News Column

LEUCADIA NATIONAL CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Interim Operations.

August 7, 2014

Statements included in this Report may contain forward-looking statements. See "Cautionary Statement for Forward-Looking Information" below. The following should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations and the description of our business included in the 2013 10-K.



Liquidity and Capital Resources

Corporate Liquidity

Our holding company's assets principally consist of the stock or membership interests of direct subsidiaries, cash and cash equivalents and other non-controlling investments in equity and debt securities. In order to maximize shareholder value, we continuously review and consider possible acquisitions of new businesses, securities and assets, and evaluate the retention and disposition of our existing operations and holdings. Accordingly, further acquisitions, divestitures, investments and changes in capital structure are possible. Our principal sources of funds are available cash resources, liquid investments, public and private capital market transactions, repayment of subsidiary advances, funds distributed from subsidiaries as tax sharing payments, management and other fees, and borrowings and dividends from subsidiaries, as well as dispositions of existing businesses and investments. In addition to cash and cash equivalents, we consider investments classified as available for sale securities and an investment in a managed fund as being generally available to meet our liquidity needs. Securities classified as available for sale securities are not as liquid as cash and cash equivalents, but they are generally easily convertible into cash within a relatively short period of time. As of June 30, 2014, the sum of these amounts aggregated $6.2 billion. However, since $4.0 billion of this amount is pledged as collateral pursuant to various agreements, is held by subsidiaries with outstanding debt (including Jefferies), or by subsidiaries that are party to agreements that restrict our ability to use the funds for other purposes, we do not consider those amounts to be available to meet corporate liquidity needs. The remaining $2.2 billion that is available is comprised of cash and short-term bonds and notes of the U.S. Government and its agencies, other publicly traded debt and equity securities and an investment in a managed fund. This amount does not include the investment in Harbinger described below, which may be sold pursuant to certain conditions, but which we currently intend to hold. Our available liquidity, and the investment income realized from cash, cash equivalents and marketable securities is used to meet our short-term recurring cash requirements, which are principally the payment of interest on our debt and corporate overhead expenses. In addition, maintaining significant structural liquidity and a stable source of reliable secured financing is a critical component of Jefferies operations. Jefferies maintains its own liquidity and access to funding in the capital markets, has its own credit rating and issues debt securities. See below for more information and analysis on Jefferies liquidity. The holding company's only long-term cash requirement is to make principal payments on its long-term debt ($1,458.6 million principal outstanding as of June 30, 2014), of which $458.6 million is due in 2015, $750.0 million in 2023 and $250.0 million in 2043. The $97.6 million of 3.75% Convertible Senior Subordinated Notes due 2014 were converted primarily in April 2014 into 4,606,109 common shares prior to maturity and are no longer outstanding. Historically, we have used our available liquidity to make acquisitions of new businesses and other investments, but, except as disclosed in this report, the timing of any future investments and the cost cannot be predicted. As of June 30, 2014, we own approximately 41.6 million common shares of Harbinger Group Inc. ("Harbinger"), representing approximately 20% of Harbinger's outstanding common shares, which are accounted for under the fair value option. The shares were acquired at an aggregate cost of $411.1 million ($253.0 million during 2014), are classified as Trading Assets and carried at fair value of $528.3 million at June 30, 2014. In addition, we currently have the right to appoint two directors to Harbinger's board; such directors were appointed on July 1, 2014. We have agreed not to increase our interest in Harbinger above 27.5% for a period of two years. In March 2014, we sold to HomeFed substantially all of our real estate properties and operations, most of our interest in Brooklyn Renaissance Plaza ("BRP") and cash of $12.5 million (subject to adjustment), in exchange for 6,986,337 newly issued unregistered HomeFed common shares. The remainder of our interest in BRP will be sold to HomeFed for 513,663 additional HomeFed common shares pending receipt of the approval of a lender to BRP; closing of this portion of the transaction is expected during the third quarter of 2014. During the first half of 2014, we invested $307.5 million in the Leucadia asset management platform. Substantially all of the invested funds represent seed capital for new investment vehicles managed by various parties that employ separate and diverse investment strategies. Leucadia asset management has raised and intends to continue to raise additional capital from third party investors as it seeks to build its asset management business. During the first half of 2014, we completed our initial funding of our two oil and gas platforms: Juneau Energy and Vitesse Energy. Juneau, funded with $43.1 million, leases and develops oil and gas properties in Texas and Oklahoma. Vitesse, funded with $47.0 million, selectively acquires non-operating oil and gas interests in the heart of the Bakken oil field. 61 --------------------------------------------------------------------------------



In July 2014, we sold Premier, through which we had conducted our gaming operations, for aggregate cash consideration of $250.0 million, subject to working capital adjustment. We expect to record a pre-tax gain on sale of discontinued operations of approximately $12.5 million in the third quarter of 2014.

In June 2014, we entered into an agreement to form a joint venture with Golden Queen Mining Co. Ltd. and the Clay family, a shareholder group which owns 27% of Golden Queen, to jointly fund, develop and operate the Soledad Mountain project. The project is a fully-permitted, open pit, heap leach gold and silver project located just outside the town of Mojave in Kern County, California. Construction has started on site and commissioning is planned for late 2015. The joint venture is subject to approval by Golden Queen's shareholders, which is scheduled for September; if approved, we expect to invest approximately $80.0 million for an approximate 33% interest in the project. In February 2009, the Board of Directors authorized, from time to time, the purchase of our outstanding debt securities through cash purchases in open market transactions, privately negotiated transactions or otherwise. Such repurchases, if any, depend upon prevailing market conditions, our liquidity requirements and other factors; such purchases may be commenced or suspended at any time without notice. At June 30, 2014, we had outstanding 368,536,178 common shares and 13,741,760 share based awards that do not require the holder to pay any exercise price (potentially an aggregate of 382,277,938 outstanding common shares if all awards become outstanding common shares). In November 2012, the Board of Directors increased the number of our common shares that we are authorized to purchase. Such purchases may be made from time to time in the open market, through block trades or otherwise. Depending on market conditions and other factors, such purchases may be commenced or suspended at any time without notice. As of July 23, 2014, we are authorized to repurchase 25,000,000 common shares. In connection with presentations made to credit rating agencies with respect to the Jefferies acquisition, we advised the agencies that we would target specific concentration, leverage and liquidity principles in the future, expressed in the form of certain ratios and percentages, although there is no legal requirement to do so. These thresholds and calculations of the actual ratios and percentages are detailed below at June 30, 2014 (dollars in thousands): Total equity



$ 10,350,681

Less, investment in Jefferies (5,495,705 ) Equity excluding Jefferies



4,854,976

Less, our two largest investments:

National Beef



(775,198 )

Harbinger, at cost (411,100 ) Equity in a stressed scenario



3,668,678

Less, net deferred tax asset excluding Jefferies amount (1,297,187 ) Equity in a stressed scenario less net deferred tax asset $ 2,371,491 Balance sheet amounts: Available liquidity, per above



$ 2,224,823

Parent company debt (see Note 16 to our Consolidated financial statements)

$ 1,444,430

Ratio of parent company debt to stressed equity:

Maximum .50 x Actual, equity in a stressed scenario .39 x



Actual, equity in a stressed scenario excluding net deferred tax asset

.61 x



Ratio of available liquidity to parent company debt:

Minimum 1.0 x Actual 1.5 x In addition, management has indicated that our largest single investment will be not more than 20% of equity excluding Jefferies (currently National Beef), and that the next largest investment will be no more than 10% of equity excluding Jefferies, in each case measured at the time such investment was made. The ratio of parent company debt to stressed equity excluding the net deferred tax asset exceeded the maximum due to the Senior Notes sold in October 2013. However, as these notes were issued, in part, to provide funds for maturing notes, it is considered to be a temporary situation that will not impact our credit ratings. 62 --------------------------------------------------------------------------------

Jefferies Liquidity General The Chief Financial Officer and Global Treasurer of Jefferies are responsible for developing and implementing liquidity, funding and capital management strategies for the Jefferies businesses. These policies are determined by the nature and needs of day to day business operations, business opportunities, regulatory obligations, and liquidity requirements. The actual levels of capital, total assets, and financial leverage are a function of a number of factors, including asset composition, business initiatives and opportunities, regulatory requirements and cost and availability of both long term and short term funding. Jefferies has historically maintained a balance sheet consisting of a large portion of total assets in cash and liquid marketable securities, arising principally from traditional securities brokerage and trading activity. The liquid nature of these assets provides flexibility in financing and managing Jefferies business. A business unit level balance sheet and cash capital analysis is prepared and reviewed with senior management on a weekly basis. As a part of this balance sheet review process, capital is allocated to all assets and gross and adjusted balance sheet limits are established. This process ensures that the allocation of capital and costs of capital are incorporated into business decisions. The goals of this process are to protect the Jefferies platform, enable the businesses to remain competitive, maintain the ability to manage capital proactively and hold businesses accountable for both balance sheet and capital usage. Jefferies Bache, LLC (Jefferies U.S. futures commission merchant) and Jefferies Bache Limited (Jefferies U.K. commodities and financial futures broker-dealer), receive cash or securities as margin to secure customer futures trades. Jefferies LLC (a U.S. broker-dealer), under SEC Rule 15c3-3, and Jefferies Bache, LLC, under CFTC Regulation 1.25, are required to maintain customer cash or qualified securities in a segregated reserve account for the exclusive benefit of our clients. Jefferies is required to conduct customer segregation calculations to ensure the appropriate amounts of funds are segregated and that no customer funds are used to finance firm activity. Similar requirements exist with respect to Jefferies U.K.-based activities conducted through Jefferies Bache Limited and Jefferies International Limited (a U.K. broker-dealer). Customer funds received are separately segregated and "locked-up" apart from Jefferies funds. If Jefferies rehypothecates customer securities, that activity is conducted only to finance customer activity. Additionally, Jefferies does not lend customer cash to counterparties to conduct securities financing activity (i.e., Jefferies does not lend customer cash to reverse in securities). Further, Jefferies has no customer loan activity in Jefferies International Limited and does not have any European prime brokerage operations. In Jefferies Bache Limited, any funds received from a customer are placed on deposit and not used as part of operations. Jefferies does not transfer U.S. customer assets to its U.K. entities. Jefferies actively monitors and evaluates its financial condition and the composition of its assets and liabilities. Substantially all trading assets and trading liabilities are valued on a daily basis and balance sheet limits for the various businesses are monitored and employed. The overall securities inventory is continually monitored, including the inventory turnover rate, which confirms the liquidity of overall assets. As a Primary Dealer in the U.S. and with a similar role in several European jurisdictions, Jefferies carries inventory and makes an active market for its clients in securities issued by the various governments. These inventory positions are substantially comprised of the most liquid securities in the asset class, with a significant portion in holdings of securities of G-7 countries. For further detail on Jefferies outstanding sovereign exposure to Greece, Ireland, Italy, Portugal and Spain, refer to Quantitative and Qualitative Disclosures about Market Risk below. Of Jefferies total trading assets, approximately 74% are readily and consistently financeable at haircuts of 10% or less. In addition, as a matter of Jefferies policy, a portion of these assets have internal capital assessed, which is in addition to the funding haircuts provided in the securities finance markets. Additionally, trading assets consisting of bank loans and investments are predominantly funded by Jefferies long term capital. Under Jefferies cash capital policy, capital allocation levels are modeled that are more stringent than the haircuts used in the market for secured funding; and surplus capital is maintained at these maximum levels. At June 30, 2014, our Consolidated Statement of Financial Condition includes Jefferies Level 3 trading assets that are 3% of total trading assets. Securities financing assets and liabilities include both financing for financial instruments trading activity and matched book transactions. Matched book transactions accommodate customers, as well as obtain securities for the settlement and financing of inventory positions. By executing repurchase agreements with central clearing corporations, Jefferies reduces the credit risk associated with these arrangements and decreases net outstanding balances. The following table presents Jefferies period end balance, average balance and maximum balance at any month end within the periods presented for Securities purchased under agreements to resell and Securities sold under agreements to repurchase (in millions): 63 --------------------------------------------------------------------------------

From Jefferies Acquisition Six Months Through Ended December 31, June 30, 2014 2013 Securities purchased under agreements to resell: Period end $ 4,609 $ 3,747 Month end average 5,924 4,936 Maximum month end 8,081 6,007 Securities sold under agreements to repurchase: Period end $ 11,668$ 10,780 Month end average 13,090 13,308 Maximum month end 14,643 16,502 Fluctuations in the balance of Jefferies repurchase agreements from period to period and intraperiod are dependent on business activity in those periods. Additionally, the fluctuations in the balances of Jefferies securities purchased under agreements to resell are influenced in any given period by its clients' balances and desires to execute collateralized financing arrangements via the repurchase market or via other financing products. Average balances and period end balances will fluctuate based on market and liquidity conditions and Jefferies considers the fluctuations intraperiod to be typical for the repurchase market.



Liquidity Management

The key objectives of Jefferies liquidity management framework are to support the successful execution of business strategies while ensuring sufficient liquidity through the business cycle and during periods of financial distress. The liquidity management policies are designed to mitigate the potential risk that adequate financing may not be accessible to service financial obligations without material franchise or business impact.



The principal elements of Jefferies liquidity management framework are the Contingency Funding Plan, the Cash Capital Policy and the assessment of Maximum Liquidity Outflow.

Contingency Funding Plan. The Jefferies Contingency Funding Plan is based on a model of a potential liquidity contraction over a one year time period. This incorporates 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 rolloff 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) liquidity outflows related to possible credit downgrade; (e) lower availability of secured funding; (f) client cash withdrawals; (g) the anticipated funding of outstanding investment and loan commitments; and (h) certain accrued expenses and other liabilities and fixed costs. Cash Capital Policy. A cash capital model is maintained that measures long-term funding sources against requirements. Sources of cash capital include equity, preferred stock and the noncurrent portion of long-term borrowings. Uses of cash capital include the following: (a) illiquid assets such as equipment, goodwill, net intangible assets, exchange memberships, deferred tax assets and certain investments; (b) a portion of securities inventory that is not expected to be financed on a secured basis in a credit stressed environment (i.e., margin requirements); and (c) drawdowns of unfunded commitments. To ensure that Jefferies does not need to liquidate inventory in the event of a funding crisis, Jefferies seeks to maintain surplus cash capital, which is reflected in the leverage ratios Jefferies maintains. Maximum Liquidity Outflow. Jefferies businesses are diverse, and liquidity needs are determined by many factors, including market movements, collateral requirements and client commitments, all of which can change dramatically in a difficult funding environment. During a liquidity crisis, credit-sensitive funding, including unsecured debt and some types of secured financing agreements, may be unavailable, and the terms (e.g., interest rates, collateral provisions and tenor) or availability of other types of secured financing may change. As a result of Jefferies policy to ensure it has sufficient funds to cover estimates of what may be needed in a liquidity crisis, Jefferies holds more cash and unencumbered securities and has greater long-term debt balances than the businesses would otherwise require. As part of this estimation process, Jefferies calculates a Maximum Liquidity Outflow that could be experienced in a liquidity crisis. Maximum Liquidity Outflow is based on a scenario that includes both market-wide stress and firm-specific stress. Based on the sources and uses of liquidity calculated under the Maximum Liquidity Outflow scenarios Jefferies determines, based on its calculated surplus or deficit, additional long-term funding that may be needed versus funding through the repurchase financing market and considers any adjustments that may be necessary to Jefferies inventory balances and cash holdings. Jefferies has sufficient excess liquidity to meet all contingent cash outflows detailed in the Maximum Liquidity Outflow. 64 --------------------------------------------------------------------------------



Sources of Liquidity

Within Jefferies, the following are financial instruments that are cash and cash equivalents or are deemed by Jefferies management to be generally readily convertible into cash, marginable or accessible for liquidity purposes within a relatively short period of time, as reflected in our Consolidated Statement of Financial Condition at June 30, 2014 (in thousands): Average Balance Second Quarter Actual 2014 (1) Cash and cash equivalents: Cash in banks $ 690,979 $ 543,088 Certificate of deposit 50,003 50,005 Money market investments 3,217,306 1,900,604 Total cash and cash equivalents 3,958,288 2,493,697 Other sources of liquidity: Debt securities owned and securities purchased under agreements to resell (2) 1,201,761 1,090,394 Other (3) 663,711 782,793 Total other sources 1,865,472 1,873,187



Total cash and cash equivalents and other liquidity sources $ 5,823,760

$ 4,366,884

(1) Average balances are calculated based on weekly balances.

(2) Consists of high quality sovereign government securities and reverse

repurchase agreements collateralized by U.S. government securities and other

high quality sovereign government securities; deposits with a central bank

within the European Economic Area, Canada, Australia, Japan, Switzerland or

the USA; and securities issued by a designated multilateral development bank

and reverse repurchase agreements with underlying collateral comprised of

these securities.

(3) Other includes unencumbered inventory representing an estimate of the amount

of additional secured financing that could be reasonably expected to be

obtained from financial instruments owned that are currently not pledged

after considering reasonable financing haircuts and additional funds available under the committed senior secured revolving credit facility available for working capital needs of Jefferies Bache. In addition to the cash balances and liquidity pool presented above, the majority of trading assets (both long and short) in Jefferies trading accounts are actively traded and readily marketable. Repurchase financing can be readily obtained for 74% of inventory at haircuts of 10% or less, which reflects the liquidity of the inventory. Jefferies continually assesses the liquidity of its inventory based on the level at which Jefferies could obtain financing in the marketplace for a given asset. Assets are considered to be liquid if financing can be obtained in the repurchase market or the securities lending market at collateral haircut levels of 10% or less. The following summarizes Jefferies trading assets by asset class that are considered to be of a liquid nature and the amount of such assets that have not been pledged as collateral as reflected in the Consolidated Statements of Financial Condition at June 30, 2014 and December 31, 2013 (in thousands): June 30, 2014 December 31, 2013 Unencumbered Unencumbered Liquid Financial Liquid Financial Liquid Financial Liquid Financial Instruments



Instruments (2) Instruments Instruments (2)

Corporate equity securities $ 2,055,459 $



345,514 $ 1,982,877 $ 137,721 Corporate debt securities

2,347,417 15,994 2,250,512 26,983 U.S. government, agency and municipal securities 2,555,155 250,025 2,513,388 400,821 Other sovereign obligations 2,412,164 1,028,114 2,346,485 991,774 Agency mortgage-backed securities (1) 3,342,120 - 2,976,133 - Physical commodities 47,166 - 37,888 - $ 12,759,481$ 1,639,647$ 12,107,283$ 1,557,299



(1) Consists solely of agency mortgage-backed securities issued by Freddie Mac,

Fannie Mae and Ginnie Mae. These securities include pass-through securities,

securities backed by adjustable rate mortgages ("ARMs"), collateralized

mortgage obligations, commercial mortgage-backed securities and interest- and

principal-only securities.

(2) Unencumbered liquid balances represent assets that can be sold or used as

collateral for a loan, but have not been.

In addition to being able to be readily financed at modest haircut levels, it is estimated that each of the individual securities within each asset class above could be sold into the market and converted into cash within three business days under normal market conditions, assuming that the entire portfolio of a given asset class was not simultaneously liquidated. There are no restrictions on the unencumbered liquid securities, nor have they been pledged as collateral. 65 --------------------------------------------------------------------------------

Sources of Funding Secured Financing Readily available secured funding is used to finance Jefferies financial instruments inventory. The ability of Jefferies to support increases in total assets is largely a function of the ability to obtain short and intermediate term secured funding, primarily through securities financing transactions. Repurchase or reverse repurchase agreements (collectively "repos"), respectively, are used to finance a portion of long inventory and cover a portion of short inventory through pledging and borrowing securities. Approximately 81% of Jefferies repurchase financing activities use collateral that is considered eligible collateral by central clearing corporations. Central clearing corporations are situated between participating members who borrow cash and lend securities (or vice versa); accordingly repo participants contract with the central clearing corporation and not one another individually. Therefore, counterparty credit risk is borne by the central clearing corporation which mitigates the risk through initial margin demands and variation margin calls from repo participants. The comparatively large proportion of Jefferies total repo activity that is eligible for central clearing reflects the high quality and liquid composition of its trading inventory. The tenor of repurchase and reverse repurchase agreements generally exceeds the expected holding period of the financed assets.



A significant portion of the financing of European Sovereign inventory is executed using central clearinghouse financing arrangements rather than via bi-lateral arrangements repo agreements. For those asset classes not eligible for central clearinghouse financing, bi-lateral financings are sought on an extended term basis.

In addition to the above financing arrangements, Jefferies issues notes backed by eligible collateral under a master repurchase agreement. The outstanding amount of the notes issued under the program was $220.0 million in aggregate, which is presented within Other secured financings in the Consolidated Statement of Financial Condition at June 30, 2014. Of the $220.0 million aggregate notes, $60.0 million matures in November 2014, a second $60.0 million in February 2015 and $100.0 million matures in March 2015, all bearing interest at a spread over one month LIBOR. Weighted average maturity of repurchase agreements for non-clearing corporation eligible funded inventory is approximately three months. Jefferies ability to finance inventory via central clearinghouses and bi-lateral arrangements is augmented by Jefferies ability to draw bank loans on an uncommitted basis under various banking arrangements. As of June 30, 2014, short-term borrowings as bank loans totaled $12.0 million. Interest under the bank lines is generally at a spread over the federal funds rate. Letters of credit are used in the normal course of business mostly to satisfy various collateral requirements in favor of exchanges in lieu of depositing cash or securities. Average daily bank loans for Jefferies during the three and six month periods of 2014 were $181.3 million and $97.6 million, respectively.



Long-Term Debt

In May 2014, Jefferies issued under its $2.0 billion Euro Medium Term Note Program senior unsecured notes with a principal amount of €500.0 million, due 2020, which bear interest at 2.375% per annum. Proceeds amounted to €498.7 million. The Jefferies Credit Facility is a committed senior secured revolving credit facility with a group of commercial banks in Dollars, Euros and Sterling, for an aggregate committed amount of $950.0 million, with availability subject to one or more borrowing bases and of which $250.0 million can be borrowed by Jefferies Bache Limited without a borrowing base requirement. In June 2014, Jefferies amended and restated the facility to extend the term for three years and reduced the committed amount to $750.0 million. The borrowers under the facility are Jefferies Bache Financial Services, Inc., Jefferies Bache, LLC and Jefferies Bache Limited. Interest is based on the Federal funds rate or, in the case of Euro and Sterling borrowings, the Euro Interbank Offered Rate and the London Interbank Offered Rate, respectively. The facility is guaranteed by Jefferies Group LLC and contains financial covenants that, among other things, imposes restrictions on future indebtedness of its subsidiaries, requires Jefferies Group LLC to maintain specified levels of tangible net worth and liquidity amounts, and requires certain subsidiaries to maintain specified levels of regulated capital. Jefferies is currently in compliance with the facility and expects to remain in compliance in both the near term and long term given current liquidity, anticipated additional funding requirements and profitability expectations.



Jefferies long-term debt ratings are as follows:

Rating Outlook Moody's Investors Service Baa3 Stable Standard and Poor's BBB Stable Fitch Ratings BBB- Stable 66

-------------------------------------------------------------------------------- Jefferies relies upon its cash holdings and external sources to finance a significant portion of its day to day operations. Jefferies access to these external sources, as well as the cost of that financing, is dependent upon various factors, including its credit ratings. Jefferies current 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, capital structure, overall risk management, business diversification and market share and competitive position in the markets in which it operates. Deteriorations in any of these factors could impact Jefferies credit ratings. While certain aspects of a credit rating downgrade are quantifiable pursuant to contractual provisions, the impact on its business and trading results in future periods is inherently uncertain and depends on a number of factors, including the magnitude of the downgrade, the behavior of individual clients and future mitigating action taken by Jefferies. In connection with certain over-the-counter derivative contract arrangements and certain other trading arrangements, Jefferies may be required to provide additional collateral to counterparties, exchanges and clearing organizations in the event of a credit rating downgrade. The amount of additional collateral that could be called by counterparties, exchanges and clearing organizations under the terms of such agreements in the event of a downgrade of Jefferies long-term credit rating below investment grade was $43.2 million. For certain foreign clearing organizations credit rating is only one of several factors employed in determining collateral that could be called. The above represents management's best estimate for additional collateral to be called in the event of credit rating downgrade. The impact of additional collateral requirements is considered in Jefferies Contingency Funding Plan and calculation of Maximum Liquidity Outflow, as described above.



Ratings issued by credit rating agencies are subject to change at any time.

Net Capital

Jefferies operates broker-dealers registered with the SEC and member firms of the Financial Industry Regulatory Authority ("FINRA"). Jefferies LLC and Jefferies Execution are subject to the Securities and Exchange Commission Uniform Net Capital Rule ("Rule 15c3-1"), which requires the maintenance of minimum net capital and which may limit distributions from the broker-dealers. Additionally, Jefferies Bache, LLC is registered as a Futures Commission Merchant and is subject to Rule 1.17 of the Commodities Futures Trading Commission ("CFTC"). FINRA is the designated self-regulatory organization for the U.S. broker-dealers and the Chicago Mercantile Exchange is the designee for Jefferies Bache, LLC. Jefferies LLC, Jefferies Execution and Jefferies Bache, LLC's net capital, adjusted net capital, and excess net capital were as follows (in thousands): Net Capital Excess Net Capital Jefferies LLC $ 1,090,453 $ 1,016,424 Jefferies Execution 5,307 5,057 Adjusted Net Capital Excess Net Capital Jefferies Bache, LLC $ 196,264 $ 80,938 Certain other U.S. and non-U.S. subsidiaries of Jefferies are subject to capital adequacy requirements as prescribed by the regulatory authorities in their respective jurisdictions, including Jefferies International Limited and Jefferies Bache Limited which are subject to the regulatory supervision and requirements of the Financial Conduct Authority in the United Kingdom. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the "Dodd-Frank Act") was signed into law on July 21, 2010. The Dodd-Frank Act contains provisions that require the registration of all swap dealers, major swap participants, security-based swap dealers, and/or major security-based swap participants. While entities that register under these provisions will be subject to regulatory capital requirements, these regulatory capital requirements have not yet been finalized. Jefferies expects that these provisions will result in modifications to the regulatory capital requirements of some of its entities, and will result in some of its other entities becoming subject to regulatory capital requirements for the first time, including Jefferies Derivative Products, LLC and Jefferies Bache Financial Services, Inc., which registered as swap dealers with the CFTC during January 2013.



The regulatory capital requirements referred to above may restrict our ability to withdraw capital from our subsidiaries.

67 --------------------------------------------------------------------------------



Consolidated Statements of Cash Flows

Net cash of $1,112.2 million was used for operating activities in the six month 2014 period and net cash of $447.5 million was provided by operating activities in the six month 2013 period. Jefferies used funds of $365.6 million during the 2014 period and generated funds of $563.0 million during the 2013 period. National Beef used funds of $72.5 million and $16.0 million during 2014 and 2013, respectively; manufacturing generated funds of $5.0 million and $5.9 million during 2014 and 2013, respectively; and discontinued operations generated funds of $11.2 million and used funds of $10.0 million during 2014 and 2013, respectively. Cash of $253.0 million was used to acquire our investment in Harbinger Group, Inc. and make additional investments of $307.5 million in the Leucadia asset management platform, both of which are classified as a use of cash for operating activities. The change in operating cash flows also reflects greater interest payments and greater income tax payments. During 2014, distributions from associated companies principally were received from Berkadia ($19.4 million), Garcadia ($20.3 million) and Jefferies related parties ($41.3 million). During 2013, distributions from associated companies principally were received from Berkadia ($26.5 million), Garcadia ($11.4 million) and Jefferies related parties ($10.7 million). Net cash of $726.5 million and $3,757.4 million was provided by investing activities in the six month 2014 and 2013 periods, respectively. Cash acquired upon acquisition of Jefferies was $3,018.0 million in 2013. Acquisitions of property, equipment and leasehold improvements, and other assets include amounts primarily related to Jefferies ($61.1 million and $15.5 million in 2014 and 2013, respectively), National Beef ($28.5 million and $21.3 million in 2014 and 2013, respectively), the Other operations segment ($65.7 million and $5.8 million in 2014 and 2013, respectively), and discontinued operations ($10.2 million and $11.2 million in 2014 and 2013, respectively). Loans to and investments in associated companies include Garcadia ($4.7 million and $38.4 million in 2014 and 2013, respectively), Linkem ($26.2 million in 2013) and Jefferies related entities ($941.7 million and $345.3 million in 2014 and 2013, respectively). Capital distributions and loan repayment from associated companies include Jefferies related entities ($1,131.7 million and $656.6 million in 2014 and 2013, respectively) and Garcadia ($3.3 million and $7.4 million in 2014 and 2013, respectively). Net cash of $659.9 million was provided by financing activities in the six month 2014 period and net cash of $792.8 million was used for financing activities in the six month 2013 period. During 2014, issuance of debt primarily reflects increases in Jefferies debt ($681.2 million), borrowings by National Beef under its bank credit facility ($106.3 million) and borrowings by the Other operations segment ($122.2 million). Issuance of debt for 2013 primarily reflects borrowings by National Beef under its bank credit facility ($78.9 million). Reduction of debt for 2014 includes $13.6 million related to National Beef's debt, $135.0 million related to Jefferies debt and $19.2 million of debt related to the Other operations segment. Reduction of debt for 2013 includes $28.5 million related to National Beef's debt, $185.0 million related to Jefferies debt and the decrease in repurchase agreements of $269.8 million.



Critical Accounting Estimates

Our discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts in the financial statements and disclosures of contingent assets and liabilities. On an on-going basis, we evaluate all of these estimates and assumptions. The following areas have been identified as critical accounting estimates because they have the potential to have a significant impact on our financial statements, and because they are based on assumptions which are used in the accounting records to reflect, at a specific point in time, events whose ultimate outcome won't be known until a later date. Actual results could differ from these estimates. Income Taxes - We record a valuation allowance to reduce our net deferred tax asset to the net amount that is more likely than not to be realized. If in the future we determine that it is more likely than not that we will be able to realize our net deferred tax asset in excess of our net recorded amount, an adjustment to increase the net deferred tax asset would increase income in such period. If in the future we were to determine that we would not be able to realize all or part of our recorded net deferred tax asset, an adjustment to decrease the net deferred tax asset would be charged to income in such period. We are required to consider all available evidence, both positive and negative, and to weight the evidence when determining whether a valuation allowance is required and the amount of such valuation allowance. Generally, greater weight is required to be placed on objectively verifiable evidence when making this assessment, in particular on recent historical operating results. Our estimate of future taxable income considers all available evidence, both positive and negative, about our operating businesses and investments, includes an aggregation of individual projections for each significant operating business and investment, estimated apportionment factors for state and local taxing jurisdictions and includes all future years that we estimate we will have available NOLs (until 2029). We believe that our estimate of future taxable income is reasonable but inherently uncertain, and if our current or future operations and investments generate taxable income different than the projected amounts, further adjustments to the valuation allowance are possible. The current balance of the deferred tax valuation allowance principally reserves for NOLs of certain subsidiaries that are not available to offset income generated by other members of the consolidated tax return group. 68 -------------------------------------------------------------------------------- We also record reserves for unrecognized tax benefits based on our assessment of the probability of successfully sustaining tax filing positions. Management exercises significant judgment when assessing the probability of successfully sustaining tax filing positions, and in determining whether a contingent tax liability should be recorded and if so estimating the amount. If our tax filing positions are successfully challenged, payments could be required that are in excess of reserved amounts or we may be required to reduce the carrying amount of our net deferred tax asset, either of which could be significant to our Consolidated Statement of Financial Condition or results of operations. Fair Value of Financial Instruments - Trading assets and trading liabilities are recorded at fair value, either as required by accounting pronouncements or through the fair value option election. Trading assets and trading liabilities include Jefferies trading activities, financial instruments of other consolidated entities that are accounted for through the fair value option election and, prior to the Jefferies acquisition, trading assets include our investment in Jefferies common shares. Gains and losses on trading assets and trading liabilities are recognized in our Consolidated Statements of Operations. Available for sale securities are reflected at fair value, with unrealized gains and losses reflected as a separate component of equity, net of taxes. When sold, realized gains and losses on available for sale securities are reflected in the caption Net realized securities gains. Fair value 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). In determining fair value, we maximize the use of observable inputs and minimize the use of unobservable inputs by requiring that observable inputs be used when available. Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from independent sources. Unobservable inputs reflect our assumptions that market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. We apply a hierarchy to categorize our fair value measurements broken down into three levels based on the transparency of inputs as follows:



Level 1: Quoted prices are available in active markets for identical assets or liabilities as of the reported date.

Level 2: Pricing inputs are other than quoted prices in active markets, which are either directly or indirectly observable as of the reported date. The nature of these financial instruments include cash instruments for which quoted prices are available but traded less frequently, derivative instruments whose fair value have been derived using a model where inputs to the model are directly observable in the market, or can be derived principally from or corroborated by observable market data, and instruments that are fair valued using other financial instruments, the parameters of which can be directly observed. Level 3: Instruments that have little to no pricing observability as of the reported date. These financial instruments are measured using management's best estimate of fair value, where the inputs into the determination of fair value require significant management judgment or estimation. 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. Jefferies Independent Price Verification Group, independent of its trading function, plays an important role in determining that 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 model's 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.



For further information on the fair value definition, Level 1, Level 2, Level 3 and related valuation techniques, see Notes 2 and 5.

Impairment of Long-Lived Assets - We evaluate our long-lived assets for impairment whenever events or changes in circumstances indicate, in management's judgment, that the carrying value of such assets may not be recoverable. When testing for impairment, we group our long-lived assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities (or asset group). The determination of whether an asset group is recoverable is based on management's estimate of undiscounted future cash flows directly attributable to the asset group as compared to its carrying value. If the carrying amount of the asset group is greater than the undiscounted cash flows, an impairment loss would be recognized for the amount by which the carrying amount of the asset group exceeds its estimated fair value. 69 -------------------------------------------------------------------------------- Substantially all of our operating businesses sell products or services that are impacted by general economic conditions in the U.S. and to a lesser extent internationally. In recent years general economic conditions reduced the demand for products or services sold by our operating subsidiaries and/or resulted in reduced pricing for products or services. A worsening of current economic conditions could cause a decline in estimated future cash flows expected to be generated by our operations and investments. If future undiscounted cash flows are estimated to be less than the carrying amounts of the asset groups used to generate those cash flows in subsequent reporting periods, particularly for those with large investments in intangible assets and property and equipment (for example, investment banking & capital markets, beef processing, manufacturing, real estate and certain associated company investments), impairment charges would have to be recorded. Goodwill - At acquisition, we allocate the cost of a business acquisition to the specific tangible and intangible assets acquired and liabilities assumed based upon their fair values. Significant judgments and estimates are often made by management to determine these values, and may include the use of appraisals, consideration of market quotes for similar transactions, use of discounted cash flow techniques or consideration of other information we believe to be relevant. Any excess of the cost of a business acquisition over the fair values of the net assets and liabilities acquired is recorded as goodwill, which is not amortized to expense. Substantially all of our goodwill was recognized in connection with the Jefferies acquisition. At least annually, and more frequently if warranted, we will assess whether goodwill has been impaired. If the estimated fair value exceeds the carrying value, goodwill at the reporting unit level is not impaired. If the estimated fair value is less than carrying value, further analysis is necessary to determine the amount of impairment, if any. The fair values will be based on widely accepted valuation techniques that we believe market participants would use, although the valuation process requires significant judgment and often involves the use of significant estimates and assumptions. The methodologies we utilize in estimating fair value include market capitalization, price-to-book multiples of comparable exchange traded companies, multiples of merger and acquisitions of similar businesses and/or projected cash flows. The estimates and assumptions used in determining fair value could have a significant effect on whether or not an impairment charge is recorded and the magnitude of such a charge. Adverse market or economic events could result in impairment charges in future periods. Our annual goodwill impairment testing date related to Jefferies is as of August 1. Compensation and Benefits - A portion of Jefferies compensation and benefits represents discretionary bonuses, which are finalized at year end. In addition to the level of net revenues, Jefferies overall compensation expense in any given year is influenced by prevailing labor markets, revenue mix, profitability, individual and business performance metrics, and use of share-based compensation programs. We believe the most appropriate way to allocate Jefferies estimated annual total compensation among interim periods is in proportion to projected net revenues earned. Consequently, during the year we accrue Jefferies compensation and benefits based on annual targeted compensation ratios, taking into account the mix of its revenues and the timing of expense recognition. Contingencies - In the normal course of business, we have been named, from time to time, as a defendant in legal and regulatory proceedings. We are also involved, from time to time, in other exams, investigations and similar reviews (both formal and informal) by governmental and self-regulatory agencies regarding our businesses, certain of which may result in judgments, settlements, fines, penalties or other injunctions. We recognize a liability for a contingency when it is probable that a liability has been incurred and the amount of loss can be reasonably estimated. If the reasonable estimate of a probable loss is a range, we accrue the most likely amount of such loss, and if such amount is not determinable, then we accrue the minimum in the range as the loss accrual. The determination of the outcome and loss estimates requires significant judgment on the part of management, can be highly subjective and is subject to significant change with the passage of time as more information becomes available. Estimating the ultimate impact of litigation matters is inherently uncertain, in particular because the ultimate outcome will rest on events and decisions of others that may not be within our power to control. We do not believe that any of our current litigation will have a significant adverse effect on our consolidated financial position, results of operations or liquidity; however, if amounts paid at the resolution of litigation are in excess of recorded reserve amounts, the excess could be significant in relation to results of operations for that period. For further information, see Note 23. Results of Operations Substantially all of our operating businesses sell products or services that are impacted by general economic conditions in the U.S. and to a lesser extent internationally. In recent years general economic conditions reduced the demand for products or services sold by our operating subsidiaries and/or resulted in reduced pricing for products or services. The discussions below concerning revenue and profitability by segment consider current economic conditions and the impact such conditions have had and may continue to have on each segment; however, should general economic conditions worsen we believe that all of our businesses would be adversely impacted. Historically, our pre-tax operating results have not been predictable from period to period, principally as a result of significant gains or losses from strategic transactions that will not recur in future periods, or from investments that are accounted for under the fair value option. The income or loss recorded on these transactions or investments are typically reflected as part of the corporate segment. In addition, the nature of Jefferies business does not produce predictable or necessarily recurring earnings. While our beef processing segment and manufacturing businesses (part of our other operations segment) tend to have more predictable or regular earnings, on a consolidated basis the results of these businesses are often less significant and apparent due to the impact of Jefferies business, such strategic transactions, and fair value accounting. 70 --------------------------------------------------------------------------------



A summary of results of continuing operations for the three and six month periods ended June 30, 2014 and 2013 is as follows (in thousands):

For the Three Month For the Six Month Period Ended June 30, Period Ended June 30, 2014 2013 2014 2013 Income (loss) from continuing operations before income taxes and income related to associated companies: Investment Banking & Capital Markets $ 85,568$ 77,603$ 281,938$ 77,603 Beef Processing Services 6,518 27,286 (21,495 ) 6,772 Other Operations (6,014 ) (22,115 ) (23,515 ) (27,427 ) Corporate (14,794 ) (33,828 ) (45,905 ) 315,113 Total consolidated income from continuing operations before income taxes and income related to associated companies $ 71,278$ 48,946 $



191,023 $ 372,061

Investment Banking & Capital Markets

The investment banking and capital markets segment is comprised of Jefferies, which was acquired on March 1, 2013 and is reflected in our consolidated financial statements utilizing a one month lag; Jefferies has a November 30th fiscal year and its fiscal quarters end one month prior to our reporting periods. A summary of results of operations for Jefferies for the three and six month periods ended June 30, 2014 and for the period from the Jefferies acquisition through June 30, 2013 is as follows (in thousands): For the Period From the For the Three For the Six Jefferies Month Month Acquisition Period Ended Period Ended Through June 30, 2014 June 30, 2014 June 30, 2013 Net revenues $ 689,303$ 1,619,815$ 651,509 Expenses: Compensation and benefits 386,001 912,775 373,880 Floor brokerage and clearing fees 54,020 103,533 32,991 Depreciation and amortization 18,383 35,414 18,934 Selling, general and other expenses 145,331 286,155 148,101 603,735 1,337,877 573,906 Income before income taxes $ 85,568$ 281,938$ 77,603 71

-------------------------------------------------------------------------------- The segment comprises many business units, with many interactions and much integration among them. Business activities include the sales, trading, origination and advisory effort for various equity, fixed income, commodities, foreign exchange and advisory products and services. Jefferies business, by its nature, does not produce predictable or necessarily recurring revenues or earnings. Jefferies results in any given period can be materially affected by conditions in global financial markets, economic conditions generally, and its own activities and positions. The discussion below is presented on a detailed product and expense basis. Net revenues presented for equity and fixed income businesses include allocations of interest income and interest expense as Jefferies assesses the profitability of these businesses inclusive of the net interest revenue or expense associated with the respective sales and trading activities, which is a function of the mix of each business's associated assets and liabilities and the related funding costs.



The following provides a summary of net revenues by source for the three and six month periods ended June 30, 2014 and for the period from the Jefferies acquisition through June 30, 2013 (in thousands):

For the Period From the Jefferies For the Three For the Six Month Month Acquisition Through Period Ended Period Ended June 30, 2014 June 30, 2014 June 30, 2013 Sales and trading: Equities $ 142,435$ 361,941 $ 149,472 Fixed income 218,820 505,549 214,376 Total sales and trading 361,255 867,490 363,848 Investment banking: Capital markets: Equities 83,726 178,464 53,564 Debt 147,000 320,038 133,714 Advisory 100,423 246,967 89,856 Total investment banking 331,149 745,469 277,134 Other (3,101 ) 6,856 10,527 Total net revenues $ 689,303$ 1,619,815 $ 651,509 72

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Net Revenues

Net revenues for Jefferies for the second quarter of 2014 reflected solid revenues in investment banking, and a steady performance in Equities and Fixed Income despite lower client trading volume. Further, European and Asian revenues for the second quarter of 2014 were the third highest quarter on record. Net revenues for the second quarter of 2013 reflected improved performance in Jefferies core equity sales and trading business and continued strength in its investment banking platform. However, there was a significant slowdown in fixed income activity during the first two months of that quarter that offset better fixed income results in the final month.



Equities Revenue

Equities revenue is comprised of equity commissions, principal transactions and net interest revenue relating to cash equities, electronic trading, equity derivatives, convertible securities, prime brokerage, securities finance and alternative investment strategies. Equities revenue is heavily dependent on the overall level of trading activity of our clients. Equities revenue also includes our share of the net earnings from our joint venture investments in Jefferies Finance, LLC and Jefferies LoanCore, LLC, which are accounted for under the equity method, as well as any changes in the value of Jefferies investments in Knight Capital and Harbinger, which are accounted for at fair value. Equities revenue for the second quarter of 2014 includes an unrealized gain of $7.6 million from our investment in Knight Capital. Also included within interest expense allocated to Jefferies equities business is positive income of $11.9 million for the amortization of premiums arising from the adjustment of Jefferies long-term debt to fair value as part of acquisition accounting. The second quarter of 2014 was characterized by U.S. stock prices continuing their upward trend as company earnings and economic data largely met expectations and monetary policy looked to remain favorable. Towards the end of the fiscal quarter, our equity option trading desk benefited from a decrease in volatility, although offset by reduced trading revenues on our U.S. equity cash desk driven by decreased customer flows, and lower trading revenues from equity block trading. Our securities financing business contributed solidly to revenues during the quarter while reduced liquidity in the secondary market due to fewer new issuances led to lower revenues from our convertibles desk. In Europe, with the economy continuing to show signs of strengthening, increased commission and trading revenues resulted from improved customer flows. Asian equity commissions for the second quarter of 2014 also were up driven by an increase in client activity. Net earnings from Jefferies Finance was consistently strong while those from Jefferies LoanCore were lower during the second quarter as compared to the same period in 2013 due to fewer securitizations. Equities revenue for the six month 2014 period includes unrealized gains of $26.5 million from Jefferies investments in Knight Capital and Harbinger Group Inc. Additionally, during the first quarter of 2014, Jefferies recognized a mark-to-market gain of $12.2 million in connection with its investment in CoreCommodity Management LLC. Also included within interest expense allocated to Jefferies equities business is positive income of $23.6 million for the amortization of premiums arising from the adjustment of Jefferies long-term debt to fair value as part of acquisition accounting. U.S. equity market conditions during the period from the Jefferies acquisition through June 30, 2013 were characterized by increasing stock prices, although trading volume was low. In equity markets, the NASDAQ Composite Index, the S&P 500 Index and the Dow Jones Industrial Average increased by 9.4%, 7.7% and 7.6%, respectively, over the quarter ending May 31, 2013, with the S&P Index reaching a new high in May 2013. Although market volumes were subdued, Jefferies U.S. equity cash and electronic trading desks experienced greater customer flow as compared to prior periods. In Europe, liquidity returned to the market as compared to 2012 aiding results, although Jefferies results were still impacted by relatively low trading volumes. Additionally, Asian equity commissions were stronger, particularly in Japan with new monetary policies increasing trading volumes on the Nikkei Exchange. Jefferies Securities Finance desk also contributed solidly to Equities revenue for the 2013 second quarter. The performance of certain strategic investment strategies was strong during the 2013 second quarter. Net earnings from Jefferies Finance and Jefferies LoanCore joint ventures were impacted by additional interest expense on new long-term debt issued by both ventures during the second quarter of 2013, the proceeds of which had not yet been deployed in the business. 73 --------------------------------------------------------------------------------



Fixed Income Revenue

Fixed income revenue includes 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, high yield and distressed securities, bank loans, foreign exchange and commodities trading activities.

Included within Interest expense for the second quarter of 2014 and for the six month 2014 period is positive income of $14.5 million and $28.9 million, respectively, from the allocation to our fixed income business of a portion of the amortization of premiums arising from adjusting our long-term debt to fair value as part of acquisition accounting. The second quarter of fiscal 2014 was characterized by mixed U.S. economic data combined with increased geopolitical risks. Credit spreads continued to tighten and volatility was extremely low. These conditions impacted trading revenues in our U.S. rates, corporates, emerging markets and mortgage business, though this effect was partially offset by investors migrating to certain parts of the latter asset classes in search of higher yields. While investor interest in high yield asset classes continues to be strong, distressed credit trading was more subdued in the second quarter than during the first quarter of 2014. Municipal securities as an asset class continue to outperform and experience increasing customer inflows benefiting our municipal securities business. Yields in Europe also tightened during the second quarter and, during the latter part of the quarter, economic data for certain European countries negatively impacted results for the period from our international rates and mortgage businesses. Futures sales and trading revenues for the three month 2014 period declined as compared to the same 2013 period primarily attributable to low volatility in the foreign currency markets as well as generally subdued client demand. The first part of the six month 2014 period was characterized by weaker U.S. economic data, which continued to be mixed throughout the six month period. Additionally, geopolitical factors created market uncertainty. Credit spreads continued to tighten as the U.S. Federal Reserve continued to taper its bond buyback program at a measured pace. These factors continued to motivate investors to take on more risk in search of yield, which has reduced demand in U.S. rates while benefiting other of our fixed income businesses. Overall, volatility was low reducing client trading demand across most of the fixed income platform with the exception of increased customer flow in our municipal securities business. Futures sales and trading revenues for the six month 2014 period were negatively impacted by challenging market conditions for foreign currency trading given political and economic instability in various global environments. The second quarter of fiscal 2013 was characterized by improving U.S. macroeconomic conditions, and, through the first half of May 2013, the U.S. Federal Reserve's policies resulted in historically low yields for fixed income securities motivating investors to take on more risk in search for yield. However, in May 2013, the fixed income markets became concerned about a possible tapering of the quantitative easing program leading ultimately to negative returns for the period across nearly all of the U.S. fixed income markets. Spreads tightened significantly in the U.S. rates market, with a significant sell-off in the market in May 2013 creating a challenging environment to monetize client flow. Corporate credit spreads also compressed during the second quarter of 2013 and a difficult trading environment prevailed. Conversely, spreads widened for mortgage products and market volatility was amplified during the period resulting in sizable write-downs in our inventory. Municipal securities underperformed as an asset class as the yields compared to other asset classes when considering the risk of the asset class did not appear attractive to investors. Our leverage credit business produced solid results as investors also sought investment yields in this fixed income class and issuers of bank debt were active with the supply level creating a positive effect on liquidity in the secondary market. Additionally, foreign exchange revenues were negatively impacted by volatility in the markets. Europe experienced strong trading volume as U.S. and Japanese investors began to search for yield, despite continuing macroeconomic and political risks in the eurozone. International mortgage revenues benefited from the demand for European mortgage bonds in the second quarter of 2013. Revenues in our international credit business were affected by an overall slowdown in market activity, as renewed uncertainty over the debt crisis in certain peripheral European countries remained.



Investment Banking Revenue

Jefferies provides a full range of capital markets and financial advisory services to its clients across most industry sectors in the Americas, Europe and Asia. Capital markets revenue includes underwriting and placement revenue related to corporate debt, municipal bonds, mortgage- and asset-backed securities and equity and equity-linked securities. Advisory revenue consists primarily of advisory and transaction fees generated in connection with merger, acquisition and restructuring transactions. During Jefferies second quarter of 2014, strong equity and debt markets, low borrowing costs and an improving U.S. and European economic environment, increased the volume of both capital market transactions and mergers and acquisition activity compared to the same period last year. From equity and debt capital raising activities, Jefferies generated $83.7 million and $147.0 million in revenues, respectively. During that three month period, Jefferies completed 171 public and private debt financings that raised $42.5 billion and completed 42 public equity financings and one convertible offering that raised $12.6 billion (35 of which Jefferies acted as sole or joint bookrunner). Financial advisory revenues totaled $100.4 million in the second quarter of 2014, during which Jefferies acted as financial advisor on 31 merger and acquisition transactions with an aggregate transaction value of $14.5 billion. 74 -------------------------------------------------------------------------------- During the six month 2014 period, Jefferies generated from equity and debt capital raising activities $178.5 million and $320.0 million in revenues, respectively. During that period, Jefferies completed 300 public and private debt financings that raised $95.6 billion and completed 79 public equity financings and 4 convertible offerings that raised $24.0 billion (68 of which Jefferies acted as sole or joint bookrunner). Financial advisory revenues totaled $247.0 million, including revenues from 59 merger and acquisition transactions with an aggregate transaction value of $35.6 billion. During Jefferies second quarter of 2013, capital markets revenue were driven by a higher number of debt capital market transactions as companies took advantage of record-low borrowing costs; however, the market weakened towards the end of May 2013 due to uncertainty regarding the timing of the Federal Reserve's tapering of its stimulus plan. Jefferies completed 138 public and private debt financings that raised a total of $54.4 billion during its second quarter of 2013. Jefferies completed 38 public equity financings that raised $8.4 billion in capital (33 of which Jefferies acted as sole or joint bookrunner).



Compensation and Benefits

Compensation and benefits expense consists of salaries, benefits, cash bonuses, commissions, annual cash compensation awards, historical annual share-based compensation awards and the amortization of certain non-annual share-based and cash compensation awards to employees. Cash and historical share-based awards granted to employees as part of year end compensation generally 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 (primarily non-compete clauses) of those awards. Accordingly, the compensation expense for a substantial portion of awards granted at year end as part of annual compensation is fully recorded in the year of the award. Included within Compensation and benefits expense are share-based amortization expenses for senior executive awards granted in January 2010 and September 2012, non-annual share-based and cash-based awards to other employees and certain year end awards that contain future service requirements for vesting. Such awards are being amortized over their respective future service periods and amounted to compensation expense of $51.6 million and $117.7 million for Jefferies for the three and six month periods of 2014, respectively, and $67.1 million for the period from the Jefferies acquisition through June 30, 2013. In addition, compensation and benefits expense for Jefferies for the three and six month 2014 periods includes approximately $3.9 million and $7.5 million, respectively, of additional amortization expense related to the write-up of the cost of outstanding share-based awards which had future service requirements at the acquisition date. Compensation and benefits as a percentage of Net revenues was 56.0% and 56.4% for the three and six month 2014 periods, respectively, and 57.4% for the period from the Jefferies acquisition through June 30, 2013.



Non-Compensation Expenses

Non-compensation expenses include floor brokerage and clearing fees, technology and communications expense, occupancy and equipment rental expense, business development, professional services, depreciation and amortization expense and other costs. All of these expenses, other than floor brokerage and clearing fees and depreciation and amortization expense, are included within Selling, general and other expenses in the Consolidated Statements of Operations. Floor brokerage and clearing expenses for the periods are reflective of the trading volumes in Jefferies fixed income and equities trading businesses. Technology and communications expense includes costs associated with development of the various trading systems and projects associated with corporate support infrastructure, including communication enhancements to our global headquarters and executive offices. Occupancy and equipment rental expense for the second quarter of 2014 reflects office re-configuration expenditure. Seasonally higher Business development costs reflect continued efforts to build market share, including our loan origination business conducted through Jefferies Finance. Professional services expense includes legal and consulting fees that continue to be incurred as part of implementing various regulatory requirements. Non-compensation expenses include approximately $3.5 million and $7.0 million for the three and six month 2014 periods, respectively, in incremental amortization expense associated with fair value adjustments to identifiable tangible and intangible assets recognized as part of acquisition accounting and $2.1 million and $4.2 million for the three and six month 2014 periods, respectively, in additional lease expense related to recognizing existing leases at their current market value. Non-compensation expenses for Jefferies second quarter of 2013 include approximately $8.2 million in amortization expense associated with fair value adjustments to identifiable tangible and intangible assets recognized as part of acquisition accounting and $9.0 million of costs related to the acquisition of Jefferies. In addition, during the 2013 second quarter, a $7.3 million charge was recognized due to vacating certain office space. 75 --------------------------------------------------------------------------------



Beef Processing Services

A summary of results of operations for National Beef for the three and six month periods ended June 30, 2014 and 2013 is as follows (in thousands):

For the Three Month For the Six Month Period Ended June 30, Period Ended June 30, 2014 2013 2014 2013 Net revenues $ 2,009,093$ 1,920,423$ 3,896,471$ 3,709,865 Expenses: Cost of sales 1,958,686 1,853,724 3,833,649 3,624,568 Compensation and benefits 10,460 8,406 21,159 16,571 Interest 3,803 3,233 6,913 6,484 Depreciation and amortization 21,195 21,855 41,955 43,588 Selling, general and other expenses 8,431 5,919



14,290 11,882

2,002,575 1,893,137



3,917,966 3,703,093

Income (loss) before income taxes $ 6,518$ 27,286$ (21,495 )$ 6,772

National Beef's profitability is dependent, in large part, on the spread between its cost for live cattle, the primary raw material for its business, and the value received from selling boxed beef and other products. Because National Beef operates in a large and liquid commodity market, it does not have much influence over the price it pays for cattle or the selling price it receives for the products it produces. National Beef's profitability typically fluctuates seasonally as well as cyclically, with relatively higher margins in the spring and summer months and during times of cattle herd expansion. The USDA reports market values for cattle, beef, offal and other products produced by ranchers, farmers and beef processors. Generally, National Beef expects its profitability to improve as the ratio of the USDA comprehensive boxed beef cutout (a weekly reported measure of the total value of all USDA inspected beef primal cuts, grind and trim produced from fed cattle) to the USDA 5-area weekly average slaughter cattle price increases and for profitability to decline as the ratio decreases. The ratio during the three and six months of 2014 was largely unchanged from the comparable 2013 periods. Revenues modestly increased during the three and six months ended June 30, 2014 as compared to the same periods in 2013 due primarily to higher selling prices but fewer cattle processed. Cost of sales increased during 2014 periods as compared to the comparable 2013 periods, as fed cattle prices continued to rise and reached record high level, due in part to the declining supply of fed cattle available for slaughter. As a result, gross margins were compressed during these periods. As more fully discussed in the 2013 10-K, during the fourth quarter of 2013 National Beef decided to close its beef processing facility located in Brawley, California; the facility was closed during the second quarter of 2014. In addition to the long-lived asset impairment charge that it recorded in the fourth quarter of 2013, during the three and six months ended June 30, 2014, National Beef recognized $4.0 million and $6.2 million, respectively, of costs in connection with closing the Brawley facility. These costs include employee separation and retention, systems decommissioning and various other expenses. Of these amounts, during the three and six month 2014 periods, $2.1 million and $4.2 million, respectively, related to employee separation, which is included in compensation and benefits in the table above, and the various other costs are included in selling, general and other expenses in the table above. National Beef does not expect to incur significant additional costs related to the closure of the Brawley facility in future periods. During 2013, Walmart discontinued using National Beef as a provider of its consumer-ready products. In addition to its Kansas City Steak Company facility, National Beef has two other consumer-ready processing facilities, one of which was completely dedicated to Walmart's business and the other substantially so dedicated. National Beef continues to pursue replacement business for its consumer-ready facilities; however, it may not be able to fully replace the operating cash flow generated by these facilities in the near future, if at all. If National Beef concludes its best course of action is to close any of these consumer-ready facilities, impairment charges may be recorded if the fair value of those facilities on a held for sale basis is less than the book value. 76 --------------------------------------------------------------------------------



Other Operations

A summary of results of operations for other operations for the three and six month periods ended June 30, 2014 and 2013 is as follows (in thousands):

For the Three Month For the Six Month Period Ended June 30, Period Ended June 30, 2014 2013 2014 2013 Net revenues $ 113,803$ 85,382$ 210,387$ 175,068 Expenses: Cost of sales 82,645 67,927 153,357 127,546 Compensation and benefits 7,238 4,908 14,859 11,123 Interest 975 - 1,264 - Depreciation and amortization 3,726 2,194 6,085 4,783 Selling, general and other expenses 25,233 32,468 58,337 59,043 119,817 107,497 233,902 202,495 Loss before income taxes $ (6,014 )$ (22,115 )$ (23,515 )$ (27,427 ) Other operations primarily consist of manufacturing, energy projects and asset management. The Leucadia asset management platform was newly formed during the third quarter of 2013. Other operations also include our real estate properties and operations. As discussed above, in March 2014, we sold to HomeFed substantially all of our real estate properties and operations in exchange for newly issued HomeFed common shares. Under GAAP, we are not permitted to immediately recognize any gain on real estate sale transactions in which the seller does not receive cash; accordingly the gain on sale of approximately $27.1 million was deferred and will be recognized into income over time. For the three and six month 2014 periods, revenues for manufacturing were $97.3 million and $182.6 million, respectively, and for the three and six month 2013 periods, were $80.4 million and $154.8 million, respectively. For the three and six month 2014 periods, revenues for asset management were $9.5 million and $11.0 million, respectively. For the three and six month 2014 periods, depreciation and amortization expenses for manufacturing were $3.5 million and $6.8 million, respectively, and for the three and six month 2013 periods, were $3.3 million and $6.7 million, respectively. Certain of these amounts are classified within Cost of sales and Selling, general and other expenses. Selling, general and other expenses include $12.8 million and $33.2 million for the three and six month 2014 periods, respectively, and $14.7 million and $28.0 million for the three and six month 2013 periods, respectively, related to the investigation and evaluation of our energy projects (principally professional fees and other costs). Pre-tax income for manufacturing was $6.9 million and $14.3 million, respectively, for the three and six month 2014 periods and was $5.9 million and $14.2 million, respectively, for the three and six month 2013 periods. Pre-tax income for asset management was $5.6 million and $4.1 million, respectively, for the three and six month 2014 periods.



Corporate

A summary of results of operations for corporate for the three and six month periods ended June 30, 2014 and 2013 is as follows (in thousands):

77 --------------------------------------------------------------------------------

For the Three Month For the Six Month Period Ended June 30, Period Ended June 30, 2014 2013 2014 2013 Net revenues $ 39,855$ 18,411$ 68,695$ 436,896 Expenses: Compensation and benefits 20,468 22,183 41,211 48,171 Interest 24,366 17,923 49,543 35,977 Depreciation and amortization 1,339 2,994 2,676 6,170 Selling, general and other expenses 8,476 9,139



21,170 31,465

54,649 52,239



114,600 121,783

Income (loss) before income taxes $ (14,794 )$ (33,828 ) $

(45,905 ) $ 315,113

Net revenues for corporate include unrealized gains (losses) on corporate securities classified as trading assets for which the fair value option was elected. Unrealized gains (losses) were $19.6 million and $32.2 million for the three and six month 2014 periods, respectively, and $182.7 million for the six month 2013 period. Net realized securities gains for corporate aggregated $12.3 million and $17.1 million for three and six month 2014 periods, respectively, and $9.5 million and $239.4 million for the three and six month 2013 periods, respectively. In the six month 2013 period, security gains include $227.6 million related to the sale of Inmet common shares. The change in interest expense primarily reflects the issuance of $750.0 million principal amount of 5.50% Senior Notes due 2023 and $250.0 million principal amount of 6.625% Senior Notes due 2043 in October 2013 and the maturity of certain of our debt securities during 2013 and 2014. Compensation and benefits includes accrued incentive bonus expenses of $6.3 million and $13.4 million, respectively, for the three and six month periods ended June 30, 2014 and $7.1 million and $14.3 million, respectively, for the three and six month periods ended June 30, 2013. In addition, compensation and benefits for the six month 2013 period includes an accrual of $8.0 million related to retention agreements with certain executive officers. Share-based compensation expense relating to grants made under our senior executive warrant plan and the fixed stock option plan was $1.9 million and $3.8 million, respectively, during the three and six month 2014 periods and $2.9 million and $4.7 million, respectively, during the three and six month 2013 periods. Share-based compensation expense related to restricted stock awards was $4.5 million and $9.0 million, respectively, during the three and six month 2014 periods and $4.3 million for the three and six month 2013 periods.



Selling, general and other expenses for the three and six month periods ended June 30, 2013 include costs related to the acquisition of Jefferies of $0.8 million and $6.6 million, respectively, and for the six month 2013 period, consent fees of $2.3 million paid to amend a covenant in our senior note indenture.

Income Taxes

For the three and six months ended June 30, 2014, the provision for income taxes includes $24.7 million and $39.8 million, respectively, for state income taxes and $4.7 million and $10.7 million, respectively, for foreign income taxes.



For

the three and six months ended June 30, 2013, the provision for income taxes includes $31.5 million and $42.0 million, respectively, for state and foreign income taxes. For the six months ended June 30, 2013, the provision for income taxes also includes a charge of $12.3 million to write-off a portion of our net deferred tax asset for state income taxes, resulting from a change in our expected state filing positions as a result of the Jefferies acquisition and reflects certain non-deductible expenses. For the six month period ended June 30, 2013, the income tax provision also includes the reversal of the December 31, 2012 deferred tax liability of $34.0 million related to our investment in Jefferies that we elected to account for under the fair value option prior to the acquisition. Due to the acquisition, there was no net income tax provision recorded for income related to the fair value option for Jefferies for the six month period ended June 30, 2013; as a result the impact on the tax provision was a benefit of $65.2 million.



Associated Companies

Income (losses) related to associated companies includes the following for the three and six month periods ended June 30, 2014 and 2013 (in thousands):

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For the Three Month For the Six Month Period Ended June 30, Period Ended June 30, 2014 2013 2014 2013 Berkadia $ 24,388$ 30,844$ 38,361$ 49,431 Garcadia companies 14,043 11,244 25,302 20,115 Linkem (4,723 ) (6,920 ) (10,559 ) (13,522 ) HomeFed 795 (355 ) 177 (596 ) JHYH - - - 7,178 Other 842 50 2,100 3,065 Total $ 35,345$ 34,863$ 55,381$ 65,671 As more fully discussed above, in March 2014 we increased our economic ownership interest in HomeFed to approximately 64%; however, we have agreed to limit our voting rights such that we will not be able to vote more than 45% of HomeFed's total voting securities voting on any matter, assuming all HomeFed shares not owned by us are voted. Since the transaction did not result in our obtaining control of HomeFed, our investment in HomeFed continues to be accounted for as an investment in an associated company. For the three month period ended June 30, 2013, our share of Berkadia's income includes an out of period adjustment of $14.8 million to record income related to prior periods. Cautionary Statement for Forward-Looking Information Statements included in this Report may contain forward-looking statements. Such statements may relate, but are not limited, to projections of revenues, income or loss, development expenditures, plans for growth and future operations, competition and regulation, as well as assumptions relating to the foregoing. Such forward-looking statements are made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted or quantified. When used in this Report, the words "will," "could," "estimates," "expects," "anticipates," "believes," "plans," "intends" and variations of such words and similar expressions are intended to identify forward-looking statements that involve risks and uncertainties. Future events and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements. Factors that could cause actual results to differ materially from any results projected, forecasted, estimated or budgeted or may materially and adversely affect our actual results include but are not limited to the following: potential acquisitions and dispositions of our operations and investments could change our risk profile; recent changes in our key executives could cause our investments to be less successful than in the past; economic downturns, including a downgrade of the U.S. credit rating and Europe's debt crisis, or a recession; risks associated with the increased volatility in raw material prices and the availability of key raw materials; outbreaks of disease affecting livestock; product liability due to contaminated beef; volatility in the volume and prices at which beef products are sold; political and economic risks in foreign countries as well as foreign currency fluctuations; costs to comply with environmental regulations; failure to replace Walmart's consumer-ready business; failure to comply with government laws and regulations and costs associated with compliance; unfavorable labor relations with its employees; declines in the U.S. housing and commercial real estate markets; increases in mortgage interest rate levels or the lack of available consumer credit; lack of liquidity and turmoil in the capital markets; obtaining significant funding, regulatory approvals and purchase commitments from third parties to develop large scale energy projects; changes in existing government and government-sponsored mortgage programs and the loss of or changes in Berkadia's relationships with the related governmental bodies; the inability of Berkadia to repay its commercial paper borrowings; a decrease in consumer spending or general increases in the cost of living; intensified competition in the operation of our businesses or for skilled management and other employees; an inability to generate sufficient taxable income to fully realize our net deferred tax asset; an inability to successfully defend any challenges to our tax filing positions; weather related conditions and significant natural disasters, including hurricanes, tornadoes, windstorms, earthquakes and hailstorms; an inability to insure certain risks economically; dividend payments on our common shares; changes in government tax policies in foreign and domestic jurisdictions; new financial legislation that could affect the market value of certain of our investments, impose additional costs on operations or require changes in business practices; credit-rating agency downgrades; volatility in the value of our investment portfolio; the effect of recent legislation and new pending regulation under the Dodd-Frank Act on Jefferies; extensive international regulation of Jefferies business; international legal, regulatory, political and economic and other risks associated with Jefferies international operations; price volatility and price declines in Jefferies debt securities and loss of revenues, clients and employees as a result of unfounded allegations; risks of loss relating to Jefferies principal trading and investments; a disruption of Jefferies business due to operational failures; credit risk associated with Jefferies business; risk associated with Jefferies hedging and derivative transactions; and liability associated with legal proceedings. Undue reliance should not be placed on these forward-looking statements, which are applicable only as of the date hereof. The Company undertakes no obligation to revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this Report or to reflect the occurrence of unanticipated events. 79



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