INTL FCStone 2011 Annual Report Download - page 44

INTL FCSTONE INC.Form10K30
PARTII
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations
At the time of MF Global bankruptcy  ling, it noti ed the CFTC
of potential de ciencies in customer segregated futures accounts
held at MF GlobalInc.  e CFTC has extensive regulations
to provide for the safety and security of customer assets on
deposit with FCMs.  ese regulations require that all FCMs
maintain customer segregated assets in approved depositories
in excess of its customer segregated liabilities and to complete a
daily calculation of this excess as well as monthly fi lings under
CFTC Form1-FR. As of September30,2011, FCStone,LLC
maintained $50.9million in segregated assets in excess of its
segregated liabilities.
In addition, the CFTC governs the acceptable investment of
customer segregated assets.  ese regulations allow for the
investment of customer segregated assets in readily marketable
instruments including U.S. Treasury securities, municipal
securities, government sponsored enterprise securities, certifi cates
of deposit, commercial paper, corporate notes or bonds, general
obligations of a sovereign nation, interest in money market
mutual funds, and repurchase transactions with affi liated entities
in otherwise allowable securities.  e Company predominately
invests its customer segregated assets in U. S. Treasury Bills and
money market mutual funds, maintains no investment in the
general obligations of a sovereign nation and does not engage
in repurchase transactions with affi liated entities.
As more fully discussed in the Item1.- Business section of this
fi ling under the heading Government regulation and Exchange
Membership, on July21,2010, the President signed into law
the Dodd-Frank Wall Street Reform and Consumer Protection
Act (the “Dodd-Frank Act”). e Dodd-Frank Act creates a
comprehensive new regulatory regime governing the OTC and
listed derivatives markets and their participants by requiring,
among other things: centralized clearing of standardized derivatives
(with certain stated exceptions); the trading of clearable derivatives
on swap execution facilities or exchanges; and registration
and comprehensive regulation of new categories of market
participants as “swap dealers” and swap “introducing brokers.”
 ese initiatives and legislation may not only aff ect us but also
certain of our customers and counterparties. Although the original
date set for completion of fi nal rules was mid-July2011, the
CFTC has announced that it will phase in its new rules through
June30,2012. Because many of the rules that the CFTC and
the SEC are required to promulgate are not yet fi nal, we cannot
predict with any degree of certainty how our business will be
aff ected. e Company will continue to monitor all applicable
developments in the implementation of the Dodd-Frank Act.
FCStone Transaction
On September30,2009, the Company acquired FCStone
Group,Inc. (“FCStone”) through its merger with a subsidiary of
the Company in exchange for 8,239,319shares of the Company’s
common stock.
Under the terms of the merger agreement, the stockholders of
FCStone received 0.2950 of a share of the Company’s common
stock in exchange for each share of FCStone’s common stock
(the “exchange ratio”). Additionally, as a result of the merger,
each outstanding FCStone stock option was converted into an
option to purchaseshares of the Company’s common stock,
with adjustments to the number ofshares and the exercise
price to refl ect the exchange ratio.  eshares of the Company’s
common stock issued to FCStone stockholders in connection
with the transaction represented approximately 47.5% of the
outstandingshares of the Company’s common stock.
 e purchase price for the transaction was $137.6million,
consisting of the fair value of common stock issued in the merger
of $135.5million and acquisition costs of $2.1million.
As of September30,2009, the acquisition of FCStone increased
the Company’s total assets by $1,173.7million, total liabilities
by $1,016.0million, noncontrolling interest by $1.6million
and stockholders’ equity by $156.1million.
 e Company recognized $7.0million of extraordinary loss,
related to purchase accounting adjustments and the correction of
immaterial errors, and $18.5million of extraordinary income for
2010 and 2009, respectively, related to the FCStone acquisition.
 e extraordinary income, also defi ned as negative goodwill,
was the result of the sum of the fair values of the assets acquired
less the liabilities assumed exceeding the acquisition cost.  e
extraordinary loss relates to adjustments to the purchase price
allocation. Typically, changes within the measurement period
are recognized through a corresponding adjustment to goodwill.
However, in the absence of goodwill, recorded in connection
with this transaction, the $7.0million has been reported as an
extraordinary loss in the consolidated fi nancial statements. See
Note18 to the Consolidated Financial Statements for additional
information on the acquisition.
Results of Operations
Set forth below is the Company’s discussion of the results of
its operations, as viewed by management, for the fi scal years
ended 2011,2010 and 2009, respectively.  is discussion refers
to both U.S. GAAP results and adjusted non-GAAP marked-
to-market information, in accordance with the information
presented in Item6, Selected Financial Data. For the Foreign
Exchange, Securities, Clearing and Execution Services (“CES”)
and Other segments, there are no diff erences between the U.S.