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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES | |
EXCHANGE ACT OF 1934 | ||
For the quarterly period ended September 30, 2007 | ||
OR | ||
[ ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES | |
EXCHANGE ACT OF 1934 | ||
For the transition period from to |
Delaware | 95-4719745 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
520 Madison Avenue, 12th Floor, New York, New York | 10022 | |
(Address of principal executive offices) | (Zip Code) |
Yes [X] No [ ]
Yes [ ] No [X]
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INDEX TO QUARTERLY REPORT ON FORM 10-Q
SEPTEMBER 30, 2007
Page | ||||||||
3 | ||||||||
4 | ||||||||
5 | ||||||||
6 | ||||||||
8 | ||||||||
44 | ||||||||
58 | ||||||||
62 | ||||||||
62 | ||||||||
62 | ||||||||
63 | ||||||||
64 | ||||||||
65 | ||||||||
EXHIBIT 31.1 | ||||||||
EXHIBIT 31.2 | ||||||||
EXHIBIT 32 |
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September 30, | December 31, | |||||||
2007 | 2006 | |||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 521,339 | $ | 513,041 | ||||
Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations | 613,808 | 508,303 | ||||||
Investments | 163,167 | 125,533 | ||||||
Investments in managed funds | 322,450 | 372,869 | ||||||
Securities borrowed | 19,348,462 | 9,711,894 | ||||||
Securities purchased under agreements to resell | 1,135,511 | 226,176 | ||||||
Receivable from brokers, dealers and clearing organizations | 777,992 | 254,580 | ||||||
Receivable from customers | 751,017 | 663,552 | ||||||
Financial instruments owned, including securities pledged to creditors of $2,142,995 and $1,481,098 in 2007 and 2006, respectively | 6,915,717 | 4,606,223 | ||||||
Premises and equipment | 122,490 | 91,375 | ||||||
Goodwill | 330,694 | 257,321 | ||||||
Other assets | 599,719 | 494,590 | ||||||
Total Assets | $ | 31,602,366 | $ | 17,825,457 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Bank loans and current portion of long-term debt | $ | 399,806 | $ | 99,981 | ||||
Securities loaned | 8,861,200 | 6,794,554 | ||||||
Securities sold under agreements to repurchase | 11,073,637 | 2,092,838 | ||||||
Payable to brokers, dealers and clearing organizations | 1,289,104 | 669,196 | ||||||
Payable to customers | 1,083,635 | 1,010,486 | ||||||
Financial instruments sold, not yet purchased | 4,077,429 | 3,600,869 | ||||||
Accrued expenses and other liabilities | 492,076 | 650,974 | ||||||
27,276,887 | 14,918,898 | |||||||
Long-term debt | 1,764,560 | 1,168,562 | ||||||
Mandatorily redeemable convertible preferred stock | 125,000 | 125,000 | ||||||
Minority interest | 605,167 | 31,910 | ||||||
Total Liabilities | 29,771,614 | 16,244,370 | ||||||
STOCKHOLDERS’ EQUITY | ||||||||
Common stock, $.0001 par value. Authorized 500,000,000 shares; issued 154,178,478 shares in 2007 and 145,628,024 shares in 2006 | 15 | 14 | ||||||
Additional paid-in capital | 1,066,634 | 876,393 | ||||||
Retained earnings | 1,071,659 | 952,263 | ||||||
Less: | ||||||||
Treasury stock, at cost, 28,521,310 shares in 2007 and 26,081,110 shares in 2006 | (320,222 | ) | (254,437 | ) | ||||
Accumulated other comprehensive gain: | ||||||||
Currency translation adjustments | 15,576 | 9,764 | ||||||
Additional minimum pension liability | (2,910 | ) | (2,910 | ) | ||||
Total accumulated other comprehensive gain | 12,666 | 6,854 | ||||||
Total stockholders’ equity | 1,830,752 | 1,581,087 | ||||||
Total Liabilities and Stockholders’ Equity | $ | 31,602,366 | $ | 17,825,457 | ||||
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Three Months Ended | Nine Months Ended | |||||||||||||||
Sept. 30, | Sept. 30, | Sept. 30, | Sept. 30, | |||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Revenues: | ||||||||||||||||
Commissions | $ | 95,652 | $ | 67,953 | $ | 255,778 | $ | 208,589 | ||||||||
Principal transactions | 47,325 | 98,984 | 320,804 | 353,088 | ||||||||||||
Investment banking | 189,780 | 144,763 | 582,988 | 395,429 | ||||||||||||
Asset management fees and investment income (loss) from managed funds | (6,283 | ) | 16,783 | 29,586 | 80,132 | |||||||||||
Interest | 334,056 | 132,424 | 845,957 | 385,035 | ||||||||||||
Other | 6,434 | 7,757 | 21,480 | 27,587 | ||||||||||||
Total revenues | 666,964 | 468,664 | 2,056,593 | 1,449,860 | ||||||||||||
Interest expense | 332,540 | 128,054 | 837,900 | 366,493 | ||||||||||||
Revenues, net of interest expense | 334,424 | 340,610 | 1,218,693 | 1,083,367 | ||||||||||||
Non-interest expenses: | ||||||||||||||||
Compensation and benefits | 183,503 | 184,421 | 662,771 | 593,830 | ||||||||||||
Floor brokerage and clearing fees | 19,155 | 15,496 | 50,264 | 46,363 | ||||||||||||
Technology and communications | 26,120 | 21,490 | 71,980 | 59,863 | ||||||||||||
Occupancy and equipment rental | 20,280 | 15,819 | 56,315 | 44,390 | ||||||||||||
Business development | 13,791 | 12,653 | 38,980 | 36,057 | ||||||||||||
Other | 16,254 | 14,394 | 51,178 | 48,405 | ||||||||||||
Total non-interest expenses | 279,103 | 264,273 | 931,488 | 828,908 | ||||||||||||
Earnings before income taxes, minority interest and cumulative effect of change in accounting principle | 55,321 | 76,337 | 287,205 | 254,459 | ||||||||||||
Income taxes | 21,608 | 29,734 | 107,312 | 99,523 | ||||||||||||
Earnings before minority interest and cumulative effect of change in accounting principle | 33,713 | 46,603 | 179,893 | 154,936 | ||||||||||||
Minority interest in earnings (loss) of consolidated subsidiaries | (5,060 | ) | 663 | 11,026 | 6,575 | |||||||||||
Earnings before cumulative effect of change in accounting principle, net | 38,773 | 45,940 | 168,867 | 148,361 | ||||||||||||
Cumulative effect of change in accounting principle, net | ¾ | ¾ | ¾ | 1,606 | ||||||||||||
Net earnings | $ | 38,773 | $ | 45,940 | $ | 168,867 | $ | 149,967 | ||||||||
Earnings per share: | ||||||||||||||||
Basic- | ||||||||||||||||
Earnings before cumulative effect of change in accounting principle, net | $ | 0.27 | $ | 0.34 | $ | 1.19 | $ | 1.12 | ||||||||
Cumulative effect of change in accounting principle, net | ¾ | ¾ | ¾ | 0.01 | ||||||||||||
Net earnings | $ | 0.27 | $ | 0.34 | $ | 1.19 | $ | 1.13 | ||||||||
Diluted- | ||||||||||||||||
Earnings before cumulative effect of change in accounting principle, net | $ | 0.26 | $ | 0.32 | $ | 1.12 | $ | 1.03 | ||||||||
Cumulative effect of change in accounting principle, net | ¾ | ¾ | ¾ | 0.01 | ||||||||||||
Net earnings | $ | 0.26 | $ | 0.32 | $ | 1.12 | $ | 1.04 | ||||||||
Weighted average shares: | ||||||||||||||||
Basic | 142,822 | 135,140 | 141,905 | 133,048 | ||||||||||||
Diluted | 155,480 | 148,908 | 153,911 | 146,502 | ||||||||||||
Fixed charge coverage ratio | 2.6X | 4.0X | 4.2X | 4.5X |
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Nine Months | Year | |||||||
Ended | Ended | |||||||
September 30, | December 31, | |||||||
2007 | 2006 | |||||||
Common stock, par value $.0001 per share | ||||||||
Balance, beginning of year | $ | 14 | $ | 7 | ||||
Issued stock | 1 | 7 | ||||||
Balance, end of period | $ | 15 | $ | 14 | ||||
Additional paid in capital | ||||||||
Balance, beginning of year | $ | 876,393 | $ | 709,447 | ||||
Benefit plan share activity (1) | 30,424 | 33,360 | ||||||
Share-based amortization expense | 107,553 | 83,137 | ||||||
Proceeds from exercise of stock options | 3,652 | 17,543 | ||||||
Acquisitions and contingent consideration | 10,349 | — | ||||||
Tax benefits | 38,263 | 32,906 | ||||||
Balance, end of period | $ | 1,066,634 | $ | 876,393 | ||||
Retained earnings | ||||||||
Balance, beginning of year, as previously reported | $ | 952,263 | $ | 803,262 | ||||
Cumulative effect of adjustment from adoption of FIN 48 | (410 | ) | — | |||||
Net earnings | 168,867 | 205,750 | ||||||
Dividends | (49,061 | ) | (56,749 | ) | ||||
Balance, end of period | $ | 1,071,659 | $ | 952,263 | ||||
Treasury stock, at cost | ||||||||
Balance, beginning of year | $ | (254,437 | ) | $ | (220,703 | ) | ||
Purchases | (61,766 | ) | (23,972 | ) | ||||
Returns / forfeitures | (4,019 | ) | (9,762 | ) | ||||
Balance, end of period | $ | (320,222 | ) | $ | (254,437 | ) | ||
Accumulated other comprehensive income (loss) | ||||||||
Balance, beginning of year | $ | 6,854 | $ | (5,163 | ) | |||
Currency adjustment | 5,812 | 8,802 | ||||||
Pension adjustment | — | 3,215 | ||||||
Balance, end of period | $ | 12,666 | $ | 6,854 | ||||
Total stockholders’ equity | $ | 1,830,752 | $ | 1,581,087 | ||||
Comprehensive income | ||||||||
Net earnings | $ | 168,867 | $ | 205,750 | ||||
Other comprehensive income | 5,812 | 12,017 | ||||||
Total comprehensive income | $ | 174,679 | $ | 217,767 | ||||
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Nine Months Ended | ||||||||
Sept. 30, | Sept. 30, | |||||||
2007 | 2006 | |||||||
Cash flows from operating activities: | ||||||||
Net earnings | $ | 168,867 | $ | 149,967 | ||||
Adjustments to reconcile net earnings to net cash used in operating activities: | ||||||||
Cumulative effect of accounting change, net | ¾ | 1,606 | ||||||
Depreciation and amortization | 21,123 | 14,478 | ||||||
Accruals related to various benefit plans, stock issuances, net of forfeitures | 133,959 | 75,510 | ||||||
(Increase) in cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations | (104,169 | ) | (138,744 | ) | ||||
(Increase) decrease in receivables: | ||||||||
Securities borrowed | (9,636,234 | ) | 115,658 | |||||
Brokers, dealers and clearing organizations | (563,124 | ) | (137,169 | ) | ||||
Customers | (87,043 | ) | (118,512 | ) | ||||
Increase in financial instruments owned | (2,006,785 | ) | (2,277,946 | ) | ||||
Increase in investments | (35,417 | ) | (19,196 | ) | ||||
Increase in investments in managed funds | (8,274 | ) | (13,588 | ) | ||||
Increase in securities purchased under agreements to resell | (909,335 | ) | ¾ | |||||
Increase in other assets | (111,017 | ) | (15,935 | ) | ||||
Increase (decrease) in operating payables: | ||||||||
Securities loaned | 2,100,026 | (537,375 | ) | |||||
Securities sold under agreements to repurchase | 8,980,799 | 65,125 | ||||||
Brokers, dealers and clearing organizations | 695,432 | 213,445 | ||||||
Customers | 73,283 | 117,025 | ||||||
Increase in financial instruments sold, not yet purchased | 406,253 | 1,785,692 | ||||||
(Decrease) increase in accrued expenses and other liabilities | (176,154 | ) | 238,015 | |||||
Increase (decrease) in minority interest | 11,026 | (5,227 | ) | |||||
Net cash used in operating activities | (1,046,784 | ) | (487,171 | ) | ||||
Cash flows from investing activities: | ||||||||
Decrease in short term bond funds | ¾ | 7,037 | ||||||
Business acquisitions, net of cash received | (33,446 | ) | ¾ | |||||
Cash paid for contingent consideration | (25,720 | ) | (19,944 | ) | ||||
Purchase of premises and equipment | (50,393 | ) | (20,104 | ) | ||||
Net cash used in investing activities | (109,559 | ) | (33,011 | ) | ||||
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CONSOLIDATED STATEMENTS OF CASH FLOWS — CONTINUED (Unaudited)
(Dollars in thousands)
Nine Months Ended | ||||||||
Sept. 30, | Sept. 30, | |||||||
2007 | 2006 | |||||||
Cash flows from financing activities | ||||||||
Tax benefit from the issuance of stock based awards | 38,263 | 17,681 | ||||||
Proceeds from reorganization of high yield secondary market trading | 354,256 | ¾ | ||||||
Redemption of capital units related to our reorganization of high yield secondary market trading | (25,780 | ) | ¾ | |||||
Repayment of long-term debt | (100,000 | ) | ¾ | |||||
Net proceeds from (payments on): | ||||||||
Bank loans | 399,806 | ¾ | ||||||
Issuance of senior notes | 593,176 | 492,155 | ||||||
Termination of interest rate swaps | 8,452 | |||||||
Issuance of mandatorily redeemable convertible preferred stock | ¾ | 125,000 | ||||||
Minority interest holders of consolidated subsidiaries related to asset management activities | 3,586 | ¾ | ||||||
Repurchase of treasury stock | (61,766 | ) | (16,638 | ) | ||||
Dividends | (49,061 | ) | (40,948 | ) | ||||
Exercise of stock options, not including tax benefits | 3,652 | 12,852 | ||||||
Net cash provided by financing activities | 1,164,584 | 590,102 | ||||||
Effect of foreign currency translation on cash and cash equivalents | 57 | 656 | ||||||
Net increase in cash and cash equivalents | 8,298 | 70,576 | ||||||
Cash and cash equivalents — beginning of period | 513,041 | 255,933 | ||||||
Cash and cash equivalents — end of period | $ | 521,339 | $ | 326,509 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid during the period for: | ||||||||
Interest | $ | 828,671 | $ | 374,388 | ||||
Income taxes | $ | 34,722 | $ | 140,472 | ||||
Non-cash proceeds from reorganization of high yield secondary market trading | $ | 230,169 | $ | ¾ | ||||
Putnam Acquisition: | ||||||||
Fair value of assets acquired, including goodwill | 14,664 | ¾ | ||||||
Liabilities assumed | ¾ | ¾ | ||||||
Stock issued | ¾ | ¾ | ||||||
Cash paid for acquisition | 14,664 | ¾ | ||||||
LongAcre Acquisition: | ||||||||
Fair value of assets acquired, including goodwill | 32,828 | ¾ | ||||||
Liabilities assumed | (6,150 | ) | ¾ | |||||
Stock issued (311,831 shares) | (7,896 | ) | ¾ | |||||
Cash paid for acquisition | 18,782 | ¾ | ||||||
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Page | ||||||
Note 1. | Organization and Summary of Significant Accounting Policies | 9 | ||||
Note 2. | Asset Management Fees and Investment Income From Managed Funds | 18 | ||||
Note 3. | Cash, Cash Equivalents, and Short-Term Investments | 21 | ||||
Note 4. | Financial Instruments | 21 | ||||
Note 5. | Short-Term Borrowings | 24 | ||||
Note 6. | Long-Term Debt | 24 | ||||
Note 7. | Mandatorily Redeemable Convertible Preferred Stock | 24 | ||||
Note 8. | Income Taxes | 25 | ||||
Note 9. | Benefit Plans | 25 | ||||
Note 10. | Minority Interest | 26 | ||||
Note 11. | Earnings Per Share | 27 | ||||
Note 12. | Derivative Financial Instruments | 28 | ||||
Note 13. | Other Comprehensive Gain (Loss) | 31 | ||||
Note 14. | Net Capital Requirements | 32 | ||||
Note 15. | Commitments, Contingencies and Guarantees | 33 | ||||
Note 16. | Segment Reporting | 35 | ||||
Note 17. | Goodwill | 36 | ||||
Note 18. | Quarterly Dividends | 37 | ||||
Note 19. | Variable Interest Entities (“VIEs”) | 37 | ||||
Note 20. | High Yield Secondary Market Trading (“HYSMT”) | 38 | ||||
Note 21. | Stock Based Compensation | 39 | ||||
Note 22. | Subsequent Event | 43 |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
September 30, | September 30, | |||||||
2007 | 2006 | |||||||
Assets under management: | ||||||||
Fixed Income (1) | $ | 1,832 | $ | 1,420 | ||||
Equities | 277 | 517 | ||||||
Convertibles | 2,802 | 2,221 | ||||||
4,911 | 4,158 | |||||||
Assets under management by third parties (2): | ||||||||
Equities, Convertibles and Fixed Income | 235 | 260 | ||||||
Private Equity | 600 | 600 | ||||||
835 | 860 | |||||||
Total | $ | 5,746 | $ | 5,018 | ||||
(1) | With the reorganization of our high yield secondary market trading activities, we no longer include high yield assets as assets under management as of April 2, 2007. Prior period amounts include $439 million in assets under management from our high yield 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. |
Three Months Ended | Nine Months Ended | |||||||||||||||
Sept. 30, | Sept. 30, | Sept. 30, | Sept. 30, | |||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Asset management fees: | ||||||||||||||||
Fixed Income (1) | $ | 1,987 | $ | 3,868 | $ | 9,589 | $ | 19,978 | ||||||||
Equities | 349 | (823 | ) | 3,494 | 11,060 | |||||||||||
Convertibles | 3,033 | 3,300 | 9,030 | 7,997 | ||||||||||||
Real Assets | ¾ | ¾ | ¾ | 2,237 | ||||||||||||
5,369 | 6,345 | 22,113 | 41,272 | |||||||||||||
Investment income (loss) from managed funds (1) | (11,652 | ) | 10,438 | 7,473 | 38,860 | |||||||||||
Total | $ | (6,283 | ) | $ | 16,783 | $ | 29,586 | $ | 80,132 | |||||||
(1) | With the reorganization of our high yield secondary market trading activities, we no longer record asset management fees and investment income from managed funds related to these activities. For the three month and nine month period ending September 30, 2006 asset management fees and investment income from managed funds related to our high yield funds amounted to $5.4 million and $34.6 million, respectively. |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Net | ||||||||||||||||
Investment | Investment | Investment | ||||||||||||||
Income (Loss) | Income from | Income (Loss) | ||||||||||||||
from | Managed Funds – | from | ||||||||||||||
Average | Managed | Minority Interest | Managed | |||||||||||||
Investment (2) | Funds | Portion | Funds | |||||||||||||
Fixed Income (1) | $ | 220.3 | $ | (10.3 | ) | $ | ¾ | $ | (10.3 | ) | ||||||
Equities | 174.1 | (1.7 | ) | ¾ | (1.7 | ) | ||||||||||
Convertibles | 34.4 | 0.3 | ¾ | 0.3 | ||||||||||||
Total | $ | 428.8 | $ | (11.7 | ) | $ | ¾ | $ | (11.7 | ) | ||||||
(2) Includes consolidated asset management entities of $123.5 million.
Investment | Net | |||||||||||||||
Investment | Income from | Investment | ||||||||||||||
Income from | Managed Funds – | Income from | ||||||||||||||
Average | Managed | Minority Interest | Managed | |||||||||||||
Investment (1) | Funds | Portion | Funds | |||||||||||||
Fixed Income | $ | 217.0 | $ | 8.1 | $ | 0.4 | $ | 7.7 | ||||||||
Equities | 85.4 | 2.3 | ¾ | 2.3 | ||||||||||||
Convertibles | 12.9 | ¾ | ¾ | ¾ | ||||||||||||
Total | $ | 315.3 | $ | 10.4 | $ | 0.4 | $ | 10.0 | ||||||||
(1) | Includes consolidated asset management entities of $77.0 million and non-consolidated high yield funds of $54.4 million. |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Investment | Net | |||||||||||||||
Investment | Income from | Investment | ||||||||||||||
Income from | Managed Funds – | Income from | ||||||||||||||
Average | Managed | Minority Interest | Managed | |||||||||||||
Investment (2) | Funds | Portion | Funds | |||||||||||||
Fixed Income (1) | $ | 239.0 | $ | 2.1 | $ | 0.4 | $ | 1.7 | ||||||||
Equities | 168.2 | 3.9 | 0.4 | 3.5 | ||||||||||||
Convertibles | 34.0 | 1.5 | ¾ | 1.5 | ||||||||||||
Total | $ | 441.2 | $ | 7.5 | $ | 0.8 | $ | 6.7 | ||||||||
(2) Includes consolidated asset management entities of $101.1 million.
Investment | Net | |||||||||||||||
Investment | Income from | Investment | ||||||||||||||
Income from | Managed Funds – | Income from | ||||||||||||||
Average | Managed | Minority Interest | Managed | |||||||||||||
Investment (1) | Funds | Portion | Funds | |||||||||||||
Fixed Income | $ | 187.0 | $ | 28.9 | $ | 6.3 | $ | 22.6 | ||||||||
Equities | 77.8 | 8.2 | ¾ | 8.2 | ||||||||||||
Convertibles | 12.7 | 1.1 | ¾ | 1.1 | ||||||||||||
Real Assets | 4.7 | 0.7 | ¾ | 0.7 | ||||||||||||
Total | $ | 282.2 | $ | 38.9 | $ | 6.3 | $ | 32.6 | ||||||||
(1) | Includes consolidated asset management entities of $40.9 million and non-consolidated high yield funds of $51.3 million. |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
September 30, 2007 | December 31, 2006 | |||||||
Cash and cash equivalents: | ||||||||
Cash in banks | $ | 223,528 | $ | 107,488 | ||||
Money market investments | 297,811 | 405,553 | ||||||
Total cash and cash equivalents | 521,339 | 513,041 | ||||||
Cash and securities segregated (1) | 613,808 | 508,303 | ||||||
Other (2) | 2,251 | 71,160 | ||||||
$ | 1,137,398 | $ | 1,092,504 | |||||
(1) | 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. | ||
(2) | Items are financial instruments utilized in our overall cash management activities and are readily convertible to cash, marginable or accessible for liquidity purposes. |
September 30, 2007 | December 31, 2006 | |||||||||||||||
Financial | Financial | |||||||||||||||
Instruments | Instruments | |||||||||||||||
Financial | Sold, | Financial | Sold, | |||||||||||||
Instruments | Not Yet | Instruments | Not Yet | |||||||||||||
Owned | Purchased | Owned | Purchased | |||||||||||||
Corporate equity securities | $ | 2,868,873 | $ | 1,918,672 | $ | 1,737,174 | $ | 1,835,046 | ||||||||
Corporate debt securities | 2,517,960 | 1,499,497 | 1,918,829 | 1,185,400 | ||||||||||||
U.S. Government and agency obligations | 625,019 | 313,214 | 592,374 | 339,891 | ||||||||||||
Mortgage-backed securities (1) | 48,305 | ¾ | 85,040 | ¾ | ||||||||||||
Asset-backed securities | 4,325 | ¾ | 28,009 | ¾ | ||||||||||||
Loans and loan commitments | 148,100 | ¾ | ¾ | ¾ | ||||||||||||
Derivatives | 697,663 | 345,738 | 234,646 | 240,231 | ||||||||||||
Other | 5,472 | 308 | 10,151 | 301 | ||||||||||||
$ | 6,915,717 | $ | 4,077,429 | $ | 4,606,223 | $ | 3,600,869 | |||||||||
(1) | Represents non-agency mortgage-backed securities. As of September 30, 2007, these securities had a rating of AA or higher. |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
September 30, 2007 | December 31, 2006 | |||||||
Corporate equity securities | $ | 1,766,909 | $ | 1,068,498 | ||||
Corporate debt securities | 376,086 | 412,600 | ||||||
$ | 2,142,995 | $ | 1,481,098 | |||||
Level 1: | Inputs that reflect unadjusted quoted prices at the measurement date for identical assets or liabilities in active markets; | |||
Level 2: | Inputs other than quoted prices included in Level 1 that are either directly or indirectly observable for the asset or liability at the measurement date; | |||
Level 3: | Inputs that are unobservable at the measurement date. |
Counterparty | ||||||||||||||||||||
and Cash | ||||||||||||||||||||
Collateral | ||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Netting | Total | ||||||||||||||||
Assets: | ||||||||||||||||||||
Financial instruments owned: | ||||||||||||||||||||
Securities | $ | 2,717,556 | $ | 3,086,127 | $ | 266,271 | $ | ¾ | $ | 6,069,954 | ||||||||||
Loans and loan commitments (1) | ¾ | ¾ | 148,100 | ¾ | 148,100 | |||||||||||||||
Derivative instruments | 841,303 | 129,807 | ¾ | (273,447 | ) | 697,663 | ||||||||||||||
Total financial instruments owned | 3,558,859 | 3,215,934 | 414,371 | (273,447 | ) | 6,915,717 | ||||||||||||||
Investments (2) | ¾ | ¾ | 105,550 | ¾ | 105,550 | |||||||||||||||
Liabilities: | ||||||||||||||||||||
Financial instruments sold, not yet purchased: | ||||||||||||||||||||
Securities | 2,180,301 | 1,529,313 | 22,077 | ¾ | 3,731,691 | |||||||||||||||
Derivative instruments | 416,970 | 717,618 | ¾ | (788,850 | ) | 345,738 | ||||||||||||||
Total financial instruments sold, not yet purchased | 2,597,271 | 2,246,931 | 22,077 | (788,850 | ) | 4,077,429 |
(1) | We elected the fair value option in accordance with FASB 159 for loans and loan commitments. The fair value of these loans approximates the contractual principal amounts. No gains or losses were recorded for the three and nine month periods ended September 30, 2007. | ||
(2) | Our $57.6 million strategic equity method investment in Jefferies Finance LLC as of September 30, 2007 is excluded from this table. |
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Non-derivative | Non-derivative | |||||||||||
instruments – | instruments – | |||||||||||
Assets | Liabilities | Investments | ||||||||||
Balance, June 30, 2007 | $ | 252,695 | $ | 2,835 | $ | 92,923 | ||||||
Total gains/ (losses) (realized and unrealized) (1) | 8,358 | 45 | 12,854 | |||||||||
Purchases, sales, settlements, and Issuances | 170,659 | (803 | ) | (227 | ) | |||||||
Net transfers in and/or out of Level 3 | (17,341 | ) | 20,000 | ¾ | ||||||||
Balance, September 30, 2007 | $ | 414,371 | $ | 22,077 | $ | 105,550 | ||||||
Change in unrealized gains/ (losses) relating to instruments still held at September 30, 2007 (1) | $ | 10,072 | $ | (5 | ) | 12,854 |
(1) | Realized and unrealized gains/ losses are reported in principal transactions in the Consolidated Statements of Earnings. |
Non- | ||||||||||||
Non-derivative | derivative | |||||||||||
instruments – | instruments – | |||||||||||
Assets | Liabilities | Investments | ||||||||||
Balance, December 31, 2006 | $ | 205,278 | $ | ¾ | $ | 97,289 | ||||||
Total gains/ (losses) (realized and unrealized) (1) | 5,575 | 45 | 21,515 | |||||||||
Purchases, sales, settlements, and Issuances | 220,292 | 515 | (13,254 | ) | ||||||||
Net transfers in and/or out of Level 3 | (16,774 | ) | 21,517 | ¾ | ||||||||
Balance, September 30, 2007 | $ | 414,371 | $ | 22,077 | $ | 105,550 | ||||||
Change in unrealized gains/ (losses) relating to instruments still held at September 30, 2007 (1) | $ | (11,292 | ) | $ | (5 | ) | $ | 21,515 |
(1) | Realized and unrealized gains/ losses are reported in principal transactions in the Consolidated Statements of Earnings. |
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(Unaudited)
September 30, 2007 | December 31, 2006 | |||||||
7.75% Senior Notes, due 2012, net of unamortized discount of $4,127 (2007) | 329,237 | 328,003 | ||||||
5.875% Senior Notes, due 2014, net of unamortized discount of $1,653 (2007) | 248,347 | ¾ | ||||||
5.5% Senior Notes, due 2016, net of unamortized discount of $1,544 (2007) | 348,456 | 348,320 | ||||||
6.45% Senior Debentures, due 2027, net of unamortized discount of $3,790 (2007) | 346,210 | ¾ | ||||||
6.25% Senior Debentures, due 2036, net of unamortized discount of $7,690 (2007) | 492,310 | 492,239 | ||||||
$ | 1,764,560 | $ | 1,168,562 | |||||
In January 2006, we sold in a registered public offering $500 million aggregate principal amount of our unsecured 6.25% 30-year senior debentures due January 15, 2036.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
Sept. 30, | Sept. 30, | Sept. 30, | Sept. 30, | |||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Net pension cost included the following components: | ||||||||||||||||
Service cost (1) | $ | 69 | $ | 137 | $ | 207 | $ | 137 | ||||||||
Interest cost on projected benefit obligation | 599 | 543 | 1,779 | 1,818 | ||||||||||||
Expected return on plan assets | (833 | ) | (697 | ) | (2,089 | ) | (1,816 | ) | ||||||||
Amortization of prior service cost | ¾ | ¾ | ¾ | ¾ | ||||||||||||
Amortization of net loss | (141 | ) | 26 | 141 | 536 | |||||||||||
Net periodic pension cost | $ | (306 | ) | $ | 9 | $ | 38 | $ | 675 | |||||||
(1) | Service costs relates to administrative expenses incurred during the three and nine month periods. |
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(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
Sept. 30, | Sept. 30, | Sept. 30, | Sept. 30, | |||||||||||||
2007 | 2006 | 2007 | 2006 | |||||||||||||
Earnings before cumulative effect of change in accounting principle, net | $ | 38,773 | $ | 45,940 | $ | 168,867 | $ | 148,361 | ||||||||
Cumulative effect of change in accounting principle, net | ¾ | ¾ | ¾ | 1,606 | ||||||||||||
Net earnings | $ | 38,773 | $ | 45,940 | $ | 168,867 | $ | 149,967 | ||||||||
Add: Convertible preferred stock dividends | 1,016 | 1,016 | 3,048 | 2,528 | ||||||||||||
Net earnings for diluted earnings per share | $ | 39,789 | $ | 46,956 | $ | 171,915 | $ | 152,495 | ||||||||
Shares: | ||||||||||||||||
Average shares used in basic computation | 142,822 | 135,140 | 141,905 | 133,048 | ||||||||||||
Unvested restricted stock / restricted stock units | 8,351 | 8,542 | 7,462 | 8,771 | ||||||||||||
Stock options | 236 | 1,184 | 480 | 1,341 | ||||||||||||
Convertible preferred stock | 4,071 | 4,042 | 4,064 | 3,342 | ||||||||||||
Average shares used in diluted computation | 155,480 | 148,908 | 153,911 | 146,502 | ||||||||||||
Earnings per share: | ||||||||||||||||
Basic- | ||||||||||||||||
Earnings before cumulative effect of change in accounting principle, net | $ | 0.27 | $ | 0.34 | $ | 1.19 | $ | 1.12 | ||||||||
Cumulative effect of change in accounting principle, net | ¾ | ¾ | ¾ | 0.01 | ||||||||||||
Net earnings | $ | 0.27 | $ | 0.34 | $ | 1.19 | $ | 1.13 | ||||||||
Diluted- | ||||||||||||||||
Earnings before cumulative effect of change in accounting principle, net | $ | 0.26 | $ | 0.32 | $ | 1.12 | $ | 1.03 | ||||||||
Cumulative effect of change in accounting principle, net | ¾ | ¾ | ¾ | 0.01 | ||||||||||||
Net earnings | $ | 0.26 | $ | 0.32 | $ | 1.12 | $ | 1.04 | ||||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
(in thousands) | September 30, 2007 | December 31, 2006 | ||||||||||||||
Assets | Liabilities | Assets | Liabilities | |||||||||||||
Derivative instruments included in financial instruments owned and financial instruments sold, not yet purchased: | ||||||||||||||||
Exchange traded futures | $ | 397,196 | $ | 13,345 | $ | 19,724 | $ | 2,116 | ||||||||
Swaps (1) | 5,337 | 490,642 | 173,821 | 20,251 | ||||||||||||
Option contracts (1) | 289,303 | 350,788 | 152,361 | 238,115 | ||||||||||||
Forward contracts | 10,127 | 10,666 | 820 | ¾ | ||||||||||||
Total | $ | 701,963 | $ | 865,441 | $ | 346,726 | $ | 260,482 | ||||||||
Derivative instruments included in other assets: | ||||||||||||||||
Interest rate swaps | ¾ | ¾ | 7,690 | ¾ |
(1) | Option and swap contracts in the table above are gross of collateral received and/ or collateral pledged. Option and swap contracts are recorded net of collateral received and/ or collateral pledged on the Consolidated Statement of Financial Condition. As September 30, 2007, collateral received and collateral pledged were $4.3 million and $519.7 million, respectively. At December 31, 2006, collateral received and collateral pledged were $112.1 million and $20.3 million, respectively. |
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(Unaudited)
(in millions) | 0 – 12 Months | 1 – 5 Years | 5 – 10 Years | Total | ||||||||||||
Swaps | $ | (483.6 | ) | $ | (0.6 | ) | $ | ¾ | $ | (484.2 | ) | |||||
Options | (6.5 | ) | (70.7 | ) | ¾ | (77.2 | ) | |||||||||
FX forwards | (1.3 | ) | 0.5 | ¾ | (0.8 | ) | ||||||||||
Exchange-traded futures | 168.5 | 228.3 | (0.1 | ) | 396.7 | |||||||||||
Total | $ | (322.9 | ) | $ | 157.5 | $ | (0.1 | ) | $ | (165.5 | ) | |||||
Fair Value | ||||||||
(in millions) | September 30, | December 31, | ||||||
2007 | 2006 | |||||||
Counterparty credit quality: | ||||||||
A or higher | $ | (564.0 | ) | $ | 37.5 | |||
Exchange-traded futures and options (1) | 398.5 | 13.4 | ||||||
Total | $ | (165.5 | ) | $ | 50.9 | |||
(1) | Exchange-traded commodities and foreign exchange futures and options are not deemed to have significant credit exposures as the exchanges guarantee that every contract will be properly settled on a daily basis. |
Fair Value | ||||||||
(in millions) | September 30, | December 31, | ||||||
2007 | 2006 | |||||||
Foundations, trusts and endowments | $ | (30.9 | ) | $ | (6.4 | ) | ||
Financial services | (235.6 | ) | 4.7 | |||||
Sovereign entity | (5.2 | ) | ¾ | |||||
Collective investment vehicles (including pension plans, mutual funds and other institutional counterparties) | (292.3 | ) | 39.2 | |||||
Exchanges (1) | 398.5 | 13.4 | ||||||
Total | $ | (165.5 | ) | $ | 50.9 | |||
(1) | Exchange-traded commodities and foreign exchange futures and options are not deemed to have significant credit exposures as the exchanges guarantee that every contract will be properly settled on a daily basis. |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Minimum | Accumulated | |||||||||||
Currency | Pension | Other | ||||||||||
Translation | Liability | Comprehensive | ||||||||||
Adjustments | Adjustment | Gain | ||||||||||
Beginning at June 30, 2007 | $ | 11,153 | $ | (2,910 | ) | $ | 8,243 | |||||
Change in third quarter of 2007 | 4,423 | ¾ | 4,423 | |||||||||
Ending at September 30, 2007 | $ | 15,576 | $ | (2,910 | ) | $ | 12,666 | |||||
Minimum | Accumulated | |||||||||||
Currency | Pension | Other | ||||||||||
Translation | Liability | Comprehensive | ||||||||||
Adjustments | Adjustment | (Loss) Gain | ||||||||||
Beginning at June 30, 2006 | $ | 6,502 | $ | (6,125 | ) | $ | 377 | |||||
Change in third quarter of 2006 | (164 | ) | ¾ | (164 | ) | |||||||
Ending at September 30, 2006 | $ | 6,338 | $ | (6,125 | ) | $ | 213 | |||||
September 30, | September 30, | |||||||
2007 | 2006 | |||||||
Net earnings | $ | 38,773 | $ | 45,940 | ||||
Other comprehensive gain (loss) | 4,423 | (164 | ) | |||||
Comprehensive income | $ | 43,196 | $ | 45,776 | ||||
Minimum | Accumulated | |||||||||||
Currency | Pension | Other | ||||||||||
Translation | Liability | Comprehensive | ||||||||||
Adjustments | Adjustment | Gain | ||||||||||
Beginning at December 31, 2006 | $ | 9,764 | $ | (2,910 | ) | $ | 6,854 | |||||
Change in first nine months of 2007 | 5,812 | ¾ | 5,812 | |||||||||
Ending at September 30, 2007 | $ | 15,576 | $ | (2,910 | ) | $ | 12,666 | |||||
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(Unaudited)
Minimum | Accumulated | |||||||||||
Currency | Pension | Other | ||||||||||
Translation | Liability | Comprehensive | ||||||||||
Adjustments | Adjustment | (Loss) Gain | ||||||||||
Beginning at December 31, 2005 | $ | 962 | $ | (6,125 | ) | $ | (5,163 | ) | ||||
Change in first nine months of 2006 | 5,376 | ¾ | 5,376 | |||||||||
Ending at September 30, 2006 | $ | 6,338 | $ | (6,125 | ) | $ | 213 | |||||
September 30, | September 30, | |||||||
2007 | 2006 | |||||||
Net earnings | $ | 168,867 | $ | 149,967 | ||||
Other comprehensive gain (loss) | 5,812 | 5,376 | ||||||
Comprehensive income | $ | 174,679 | $ | 155,343 | ||||
Net Capital | Excess Net Capital | |||||||
Jefferies | $ | 431,661 | $ | 409,404 | ||||
Jefferies Execution | $ | 24,473 | $ | 24,223 | ||||
Jefferies High Yield Trading | $ | 555,033 | $ | 554,783 |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Maturity Date | ||||||||||||||||||||||||
Notional / | 2009 | 2011 | 2013 | |||||||||||||||||||||
Maximum | and | and | and | |||||||||||||||||||||
Payout | 2007 | 2008 | 2010 | 2012 | Later | |||||||||||||||||||
(Dollars in Millions) | ||||||||||||||||||||||||
Standby letters of credit | $ | 258.5 | $ | 128.7 | $ | 129.8 | — | — | — | |||||||||||||||
Bank credit | $ | 60.4 | — | $ | 20.0 | — | $ | 36.0 | $ | 4.4 | ||||||||||||||
Equity commitments | $ | 511.5 | — | — | — | $ | 1.3 | $ | 510.2 | |||||||||||||||
Derivative contracts | $ | 609.5 | $ | 579.5 | $ | 20.0 | — | $ | 10.0 | — |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
• | 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 segment’s 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 segment’s capital utilization. |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Capital | Asset | ||||||||||||
Markets | Management | Total | |||||||||||
Three months ended September 30, 2007 | |||||||||||||
Net revenues | $ | 342.0 | $ | (7.6 | ) | $ | 334.4 | ||||||
Expenses | 274.5 | 4.6 | 279.1 | ||||||||||
Earnings before income taxes, minority interest and cumulative effect of change in accounting principle | $ | 67.5 | $ | (12.2 | ) | $ | 55.3 | ||||||
Nine months ended September 30, 2007 | |||||||||||||
Net revenues | $ | 1,193.0 | $ | 25.7 | $ | 1,218.7 | |||||||
Expenses | 905.2 | 26.3 | 931.5 | ||||||||||
Earnings before income taxes, minority interest and cumulative effect of change in accounting principle | $ | 287.8 | $ | (0.6 | ) | $ | 287.2 | ||||||
Segment assets | $ | 31,306.3 | $ | 296.1 | $ | 31,602.4 | |||||||
Three months ended September 30, 2006 | |||||||||||||
Net revenues | $ | 330.4 | $ | 10.2 | $ | 340.6 | |||||||
Expenses | 249.9 | 14.4 | 264.3 | ||||||||||
Earnings before income taxes, minority interest and cumulative effect of change in accounting principle | $ | 80.5 | $ | (4.2 | ) | $ | 76.3 | ||||||
Nine months ended September 30, 2006 | |||||||||||||
Net revenues | $ | 1,041.9 | $ | 41.5 | $ | 1,083.4 | |||||||
Expenses | 785.4 | 43.5 | 828.9 | ||||||||||
Earnings before income taxes, minority interest and cumulative effect of change in accounting principle | $ | 256.5 | $ | (2.0 | ) | $ | 254.5 | ||||||
Segment assets | $ | 15,270.7 | $ | 214.0 | $ | 15,484.7 | |||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Nine Months | ||||
Ended | ||||
Sept. 30, 2007 | ||||
Balance, at December 31, 2006 | $ | 257,321 | ||
Add: Acquisition(s) | 44,244 | |||
Add: Accrued contingent consideration | 29,129 | |||
Balance, at September 30, 2007 | $ | 330,694 | ||
1st Quarter | 2nd Quarter | 3rd Quarter | ||||||||||
2007 | $ | 0.125 | $ | 0.125 | $ | 0.125 | ||||||
2006 | $ | 0.075 | $ | 0.125 | $ | 0.125 |
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(Unaudited)
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(Unaudited)
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(Unaudited)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Weighted | ||||||||
Nine Months Ended | Average Grant | |||||||
September 30, 2007 | Date Fair Value | |||||||
(Shares in 000s) | ||||||||
Restricted stock | ||||||||
Balance, beginning of year | 4,336 | $ | 19.12 | |||||
Grants | 4,664 | $ | 28.57 | |||||
Forfeited | (382 | ) | $ | 25.19 | ||||
Vested | (1,644 | ) | $ | 19.91 | ||||
Balance, end of period | 6,974 | $ | 25.26 | |||||
Weighted | |||||||||||||||||
Nine Months Ended | Average Grant | ||||||||||||||||
September 30, 2007 | 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 year | 14,813 | 13,905 | $ | 19.21 | $ | 7.26 | |||||||||||
Grants, includes dividends | 3,675 | 320 | (1) | $ | 25.13 | $ | — | (1) | |||||||||
Deferral expiration | — | (1,791 | ) | $ | — | $ | 12.20 | ||||||||||
Forfeited | (400 | ) | — | $ | 20.81 | $ | — | ||||||||||
Vested | (3,071 | ) | 3,071 | $ | 17.99 | $ | 17.99 | ||||||||||
Grants related to stock option exercises | — | 509 | $ | — | $ | 11.69 | |||||||||||
Balance, end of period | 15,017 | 16,014 | $ | 21.01 | $ | 8.75 | |||||||||||
(1) | Represents dividend equivalents on restricted stock units declared during the nine month period ending September 30, 2007. |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Weighted- | ||||||||
Dollars and shares in thousands, except per share data | Average | |||||||
Options | Exercise Price | |||||||
Outstanding, December 31, 2006 | 1,688 | $11.02 | ||||||
Granted | — | — | ||||||
Exercised | (1,303 | ) | $11.18 | |||||
Canceled | — | — | ||||||
Outstanding, September 30, 2007 | 385 | $10.28 | ||||||
Outstanding | ||||||||
Net of Expected | Options | |||||||
September 30, 2007 | Forfeitures | Exercisable | ||||||
Number of options | 385 | 385 | ||||||
Weighted-average exercise price | $10.28 | $10.28 | ||||||
Aggregate intrinsic value | $6,757 | $6,757 | ||||||
Weighted-average remaining contractual term, in years | 1.82 | 1.82 |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
(Unaudited)
Table of Contents
Condition and Results of Operations
• | the description of our business and risk factors contained in our annual report on Form 10-K for the fiscal year ended December 31, 2006 and filed with the SEC on March 1, 2007; | ||
• | the discussion of our analysis of financial condition and results of operations contained in this report under the caption “Management’s 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. |
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Table of Contents
Three Months Ended | |||||||||||||||||
September 30, 2007 | September 30, 2006 | ||||||||||||||||
% of | % of | ||||||||||||||||
Total | Total | ||||||||||||||||
Amount | Revenues | Amount | Revenues | ||||||||||||||
Equity | $ | 140,296 | 21 | % | $ | 112,635 | 24 | % | |||||||||
Fixed income and commodities: | |||||||||||||||||
Fixed income (excluding high yield) and commodities (1) | 16,502 | 2 | 50,871 | 11 | |||||||||||||
High yield (2) | (7,387 | ) | (1 | ) | 11,188 | 2 | |||||||||||
Total | 9,115 | 1 | 62,059 | 13 | |||||||||||||
Investment banking | 189,780 | 29 | 144,763 | 31 | |||||||||||||
Asset management fees and investment income from managed funds (3): | |||||||||||||||||
Asset management fees | 5,369 | 1 | 6,345 | 2 | |||||||||||||
Investment income (loss) from managed funds | (11,652 | ) | (2 | ) | 10,438 | 2 | |||||||||||
Total | (6,283 | ) | (1 | ) | 16,783 | 4 | |||||||||||
Interest | 334,056 | 50 | 132,424 | 28 | |||||||||||||
Total revenues | $ | 666,964 | 100% | $ | 468,664 | 100% | |||||||||||
(1) | Fixed income and commodities revenue is primarily comprised of investment grade fixed income, convertible and commodities product revenue. | ||
(2) | High yield revenue is comprised of revenue generated by our high yield secondary market trading activities during the third quarter of 2007 and revenue generated by our pari passu share of high yield revenue in the third quarter of 2006. Our economic share of the revenues from high yield secondary market trading was $(3.7) million or 50% of the total high yield revenue for the third quarter ended September 30, 2007. For the prior year period we recorded our pari passu share of our high yield fixed income activities in this caption. | ||
(3) | Prior period amounts include asset management revenue from high yield funds. Effective April 2, 2007, with the commencement of our reorganized high yield secondary market trading activities, we do not record asset management revenue associated with these activites. |
Table of Contents
Quarter Ended | ||||||||||||
Sept. 30, | Sept. 30, | Percentage | ||||||||||
2007 | 2006 | Change | ||||||||||
(Dollars in Thousands) | ||||||||||||
Capital markets | $ | 92,256 | $ | 57,816 | 60 | % | ||||||
Advisory | 97,524 | 86,947 | 12 | % | ||||||||
Total | $ | 189,780 | $ | 144,763 | 31 | % | ||||||
In millions | Three | Three | Percent | |||||||||
Month | Month | Change | ||||||||||
Period | Period | |||||||||||
Ending | Ending | |||||||||||
Sept. 30, | Sept. 30, | |||||||||||
2007 | 2006 | |||||||||||
Balance, beginning of period | $5,491 | $4,383 | 25 | % | ||||||||
Net cash flow in (out) | 227 | 562 | ||||||||||
Net market appreciation | 28 | 73 | ||||||||||
255 | 635 | |||||||||||
Balance, end of period | $5,746 | $5,018 | 15 | % | ||||||||
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Nine Months Ended | ||||||||||||||||
September 30, 2007 | September 30, 2006 | |||||||||||||||
% of | % of | |||||||||||||||
Total | Total | |||||||||||||||
Amount | Revenues | Amount | Revenues | |||||||||||||
Equity | $ | 457,916 | 22 | % | $ | 386,917 | 27 | % | ||||||||
Fixed income and commodities: | ||||||||||||||||
Fixed income (excluding high yield) and commodities (1) | 103,073 | 5 | 132,206 | 9 | ||||||||||||
High yield (2) | 37,073 | 2 | 70,141 | 5 | ||||||||||||
Total | 140,146 | 7 | 202,347 | 14 | ||||||||||||
Investment banking | 582,988 | 28 | 395,429 | 27 | ||||||||||||
Asset management fees and investment income from managed funds (3): | ||||||||||||||||
Asset management fees | 22,114 | 1 | 41,272 | 3 | ||||||||||||
Investment income from managed funds | 7,472 | 1 | 38,860 | 2 | ||||||||||||
Total | 29,586 | 2 | 80,132 | 5 | ||||||||||||
Interest | 845,957 | 41 | 385,035 | 27 | ||||||||||||
Total revenues | $ | 2,056,593 | 100% | $ | 1,449,860 | 100% | ||||||||||
(1) | Fixed income and commodities revenue is primarily comprised of investment grade fixed income, convertible and commodities product revenue. |
(2) | High yield revenue is comprised of revenue generated by our high yield secondary market trading activities during the second and third quarter of 2007 and revenue generated by our pari passu share of high yield revenue during the first quarter of 2007 and the first nine months of 2006. For the prior year period we recorded 100% of the revenue related to our pari passu share of our high yield revenue. |
(3) | Prior period amounts include asset management revenue from high yield funds. Effective April 2, 2007, with the commencement of our reorganized high yield secondary market trading activities, we do not record asset management revenue associated with these activities. |
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Nine Months Ended | ||||||||||||
Sept. 30, | Sept. 30, | Percentage | ||||||||||
2007 | 2006 | Change | ||||||||||
(Dollars in Thousands) | ||||||||||||
Capital markets | $ | 318,191 | $ | 147,748 | 115 | % | ||||||
Advisory | 264,797 | 247,681 | 7 | % | ||||||||
Total | $ | 582,988 | $ | 395,429 | 47 | % | ||||||
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In millions | Nine Month | Nine Month | Percent | |||||||||
Period | Period | Change | ||||||||||
Ending | Ending | |||||||||||
Sept. 30, | Sept. 30, | |||||||||||
2007 | 2006 | |||||||||||
Balance, beginning of period | $ 5,282 | $ 4,031 | 31 | % | ||||||||
Net cash flow in | 241 | 687 | ||||||||||
Net market appreciation | 223 | 300 | ||||||||||
464 | 987 | |||||||||||
Balance, end of period | $ 5,746 | $ 5,018 | 15 | % | ||||||||
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September 30, 2007 | December 31, 2006 | |||||||
Cash and cash equivalents: | ||||||||
Cash in banks | $ | 223,528 | $ | 107,488 | ||||
Money market investments | 297,811 | 405,553 | ||||||
Total cash and cash equivalents | 521,339 | 513,041 | ||||||
Cash and securities segregated (1) | 613,808 | 508,303 | ||||||
Other (2) | 2,251 | 71,160 | ||||||
$ | 1,137,398 | $ | 1,092,504 | |||||
(1) | 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. | ||
(2) | Items are financial instruments utilized in our overall cash management activities and are readily convertible to cash in normal market conditions. |
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• | The payment of interest expense (including dividends on our mandatorily redeemable convertible preferred stock) on our long term debt; | |
• | The anticipated funding of outstanding investment commitments; | |
• | The anticipated fixed costs over the next 12 months; | |
• | Potential stock repurchases; and | |
• | Certain accrued expenses and other liabilities |
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September 30, 2007 | December 31, 2006 | |||||||
Stockholders’ equity | $ | 1,830,752 | $ | 1,581,087 | ||||
Less: Goodwill | (330,694 | ) | (257,321 | ) | ||||
Tangible stockholders’ equity | $ | 1,500,058 | $ | 1,323,766 | ||||
Stockholders’ equity | $ | 1,830,752 | $ | 1,581,087 | ||||
Add: Projected tax benefit on vested portion of restricted stock | 134,039 | 130,700 | ||||||
Pro forma stockholders’ equity | $ | 1,964,791 | $ | 1,711,787 | ||||
Tangible stockholders’ equity | $ | 1,500,058 | $ | 1,323,766 | ||||
Add: Projected tax benefit on vested portion of restricted stock | 134,039 | 130,700 | ||||||
Pro forma tangible stockholders’ equity | $ | 1,634,097 | $ | 1,454,466 | ||||
Shares outstanding | 125,657,168 | 119,546,914 | ||||||
Add: Shares not issued, to the extent of related expense amortization | 22,433,471 | 24,139,907 | ||||||
Less: Shares issued, to the extent related expense has not been amortized | (4,442,655 | ) | (1,813,423 | ) | ||||
Adjusted shares outstanding | 143,647,984 | 141,873,398 | ||||||
Book value per share (1) | $ | 14.57 | $ | 13.23 | ||||
Pro forma book value per share (2) | $ | 13.68 | $ | 12.07 | ||||
Tangible book value per share (3) | $ | 11.94 | $ | 11.07 | ||||
Pro forma tangible book value per share (4) | $ | 11.38 | $ | 10.25 | ||||
(1) | Book value per share equals stockholders’ equity divided by common shares outstanding. | |
(2) | Pro forma book value per share equals stockholders’ equity plus the projected deferred tax benefit on the amortized portion of restricted stock and RSUs divided by common shares outstanding adjusted for shares not yet issued to the extent of the related expense amortization and shares issued to the extent the related expense has not been amortized. | |
(3) | Tangible book value per share equals tangible stockholders’ equity divided by common shares outstanding. | |
(4) | Pro forma tangible book value per share equals tangible stockholders’ equity plus the projected deferred tax benefit on the amortized portion of restricted stock and RSUs divided by common shares outstanding adjusted for shares not yet issued to the extent of the related expense amortization and shares issued to the extent the related expense has not been amortized. |
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September 30, | December 31, | |||||||
2007 | 2006 | |||||||
Long-Term Debt | $ | 1,764,560 | $ | 1,168,562 | ||||
Mandatorily Redeemable Convertible Preferred Stock | 125,000 | 125,000 | ||||||
Total Stockholders’ Equity | 1,830,752 | 1,581,087 | ||||||
Total Capital | $ | 3,720,312 | $ | 2,874,649 | ||||
Rating | ||||||||
Moody’s Investors Services | Baa1 | |||||||
Standard and Poor’s | BBB+ | |||||||
Fitch Ratings | BBB+ |
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Net Capital | Excess Net Capital | |||||||
Jefferies | $ | 431,661 | $ | 409,404 | ||||
Jefferies Execution | $ | 24,473 | $ | 24,223 | ||||
Jefferies High Yield Trading | $ | 555,033 | $ | 554,783 |
September 30, 2007 | December 31, 2006 | |||||||
Total assets | $ | 31,602,366 | $ | 17,825,457 | ||||
Adjusted assets (1) | 30,988,558 | 17,317,154 | ||||||
Net adjusted assets (2) | 11,640,096 | 7,605,260 | ||||||
Leverage ratio (3) | 17.3 | 11.3 | ||||||
Adjusted leverage ratio (4) | 16.9 | 11.0 | ||||||
Net adjusted leverage ratio (5) | 6.4 | 4.8 |
(1) | Adjusted assets are total assets less cash and securities segregated. | ||
(2) | Net adjusted assets are adjusted assets, less securities borrowed. | ||
(3) | Leverage ratio equals total assets divided by stockholders’ equity. | ||
(4) | Adjusted leverage ratio equals adjusted assets divided by stockholders’ equity. | ||
(5) | Net adjusted leverage ratio equals net adjusted assets divided by stockholders’ equity. |
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• | inventory position and exposure limits, on a gross and net basis; | ||
• | scenario analyses, stress tests and other analytical tools that measure the potential effects on our trading net revenues of various market events, including, but not limited to, a large widening of credit spreads, a substantial decline in equities markets and significant moves in selected emerging markets; and | ||
• | risk limits based on a summary measure of risk exposure referred to as Value-at-Risk (“VaR”). |
Daily VaR (1) | ||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Value-at-Risk in trading portfolios | ||||||||||||||||||||||||
VaR at | Average VaR Three Months Ended | |||||||||||||||||||||||
Risk Categories | 9/30/07 | 6/30/07 | 12/31/06 | 9/30/07 | 6/30/07 | 12/31/06 | ||||||||||||||||||
Interest Rates | $ | 1.48 | $ | 1.71 | $ | 1.39 | $ | 1.78 | $ | 1.69 | $ | 1.07 | ||||||||||||
Equity Prices | $ | 10.37 | $ | 8.95 | $ | 6.37 | $ | 8.34 | $ | 7.84 | $ | 5.44 | ||||||||||||
Currency Rates | $ | 0.46 | $ | 0.45 | $ | 0.34 | $ | 0.47 | $ | 0.29 | $ | 0.34 | ||||||||||||
Commodity Prices | $ | 1.20 | $ | 1.59 | $ | 0.80 | $ | 1.29 | $ | 1.18 | $ | 1.41 | ||||||||||||
Diversification Effect (2) | $ | (3.39 | ) | $ | (3.60 | ) | $ | (3.36 | ) | $ | (4.03 | ) | $ | (2.92 | ) | $ | (3.18 | ) | ||||||
Firmwide | $ | 10.12 | $ | 9.10 | $ | 5.54 | $ | 7.85 | $ | 8.08 | $ | 5.08 | ||||||||||||
(1) | VaR is the potential loss in value of our trading positions due to adverse market movements over a defined time horizon with a specific confidence level. For the VaR numbers reported above, a one-day time horizon and 95% confidence level were used. | ||
(2) | Equals the difference between firmwide VaR and the sum of the VaRs by risk categories. This effect is due to the market categories not being perfectly correlated. |
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Daily VaR (1) | ||||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||
Value-At-Risk Highs and Lows for Three Months Ended | ||||||||||||||||||||||||
09/30/07 | 06/30/07 | 12/31/06 | ||||||||||||||||||||||
Risk Categories | High | Low | High | Low | High | Low | ||||||||||||||||||
Interest Rates | $ | 2.24 | $ | 1.37 | $ | 2.18 | $ | 1.41 | $ | 1.50 | $ | 0.45 | ||||||||||||
Equity Prices | $ | 12.40 | $ | 6.59 | $ | 10.34 | $ | 4.94 | $ | 6.45 | $ | 4.22 | ||||||||||||
Currency Rates | $ | 0.54 | $ | 0.30 | $ | 0.55 | $ | 0.13 | $ | 0.48 | $ | 0.24 | ||||||||||||
Commodity Prices | $ | 2.36 | $ | 0.78 | $ | 2.03 | $ | 0.40 | $ | 3.22 | $ | 0.61 | ||||||||||||
Firmwide | $ | 11.35 | $ | 5.95 | $ | 11.36 | $ | 5.31 | $ | 5.85 | $ | 4.27 | ||||||||||||
(1) | VaR is the potential loss in value of our trading positions due to adverse market movements over a defined time horizon with a specific confidence level. For the VaR numbers reported above, a one-day time horizon and 95% confidence level were used. |
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($ in millions)
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(c) Total Number of | ||||||||||||||||
(a) Total | (b) | Shares Purchased as | (d) Maximum Number of | |||||||||||||
Number of | Average | Part of Publicly | Shares that May Yet Be | |||||||||||||
Shares | Price Paid | Announced Plans or | Purchased Under the | |||||||||||||
Period | Purchased (1) | per Share | Programs | Plans or Programs (2) | ||||||||||||
July 1 – July 31, 2007 | 543,292 | 27.02 | 475,000 | 5,019,793 | ||||||||||||
August 1 – August 31, 2007 | 526,407 | 25.58 | 525,000 | 4,494,793 | ||||||||||||
September 1 – September 30, 2007 | 40,305 | 22.29 | 37,515 | 4,457,278 | ||||||||||||
Total | 1,110,004 | 26.17 | 1,037,515 |
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3.1 | Amended and Restated Certificate of Incorporation of Jefferies Group, Inc. is incorporated herein by reference to Exhibit 3 of the Registrant’s Form 8-K filed on May 26, 2004. | |
3.2 | Registrant’s Certificate of Designations of 3.25% Series A Cumulative Convertible Preferred Stock is incorporated herein by reference to Exhibit 3.1 of the Registrant’s Form 8-K filed on February 21, 2006. | |
3.3 | By-Laws of Jefferies Group, Inc are incorporated herein by reference to Exhibit 3.2 of Registrant’s Form 10-K filed on March 28, 2003. | |
31.1* | Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial Officer. | |
31.2* | Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive Officer. | |
32* | Rule 13a-14(b)/15d-14(b) and Section 1350 of Title 18 U.S.C. Certification by the Chief Executive Officer and Chief Financial Officer. |
* | Filed herewith. |
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JEFFERIES GROUP, INC. | ||||||||||
(Registrant) | ||||||||||
Date: | November 8, 2007 | By: | /s/ | Joseph A. Schenk | ||||||
Joseph A. Schenk | ||||||||||
Chief Financial Officer | ||||||||||
(duly authorized officer) |
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