SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
| [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 28, 2001 |
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.
| DELAWARE | 95-4719745 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer 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.
As of September 28, 2001, the registrant had 26,932,700 common shares, $.0001 par value, outstanding.
Page 1 of 18
JEFFERIES GROUP, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
SEPTEMBER 28, 2001
| Page | |||||
| PART I. | FINANCIAL INFORMATION | ||||
| Item 1. | Financial Statements | ||||
| Consolidated Statements of Financial Condition - September 28, 2001 (unaudited) and December 31, 2000 | 3 | ||||
| Consolidated Statements of Earnings (unaudited) - Three Months and Nine Months Ended September 28, 2001 and September 29, 2000 | 4 | ||||
| Consolidated Statement of Changes in Stockholders’ Equity (unaudited) - Nine Months Ended September 28, 2001 | 5 | ||||
| Consolidated Statements of Cash Flows (unaudited) - Nine Months Ended September 28, 2001 and September 29, 2000 | 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 | 17 | |||
| Item 2. | Changes in Securities and Use of Proceeds | 17 | |||
| Item 6. | Exhibits and Reports on Form 8-K | 17 | |||
Page 2 of 18
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 28, | December 31, | |||||||||||
| 2001 | 2000 | |||||||||||
| (unaudited) | ||||||||||||
ASSETS | ||||||||||||
| Cash and cash equivalents | $ | 124,281 | $ | 24,996 | ||||||||
| Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations | 171,978 | 206,444 | ||||||||||
| Receivable from brokers and dealers | 3,102,083 | 2,860,677 | ||||||||||
| Receivable from customers, officers and directors | 163,405 | 254,562 | ||||||||||
| Securities owned | 299,361 | 224,738 | ||||||||||
| Securities pledged to creditors | 56,737 | 96,324 | ||||||||||
| Investments | 166,779 | 136,047 | ||||||||||
| Premises and equipment | 48,944 | 43,635 | ||||||||||
| Other assets | 182,215 | 110,446 | ||||||||||
| $ | 4,315,783 | $ | 3,957,869 | |||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||||
| Bank loans | $ | 51,000 | $ | — | ||||||||
| Payable to brokers and dealers | 2,882,825 | 2,423,488 | ||||||||||
| Payable to customers | 335,189 | 501,786 | ||||||||||
| Securities sold, not yet purchased | 120,620 | 171,685 | ||||||||||
| Accrued expenses and other liabilities | 219,367 | 249,918 | ||||||||||
| 3,609,001 | 3,346,877 | |||||||||||
| Long-term convertible debt | 4,175 | 2,963 | ||||||||||
| Long-term debt | 149,655 | 149,582 | ||||||||||
| 3,762,831 | 3,499,422 | |||||||||||
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 27,768,798 shares in 2001 and 25,177,419 shares in 2000 | 3 | 3 | ||||||||||
| Additional paid-in capital | 151,158 | 86,004 | ||||||||||
| Retained earnings | 423,876 | 384,846 | ||||||||||
| Less: | ||||||||||||
| Treasury stock, at cost, 836,098 shares in 2001 and 489,039 shares in 2000 | (20,101 | ) | (10,383 | ) | ||||||||
| Accumulated other comprehensive loss: | ||||||||||||
| Currency translation adjustments | (846 | ) | (885 | ) | ||||||||
| Additional minimum pension liability | (1,138 | ) | (1,138 | ) | ||||||||
| Total accumulated other comprehensive loss | (1,984 | ) | (2,023 | ) | ||||||||
| Total stockholders’ equity | 552,952 | 458,447 | ||||||||||
| $ | 4,315,783 | $ | 3,957,869 | |||||||||
See accompanying unaudited notes to consolidated financial statements.
Page 3 of 18
JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
(In thousands, except per share amounts)
| Three Months Ended | Nine Months Ended | |||||||||||||||||
| Sept. 28, | Sept. 29, | Sept. 28, | Sept. 29, | |||||||||||||||
| 2001 | 2000 | 2001 | 2000 | |||||||||||||||
| Revenues: | ||||||||||||||||||
| Commissions | $ | 51,081 | $ | 51,411 | $ | 165,488 | $ | 164,061 | ||||||||||
| Principal transactions | 54,449 | 65,445 | 213,679 | 203,865 | ||||||||||||||
| Corporate finance | 22,468 | 38,240 | 83,557 | 73,114 | ||||||||||||||
| Interest | 31,259 | 39,589 | 109,535 | 124,240 | ||||||||||||||
| Asset management | 4,652 | 2,941 | 15,192 | 7,249 | ||||||||||||||
| Other | 1,735 | 673 | 3,798 | 3,148 | ||||||||||||||
| Total revenues | 165,644 | 198,299 | 591,249 | 575,677 | ||||||||||||||
| Interest expense | 28,565 | 35,047 | 95,821 | 104,423 | ||||||||||||||
| Revenues, net of interest expense | 137,079 | 163,252 | 495,428 | 471,254 | ||||||||||||||
| Non-interest expenses: | ||||||||||||||||||
| Compensation and benefits | 79,877 | 102,533 | 298,605 | 290,750 | ||||||||||||||
| Floor brokerage and clearing fees | 10,865 | 8,719 | 32,953 | 27,484 | ||||||||||||||
| Communications | 9,595 | 11,526 | 33,163 | 35,236 | ||||||||||||||
| Occupancy and equipment rental | 5,346 | 4,873 | 16,973 | 14,038 | ||||||||||||||
| Travel and promotional | 5,656 | 3,728 | 16,968 | 13,490 | ||||||||||||||
| Other | 7,351 | 6,349 | 22,672 | 17,150 | ||||||||||||||
| Total non-interest expenses | 118,690 | 137,728 | 421,334 | 398,148 | ||||||||||||||
| Earnings before income taxes | 18,389 | 25,524 | 74,094 | 73,106 | ||||||||||||||
| Income taxes | 7,757 | 10,811 | 31,226 | 30,997 | ||||||||||||||
| Net earnings | $ | 10,632 | $ | 14,713 | $ | 42,868 | $ | 42,109 | ||||||||||
| Earnings per share: | ||||||||||||||||||
| Basic | $ | 0.43 | $ | 0.62 | $ | 1.76 | $ | 1.76 | ||||||||||
| Diluted | $ | 0.40 | $ | 0.60 | $ | 1.67 | $ | 1.74 | ||||||||||
| Weighted average shares: | ||||||||||||||||||
| Basic | 24,938 | 23,859 | 24,397 | 23,862 | ||||||||||||||
| Diluted | 26,593 | 24,402 | 25,746 | 24,220 | ||||||||||||||
See accompanying unaudited notes to consolidated financial statements.
Page 4 of 18
JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (Unaudited)
NINE MONTHS ENDED SEPTEMBER 28, 2001
(Dollars in thousands, except per share amounts)
| Accumulated | Total | ||||||||||||||||||||||||
| Additional | Other | Stock- | |||||||||||||||||||||||
| Common | Paid-in | Retained | Treasury | Comprehensive | holders' | ||||||||||||||||||||
| Stock | Capital | Earnings | Stock | Loss | Equity | ||||||||||||||||||||
| Balance, December 31, 2000 | $ | 3 | $ | 86,004 | $ | 384,846 | $ | (10,383 | ) | $ | (2,023 | ) | $ | 458,447 | |||||||||||
| Exercise of stock options, including tax benefits (76,256 shares) | — | 1,826 | — | — | — | 1,826 | |||||||||||||||||||
| Purchase of treasury stock (330,000 shares) | — | — | — | (9,390 | ) | — | (9,390 | ) | |||||||||||||||||
| Issuance of ESPP and common shares (255,265 shares) | — | 5,903 | — | — | — | 5,903 | |||||||||||||||||||
| Issuance of restricted stock (2,242,799 shares), net of forfeitures, and additional vesting of restricted stock shares, including tax benefits | — | 55,023 | — | (328 | ) | — | 54,695 | ||||||||||||||||||
| Employee stock ownership plan amortization and stock purchases, net | — | 2,402 | — | — | — | 2,402 | |||||||||||||||||||
| Quarterly dividends ($.05 per share per quarter) | — | — | (3,838 | ) | — | — | (3,838 | ) | |||||||||||||||||
| Comprehensive income: | |||||||||||||||||||||||||
| Net earnings | — | — | 42,868 | — | — | 42,868 | |||||||||||||||||||
| Other comprehensive income, net of tax: | |||||||||||||||||||||||||
| Translation adjustment | — | — | — | — | 39 | 39 | |||||||||||||||||||
| Comprehensive income | — | — | — | — | — | 42,907 | |||||||||||||||||||
| Balance, September 28, 2001 | $ | 3 | $ | 151,158 | $ | 423,876 | $ | (20,101 | ) | $ | (1,984 | ) | $ | 552,952 | |||||||||||
See accompanying unaudited notes to consolidated financial statements.
Page 5 of 18
JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)
| Nine Months Ended | ||||||||||||
| Sept. 28, | Sept. 29, | |||||||||||
| 2001 | 2000 | |||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net earnings | $ | 42,868 | $ | 42,109 | ||||||||
| Adjustments to reconcile net earnings to net cash provided by (used in) operations: | ||||||||||||
| Depreciation and amortization | 12,612 | 8,887 | ||||||||||
| (Increase) decrease in cash and securities segregated and on deposit for regulatory purposes | 35,433 | (93,462 | ) | |||||||||
| (Increase) decrease in receivables: | ||||||||||||
| Brokers and dealers | (241,406 | ) | (760,812 | ) | ||||||||
| Customers, officers and directors | 91,157 | (29,748 | ) | |||||||||
| (Increase) decrease in securities owned | (73,593 | ) | 35,934 | |||||||||
| Decrease in securities pledged to creditors | 39,587 | — | ||||||||||
| Increase in investments | (30,732 | ) | (12,796 | ) | ||||||||
| Increase in other assets | (44,932 | ) | (30,384 | ) | ||||||||
| Increase (decrease) in operating payables: | ||||||||||||
| Brokers and dealers | 459,337 | 578,363 | ||||||||||
| Customers | (166,597 | ) | 140,029 | |||||||||
| Decrease in securities sold, not yet purchased | (51,065 | ) | (33,468 | ) | ||||||||
| �� | Increase (decrease) in accrued expenses and other liabilities | (32,747 | ) | 9,256 | ||||||||
| Total adjustments | (2,946 | ) | (188,201 | ) | ||||||||
| Net cash provided by (used in) operating activities | 39,922 | (146,092 | ) | |||||||||
Continued on next page.
See accompanying unaudited notes to consolidated financial statements.
Page 6 of 18
JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS — CONTINUED (Unaudited)
(Dollars in thousands)
| Nine Months Ended | ||||||||||||
| Sept. 28, | Sept. 29, | |||||||||||
| 2001 | 2000 | |||||||||||
| Cash flows from financing activities: | ||||||||||||
| Net proceeds from (payments on): | ||||||||||||
| Bank loans | 51,000 | 90,000 | ||||||||||
| Subordinated loans on consolidated subsidiary | 1,300 | — | ||||||||||
| Convertible note issuance | — | 2,792 | ||||||||||
| Repurchase of treasury stock | (9,390 | ) | (9,796 | ) | ||||||||
| Dividends paid | (3,838 | ) | (3,650 | ) | ||||||||
| Exercise of stock options | 1,826 | 1,410 | ||||||||||
| Issuance of ESPP and common shares | 5,903 | 5,678 | ||||||||||
| Issuance of restricted stock | 38,667 | 11,446 | ||||||||||
| Employee Stock Ownership Plan stock purchases | — | (349 | ) | |||||||||
| Net cash provided by financing activities | 85,468 | 97,531 | ||||||||||
| Cash flows from investing activities: | ||||||||||||
| Lawrence Helfant, Inc. acquisition (net of cash received) | (12,404 | ) | — | |||||||||
| Purchase of premises and equipment | (13,652 | ) | (6,909 | ) | ||||||||
| Net cash flows from investing activities | (26,056 | ) | (6,909 | ) | ||||||||
| Effect of foreign currency translation on cash | (49 | ) | (1,684 | ) | ||||||||
| Net increase in cash and cash equivalents | 99,285 | (57,154 | ) | |||||||||
| Cash and cash equivalents — beginning of period | 24,996 | 77,197 | ||||||||||
| Cash and cash equivalents — end of period | $ | 124,281 | $ | 20,043 | ||||||||
| Supplemental disclosures of cash flow information: | ||||||||||||
| Cash paid during the period for: | ||||||||||||
| Interest | $ | 103,675 | $ | 102,653 | ||||||||
| Income taxes | $ | 31,085 | $ | 10,819 | ||||||||
| Lawrence Helfant, Inc. acquisition: | ||||||||||||
| Fair value of assets acquired | $ | 30,628 | ||||||||||
| Liabilities assumed | (2,196 | ) | ||||||||||
| Stock issued (458,333 shares) | (16,028 | ) | ||||||||||
| Net cash paid for acquisition | 12,404 | |||||||||||
| Cash acquired in acquisition | 1,896 | |||||||||||
| Cash paid for acquisition | $ | 14,300 | ||||||||||
See accompanying unaudited notes to consolidated financial statements.
Page 7 of 18
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 W & D Securities, Inc. (“W & D”) are consolidated because of the nature and extent of Group’s ownership interest in W & D. The Company and its subsidiaries operate and are managed as a single business segment, that of a securities broker-dealer, which includes several types of financial services, such as principal and agency transactions in equity, convertible debt and high yield, as well as corporate finance activities. Since the Company’s services are provided using the same distribution channels, support services and facilities and all are provided to meet client needs, the Company does not identify assets or allocate all expenses to any service or class of service as a separate business segment.
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, 2000.
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.
Reclassifications
Certain reclassifications have been made to the prior period’s amounts to conform to the current period’s presentation.
Helfant Acquisition
To expand its floor brokerage operations, the Company acquired Lawrence Helfant, Inc. (“Helfant”) in the third quarter of 2001, with a combination of stock and cash totaling approximately $30.3 million. The acquisition was accounted for as a purchase and resulted in approximately $20.0 million in goodwill.
Receivable from, and Payable to, Brokers and Dealers
Receivable from and payable to brokers and dealers consists of the following as of September 28, 2001 (in thousands of dollars):
| Receivable from brokers and dealers: | |||||
| Securities borrowed | $ | 2,951,925 | |||
| Other | 150,158 | ||||
| $ | 3,102,083 | ||||
| Payable to brokers and dealers: | |||||
| Securities loaned | $ | 2,792,835 | |||
| Other | 89,990 | ||||
| $ | 2,882,825 | ||||
Page 8 of 18
JEFFERIES GROUP, INC. AND SUBSIDIARIES
Securities Owned, Securities Pledged to Creditors 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 28, 2001 (in thousands of dollars):
| Securities | ||||||||
| Sold, | ||||||||
| Securities | Not Yet | |||||||
| Owned | Purchased | |||||||
| Corporate equity securities | $ | 63,582 | $ | 69,201 | ||||
| High-yield securities | 113,647 | 1,593 | ||||||
| Corporate debt securities | 118,685 | 41,576 | ||||||
| U.S. government securities | 2,625 | 8,166 | ||||||
| Options | 822 | 84 | ||||||
| $ | 299,361 | $ | 120,620 | |||||
The following is a summary of the market value of major categories of securities pledged to creditors as of September 28, 2001 (in thousands of dollars):
| Securities | ||||
| Pledged To Creditors | ||||
| Corporate equity securities | $ | 24,197 | ||
| High yield securities | 8,646 | |||
| Corporate debt securities | 23,894 | |||
| $ | 56,737 | |||
Investments
Investments consist of the following as of September 28, 2001 (in thousands of dollars):
| Debt and equity investments | $ | 19,361 | ||
| Partnership interests | 53,564 | |||
| Equity and debt interests in affiliates | 93,854 | |||
| $ | 166,779 | |||
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 28, 2001 (in thousands of dollars):
| Cash in banks | $ | 21,078 | ||
| Short term investments | 103,203 | |||
| $ | 124,281 | |||
Page 9 of 18
JEFFERIES GROUP, INC. AND SUBSIDIARIES
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 28, 2001 and September 29, 2000 (in thousands, except per share amounts):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| Sept. 28, | Sept. 29, | Sept. 28, | Sept. 29, | |||||||||||||
| 2001 | 2000 | 2001 | 2000 | |||||||||||||
| Net earnings | $ | 10,632 | $ | 14,713 | $ | 42,868 | $ | 42,109 | ||||||||
| Shares for basic and diluted calculations: | ||||||||||||||||
| Average shares used in basic computation | 24,938 | 23,859 | 24,397 | 23,862 | ||||||||||||
| Stock options | 591 | 325 | 510 | 208 | ||||||||||||
| Restricted stock | 1,064 | 218 | 839 | 150 | ||||||||||||
| Average shares used in diluted computation | 26,593 | 24,402 | 25,746 | 24,220 | ||||||||||||
| Earnings per share: | ||||||||||||||||
| Basic | $ | 0.43 | $ | 0.62 | $ | 1.76 | $ | 1.76 | ||||||||
| Diluted | $ | 0.40 | $ | 0.60 | $ | 1.67 | $ | 1.74 | ||||||||
Asset Management
The following summarizes revenues from asset management for the three month and nine month periods ended September 28, 2001 and September 29, 2000 (in thousands of dollars):
| Three Months Ended | Nine Months Ended | |||||||||||||||
| Sept. 28, | Sept. 29, | Sept. 28, | Sept. 29, | |||||||||||||
| 2001 | 2000 | 2001 | 2000 | |||||||||||||
High Yield (HY) | ||||||||||||||||
| Performance based | $ | 3,175 | $ | 1,883 | $ | 11,050 | $ | 4,893 | ||||||||
| Asset based | 733 | 444 | 1,770 | 871 | ||||||||||||
Non-HY Employee Funds | ||||||||||||||||
| Asset based | 83 | 57 | 248 | 57 | ||||||||||||
International | 661 | 557 | 2,124 | 1,428 | ||||||||||||
| Total | $ | 4,652 | $ | 2,941 | $ | 15,192 | $ | 7,249 | ||||||||
Other Comprehensive Income (Loss)
The following summarizes other comprehensive income and accumulated other comprehensive loss at September 28, 2001 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 | $ | 2,608 | $ | — | $ | 2,608 | ||||||
| Minimum pension liability adjustment | — | — | — | |||||||||
| Other comprehensive income | $ | 2,608 | $ | — | $ | 2,608 | ||||||
Page 10 of 18
JEFFERIES GROUP, INC. AND SUBSIDIARIES
| Minimum | Accumulated | |||||||||||
| Currency | Pension | Other | ||||||||||
| Translation | Liability | Comprehensive | ||||||||||
| Adjustments | Adjustment | Income (Loss) | ||||||||||
| Beginning at June 29, 2001 | $ | (3,454 | ) | $ | (1,138 | ) | $ | (4,592 | ) | |||
| Change in third quarter of 2001 | 2,608 | — | 2,608 | |||||||||
| Ending at September 28, 2001 | $ | (846 | ) | $ | (1,138 | ) | $ | (1,984 | ) | |||
The following summarizes other comprehensive loss and accumulated other comprehensive loss at September 29, 2000 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 | $ | (747 | ) | $ | — | $ | (747 | ) | ||||
| Minimum pension liability adjustment | — | — | — | |||||||||
| Other comprehensive loss | $ | (747 | ) | $ | — | $ | (747 | ) | ||||
| Minimum | Accumulated | |||||||||||
| Currency | Pension | Other | ||||||||||
| Translation | Liability | Comprehensive | ||||||||||
| Adjustments | Adjustment | Income (Loss) | ||||||||||
| Beginning at June 30, 2000 | $ | (701 | ) | $ | (183 | ) | $ | (884 | ) | |||
| Change in third quarter of 2000 | (747 | ) | — | (747 | ) | |||||||
| Ending at September 29, 2000 | $ | (1,448 | ) | $ | (183 | ) | $ | (1,631 | ) | |||
Comprehensive income for the three months ended September 28, 2001 and September 29, 2000 was as follows:
| Sept. 28, | Sept. 29, | |||||||
| 2001 | 2000 | |||||||
| Net earnings | $ | 10,632 | $ | 14,713 | ||||
| Other comprehensive income (loss) | 2,608 | (747 | ) | |||||
| Comprehensive income | $ | 13,240 | $ | 13,966 | ||||
The following summarizes other comprehensive income and accumulated other comprehensive loss at September 28, 2001 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 | $ | 39 | $ | — | $ | 39 | ||||||
| Minimum pension liability adjustment | — | — | — | |||||||||
| Other comprehensive income | $ | 39 | $ | — | $ | 39 | ||||||
| Minimum | Accumulated | |||||||||||
| Currency | Pension | Other | ||||||||||
| Translation | Liability | Comprehensive | ||||||||||
| Adjustments | Adjustment | Income (Loss) | ||||||||||
| Beginning at December 31, 2000 | $ | (885 | ) | $ | (1,138 | ) | $ | (2,023 | ) | |||
| Change in 2001 | 39 | — | 39 | |||||||||
| Ending at September 28, 2001 | $ | (846 | ) | $ | (1,138 | ) | $ | (1,984 | ) | |||
Page 11 of 18
JEFFERIES GROUP, INC. AND SUBSIDIARIES
The following summarizes other comprehensive loss and accumulated other comprehensive loss at September 29, 2000 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 | $ | (1,684 | ) | $ | — | $ | (1,684 | ) | ||||
| Minimum pension liability adjustment | — | — | — | |||||||||
| Other comprehensive loss | $ | (1,684 | ) | $ | — | $ | (1,684 | ) | ||||
| Minimum | Accumulated | |||||||||||
| Currency | Pension | Other | ||||||||||
| Translation | Liability | Comprehensive | ||||||||||
| Adjustments | Adjustment | Income (Loss) | ||||||||||
| Beginning at December 31, 1999 | $ | 236 | $ | (183 | ) | $ | 53 | |||||
| Change in 2000 | (1,684 | ) | — | (1,684 | ) | |||||||
| Ending at September 29, 2000 | $ | (1,448 | ) | $ | (183 | ) | $ | (1,631 | ) | |||
Comprehensive income for the nine months ended September 28, 2001 and September 29, 2000 was as follows:
| Sept. 28, | Sept. 29, | |||||||
| 2001 | 2000 | |||||||
| Net earnings | $ | 42,868 | $ | 42,109 | ||||
| Other comprehensive income (loss) | 39 | (1,684 | ) | |||||
| Comprehensive income | $ | 42,907 | $ | 40,425 | ||||
Net Capital Requirements
As registered broker-dealers, JEFCO, W & D and Helfant 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. Helfant has elected to use the aggregate indebtedness standard permitted by the Rule, which requires it to maintain its aggregate indebtedness to all other persons at less than 1500 percent of its net capital.
Net capital changes from day to day, but as of September 28, 2001, JEFCO’s, W & D’s and Helfant’s net capital was $125.0 million, $1.9 million and $3.3 million, respectively, which exceeded minimum net capital requirements by $120.5 million, $1.6 million and $3.0 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. | ||||||||||
| 2001 | $ | .05 | $ | .05 | $ | .05 | ||||||
| 2000 | $ | .05 | $ | .05 | $ | .05 | ||||||
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JEFFERIES GROUP, INC. AND SUBSIDIARIES
Off-Balance Sheet Risk
In the normal course of business, the Company had letters of credit outstanding aggregating $32.8 million at September 28, 2001, to satisfy various collateral requirements in lieu of depositing cash or securities.
Segment Reporting
The company’s operations have been classified into a single business segment, a securities broker-dealer, which includes several types of financial services. This segment includes the traditional securities brokerage and investment banking activities of the Company. The Company’s business is predominantly in the United States with less than 10% of revenues and approximately 2% of assets attributable to international operations.
New Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued two Statements: Statement No. 141, “Business Combinations”, and Statement No. 142, “Goodwill and Other Intangible Assets”.
Those Statements will change the accounting for business combinations and goodwill in two significant ways. First, Statement 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method will be prohibited. Second, Statement 142 changes the accounting for goodwill from an amortization method to an impairment-only approach. Thus, amortization of goodwill, including goodwill recorded in past business combinations, will cease upon adoption of that Statement, which, for companies with calendar year ends, will be January 1, 2002. The implementation of these statements is not expected to have a material impact on the Company.
Goodwill
Goodwill represents the excess of cost over net assets acquired and is included in other assets. The following is a summary of goodwill as of September 28, 2001 (in thousands of dollars):
| Excess of Purchase | ||||||||||||||||||||
| Excess of Purchase | Price Over Net | |||||||||||||||||||
| Price Over Net | Accumulated | Assets Acquired | ||||||||||||||||||
| Acquisition | Assets Acquired | Amortization | Remaining | Acquisition Date | Amortization Period | |||||||||||||||
| The Europe Company | $ | 13,376 | $ | 1,599 | $ | 11,777 | Aug. 2000 | 10 years | ||||||||||||
| Lawrence Helfant, Inc. | 20,007 | — | 20,007 | Sept. 2001 | None | |||||||||||||||
| $ | 33,383 | $ | 1,599 | $ | 31,784 | |||||||||||||||
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JEFFERIES GROUP, INC. AND SUBSIDIARIES
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Analysis of Financial Condition
Total assets increased $357.9 million from $3,957.9 million at December 31, 2000 to $4,315.8 million at September 28, 2001. Total liabilities increased $263.4 million from $3,499.4 million at December 31, 2000 to $3,762.8 million at September 28, 2001. The increase in assets and liabilities is mostly due to an increase in the balances associated with JEFCO’s securities borrowed and loaned matched book business. Additionally, total stockholders’ equity increased $94.5 million from $458.4 million at December 31, 2000 to $553.0 million at September 28, 2001. The increase in stockholders’ equity was partly due to stock issuances and amortization, net of stock purchases amounting to $55.4 million and net earnings of $42.9 million.
Third Quarter 2001 Versus Third Quarter 2000
Revenues, net of interest expense, decreased 16% to $137.1 million, compared to $163.3 million for the third quarter of 2000. The decrease was due primarily to a $15.8 million, or 41%, decrease in corporate finance, an $11.0 million, or 17%, decrease in principal transactions, a $1.8 million, or 41%, decrease in net interest income (interest revenues less interest expense), partially offset by a $1.7 million, or 58%, increase in asset management, and a $1.1 million increase in other income. Commissions revenues remained relatively unchanged, despite being closed for four trading days as a result of the September 11th tragedy. Principal transactions revenue decreased mostly due to the Equities and International Divisions. Corporate finance revenues decreased due mostly to a decrease in advisory fees. Net interest income was down mostly due to decreased securities borrowed and loaned matched book business and decreased interest rates. Asset management increased due to more assets under management and greater profitability. Other income increased mostly due to several miscellaneous items.
Total non-interest expenses decreased 14% to $118.7 million, compared to $137.7 million for the third quarter of 2000. Compensation and benefits decreased $22.7 million, or 22%, mostly due to a decrease in incentive based compensation accruals, despite an increased headcount. Floor brokerage and clearing fees increased $2.1 million, or 25%, due to increased volume of business executed on the various exchanges. Travel and promotional increased $1.9 million, or 52%, largely due to an increase in business travel. Communications decreased $1.9 million, or 17%, mostly due to negotiated refunds and lower rate charges on some services. Other expense increased $1.0 million or 16%, largely due to higher legal expense. Occupancy and equipment rental increased $473,000, or 10%, mostly due to office expansion.
Earnings before income taxes were down 28% to $18.4 million, compared to $25.5 million for the same prior year period. The effective tax rate was approximately 42% for the third quarter of 2001 and 2000. Net earnings were down $4.1 million to $10.6 million, compared to $14.7 million for the same prior year period.
Basic net earnings per share were $0.43 for the third quarter of 2001 on 24,938,000 shares compared to $0.62 in the 2000 period on 23,859,000 shares. Diluted net earnings per share were $0.40 for the third quarter of 2001 on 26,593,000 shares compared to $0.60 in the comparable 2000 period on 24,402,000 shares.
First Nine Months 2001 Versus First Nine Months 2000
Revenues, net of interest expense, increased 5% to $495.4 million, compared to $471.3 million for the first nine months of 2000. The increase was due primarily to a $10.4 million, or 14%, increase in corporate finance, a $9.8 million, or 5%, increase in principal transactions, a $7.9 million, or 110%, increase in asset management, and a $1.4 million, or 1%, increase in commissions, a $650,000, or 21%, increase in other income, partially offset by a $6.1 million, or 31%, decrease in net interest income (interest revenues less interest expense). Commissions and principal transactions revenue increased mostly due to the High Yield, Convertibles and Equities Divisions. Corporate finance revenues increased due mostly to an increase in debt underwriting. Net interest income was down mostly due to decreased securities borrowed and loaned matched book business and interest rates. Asset management increased due to more assets under management and greater profitability. Other income increased mostly due to several miscellaneous items.
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JEFFERIES GROUP, INC. AND SUBSIDIARIES
Total non-interest expenses increased 6% to $421.3 million, compared to $398.1 million for the first nine months of 2000. Compensation and benefits increased $7.9 million, or 3%, mostly due to increased headcount. Other expense increased $5.5 million or 32%, largely due to higher legal expense. Floor brokerage and clearing fees increased $5.5 million, or 20%, due to increased volume of business executed on the various exchanges. Travel and promotional increased $3.5 million, or 26%, largely due to an increase in business travel. Occupancy and equipment rental increased $2.9 million, or 21%, mostly due to office expansion. Communications decreased $2.1 million, or 6%, mostly due to negotiated refunds and lower rate charges on some services.
Earnings before income taxes were $74.1 million compared to $73.1 million for the same prior year period. The effective tax rate was approximately 42% for the first nine months of both 2001 and 2000. Net earnings were up $759,000 to $42.9 million, compared to $42.1 million for the same prior year period.
Basic net earnings per share were $1.76 for the nine months of 2001 on 24,397,000 shares compared to $1.76 in the 2000 period on 23,862,000 shares. Diluted net earnings per share were $1.67 for the first nine months of 2001 on 25,746,000 shares compared to $1.74 in the comparable 2000 period on 24,220,000 shares.
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JEFFERIES GROUP, INC. AND SUBSIDIARIES
Revenues by Source
The following provides a breakdown of total revenues by source for the three months and nine months ended September 28, 2001 and September 29, 2000.
| Three Months Ended | |||||||||||||||||
| Sept. 28, 2001 | Sept. 29, 2000 | ||||||||||||||||
| % of | % of | ||||||||||||||||
| Total | Total | ||||||||||||||||
| Amount | Revenues | Amount | Revenues | ||||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| Commissions and principal transactions: | |||||||||||||||||
| Equities | $ | 66,267 | 40 | % | $ | 78,962 | 40 | % | |||||||||
| International | 13,093 | 8 | 19,706 | 10 | |||||||||||||
| High Yield | 17,035 | 10 | 11,848 | 6 | |||||||||||||
| Convertible | 8,153 | 5 | 6,031 | 3 | |||||||||||||
| Other proprietary trading | 982 | 1 | 309 | — | |||||||||||||
| Total | 105,530 | 64 | 116,856 | 59 | |||||||||||||
| Corporate finance | 22,468 | 13 | 38,240 | 19 | |||||||||||||
| Interest | 31,259 | 19 | 39,589 | 20 | |||||||||||||
| Asset management | 4,652 | 3 | 2,941 | 2 | |||||||||||||
| Other | 1,735 | 1 | 673 | — | |||||||||||||
| Total revenues | $ | 165,644 | 100 | % | $ | 198,299 | 100 | % | |||||||||
| Nine Months Ended | |||||||||||||||||
| Sept. 28, 2001 | Sept. 29, 2000 | ||||||||||||||||
| % of | % of | ||||||||||||||||
| Total | Total | ||||||||||||||||
| Amount | Revenues | Amount | Revenues | ||||||||||||||
| (Dollars in thousands) | |||||||||||||||||
| Commissions and principal transactions: | |||||||||||||||||
| Equities | $ | 251,572 | 43 | % | $ | 248,521 | 43 | % | |||||||||
| International | 48,192 | 8 | 64,223 | 11 | |||||||||||||
| High Yield | 51,114 | 9 | 32,464 | 6 | |||||||||||||
| Convertible | 25,257 | 4 | 19,073 | 3 | |||||||||||||
| Other proprietary trading | 3,032 | — | 3,645 | 1 | |||||||||||||
| Total | 379,167 | 64 | 367,926 | 64 | |||||||||||||
| Corporate finance | 83,557 | 14 | 73,114 | 13 | |||||||||||||
| Interest | 109,535 | 18 | 124,240 | 22 | |||||||||||||
| Asset management | 15,192 | 3 | 7,249 | 1 | |||||||||||||
| Other | 3,798 | 1 | 3,148 | — | |||||||||||||
| Total revenues | $ | 591,249 | 100 | % | $ | 575,677 | 100 | % | |||||||||
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JEFFERIES GROUP, INC. AND SUBSIDIARIES
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 2. Changes in Securities and Use of Proceeds
During July 2001, the Company issued 312,207 shares of restricted stock as consideration for the purchase of minority interests in FS Private Investment LLC and FS Private Investments III LLC. The securities were issued in a transaction not involving a public offering and were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933.
During September and October 2001, the Company issued 458,333 common stock shares (443,333 of which are restricted common stock shares) to the owners of Lawrence Helfant, Inc. in connection with and as partial consideration for the Company’s acquisition of Lawrence Helfant, Inc. The securities were issued in a transaction not involving a public offering and were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933.
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K.
None.
Page 17 of 18
JEFFERIES GROUP, INC. AND SUBSIDIARIES
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 9, 2001 | By: | /s/ Joseph A. Schenk |
| Joseph A. Schenk Chief Financial Officer | ||
Page 18 of 18
