-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C6g3uKeVFIFmpEqP1YrCX4DqsgVf9rWvsOdsBURq4jceK4peKnYHoVMnCGJVe+Se +xaUvsdfsjjccwgnBnJpgg== 0000950148-99-002354.txt : 19991108 0000950148-99-002354.hdr.sgml : 19991108 ACCESSION NUMBER: 0000950148-99-002354 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990924 FILED AS OF DATE: 19991105 FILER: COMPANY DATA: COMPANY CONFORMED NAME: JEFFERIES GROUP INC /DE/ CENTRAL INDEX KEY: 0001084580 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 954719745 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14947 FILM NUMBER: 99741831 BUSINESS ADDRESS: STREET 1: 11100 SANTA MONICA BLVD CITY: LOS ANGELES STATE: CA ZIP: 90025 BUSINESS PHONE: 3104451199 MAIL ADDRESS: STREET 1: 11100 SANTA MONICA BLVD CITY: LOS ANGELES STATE: CA ZIP: 90025 FORMER COMPANY: FORMER CONFORMED NAME: JEF HOLDING CO INC DATE OF NAME CHANGE: 19990419 10-Q 1 FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-Q [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 24, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period _______ from to ______ Commission file number 1-14947 JEFFERIES GROUP, INC. (Exact name of registrant as specified in its charter) DELAWARE 95-4719745 - -------------------------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 11100 Santa Monica Blvd., Los Angeles, California 90025 - -------------------------------------------------- ------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (310) 445-1199 ----------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of September 24, 1999, the registrant had 23,979,887 common shares, $.0001 par value, outstanding. Page 1 of 20 2 JEFFERIES GROUP, INC. AND SUBSIDIARIES INDEX TO QUARTERLY REPORT ON FORM 10-Q SEPTEMBER 24, 1999
Page ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Financial Condition - September 24, 1999 (unaudited) and December 31, 1998......................... 3 Consolidated Statements of Earnings (unaudited) - Three Months and Nine Months Ended September 24, 1999 and September 25, 1998....................................................... 4 Consolidated Statement of Changes in Stockholders' Equity (unaudited) - Nine Months Ended September 24, 1999......................................... 5 Consolidated Statements of Cash Flows (unaudited) - Nine Months Ended September 24, 1999 and September 25, 1998.................. 6 Notes to Consolidated Financial Statements (unaudited)......................... 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................... 14 PART II. OTHER INFORMATION Item 1. Legal Proceedings.............................................................. 19 Item 6. Exhibits and Reports on Form 8-K............................................... 19
Page 2 of 20 3 JEFFERIES GROUP, INC. AND SUBSIDIARIES PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
September 24, December 31, 1999 1998 ------------- ------------ ASSETS (unaudited) Cash and cash equivalents ................................................ $ 32,625 $ 55,581 Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations ................................................ 54,297 62,518 Receivable from brokers and dealers ...................................... 2,269,595 2,018,090 Receivable from customers, officers and directors ........................ 199,572 93,526 Securities owned ......................................................... 211,621 100,797 Investments .............................................................. 135,861 93,463 Investment in discontinued operations of ITG ............................. -- 108,333 Premises and equipment ................................................... 31,728 20,524 Other assets ............................................................. 87,532 65,032 ----------- ----------- $ 3,022,831 $ 2,617,864 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Bank loans ............................................................... $ -- $ 21,000 Payable to brokers and dealers ........................................... 1,974,374 1,602,906 Payable to customers ..................................................... 235,800 226,774 Securities sold, not yet purchased ....................................... 80,082 39,365 Accrued expenses and other liabilities ................................... 196,038 243,657 ----------- ----------- 2,486,294 2,133,702 Long-term debt ........................................................... 149,460 149,387 ----------- ----------- 2,635,754 2,283,089 =========== =========== STOCKHOLDERS' EQUITY: Preferred stock, $.0001 par value. Authorized 10,000,000 shares; none issued ....................................... -- -- Common stock, $.0001 par value. Authorized 100,000,000 shares; issued 24,007,899 shares in 1999 and 23,368,268 shares in 1998 ........................................ 2 234 Additional paid-in capital ............................................. 67,308 28,943 Retained earnings ...................................................... 321,695 344,441 Less: Treasury stock, at cost, 28,012 shares in 1999 and 2,138,238 shares in 1998 ........................................... (587) (37,125) Accumulated other comprehensive income (loss): Currency translation adjustments ................................... 328 (49) Additional minimum pension liability ............................... (1,669) (1,669) ----------- ----------- Total accumulated other comprehensive income (loss) .................. (1,341) (1,718) ----------- ----------- Total stockholders' equity ....................................... 387,077 334,775 ----------- ----------- $ 3,022,831 $ 2,617,864 =========== ===========
See accompanying unaudited notes to consolidated financial statements. Page 3 of 20 4 JEFFERIES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Nine Months Ended ---------------------- -------------------- Sept. 24, Sept. 25, Sept. 24, Sept. 25, 1999 1998 1999 1998 --------- --------- --------- --------- Revenues: Commissions ................................. $ 48,846 $ 49,399 $148,229 $133,416 Principal transactions ...................... 49,046 34,103 163,935 123,337 Corporate finance ........................... 16,199 13,489 66,491 109,604 Interest .................................... 27,576 25,934 83,718 68,013 Other ....................................... 4,141 1,116 7,442 3,218 --------- --------- --------- --------- Total revenues ......................... 145,808 124,041 469,815 437,588 Interest expense .............................. 22,725 20,303 70,165 57,318 --------- --------- --------- --------- Revenues, net of interest expense ............. 123,083 103,738 399,650 380,270 --------- --------- --------- --------- Non-interest expenses: Compensation and benefits ................... 76,743 63,855 244,256 237,163 Floor brokerage and clearing fees ........... 8,155 8,399 24,320 23,488 Communications .............................. 11,437 12,213 32,532 35,611 Occupancy and equipment rental .............. 4,234 3,347 11,359 10,396 Travel and promotional ...................... 4,042 4,203 11,635 14,282 Other ....................................... 2,981 4,891 14,640 16,523 --------- --------- --------- --------- Total non-interest expenses ............ 107,592 96,908 338,742 337,463 --------- --------- --------- --------- Earnings before income taxes .................. 15,491 6,830 60,908 42,807 Income taxes .................................. 6,651 1,914 25,625 16,222 --------- --------- --------- --------- Earnings from continuing operations ........... 8,840 4,916 35,283 26,585 Earnings from discontinued operations, net of income taxes ............. 91 10,760 11,238 24,393 --------- --------- --------- --------- Net earnings ........................... $ 8,931 $ 15,676 $ 46,521 $ 50,978 ========= ========= ========= ========= Earnings per share: Basic: Continuing operations ..................... $ 0.37 $ 0.22 $ 1.49 $ 1.20 Discontinued operations ................... -- 0.48 0.47 1.09 --------- --------- --------- --------- Net earnings .............................. $ 0.37 $ 0.70 $ 1.96 $ 2.29 ========= ========= ========= ========= Diluted: Continuing operations ..................... $ 0.36 $ 0.21 $ 1.47 $ 1.16 Discontinued operations.................... 0.01 0.45 0.46 1.02 --------- --------- --------- --------- Net earnings .............................. $ 0.37 $ 0.66 $ 1.93 $ 2.18 ========= ========= ========= ========= Weighted average shares: Basic ...................................... 23,971 22,432 23,708 22,233 Diluted .................................... 24,288 22,965 23,936 22,918
See accompanying unaudited notes to consolidated financial statements. Page 4 of 20 5 JEFFERIES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) NINE MONTHS ENDED SEPTEMBER 24, 1999 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Accumulated Total Additional Other Stock- Common Paid-in Retained Treasury Comprehensive holders' Stock Capital Earnings Stock Income (Loss) Equity --------- ---------- --------- --------- ------------- --------- Balance, December 31, 1998 ............ $ 234 $ 28,943 $ 344,441 $ (37,125) $ (1,718) $ 334,775 Exercise of stock options, including tax benefits (1,108,880 shares) ........... 10 28,871 -- -- -- 28,881 Purchase of treasury stock (375,601 shares) ............. -- -- -- (17,587) -- (17,587) Capital Accumulation Plan distributions, including tax benefits (1,712,549 shares) .. -- 24,335 -- 30,737 -- 55,072 Change in proportionate share of subsidiary's equity related to stock issuances / purchases at the subsidiary .. -- -- 1,121 -- -- 1,121 Issuance of restricted stock (304,029 shares), net of forfeitures, and additional vesting of restricted stock shares, including tax benefits 3 8,302 -- -- -- 8,305 Spin-off of Investment Technology Group, Inc., net of $60,000 cash dividend ..... (245) (23,143) (66,846) 23,388 -- (66,846) Quarterly dividends ($.05 per share per quarter) -- -- (3,542) -- -- (3,542) Comprehensive income: Net earnings ................ -- -- 46,521 -- -- 46,521 Other comprehensive income (loss), net of tax: Translation adjustment ...... -- -- -- -- 377 377 --------- Comprehensive income .......... -- -- -- -- -- 46,898 --------- --------- --------- --------- --------- --------- Balance, September 24, 1999 ........... $ 2 $ 67,308 $ 321,695 $ (587) $ (1,341) $ 387,077 ========= ========= ========= ========= ========= =========
See accompanying unaudited notes to consolidated financial statements. Page 5 of 20 6 JEFFERIES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS)
Nine Months Ended ----------------------- Sept. 24, Sept. 25, 1999 1998 ---------- ---------- Cash flows from operating activities: Net earnings .......................................................... $ 46,521 $ 50,978 --------- --------- Adjustments to reconcile net earnings to net cash provided by (used in) operations: Depreciation and amortization ....................................... 6,607 11,727 (Increase) decrease in cash and securities segregated and on deposit for regulatory purposes ............................ 8,221 (17,521) (Increase) decrease in receivables: Brokers and dealers ............................................... (251,505) (565,561) Customers, officers and directors ................................. (106,046) 19,521 (Increase) decrease in securities owned ............................. (110,824) 109,194 (Increase) decrease in investments .................................. (42,398) 3,823 (Increase) decrease in investment in discontinued operations ........................................................ 41,487 (30,242) (Increase) decrease in other assets ................................. (22,500) 16,315 Increase (decrease) in operating payables: Brokers and dealers ............................................... 371,468 599,232 Customers ......................................................... 9,026 (17,185) Increase (decrease) in securities sold, not yet purchased ........... 40,717 (125,155) Decrease in accrued expenses and other liabilities .................. (47,619) (54,338) --------- --------- Total adjustments ............................................ (103,366) (50,190) --------- --------- Net cash provided by (used in) operating activities .......... (56,845) 788 --------- ---------
Continued on next page. See accompanying unaudited notes to consolidated financial statements. Page 6 of 20 7 JEFFERIES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (UNAUDITED) (DOLLARS IN THOUSANDS)
Nine Months Ended ------------------------ Sept. 24, Sept. 25, 1999 1998 ---------- ---------- Cash flows from financing activities: Net proceeds from (payments on): Bank loans ............................................................ (21,000) -- Repurchase of treasury stock .......................................... (17,587) (11,692) Dividends paid ........................................................ (3,542) (3,113) Exercise of stock options ............................................. 28,881 11,463 Issuance of common stock shares ....................................... -- 2,181 Issuance of restricted stock .......................................... 8,305 895 Capital Accumulation Plan distributions ............................... 55,072 6,086 Change in proportionate share of subsidiary's equity .................. 1,121 4,353 -------- -------- Net cash provided by financing activities ......................... 51,250 10,173 -------- -------- Cash flows from investing activities - purchase of premises and equipment ......................................... (17,738) (8,654) -------- -------- Effect of foreign currency translation on cash ............................... 377 (284) -------- -------- Net increase (decrease) in cash and cash equivalents............... (22,956) 2,023 Cash and cash equivalents - beginning of period .............................. 55,581 58,225 -------- -------- Cash and cash equivalents - end of period .................................... $ 32,625 $ 60,248 ======== ======== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest ................................................................. $ 69,060 $ 56,714 ======== ======== Income taxes ............................................................. $ 12,440 $ 33,328 ======== ========
Supplemental disclosure of non-cash financing activities: In April 1999, Jefferies Group, Inc. spun-off its investment in Investment Technology Group, Inc., which resulted in a $66,846 reduction in stockholders' equity. See accompanying unaudited notes to consolidated financial statements. Page 7 of 20 8 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) CONSOLIDATED FINANCIAL STATEMENTS The accompanying consolidated financial statements include the accounts of Jefferies Group, Inc. ("Group") and all its subsidiaries ("Company"), including Jefferies & Company, Inc. ("JEFCO"). The accounts of Investment Technology Group, Inc. and all its subsidiaries (collectively "ITG"), including its wholly owned subsidiary, ITG Inc. are included in the financial statements as discontinued operations up to April 27, 1999 (the spin-off date). The accounts of W & D Securities, Inc. ("W & D") are consolidated because of the nature and extent of the Group's ownership interest in W & D. The Company and its subsidiaries (after the discontinuance of ITG) are primarily engaged in a single line of business as a securities broker-dealer, which includes several types of services, such as principal and agency transactions in equity, convertible debt and high yield securities, as well as corporate finance activities. All significant intercompany accounts and transactions are eliminated in consolidation. The consolidated financial statements reflect all adjustments, which are, in the opinion of management, necessary for the fair statement of the results for the interim periods and should be read in conjunction with the Company's annual report for the year ended December 31, 1998. SECURITIES TRANSACTIONS All transactions in securities, commission revenues and related expenses are recorded on a trade-date basis. Securities owned and securities sold, not yet purchased, are valued at market, and unrealized gains or losses are reflected in revenues from principal transactions. COMMON AND PREFERRED STOCK In conjunction with the spin-off of ITG, the stated par value per share of both the Company's common and preferred stock was changed from $0.01 to $.0001 and 774,278 shares of treasury stock were retired. A total of $245,000 was reclassified to the Company's additional paid-in capital account from the Company's common stock account. RECLASSIFICATIONS Certain reclassifications have been made to the prior period's amounts to conform to the current period's presentation. Page 8 of 20 9 RECEIVABLE FROM, AND PAYABLE TO, BROKERS AND DEALERS Receivable from and payable to brokers and dealers consists of the following as of September 24, 1999 (in thousands of dollars): Receivable from brokers and dealers: Securities borrowed.............................. $ 2,129,032 Securities purchased under agreements to resell.. 10,540 Other............................................ 130,023 ------------ $ 2,269,595 ============ Payable to brokers and dealers: Securities loaned................................ $ 1,958,067 Securities sold under agreements to repurchase... 6,378 Other............................................ 9,929 ------------ $ 1,974,374 ============
SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED The following is a summary of the market value of major categories of securities owned and securities sold, not yet purchased, as of September 24, 1999 (in thousands of dollars):
Securities Sold, Securities Not Yet Owned Purchased ---------- ------- Corporate equity securities ........................... $ 94,089 $ 60,519 High-yield securities ................................. 70,559 17,851 Corporate debt securities ............................. 40,200 1,219 U.S. Government and agency obligations ................ 5,975 -- Options ............................................... 798 493 -------- -------- $211,621 $ 80,082 ======== ========
INVESTMENTS Investments consist of the following as of September 24, 1999 (in thousands of dollars): Debt and equity investments.......................... $ 60,939 Partnership interests................................ 65,405 Equity and debt interests in affiliates.............. 9,517 ----------- $ 135,861 ===========
CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash in banks and short term investments. Cash equivalents are part of the cash management activities of the Company and generally mature within 90 days. The following is a summary of cash and cash equivalents as of September 24, 1999 (in thousands of dollars): Cash in banks........................................ $ 16,136 Short term investments............................... 16,489 -------- $ 32,625 ========
Page 9 of 20 10 EARNINGS PER SHARE The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the three month and nine month periods ended September 24, 1999 and September 25, 1998 (in thousands, except per share amounts):
Three Months Ended Nine Months Ended --------------------- -------------------- Sept. 24, Sept. 25, Sept. 24, Sept. 25, 1999 1998 1999 1998 --------- --------- --------- --------- Earnings from continuing operations ............. $ 8,840 $ 4,916 $ 35,283 $ 26,585 Earnings from discontinued operations ........... 91 10,760 11,238 24,393 -------- -------- -------- -------- Net earnings for basic earnings per share ....... 8,931 15,676 46,521 50,978 Adjustment - stock options on subsidiary ....... (2) (484) (422) (1,061) -------- -------- -------- -------- Adjusted earnings - diluted calculation ......... $ 8,929 $ 15,192 $ 46,099 $ 49,917 ======== ======== ======== ======== Shares for basic and diluted calculations: Average number of common shares ................. 23,971 20,956 23,702 20,824 Capital Accumulation Plan unissued shares ....... -- 1,476 6 1,409 -------- -------- -------- -------- Average shares used in basic computation ........ 23,971 22,432 23,708 22,233 Stock options ................................... 302 459 207 553 Other unissued common stock equivalents ......... 15 74 21 132 -------- -------- -------- -------- Average shares used in diluted computation ...... 24,288 22,965 23,936 22,918 ======== ======== ======== ======== Earnings per share: Basic: Earnings from continuing operations ............. $ 0.37 $ 0.22 $ 1.49 $ 1.20 Earnings from discontinued operations ........... -- 0.48 0.47 1.09 -------- -------- -------- -------- Net earnings .................................... $ 0.37 $ 0.70 $ 1.96 $ 2.29 ======== ======== ======== ======== Diluted: Earnings from continuing operations ............. $ 0.36 $ 0.21 $ 1.47 $ 1.16 Earnings from discontinued operations ........... 0.01 0.45 0.46 1.02 -------- -------- -------- -------- Net earnings .................................... $ 0.37 $ 0.66 $ 1.93 $ 2.18 ======== ======== ======== ========
OTHER COMPREHENSIVE INCOME The following summarizes other comprehensive income and accumulated other comprehensive income at September 24, 1999 and for the three months then ended (in thousands of dollars):
Before-Tax Income Tax Net-of-Tax Amount or Benefit Amount ---------- ---------- ---------- Currency translation adjustments ... $ 1,017 $ -- $ 1,017 Minimum pension liability adjustment -- -- -- ------- ----- ------- Other comprehensive income (loss) .. $ 1,017 $ -- $ 1,107 ======= ===== ======= Minimum Accumulated Currency Pension Other Translation Liability Comprehensive Adjustments Adjustment Income (Loss) ----------- ----------- ------------- Beginning at June 25, 1999 ......... $ (689) $(1,669) $(2,358) Change in third quarter of 1999 .... 1,017 -- 1,017 ------- ----- ------- Ending at September 24, 1999 ....... $ 328 $(1,669) $(1,341) ======= ===== =======
Page 10 of 20 11 The following summarizes other comprehensive income and accumulated other comprehensive income at September 25, 1998 and for the three months then ended (in thousands of dollars):
Before-Tax Income Tax Net-of-Tax Amount or Benefit Amount ---------- ---------- ---------- Currency translation adjustments .... $ 328 $ -- $ 328 Minimum pension liability adjustment. -- -- -- ------- ----- ------- Other comprehensive income (loss) ... $ 328 $ -- $ 328 ======= ===== ======= Minimum Accumulated Currency Pension Other Translation Liability Comprehensive Adjustments Adjustment Income (Loss) ----------- ---------- ------------- Beginning at June 26, 1998 .......... $(1,234) $(1,520) $(2,754) Change in third quarter of 1998 ..... 328 -- 328 ------- ------- ------- Ending at September 25, 1998 ........ $ (906) $(1,520) $(2,426) ======= ======= =======
Comprehensive income for the three months ended September 24, 1999 and September 25, 1998 was as follows:
Sept. 24, Sept. 25, 1999 1998 --------- --------- Net earnings..................................... $ 8,931 $ 15,676 Other comprehensive income....................... 1,017 328 ------- -------- Comprehensive income............................. $ 9,948 $ 16,004 ======= ========
The following summarizes other comprehensive income and accumulated other comprehensive income at September 24, 1999 and for the nine months then ended (in thousands of dollars):
Before-Tax Income Tax Net-of-Tax Amount or Benefit Amount ---------- ---------- ---------- Currency translation adjustments ... $ 377 $ -- $ 377 Minimum pension liability adjustment -- -- -- ------- ----- ------- Other comprehensive income (loss) .. $ 377 $ -- $ 377 ======= ===== ======= Minimum Accumulated Currency Pension Other Translation Liability Comprehensive Adjustments Adjustment Income (Loss) ----------- ---------- ------------- Beginning at December 31, 1998 ..... $ (49) $(1,669) $(1,718) Change in 1999 ..................... 377 -- 377 ------- ------- ------- Ending at September 24, 1999 ....... $ 328 $(1,669) $(1,341) ======= ======= =======
Page 11 of 20 12 The following summarizes other comprehensive income and accumulated other comprehensive income at September 25, 1998 and for the nine months then ended (in thousands of dollars):
Before-Tax Income Tax Net-of-Tax Amount or Benefit Amount ---------- ---------- ---------- Currency translation adjustments ... $ (284) $ -- $ (284) Minimum pension liability adjustment -- -- -- ------- ------- ------- Other comprehensive income (loss) .. $ (284) $ -- $ (284) ======= ======= ======= Minimum Accumulated Currency Pension Other Translation Liability Comprehensive Adjustments Adjustment Income (Loss) ----------- ---------- ------------- Beginning at December 31, 1997 ..... $ (622) $(1,520) $(2,142) Change in 1998 ..................... (284) -- (284) ------- ------- ------- Ending at September 25, 1998 ....... $ (906) $(1,520) $(2,426) ======= ======= =======
Comprehensive income for the nine months ended September 24, 1999 and September 25, 1998 was as follows:
Sept. 24, Sept. 25, 1999 1998 --------- --------- Net earnings..................................... $ 46,521 $ 50,978 Other comprehensive income....................... 377 (284) --------- -------- Comprehensive income............................. $ 46,898 $ 50,694 ========= ========
NET CAPITAL REQUIREMENTS As registered broker-dealers, JEFCO and W & D are subject to the Securities and Exchange Commission's Uniform Net Capital Rule (Rule 15c3-1), which requires the maintenance of minimum net capital. JEFCO and W & D have elected to use the alternative method permitted by the Rule, which requires that they each maintain minimum net capital, as defined, equal to the greater of $250,000 or 2% of the aggregate debit balances arising from customer transactions, as defined. Net capital changes from day to day, but as of September 24, 1999, JEFCO's and W & D's net capital was $219.2 million and $2.5 million, respectively, which exceeded minimum net capital requirements by $213.8 million and $2.3 million, respectively. QUARTERLY DIVIDENDS In 1988, the Company instituted a policy of paying regular quarterly dividends. There are no restrictions on the Company's present ability to pay dividends on common stock, other than the governing provisions of the Delaware General Corporation Law. Dividends per Common Share (declared and paid):
1st Qtr. 2nd Qtr. 3rd Qtr. -------- -------- -------- 1999....... $.05 $.05 $.05 1998....... $.05 $.05 $.05
OFF-BALANCE SHEET RISK In the normal course of business, the Company had letters of credit outstanding aggregating $36.1 million at September 24, 1999, to satisfy various collateral requirements in lieu of depositing cash or securities. Page 12 of 20 13 SEGMENT REPORTING The Company's business is predominantly in the United States with approximately 9% of revenues and 1% of assets attributable to international operations. On April 27, 1999, Group and ITG consummated the separation of ITG from the other Group businesses. Financial information for the discontinued business segment is summarized as follows (in thousands of dollars): COMPONENTS OF DISCONTINUED OPERATIONS OF ITG
THREE MONTHS ENDED NINE MONTHS ENDED --------------------------- --------------------------- SEPT. 24, SEPT. 25, SEPT. 24, SEPT. 25, 1999 1998 1999 1998 ----------- ----------- ------------ ----------- Net earnings of ITG............................... $ 63 $ 13,884 $ 9,201 $ 31,174 Deferred taxes on ITG's IPO gain.................. -- -- 12,843 -- Less: Write-off of goodwill on JEF related to ITG -- -- 5,208 -- Less: Company's net spin-off related expenses..... (41) 552 3,807 1,104 Less: Minority interest in ITG.................... 13 2,572 1,791 5,677 ----------- ----------- ------------ ----------- Discontinued operations of ITG.................... $ 91 $ 10,760 $ 11,238 $ 24,393 =========== =========== ============ ===========
Cash paid for interest and income taxes The interest paid and income taxes paid amounts included in the Consolidated Statements of Cash Flows included amounts related to discontinued operations of ITG (in thousands of dollars).
SEPT. 24, SEPT. 25, 1999 1998 --------- --------- Interest paid......................................... $ 31 $ 31 Income taxes paid..................................... $6,538 $23,530
Page 13 of 20 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This document and in particular the section entitled "The Year 2000 Project" contains certain forward-looking statements. These statements are intended to be "forward-looking statements", as that phrase is defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements, which can be identified by the use of terms such as "plan," "will," "would," "expect," or variations of such terms, may not occur as presently anticipated due to various uncertainties. As a result, no forward-looking statement should be regarded as a representation by the Company or any other person that the presently anticipated events will occur as described herein. ANALYSIS OF FINANCIAL CONDITION Total assets increased $404.9 million from $2,617.9 million at December 31, 1998 to $3,022.8 million at September 24, 1999. The increase in assets is mostly due to an increase in the balances associated with JEFCO's securities borrowed and loaned matched book business. THIRD QUARTER 1999 VERSUS THIRD QUARTER 1998 Revenues, net of interest expense, increased 19% to $123.1 million, compared to $103.7 million for the third quarter of 1998. The increase was due primarily to a $14.9 million, or 44%, increase in principal transactions, a $3.0 million, or 271%, increase in other income, and a $2.7 million, or 20%, increase in corporate finance, partially offset by a $780,000, or 14%, decrease in net interest income and a $553,000, or 1%, decrease in commissions. Commission revenues decreased mostly due to the Equities Division. Revenues from principal transactions increased primarily due to increased trading gains related to other proprietary trading. Corporate finance revenues increased despite the currently difficult environment for underwritings. Net interest income (interest revenues less interest expense) was down $780,000 mostly due to a reduction in other interest income. Total non-interest expenses increased 11% to $107.6 million, compared to $96.9 million for the third quarter of 1998. Compensation and benefits increased $12.9 million, or 20%, mostly due to an increase in incentive based compensation accruals. Other expense decreased $1.9 million or 39%, mostly due to adjustments of accruals for legal, bad debts and other miscellaneous expenses. Occupancy and equipment rental increased $887,000 or 27%, due mostly to office space relocation expenses. Communications decreased $776,000, or 6%, mostly due to a reduction in Y2K costs. Both travel and promotional and floor brokerage and clearing fees remained relatively unchanged. Earnings before income taxes were up 127% to $15.5 million, compared to $6.8 million for the same prior year period. The effective tax rate was approximately 42.9% for the third quarter of 1999 and approximately 28.0% for the third quarter of 1998. The increase in the tax rate is mostly due to the favorable impact on the 1998 tax rate of a reversal of deferred taxes. The net effect of the increase in earnings before income taxes and the increase in effective tax rate was that earnings from continuing operations were up $3.9 million to $8.8 million, compared to $4.9 million for the same prior year period. Earnings from discontinued operations, net of income taxes, amounted to a relatively minor $91,000 and represent adjustments to spin-off expenses recorded in the second quarter of 1999. Basic earnings from continuing operations per share were $0.37 for the third quarter of 1999 on 23,971,000 shares compared to $0.22 in the 1998 period on 22,432,000 shares. Diluted earnings from continuing operations per share were $0.36 for the third quarter of 1999 on 24,288,000 shares compared to $0.21 in the comparable 1998 period on 22,965,000 shares. Page 14 of 20 15 Basic net earnings per share were $0.37 for the third quarter of 1999 on 23,971,000 shares compared to $0.70 in the 1998 period on 22,432,000 shares. Diluted net earnings per share were $0.37 for the third quarter of 1999 on 24,288,000 shares compared to $0.66 in the comparable 1998 period on 22,965,000 shares. FIRST NINE MONTHS 1999 VERSUS FIRST NINE MONTHS 1998 Revenues, net of interest expense, increased 5% to $399.7 million, compared to $380.3 million for the first nine months of 1998. The increase was due primarily to a $40.6 million, or 33%, increase in principal transactions, a $14.8 million, or 11%, increase in commissions, a $4.2 million, or 131%, increase in other income, and a $2.9 million, or 27%, increase in net interest income, offset by a $43.1 million, or 39%, decrease in corporate finance. Commission revenues increased, led by the Equities and Convertible Divisions. Revenues from principal transactions increased primarily due to increased trading gains in the High Yield Division, Equities Division and in other proprietary trading. Corporate finance revenues declined due to the currently difficult environment for underwritings. Net interest income (interest revenues less interest expense) was up mostly due to an excess of securities borrowed interest income over securities loaned interest expense. Total non-interest expenses increased slightly to $338.7 million, compared to $337.5 million for the first nine months of 1998. Compensation and benefits increased $7.1 million, or 3%, mostly due to an increase in incentive based compensation accruals. Communications decreased $3.1 million, or 9%, including a $1.2 million reduction in Y2K costs, mostly due to cost reduction measures taken in the later part of 1998. Travel and promotional decreased $2.6 million, or 19%, largely due to a reduction in business travel. Other expense decreased $1.9 million, or 11%, mostly due to reductions in printing and postage/courier expenses. Occupancy and equipment rental increased $1.0 million, or 9%, due mostly to office space relocation expenses. Floor brokerage and clearing fees increased $832,000, or 4%, due to increased volume of business executed on the various exchanges. Earnings before income taxes were up 42% to $60.9 million, compared to $42.8 million for the same prior year period. The effective tax rate was approximately 42.1% for the first nine months of 1999 and approximately 37.9% for the first nine months of 1998. The increase in the tax rate is mostly due to the favorable impact on the 1998 tax rate of a reversal of deferred taxes. The net effect of the increase in earnings before income taxes and the increase in effective tax rate was that earnings from continuing operations were up 33% to $35.3 million, compared to $26.6 million for the same prior year period. Earnings from discontinued operations, net of income taxes, were down $13.2 million, or 54%, mostly due to the cessation of ITG as a subsidiary of the Company. Basic earnings from continuing operations per share were $1.49 for the first nine months of 1999 on 23,708,000 shares compared to $1.20 in the 1998 period on 22,233,000 shares. Diluted earnings from continuing operations per share were $1.47 for the first nine months of 1999 on 23,936,000 shares compared to $1.16 in the comparable 1998 period on 22,918,000 shares. Basic net earnings per share were $1.96 for the first nine months of 1999 on 23,708,000 shares compared to $2.29 in the 1998 period on 22,233,000 shares. Diluted net earnings per share were $1.93 for the first nine months of 1999 on 23,936,000 shares compared to $2.18 in the comparable 1998 period on 22,918,000 shares. LIQUIDITY AND CAPITAL RESOURCES During June 1999, JEFCO obtained a NASD Regulation approved $120,000,000 revolving credit facility to be used in connection with underwriting activities. The revolving credit facility terminates in June 2001. Loans under this facility bear interest at 2.5% over either the Federal funds rate or the London Interbank Offered Rate. There have been no borrowings against the revolving credit facility. Page 15 of 20 16 REVENUES BY SOURCE The following provides a breakdown of total revenues by source for the three months and nine months ended September 24, 1999 and September 25, 1998.
Three Months Ended ------------------------------------------------------- Sept. 24, 1999 Sept. 25, 1998 ---------------------- ------------------------- % of % of Total Total Amount Revenues Amount Revenues ------ -------- ------ -------- (Dollars in thousands) Commissions and principal transactions: Equities ......................... $ 64,123 44% $ 67,444 54% International .................... 15,322 10 11,807 9 High Yield ....................... 6,700 5 6,207 5 Convertible ...................... 4,074 3 3,231 3 Other proprietary trading ........ 7,673 5 (5,187) (4) ------------------------ ----------------------- Total ........................ 97,892 67 83,502 67 Corporate finance ..................... 16,199 11 13,489 11 Interest .............................. 27,576 19 25,934 21 Other ................................. 4,141 3 1,116 1 ------------------------ ----------------------- Total revenues ................. $ 145,808 100% $ 124,041 100% ======================== ======================= Nine Months Ended ------------------------------------------------------ Sept. 24, 1999 Sept. 25, 1998 ------------------------ ------------------------- % of % of Total Total Amount Revenues Amount Revenues -------- -------- -------- -------- (Dollars in thousands) Commissions and principal transactions: Equities ......................... $206,543 44% $184,019 42% International .................... 41,651 9 37,386 9 High Yield ....................... 37,498 8 24,772 6 Convertible ...................... 14,477 3 8,619 2 Other proprietary trading ........ 11,995 2 1,957 0 ---------------------- ---------------------- Total ........................ 312,164 66 256,753 59 Corporate finance ..................... 66,491 14 109,604 25 Interest .............................. 83,718 18 68,013 15 Other ................................. 7,442 2 3,218 1 ---------------------- ---------------------- Total revenues ................. $469,815 100% $437,588 100% ====================== ======================
THE YEAR 2000 PROJECT The Y2K preparedness effort by the Company (the "Y2K Project") and its subsidiaries began in late 1997 and early 1998 with an initial assessment of the Company's systems, its risk of exposure, the steps necessary to achieve Y2K compliance, and the resources necessary to implement those steps. As a result, the Company engaged Keane, Inc. as independent Y2K consultants, and Ernst & Young, LLP ("E&Y") to provide quarterly reviews of the Y2K Project as an internal audit outsourcer and to provide the independent accountant's report required by Release No. 34-40608. Together with the advice of these professionals, the Company formulated and adopted a Y2K Master Plan. Page 16 of 20 17 The first phase of the Y2K Project, the Inventory, Assessment and Planning phase, involved a complete assessment of the Company's systems, both information technology ("IT") related and non-IT related, and a survey of all vendors and key clients. Systems were categorized into one of three "Triage" Levels - Mission Critical, Business Important, or Other, with "Mission Critical" defined as those systems, the failure of which would result in the Company being unable to conduct business. The Company also created the framework for the Remediation and Testing phase that would follow, and set schedules for reaching the Operational Sustainability and Fully Compliant phases. This planning process provided a guide for each of the Company's divisions in its preparation of more detailed project plans that outline specific areas of work on each system. The Y2K Project called for the devotion of resources primarily to Mission Critical systems during 1998, and Business Important and Other systems primarily in the first quarter of 1999. Current State of Readiness The Company completed the first phase of the Y2K Project (Inventory, Assessment and Planning) during 1998, and completed the Remediation and Testing phase on September 30, 1999. The Company has polled each of its vendors about their Y2K compliance. Of the 668 vendors contacted, 620 (92.3%) have responded and all who responded have indicated that they are or intend to become Y2K compliant by mid-1999. Though none of the remaining vendors provides Mission Critical services, the Company intends to attempt to obtain assurances from the remaining vendors as time permits. Notwithstanding these representations from its vendors, the Company is not relying on vendor statements of readiness but has independently tested each system and connection as part of the Y2K Project and continues to monitor the compliance of key vendor products. The Company has obtained assurances from all its vendors of Mission Critical systems that each vendor is Y2K compliant and the Company has no reason to believe any of those vendors will be unable to sustain Y2K compliance through the remainder of the year. However, because the Company may be forced to rely on contingency plans, which may have a material adverse effect on the Company's business and operations, as discussed below, the Company continues to independently test each system and connection for Y2K compliance. The Company's representatives have also contacted and tested with certain key clients. Due to the nature of the Company's business, the clients that comprise the vast majority of the Company's revenues are institutional and are regulated by various governmental and self-regulatory bodies. The Company has obtained assurances on the Y2K compliance of a majority of its key clients through public disclosures and filings. In addition, the Company intends to proactively work with clients to ensure their continued access to the Company's services through the Year 2000 and to supply contingency plans to clients in the event client system failures prevent interaction with the Company through traditional methods. The Company has completed regression testing and implementation of all systems needed to participate in the Securities Industry Association's ("SIA") street-wide testing and successfully tested those systems in a forward date environment during the SIA tests. The SIA tests resulted in no external Y2K related errors and only minor internal errors. The Company has also obtained compliant versions of all key systems from third party vendors and is testing those systems. As of October 1, 1999, the Company "locked down" all IT systems and is no longer permitting any changes to production systems without business unit approval, IT approval, and full Y2K testing. Other than the implementation of the Company's new internal payroll system which is scheduled for completion on November 1, 1999, the Company expects to resist all new development except changes that are required by regulation, are necessary to correct a specific production problem, or are part of a Y2K contingency plan. The Company is working with its landlords and lessors to assure the continued functionality of the Mission Critical non-IT systems upon which it is dependent, and is in the process of preparing contingency plans for non-IT failures as described below. Other than its internal audits and periodic reporting requirements to the Commission and the NASD, the Company has not been reviewed or audited by any state or federal regulators. Page 17 of 20 18 Costs to Address Y2K Issues The Company's budget for the Y2K Project is $17.3 million. Current spending rates and projected expenses indicate that the Company will stay within that budget. As of September 1999, approximately $15.5 million of costs in the budget have already been incurred. The remainder of the Y2K budget will be spent re-testing software as a result of product upgrades, confirming the Y2K compliance of vendors and clients, implementing the Y2K Contingency Plan, and as a reserve for future remediation in the event of any Y2K failure. Risks Though the Company has now achieved Operational Sustainability, a number of material risks remain which could have a materially adverse impact on the Company. These risks generally arise as a result of either: (1) failures of internal systems or (2) failures of third party systems. Despite the considerable testing and remediation efforts the Company has undertaken, latent errors in the Company's internal systems that remain undetected could cause failures in those systems. Failures in one or more key systems would almost certainly result in substantial impairment of the Company's ability to efficiently process orders and trades or to perform its clearing functions. Although the Company expects that the contingency plans discussed below will allow it to continue operations, those contingency plans may not support the volume of trading the Company is accustomed to and could therefore cause substantial losses in revenue while they are relied upon. In the event failures occur, lost data may result in failed trades and related violations of NASD and SEC rules and regulations. To minimize the time during which it must rely on any contingency plan, the Company plans to devote all available resources to restoring normal system operations in the event any failures occur. There is also a substantial risk that failures by third parties could compromise the major order-processing systems upon which the Company is heavily dependent. Vendors such as Automatic Data Processing, Inc. and the Securities Industry Automation Corporation have represented to the Company that they either are or intend to become Y2K compliant and the Company has worked closely with each of these parties as they prepare for Y2K, but the failure of any one of these systems could result in a significant interruption of normal business for the Company. Due to the interdependence of the Company's systems on those third party systems, the Company does not believe any effective replacement products could be adopted if those systems are not remediated and is therefore focusing its attention on assisting with the remediation and testing process and on developing contingency plans. In addition, there is also a risk that the Company's ability to conduct transactions will be materially impaired by the failure of any significant component of the national clearing and settlement system, failures of major counterparties, exchanges or financial institutions in the marketplace. Failures by one or more of the New York Stock Exchange, Inc., the Nasdaq Stock Market, the Depository Trust Company, the National Securities Clearing Corporation or any of the largest banks or brokerage firms could prevent the entire market from effectively transmitting and receiving data after the Year 2000, despite the Y2K compliance of the Company's systems. Although it is expected that each of these parties will conduct extensive testing to ensure that each is Y2K compliant, there can be no assurance that an unforeseen problem will not create a market disruption that in turn affects the Company's Brokerage and Investment Banking Business. Contingency Plans The Company has developed a Y2K Contingency Plan (the "Contingency Plan"), a detailed mediation and recovery plan that covers each of the six significant risks that may arise from a Y2K failure: 1) loss of data, 2) software failures, 3) telecommunications failures, 4) loss of key hardware, 5) loss of key personnel, and 6) loss of facilities. Page 18 of 20 19 The Contingency Plan addresses each of these risks with respect to each of the Company's nine key business areas (Equities, International, High Yield, Convertibles, Corporate Finance, Operations, Accounting, Facilities and Technology), and addresses both internal systems and failures by key third party information providers and other vendors. The Contingency Plan also sets forth an approach to maintaining business continuity for each of the Company's key business areas. The specific alternatives for failures of various systems are set forth in the Contingency Plan and range from the use of cellular phones or relocation of personnel in the event of a communication failure to the installation of backup software or hardware. The Contingency Plan provides an analysis of each reasonably possible failure scenario for a given Mission Critical system or process. Specifically, the Contingency Plan sets forth (1) the likelihood of failure of each Mission Critical system or process, (2) the circumstances under which a failure in such systems might occur, (3) the impact the failure would have on the competitive environment of the Company, and (4) a detailed mitigation strategy for each type of failure. Mitigation strategies typically list specific products or vendors that can be used to replace failed systems, manual alternatives for ordinarily automated processes and alternative sources for data or datastreams that are interrupted or become unreliable. Additional mitigation strategies are offered where appropriate. The Contingency Plan also includes a specific description of start up procedures to reactivate systems that fail, itemizes the staffing and equipment requirements that will be associated with repairing or re-starting a given system and a contact list of key individuals familiar with the system or process that should be contacted to assist with remediation or business restoration procedures. The Contingency Plan is modeled on the recommendations of the SIA, and a companion Event Management Plan has also been drafted. The Company intends to continue to modify and improve upon the Contingency Plan until the Year 2000 to account for additional detail, alternatives and techniques developed by the Company or adopted by the Securities industry. The Company also intends to staff a Coordination and Communication Center during late December, and to implement its Event Management Plan through the transition into the Year 2000. Forward Looking Statements The Company's projections in this section are based upon assumptions, which it believes to be correct, but which are not guaranteed. Any change in those assumptions could result in material variations in those projections, including the projected costs for remediation and testing, the feasibility of using contingency plans, and the impact of third party failures. Any such change could have a material adverse impact on the Company and its results of operations. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Many aspects of the Company's business involve substantial risks of liability. In the normal course of business, the Company and its subsidiaries have been named as defendants or co-defendants in lawsuits involving primarily claims for damages. The Company's management believes that pending litigation will not have a material adverse effect on the Company. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (b) Reports on Form 8-K. None. Page 19 of 20 20 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. JEFFERIES GROUP, INC. --------------------- (Registrant) Date: November 5, 1999 By: /s/ Clarence T. Schmitz ------------------ -------------------------- Clarence T. Schmitz Chief Financial Officer Page 20 of 20 EX-27 2 FINANCIAL DATA SCHEDULE
BD THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AND THE CONSOLIDATED STATEMENTS OF EARNINGS AS OF SEPTEMBER 24, 1999 AND FOR THE NINE MONTHS THEN ENDED AND THE NOTES THERETO, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS FILED IN THE THIRD QUARTER 1999 JEFFERIES GROUP, INC. 10-Q FILING. 1,000 U.S. DOLLARS 9-MOS DEC-31-1999 JAN-01-1999 SEP-24-1999 1 32,625 329,595 10,540 2,129,032 135,861 31,728 3,022,831 0 245,729 6,378 1,958,067 80,082 149,460 0 0 2 387,075 3,022,831 163,935 83,718 148,229 66,491 0 70,165 244,256 60,908 60,908 0 0 46,521 1.96 1.93
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