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 June 25, 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 June 25, 1999, the registrant had 23,942,896 common shares, $.0001 par
value, outstanding.
Page 1 of 21
2
JEFFERIES GROUP, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
JUNE 25, 1999
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition -
June 25, 1999 (unaudited) and December 31, 1998................... 3
Consolidated Statements of Earnings (unaudited) -
Three Months and Six Months Ended June 25,
1999 and June 26, 1998 ........................................... 4
Consolidated Statement of Changes in Stockholders' Equity
(unaudited) - Six Months Ended June 25, 1999...................... 5
Consolidated Statements of Cash Flows (unaudited) -
Six Months Ended June 25, 1999 and June 26, 1998.................. 6
Notes to Consolidated Financial Statements (unaudited).............. 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................... 13
Item 4. Submission of Matters to a Vote of Security Holders................. 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................... 20
Item 6. Exhibits and Reports on Form 8-K.................................... 20
Page 2 of 21
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)
June 25, December 31,
1999 1998
----------- -----------
ASSETS (unaudited)
Cash and cash equivalents ............................... $ 42,943 $ 55,581
Cash and securities segregated and on deposit for
regulatory purposes or deposited with clearing and
depository organizations ............................. 17,251 62,518
Receivable from brokers and dealers ..................... 2,929,504 2,018,090
Receivable from customers, officers and directors ....... 185,970 93,526
Securities owned ........................................ 221,206 100,797
Investments ............................................. 100,717 93,463
Investment in discontinued operations of ITG ............ -- 108,333
Premises and equipment .................................. 23,796 20,524
Other assets ............................................ 93,810 65,032
----------- -----------
$ 3,615,197 $ 2,617,864
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank loans .............................................. $ -- $ 21,000
Payable to brokers and dealers .......................... 2,598,855 1,602,906
Payable to customers .................................... 222,892 226,774
Securities sold, not yet purchased ...................... 91,938 39,365
Accrued expenses and other liabilities .................. 176,020 243,657
----------- -----------
3,089,705 2,133,702
Long-term debt .......................................... 149,436 149,387
----------- -----------
3,239,141 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 23,942,896 shares in
1999 and 23,368,268 shares in 1998 .................. 2 234
Additional paid-in capital ............................ 64,402 28,943
Retained earnings ..................................... 314,010 344,441
Less:
Treasury stock, at cost, 2,138,238 shares in 1998 ... -- (37,125)
Accumulated other comprehensive income (loss):
Currency translation adjustments .................. (689) (49)
Additional minimum pension liability .............. (1,669) (1,669)
----------- -----------
Total accumulated other comprehensive income (loss) . (2,358) (1,718)
----------- -----------
Total stockholders' equity ...................... 376,056 334,775
----------- -----------
$ 3,615,197 $ 2,617,864
=========== ===========
See accompanying unaudited notes to consolidated financial statements.
Page 3 of 21
4
JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended Six Months Ended
---------------------- ----------------------
June 25, June 26, June 25, June 26,
1999 1998 1999 1998
-------- -------- -------- --------
Revenues:
Commissions .......................... $ 49,698 $ 41,995 $ 99,383 $ 84,017
Principal transactions ............... 58,615 41,508 114,889 89,234
Corporate finance .................... 35,984 41,716 50,292 96,115
Interest ............................. 28,943 23,111 56,142 42,079
Other ................................ 2,089 1,369 3,301 2,102
-------- -------- -------- --------
Total revenues ................... 175,329 149,699 324,007 313,547
Interest expense ....................... 24,866 20,058 47,440 37,015
-------- -------- -------- --------
Revenues, net of interest expense ...... 150,463 129,641 276,567 276,532
-------- -------- -------- --------
Non-interest expenses:
Compensation and benefits ............ 91,892 77,878 167,513 173,308
Floor brokerage and clearing fees .... 8,301 7,729 16,165 15,089
Communications ....................... 10,898 12,486 21,095 23,398
Occupancy and equipment rental ....... 3,785 3,436 7,125 7,049
Travel and promotional ............... 4,135 5,125 7,593 10,079
Other ................................ 6,405 6,236 11,659 11,632
-------- -------- -------- --------
Total non-interest expenses ...... 125,416 112,890 231,150 240,555
-------- -------- -------- --------
Earnings before income taxes ........... 25,047 16,751 45,417 35,977
Income taxes ........................... 10,270 6,650 18,974 14,308
-------- -------- -------- --------
Earnings from continuing operations .... 14,777 10,101 26,443 21,669
Earnings from discontinued
operations, net of income taxes ...... 6,192 7,725 11,147 13,633
-------- -------- -------- --------
Net earnings ........................... $ 20,969 $ 17,826 $ 37,590 $ 35,302
======== ======== ======== ========
Earnings per share:
Basic:
Continuing operations .............. $ 0.62 $ 0.46 $ 1.12 $ 0.98
Discontinued operations ............ 0.26 0.34 0.47 0.62
-------- -------- -------- --------
Net earnings ....................... $ 0.88 $ 0.80 $ 1.59 $ 1.60
======== ======== ======== ========
Diluted:
Continuing operations .............. $ 0.61 $ 0.44 $ 1.11 $ 0.95
Discontinued operations ............ 0.26 0.32 0.45 0.56
-------- -------- -------- --------
Net earnings ....................... $ 0.87 $ 0.76 $ 1.56 $ 1.51
======== ======== ======== ========
Weighted average shares:
Basic ............................... 23,936 22,199 23,576 22,133
Diluted ............................. 24,114 22,909 23,808 22,901
See accompanying unaudited notes to consolidated financial statements.
Page 4 of 21
5
JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 25, 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
(1,047,877 shares) .............. 10 27,700 -- -- -- 27,710
Purchase of treasury stock
(347,589 shares) ................ -- -- -- (17,000) -- (17,000)
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
(300,029 shares), net of
forfeitures, and additional
vesting of restricted stock
shares, including tax benefits .. 3 6,567 -- -- -- 6,570
Spin-off of ITG, net of
$60,000 cash dividend ........... (245) (23,143) (66,799) 23,388 -- (66,799)
Quarterly dividends
($.05 per share per quarter) .... -- -- (2,343) -- -- (2,343)
Comprehensive income:
Net earnings ................... -- -- 37,590 -- -- 37,590
Other comprehensive
income (loss), net of tax:
Translation adjustment ......... -- -- -- -- (640) (640)
---------
Comprehensive income ............. -- -- -- -- -- 36,950
----- -------- --------- -------- ------- ---------
Balance, June 25, 1999 ........... $ 2 $ 64,402 $ 314,010 $-- $(2,358) $ 376,056
===== ======== ========= ======== ======= =========
See accompanying unaudited notes to consolidated financial statements.
Page 5 of 21
6
JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
Six Months Ended
------------------------
June 25, June 26,
1999 1998
--------- ---------
Cash flows from operating activities:
Net earnings ........................................... $ 37,590 $ 35,302
--------- ---------
Adjustments to reconcile net earnings to net
cash provided by (used in) operations:
Depreciation and amortization ........................ 4,473 5,660
Decrease (increase) in cash and securities
segregated and on deposit for regulatory purposes .. 45,267 (45,181)
Increase in receivables:
Brokers and dealers ................................ (911,414) (660,167)
Customers, officers and directors .................. (92,444) (9,985)
Increase in securities owned ......................... (120,409) (51,507)
(Increase) decrease in investments ................... (7,254) 6,490
(Increase) decrease in investment in
discontinued operations ............................ 41,534 (16,332)
(Increase) decrease in other assets .................. (28,871) 143
Increase (decrease) in operating payables:
Brokers and dealers ................................ 995,949 750,006
Customers .......................................... (3,882) (4,011)
Increase in securities sold, not yet purchased ....... 52,573 24,786
Decrease in accrued expenses and other liabilities ... (67,637) (48,581)
--------- ---------
Total adjustments ............................ (92,115) (48,679)
--------- ---------
Net cash used in operating activities ........ (54,525) (13,377)
--------- ---------
Continued on next page.
See accompanying unaudited notes to consolidated financial statements.
Page 6 of 21
7
JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (UNAUDITED)
(DOLLARS IN THOUSANDS)
Six Months Ended
-------------------------
June 25, June 26,
1999 1998
-------- --------
Cash flows from financing activities:
Net proceeds from (payments on):
Bank loans ............................................. (21,000) --
Repurchase of treasury stock ........................... (17,000) (10,286)
Dividends paid ......................................... (2,343) (2,069)
Exercise of stock options .............................. 27,710 9,679
Issuance of common stock shares ........................ -- 2,181
Issuance of restricted stock ........................... 6,570 917
Capital Accumulation Plan distributions ................ 55,072 5,430
Change in proportionate share of subsidiary's equity ... 1,121 2,257
-------- --------
Net cash provided by financing activities .... 50,130 8,109
-------- --------
Cash flows from investing activities -
purchase of premises and equipment ......................... (7,603) (3,393)
-------- --------
Effect of foreign currency translation on cash ............... (640) (612)
-------- --------
Net decrease in cash and cash equivalents ...... (12,638) (9,273)
Cash and cash equivalents - beginning of period .............. 55,581 58,225
-------- --------
Cash and cash equivalents - end of period .................... $ 42,943 $ 48,952
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ................................................. $ 45,783 $ 35,573
======== ========
Income taxes ............................................. $ 8,701 $ 22,684
======== ========
Supplemental disclosure of non-cash financing activities:
In April 1999, Jefferies Group, Inc. spun-off its investment in ITG,
which resulted in a $66,799 reduction in stockholders' equity.
See accompanying unaudited notes to consolidated financial statements.
Page 7 of 21
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 Company'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 21
9
JEFFERIES GROUP, INC. AND SUBSIDIARIES
RECEIVABLE FROM, AND PAYABLE TO, BROKERS AND DEALERS
Receivable from and payable to brokers and dealers consists of the
following as of June 25, 1999 (in thousands of dollars):
Receivable from brokers and dealers:
Securities borrowed ................................. $2,787,632
Securities purchased under agreements to resell ..... 72,954
Other ............................................... 68,918
----------
$2,929,504
==========
Payable to brokers and dealers:
Securities loaned ................................... $2,509,718
Securities sold under agreements to repurchase ...... 72,959
Other ............................................... 16,178
----------
$2,598,855
==========
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 June 25, 1999 (in
thousands of dollars):
Securities
Sold,
Securities Not Yet
Owned Purchased
---------- ---------
Corporate equity securities ................ $104,742 $58,274
High-yield securities ...................... 78,109 32,754
Corporate debt securities .................. 36,760 372
U.S. Government and agency obligations ..... 859 --
Options .................................... 736 538
-------- -------
$221,206 $91,938
======== =======
INVESTMENTS
Investments consist of the following as of June 25, 1999 (in thousands
of dollars):
Debt and equity investments ................ $ 40,594
Partnership interests ...................... 52,456
Equity and debt interests in affiliates .... 7,667
--------
$100,717
========
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 June 25, 1999 (in thousands of dollars):
Cash in banks .............. $13,268
Short term investments ..... 29,675
-------
$42,943
=======
Page 9 of 21
10
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
six month periods ended June 25, 1999 and June 26, 1998 (in thousands, except
per share amounts):
Three Months Ended Six Months Ended
------------------------- -------------------------
June 25, June 26, June 25, June 26,
1999 1998 1999 1998
-------- -------- -------- --------
Earnings from continuing operations .......... $ 14,777 $ 10,101 $ 26,443 $ 21,669
Earnings from discontinued operations ........ 6,192 7,725 11,147 13,633
-------- -------- -------- --------
Net earnings for basic earnings per share .... 20,969 17,826 37,590 35,302
Adjustment - stock options on subsidiary .... (35) (373) (420) (649)
-------- -------- -------- --------
Adjusted earnings - diluted calculation ...... $ 20,934 $ 17,453 $ 37,170 $ 34,653
======== ======== ======== ========
Shares for basic and diluted calculations:
Average number of common shares .............. 23,936 20,846 23,568 20,758
Capital Accumulation Plan unissued shares .... -- 1,353 8 1,375
-------- -------- -------- --------
Average shares used in basic computation ..... 23,936 22,199 23,576 22,133
Stock options ................................ 166 550 208 602
Other unissued common stock equivalents ...... 12 160 24 166
-------- -------- -------- --------
Average shares used in diluted computation ... 24,114 22,909 23,808 22,901
======== ======== ======== ========
Earnings per share:
Basic:
Earnings from continuing operations .......... $ 0.62 $ 0.46 $ 1.12 $ 0.98
Earnings from discontinued operations ........ 0.26 0.34 0.47 0.62
-------- -------- -------- --------
Net earnings ................................. $ 0.88 $ 0.80 $ 1.59 $ 1.60
======== ======== ======== ========
Diluted:
Earnings from continuing operations .......... $ 0.61 $ 0.44 $ 1.11 $ 0.95
Earnings from discontinued operations ........ 0.26 0.32 0.45 0.56
-------- -------- -------- --------
Net earnings ................................. $ 0.87 $ 0.76 $ 1.56 $ 1.51
======== ======== ======== ========
OTHER COMPREHENSIVE INCOME
The following summarizes other comprehensive income and accumulated
other comprehensive income at June 25, 1999 and for the six months then ended
(in thousands of dollars):
Before-Tax Income Tax Net-of-Tax
Amount or Benefit Amount
---------- ---------- ----------
Currency translation adjustments ....... $(640) $-- $(640)
Minimum pension liability adjustment ... -- -- --
----- --- -----
Other comprehensive income (loss) ...... $(640) $-- $(640)
===== === =====
Accumulated
Minimum Other
Currency Pension Comprehensive
Translation Liability Income
Adjustments Adjustment (Loss)
----------- ---------- -------------
Beginning at December 31, 1998 ....... $ (49) $(1,669) $(1,718)
Change in 1999 ....................... (640) -- (640)
----- ------- -------
Ending at June 25, 1999 .............. $(689) $(1,669) $(2,358)
===== ======= =======
Page 10 of 21
11
JEFFERIES GROUP, INC. AND SUBSIDIARIES
The following summarizes other comprehensive income and accumulated
other comprehensive income at June 26, 1998 and for the six months then ended
(in thousands of dollars):
Before-Tax Income Tax Net-of-Tax
Amount or Benefit Amount
---------- ---------- ----------
Currency translation adjustments .......... $(612) $ -- $(612)
Minimum pension liability adjustment ...... -- -- --
----- ---- -----
Other comprehensive income (loss) ......... $(612) $ -- $(612)
===== ==== =====
Accumulated
Minimum Other
Currency Pension Comprehensive
Translation Liability Income
Adjustments Adjustment (Loss)
----------- ---------- -------------
Beginning at December 31, 1997 ..... $ (622) $(1,520) $(2,142)
Change in 1998 ..................... (612) -- (612)
------- ------- -------
Ending at June 26, 1998 ............ $(1,234) $(1,520) $(2,754)
======= ======= =======
Comprehensive income for the six months ended June 25, 1999 and June 26, 1998
was as follows:
June 25, June 26,
1999 1998
-------- --------
Net earnings ....................... $ 37,590 $ 35,302
Other comprehensive income ......... (640) (612)
-------- --------
Comprehensive income ............... $ 36,950 $ 34,690
======== ========
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 June 25, 1999, JEFCO's
and W & D's net capital was $220.6 million and $2.4 million, respectively, which
exceeded minimum net capital requirements by $216.0 million and $2.1 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.
-------- --------
1999 ......... $ .05 $ .05
1998 ......... $ .05 $ .05
OFF-BALANCE SHEET RISK
In the normal course of business, the Company had letters of credit
outstanding aggregating $31.3 million at June 25, 1999, to satisfy various
collateral requirements in lieu of depositing cash or securities.
Page 11 of 21
12
JEFFERIES GROUP, INC. AND SUBSIDIARIES
SEGMENT REPORTING
The Company's business is predominantly in the United States with
approximately 7% 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 SIX MONTHS ENDED
-------------------------- --------------------------
JUNE 25, JUNE 26, JUNE 25, JUNE 26,
1999 1998 1999 1998
------- ------ ------- -------
Net earnings of ITG ..................................... $ 779 $9,928 $ 9,137 $17,290
Deferred taxes on ITG's IPO gain ........................ 12,843 -- 12,843 --
Less: Write-off of goodwill on JEF related to ITG ....... 5,207 -- 5,207 --
Less: Company's net spin-off related expenses ........... 2,071 401 3,848 552
Less: Minority interest in ITG .......................... 152 1,802 1,778 3,105
------- ------ ------- -------
Discontinued operations of ITG .......................... $ 6,192 $7,725 $11,147 $13,633
======= ====== ======= =======
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).
JUNE 25, JUNE 26,
1999 1998
-------- --------
Interest paid............. $ 31 $ 14
Income taxes paid......... $6,538 $11,081
Page 12 of 21
13
JEFFERIES GROUP, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This document contains forward-looking statements concerning the
Company's Year 2000 ("Y2K") Project. 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 Jefferies Group, Inc., or any other person that the presently
anticipated events will occur as described herein.
ANALYSIS OF FINANCIAL CONDITION
Total assets increased $997.3 million from $2,617.9 million at December
31, 1998 to $3,615.2 million at June 25, 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.
SECOND QUARTER 1999 VERSUS SECOND QUARTER 1998
Revenues, net of interest expense, increased 16% to $150.5 million,
compared to $129.6 million for the second quarter of 1998. The increase was due
primarily to a $17.1 million, or 41%, increase in principal transactions, a $7.7
million, or 18%, increase in commissions, partially offset by a $5.7 million, or
14%, 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 Equities and High
Yield Divisions. Corporate finance revenues declined due to the currently
difficult environment for underwritings. Net interest income (interest revenues
less interest expense) was up $1.0 million mostly due to an excess of securities
borrowed interest income over securities loaned interest expense.
Total non-interest expenses increased 11% to $125.4 million, compared to
$112.9 million for the second quarter of 1998. Compensation and benefits
increased $14.0 million, or 18%, mostly due to an increase in incentive based
compensation accruals. Communications decreased $1.6 million, or 13%, mostly due
to a reduction in Y2K costs. Travel and promotional decreased $1.0 million, or
19%, largely due to a reduction in business travel. Floor brokerage and clearing
fees increased $572,000 or 7%, due to increased volume of business executed on
the various exchanges. Occupancy and equipment rental increased $349,000 or 10%,
due mostly to office space relocation expenses. Other expense remained
relatively unchanged.
Earnings before income taxes were up 50% to $25.0 million, compared to
$16.8 million for the same prior year period. The effective tax rate was
approximately 41.0% for the second quarter of 1999 and approximately 39.7% for
the second quarter of 1998. The increase in the tax rate is mostly due to an
increase in income from foreign jurisdictions with higher tax rates. 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 $4.7
million to $14.8 million, compared to $10.1 million for the same prior year
period.
Earnings from discontinued operations, net of income taxes, were down
$1.5 million, or 20%, mostly due to the cessation of ITG as a subsidiary of the
Company.
Basic earnings from continuing operations per share were $0.62 for the
second quarter of 1999 on 23,936,000 shares compared to $0.46 in the 1998 period
on 22,199,000 shares. Diluted earnings from continuing operations per share were
$0.61 for the second quarter of 1999 on 24,114,000 shares compared to $0.44 in
the comparable 1998 period on 22,909,000 shares.
Page 13 of 21
14
JEFFERIES GROUP, INC. AND SUBSIDIARIES
Basic net earnings per share were $0.88 for the second quarter of 1999
on 23,936,000 shares compared to $0.80 in the 1998 period on 22,199,000 shares.
Diluted net earnings per share were $0.87 for the second quarter of 1999 on
24,114,000 shares compared to $0.76 in the comparable 1998 period on 22,909,000
shares.
FIRST HALF 1999 VERSUS FIRST HALF 1998
Revenues, net of interest expense, increased slightly to $276.6 million,
compared to $276.5 million for the first half of 1998. The increase was due
primarily to a $25.7 million, or 29%, increase in principal transactions, a
$15.4 million, or 18%, increase in commissions, and a $3.6 million, or 72%,
increase in net interest income, offset by a $45.8 million, or 48%, 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 Equities and High Yield Divisions.
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 decreased 4% to $231.2 million, compared to
$240.6 million for the first half of 1998. Compensation and benefits decreased
$5.8 million, or 3%, mostly due to a decrease in incentive based compensation
accruals. Travel and promotional decreased $2.5 million, or 25%, largely due to
a reduction in business travel. Communications decreased $2.3 million, or 10%,
including a $594,000 reduction in Y2K costs, mostly due to cost reduction
measures taken in the later part of 1998. Floor brokerage and clearing fees
increased $1.1 million, or 7%, due to increased volume of business executed on
the various exchanges. Occupancy and equipment rental and other expense both
remained relatively unchanged.
Earnings before income taxes were up 26% to $45.4 million, compared to
$36.0 million for the same prior year period. The effective tax rate was
approximately 41.8% for the first half of 1999 and approximately 39.8% for the
first half of 1998. The increase in the tax rate is mostly due to an increase in
income from foreign jurisdictions with higher tax rates. 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 22% to $26.4 million,
compared to $21.7 million for the same prior year period.
Earnings from discontinued operations, net of income taxes, were down
$2.5 million, or 18%, mostly due to the cessation of ITG as a subsidiary of the
Company.
Basic earnings from continuing operations per share were $1.12 for the
first half of 1999 on 23,576,000 shares compared to $0.98 in the 1998 period on
22,133,000 shares. Diluted earnings from continuing operations per share were
$1.11 for the first half of 1999 on 23,808,000 shares compared to $0.95 in the
comparable 1998 period on 22,901,000 shares.
Basic net earnings per share were $1.59 for the first half of 1999 on
23,576,000 shares compared to $1.60 in the 1998 period on 22,133,000 shares.
Diluted net earnings per share were $1.56 for the first half of 1999 on
23,808,000 shares compared to $1.51 in the comparable 1998 period on 22,901,000
shares.
LIQUIDITY AND CAPITAL RESOURCES
During June 1999, JEFCO obtained an NASDR-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 14 of 21
15
JEFFERIES GROUP, INC. AND SUBSIDIARIES
REVENUES BY SOURCE
The following provides a breakdown of total revenues by source for the
three months and six months ended June 25, 1999 and June 26, 1998.
Three Months Ended
-----------------------------------------------
June 25, 1999 June 26, 1998
--------------------- -------------------
% of % of
Total Total
Amount Revenues Amount Revenues
-------- -------- -------- ---
(Dollars in thousands)
Commissions and principal transactions:
Equities ............................... $ 73,678 42% $ 58,891 39%
International .......................... 11,523 7 11,804 8
High Yield ............................. 16,437 9 8,863 6
Convertible ............................ 5,207 3 2,415 2
Other proprietary trading .............. 1,468 1 1,530 1
-------- --- -------- ---
Total ............................. 108,313 62 83,503 56
Corporate finance .......................... 35,984 21 41,716 28
Interest ................................... 28,943 16 23,111 15
Other ...................................... 2,089 1 1,369 1
-------- --- -------- ---
Total revenues ....................... $175,329 100% $149,699 100%
======== === ======== ===
Six Months Ended
-----------------------------------------------
June 25, 1999 June 26, 1998
--------------------- -------------------
% of % of
Total Total
Amount Revenues Amount Revenues
-------- -------- -------- ---
(Dollars in thousands)
Commissions and principal transactions:
Equities ............................... $142,420 44% $116,574 37%
International .......................... 26,329 8 25,579 8
High Yield ............................. 30,798 10 18,565 6
Convertible ............................ 10,403 3 5,388 2
Other proprietary trading .............. 4,322 1 7,145 2
-------- --- -------- ---
Total ............................. 214,272 66 173,251 55
Corporate finance .......................... 50,292 16 96,115 31
Interest ................................... 56,142 17 42,079 13
Other ...................................... 3,301 1 2,102 1
-------- --- -------- ---
Total revenues ....................... $324,007 100% $313,547 100%
======== === ======== ===
THE YEAR 2000 PROJECT
The Y2K preparedness effort by the Company (the "Y2K Project") and its
subsidiaries (the term "Company" does not include Investment Technology Group,
Inc. (NYSE: ITG) and its subsidiaries, which have developed their own Y2K plan)
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 15 of 21
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JEFFERIES GROUP, INC. AND SUBSIDIARIES
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 has now completed the first phase of the Y2K Project
(Inventory, Assessment and Planning), and is working toward completion of the
second phase: Remediation and Testing. As of June 25, 1999, phase two was
approximately 90% complete. The remediation portion of this phase has been
completed, and the testing portion has been under way since mid-1998. Although
the Company originally planned to complete phase two by December 31, 1998, and
participate in extended point to point testing in early 1999, the Company
received notice during the fourth quarter of 1998 that certification and
extended point to point testing would commence in November, 1998. Resources were
redirected during the fourth quarter to prepare the Company for participation in
these tests, causing a delay in testing previously scheduled for the fourth
quarter 1998. In addition, compliant versions of certain key applications did
not arrive until late December 1998 or early January 1999, which prevented their
testing until that time.
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
will be Y2K compliant and the Company has no reason to believe any of those
vendors will be unable to attain compliance. 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 is
independently testing 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 determined that a detailed review of each client is not practicable, and
therefore is considering a survey of certain of its clients to determine their
Y2K readiness.
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 test. The SIA tests resulted in no external Y2K
related errors and only minor internal errors. The remainder of testing to be
performed involves testing each system using either compliant environment
regression testing or unit regression and forward date testing in the existing
environment, followed by user group testing. Each system (IT and non-IT) will
then be subjected to forward date testing in a simulated production environment.
The Company has obtained compliant versions of all key systems from third party
vendors and is testing those systems. 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
Page 16 of 21
17
JEFFERIES GROUP, INC. AND SUBSIDIARIES
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.
Costs to Address Y2K Issues
The Company's budget for the Y2K Project is $17.3 million, exclusive of
ITG. Current spending rates and projected expenses indicate that the Company
will stay within that budget. As of June 1999, approximately $14.2 million of
costs in the budget have already been incurred. This budget includes new
software and hardware, consultants to assist with project administration,
quarterly internal audit outsourcing by E&Y, and a large number of the present
IT staff devoting a substantial portion of their time to the Y2K Project. Until
the Y2K Project is completed, the vast majority of IT resources will continue to
be redirected into the Y2K Project and new development unrelated to Y2K has been
limited to only the most essential projects. The budget for the second half of
1999 is projected to be approximately $1.9 million, which will be reassessed in
the second half of 1999 to account for the possible implementation of
contingency plans if any vendors will not achieve Y2K compliance.
Risks
The Company has now achieved Operational Sustainability, other than the
implementation of its new internal payroll system, which is scheduled for
completion on August 27, 1999. Though the Company expects to be fully compliant
by the end of the third quarter of 1999, 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.
Page 17 of 21
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JEFFERIES GROUP, INC. AND SUBSIDIARIES
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.
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 the system or
process, (2) the circumstances under which such a failure 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.
Finally, the Contingency Plan includes a matrix showing the way each system or
process would be impacted by each of the six primary risk areas discussed above,
and testing, remediation, business recovery, responsible persons and timetable
involved in the restoration of each. 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.
Funds to begin actual implementation of the Contingency Plan will be
allocated in the third quarter of 1999 based upon perceived risk of failure of
each system. Implementation of the Contingency Plan will be effected by the
fourth quarter.
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.
Page 18 of 21
19
JEFFERIES GROUP, INC. AND SUBSIDIARIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Date of Meeting -- April 20, 1999
Type of Meeting -- Special Meeting
(b) Not applicable
(c)(1) At the meeting, with respect to the matters under consideration, the
following votes were cast in the following manner:
For Against Abstain Non-vote
---------- --------- ------- --------
Merger between the Company and ITG 16,850,689 21,476 4,743 0
1999 Incentive Compensation Plan 13,740,217 3,052,618 84,073 0
1999 Directors' Stock Incentive Plan 15,624,241 1,095,754 156,913 0
(d) Not applicable
Page 19 of 21
20
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 6. EXHIBITS AND REPORTS ON FORM 8-K
(b) Reports on Form 8-K.
On April 13, 1999, the Company filed a Form 8-K disclosing the Company's
first quarter 1999 earnings release.
On April 30, 1999, the Company filed a Form 8-K disclosing that the
Company's predecessor JEF Holding Company, Inc. had filed with the
Secretary of State of the State of Delaware a Certificate of Amendment
to JEF Holding Company, Inc.'s Amended and Restated Certificate of
Incorporation in order to change its name to Jefferies Group, Inc.
Page 20 of 21
21
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: August 6, 1999 By: /s/ Clarence T. Schmitz
--------------------------- -------------------------------------
Clarence T. Schmitz
Chief Financial Officer
Page 21 of 21