a broker dealer carrying client accounts, to requirements related to
maintaining cash or qualified securities in a segregated reserve account for the exclusive
benefit of its clients. |
A substantial portion of our assets are liquid, consisting of cash or assets readily
convertible into cash. The majority of
financial instruments (both long and short) in our trading accounts are actively traded and readily
marketable. We have the ability to readily obtain repurchase financing for our inventory at nominal
haircuts. In addition, receivables from brokers and dealers are primarily current open
transactions, margin deposits or securities borrowed transactions, which are typically settled or
closed out within a few days. Receivable from customers includes margin balances and amounts due on
transactions in the process of settlement. Most of our receivables are secured by marketable
securities. The customer receivable portion of the securities financing transactions
includes margin loans, collateralized by customer owned securities, and customer cash, which is
segregated according to regulatory requirements. The customer payable portion of the securities
financing transactions is mitigated by collateral maintenance policies that limit the Companys
credit exposure to customers.
Page 73 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
Our assets are funded by equity capital, senior debt, convertible debt, mandatorily redeemable
convertible preferred stock, mandatorily redeemable preferred interests, securities loaned,
securities sold under agreements to repurchase, customer free credit balances, bank loans and other
payables. Bank loans represent temporary (usually overnight) secured and unsecured short-term
borrowings, which are generally payable on demand and generally bear interest at a spread over the
federal funds rate. Bank loans that are unsecured are typically overnight loans used to finance
financial instruments owned or clearing related balances. We had no outstanding secured or
unsecured bank loans as of May 31, 2010 and December 31, 2009. Average daily bank loans for the
five months ended May 31, 2010 and the year ended December 31, 2009 were $47.6 million and $24.2
million, respectively. We have arrangements with various banks for financing of up to $1,011.2
million, including $975 million of bank loans and $36.2 million of letters of credit. Of the
$1,011.2 million of uncommitted lines of credit, $211.2 million is unsecured and $800 million is
secured. Secured amounts are collateralized by a combination of customer and firm securities.
Letters of credit are used in the normal course of business mostly to satisfy various collateral
requirements in lieu of depositing cash or securities.
Liquidity Management Policies
The key objectives of the liquidity management framework are to support the successful execution of
our business strategies while ensuring sufficient liquidity through the business cycle and during
periods of financial distress. Our liquidity management policies are designed to mitigate the
potential risk that we may be unable to access adequate financing to service our financial
obligations without material franchise or business impact.
The principal elements of our liquidity management framework are the Funding Action Plan and the
Cash Capital Policy.
|
|
Funding Action Plan. The Funding Action Plan models a potential liquidity contraction over
a one-year time period. Our funding action plan model scenarios incorporate potential cash
outflows during a liquidity stress event, including, but not limited to, the following: (a)
repayment of all unsecured debt maturing within one year and no incremental unsecured debt
issuance; (b) maturity roll-off of outstanding letters of credit with no further issuance and
replacement with cash collateral; (c) higher margin requirements than currently exist on
assets on securities financing activity, including repurchase agreements, (d) lower
availability of secured funding; (e) client cash withdrawals; (f) the anticipated funding of
outstanding investment commitments and (g) certain accrued expenses and other liabilities and
fixed costs. |
|
|
Cash Capital Policy. We maintain a cash capital model that measures long-term funding
sources against requirements. Sources of cash capital include our equity, preferred stock and
the non-current portion of long-term borrowings. Uses of cash capital include the following:
(a) illiquid assets such as buildings, equipment, goodwill, net intangible assets, exchange
memberships, deferred tax assets and certain investments; (b) a portion of securities
inventory that is not expected to be financed on a secured basis in a credit-stressed
environment (i.e., margin requirements) and (c) drawdowns of unfunded commitments. To ensure
that we do not need to liquidate inventory in the event of a funding crisis, we seek to
maintain surplus cash capital, which is reflected in the leverage ratios we maintain. Our
equity capital of $2,602.2 million, mandatorily redeemable convertible preferred stock of
$125.0 million, mandatorily redeemable preferred interest of consolidated subsidiaries of
$303.5 million, and long-term borrowings (debt obligations scheduled to mature in more than 12
months) of $2,731.2 million comprise our total capital of $5,761.9 million as of May 31, 2010,
which exceeded our cash capital requirements. |
Financial Condition and Capital Management.
A business unit level balance sheet and cash capital analysis is prepared and reviewed with senior
management on a weekly basis. As a part of this balance sheet review process, capital is
allocated to all assets and gross and adjusted balance sheet limits are established. This
process ensures that the allocation of capital and costs of capital are incorporated into business
decisions. The goals of this process are to protect the firms platform, enable our businesses to
remain competitive, maintain the ability to manage capital proactively and hold businesses
accountable for both balance sheet and capital usage.
Page 74 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
Analysis of Financial Condition and Capital Resources
We actively monitor and evaluate our financial condition and the composition of our assets and
liabilities. Substantially all of our Financial instruments owned and Financial instruments sold,
not yet purchased are valued on a daily basis and we monitor and employ balance sheet limits for
our various businesses. As our government and agencies fixed income business has expanded
throughout 2009 and 2010 both domestically and internationally, a greater portion of our securities
inventory is comprised of U.S. government and agency securities and other G-7 government
securities, for which there is a deep and liquid market. While our balance sheet may fluctuate
given our continued expansion into new business areas and the need to maintain inventory to serve
growing client activity, our overall balance sheet during the reported periods remains materially
consistent with the balances at the end of each reporting period, apart from new business
expansion. In 2009, average total assets for each quarter varied from that quarters
ending total assets in a range from -7% to +13%. During the three and five months ended May 31,
2010, average total assets were respectively approximately 17% and 14% higher than at May 31, 2010.
Total assets increased to $32,117.0 million at May 31, 2010 or by 14%, from $28,189.3 million at
December 31, 2009 primarily due to an increase in the level of our financial instruments owned
inventory and receivables associated with principal and agency transactions consistent with the
higher level of financial instruments owned inventory. The inventory level of our financial
instruments owned, including securities pledged to creditors, was up by 44% to $13,700.0 million at
May 31, 2010 from $9,487.7 million at December 31, 2009, while our financial instruments sold, not
yet purchased also commensurately increased by 43% to $7,752.6 million at May 31, 2010 from
$5,409.2 million at December 31, 2009.
Almost half of the increase in our total financial instruments owned inventory is attributed to
government and agency securities. This net increase in our inventory positions (long and short
inventory) is primarily attributed to the further build out of our U.S. government and agencies and
other sovereign debt trading businesses, both domestically and internationally, as we were
designated a Primary Dealer in the U.S. during 2009 and in similar capacities in several European
jurisdictions as well during the latter part of 2009. These inventory positions are substantially
comprised of the most liquid securities in the asset class with little weighting of the inventory
portfolio to securities of non-G-7 countries. Our market risk exposure to Portugal, Italy,
Ireland, Greece and Spain is negligible at May 31, 2010. Our net inventory positions also
increased as of May 31, 2010 from December 31, 2009 due to certain block trading opportunities
taken in the first quarter of 2010. Our mortgage- and asset-backed securities inventory increased
by $978.4 million, or 32%, as of May 31, 2010 from the prior year end and we continually monitor
our overall mortgage- and asset-backed securities exposure, including the inventory turnover rate,
which demonstrates the liquidity of the overall asset class.
At May 31, 2010, our Level 3 assets for which we have economic exposure was 3% of our total assets
at fair value and 16% of equity capital. Level 3 mortgage- and asset-backed securities represent
4% and 5% of total mortgage- and asset-backed securities inventory at May 31, 2010 and December 31,
2009, respectively. Of our total Financial instruments owned, approximately 80% are readily and
consistently financeable at haircuts of 10% or less. In addition, as a matter of our policy, a
portion of these assets have capital assessed, which is in addition to the funding haircuts
provided in the securities finance markets. The remaining 20% of our Financial instruments owned
consists of high yield bonds, bank loans, investments and non-agency mortgage-backed securities
that are predominantly funded by long term capital. Under our cash capital policy, we model
capital allocation levels that are more stringent than the haircuts used in the market for secured
funding; and we maintain surplus capital at these modeled levels.
Our securities borrowed and securities purchased under agreements to resell decreased from
$11.753.2 million at December 31, 2009 to $10,486.8 million at May 31, 2010, or by 11%, while our
securities loaned and securities sold under agreements to repurchase increased to $12,905.7 million
at May 31, 2010, or by 9%.
The average increase in our securities financing assets and liabilities was, 16% and 12%,
respectively, higher than month end balances for the three months ended May 31, 2010 and 14% and
8%, respectively, higher than month end balances for the five months ended May 31, 2010. Securities
financing assets and liabilities also include matched book transactions with minimal market, credit
and/or liquidity risk. Matched
book transactions accommodate customers, as well as obtain securities for the settlement and
financing of inventory positions. In 2009, our average securities financing assets and liabilities
for each quarter varied from quarter end in a range of -12% to +17%. During the three months ended
May 31, 2010, average securities financing assets and
Page 75 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
liabilities were respectively 16% and 12%
higher than at ending balances at May 31, 2010. During the five months ended May 31, 2010, average
securities financing assets and liabilities were respectively 14% and 8% higher than at ending
balances at May 31, 2010. The majority of our outstanding securities purchased under agreements to
resell and securities sold under agreements to repurchase at May 31, 2010 are transacted in support
of U.S. treasury and agency securities, agency mortgage-backed securities and sovereign government
obligations, which are turned over on a frequent basis.
Common stockholders equity decreased to $2,288.1 million at May 31, 2010 from $2,308.6 million at
December 31, 2009. The decrease in our common stockholders equity during the five months ended
May 31, 2010 is principally attributed to translation adjustments as the British pound weakened
against the U.S. dollar during the period, dividend and dividend equivalents during the period and
repurchases of approximately 4.1 million shares of our common stock during the period, which
increased our treasury stock by $106.5 million. Decreases in our common stockholders equity is
partially offset by net earnings to common shareholders of $118.5 million and net share-based
amortization expense for the five months ended May 31, 2010.
The following table sets forth book value, pro forma book value, tangible book value and pro forma
tangible book value per share (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
May 31, 2010 |
|
|
December 31, 2009 |
|
Common stockholders equity |
|
$ |
2,288,064 |
|
|
$ |
2,308,589 |
|
Less: Goodwill |
|
|
(363,144 |
) |
|
|
(364,795 |
) |
|
|
|
|
|
|
|
Tangible common stockholders equity |
|
$ |
1,924,920 |
|
|
$ |
1,943,794 |
|
|
|
|
|
|
|
|
|
|
Shares outstanding |
|
|
171,590,607 |
|
|
|
165,637,554 |
|
Outstanding restricted stock units (5) |
|
|
28,695,698 |
|
|
|
27,404,347 |
|
|
|
|
|
|
|
|
Adjusted shares outstanding |
|
|
200,286,305 |
|
|
|
193,041,901 |
|
|
|
|
|
|
|
|
|
|
Common book value per share (1) |
|
$ |
13.33 |
|
|
$ |
13.94 |
|
|
|
|
|
|
|
|
Adjusted common book value per share (2) |
|
$ |
11.42 |
|
|
$ |
11.96 |
|
|
|
|
|
|
|
|
Tangible common book value per share (3) |
|
$ |
11.22 |
|
|
$ |
11.74 |
|
|
|
|
|
|
|
|
Adjusted tangible common book value per
share (4) |
|
$ |
9.61 |
|
|
$ |
10.07 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Common book value per share equals common stockholders equity divided by common shares outstanding. |
|
(2) |
|
Adjusted common book value per share equals common stockholders equity divided by common shares
outstanding adjusted for outstanding restricted stock units. |
|
(3) |
|
Tangible common book value per share equals tangible common stockholders equity divided by common
shares outstanding. |
|
(4) |
|
Adjusted common tangible book value per share equals tangible common stockholders equity divided
by common shares outstanding adjusted for outstanding restricted stock units. |
|
(5) |
|
Outstanding restricted stock units, which give the recipient the right to receive common shares at
the end of a specified deferral period, are granted in connection with our share-based employee
incentive plans and include both awards that contain future service requirements and awards for which
the future service requirements have been met. |
Tangible common stockholders equity, tangible common book value per share, adjusted common
book value per share and adjusted tangible common book value per share are non-GAAP financial
measures. A non-GAAP financial measure is a numerical measure of financial performance that
includes adjustments to the most directly comparable measure calculated and presented in accordance
with GAAP, or for which there is no specific GAAP guidance. We calculate tangible common
stockholders equity as common stockholders equity less intangible assets, specifically goodwill.
Goodwill is subtracted from common stockholders equity in determining tangible common
stockholders equity as we believe that goodwill does not constitute an operating asset, which can
be deployed in a liquid manner. We calculate tangible common book value per share by dividing
tangible common stockholders equity by common stock outstanding. We calculate adjusted common
book value per share as common stockholders equity divided by common shares outstanding adjusted
for outstanding restricted stock units. We calculate adjusted tangible
Page 76 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
common book value per share
by dividing tangible common stockholders equity by common shares outstanding adjusted for
outstanding restricted stock units. We believe the adjustment to shares outstanding for
outstanding restricted stock units reflects potential economic claims on our net assets enabling
shareholders to better assess their standing with respect to our financial condition. Valuations of
financial companies are often measured as a multiple of tangible common stockholders equity,
inclusive of any dilutive effects, making these ratios, and changes in these ratios, a meaningful
measurement for investors.
On December 30, 2009, we granted 5,384,000 shares of restricted stock as part of year-end
compensation. The closing price of our common stock was $23.77 on December 30, 2009. These shares
were issued in the first three months of 2010 and increased shares outstanding as of May 31, 2010.
On January 19, 2010, we granted 232,288 shares of restricted stock and 2,990,708 restricted stock
units to senior executives as part of 2009 year-end and future compensation arrangements for which
no compensation expense has been recognized in the results of operations for the year ended
December 31, 2009. The shares of restricted stock were issued during the first three months of
2010 and increased shares outstanding at May 31, 2010. Shares underlying the restricted stock
units will be issued in 2013, but are included in outstanding restricted stock units as of May 31,
2010 and increased adjusted shares outstanding. In addition, approximately one million shares were
issued during the five months ended May 31, 2010 primarily in connection with awards to new
employees. The increase in shares outstanding is offset by repurchases of 4.1 million shares at an
average price of $25.37 during the five months ended May 31, 2010.
At May 31, 2010, we have $125.0 million of Series A convertible preferred stock outstanding, which
is convertible into 4,105,138 shares of our common stock at an effective conversion price of
approximately $30.45 per share and $345 million of convertible senior debentures outstanding, which
is convertible into 8,800,122 shares of our common stock at an effective conversion price of
approximately $39.20 per share.
Leverage Ratios
The following table presents total assets, adjusted assets, total stockholders equity and tangible
stockholders equity with the resulting leverage ratios as of May 31, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
May 31, 2010 |
|
December 31, 2009 |
|
|
|
|
|
|
|
Total assets |
|
$ |
32,116,958 |
|
|
$ |
28,189,271 |
|
Deduct: Securities borrowed |
|
|
(7,298,528 |
) |
|
|
(8,237,998 |
) |
Securities purchased under agreements
to resell |
|
|
(3,188,239 |
) |
|
|
(3,515,247 |
) |
|
Add: Financial instruments sold, not yet
purchased |
|
|
7,752,612 |
|
|
|
5,409,151 |
|
Less derivative liabilities |
|
|
(67,919 |
) |
|
|
(18,427 |
) |
|
|
|
|
|
|
|
Subtotal |
|
|
7,684,693 |
|
|
|
5,390,724 |
|
Deduct: Cash and securities segregated and on
deposit
for regulatory purposes or deposited
with
clearing and depository organizations |
|
|
(1,412,894 |
) |
|
|
(1,089,803 |
) |
Goodwill |
|
|
(363,144 |
) |
|
|
(364,795 |
) |
|
|
|
|
|
|
|
Adjusted assets |
|
$ |
27,538,846 |
|
|
$ |
20,372,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
$ |
2,602,246 |
|
|
$ |
2,630,127 |
|
Deduct: Goodwill |
|
|
(363,144 |
) |
|
|
(364,795 |
) |
|
|
|
|
|
|
|
Tangible stockholders equity |
|
$ |
2,239,102 |
|
|
$ |
2,265,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage ratio (1) |
|
|
12.3 |
|
|
|
10.7 |
|
|
|
|
|
|
|
|
Adjusted leverage ratio (2) |
|
|
12.3 |
|
|
|
9.0 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Leverage ratio equals total assets divided by total stockholders equity. |
|
(2) |
|
Adjusted leverage ratio equals adjusted assets divided by tangible stockholders
equity. |
Page 77 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
Adjusted assets is a non-GAAP financial measure and excludes certain assets that are
considered of lower risk as they are generally self-financed by customer liabilities through our
securities lending activities. We view the resulting measure of adjusted leverage also a non-GAAP
financial measure as a more relevant measure of financial risk when comparing financial services
companies. Our leverage ratio and adjusted leverage ratio increased from May 31, 2010 to December
31, 2009 commensurate with the increase in our trading inventory and consistent with growth and
expansion of our trading business year over year. A significant portion of the increase in our
trading inventory is due to the expansion of our government and agencies business which trades in
highly liquid U.S. government and agency securities and other G-7 government securities.
Capital Resources
We had total long-term capital of $5.8 billion and $5.8 billion resulting in a long-term debt to
equity capital ratio of 121% and 121%, at May 31, 2010 and December 31, 2009, respectively. Our
total capital base as of May 31, 2010 and December 31, 2009 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
May 31, 2010 |
|
|
December 31, 2009 |
|
Long-term debt |
|
$ |
2,731,195 |
|
|
$ |
2,729,117 |
|
Mandatorily redeemable convertible preferred stock |
|
|
125,000 |
|
|
|
125,000 |
|
Mandatorily redeemable preferred interest of
consolidated subsidiaries |
|
|
303,494 |
|
|
|
318,047 |
|
Total stockholders equity |
|
|
2,602,247 |
|
|
|
2,630,127 |
|
|
|
|
|
|
|
|
|
Total capital |
|
$ |
5,761,936 |
|
|
$ |
5,802,291 |
|
|
|
|
|
|
|
|
Our ability to support increases in total assets is largely a function of our ability to obtain
short-term secured and unsecured funding, primarily through securities lending, and our $1,011.2
million of uncommitted secured and unsecured bank lines. Our ability was further enhanced by the
cash proceeds from our $700 million senior unsecured debt issuances in 2009; and our issuance of
$345 million convertible senior debentures in October 2009
further demonstrates our access to long-term funding in the capital markets. Additionally, we issued $400
million in unsecured senior notes in June 2010. We had no outstanding bank loans as of May 31,
2010 and December 31, 2009. On January 19, 2010, we declared a quarterly dividend of $0.075 in
cash per share of common stock payable on March 15, 2010; and on June 22, 2010, we declared a
quarterly dividend of $0.075 in cash per share of common stock payable on August 16, 2010. We did
not declare dividends on our common stock to be paid during 2009.
At May 31, 2010, our senior long-term debt, net of unamortized discounts and premiums, consisted of
contractual principal payments (adjusted for amortization) of $306.4 million, $248.9 million,
$348.8million, $708.8 million, $346.5 million, $279.2 million and $492.6 million due in 2012, 2014,
2016, 2019, 2027, 2029 and 2036, respectively. At May 31, 2010, contractual interest payment
obligations related to our senior long-term debt are $168.8 million for 2010, $184.2 million for
2011, $165.6 million for 2012, $160.6 million for 2013, $152.4 million for 2014, and $1,245.2
million for all of the remaining periods after 2014.
We rely upon our cash holdings and external sources to finance a significant portion of our
day-to-day operations. Access to these external sources, as well as the cost of that financing, is
dependent upon various factors, including our debt ratings. Our current debt ratings are dependent
upon many factors, including industry dynamics, operating and economic environment, operating
results, operating margins, earnings trend and volatility, balance sheet composition, liquidity and
liquidity management, our capital structure, our overall risk management, business diversification
and our market share and competitive position in the markets in which we operate. Deteriorations in
any of these factors could impact our credit ratings thereby increasing the cost of obtaining
funding and impacting certain trading revenues, particularly where collateral agreements are
referenced to our external credit ratings.
Page 78 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
Our long-term debt ratings are as follows:
|
|
|
|
|
|
|
Rating |
|
Outlook |
| |
|
| |
Moodys Investors Service
|
|
Baa2
|
|
Stable |
Standard and Poors
|
|
BBB
|
|
Stable |
Fitch Ratings
|
|
BBB
|
|
Stable |
Net Capital
Jefferies, Jefferies Execution and Jefferies High Yield Trading are subject to the net capital
requirements of the SEC and other regulators, which are designed to measure the general financial
soundness and liquidity of broker-dealers. Jefferies, Jefferies Execution and Jefferies High Yield
Trading use the alternative method of calculation.
As of May 31, 2010, Jefferies, Jefferies Execution and Jefferies High Yield Tradings net capital
and excess net capital were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Net Capital |
|
|
Excess Net Capital |
|
Jefferies |
|
$ |
766,818 |
|
|
$ |
702,399 |
|
Jefferies Execution |
|
$ |
9.961 |
|
|
$ |
9,711 |
|
Jefferies High Yield Trading |
|
$ |
356,176 |
|
|
$ |
355,926 |
|
Certain non-U.S. subsidiaries are subject to capital adequacy requirements as prescribed by the
regulatory authorities in their respective jurisdictions, including Jefferies International Limited
which is subject to the regulatory supervision and requirements of the Financial Services Authority
in the United Kingdom. The subsidiaries consistently operate in excess of the net capital
requirements.
Contractual Obligations and Commitments
The tables below provide information about our commitments related to debt obligations, investments
and derivative contracts as of May 31, 2010. The table presents principal cash flows with expected
maturity dates (in millions of dollars).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected Maturity Date |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
|
2014 |
|
|
2016 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and |
|
|
and |
|
|
and |
|
|
|
|
|
|
2010 |
|
|
2011 |
|
|
2013 |
|
|
2015 |
|
|
Later |
|
|
Total |
|
Debt obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior notes |
|
|
|
|
|
|
|
|
|
|
306 |
|
|
|
249 |
|
|
|
2,176 |
|
|
|
2,731 |
|
Mandatorily redeemable
convertible
preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125 |
|
|
|
125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank credit |
|
|
23 |
|
|
|
8 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
35 |
|
Equity commitments |
|
|
|
|
|
|
1 |
|
|
|
2 |
|
|
|
13 |
|
|
|
146 |
|
|
|
162 |
|
Loan commitments |
|
|
240 |
|
|
|
|
|
|
|
17 |
|
|
|
74 |
|
|
|
|
|
|
|
331 |
|
Mortgage-related commitments |
|
|
590 |
|
|
|
240 |
|
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
881 |
|
Underwriting commitments |
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 |
|
Derivative contracts -
non credit related |
|
|
19,353 |
|
|
|
5,770 |
|
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
25,135 |
|
Derivative contracts -
credit related |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110 |
|
|
|
30 |
|
|
|
140 |
|
Certain of our derivative contracts meet the definition of a guarantee and are therefore included
in the above table. For additional information on commitments, see Note 16, Commitments,
Contingencies and Guarantees, to the consolidated financial statements.
Page 79 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
In the normal course of business we engage in other off-balance sheet arrangements, including
derivative contracts. Neither derivatives notional amounts nor underlying instrument values are
reflected as assets or liabilities in on our consolidated Statements of Financial Condition.
Rather, the fair value of derivative contracts are reported in the consolidated Statements of
Financial Condition as Financial instruments owned derivative contracts or Financial instruments
sold, not yet purchased derivative contracts as applicable. Derivative contracts are reflected
net of cash paid or received pursuant to credit support agreements and are reported on a
net-by-counterparty basis when a legal right of offset exists under an enforceable master netting
agreement. For additional information about our accounting policies and our derivative activities
see Note 1, Organization and Summary of Significant Accounting Policies, and Note 3, Financial
Instruments, to the consolidated financial statements.
We are routinely involved with variable interest entities (VIEs) in connection with our
mortgage-backed securities securitization activities. As May 31, 2010, we did not have any
commitments to purchase assets from our securitization vehicles. At May 31, 2010, we held $295.9
million of mortgage-backed securities issued by VIEs for which we were initially involved as
transferor and placement agent, which are accounted for at fair value and recorded within Financial
instruments owned on our consolidated Statement of Financial Condition in the same manner as our
other financial instruments. For additional information regarding our involvement with VIEs, see
Note 6, Securitization Activities and Variable Interest Entities, to the consolidated financial
statements.
Due to the uncertainty regarding the timing and amounts that will ultimately be paid, our liability
for unrecognized tax benefits has been excluded from the above contractual obligations table. See
Note 15 to the consolidated financial statements for further information.
Risk Management
Risk is an inherent part of our business and activities. The extent to which we properly and
effectively identify, assess, monitor and manage each of the various types of risk involved in our
activities is critical to our financial soundness and profitability. We seek to identify, assess,
monitor and manage the following principal risks involved in our business activities: market,
credit, operational, legal and compliance, new business, reputational and other. Risk management
is a multi-faceted process that requires communication, judgment and knowledge of financial
products and markets. Senior management takes an active role in the risk management process and
requires specific administrative and business functions to assist in the identification, assessment
and control of various risks. Our risk management policies, procedures and methodologies are fluid
in nature and are subject to ongoing review and modification.
Market Risk. The potential for changes in the value of financial instruments is referred to as
market risk. Our market risk generally represents the risk of loss that may result from a change
in the value of a financial instrument as a result of fluctuations in interest rates, credit
spreads, equity prices, commodity prices and foreign exchange rates, along with the level of
volatility of each. Interest rate risks result primarily from exposure to changes in the yield
curve, the volatility of interest rates, and credit spreads. Equity price risks result from
exposure to changes in prices and volatilities of individual equities, equity baskets and equity
indices. Commodity price risks result from exposure to the changes in prices and volatilities of
individual commodities, commodity baskets and commodity indices. Market risk arises from
market-making, proprietary trading, underwriting, specialist and investing activities. We seek to
manage our exposure to market risk by diversifying exposures, controlling position sizes, and
establishing economic hedges in related securities or derivatives. Due to imperfections in
correlations, gains and losses can occur even for positions that are hedged. Position limits in
trading and inventory accounts are established and monitored on an ongoing basis. Each day,
consolidated position and exposure reports are prepared and distributed to various levels of
management, which enable management to monitor inventory levels and results of the trading groups.
Credit Risk. Credit risk represents the loss that we would incur if a client, counterparty or
issuer of financial instruments, such as securities and derivatives, held by us fails to perform
its contractual obligations. We follow industry practices to reduce credit risk related to various
trading, investing and financing activities by obtaining and maintaining collateral. We adjust
margin requirements if we believe the risk exposure is not appropriate based on market conditions.
Liabilities to other brokers and dealers related to unsettled transactions (i.e., securities
failed-to-receive) are recorded at the amount for which the securities were purchased, and are paid
upon receipt of the securities
Page 80 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
from other brokers or dealers. In the case of aged securities
failed-to-receive, we may purchase the underlying security in the market and seek reimbursement for
losses from the counterparty in accordance with standard industry practices.
Operational Risk. Operational risk generally refers to the risk of loss resulting from our
operations, including, but not limited to, improper or unauthorized execution and processing of
transactions, deficiencies in our operating systems, business disruptions and inadequacies or
breaches in our internal control processes. Our businesses are highly dependent on our ability to
process, on a daily basis, a large number of transactions across numerous and diverse markets in
many currencies. In addition, the transactions we process have become increasingly complex. If
any of our financial, accounting or other data processing systems do not operate properly or are
disabled or if there are other shortcomings or failures in our internal processes, people or
systems, we could suffer an impairment to our liquidity, financial loss, a disruption of our
businesses, liability to clients, regulatory intervention or reputational damage. These systems
may fail to operate properly or become disabled as a result of events that are wholly or partially
beyond our control, including a disruption of electrical or communications services or our
inability to occupy one or more of our buildings. The inability of our systems to accommodate an
increasing volume of transactions could also constrain our ability to expand our businesses.
We also face the risk of operational failure or termination of any of the clearing agents,
exchanges, clearing houses or other financial intermediaries we use to facilitate our securities
transactions. Any such failure or termination could adversely affect our ability to effect
transactions and manage our exposure to risk.
In addition, despite the contingency plans we have in place, our ability to conduct business may be
adversely impacted by a disruption in the infrastructure that supports our businesses and the
communities in which they are located. This may include a disruption involving electrical,
communications, transportation or other services used by us or third parties with which we conduct
business.
Our operations rely on the secure processing, storage and transmission of confidential and other
information in our computer systems and networks. Although we take protective measures and
endeavor to modify them as circumstances warrant, our computer systems, software and networks may
be vulnerable to unauthorized access, computer viruses or other malicious code, and other events
that could have a security impact. If one or more of such events occur, this potentially could
jeopardize our or our clients or counterparties confidential and other information processed and
stored in, and transmitted through, our computer systems and networks, or otherwise cause
interruptions or malfunctions in our, our clients, our counterparties or third parties
operations. We may be required to expend significant additional resources to modify our protective
measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject
to litigation and financial losses that are either not insured against or not fully covered through
any insurance maintained by us.
Legal and Compliance Risk. Legal and compliance risk includes the risk of non-compliance with
applicable legal and regulatory requirements. We are subject to extensive regulation in the
different jurisdictions in which we conduct our business. We have various procedures addressing
issues such as regulatory capital requirements, sales and trading practices, use of and safekeeping
of customer funds, credit granting, collection activities, anti-money laundering and record
keeping. We also maintain an anonymous hotline for employees or others to report suspected
inappropriate actions by us or by our employees or agents.
New Business Risk. New business risk refers to the risks of entering into a new line of business
or offering a new product. By entering a new line of business or offering a new product, we may
face risks that we are unaccustomed to dealing with and may increase the magnitude of the risks we
currently face. We review proposals for new businesses and new products to determine if we are
prepared to handle the additional or increased risks associated with entering into such activities.
Reputational Risk. We recognize that maintaining our reputation among clients, investors,
regulators and the general public is an important aspect of minimizing legal and operational risks.
Maintaining our reputation depends on a large number of factors, including the selection of our
clients and the conduct of our business activities. We seek to maintain
our reputation by screening potential clients and by conducting our business activities in
accordance with high ethical standards.
Page 81 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
Other Risk. Other risks encountered by us include political, regulatory and tax risks. These
risks reflect the potential impact that changes in local and international laws and tax statutes
have on the economics and viability of current or future transactions. In an effort to mitigate
these risks, we continuously review new and pending regulations and legislation and participate in
various industry interest groups.
Accounting and Developments
The following is a summary of ASC Topics that have or will impact our disclosures and/or accounting
policies for financial statements issued for interim and annual periods:
Consolidation
We have adopted accounting changes described in ASC 810, Consolidation Topic, as of January 1,
2010, which require that the party who has the power to direct the activities of a variable
interest entity that most significantly impact the entitys economic performance and who has an
obligation to absorb losses of the entity or a right to receive benefits from the entity that could
potentially be significant to the entity consolidate the variable interest entity. The changes to
ASC 810, effective as of January 1, 2010, eliminate the quantitative approach previously applied to
assessing whether to consolidate a variable interest entity and require ongoing reassessments for
consolidation. Upon adoption of these accounting changes on January 1, 2010, we consolidated
certain CLOs and other investment vehicles. The consolidation of these entities resulted in an
increase in total assets of $1,606.9 million, an increase in total liabilities of $1,603.8 million
and an increase to total stockholders equity of $3.1 million on January 1, 2010. Subsequently, we
sold and assigned our management agreements for the CLOs to a third party; thus we no longer have
the power to direct the most significant activities of the CLOs. Upon the assignment of the
management agreements in January 2010, we deconsolidated the CLOs and accounted for our remaining
interests in the CLOs at fair value.
Transfers and Servicing
We adopted further accounting changes described in ASC 860, Transfers and Servicing Topic, as of
January 1, 2010, which eliminate the concept of a qualifying special purpose entity, require that a
transferor consider all arrangements made contemporaneously with, or in contemplation of, a
transfer of assets when determining whether derecognition of a financial asset is appropriate,
clarify the requirement that a transferred financial asset be legally isolated from the transferor
and any of its consolidated affiliates, stipulate that constraints on a transferees ability to
freely pledge or exchange transferred assets causes the transfer to fail sale accounting, and
define participating interests and provides guidance on derecognizing participating interests. The
adoption did not have an effect on our financial condition, results of operations or cash flows.
Page 82 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We use a number of quantitative tools to manage our exposure to market risk. These tools include:
|
|
|
inventory position and exposure limits, on a gross and net basis; |
|
|
|
|
scenario analyses, stress tests and other analytical tools that measure the potential
effects on our trading net revenues of various market events, including, but not
limited to, a large widening of credit spreads, a substantial decline in equities
markets and significant moves in selected emerging markets; and |
|
|
|
|
risk limits based on a summary measure of risk exposure referred to as Value-at-Risk. |
Value-at Risk
We estimate Value-at-Risk (VaR) using a model that simulates revenue and loss distributions on all
financial instruments by applying historical market changes to the current portfolio. Using the
results of this simulation, VaR measures potential loss of trading revenues at a given confidence
level over a specified time horizon. We calculate VaR over a one day holding period measured at a
95% confidence level which implies that, on average, we expect to realize a loss of daily trading
revenue at least as large as the VaR amount on one out of every twenty trading days.
VaR is one measurement of potential loss in trading revenues that may result from adverse market
movements over a specified period of time with a selected likelihood of occurrence. As with all
measures of VaR, our estimate has substantial limitations due to our reliance on historical
performance, which is not necessarily a predictor of the future. Consequently, this VaR estimate
is only one of a number of tools we use in our daily risk management activities.
VaR is a model that predicts the future risk based on historical data. We could incur losses
greater than the reported VaR because the historical market prices and rates changes may not be an
accurate measure of future market events and conditions. In addition, the VaR model measures the
risk of a current static position over a one-day horizon and might not predict the future position.
When comparing our VaR numbers to those of other firms, it is important to remember that different
methodologies could produce significantly different results.
The VaR numbers below are shown separately for interest rate, equity, currency and commodity
products, as well as for our overall trading positions, excluding corporate investments in asset
management positions, using a historical simulation approach. The aggregated VaR presented here is
less than the sum of the individual components (i.e., interest rate risk, foreign exchange rate
risk, equity risk and commodity price risk) due to the benefit of diversification among the risk
categories. Diversification benefit equals the difference between aggregated VaR and the sum of
VaRs for the four risk categories. The following table illustrates the VaR for each component of
market risk.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daily VaR(1) |
|
|
|
(In Millions) |
|
|
|
Value-at-Risk in trading portfolios |
|
|
|
VaR at |
|
|
Average VaR 3 Months Ended |
|
Risk Categories |
|
5/31/10 |
|
|
3/31/10 |
|
|
12/31/09 |
|
|
5/31/10 |
|
|
3/31/10 |
|
|
12/31/09 |
|
|
|
|
|
|
Interest Rates |
|
$ |
7.10 |
|
|
$ |
5.75 |
|
|
$ |
2.66 |
|
|
$ |
6.53 |
|
|
$ |
7.19 |
|
|
$ |
5.24 |
|
Equity Prices |
|
$ |
3.25 |
|
|
$ |
5.16 |
|
|
$ |
4.33 |
|
|
$ |
4.54 |
|
|
$ |
7.10 |
|
|
$ |
5.02 |
|
Currency Rates |
|
$ |
0.43 |
|
|
$ |
0.43 |
|
|
$ |
0.86 |
|
|
$ |
0.51 |
|
|
$ |
0.80 |
|
|
$ |
1.13 |
|
Commodity Prices |
|
$ |
1.36 |
|
|
$ |
1.34 |
|
|
$ |
1.91 |
|
|
$ |
1.16 |
|
|
$ |
1.77 |
|
|
$ |
1.56 |
|
Diversification Effect2 |
- |
$ |
5.32 |
| - |
$ |
2.89 |
| - |
$ |
2.83 |
| - |
$ |
4.49 |
| - |
$ |
5.65 |
|
- |
$ |
6.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Firmwide |
|
$ |
6.82 |
|
|
$ |
9.79 |
|
|
$ |
6.93 |
|
|
$ |
8.25 |
|
|
$ |
11.21 |
|
|
$ |
6.46 |
|
|
|
|
|
|
Page 83 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daily VaR(1) |
|
|
|
(In Millions) |
|
|
|
Value-at-Risk Highs and Lows for Three Months Ended |
|
|
|
5/31/10 |
|
|
3/31/10 |
|
|
12/31/09 |
|
Risk Categories |
|
High |
|
|
Low |
|
|
High |
|
|
Low |
|
|
High |
|
|
Low |
|
Interest Rates |
|
$ |
9.37 |
|
|
$ |
4.70 |
|
|
$ |
11.75 |
|
|
$ |
2.88 |
|
|
$ |
8.87 |
|
|
$ |
2.37 |
|
Equity Prices |
|
$ |
9.43 |
|
|
$ |
2.52 |
|
|
$ |
13.40 |
|
|
$ |
2.52 |
|
|
$ |
10.69 |
|
|
$ |
2.69 |
|
Currency Rates |
|
$ |
0.95 |
|
|
$ |
0.14 |
|
|
$ |
1.52 |
|
|
$ |
0.43 |
|
|
$ |
3.89 |
|
|
$ |
0.41 |
|
Commodity Prices |
|
$ |
1.85 |
|
|
$ |
0.60 |
|
|
$ |
3.27 |
|
|
$ |
0.96 |
|
|
$ |
2.53 |
|
|
$ |
0.90 |
|
Firmwide |
|
$ |
11.54 |
|
|
$ |
6.22 |
|
|
$ |
17.41 |
|
|
$ |
6.44 |
|
|
$ |
10.20 |
|
|
$ |
3.89 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
VaR is the potential loss in value of our trading positions due to
adverse market movements over a defined time horizon with a specific confidence level. For
the VaR numbers reported above, a one-day time horizon and 95% confidence level were used. |
|
(2) |
|
Equals the difference between firmwide VaR and the sum of the VaRs by risk
categories. This effect is due to the market categories not being perfectly correlated. |
Average VaR of $8.25 million during the three months ended May 31, 2010 decreased from the
$11.21 million average during the three months ended March 31, 2010 due mainly to a decrease in
exposure to Equity Prices and Interest Rates. The decrease in exposure to Equity Prices during the
second quarter of 2010 is attributed to our exposure to equity block trading positions and related
capital market activities giving rise to certain equity inventory levels during the three months
ended March 31, 2010, which were subsequently sold during the three month period ended May 31,
2010.
The following table presents our daily VaR over the last periods:
VaR trended higher during the three months ended September 30, 2009 as we continued to expand fixed
income trading activity. This was offset during the three months ended December 31, 2009 as our
inventory mix created a greater diversification effect on overall VaR. During the three months
ended March 31, 2010, VaR trended higher from certain equity and debt blocking trading positions
executed primarily in connection with certain capital market activities. During May 2010, VaR
fluctuated due to positions within our strategic investments trading business.
VaR Back-Testing
The comparison of daily actual revenue fluctuations with the daily VaR estimate is the primary
method used to test the efficacy of the VaR model. Back testing is performed at various levels of
the trading portfolio, from the holding company level down to specific business lines. A
back-testing exception occurs when the daily loss exceeds the daily VaR estimate. Results of the
process at the aggregate level demonstrated one outlier when comparing the 95% one-day VaR with the
back-testing profit and loss in the second quarter of 2010. A 95% confidence one-day VaR model
Page 84 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
usually should not have more than twelve (1 out of 20 days) back-testing exceptions on an annual
basis. Back-testing profit and loss is a subset of actual trading revenue, excluding fees,
commissions, and certain provisions. We compare the trading revenue with VaR for back-testing
purposes because VaR assesses only the potential change in position value due to overnight
movements in financial market variables such as prices, interest rates and volatilities under
normal market conditions. The graph below illustrates the relationship between daily back-testing
trading profit and loss and daily VaR for us during the three months ended May 31, 2010.
Increased equity market volatility resulted in increased trading profits and losses during May
2010.
Daily Trading Net Revenue
Trading revenue used in the histogram below entitled Three Months Ended May 31, 2010 vs. Three
Months Ended June 30, 2009 Distribution of Daily Trading Revenue is the actual daily trading
revenue which is excluding fees, commissions and certain provisions. The histogram below shows the
distribution of daily trading revenue for substantially all of our trading activities.
During the three months ended September 30, 2009, we changed the groupings of the Daily Trading
Revenue histogram. Previously, daily trading revenue was grouped in $1.0 million increments ranging
from $(2.0) million to $4.0 million. As of September 30, 2009, the grouping is presented in $2.0
million increments ranging from $(4.0)
Page 85 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
million to $10.0 million. This presentation provides more information across the distribution by reducing the maximum number of days in any single grouping.
Item 4. Controls and Procedures
We, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated
the effectiveness of our disclosure controls and procedures as of May 31, 2010. Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures as of May 31, 2010 are functioning effectively to provide reasonable
assurance that the information required to be disclosed by us in reports filed under the Securities
Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms and (ii) accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that
the objectives of the controls system are met, and no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within a company have been
detected.
No change in our internal control over financial reporting occurred during the quarter ended May
31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Many aspects of our business involve substantial risks of legal liability. In the normal course of
business, we have been named as defendants or co-defendants in lawsuits involving primarily claims
for damages. We are also involved in a number of judicial and regulatory matters arising out of
the conduct of our business. Based on currently available information, we do not believe that any
matter will have a material adverse effect on our financial condition, although, depending on our
results for a particular period, an adverse determination could be material for a particular
period.
Prior to February 2008, we bought and sold auction rate securities (ARS) for PCS clients and
institutional customers that used our cash management desk. We did not underwrite or act as an
auction agent for any issuer of auction rate securities. A number of firms that underwrote ARS
have entered into settlements with various regulators to, among other measures, purchase at par ARS
sold to retail customers. FINRA is currently conducting an investigation of our activities
relating to ARS.
The enforcement division of FINRA has advised us that it has made a preliminary determination to
bring an enforcement action against us alleging a number of violations of FINRA and SEC rules
relating to our activities in ARS with respect to our corporate cash management activities within
our private wealth management division. In accordance with FINRA procedures, we have an opportunity
to explain why we believe an action is not appropriate. If we are unable to explain why no such
action should be brought or otherwise to reach a satisfactory resolution with FINRA, we intend to
vigorously defend our position.
Item 1A. Risk Factors
Information regarding our risk factors appears in Part I, Item 1A. of our annual report on Form
10-K for the fiscal year ended December 31, 2009 filed with the SEC on February 26, 2010. These
risk factors describe some of the assumptions, risks, uncertainties and other factors that could
adversely affect our business or that could otherwise result in changes that differ materially from
our expectations. The following additional risk factors should be read in addition to the risk
factors contained in our Form 10-K:
Page 86 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
Pending as well as proposed legislation and regulatory initiatives may significantly affect our
businesses.
Recent market and economic conditions have led to new legislation and numerous proposals for
changes in the regulation of the financial services industry, including significant additional
legislation and regulation in the United States and abroad. Proposals for further regulation of
financial institutions, both domestically and internationally, include calls to increase their
capital and liquidity requirements; limit the size and types of the activities permitted; and
increase taxes on some institutions. Legislation pending in the United States, if enacted, would
also impose more comprehensive regulation of the over-the-counter derivatives market. In addition,
there have been various legislative proposals to impose fiduciary standards on securities firms in
their dealings with states, municipalities and pension funds, among others, which, if enacted,
could have an effect on our municipal securities business.
These initiatives would affect not only us but also certain of our customers. As a result, these
new (and other) legislative and regulatory changes could affect our revenue, limit our ability to
pursue business opportunities, impact the value of assets that we hold, require us to change
certain of our business practices, impose additional costs on us, or otherwise adversely affect our
businesses. Accordingly, we cannot provide assurance that any such new legislation or regulation
would not have an adverse effect on our business, results of operations, cash flows or financial
condition.
If we do not comply with current or future legislation and regulations that apply to our
operations, we may be subject to fines, penalties or material restrictions on our businesses in the
jurisdiction where the violation occurred. In recent years, regulatory oversight and enforcement
have increased substantially, imposing additional costs and taxes and increasing the potential
risks associated with our operations. As this regulatory trend continues, it could adversely
affect our operations and, in turn, our financial results.
We cannot fully predict the impact of U.K. bank regulation reform on our business.
On June 17, 2010, the U.K. government announced the breakup of its chief financial regulator, the
Financial Services Authority, into three separate agencies, including a bank regulating subsidiary
inside the Bank of England. It is unclear what effect this reform will have on our business in the
U.K. This reform may result in calls to increase capital and to impose new liquidity requirements,
and may impose other additional obligations and taxes on our U.K. operations. As a result, these
changes could affect our revenue, limit our ability to pursue business opportunities, impact the
value of assets that we hold, require us to change certain of our business practices, impose
additional costs on us, or otherwise adversely affect our U.K. businesses. Accordingly, we cannot
provide assurance that such reform would not have an adverse effect on our business, results of
operations, cash flows or financial condition.
Page 87 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(c) Total Number of |
|
|
(d) Maximum Number |
|
|
|
|
|
|
|
|
|
|
|
Shares Purchased as |
|
|
of Shares that May |
|
|
|
(a) Total Number |
|
|
(b) Average |
|
|
Part of Publicly |
|
|
Yet Be Purchased |
|
|
|
of Shares |
|
|
Price Paid per |
|
|
Announced Plans or |
|
|
Under the Plans or |
|
Period |
|
Purchased (1) |
|
|
Share |
|
|
Programs (2) |
|
|
Programs |
|
March 1 March 31, 2010 |
|
|
20,485 |
|
|
|
25.49 |
|
|
|
|
|
|
|
12,925,010 |
|
April 1 April 30, 2010 |
|
|
173,702 |
|
|
|
25.04 |
|
|
|
156,300 |
|
|
|
12,768,710 |
|
May 1 May 31, 2010 |
|
|
1,425,816 |
|
|
|
25.08 |
|
|
|
1,343,700 |
|
|
|
11,425,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,620,003 |
|
|
|
|
|
|
|
1,500,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
We repurchased an aggregate of 120,003 shares other than as part of a publicly announced plan
or program. We repurchased these securities in connection with our stock compensation plans
which allow participants to use shares to pay the exercise price of certain options exercised
and to use shares to satisfy certain tax liabilities arising from the exercise of options or
the vesting of restricted stock. The number above does not include unvested shares forfeited
back to us pursuant to the terms of our stock compensation plans. |
|
(2) |
|
On December 14, 2009 we announced the authorization by our Board of Directors of the
repurchase, from time to time, of up to an aggregate of 15,000,000 shares of our common stock,
inclusive of prior authorizations. |
Page 88 of 90
JEFFERIES GROUP, INC. AND SUBSIDIARIES
Item 6. Exhibits
|
|
|
Exhibits |
|
|
3.1
|
|
Amended and Restated Certificate of Incorporation of Jefferies Group,
Inc. is incorporated herein by reference to Exhibit 3 of the
Registrants Form 8-K filed on May 26, 2004. |
|
3.2
|
|
Certificate of Designations of 3.25% Series A Cumulative Convertible
Preferred Stock is incorporated herein by reference to Exhibit 3.1 of
the Registrants Form 8-K filed on February 21, 2006. |
|
3.3
|
|
By-Laws of Jefferies Group, Inc are incorporated herein by reference
to Exhibit 3 of Registrants Form 8-K filed on December 4, 2007. |
|
10.1*
|
|
Registration Rights Agreement dated as of April 13, 2010 by Jefferies
Group, Inc. and Leucadia National Corporation. |
|
10.2
|
|
Amendment No. 2 dated May 3, 2010 to Credit Agreement among JCP Fund
V Bridge Partners LLC and Jefferies Group, Inc. is incorporated
herein by reference to Exhibit 10 of Registrants Form 8-K filed on
May 4, 2010. |
|
31.1*
|
|
Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial Officer. |
|
31.2*
|
|
Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive Officer. |
|
32*
|
|
Rule 13a-14(b)/15d-14(b) and Section 1350 of Title 18 U.S.C.
Certification by the Chief Executive Officer and Chief Financial
Officer. |
Page 89 of 90
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
|
|
|
|
|
|
|
JEFFERIES GROUP, INC.
|
|
|
|
(Registrant) |
|
|
|
|
|
|
|
|
|
Date: July 9, 2010 |
By: |
/s/ Peregrine C. Broadbent
|
|
|
|
Peregrine C. Broadbent |
|
|
|
Chief Financial Officer
(duly authorized officer) |
|
|
Page 90 of 90