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 March 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 the definitions
of large accelerated filer, accelerated filer and smaller reporting
company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer þ | |
Accelerated filer o | |
Non-accelerated filer o | |
Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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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. 171,690,186 shares as of the close of business April 28, 2010.
JEFFERIES GROUP, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
MARCH 31, 2010
Page 2 of 83
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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March 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 $138,429 from VIEs) |
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$ |
1,028,903 |
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$ |
1,853,167 |
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Cash and securities segregated and on deposit for regulatory
purposes or deposited with clearing and depository organizations |
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1,328,194 |
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1,089,803 |
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Financial instruments owned, at fair value, including securities pledged
to creditors of $9,060,962 and $5,623,345 in 2010 and 2009, respectively: |
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Corporate equity securities (including $101,690 from VIEs) |
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1,854,113 |
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1,500,042 |
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Corporate debt securities (including $615,562 from VIEs) |
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3,355,418 |
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2,421,704 |
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Government, federal agency and other sovereign obligations |
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3,509,456 |
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1,762,643 |
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Mortgage- and asset-backed securities (including $31,624 from VIEs) |
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3,584,910 |
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3,079,865 |
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Loans and other receivables (including $368,302 from VIEs) |
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481,899 |
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591,208 |
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Derivatives (including $2,172 from VIEs) |
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38,952 |
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62,117 |
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Investments, at fair value (including $15,294 from VIEs) |
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70,854 |
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70,156 |
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Total financial instruments owned, at fair value (including $1,134,644 from VIEs) |
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12,895,602 |
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9,487,735 |
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Investments in managed funds |
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121,180 |
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115,774 |
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Other investments |
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206,059 |
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193,628 |
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Securities borrowed |
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8,246,352 |
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8,237,998 |
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Securities purchased under agreements to resell |
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4,625,081 |
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3,515,247 |
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Securities received as collateral |
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34,727 |
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68,494 |
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Receivables: |
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Brokers, dealers and clearing organizations (including $317,494 from VIEs) |
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2,071,042 |
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1,504,480 |
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Customers (including $114 from VIEs) |
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1,198,288 |
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1,020,480 |
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Fees, interest and other |
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126,336 |
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108,749 |
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Premises and equipment |
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137,472 |
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140,132 |
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Goodwill |
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364,135 |
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364,795 |
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Other assets (including $107 from VIEs) |
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529,104 |
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488,789 |
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Total assets (including $1,590,788 from VIEs) |
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$ |
32,912,475 |
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$ |
28,189,271 |
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Continued on next page.
Page 3 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED) CONTINUED
(Dollars in thousands, except per share amounts)
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March 31, |
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December 31, |
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2010 (1) |
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2009 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Financial instruments sold, not yet purchased, at fair value: |
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Corporate equity securities (including $37,416 from VIEs) |
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$ |
1,780,182 |
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$ |
1,360,528 |
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Corporate debt securities (including $458,230 from VIEs) |
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2,518,190 |
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1,909,781 |
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Government, federal agency and other sovereign obligations |
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2,636,956 |
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1,735,861 |
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Mortgage- and asset-backed securities |
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12,060 |
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21,474 |
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Loans (including $321,311 from VIEs) |
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353,063 |
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363,080 |
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Derivatives (including $561 from VIEs) |
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23,673 |
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18,427 |
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Total financial instruments sold, not yet purchaed, at fair value (including
$817,518 from VIEs) |
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7,324,124 |
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5,409,151 |
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Securities loaned |
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3,414,947 |
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3,592,836 |
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Securities sold under agreements to repurchase |
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10,504,523 |
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8,239,117 |
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Obligation to return securities received as collateral |
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34,727 |
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68,494 |
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Payables: |
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Brokers, dealers and clearing organizations (including $250,346 from VIEs) |
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1,834,629 |
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889,687 |
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Customers |
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3,381,557 |
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3,246,485 |
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Accrued expenses and other liabilities (including $2,255 from VIEs) |
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597,245 |
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941,210 |
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27,091,752 |
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22,386,980 |
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Long-term debt |
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2,730,379 |
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2,729,117 |
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Mandatorily redeemable convertible preferred stock |
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125,000 |
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125,000 |
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Mandatorily redeemable preferred interest of consolidated subsidiaries
(including $320,058 from VIEs) |
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320,058 |
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318,047 |
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Total liabilities (including $1,390,177 from VIEs) |
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30,267,189 |
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25,559,144 |
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STOCKHOLDERS EQUITY |
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Common stock, $.0001 par value. Authorized 500,000,000 shares;
issued 196,536,929 shares in 2010 and 187,855,347 shares in 2009 |
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20 |
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19 |
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Additional paid-in capital |
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2,067,144 |
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2,036,087 |
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Retained earnings |
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757,126 |
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698,488 |
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Less: |
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Treasury stock, at cost, 24,691,756 shares in 2010 and
22,217,793 shares in 2009 |
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(447,600 |
) |
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(384,379 |
) |
Accumulated other comprehensive loss: |
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Currency translation adjustments |
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(52,487 |
) |
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(34,369 |
) |
Additional minimum pension liability |
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(7,257 |
) |
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(7,257 |
) |
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Total accumulated other comprehensive loss |
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(59,744 |
) |
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(41,626 |
) |
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Total common stockholders equity |
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2,316,946 |
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2,308,589 |
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Noncontrolling interests |
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328,340 |
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321,538 |
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Total stockholders equity |
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2,645,286 |
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2,630,127 |
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Total liabilities and stockholders equity |
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$ |
32,912,475 |
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$ |
28,189,271 |
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(1) |
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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 March 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 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
(In thousands, except per share amounts)
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Three Months Ended |
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March 31, |
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March 31, |
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2010 |
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2009 |
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Revenues: |
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Commissions |
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$ |
134,438 |
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$ |
131,820 |
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Principal transactions |
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152,546 |
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122,376 |
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Investment banking |
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198,337 |
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37,086 |
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Asset management fees and investment income (loss) from managed funds |
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6,599 |
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(37 |
) |
Interest |
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150,020 |
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|
102,087 |
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Other |
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16,679 |
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12,572 |
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Total revenues |
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658,619 |
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405,904 |
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Interest expense |
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75,377 |
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63,947 |
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Net revenues |
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583,242 |
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|
341,957 |
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Interest on mandatorily redeemable preferred interest of
consolidated subsidiaries |
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|
2,048 |
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(5,303 |
) |
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Net revenues, less mandatorily redeemable preferred interest |
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581,194 |
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|
347,260 |
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Non-interest expenses: |
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Compensation and benefits |
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319,801 |
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213,381 |
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Floor brokerage and clearing fees |
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30,730 |
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|
13,702 |
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Technology and communications |
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|
40,210 |
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|
30,785 |
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Occupancy and equipment rental |
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19,706 |
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|
16,296 |
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Business development |
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13,361 |
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9,445 |
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Professional services |
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14,423 |
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|
10,220 |
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Other |
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17,413 |
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4,249 |
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Total non-interest expenses |
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455,644 |
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298,078 |
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Earnings before income taxes |
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|
125,550 |
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|
49,182 |
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Income tax expense |
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|
47,541 |
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|
16,756 |
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Net earnings |
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|
78,009 |
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|
32,426 |
|
Net earnings (loss) to noncontrolling interests |
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|
3,943 |
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(5,911 |
) |
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Net earnings to common shareholders |
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$ |
74,066 |
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$ |
38,337 |
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Earnings per common share: |
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Basic |
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$ |
0.36 |
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$ |
0.19 |
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Diluted |
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$ |
0.36 |
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$ |
0.19 |
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Weighted average common shares: |
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Basic |
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|
198,507 |
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|
203,310 |
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Diluted |
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|
202,630 |
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|
203,326 |
|
See accompanying unaudited notes to consolidated financial statements.
Page 5 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
(Unaudited)
(Dollars in thousands, except per share amounts)
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Three Months Ended |
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Year Ended |
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March 31, 2010 |
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December 31, 2009 |
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Common stock, par value $0.0001 per share |
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Balance, beginning of period |
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$ |
19 |
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$ |
17 |
|
Issued |
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|
1 |
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2 |
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|
|
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Balance, end of period |
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|
20 |
|
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|
19 |
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|
|
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|
|
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|
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Additional paid-in capital |
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|
|
|
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Balance, beginning of period |
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2,036,087 |
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|
1,870,120 |
|
Benefit plan share activity (1) |
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|
885 |
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|
|
16,499 |
|
Share-based expense, net of forfeitures and clawbacks |
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|
9,244 |
|
|
|
125,127 |
|
Proceeds from exercise of stock options |
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|
56 |
|
|
|
69 |
|
Contingent consideration |
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|
419 |
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|
|
(2,710 |
) |
Tax benefit (deficiency) for issuance of share-based
awards |
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|
17,982 |
|
|
|
(14,606 |
) |
Equity component of convertible debt issuance, net of tax |
|
|
|
|
|
|
41,588 |
|
Dividend equivalents on share-based plans |
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|
2,471 |
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|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
2,067,144 |
|
|
|
2,036,087 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings |
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
698,488 |
|
|
|
418,445 |
|
Net earnings to common shareholders |
|
|
74,066 |
|
|
|
280,043 |
|
Dividends |
|
|
(15,428 |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
757,126 |
|
|
|
698,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock, at cost |
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
(384,379 |
) |
|
|
(115,190 |
) |
Purchases |
|
|
(63,220 |
) |
|
|
(263,794 |
) |
Returns / forfeitures |
|
|
(1 |
) |
|
|
(8,105 |
) |
Issued |
|
|
|
|
|
|
2,710 |
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
(447,600 |
) |
|
|
(384,379 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive (loss) income |
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
(41,626 |
) |
|
|
(52,121 |
) |
Currency adjustment |
|
|
(18,118 |
) |
|
|
9,306 |
|
Pension adjustment, net of tax |
|
|
|
|
|
|
1,189 |
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
(59,744 |
) |
|
|
(41,626 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total common stockholders equity |
|
|
2,316,946 |
|
|
|
2,308,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncontrolling interests |
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
321,538 |
|
|
|
287,805 |
|
Net earnings to noncontrolling interests |
|
|
3,943 |
|
|
|
36,537 |
|
Contributions |
|
|
46 |
|
|
|
2,860 |
|
Distributions |
|
|
(245 |
) |
|
|
(5,664 |
) |
Adoption of accounting changes to ASC 810 |
|
|
3,058 |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
328,340 |
|
|
|
321,538 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
$ |
2,645,286 |
|
|
$ |
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 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
Net earnings to common shareholders |
|
$ |
74,066 |
|
|
$ |
38,337 |
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Currency translation adjustments |
|
|
(18,118 |
) |
|
|
(3,495 |
) |
|
|
|
|
|
|
|
Total other comprehensive loss (1) |
|
|
(18,118 |
) |
|
|
(3,495 |
) |
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
55,948 |
|
|
$ |
34,842 |
|
|
|
|
|
|
|
|
|
|
|
(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 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2010 |
|
|
March 31, 2009 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
78,009 |
|
|
$ |
32,426 |
|
|
|
|
|
|
|
|
Adjustments to reconcile net earnings to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
7,859 |
|
|
|
7,148 |
|
Gain on repurchase of long-term debt |
|
|
|
|
|
|
(5,946 |
) |
Fees related to assigned management agreements |
|
|
(920 |
) |
|
|
|
|
Interest on mandatorily redeemable preferred interests of consolidated subsidiaries |
|
|
2,048 |
|
|
|
(5,303 |
) |
Accruals related to various benefit plans, stock issuances, net of forfeitures |
|
|
10,129 |
|
|
|
7,169 |
|
(Increase) decrease in cash and securities segregated and on deposit for regulatory
purposes or deposited with clearing and depository organizations |
|
|
(238,408 |
) |
|
|
65,956 |
|
(Increase) decrease in receivables: |
|
|
|
|
|
|
|
|
Brokers, dealers and clearing organizations |
|
|
(595,687 |
) |
|
|
53,474 |
|
Customers |
|
|
(192,481 |
) |
|
|
(57,969 |
) |
Fees, interest and other |
|
|
(18,812 |
) |
|
|
21,590 |
|
(Increase) decrease in securities borrowed |
|
|
(57,434 |
) |
|
|
1,494,964 |
|
Increase in financial instruments owned |
|
|
(3,454,521 |
) |
|
|
(1,549,463 |
) |
Increase in other investments |
|
|
(12,635 |
) |
|
|
(4,890 |
) |
(Increase) decrease in investments in managed funds |
|
|
(5,406 |
) |
|
|
7,629 |
|
Increase in securities purchased under agreements to resell |
|
|
(1,121,664 |
) |
|
|
(1,767,452 |
) |
(Increase) decrease in other assets |
|
|
(52,113 |
) |
|
|
6,092 |
|
Increase in payables: |
|
|
|
|
|
|
|
|
Brokers, dealers and clearing organizations |
|
|
968,300 |
|
|
|
69,930 |
|
Customers |
|
|
135,803 |
|
|
|
252,122 |
|
Decrease in securities loaned |
|
|
(134,453 |
) |
|
|
(62,162 |
) |
Increase in financial instruments sold, not yet purchased |
|
|
1,977,040 |
|
|
|
1,236,556 |
|
Increase (decrease) in securities sold under agreements to repurchase |
|
|
2,272,072 |
|
|
|
(135,675 |
) |
Decrease in accrued expenses and other liabilities |
|
|
(318,262 |
) |
|
|
(288,797 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities |
|
|
(751,536 |
) |
|
|
(622,601 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchase of premises and equipment |
|
|
(4,474 |
) |
|
|
(5,516 |
) |
Business acquisition |
|
|
|
|
|
|
(38,760 |
) |
Cash received from contingent consideration |
|
|
656 |
|
|
|
|
|
Cash paid for contingent consideration |
|
|
(6,997 |
) |
|
|
(8,163 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(10,815 |
) |
|
|
(52,439 |
) |
|
|
|
|
|
|
|
Continued on next page.
Page 8 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS CONTINUED (Unaudited)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2010 |
|
|
March 31, 2009 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Excess tax benefits from the issuance of share-based awards |
|
$ |
18,475 |
|
|
$ |
4,299 |
|
Net (payments on) proceeds from: |
|
|
|
|
|
|
|
|
Repurchase of long-term debt |
|
|
|
|
|
|
(9,515 |
) |
Mandatorily redeemable preferred interest of consolidated subsidiaries |
|
|
(37 |
) |
|
|
|
|
Noncontrolling interest |
|
|
(199 |
) |
|
|
|
|
Repurchase of common stock |
|
|
(63,220 |
) |
|
|
(75,549 |
) |
Dividends |
|
|
(12,957 |
) |
|
|
|
|
Exercise of stock options, not including tax benefits |
|
|
56 |
|
|
|
69 |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(57,882 |
) |
|
|
(80,696 |
) |
|
|
|
|
|
|
|
Effect of foreign currency translation on cash and cash equivalents |
|
|
(4,031 |
) |
|
|
433 |
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents |
|
|
(824,264 |
) |
|
|
(755,303 |
) |
Cash and cash equivalents at beginning of period |
|
|
1,853,167 |
|
|
|
1,294,329 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
1,028,903 |
|
|
$ |
539,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid (received) during the period for: |
|
|
|
|
|
|
|
|
Interest |
|
$ |
84,941 |
|
|
$ |
73,524 |
|
Income taxes |
|
|
59,791 |
|
|
|
(1,061 |
) |
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 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Index
|
|
|
|
|
|
|
Page |
|
|
|
|
11 |
|
|
|
|
|
|
|
|
|
18 |
|
|
|
|
|
|
|
|
|
19 |
|
|
|
|
|
|
|
|
|
28 |
|
|
|
|
|
|
|
|
|
31 |
|
|
|
|
|
|
|
|
|
32 |
|
|
|
|
|
|
|
|
|
38 |
|
|
|
|
|
|
|
|
|
40 |
|
|
|
|
|
|
|
|
|
40 |
|
|
|
|
|
|
|
|
|
41 |
|
|
|
|
|
|
|
|
|
41 |
|
|
|
|
|
|
|
|
|
42 |
|
|
|
|
|
|
|
|
|
43 |
|
|
|
|
|
|
|
|
|
47 |
|
|
|
|
|
|
|
|
|
48 |
|
|
|
|
|
|
|
|
|
49 |
|
|
|
|
|
|
|
|
|
51 |
|
|
|
|
|
|
|
|
|
51 |
|
|
|
|
|
|
|
|
|
52 |
|
Page 10 of 83
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 a
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 and third quarters will be the
three months ended May 31 and August 31, respectively, and our fiscal year end will consist of the
eleven month transition period beginning January 1, 2010 through November 30, 2010. Operating
results for the three months ended March 31, 2010 are not necessarily indicative of the results
that may be expected for the eleven-month period ending November 30, 2010.
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 months ended March 31, 2009 by $29.9 million from $101.9
million to $131.8 million and conversely to decrease Principal transactions by $29.9 million from
$152.3 million to $122.4 million for transactions during the three months ended March 31, 2009
previously presented in our Quarterly Report on Form 10-Q, as filed on May 8, 2009. There was no
impact on Total revenues, Net revenues, Net earnings or Earnings per share for the three months
ended March 31, 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.
All material intercompany accounts and transactions are eliminated in consolidation.
Page 11 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
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 $8.8 million and $7.1 million for the three months ended March 31, 2010 and 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. Expenses are recorded net of
client reimbursements. Revenues are presented net of related unreimbursed expenses. Unreimbursed
expenses with no related revenues are included in business development 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.
Cash Equivalents
Cash equivalents include highly liquid investments not held for resale with original maturities of
three months or less.
Page 12 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
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 the 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. |
|
|
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
Page 13 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
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, as appropriate.
Page 14 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
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 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 cost 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 83
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 83
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 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 the consolidation of 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 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
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
and accounted 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 March 31, 2010 and December 31,
2009 (in thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Cash in banks |
|
$ |
203,818 |
|
|
$ |
196,189 |
|
Money market investments |
|
|
825,085 |
|
|
|
1,656,978 |
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
|
1,028,903 |
|
|
|
1,853,167 |
|
Cash and securities segregated (1) |
|
|
1,328,194 |
|
|
|
1,089,803 |
|
|
|
|
|
|
|
|
|
|
$ |
2,357,097 |
|
|
$ |
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 83
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 March 31, 2010 and December 31, 2009 by level within the fair
value hierarchy (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Counterparty |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and Cash |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateral |
|
|
|
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Netting |
|
|
Total |
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments owned: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate equity securities |
|
$ |
1,761,958 |
|
|
$ |
55,089 |
|
|
$ |
37,066 |
|
|
$ |
|
|
|
$ |
1,854,113 |
|
Corporate debt securities |
|
|
8,193 |
|
|
|
3,224,253 |
|
|
|
109,464 |
|
|
|
|
|
|
|
3,341,910 |
|
Collateralized debt obligations |
|
|
|
|
|
|
3 |
|
|
|
13,505 |
|
|
|
|
|
|
|
13,508 |
|
U.S. government and federal agency securities |
|
|
1,508,637 |
|
|
|
442,967 |
|
|
|
|
|
|
|
|
|
|
|
1,951,604 |
|
U.S. issued municipal securities |
|
|
|
|
|
|
239,969 |
|
|
|
425 |
|
|
|
|
|
|
|
240,394 |
|
Foreign government issued securities |
|
|
661,845 |
|
|
|
655,613 |
|
|
|
|
|
|
|
|
|
|
|
1,317,458 |
|
Residential mortgage-backed securities |
|
|
|
|
|
|
3,196,723 |
|
|
|
166,536 |
|
|
|
|
|
|
|
3,363,259 |
|
Commercial mortgage-backed securities |
|
|
|
|
|
|
98,762 |
|
|
|
14,966 |
|
|
|
|
|
|
|
113,728 |
|
Other asset-backed securities |
|
|
|
|
|
|
107,813 |
|
|
|
110 |
|
|
|
|
|
|
|
107,923 |
|
Loans and other receivables |
|
|
|
|
|
|
245,669 |
|
|
|
236,230 |
|
|
|
|
|
|
|
481,899 |
|
Derivatives |
|
|
139,540 |
|
|
|
81,659 |
|
|
|
|
|
|
|
(182,247 |
) |
|
|
38,952 |
|
Investments at fair value |
|
|
|
|
|
|
685 |
|
|
|
70,169 |
|
|
|
|
|
|
|
70,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial instruments owned |
|
$ |
4,080,173 |
|
|
$ |
8,349,205 |
|
|
|
648,471 |
|
|
$ |
(182,247 |
) |
|
$ |
12,895,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in Managed Funds |
|
|
|
|
|
|
|
|
|
|
8,378 |
|
|
|
|
|
|
|
|
|
Level 3 assets for which the firm does not bear
economic exposure (1) |
|
|
|
|
|
|
|
|
|
|
(214,743 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 assets for which the firm bears
economic exposure |
|
|
|
|
|
|
|
|
|
$ |
442,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments sold,
not yet purchased: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate equity securities |
|
$ |
1,757,459 |
|
|
$ |
22,685 |
|
|
$ |
38 |
|
|
$ |
|
|
|
$ |
1,780,182 |
|
Corporate debt securities |
|
|
|
|
|
|
2,517,966 |
|
|
|
224 |
|
|
|
|
|
|
|
2,518,190 |
|
U.S. government and federal agency securities |
|
|
1,296,376 |
|
|
|
160 |
|
|
|
|
|
|
|
|
|
|
|
1,296,536 |
|
U.S. issued municipal securities |
|
|
|
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
10 |
|
Foreign government issued securities |
|
|
729,373 |
|
|
|
611,037 |
|
|
|
|
|
|
|
|
|
|
|
1,340,410 |
|
Residential mortgage-backed securities |
|
|
|
|
|
|
11,199 |
|
|
|
|
|
|
|
|
|
|
|
11,199 |
|
Commercial mortgage-backed securities |
|
|
|
|
|
|
861 |
|
|
|
|
|
|
|
|
|
|
|
861 |
|
Loans |
|
|
|
|
|
|
176,766 |
|
|
|
176,297 |
|
|
|
|
|
|
|
353,063 |
|
Derivatives |
|
|
129,273 |
|
|
|
108,366 |
|
|
|
1,517 |
|
|
|
(215,483 |
) |
|
|
23,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial instruments sold,
not yet purchased |
|
$ |
3,912,481 |
|
|
$ |
3,449,050 |
|
|
$ |
178,076 |
|
|
$ |
(215,483 |
) |
|
$ |
7,324,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consists of Level 3 assets which are attributable to third party and employee
noncontrolling interests in certain consolidated entities. |
Page 19 of 83
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 |
|
Foreign government issued securities |
|
|
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 |
|
Foreign government issued securities |
|
|
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 83
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: 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 83
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. Noncallable 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.
Foreign Government Issued Securities
|
|
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 83
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 83
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 March 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:
|
|
|
|
|
|
|
|
|
Valuation Basis at |
|
Financial Instruments |
|
Financial Instruments |
March 31, 2010 |
|
Owned |
|
Sold, Not Yet Purchased |
Exchange closing prices |
|
|
14 |
% |
|
|
24 |
% |
Recently observed transaction prices |
|
|
12 |
% |
|
|
2 |
% |
Data providers/pricing services |
|
|
60 |
% |
|
|
58 |
% |
Broker quotes |
|
|
11 |
% |
|
|
15 |
% |
Valuation techniques |
|
|
3 |
% |
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
100 |
% |
|
|
100 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation Basis at |
|
Financial Instruments |
|
Financial Instruments |
December 31, 2009 |
|
Owned |
|
Sold, 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 |
% |
|
|
|
|
|
|
|
|
|
Page 24 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
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 March 31, 2010 and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
unrealized gains/ |
|
|
|
|
|
|
Total gains/ |
|
Purchases, |
|
|
|
|
|
|
|
|
|
|
|
|
|
(losses) relating to |
|
|
Balance, |
|
losses |
|
sales, settlements, |
|
Transfers |
|
Transfers out |
|
Balance, |
|
instruments still held |
|
|
December 31, |
|
(realized and |
|
and |
|
into |
|
of |
|
March 31, |
|
at March 31, 2010 |
|
|
2009 |
|
unrealized) (1) |
|
issuances |
|
Level 3 |
|
Level 3 |
|
2010 |
|
(1) |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments owned: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate equity securities |
|
$ |
43,042 |
|
|
$ |
(6,605 |
) |
|
$ |
3,361 |
|
|
$ |
71 |
|
|
$ |
(2,803 |
) |
|
$ |
37,066 |
|
|
$ |
(6,378 |
) |
Corporate debt securities |
|
|
116,648 |
|
|
|
(1,318 |
) |
|
|
(5,163 |
) |
|
|
50 |
|
|
|
(753 |
) |
|
|
109,464 |
|
|
|
937 |
|
Collateralized debt obligations |
|
|
9,570 |
|
|
|
3,935 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,505 |
|
|
|
3,935 |
|
U.S. issued municipal securities |
|
|
420 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
425 |
|
|
|
5 |
|
Foreign government issued
securities |
|
|
196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(196 |
) |
|
|
|
|
|
|
|
|
Residential mortgage-backed
securities |
|
|
136,496 |
|
|
|
5,345 |
|
|
|
23,248 |
|
|
|
5,397 |
|
|
|
(3,950 |
) |
|
|
166,536 |
|
|
|
392 |
|
Commercial mortgage-backed
securities |
|
|
3,215 |
|
|
|
(226 |
) |
|
|
12,450 |
|
|
|
858 |
|
|
|
(1,331 |
) |
|
|
14,966 |
|
|
|
(303 |
) |
Other asset-backed securities |
|
|
110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110 |
|
|
|
|
|
Loans and other receivables |
|
|
506,542 |
|
|
|
6,735 |
|
|
|
(44,488 |
) |
|
|
|
|
|
|
(232,559 |
) |
|
|
236,230 |
|
|
|
4,025 |
|
Investments at fair value |
|
|
65,564 |
|
|
|
282 |
|
|
|
38 |
|
|
|
4,285 |
|
|
|
|
|
|
|
70,169 |
|
|
|
(313 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in managed funds |
|
$ |
|
|
|
$ |
1,106 |
|
|
$ |
7,272 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
8,378 |
|
|
$ |
1,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial instruments sold, not
yet purchased: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate equity securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
38 |
|
|
$ |
|
|
|
$ |
38 |
|
|
$ |
|
|
Corporate debt securities |
|
|
|
|
|
|
(6 |
) |
|
|
230 |
|
|
|
|
|
|
|
|
|
|
|
224 |
|
|
|
(5 |
) |
Net derivatives (2) |
|
|
6,835 |
|
|
|
(3,409 |
) |
|
|
|
|
|
|
|
|
|
|
(1,909 |
) |
|
|
1,517 |
|
|
|
(3,409 |
) |
Loans |
|
|
352,420 |
|
|
|
|
|
|
|
(48,282 |
) |
|
|
|
|
|
|
(127,841 |
) |
|
|
176,297 |
|
|
|
|
|
|
|
|
(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 three months ended March 31, 2010, we had transfers of assets of $10.7 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, which have little to no transparency as to trade activity. Transfers
of assets from Level 3 to Level 2 during the three months ended March 31, 2010 were $241.6 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.
Page 25 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
Transfers of liabilities from Level 2 to Level 3 were $0.04 million and transfers of liabilities
from Level 3 to Level 2 were $129.8 million for the three months ended March 31, 2010. Transfers
of liabilities from Level 3 to Level 2 during the three months ended March 31, 2010 are primarily
due to transfers of short 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, excluding investments in managed funds, were $8.2 million and net
gains on Level 3 liabilities were $3.4 million for the three months ended March 31, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2009 |
|
|
|
Non-derivative |
|
|
Non-derivative |
|
|
Derivative |
|
|
Derivative |
|
|
|
|
|
|
instruments |
|
|
instruments |
|
|
instruments |
|
|
instruments |
|
|
|
|
|
|
Assets |
|
|
Liabilities |
|
|
Assets |
|
|
Liabilities |
|
|
Investments |
|
Balance, December 31, 2008 |
|
$ |
394,316 |
|
|
$ |
3,515 |
|
|
$ |
|
|
|
$ |
8,197 |
|
|
$ |
75,059 |
|
Total gains/ (losses)
(realized and unrealized)
(1) |
|
|
(39,296 |
) |
|
|
390 |
|
|
|
3,087 |
|
|
|
(4,324 |
) |
|
|
(6,474 |
) |
Purchases, sales,
settlements, and
issuances |
|
|
134,968 |
|
|
|
58,516 |
|
|
|
|
|
|
|
|
|
|
|
2,757 |
|
Transfers into Level 3 |
|
|
25,528 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
Transfers out of Level 3 |
|
|
(12,550 |
) |
|
|
(3,515 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 31, 2009 |
|
$ |
502,966 |
|
|
$ |
58,906 |
|
|
$ |
3,087 |
|
|
$ |
3,873 |
|
|
$ |
71,348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized
gains/ (losses) relating
to instruments still held
at March 31, 2009 (1) |
|
$ |
(37,511 |
) |
|
$ |
(390 |
) |
|
$ |
3,087 |
|
|
$ |
4,324 |
|
|
$ |
(7,013 |
) |
|
|
|
(1) |
|
Realized and unrealized gains/ (losses) are reported in principal transactions in the
Consolidated Statements of Earnings. |
During the three months ended March 31, 2009, we had transfers of assets of $25.5 million from
Level 2 to Level 3 and transfers of $12.6 million from Level 3 to Level 2. During the three months
ended March 31, 2009, we had transfers of liabilities of $3.5 million from Level 3 to Level 2. Net
gains on Level 3 derivative assets and derivative liabilities were $3.1 million and $4.3 million,
respectively, for the three months ended March 31, 2009 and net losses on Level 3 non-derivative
assets were $39.3 million.
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 March 31, 2010 and December 31, 2009 (in thousands):
Page 26 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
|
|
|
|
|
Unfunded |
|
|
Redemption Frequency |
|
|
|
Fair Value |
|
|
Commitments |
|
|
(if currently eligible) |
|
Equity Long/Short Hedge Funds (a) (i) |
|
$ |
18,567 |
|
|
$ |
|
|
|
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) |
|
|
771 |
|
|
|
|
|
|
|
|
|
Fund of Funds(e) (i) |
|
|
3,529 |
|
|
|
163 |
|
|
Annually, GP
Consent Required |
Private Equity Funds(f) (i) |
|
|
12,039 |
|
|
|
3,118 |
|
|
|
|
|
Private Equity Funds International(g) |
|
|
7,703 |
|
|
|
4,616 |
|
|
|
|
|
Other Investments(h) |
|
|
4,543 |
|
|
|
|
|
|
At Will |
|
|
|
|
|
|
|
|
|
|
|
Total(j) |
|
$ |
48,181 |
|
|
$ |
7,897 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 March 31, 2010 and December 31, 2009,
investments representing approximately 28% and 31%, respectively, of fair value cannot be
redeemed until the lock-up period expires on December 31, 2010. At March 31, 2010 and December
31, 2009, investments representing approximately 70% and 67%, respectively, of the fair value
in this category are redeemable with 60 90 days prior written notice. |
|
(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 March 31, 2010 and December 31, 2009, approximately 76% and 40%, respectively, of
the fair value of the investments is managed by Jefferies and has no redemption provisions.
Distributions are received through the liquidation of the underlying assets of the fund of |
Page 27 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
|
|
|
|
|
funds, which are estimated to be liquidated in one to three years. At March 31, 2010 and
December 31, 2009, investments representing approximately 16% and 60%, respectively, of the fair
value of the investments in this category were approved for redemption and the funds net asset
values were received in April and in the first quarter of 2010, respectively. Investments
representing approximately 8% at March 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. |
|
(g) |
|
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 March 31, 2010 and December 31, 2009, investments
representing approximately 95% and 94%, respectively, of fair value are expected to liquidate
in one to eleven years. At March 31, 2010 and December 31, 2009, an investment representing
approximately 5% and 6%, respectively, 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. |
|
(h) |
|
This category includes investments in private equity funds that invest in the equity of
foreign private companies. At March 31, 2010 and December 31, 2009, investments representing
approximately 76% 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
March 31, 2010 and December 31, 2009 the fair value of investments representing approximately
24% and 26%, respectively, of the fair value are private equity funds that invest in Croatian
and Vietnamese companies. |
|
(i) |
|
At March 31, 2010 and December 31, 2009 investments representing approximately 78% 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 March 31, 2010 and December 31, 2009
investments representing approximately 22% and 33%, respectively, of fair value are
closed-ended funds that invest in Vietnamese equity and debt instruments. |
|
(j) |
|
Fair value has been estimated using the net asset value derived from each of the funds
partner capital statements. |
|
(k) |
|
Investments at fair value, in the Consolidated Statements of Financial Condition at March 31,
2010 and December 31, 2009 include $22.7 million 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.
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,
Page 28 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
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 notional amounts of derivative contracts at
March 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 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
|
Assets |
|
|
Liabilities |
|
|
|
|
|
|
|
Notional |
|
|
|
|
|
|
Notional |
|
|
|
Fair Value |
|
|
Amount |
|
|
Fair Value |
|
|
Amount |
|
Interest rate contracts |
|
$ |
17,817 |
|
|
$ |
56,741,743 |
|
|
$ |
31,786 |
|
|
$ |
61,678,849 |
|
Foreign exchange contracts |
|
|
25,210 |
|
|
|
747,978 |
|
|
|
28,296 |
|
|
|
631,551 |
|
Equity contracts |
|
|
138,865 |
|
|
|
3,398,117 |
|
|
|
129,471 |
|
|
|
3,032,428 |
|
Commodity contracts |
|
|
21,573 |
|
|
|
13,002,789 |
|
|
|
35,200 |
|
|
|
9,213,285 |
|
Credit contracts |
|
|
17,734 |
|
|
|
378,761 |
|
|
|
14,403 |
|
|
|
345,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
221,199 |
|
|
$ |
74,269,388 |
|
|
|
239,156 |
|
|
$ |
74,901,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Counterparty/cash-collateral netting |
|
|
(182,247 |
) |
|
|
|
|
|
|
(215,483 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total per Consolidated Statement of Financial
Condition |
|
$ |
38,952 |
|
|
|
|
|
|
$ |
23,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
Assets |
|
|
Liabilities |
|
|
|
|
|
|
|
Notional |
|
|
|
|
|
|
Notional |
|
(in thousands) |
|
Fair Value |
|
|
Amount |
|
|
Fair Value |
|
|
Amount |
|
Interest rate contracts |
|
$ |
27,415 |
|
|
$ |
1,259,014 |
|
|
$ |
24,068 |
|
|
$ |
1,910,832 |
|
Foreign exchange contracts |
|
|
2,637 |
|
|
|
291,812 |
|
|
|
7,470 |
|
|
|
281,246 |
|
Equity contracts |
|
|
222,311 |
|
|
|
3,580,416 |
|
|
|
228,403 |
|
|
|
8,958,430 |
|
Commodity contracts |
|
|
54,257 |
|
|
|
4,882,782 |
|
|
|
57,237 |
|
|
|
2,683,425 |
|
Credit contracts |
|
|
16,713 |
|
|
|
217,441 |
|
|
|
13,682 |
|
|
|
135,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
323,333 |
|
|
$ |
10,231,465 |
|
|
|
330,860 |
|
|
$ |
13,968,933 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Counterparty/cash-collateral netting |
|
|
(261,216 |
) |
|
|
|
|
|
|
(312,433 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total per Consolidated Statement of Financial
Condition |
|
$ |
62,117 |
|
|
|
|
|
|
$ |
18,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 29 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
The following table presents unrealized and realized gains and losses on derivative contracts for
the three months ended March 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2010 |
|
|
March 31, 2009 |
|
(in thousands) |
|
Gain (Loss) |
|
|
Gain (Loss) |
|
Interest rate contracts |
|
$ |
21,257 |
|
|
$ |
(5,010 |
) |
Foreign exchange contracts |
|
|
(871 |
) |
|
|
(1,121 |
) |
Equity contracts |
|
|
(5,936 |
) |
|
|
(191,483 |
) |
Commodity contracts |
|
|
(2,845 |
) |
|
|
(3,556 |
) |
Credit contracts |
|
|
(19,048 |
) |
|
|
7,215 |
|
|
|
|
|
|
|
|
Total |
|
$ |
(7,443 |
) |
|
$ |
(193,955 |
) |
|
|
|
|
|
|
|
The following tables set forth the remaining contract maturity of the fair value of OTC derivative
assets and liabilities as of March 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 options |
|
$ |
5,559 |
|
|
$ |
6,252 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
11,811 |
|
Total return swaps |
|
|
3,053 |
|
|
|
2,032 |
|
|
|
|
|
|
|
|
|
|
|
5,085 |
|
Credit default swaps |
|
|
|
|
|
|
1,008 |
|
|
|
12,290 |
|
|
|
(364 |
) |
|
|
12,934 |
|
Fx forwards and swaps |
|
|
1,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,049 |
|
Interest rate swaps |
|
|
|
|
|
|
|
|
|
|
660 |
|
|
|
|
|
|
|
660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
9,661 |
|
|
$ |
9,292 |
|
|
$ |
12,950 |
|
|
$ |
(364 |
) |
|
$ |
31,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
At March 31, 2010, we held exchange traded derivative assets of $10.3 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 March 31, 2010, collateral received was $2.9
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. |
Page 30 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTC derivative liabilities (1) (2) (4) |
|
|
|
|
|
|
|
|
|
|
|
Greater Than |
|
|
Cross-Maturity |
|
|
|
|
|
|
0 - 12 Months |
|
|
1 - 5 Years |
|
|
5 Years |
|
|
Netting (3) |
|
|
Total |
|
Commodity swaps |
|
$ |
16,909 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
16,909 |
|
Commodity options |
|
|
2,259 |
|
|
|
7,334 |
|
|
|
|
|
|
|
|
|
|
|
9,593 |
|
Total return swaps |
|
|
120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120 |
|
Credit default swaps |
|
|
|
|
|
|
|
|
|
|
11,443 |
|
|
|
(364 |
) |
|
|
11,079 |
|
Equity options |
|
|
|
|
|
|
1,517 |
|
|
|
|
|
|
|
|
|
|
|
1,517 |
|
Fx forwards and swaps |
|
|
5,516 |
|
|
|
243 |
|
|
|
|
|
|
|
|
|
|
|
5,759 |
|
Interest rate swaps |
|
|
257 |
|
|
|
8,831 |
|
|
|
5,698 |
|
|
|
|
|
|
|
14,786 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
25,061 |
|
|
$ |
17,925 |
|
|
$ |
17,141 |
|
|
$ |
(364 |
) |
|
$ |
59,763 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
At March 31, 2010, we held no exchange traded derivative liabilities. |
|
(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 March 31, 2010, collateral pledged was $36.1
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 March 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 |
|
$ |
30,520 |
|
Unrated |
|
|
1,019 |
|
|
|
|
|
Total |
|
$ |
31,539 |
|
|
|
|
|
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 March 31, 2010 and 2009, is $20.7 million and $26.1 million,
respectively, for which we have posted collateral of $19.6 million and $24.3 million, respectively,
in the normal course of business. On March 31, 2010, if the credit-risk-related contingent features
underlying these agreements were triggered, we would not be required to post additional collateral
to our counterparties as we are over collateralized; if triggered on March 31, 2009, we would have
been required to post an additional $0.7 million of collateral to our counterparties.
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 March 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 $13.5 billion and $11.6
billion, respectively. At March 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.
Page 31 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
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 March 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 March 31, 2010 and December 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Equity securities |
|
$ |
1,147,704 |
|
|
$ |
658,959 |
|
Fixed income securities |
|
|
7,913,258 |
|
|
|
4,964,386 |
|
|
|
|
|
|
|
|
|
|
$ |
9,060,962 |
|
|
$ |
5,623,345 |
|
|
|
|
|
|
|
|
At March 31, 2010 and December 31, 2009, of the total securities pledged to creditors, $1.8 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 March 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 March 31, 2010 and December 31, 2009, $34.7 million and $68.5 million, respectively, were
reported as Securities received as collateral and as Obligation to return securities received as
collateral.
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
Page 32 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
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. We apply fair value accounting to these securities. We have not provided
financial or other support to these securitization vehicles during the three months ended March 31,
2010 and 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 March 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 months ended March 31, 2010, we transferred assets of $3,130.5 million as part of
our securitization activities in which we had continuing involvement, received cash proceeds of
$2,457.0 million, beneficial interests of $729.7 million, and recognized Net revenues of $29.0
million. During the three months ended March 31, 2009, we transferred assets of $1,078.1 million
as part of our securitization activities in which we had continuing involvement, received cash
proceeds of $1,080.1 million, beneficial interests of $132.2 million, and recognized Net revenues
of $2.7 million. These transfers were accounted for as sales of assets. Beneficial interests
received in the form of securities issued by these vehicles 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.
The following table presents cash flows received on beneficial interests in securitization vehicles
to which we have transferred assets and received sale accounting during the three months ended
March 31, 2010 and 2009 (in millions):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
March 31, 2010 (1) |
|
March 31, 2009 (1) |
Residential mortgage-backed securities |
|
$ |
6.2 |
|
|
$ |
0.4 |
|
|
|
|
(1) |
|
There were no cash flows received on beneficial interests in securitization vehicles of
Commercial mortgage-backed securities for the three months ended March 31, 2010 and March 31,
2009. |
Page 33 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
The following table presents the total information regarding securitization vehicles to which we,
acting as transferor, have transferred assets and for which we received sale accounting treatment
at March 31, 2010 and December 31, 2009 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Initial Fair Value |
|
|
|
|
of Securities |
|
As of March 31, 2010 |
Securitization Type |
|
Received (3) |
|
Total Assets (4) |
|
Securities (1)(2) |
Residential mortgage-backed securities |
|
$ |
708.3 |
|
|
$ |
3,820.1 |
|
|
$ |
417.0 |
|
Commercial mortgage-backed securities |
|
|
21.4 |
|
|
|
266.4 |
|
|
|
19.8 |
|
|
|
|
(1) |
|
At March 31, 2010, 99% 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 May 6, 2010, we continue to hold approximately $183.8 million
and $5.0 million of these Residential mortgage-backed securities and Commercial mortgage-backed
securities, respectively, in inventory. |
|
(3) |
|
Initial fair value of securities received that were issued by securitization vehicles on date
of asset transfer. |
|
(4) |
|
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
A-rated. |
|
(2) |
|
A significant portion of these securities have been subsequently sold in secondary market
transactions to third parties. As of May 6, 2010, we continue to hold approximately $24.1 million
and $-0- of these Residential mortgage-backed securities and Commercial mortgage-backed securities,
respectively, in inventory. |
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
Page 34 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
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 March 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated VIE Assets |
|
|
|
March 31, 2010 |
|
|
December 31, 2009 |
|
|
|
High Yield |
|
|
Other |
|
|
High Yield |
|
|
Other |
|
Cash |
|
$ |
136.8 |
|
|
$ |
1.6 |
|
|
$ |
190.9 |
|
|
$ |
|
|
Financial instruments owned |
|
|
1,113.7 |
|
|
|
20.9 |
|
|
|
1,100.1 |
|
|
|
|
|
Securities borrowed |
|
|
519.0 |
|
|
|
|
|
|
|
559.9 |
|
|
|
|
|
Receivable from brokers and dealers |
|
|
349.5 |
|
|
|
|
|
|
|
340.5 |
|
|
|
|
|
Other |
|
|
335.6 |
|
|
|
|
|
|
|
47.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,454.6 |
|
|
$ |
22.5 |
|
|
$ |
2,238.4 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated VIE Liabilities |
|
|
|
March 31, 2010 |
|
|
December 31, 2009 |
|
|
|
High Yield |
|
|
Other |
|
|
High Yield |
|
|
Other |
|
Financial instruments sold, not yet purchased |
|
$ |
818.2 |
|
|
$ |
|
|
|
$ |
893.2 |
|
|
$ |
|
|
Payable to brokers and dealers |
|
|
287.0 |
|
|
|
|
|
|
|
326.5 |
|
|
|
|
|
Mandatorily redeemable interests (1) |
|
|
1,047.9 |
|
|
|
|
|
|
|
964.2 |
|
|
|
|
|
Promissory note (2) |
|
|
|
|
|
|
6.5 |
|
|
|
|
|
|
|
|
|
Other |
|
|
49.7 |
|
|
|
|
|
|
|
9.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,202.8 |
|
|
$ |
6.5 |
|
|
$ |
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 $320.1 million and $318.0 million at March 31,
2010 and December 31, 2009, respectively. |
|
(2) |
|
The promissory note represents an amount due to us and is eliminated in
consolidation. |
Page 35 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
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 Jefferies High Yield Holdings, LLC (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 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.
At March 31 2010 and December 31, 2009, the carrying amount of our variable interests was $332.2
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. At March 31, 2010 and
December 31, 2009, we have an unfunded commitment of $250.0 million to JHYH. 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 March 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 March 31, 2010 and December
31, 2009.
We have aggregated certain nonconsolidated VIEs based upon principal business activity. The
following table presents the total assets of nonconsolidated VIEs in which we hold variable
interests, our maximum exposure to loss
Page 36 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
these nonconsolidated VIEs, and the carrying amount of our interests in these nonconsolidated VIEs
at March 31, 2010 and December 31, 2009 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
|
|
|
|
|
Maximum exposure to |
|
|
|
|
|
|
|
|
|
|
loss in non- |
|
|
|
|
|
|
VIE Assets |
|
|
consolidated VIEs |
|
|
Carrying Amount |
|
Collateralized loan obligations |
|
$ |
1,902.0 |
|
|
$ |
28.6 |
(2) |
|
$ |
28.6 |
|
Mortgage- and asset-backed vehicles Non-agency (1) |
|
|
66,663.6 |
|
|
|
558.2 |
(2) |
|
|
558.2 |
|
Mortgage- and asset-backed vehicles Agency (1) |
|
|
10,766.2 |
|
|
|
1,157.7 |
(2) |
|
|
1,157.7 |
|
Asset management vehicle |
|
|
692.8 |
|
|
|
17.8 |
(2) |
|
|
17.8 |
|
Private equity vehicle |
|
|
55.5 |
|
|
|
50.0 |
(3) |
|
|
48.5 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
80,080.1 |
|
|
$ |
1812.3 |
|
|
$ |
1810.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
VIE assets represent the unpaid principal balance of the assets in these vehicles at March 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. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
$8.4 million and $7.3 million at March 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
Page 37 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
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 March 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 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. As of March 31, 2010 and December 31, 2009, we have
funded approximately $48.5 million and $45.7 million, respectively, of the aggregate principal
balance leaving approximately $1.5 million and $4.3 million, respectively, unfunded. Our loan to
the Borrower is recorded in Other investments on the Consolidated Statements of Financial
Condition. 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. (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 is 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):
Page 38 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
|
|
|
|
|
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 |
|
|
|
|
|
Goodwill
The following is a summary of goodwill activity for the three months ended March 31, 2010 (in
thousands):
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2010 |
|
Balance, at beginning of period |
|
$ |
364,795 |
|
Add: Contingent Consideration |
|
|
798 |
|
Less: Translation adjustments |
|
|
(1,458 |
) |
|
|
|
|
Balance, at end of period |
|
$ |
364,135 |
|
|
|
|
|
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 three months ended March 31, 2010, we paid approximately $7.0 million in cash
related to contingent consideration that had been earned during the current year or 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 $0.9 million
in fees related to these servicing rights during the three-months ended March 31, 2010. The
following presents the activity in the balance of these servicing rights for the three months ended
March 31, 2010 (in thousands):
Page 39 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2010 |
|
Balance, beginning of period |
|
$ |
8,500 |
|
Less: Amortization |
|
|
88 |
|
|
|
|
|
Balance, end of period |
|
$ |
8,412 |
|
|
|
|
|
The fair value of these servicing rights was $14.6 million and $8.5 million at March 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.
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 March 31, 2010 and December 31, 2009. Average daily bank loans for the three
months ended March 31, 2010 and the year ended December 31, 2009 were $72.0 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 March 31, 2010 and December 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
December 31, 2009 |
|
7.75% Senior Notes, due 2012 |
|
$ |
306,587 |
|
|
$ |
306,811 |
|
5.875% Senior Notes, due 2014 |
|
|
248,889 |
|
|
|
248,831 |
|
5.5% Senior Notes, due 2016 |
|
|
348,732 |
|
|
|
348,865 |
|
8.5% Senior Notes, due 2019 |
|
|
709,052 |
|
|
|
709,193 |
|
6.45% Senior Debentures, due 2027 |
|
|
346,468 |
|
|
|
346,439 |
|
3.875% Convertible Senior Debentures, due, 2029 |
|
|
278,078 |
|
|
|
276,433 |
|
6.25% Senior Debentures, due 2036 |
|
|
492,573 |
|
|
|
492,545 |
|
|
|
|
|
|
|
|
|
|
$ |
2,730,379 |
|
|
$ |
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,
Page 40 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
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.
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 less accrued interest of $8.5 million.
The $8.5 million basis difference related to the fair value of the interest rate swaps at the time
of the termination 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 in a private placement $125.0 million of our Series A
convertible preferred stock. 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 March 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 March
31, 2010 and December 31, 2009 (in millions):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
JSOP |
|
$ |
284.4 |
|
|
$ |
282.7 |
|
JESOP |
|
|
33.2 |
|
|
|
33.2 |
|
Other (1) |
|
|
10.7 |
|
|
|
5.6 |
|
|
|
|
|
|
|
|
Noncontrolling interests |
|
$ |
328.3 |
|
|
$ |
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.
Page 41 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
Net income or loss and other comprehensive income or loss is then attributed to the parent and
noncontrolling interests. Net earnings (loss) 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 March 31, 2010 and
2009 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 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 $320.1 million and $318.0 million at March 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 March 31, 2010
and 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, |
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
Net pension cost included the following components: |
|
|
|
|
|
|
|
|
Service cost (1) |
|
$ |
50 |
|
|
$ |
50 |
|
Interest cost on projected benefit obligation |
|
|
616 |
|
|
|
658 |
|
Expected return on plan assets |
|
|
(656 |
) |
|
|
(614 |
) |
Net amortization |
|
|
176 |
|
|
|
229 |
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
186 |
|
|
$ |
323 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Service cost relates to administrative expenses incurred during the periods. |
We did not contribute to our pension plan during the three months ended March 31, 2010 and we do
not anticipate a contribution during the fiscal year. Effective December 31, 2005, benefits under
the pension plan have been frozen. There are no incremental benefit accruals for service after
December 31, 2005.
Page 42 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
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 $33.9 million and
$17.0 million for the three months ended March 31, 2010 and 2009, respectively. The net tax
benefit (deficiency) related to share-based compensation plans recognized in additional paid-in
capital during the three months ended March 31, 2010 and 2009 was $18.0 million and $(18.9)
million, 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 $18.5 million and $4.3 million related to share-based
compensation in cash flows from financing activities for the three months ended March 31, 2010 and
2009, respectively. As of March 31, 2010, we had $130.8 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 3.7 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 months ended March 31, 2010 and 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. For the three months ended March 31, 2010 and 2009, we accrued compensation expense of
approximately $24.7 million and $16.3 million, respectively, related to restricted
Page 43 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
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.
The total compensation cost associated with restricted stock and restricted stock units amounted to
$33.9 million and $16.8 million for the three months ended March 31, 2010 and 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 |
|
|
March 31, 2010 |
|
Date Fair Value |
|
|
(Shares in 000s) |
|
|
|
|
Restricted stock |
|
|
|
|
|
|
|
|
Balance, beginning of period |
|
|
2,216 |
|
|
$ |
20.01 |
|
Grants |
|
|
421 |
(1) |
|
$ |
25.46 |
|
Fulfillment of service requirement |
|
|
(109 |
)(1) |
|
$ |
12.80 |
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
2,528 |
(2) |
|
$ |
21.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes approximately 12,500 shares of restricted stock granted with
no future service requirement during the first quarter of 2010. As
such, these shares are shown as granted and vested in the first
quarter of 2010. |
|
(2) |
|
Represents restricted stock with a future service requirement. |
The following table details the activity of restricted stock units:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Period Ended |
|
Average Grant |
|
|
March 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 |
|
|
3,024 |
|
|
|
93 |
(1) |
|
$ |
25.81 |
|
|
$ |
23.98 |
|
Distribution of underlying shares |
|
|
|
|
|
|
(1,107 |
) |
|
$ |
|
|
|
$ |
18.91 |
|
Forfeited |
|
|
|
|
|
|
(158 |
) |
|
$ |
|
|
|
$ |
17.17 |
|
Fulfillment of service requirement |
|
|
(62 |
) |
|
|
62 |
|
|
$ |
12.72 |
|
|
$ |
12.72 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
|
3,898 |
|
|
|
25,358 |
|
|
$ |
23.92 |
|
|
$ |
14.68 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents dividend equivalents on restricted stock units declared during the first quarter of 2010. |
The aggregate fair value of restricted stock and restricted stock units upon the awards
vesting during the three months ended March 31, 2010 and 2009 was $22.8 million and $3.2 million,
respectively. In addition, we granted restricted stock units with no future service period during
the first quarter of 2009 with an aggregate fair value of $1.2 million. We had no grants of
restricted stock units with no future service period during the first quarter of 2010.
Page 44 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
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 grants subsequent to 2004. A summary of
our stock option activity for the three months ended March 31, 2010 is presented below (amounts in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2010 |
|
|
|
|
|
|
Weighted Average |
|
|
Options |
|
Exercise Price |
Outstanding at beginning of year |
|
|
48 |
|
|
$ |
7.65 |
|
Exercised |
|
|
(11 |
) |
|
$ |
5.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period |
|
|
37 |
|
|
$ |
8.46 |
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of period |
|
|
37 |
|
|
$ |
8.46 |
|
The total intrinsic value of stock options exercised during the three months ended March 31,
2010 and 2009 was $242,000 and $94,000, respectively. Cash received from the exercise of stock
options during the three months ended March 31, 2010 and 2009 totaled $56,000 and $69,000,
respectively, and the tax benefit realized from stock options exercised during the three months
ended March 31, 2010 and 2009 was $99,000 and $37,000, respectively.
The table below provides additional information related to stock options outstanding at March 31,
2010:
Dollars and shares in thousands, except per share data
|
|
|
|
|
|
|
|
|
|
|
Outstanding, |
|
|
|
|
Net of Expected |
|
Options |
March 31, 2010 |
|
Forfeitures |
|
Exercisable |
Number of options |
|
|
37 |
|
|
|
37 |
|
Weighted-average exercise price |
|
|
8.46 |
|
|
|
8.46 |
|
Aggregate intrinsic value |
|
|
553 |
|
|
|
553 |
|
Weighted-average remaining contractual term, in years |
|
|
4.65 |
|
|
|
4.65 |
|
At March 31, 2010, the intrinsic value of vested options was approximately $553,000 for which tax
benefits expected to be recognized in equity upon exercise are approximately $227,000.
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
Page 45 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
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 basis by investing it 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 $50,000 and
$210,000 for the three months ended March 31, 2010 and 2009, respectively. As of March 31, 2010,
there were 2,879,000 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 months ended March 31, 2010 and 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 $2.8 million and $2.3 million for the
three months ended March 31, 2010 and 2009, respectively.
Page 46 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
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 months ended March 31, 2010 and 2009 (in
thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2010 |
|
|
March 31, 2009 |
|
Earnings for basic earnings per common share: |
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
78,009 |
|
|
$ |
32,426 |
|
Net earnings to noncontrolling interests |
|
|
3,943 |
|
|
|
(5,911 |
) |
|
|
|
|
|
|
|
Net earnings to common shareholders |
|
|
74,066 |
|
|
|
38,337 |
|
Less: Allocation of earnings to participating securities (1) |
|
|
2,163 |
|
|
|
37 |
|
|
|
|
|
|
|
|
Net earnings available to common shareholders |
|
$ |
71,903 |
|
|
$ |
38,300 |
|
|
|
|
|
|
|
|
Earnings for diluted earnings per common share: |
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
78,009 |
|
|
$ |
32,426 |
|
Net earnings to noncontrolling interests |
|
|
3,943 |
|
|
|
(5,911 |
) |
|
|
|
|
|
|
|
Net earnings to common shareholders |
|
|
74,066 |
|
|
|
38,337 |
|
Add: Convertible preferred stock dividends |
|
|
1,016 |
|
|
|
|
|
Less: Allocation of earnings to participating securities (1) |
|
|
2,158 |
|
|
|
37 |
|
|
|
|
|
|
|
|
Net earnings available to common shareholders |
|
$ |
72,924 |
|
|
$ |
38,300 |
|
|
|
|
|
|
|
|
Shares: |
|
|
|
|
|
|
|
|
Average common shares used in basic computation |
|
|
198,507 |
|
|
|
203,310 |
|
Stock options |
|
|
18 |
|
|
|
16 |
|
Mandatorily redeemable convertible preferred stock |
|
|
4,105 |
|
|
|
|
|
Convertible debt |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average common shares used in diluted computation |
|
|
202,630 |
|
|
|
203,326 |
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.36 |
|
|
$ |
0.19 |
|
Diluted |
|
$ |
0.36 |
|
|
$ |
0.19 |
|
|
|
|
(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 5,815,000 and 199,000 for the three months ended March 31,
2010 and 2009, respectively. No dividends were declared during 2009. Dividends declared on
participating securities during the first quarter of 2010 amounted to approximately
$494,000. 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 |
|
|
March 31, 2010 |
|
March 31, 2009 |
Mandatorily redeemable convertible preferred stock |
|
|
|
|
|
|
4,105,138 |
|
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 47 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
Dividends per Common Share (declared and paid):
|
|
|
|
|
|
|
1st Quarter |
2010 |
|
$ |
0.075 |
|
2009 |
|
|
|
|
On April 19, 2010, a quarterly dividend was declared of $0.075 per share of common stock
payable on June 15, 2010 to stockholders of record as of May 14, 2010.
Note 15. Income Taxes
As of March 31, 2010 and December 31, 2009, we had approximately $26.4 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 $17.1
million and $15.7 million (net of federal benefit of state taxes) at March 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 resolution of these examinations will have a material effect
on the consolidated statements of financial position, but could have a material impact on the
consolidated income statement for the period in which resolution 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. As of March 31, 2010 and December 31, 2009, we have
accrued interest related to unrecognized tax benefits of approximately $4.9 million and $4.4
million, respectively. No penalties were accrued at March 31, 2010 and December 31, 2009.
Page 48 of 83
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 March 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 |
|
$ |
414.4 |
|
|
$ |
250.0 |
|
|
$ |
0.6 |
|
|
$ |
2.3 |
|
|
$ |
15.4 |
|
|
$ |
146.1 |
|
Loan commitments |
|
$ |
322.4 |
|
|
$ |
226.5 |
|
|
|
|
|
|
$ |
65.1 |
|
|
$ |
30.8 |
|
|
|
|
|
Underwriting commitments |
|
$ |
13.2 |
|
|
$ |
13.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts
non-credit related |
|
$ |
44,316.2 |
|
|
$ |
39,034.3 |
|
|
$ |
5,272.0 |
|
|
$ |
9.9 |
|
|
|
|
|
|
|
|
|
Derivative contracts credit related: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Index credit default swaps |
|
$ |
345.0 |
|
|
|
|
|
|
|
|
|
|
$ |
315.0 |
|
|
|
|
|
|
$ |
30.0 |
|
The following table summarizes the external credit ratings of the underlyings or
referenced assets for credit related commitments, guarantees and derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notional / |
|
External Credit Rating |
|
|
Maximum |
|
AAA/ |
|
|
|
|
|
|
|
|
|
|
|
|
Payout |
|
Aaa |
|
AA/Aa |
|
A |
|
BBB/Baa |
|
BB/Ba |
|
Unrated |
|
|
(Dollars in Millions) |
Bank credit |
|
$ |
34.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
34.5 |
|
Loan commitments |
|
$ |
322.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
65.0 |
|
|
$ |
80.8 |
|
|
$ |
176.6 |
|
Derivative contracts credit related: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Index credit default swaps |
|
$ |
345.0 |
|
|
$ |
20.0 |
|
|
$ |
10.0 |
|
|
$ |
315.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank Credit. As of March 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 March 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 March 31, 2010,
we have funded $107.5 million of our aggregate $250.0 million commitment leaving $142.5 million
unfunded.
As of March 31, 2010, we have an aggregate commitment to invest equity of approximately $13.3
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).
Page 49 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
We have an aggregate commitment to fund JHYH of $600.0 million and have funded approximately $350.0
million as of March 31, 2010, leaving $250.0 million unfunded.
As of March 31, 2010, we had other equity commitments to invest up to $8.6 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 March 31, 2010, we had $320.9 million of loan commitments outstanding to clients.
On August 11, 2008, 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. As of March 31, 2010, we have funded approximately $48.5 million of
the aggregate principal balance leaving approximately $1.5 million unfunded. 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. (See Note 19 for additional discussion of the credit
agreement with JCP V.)
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 March 31, 2010, the maximum payout value of derivative contracts deemed to meet the definition
of a guarantee was approximately $44,661.2 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 March 31, 2010, the fair value of such derivative contracts approximated $(51.0) 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
enter into offsetting transactions with JFP and receive 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.
Page 50 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
Note 17. Net Capital Requirements
As registered broker-dealers, 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. Jefferies, Jefferies Execution and Jefferies High
Yield Trading have elected to use the alternative method permitted by the Rule.
As of March 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 |
|
$ |
817,720 |
|
|
$ |
746,203 |
|
Jefferies Execution |
|
$ |
9,356 |
|
|
$ |
9,106 |
|
Jefferies High Yield Trading |
|
$ |
492,640 |
|
|
$ |
492,390 |
|
Certain non-U.S. subsidiaries are subject to capital adequacy requirements as prescribed by
the regulatory authorities in their respective jurisdictions. 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. |
Page 51 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
Our net revenues, expenses, and total assets by segment are summarized below (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital |
|
|
Asset |
|
|
|
|
|
|
Markets |
|
|
Management |
|
|
Total |
|
Three months ended March 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
576,643 |
|
|
$ |
6,599 |
|
|
$ |
583,242 |
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
$ |
446,190 |
|
|
$ |
9,454 |
|
|
$ |
455,644 |
|
|
|
|
|
|
|
|
|
|
|
Segment assets |
|
$ |
32,787,482 |
|
|
$ |
124,993 |
|
|
$ |
32,912,475 |
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
$ |
341,994 |
|
|
$ |
(37 |
) |
|
$ |
341,957 |
|
|
|
|
|
|
|
|
|
|
|
Expenses |
|
$ |
292,673 |
|
|
$ |
5,405 |
|
|
$ |
298,078 |
|
|
|
|
|
|
|
|
|
|
|
Segment assets |
|
$ |
21,162,139 |
|
|
$ |
129,687 |
|
|
$ |
21,291,826 |
|
|
|
|
|
|
|
|
|
|
|
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 ended March 31, 2010 and 2009 (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2010 |
|
|
March 31, 2009 |
|
Americas (1) |
|
$ |
494,480 |
|
|
$ |
306,234 |
|
Europe |
|
|
89,525 |
|
|
|
35,560 |
|
Asia (including Middle East) |
|
|
(763 |
) |
|
|
163 |
|
|
|
|
|
|
|
|
Net Revenues |
|
$ |
583,242 |
|
|
$ |
341,957 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Substantially all relates to U.S. 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 executive officers. The loan proceeds may be 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 March 31, 2010 and December 31,
2009, loans in the aggregate principal amount of
Page 52 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
(Unaudited)
approximately $48.5 million and $45.7 million, respectively, were outstanding under the Credit
Facility and recorded in Other investments on the Consolidated Statements of Financial Condition.
At March 31, 2010, we have commitments to purchase $136.5 million in agency commercial
mortgage-backed securities from Berkadia Commercial Mortgage, LLC, which is partially owned by
Leucadia.
Page 53 of 83
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; |
|
|
|
|
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, 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 accounting policies and the estimates required therein 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 54 of 83
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 generally 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 March 31, 2010 and December 31, 2009 (in
thousands of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 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 |
|
$ |
1,854,113 |
|
|
$ |
1,780,182 |
|
|
$ |
1,500,042 |
|
|
$ |
1,360,528 |
|
Corporate debt securities |
|
|
3,355,418 |
|
|
|
2,518,190 |
|
|
|
2,421,704 |
|
|
|
1,909,781 |
|
Government, federal agency
and other sovereign obligations |
|
|
3,509,456 |
|
|
|
2,636,956 |
|
|
|
1,762,643 |
|
|
|
1,735,861 |
|
Mortgage- and asset-backed securities |
|
|
3,584,910 |
|
|
|
12,060 |
|
|
|
3,079,865 |
|
|
|
21,474 |
|
Loans and other receivables |
|
|
481,899 |
|
|
|
353,063 |
|
|
|
591,208 |
|
|
|
363,080 |
|
Derivatives |
|
|
38,952 |
|
|
|
23,679 |
|
|
|
62,117 |
|
|
|
18,427 |
|
Investments |
|
|
70,854 |
|
|
|
|
|
|
|
70,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,895,602 |
|
|
$ |
7,324,130 |
|
|
$ |
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 $2,715.6 million and $1,983.6 million
at March 31, 2010 and December 31, 2009, respectively. TBA securities had a net asset fair
value of $10.4 million and $27.7 million at March 31, 2010 and December 31, 2009,
respectively, and are included in Financial instruments owned and Financial instruments sold,
not yet purchased in our Consolidated Statement 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 55 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
on the fair value definition, Level 1, Level 2, Level 3 and related valuations techniques, see
Notes 1 and 3 to the consolidated financial statements.
Level 3 Assets and Liabilities Total level 3 assets were $656.8 million and $883.7
million as of March 31, 2010 and December 31, 2009, respectively, and represented approximately 5%
and 9%, respectively, of total assets measured at fair value. Level 3 assets, for which the firm
bears economic exposure, were $442.1 million and $504.6 million as of March 31, 2010 and December
31, 2009, respectively. Level 3 liabilities were $178.1 million and $357.3 million as of March 31,
2010 and December 31, 2009, respectively, and represented approximately 2% and 7%, respectively, of
total liabilities measured at fair value. 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
March 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 |
|
|
|
March 31, |
|
|
December 31, |
|
|
March 31, |
|
|
December 31, |
|
(in thousands) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Loans and other receivables |
|
$ |
236,230 |
|
|
$ |
506,542 |
|
|
$ |
176,297 |
|
|
$ |
352,420 |
|
Mortgage and asset-backed securities |
|
|
181,612 |
|
|
|
139,821 |
|
|
|
|
|
|
|
|
|
Investments |
|
|
70,169 |
|
|
|
65,564 |
|
|
|
|
|
|
|
|
|
Corporate debt securities |
|
|
56,863 |
|
|
|
66,728 |
|
|
|
224 |
|
|
|
|
|
Auction rate securities |
|
|
53,026 |
|
|
|
50,340 |
|
|
|
|
|
|
|
|
|
Corporate equity securities |
|
|
37,066 |
|
|
|
43,042 |
|
|
|
38 |
|
|
|
|
|
Collateralized debt obligations |
|
|
13,505 |
|
|
|
9,570 |
|
|
|
|
|
|
|
|
|
Derivatives |
|
|
|
|
|
|
1,909 |
|
|
|
1,517 |
|
|
|
4,926 |
|
Sovereign obligations |
|
|
|
|
|
|
196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Level 3 financial instruments |
|
|
648,471 |
|
|
|
883,712 |
|
|
|
178,076 |
|
|
|
357,346 |
|
Investments in Managed Funds |
|
|
8,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Level 3 assets |
|
|
656,849 |
|
|
|
883,712 |
|
|
|
178,076 |
|
|
|
357,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 assets for which the firm
bears no economic exposure |
|
|
(214,743 |
) |
|
|
(379,153 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 assets for which the firm
bears economic exposure |
|
$ |
442,106 |
|
|
$ |
504,559 |
|
|
$ |
178,076 |
|
|
$ |
357,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three months ended March 31, 2010, we had transfers of assets of $10.7 million from
Level 2 to Level 3 and transfers of assets of $241.6 million from Level 3 to Level 2. Transfers of
liabilities from Level 2 to Level 3 were $0.04 million and transfers of liabilities from Level 3 to
Level 2 were $129.8 million for the three months ended March 31, 2010. Net gains on Level 3 assets
were $8.2 million and net gains on Level 3 liabilities were $3.4 million for the three months ended
March 31, 2010. During the three months ended March 31, 2009, we had transfers of assets of $25.5
million from Level 2 to Level 3 and transfers of $12.6 million from Level 3 to Level 2. During the
three months ended March 31, 2009, we had transfers of liabilities of $3.5 million from Level 3 to
Level 2. Net gains on Level 3 derivative assets and derivative liabilities were $3.1 million and
$4.3 million, respectively, for the three months ended March 31, 2009 and net losses on Level 3
non-derivative assets were $39.3 million.
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
Page 56 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
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 57 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
Consolidated Results of Operations
The following table provides an overview of our consolidated results of operations:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
(Dollars in Thousands, except for per share amounts) |
|
March 31, 2010 |
|
March 31, 2009 |
Net revenues, less mandatorily redeemable preferred interest |
|
$ |
581,194 |
|
|
$ |
347,260 |
|
Non-interest expenses |
|
|
455,644 |
|
|
|
298,078 |
|
Earnings before income taxes |
|
|
125,550 |
|
|
|
49,182 |
|
Income tax expense |
|
|
47,541 |
|
|
|
16,756 |
|
Net earnings |
|
|
78,009 |
|
|
|
32,426 |
|
Net earnings (loss) to noncontrolling interests |
|
|
3,943 |
|
|
|
(5,911 |
) |
Net earnings to common shareholders |
|
|
74,066 |
|
|
|
38,337 |
|
Earnings per diluted common share |
|
$ |
0.36 |
|
|
$ |
0.19 |
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate |
|
|
38 |
% |
|
|
34 |
% |
Net revenues, less mandatorily redeemable preferred interest, for the three months ended March 31,
2010 increased 67% to $581.2 million as compared to $347.3 million for the first quarter of 2009
primarily due to significant increases in revenues generated by our investment banking and sales
and trading businesses. Non-interest expenses of $455.6 million for the three months ended March
31, 2010 reflected an increase of 53% over the comparable 2009 period primarily attributable to an
increase in compensation and benefits due to increased revenues and employee levels.
Non-compensation expenses also increased due to increased business activity and our $6.8 million
donation to various Haiti earthquake charities.
The effective tax rate was 38% for the first quarter ended March 31, 2010, an increase in
comparison to an effective tax rate of 34% for the first quarter of 2009. The increase in our
effective tax rate for the three months ended March 31, 2010 over the comparable 2009 period is
attributable to an increase in the provision for state and local taxes during the first quarter of
2010.
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 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.
At March 31, 2010, we had 2,729 employees globally, compared to 2,296 at March 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 and third quarters will be the
three months ended May 31 and August 31, respectively, and our 2010 fiscal year will consist of the
eleven month transition period beginning January 1, 2010 through November 30, 2010.
Our business, by its nature, does not produce predictable 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.
Page 58 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
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 high yield products and advisory services. The Capital Markets
segment comprises many businesses, with many interactions among them. In addition, we choose to
voluntarily disclose the Asset Management segment, even though it is currently an immaterial
non-reportable segment.
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 because the Asset Management
segment is immaterial as compared to the consolidated Results of Operations. 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, we have integrated our high yield platforms within our overall
fixed income business and are now presenting our high yield net revenues within fixed income net
revenue as of the quarter ended March 31, 2010. Reclassifications have been made to our previous
presentation of Revenues by Source for the three months ended March 31, 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 ended March 31, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2010 |
|
|
March 31, 2009 |
|
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
(in thousands) |
|
Amount |
|
|
Revenues |
|
|
Amount |
|
|
Revenues |
|
Equities |
|
$ |
164,825 |
|
|
|
28 |
% |
|
$ |
99,237 |
|
|
|
29 |
% |
Fixed income |
|
|
213,481 |
|
|
|
37 |
|
|
|
199,637 |
|
|
|
58 |
|
Other |
|
|
|
|
|
|
|
|
|
|
6,034 |
|
|
|
2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
378,306 |
|
|
|
65 |
|
|
|
304,908 |
|
|
|
89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
34,099 |
|
|
|
6 |
|
|
|
1,784 |
|
|
|
|
|
Debt |
|
|
101,964 |
|
|
|
17 |
|
|
|
12,789 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital markets |
|
|
136,063 |
|
|
|
23 |
|
|
|
14,573 |
|
|
|
4 |
|
Advisory |
|
|
62,274 |
|
|
|
11 |
|
|
|
22,513 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment banking |
|
|
198,337 |
|
|
|
34 |
|
|
|
37,086 |
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset management fees and investment
income from managed funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset management fees |
|
|
4,017 |
|
|
|
1 |
|
|
|
3,762 |
|
|
|
1 |
|
Investment income (loss) from managed funds |
|
|
2,582 |
|
|
|
|
|
|
|
(3,799 |
) |
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
6,599 |
|
|
|
1 |
|
|
|
(37 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues |
|
|
583,242 |
|
|
|
100 |
% |
|
|
341,957 |
|
|
|
100 |
% |
Interest on mandatorily redeemable
preferred interest of consolidated
subsidiaries |
|
|
2,048 |
|
|
|
|
|
|
|
(5,303 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenues, less mandatorily redeemable
preferred interest |
|
$ |
581,194 |
|
|
|
|
|
|
$ |
347,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Page 59 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
Net Revenues
Net revenues, before interest on mandatorily redeemable preferred interests, for the three months
ended March 31, 2010 were $583.2 million, an increase of 71%, as compared to net revenues of $342.0
million for the first quarter of 2009. The considerable increase was primarily due to strong
revenue contributions in the first quarter of 2010 from equities of $164.8 million, a 66% increase
over the comparable prior quarter, and investment banking revenues of $198.3 million, a four-fold
increase over the first quarter of 2009.
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 $164.8 million and $99.2 million for the three months ended March 31,
2010 and 2009, respectively, representing a 66% increase from the first quarter of 2009, primarily
driven by growth in our international, equity derivatives and electronic trading businesses, growth
in our securities lending and prime brokerage businesses, positive block trading opportunities and
gains in alternative investments revenue, partially offset by declines in U.S. cash equities
revenue and trading results from certain strategic investment strategies. Our international
equities platform has continued to expand, further building market share, resulting in added
revenues for the current quarter. Revenue from equity derivatives, prime brokerage and electronic
trading activities increased as compared to the first quarter of 2009 as market share continues to
grow and client prime brokerage balances continue to increase. The decrease in revenue generated
by our U.S. customer cash equities business is reflective of overall reduced exchange market volume
and reduced volatility in the first quarter of 2010. First quarter 2010 revenue reflects a strong
contribution from our investment in the Jefferies Finance joint venture and also benefited from
several block trading opportunities.
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 revenue was $213.5 million for the first quarter of 2010, up 7% from revenue of $199.6
million for the first quarter of 2009. The increase in revenue in for the first quarter of 2010
reflects the continued growth of our fixed income businesses, with strong contributions from our
high yield and mortgage-backed securities trading activities, the addition of municipal bond
trading activities as a result of our acquisition of Depfa in March 2009, improved performance from
our commodities trading activities and the ongoing expansion of our government and agencies and
international credit trading businesses. Revenue increases from these business activities were
partially offset by declines in revenue for the first quarter of 2010 as compared to the comparable
2009 quarter generated by our corporate bond, emerging markets and convertible debt trading
businesses and from bank loan trading activities. Increases in revenue from certain fixed income
businesses was also partially offset by net principal transaction losses on certain debt block
trading positions.
High yield revenue significantly improved for the three months ended March 31, 2010, compared to
negative revenue in the first quarter of 2009 driven by an increase in sales volumes generating
higher commission revenue for the quarter, as well as improved results on certain trading positions
as compared to net principal transaction losses experienced in the first quarter of 2009 due to
unfavorable market conditions. Revenue from our mortgage-backed securities businesses was higher
in the current quarter with the further development of our international capabilities and
contributions from trading in additional asset-backed securities classes with the continued
expansion of this business. The expansion of our government and agencies platform in Europe,
assisted by our appointment as in
Page 60 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
several European jurisdictions as dealers for government bond issues, resulted in additional fixed
income revenue generation for the first quarter of 2010 with increased customer flow volume.
Tightening credit spreads negatively impacted principal transaction trading revenue in our
corporate bond and emerging market bond businesses, which was also impacted by specific country
events. Convertible revenue declined as compared to the comparable prior quarter primarily
attributed to reduced volumes on lower volatility. Additionally, the convertible revenue for the
first quarter of 2009 reflected substantial gains from the improving market conditions in early
2009. Our bank debt trading revenue was down for the first quarter of 2010 as compared to the
2009 first quarter primarily due to losses on credit hedges, partially offset by higher market
value volumes and revenue generated by our expanded trade receivables trading activities.
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 months ended March 31, 2010 and 2009 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
business 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 |
|
|
|
|
(in thousands) |
|
March 31, 2010 |
|
|
March 31, 2009 |
|
|
% Change |
|
Equity |
|
$ |
34,099 |
|
|
$ |
1,784 |
|
|
|
1811 |
% |
Debt |
|
|
101,964 |
|
|
|
12,789 |
|
|
|
697 |
% |
|
|
|
|
|
|
|
|
|
|
Capital markets |
|
|
136,063 |
|
|
|
14,573 |
|
|
|
834 |
% |
Advisory |
|
|
62,274 |
|
|
|
22,513 |
|
|
|
177 |
% |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
198,337 |
|
|
$ |
37,086 |
|
|
|
435 |
% |
|
|
|
|
|
|
|
|
|
|
Capital markets produced revenue of $136.1 million for the three months ended March 31, 2010,
compared to $14.6 million for the three months ended March 31, 2009, reflective of a significantly
improved market environment for debt and equity underwritings, the contribution of our mortgage
underwriting platform and the addition of our healthcare banking capabilities during the second
half of 2009. Capital markets revenue contributions were strongest in the healthcare, energy,
mortgage and industrial sectors. Revenue from our advisory business of $62.3 million for the first
quarter of 2010 increased as compared to the first quarter of 2009 revenue of $22.5 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 management fees and investment income (loss) for the three
months ended March 31, 2010 and 2009 (in thousands):
Page 61 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
March 31, 2010 |
|
|
March 31, 2009 |
|
Asset management fees: |
|
|
|
|
|
|
|
|
Fixed Income |
|
$ |
920 |
|
|
$ |
1,721 |
|
Equities |
|
|
466 |
|
|
|
667 |
|
Convertibles |
|
|
1,806 |
|
|
|
1,374 |
|
Commodities |
|
|
825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,017 |
|
|
|
3,762 |
|
|
|
|
|
|
|
|
|
|
Investment income (loss) from managed funds (1) |
|
|
2,582 |
|
|
|
(3,799 |
) |
|
|
|
|
|
|
|
Total |
|
$ |
6,599 |
|
|
$ |
(37 |
) |
|
|
|
|
|
|
|
|
|
|
(1) |
|
Of the total investment earnings (loss) from managed funds, $(0.2) million and $(0.1) million
is attributed to noncontrolling interest holders for the three months ended March 31, 2010 and
2009, respectively. |
Asset management fees increased to $4.0 million for the three months ended March 31, 2010 as
compared to asset management fees of $3.8 million for the three months ended March 31, 2009,
primarily as a result of quality performance fee revenue generated by our global convertible bond
fund business and fee revenue generated on new commodity managed accounts opened in the second half
of 2009, partially offset by a decline in fee revenue from managed collateralized loan obligations
(CLOs) as we completed the assignment of the management contracts for those assets in January
2010. Investment income from managed funds totaled $2.6 million for the first quarter of 2010 as
compared to an investment loss of $3.8 million for the first quarter of 2009 primarily due to
improved asset valuations across our managed funds.
Assets under Management
Period end assets under management by predominant asset strategy were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
March 31, 2009 |
|
Assets under management (1)(3): |
|
|
|
|
|
|
|
|
Fixed Income |
|
$ |
|
|
|
$ |
1,244 |
|
Equities |
|
|
79 |
|
|
|
86 |
|
Convertibles |
|
|
1,760 |
|
|
|
1,327 |
|
|
|
|
|
|
|
|
|
|
|
1,839 |
|
|
|
2,657 |
|
|
|
|
|
|
|
|
Assets under management by third parties (2): |
|
|
|
|
|
|
|
|
Fixed Income (3) |
|
|
1,702 |
|
|
|
|
|
Private Equity (4) |
|
|
600 |
|
|
|
600 |
|
|
|
|
|
|
|
|
|
|
|
2,302 |
|
|
|
600 |
|
|
|
|
|
|
|
|
Total |
|
$ |
4,141 |
|
|
$ |
3,257 |
|
|
|
|
|
|
|
|
|
|
|
(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 March 31, 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 March 31, 2010
as a component of Assets under management by third parties.
Page 62 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
Change in Assets under Management
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
% |
|
(in millions) |
|
March 31, 2010 |
|
|
March 31, 2009 |
|
|
Change |
|
Balance, beginning of period |
|
$ |
4,024 |
|
|
$ |
3,491 |
|
|
|
15 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flow in (out) |
|
|
18 |
|
|
|
(376 |
) |
|
|
|
|
Net market appreciation |
|
|
99 |
|
|
|
142 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
117 |
|
|
|
(234 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
4,141 |
|
|
$ |
3,257 |
|
|
|
27 |
% |
|
|
|
|
|
|
|
|
|
|
|
The net increase in assets under management of $117 million during the three months ended
March 31, 2010 is primarily attributable to market appreciation 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 decline in assets under management for the three
months ended March 31, 2009 is primarily due to customer redemptions from our global convertible
bond funds, partially offset by market appreciation in our managed CLOs.
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) |
|
March 31, 2010 |
|
|
March 31, 2009 |
|
Managed Accounts: |
|
|
|
|
|
|
|
|
Equities |
|
$ |
100 |
|
|
$ |
25 |
|
Commodities |
|
|
492 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
592 |
|
|
$ |
25 |
|
|
|
|
|
|
|
|
Change in Managed Accounts
|
|
|
|
|
|
|
|
|
(notional account value) |
|
Three Months Ended |
|
(in millions) |
|
March 31, 2010 |
|
|
March 31, 2009 |
|
Balance, beginning of period |
|
$ |
560 |
|
|
$ |
|
|
Net account additions |
|
|
49 |
|
|
|
25 |
|
Net account depreciation |
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance, end of period |
|
$ |
592 |
|
|
$ |
25 |
|
|
|
|
|
|
|
|
The change in the notional account value of managed accounts for the three months ended March 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 ended March 31, 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 March 31, 2010 and December
31, 2009 (in thousands):
Page 63 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
December 31, 2009 |
|
Unconsolidated funds (1) |
|
$ |
120,745 |
|
|
$ |
115,009 |
|
Consolidated funds (2) |
|
|
42,492 |
|
|
|
44,441 |
|
|
|
|
|
|
|
|
Total |
|
$ |
163,237 |
|
|
$ |
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. |
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 $319.8 million for the three months ended March 31, 2010 compared
to $213.4 million for the comparable periods in 2009, an increase of 50%. Our ratio of compensation
and benefits to net revenues for the first quarter of 2010 was 55% as compared to 62% for the first
quarter of 2009. Employee headcount increased to 2,729 total global employees at March 31, 2010 as
compared to 2,296 employees at March 31, 2009. The increase in compensation and benefits expense
for the first quarter of 2010 as compared to the same 2009 period is consistent with the revenue
increase in the first quarter of 2010 as compared to the comparable 2009 quarter. Compensation
costs also increased due to increased headcount as we have expanded our fixed income 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 $135.8 million and $84.7 million for the three months ended March
31, 2010 and 2009, respectively, an increase of 60%. Non-compensation expenses for the first
quarter of 2010 as compared to the 2009 first quarter 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 professional
services expense commensurate with increased business activity. Increases in Other non-interest
expenses for the first quarter of 2010 as compared to the first quarter of 2009 are attributed
primarily to 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 / (Loss) before Income Taxes
Earnings before income taxes was $125.6 million for the first quarter of 2010 up from a earnings
before income taxes of $49.2 million for the first quarter of 2009.
Page 64 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
Income Taxes
Income tax expense was $47.5 million and $16.8 million and the effective tax rate was 38% and 34%
for the three months ended March 31, 2010 and 2009, respectively. The change in our effective tax
rate for the three months ended March 31, 2010 as compared to the same period ended March 31, 2009
is attributable to an increase in the provision for state and local taxes during the first quarter
of 2010.
Earnings per Common Share
Diluted earnings per common share was $0.36 for the first quarter of 2010 on 202,630,000 shares
compared to diluted earnings per common share of $0.19 for the first quarter of 2009 on 203,326,000
shares. Convertible preferred stock dividends were not included in the calculation of diluted
earnings per common share for the three ended March 31, 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 March 31, 2010 and December 31,
2009 (in millions):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
December 31, 2009 |
|
Residential mortgage-backed agency securities (1) |
|
$ |
2,890 |
|
|
$ |
2,579 |
|
|
|
|
|
|
|
|
|
|
TBA securities (2) |
|
|
(2,716 |
) |
|
|
(1,984 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net agency mortgage-backed security exposure (2) |
|
|
174 |
|
|
|
595 |
|
|
|
|
|
|
|
|
|
|
Prime mortgage-backed securities (3) |
|
|
97 |
|
|
|
66 |
|
Alt-A mortgage-backed securities (4) |
|
|
257 |
|
|
|
239 |
|
Subprime mortgage-backed securities (4) |
|
|
64 |
|
|
|
50 |
|
Commercial mortgage-backed securities (5) |
|
|
160 |
|
|
|
85 |
|
Collateralized debt obligations |
|
|
9 |
|
|
|
|
|
Other mortgage- and asset-backed securities |
|
|
108 |
|
|
|
60 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total nonagency mortgage- and asset-backed security exposure |
|
|
695 |
|
|
|
500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net mortgage- and asset-backed security exposure |
|
$ |
869 |
|
|
$ |
1,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage loans and mortgage participation certificates (6) |
|
$ |
54 |
|
|
$ |
66 |
|
Corporate loans (7) |
|
|
398 |
|
|
|
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
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 March 31,
2010 and December 31, 2009. Such contracts are accounted for at a net asset fair value of
$10.4 million and $27.7 million at March 31, 2010 and December 31, 2009, respectively, which
are |
Page 65 of 83
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 March 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 $13.5 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 March 31, 2010 and December 31, 2009,
respectively, and $8.4 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 March
31, 2010 and December 31, 2009, respectively. |
Of our prime, Alt-A and subprime mortgage-backed securities and other asset-backed securities
at March 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 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
17 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
17 |
|
2009 |
|
|
12 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
18 |
|
2008 |
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53 |
|
2007 |
|
|
56 |
|
|
|
15 |
|
|
|
1 |
|
|
|
7 |
|
|
|
71 |
|
|
|
|
|
|
|
150 |
|
2006 and prior |
|
|
117 |
|
|
|
34 |
|
|
|
48 |
|
|
|
74 |
|
|
|
184 |
|
|
|
|
|
|
|
457 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
238 |
|
|
$ |
49 |
|
|
$ |
49 |
|
|
$ |
98 |
|
|
$ |
255 |
|
|
$ |
6 |
|
|
$ |
695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
four countries in Europe. As a result of thes designations, combined with our strong financial
results and generally improving market conditions, over the past nine months, we have experienced a
significant increase in financing lines being made available to Jefferies 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. Our long-term debt has an average maturity of 11.4 years, we have no scheduled debt
maturities until 2012, we have no short-
Page 66 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
term borrowings and we have significant cash balances on hand. We continue to actively manage our
liquidity profile and counterparty relationships to enable ongoing access to both short and
longer-term funding.
Our actual level 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):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
December 31, 2009 |
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Cash in banks |
|
$ |
203,818 |
|
|
$ |
196,189 |
|
Money market investments |
|
|
825,085 |
|
|
|
1,656,978 |
|
|
|
|
|
|
|
|
Total cash and cash equivalents |
|
|
1,028,903 |
|
|
|
1,853,167 |
|
Cash and securities segregated (1) |
|
|
1,328,194 |
|
|
|
1,089,803 |
|
|
|
|
|
|
|
|
|
|
$ |
2,357,097 |
|
|
$ |
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 our financial instruments (both long and short) in our
trading accounts are actively traded and readily marketable, including 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.
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. Unsecured bank loans 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 March 31, 2010 and December 31, 2009. Average daily bank loans for the three months
ended March 31, 2010 and the year ended December 31, 2009 were $72.0 and $24.2 million,
respectively. We have arrangements with various banks for financing of up to $1,006.1 million,
including $975.0 million of bank loans and $31.1 million of letters of credit. Of the $1,006.1
million of uncommitted lines of credit, $206.1 million is unsecured and $800.0 million is secured.
Secured amounts are collateralized by a combination of customer, non-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.
Page 67 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
Liquidity Management Policies
The primary goal of our liquidity management activities is to ensure adequate funding over a range
of market environments. 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. We seek to
maintain a surplus cash capital position to ensure that we do not need to liquidate inventory
in the event of a funding crisis, which is reflected in the levels of our leverage ratios we
maintain. Our equity capital of $2,645.3 million, mandatorily redeemable convertible
preferred stock of $125.0 million, mandatorily redeemable preferred interest of consolidated
subsidiaries of $320.1 million, and long-term borrowings (debt obligations scheduled to mature
in more than 12 months) of $2,730.4 million comprise our total capital of $5,820.8 million as
of March 31, 2010, which exceeded our cash capital requirements. |
Financial Condition and Capital Management. 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
process there is proactive linkage between the businesses and the balance sheet, assignment of
capital assessment to all assets, establishment of gross and adjusted balance sheet limits, which
ensures that the allocation of capital and costs of capital is incorporated into business
decisions. The results of this process are that we protect the firms platform, enable our
businesses to remain competitive, provide us with the ability to manage capital proactively and
hold our businesses accountable for both balance sheet and capital usage.
Analysis of Financial Condition and Capital Resources
Financial Condition
We actively monitor and evaluate our financial condition and the composition of our assets and
liabilities. We have historically maintained a highly liquid balance sheet, with a substantial
portion of our total assets consisting of cash, highly liquid marketable securities and short-term
receivables, arising principally from traditional securities brokerage activity. 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 in the first quarter
of 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
Page 68 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
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 first quarter of 2010, average total assets were approximately
8% higher than at March 31, 2010.
Total assets increased to $32,912.5 million at March 31, 2010 or by 17%, from $28,189.3 million at
December 31, 2009 primarily due to an increase in the level of our financial instruments owned
inventory, an increase in our collateralized transaction activity 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 36% to $12,895.6 million at March 31, 2010 from $9,487.7 million at December
31, 2009, while our financial instruments sold, not yet purchased also commensurately increased to
$7,324.1 million at March 31, 2010 from $5,409.2 million at December 31, 2009.
The overall 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 designated in similar capacities in several European jurisdictions as
well during the latter part of 2009. These inventory positions are comprised of the most liquid
securities asset class and our market risk exposure to Portugal, Italy, Ireland, Greece and Spain
is negligible at March 31, 2010. Our net inventory positions also increased as of March 31, 2010
from December 31, 2009 due to the growth of our strategic investments business and certain block
trading opportunities taken during the first quarter of 2010, partially offset by settlements in
our bank loan trading business. Our mortgage-backed securities inventory increased modestly as of
March 31, 2010 from the prior year end and we continually monitor our overall mortgage-backed
securities exposure, including the turnover rate of our mortgage-backed securities inventory, which
demonstrates the liquidity of the overall asset class. At March 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 for which we have economic exposure was 5% of the
total of this asset class. Of our total Financial instruments owned, approximately 80% are
considered very liquid; they 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, loans, investments and other less
liquid products that are predominantly funded by long term capital. Under our cash capital policy,
we model more stringent capital allocation rules than market rates for secured funding and maintain
surplus capital at these modeled levels.
Our securities borrowed and securities purchased under agreements to resell increased to $12,871.4
million at March 31, 2010, or by 10%, while our securities loaned and securities sold under
agreements to repurchase increased to $13,919.5 million at March 31, 2010, or by 18%. Our
outstanding securities financing balances did not vary significantly during the first quarter of
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 first quarter of 2010, average securities financing assets and
liabilities were 1% higher than at March 31, 2010. The majority of our outstanding securities
purchased under agreements to resell and securities sold under agreements to repurchase at March
31, 2010 are transacted in support of U.S. treasury and agency securities and agency
mortgage-backed securities with the average tenor of 30 days for our fixed income secured financing
activities consistent with the rapid turnover we experience for our holdings of these financial
instrument asset classes.
Common stockholders equity increased to $2,316.9 million at March 31, 2010 from $2,308.6 million
at December 31, 2009. The increase in our common stockholders equity is principally attributed to
net earnings to common shareholders of $74.1 million in the first quarter of 2010, net share-based
amortization expense and the impact of a tax benefit on the deductibility of employee share-based
awards upon distribution of the awards to employees, which occurred in the first quarter of 2010 as
a result of our stock price being higher at the distribution date than at the initial grant date
net currency. Increases in our common stockholders equity is partially offset by translation
adjustments as the British pound weakened against the U.S. dollar in the first quarter of 2010,
repurchases of approximately 2.5 million shares of our common stock during the first quarter of
2010, which increased our treasury stock by $63.2 million and dividends and dividend equivalents
paid during the quarter.
Page 69 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
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):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
December 31, 2009 |
|
Common stockholders equity |
|
$ |
2,316,946 |
|
|
$ |
2,308,589 |
|
Less: Goodwill |
|
|
(364,135 |
) |
|
|
(364,795 |
) |
|
|
|
|
|
|
|
Tangible common stockholders equity |
|
$ |
1,952,811 |
|
|
$ |
1,943,794 |
|
|
|
|
|
|
|
|
|
|
Shares outstanding |
|
|
171,845,173 |
|
|
|
165,637,554 |
|
Outstanding restricted stock units (5) |
|
|
29,255,687 |
|
|
|
27,404,347 |
|
|
|
|
|
|
|
|
Adjusted shares outstanding |
|
|
201,100,860 |
|
|
|
193,041,901 |
|
|
|
|
|
|
|
|
|
|
Common book value per share (1) |
|
$ |
13.48 |
|
|
$ |
13.94 |
|
|
|
|
|
|
|
|
Adjusted common book value per share (2) |
|
$ |
11.52 |
|
|
$ |
11.96 |
|
|
|
|
|
|
|
|
Tangible common book value per share (3) |
|
$ |
11.36 |
|
|
$ |
11.74 |
|
|
|
|
|
|
|
|
Adjusted tangible common book value per share (4) |
|
$ |
9.71 |
|
|
$ |
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 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 quarter of 2010 and increased shares outstanding as of March 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 and 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 in the first quarter of 2010 and
increased shares outstanding at March 31, 2010. Shares underlying the restricted stock units will
be issued in 2013, but will be
Page 70 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
included in outstanding restricted stock units in the first quarter of 2010 and will increase
adjusted shares outstanding. The increase in shares outstanding is offset by repurchases of 2.5
million shares at an average price of $25.55 during the quarter ended March 31, 2010.
At March 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 March 31, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
December 31, 2009 |
|
Total assets |
|
$ |
32,912,475 |
|
|
$ |
28,189,271 |
|
Deduct: Securities borrowed |
|
|
(8,246,352 |
) |
|
|
(8,237,998 |
) |
Securities purchased under agreements to resell |
|
|
(4,624,081 |
) |
|
|
(3,515,247 |
) |
|
|
|
|
|
|
|
|
|
Add: Financial instruments sold, not yet purchased |
|
|
7,324,124 |
|
|
|
5,409,151 |
|
Less derivative liabilities |
|
|
(23,672 |
) |
|
|
(18,427 |
) |
|
|
|
|
|
|
|
Subtotal |
|
|
7,300,452 |
|
|
|
5,390,724 |
|
Deduct: Cash and securities segregated and on deposit
for regulatory purposes or deposited with
clearing and depository organizations |
|
|
(1,328,194 |
) |
|
|
(1,089,803 |
) |
Goodwill |
|
|
(364,135 |
) |
|
|
(364,795 |
) |
|
|
|
|
|
|
|
Adjusted assets |
|
$ |
25,650,165 |
|
|
$ |
20,372,152 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
$ |
2,645,286 |
|
|
$ |
2,630,127 |
|
Deduct: Goodwill |
|
|
(364,135 |
) |
|
|
(364,795 |
) |
|
|
|
|
|
|
|
Tangible stockholders equity |
|
$ |
2,281,151 |
|
|
$ |
2,265,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Leverage ratio (1) |
|
|
12.4 |
|
|
|
10.7 |
|
|
|
|
|
|
|
|
Adjusted leverage ratio (2) |
|
|
11.2 |
|
|
|
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. |
Adjusted assets is a non-GAAP financial measures and excludes certain assets that are
considered self-funded and, therefore, of lower risk, which are generally 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 March 31, 2010 to December 31, 2009 commensurate with the increase in our trading inventory
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.
Page 71 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
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 120% and 121%, at March 31, 2010 and December 31, 2009, respectively. Our
total capital base as of March 31, 2010 and December 31, 2009 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010 |
|
|
December 31, 2009 |
|
Long-term debt |
|
$ |
2,730,379 |
|
|
$ |
2,729,117 |
|
Mandatorily redeemable convertible preferred stock |
|
|
125,000 |
|
|
|
125,000 |
|
Mandatorily redeemable preferred interest of
consolidated subsidiaries |
|
|
320,058 |
|
|
|
318,047 |
|
Total stockholders equity |
|
|
2,645,286 |
|
|
|
2,630,127 |
|
|
|
|
|
|
|
|
Total capital |
|
$ |
5,820,723 |
|
|
$ |
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 through our
$1,006.1 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. We had no outstanding bank loans as of March
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 to stockholders of record as of February
16, 2010. We did not declare dividends on our common stock to be paid during 2009.
At March 31, 2010, our senior long-term debt, net of unamortized discounts and premiums, consisted
of contractual principal payments (adjusted for amortization) of $306.6 million, $248.9 million,
$348.7 million, $709.1 million, $346.5 million, $278.1 million and $492.6 million due in 2012,
2014, 2016, 2019, 2027, 2029 and 2036, respectively. At March 31, 2010, contractual interest
payment obligations related to our senior long-term debt are $184.2 million for 2010 and 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. On March 26, 2010, Fitch Ratings affirmed our long-term
and short-term ratings at BBB and F2, respectively, and revised its outlook to stable from
negative for all ratings. Our long-term debt ratings are as follows:
|
|
|
|
|
Rating |
Moodys Investors Service |
|
Baa2 |
Standard and Poors |
|
BBB |
Fitch Ratings |
|
BBB |
Page 72 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
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 March 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 |
|
$ |
817,720 |
|
|
$ |
746,203 |
|
Jefferies Execution |
|
$ |
9,356 |
|
|
$ |
9,106 |
|
Jefferies High Yield Trading |
|
$ |
492,640 |
|
|
$ |
492,390 |
|
Contractual Obligations and Commitments
The tables below provide information about our commitments related to debt obligations, investments
and derivative contracts as of March 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 |
|
|
|
|
|
|
|
|
|
|
307 |
|
|
|
249 |
|
|
|
2,174 |
|
|
|
2,730 |
|
Mandatorily redeemable convertible
preferred stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125 |
|
|
|
125 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank credit |
|
|
23 |
|
|
|
8 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
35 |
|
Equity commitments |
|
|
250 |
|
|
|
1 |
|
|
|
2 |
|
|
|
15 |
|
|
|
146 |
|
|
|
414 |
|
Loan commitments |
|
|
226 |
|
|
|
|
|
|
|
65 |
|
|
|
31 |
|
|
|
|
|
|
|
322 |
|
Underwriting commitments |
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 |
|
Derivative contracts non credit
related |
|
|
39,034 |
|
|
|
5,272 |
|
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
44,316 |
|
Derivative contracts credit related |
|
|
|
|
|
|
|
|
|
|
315 |
|
|
|
|
|
|
|
30 |
|
|
|
345 |
|
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.
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 March 31, 2010, we did not have any
commitments to purchase assets from our securitization vehicles. At
March 31, 2010, we held $436.8 million of mortgage-backed securities issued by VIEs for
Page 73 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
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. Subsequent to March 31, 2010,
a significant portion of these mortgage-backed securities have been sold into the market. 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 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
Page 74 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
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."
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:
Page 75 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
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 the consolidation of 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 the first quarter of 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 76 of 83
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:
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inventory position and exposure limits, on a gross and net basis; |
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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 |
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risk limits based on a summary measure of risk exposure referred to as Value-at-Risk. |
Value-at Risk
Jefferies estimates 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. The Companys VaR
models evolve over time in response to changes in the composition of trading portfolios and to
improvements in modeling techniques and systems capabilities.
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.
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Daily VaR(1) |
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(In Millions) |
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Value-at-Risk in trading portfolios |
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VaR at |
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Average VaR 3 Months Ended |
Risk Categories |
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3/31/10 |
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12/31/09 |
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9/30/09 |
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3/31/10 |
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12/31/09 |
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9/30/09 |
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Interest Rates |
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$ |
5.75 |
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$ |
2.66 |
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$ |
4.07 |
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$ |
7.19 |
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$ |
5.24 |
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$ |
6.39 |
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Equity Prices |
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$ |
5.16 |
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$ |
4.33 |
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$ |
8.08 |
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$ |
7.10 |
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$ |
5.02 |
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$ |
4.86 |
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Currency Rates |
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$ |
0.43 |
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$ |
0.86 |
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$ |
0.79 |
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$ |
0.80 |
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$ |
1.13 |
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$ |
0.70 |
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Commodity Prices |
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$ |
1.34 |
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$ |
1.91 |
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$ |
1.35 |
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$ |
1.77 |
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$ |
1.56 |
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$ |
1.44 |
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Diversification Effect2 |
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-$ |
2.89 |
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-$ |
2.83 |
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-$ |
4.82 |
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-$ |
5.65 |
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-$ |
6.49 |
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-$ |
5.88 |
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Firmwide |
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$ |
9.79 |
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$ |
6.93 |
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$ |
9.47 |
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$ |
11.21 |
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$ |
6.46 |
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$ |
7.51 |
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Page 77 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
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Daily VaR(1) |
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(In Millions) |
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Value-at-Risk Highs and Lows for Three Months Ended |
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3/31/10 |
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12/31/09 |
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9/30/09 |
Risk Categories |
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High |
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Low |
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High |
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Low |
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High |
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Low |
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Interest Rates |
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$ |
11.75 |
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$ |
2.88 |
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$ |
8.87 |
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$ |
2.37 |
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$ |
10.55 |
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$ |
3.52 |
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Equity Prices |
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$ |
13.40 |
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$ |
2.52 |
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$ |
10.69 |
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$ |
2.69 |
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$ |
10.69 |
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$ |
2.16 |
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Currency Rates |
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$ |
1.52 |
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$ |
0.43 |
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$ |
3.89 |
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$ |
0.41 |
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$ |
1.52 |
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$ |
0.18 |
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Commodity Prices |
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$ |
3.27 |
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$ |
0.96 |
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$ |
2.53 |
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$ |
0.90 |
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$ |
3.50 |
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$ |
0.80 |
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Firmwide |
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$ |
17.41 |
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$ |
6.44 |
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$ |
10.20 |
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$ |
3.89 |
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$ |
11.54 |
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$ |
5.12 |
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Average VaR of $11.21 million during the first quarter of 2010 increased from an average of
$6.46 million during the fourth quarter of 2009 due mainly to an increase in exposure to Interest
Rates and Equity Prices. The increase in our exposure to Interest Rates in the first quarter of
2010 as compared to the fourth quarter to 2009 is due to the growth of our fixed income business,
including the expansion of our rates business internationally, and the related inventory levels of
that business. The increase in our exposure to Equity Prices for the quarter is primarily
attributed to equity block trading positions and related capital markets activities giving rise to
certain equity inventory levels.
The following table presents our daily VaR over the last four quarters:
Daily VaR Trend
VaR trended higher during the third quarter of 2009 as we continued to expand fixed income trading
activity. This was offset during the fourth quarter of 2009 as our inventory mix created a greater
diversification effect on overall VaR. During the first quarter of 2010, VaR trended higher from
certain equity and debt blocking trading positions executed primarily in connection with certain
capital market activities.
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 no outliers when comparing the 95% one-day VaR with the
back-testing profit and loss in the first quarter of 2010. A 95% confidence one-day VaR model
usually
Page 78 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
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 in the first quarter of 2010.
Daily Trading Net Revenue
($ in millions)
Trading revenue used in the histogram below entitled First Quarter 2010 vs. First Quarter 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 quarter 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) million to $10.0 million. This presentation provides more
information across the distribution by reducing the maximum number of days in any single grouping.
Page 79 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
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 March 31, 2010. Based on that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures as of March 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 March
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. There have been no material changes from the risk factors previously disclosed in
our annual report on Form 10-K.
Page 80 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
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(c) Total Number of |
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(d) Maximum Number |
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(a) Total |
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Shares Purchased as |
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of Shares that May |
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Number of |
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(b) Average |
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Part of Publicly |
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Yet Be Purchased |
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Shares |
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Price Paid |
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Announced Plans or |
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Under the Plans or |
Period |
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Purchased (1) |
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per Share |
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Programs (2)(3) |
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Programs |
January 1 January 31, 2010 |
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107,189 |
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26.32 |
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100,000 |
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14,900,000 |
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February 1 February 28, 2010 |
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2,346,203 |
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25.52 |
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1,974,990 |
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12,925,010 |
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March 1 March 31, 2010 |
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20,485 |
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25.49 |
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12,925,010 |
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Total |
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2,473,877 |
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2,074,990 |
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(1) |
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We repurchased an aggregate of 398,887 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. |
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(2) |
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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 81 of 83
JEFFERIES GROUP, INC. AND SUBSIDIARIES
Item 6. Exhibits
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Exhibits |
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3.1 |
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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. |
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3.2 |
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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. |
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3.3 |
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By-Laws of Jefferies Group, Inc are incorporated herein by reference
to Exhibit 3 of Registrants Form 8-K filed on December 4, 2007. |
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10.1 |
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Summary of 2010, 2011 and 2012 executive compensation program for
Messrs. Handler and Friedman is incorporated herein by reference to
Exhibit 10 of Registrants Form 8-K filed on January 20, 2010. |
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10.2 |
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Summary of the 2010 Executive Compensation Program for Messrs.
Broadbent, Feller and Hendrickson is incorporated herein by reference
to Exhibit 10.5 of Registrants Form 10-K filed on February 26, 2010. |
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31.1* |
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Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial Officer. |
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31.2* |
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Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive Officer. |
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32* |
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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 82 of 83
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.
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JEFFERIES GROUP, INC.
(Registrant) |
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Date: May 7, 2010 |
By: |
/s/ Peregrine C. Broadbent
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Peregrine C. Broadbent |
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Chief Financial Officer
(duly authorized officer) |
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Page 83 of 83