<PAGE> 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 March 26, 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)
<TABLE>
<CAPTION>
DELAWARE 95-2848406
-------- ----------
<S> <C>
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
<TABLE>
<CAPTION>
11100 Santa Monica Blvd., Los Angeles, California 90025
- ------------------------------------------------- -----
<S> <C>
(Address of principal executive offices) (Zip Code)
</TABLE>
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 March 26, 1999, the registrant had 23,589,338 common shares, $.01 par
value, outstanding.
<PAGE> 2
JEFFERIES GROUP, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
MARCH 26, 1999
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition -
March 26, 1999 (unaudited) and December 31, 1998 .................... 3
Consolidated Statements of Earnings (unaudited) -
Three Months Ended March 26, 1999 and March 27, 1998 ................ 4
Consolidated Statement of Changes in Stockholders' Equity (unaudited) -
Three Months Ended March 26, 1999 ................................... 5
Consolidated Statements of Cash Flows (unaudited) -
Three Months Ended March 26, 1999 and March 27, 1998 ................ 6
Notes to Consolidated Financial Statements (unaudited) ................ 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ..................................................... 18
Item 6. Exhibits and Reports on Form 8-K ...................................... 18
</TABLE>
Page 2 of 19
<PAGE> 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)
<TABLE>
<CAPTION>
March 26, December 31,
1999 1998
----------- -----------
ASSETS (unaudited)
<S> <C> <C>
Cash and cash equivalents ............................. $ 80,681 $ 55,581
Cash and securities segregated and on deposit for
regulatory purposes or deposited with clearing and
depository organizations ............................. 64,863 62,518
Receivable from brokers and dealers ................... 2,753,685 2,018,090
Receivable from customers, officers and directors ..... 146,295 93,526
Securities owned ...................................... 145,972 100,797
Investments ........................................... 94,843 93,463
Investment in discontinued operations of ITGI ......... 117,207 108,333
Premises and equipment ................................ 19,937 20,524
Other assets .......................................... 78,234 65,032
----------- -----------
$ 3,501,717 $ 2,617,864
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank loans ............................................ $ -- $ 21,000
Payable to brokers and dealers ........................ 2,493,769 1,602,906
Payable to customers .................................. 239,949 226,774
Securities sold, not yet purchased .................... 80,006 39,365
Accrued expenses and other liabilities ................ 124,501 243,657
----------- -----------
2,938,225 2,133,702
Long-term debt ........................................ 149,411 149,387
----------- -----------
3,087,636 2,283,089
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value. Authorized 1,000,000
shares; none issued ............................... -- --
Common stock, $.01 par value. Authorized 100,000,000
shares; issued 24,362,736 shares in 1999 and
23,368,268 shares in 1998 ......................... 244 234
Additional paid-in capital .......................... 78,925 28,943
Retained earnings ................................... 360,428 344,441
Less:
Treasury stock, at cost; 773,398 shares in 1999
and 2,138,238 shares in 1998 .................... (23,345) (37,125)
Accumulated other comprehensive income (loss):
Currency translation adjustments ................ (502) (49)
Additional minimum pension liability ............ (1,669) (1,669)
----------- -----------
Total accumulated other comprehensive income (loss) (2,171) (1,718)
----------- -----------
Total stockholders' equity .................... 414,081 334,775
----------- -----------
$ 3,501,717 $ 2,617,864
=========== ===========
</TABLE>
See accompanying unaudited notes to consolidated
financial statements.
Page 3 of 19
<PAGE> 4
JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended
------------------------------
March 26, March 27,
1999 1998
-------- --------
<S> <C> <C>
Revenues:
Commissions ............................. $ 49,685 $ 42,022
Principal transactions .................. 56,274 47,726
Corporate finance ....................... 14,308 54,399
Interest ................................ 27,199 18,968
Other ................................... 1,212 733
-------- --------
Total revenues ........................ 148,678 163,848
Interest expense .......................... 22,574 16,957
-------- --------
Revenues, net of interest expense ......... 126,104 146,891
-------- --------
Non-interest expenses:
Compensation and benefits ............... 76,421 95,430
Floor brokerage and clearing fees ....... 7,064 7,360
Communications .......................... 10,197 10,912
Occupancy and equipment rental .......... 3,340 3,613
Travel and promotional .................. 3,458 4,954
Other ................................... 5,254 5,396
-------- --------
Total non-interest expenses ........... 105,734 127,665
-------- --------
Earnings before income taxes .............. 20,370 19,226
Income taxes .............................. 8,704 7,658
-------- --------
Earnings from continuing operations ....... 11,666 11,568
Earnings from discontinued
operations, net of income taxes ......... 4,955 5,908
-------- --------
Net earnings .......................... $ 16,621 $ 17,476
======== ========
Earnings per share:
Basic:
Continuing operations ................... $ 0.50 $ 0.52
Discontinued operations ................. 0.22 0.27
-------- --------
Net earnings .......................... $ 0.72 $ 0.79
======== ========
Diluted:
Continuing operations ................... $ 0.50 $ 0.51
Discontinued operations ................. 0.19 0.24
-------- --------
Net earnings .......................... $ 0.69 $ 0.75
======== ========
Weighted average shares:
Basic ................................... 23,217 22,067
Diluted ................................. 23,514 22,864
</TABLE>
See accompanying unaudited notes to consolidated
financial statements.
Page 4 of 19
<PAGE> 5
JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
THREE MONTHS ENDED MARCH 26, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Accumulated Total
Additional Other Stock-
Common Paid-in Retained Treasury Comprehensive holders'
Stock Capital Earnings Stock Income (Loss) Equity
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1998 ............ $ 234 $ 28,943 $ 344,441 $ (37,125) $ (1,718) $ 334,775
Exercise of stock options,
including tax benefits
(788,171 shares) ............. 8 20,329 -- -- -- 20,337
Purchase of treasury stock
(346,709 shares) ............. -- -- -- (16,957) -- (16,957)
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 .. -- -- 512 -- -- 512
Issuance of restricted stock
(205,297 shares), net of
forfeitures, and additional
vesting of restricted stock
shares, including tax benefits 2 5,318 -- -- -- 5,320
Quarterly dividends
($.05 per share per quarter) . -- -- (1,146) -- -- (1,146)
Comprehensive income:
Net earnings ................ -- -- 16,621 -- -- 16,621
Other comprehensive
income (loss), net of tax:
Translation adjustment ...... -- -- -- -- (453) (453)
---------
Comprehensive income .......... -- -- -- -- -- 16,168
--------- --------- --------- --------- --------- ---------
Balance,
March 26, 1999 ............... $ 244 $ 78,925 $ 360,428 $ (23,345) $ (2,171) $ 414,081
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying unaudited notes to consolidated
financial statements.
Page 5 of 19
<PAGE> 6
JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------
March 26, March 27,
1999 1998
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings ............................................... $ 16,621 $ 17,476
--------- ---------
Adjustments to reconcile net earnings to net cash provided
by (used in) operations:
Depreciation and amortization ........................... 2,353 3,112
Increase in cash and securities segregated and on
deposit for regulatory purposes ....................... (2,345) (31,574)
(Increase) decrease in receivables:
Brokers and dealers ................................... (735,595) (725,728)
Customers, officers and directors ..................... (52,769) 43,878
Increase in securities owned ............................ (45,175) (13,446)
Increase in investments ................................. (1,380) (18,821)
Increase in investment in discontinued operations........ (8,967) (6,686)
(Increase) decrease in other assets ..................... (13,202) 19,480
Increase in operating payables:
Brokers and dealers ................................... 890,863 770,013
Customers ............................................. 13,175 5,841
Increase in securities sold, not yet purchased .......... 40,641 10,420
Decrease in accrued expenses and other liabilities ...... (119,156) (83,607)
--------- ---------
Total adjustments ................................ (31,557) (27,118)
--------- ---------
Net cash used in operating activities ............ (14,936) (9,642)
--------- ---------
</TABLE>
Continued on next page.
See accompanying unaudited notes to consolidated
financial statements.
Page 6 of 19
<PAGE> 7
JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
March 26, March 27,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from financing activities:
Net proceeds from (payments on):
Bank loans ......................................... (21,000) --
Repurchase of treasury stock ....................... (16,957) (3,102)
Dividends paid ..................................... (1,146) (1,027)
Exercise of stock options .......................... 20,337 6,678
Issuance of common stock shares .................... -- 2,181
Issuance of restricted stock ....................... 5,320 727
Capital Accumulation Plan distributions ............ 55,072 4,095
Change in proportionate share of subsidiary's equity 512 834
-------- --------
Net cash provided by financing activities . 42,138 10,386
-------- --------
Cash flows from investing activities -
purchase of premises and equipment ...................... (1,649) (1,805)
-------- --------
Effect of foreign currency translation on cash ............ (453) (66)
-------- --------
Net increase (decrease) in cash and cash equivalents . 25,100 (1,127)
Cash and cash equivalents - beginning of period ........... 55,581 58,225
-------- --------
Cash and cash equivalents - end of period ................. $ 80,681 $ 57,098
======== ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest .............................................. $ 21,327 $ 14,261
======== ========
Income taxes .......................................... $ 8,043 $ 13,318
======== ========
</TABLE>
See accompanying unaudited notes to consolidated
financial statements.
Page 7 of 19
<PAGE> 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 "ITGI"), including its wholly
owned subsidiary, ITG Inc. ("ITG") are included in the financial statements as
discontinued operations. 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
ITGI) 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 taxable fixed income
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.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's amounts to
conform to the current period's presentation.
RECEIVABLE FROM, AND PAYABLE TO, BROKERS AND DEALERS
Receivable from and payable to brokers and dealers consists of the
following as of March 26, 1999 (in thousands of dollars):
<TABLE>
<S> <C>
Receivable from brokers and dealers:
Securities borrowed ............................. $2,635,037
Securities purchased under agreements to resell . 37,659
Other ........................................... 80,989
----------
$2,753,685
==========
Payable to brokers and dealers:
Securities loaned ............................... $2,440,815
Securities sold under agreements to repurchase .. 37,699
Other ........................................... 15,255
----------
$2,493,769
==========
</TABLE>
Page 8 of 19
<PAGE> 9
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 March 26, 1999
(in thousands of dollars):
<TABLE>
<CAPTION>
Securities
Sold,
Securities Not Yet
Owned Purchased
-------- --------
<S> <C> <C>
Corporate equity securities .......... $ 64,176 $ 51,005
High-yield securities ................ 64,329 25,524
Corporate debt securities ............ 15,529 1,324
U.S. Government and agency obligations 948 --
Options .............................. 990 2,153
-------- --------
$145,972 $ 80,006
======== ========
</TABLE>
INVESTMENTS
Investments consist of the following as of March 26, 1999 (in thousands of
dollars):
<TABLE>
<S> <C>
Debt and equity investments ........... $36,003
Partnership interests ................. 52,125
Equity and debt interests in affiliates 6,715
-------
$94,843
=======
</TABLE>
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 March 26, 1999 (in thousands of dollars):
<TABLE>
<S> <C>
Cash in banks ........ $27,662
Short term investments 53,019
-------
$80,681
=======
</TABLE>
Page 9 of 19
<PAGE> 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 periods
ended March 26, 1999 and March 27, 1998 (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
March 26, March 27,
1999 1998
-------- --------
<S> <C> <C>
Earnings from continuing operations ....... $ 11,666 $ 11,568
Discontinued operations ................... 4,955 5,908
-------- --------
Net earnings for basic earnings per share . 16,621 17,476
Adjustment - stock options on subsidiary . (385) (294)
-------- --------
Adjusted earnings - diluted calculation ... $ 16,236 $ 17,182
======== ========
Shares for basic and diluted calculations:
Average number of common shares ........... 23,200 20,669
Capital Accumulation Plan unissued shares . 17 1,398
-------- --------
Average shares used in basic computation .. 23,217 22,067
Stock options ............................. 261 612
Other unissued common stock equivalents ... 36 185
-------- --------
Average shares used in diluted computation 23,514 22,864
======== ========
Earnings per share:
Basic:
Earnings from continuing operations ....... $ 0.50 $ 0.52
Discontinued operations of ITGI, net of tax 0.22 0.27
--------- --------
Net earnings .............................. $ 0.72 $ 0.79
======== ========
Diluted:
Earnings from continuing operations ....... $ 0.50 $ 0.51
Discontinued operations of ITGI, net of tax 0.19 0.24
-------- --------
Net earnings .............................. $ 0.69 $ 0.75
======== ========
</TABLE>
OTHER COMPREHENSIVE INCOME
The following summarizes other comprehensive income and accumulated other
comprehensive income at March 26, 1999 and for the three months then ended (in
thousands of dollars):
<TABLE>
<CAPTION>
Before-Tax Income Tax Net-of-Tax
Amount or Benefit Amount
<S> <C> <C> <C>
Currency translation adjustments ... $(453) $ -- $(453)
Minimum pension liability adjustment -- -- --
----- --------------- -----
Other comprehensive income (loss) .. $(453) $ -- $(453)
===== =============== =====
</TABLE>
<TABLE>
<CAPTION>
Minimum Accumulated
Currency Pension Other
Translation Liability Comprehensive
Adjustments Adjustment Income (Loss)
<S> <C> <C> <C>
Beginning at December 31, 1998 $ (49) $(1,669) $(1,718)
Change in 1999 ............... (453) -- (453)
------- ------- -------
Ending at March 26, 1999 ..... $ (502) $(1,669) $(2,171)
======= ======= =======
</TABLE>
Page 10 of 19
<PAGE> 11
The following summarizes other comprehensive income and accumulated other
comprehensive income at March 27, 1998 and for the three months then ended (in
thousands of dollars):
<TABLE>
<CAPTION>
Before-Tax Income Tax Net-of-Tax
Amount or Benefit Amount
<S> <C> <C> <C>
Currency translation adjustments ... $(66) $ -- $(66)
Minimum pension liability adjustment -- -- --
---- --------------- ----
Other comprehensive income (loss) .. $(66) $ -- $(66)
==== =============== ====
</TABLE>
<TABLE>
<CAPTION>
Minimum Accumulated
Currency Pension Other
Translation Liability Comprehensive
Adjustments Adjustment Income (Loss)
<S> <C> <C> <C>
Beginning at December 31, 1997 $ (622) $(1,520) $(2,142)
Change in 1998 ............... (66) -- (66)
------- ------- -------
Ending at March 27, 1998 ..... $ (688) $(1,520) $(2,208)
======= ======= =======
</TABLE>
Comprehensive income for the three months ended March 26, 1999 and March 27,
1998 was as follows:
<TABLE>
<CAPTION>
March 26, March 27,
1999 1998
-------- --------
<S> <C> <C>
Net earnings ............. $ 16,621 $ 17,476
Other comprehensive income (453) (66)
-------- --------
Comprehensive income ..... $ 16,168 $ 17,410
======== ========
</TABLE>
NET CAPITAL REQUIREMENTS
As registered broker-dealers, JEFCO, ITG 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, ITG 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 March 26, 1999, JEFCO's,
ITG's and W & D's net capital was $168.8 million, $91.4 million and $2.3
million, respectively, which exceeded minimum net capital requirements by $164.3
million, $91.1 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):
<TABLE>
<CAPTION>
1st Qtr.
--------
<S> <C>
1999....... $.05
1998....... $.05
</TABLE>
OFF-BALANCE SHEET RISK
In the normal course of business, the Company had letters of credit
outstanding aggregating $38.8 million at March 26, 1999, to satisfy various
collateral requirements in lieu of depositing cash or securities.
Page 11 of 19
<PAGE> 12
CONTINGENCIES
Income Taxes. The Company received a "30-day letter" from the Internal
Revenue Service proposing certain adjustments which, if sustained, would result
in a tax deficiency of approximately $10.0 million plus interest. Substantially
all of the proposed adjustments relate to ITGI and include (i) the disallowance
of deductions taken in connection with the termination of certain compensation
plans at the time of ITGI's initial public offering in 1994 and (ii) the
disallowance of tax credits taken in connection with certain research and
development expenditures. The Company intends to vigorously contest the proposed
adjustments and believes that resolution of this matter will not have a material
adverse effect on the Company. Pursuant to the Tax Sharing and Indemnification
Agreement among Group, JEF Holding Company, Inc. and ITGI, dated as of March 17,
1999, ITGI has agreed to assume, after the spin-off, any liabilities arising
from the adjustments which relate to it.
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 ITGI consummated the separation of ITGI from
the other Group businesses.
Financial information for the discontinued business segment is summarized
as follows (in thousands of dollars):
ITGI CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
MARCH 26, DECEMBER 31,
1999 1998
--------- ---------
<S> <C> <C>
ASSETS
Cash and cash equivalents ................................. $ 113,175 $ 77,324
Securities owned .......................................... 31,765 39,615
Investments ............................................... 1,029 1,000
Receivables ............................................... 16,172 24,127
Premises and equipment .................................... 19,595 19,662
Other assets .............................................. 17,959 18,784
--------- ---------
$ 199,695 $ 180,512
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses ..................... $ 44,382 $ 36,515
Securities sold, not yet purchased ........................ 148 288
--------- ---------
44,530 36,803
Stockholders' equity ...................................... 155,165 143,709
--------- ---------
$ 199,695 $ 180,512
========= =========
COMPONENTS OF INVESTMENT IN DISCONTINUED OPERATIONS OF ITGI
Stockholders' equity of ITGI .............................. $ 155,165 $ 143,709
Add: Goodwill on Company's books related to ITGI ......... 5,208 5,300
Less: Deferred taxes on ITGI initial public offering gain (12,924) (12,922)
Less: Minority interest in ITGI .......................... (30,242) (27,754)
--------- ---------
Investment in discontinued operations of ITGI ............. $ 117,207 $ 108,333
========= =========
</TABLE>
Page 12 of 19
<PAGE> 13
ITGI CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
MARCH 26, MARCH 27,
1999 1998
------- -------
<S> <C> <C>
Revenues .................................................... $52,628 $41,387
Expenses .................................................... 35,391 28,337
------- -------
Earnings before income tax expense .......................... 17,237 13,050
Income tax expense .......................................... 8,878 5,688
------- -------
Net earnings ................................................ $ 8,359 $ 7,362
======= =======
COMPONENTS OF DISCONTINUED OPERATIONS OF ITGI
Net earnings of ITGI ........................................ $ 8,359 $ 7,362
Less: Company's spin-off related expenses .................. 1,778 151
Less: Minority interest in ITGI ............................ 1,626 1,303
------- -------
Discontinued operations of ITGI ............................. $ 4,955 $ 5,908
======= =======
</TABLE>
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
ITGI (in thousands of dollars).
<TABLE>
<CAPTION>
MARCH 26, MARCH 27,
1999 1998
--------- ---------
<S> <C> <C>
Interest paid ................ $ 28 $ 13
Income taxes paid to affiliate $7,074 $5,263
</TABLE>
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 $883.8 million from $2,617.9 million at December 31,
1998 to $3,501.7 million at March 26, 1999. The increase in assets is mostly due
to an increase in the balances associated with the Jefferies' securities
borrowed and lending matched book business.
FIRST QUARTER 1999 VERSUS FIRST QUARTER 1998
Revenues, net of interest expense, decreased 14% to $126.1 million,
compared to $146.9 million for the first quarter of 1998. The decrease was due
primarily to a $40.1 million, or 74%, decrease in corporate finance, partially
offset by a $7.7 million, or 18%, increase in commissions and an $8.5 million,
or 18%, increase in principal transactions. 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 Taxable
Fixed Income Divisions. Corporate finance revenues declined due to the currently
difficult environment for underwritings. Net interest income (interest revenues
less interest expense) was up $2.6 million mostly due to an excess of securities
borrowed interest income over securities loaned interest expense.
Page 13 of 19
<PAGE> 14
Total non-interest expenses decreased 17% to $105.7 million, compared to
$127.7 million for the first quarter of 1998. Compensation and benefits
decreased $19.0 million, or 20%, mostly due to a decrease in incentive based
compensation accruals. Travel and promotional decreased $1.5 million, or 30%,
largely due to a reduction in business travel. Communications decreased
$715,000, or 7%, despite a $884,000 increase in Y2K costs. Occupancy and
equipment rental decreased $273,000 or 8%, due to a reduction in office space
relocation expenses. Floor brokerage and clearing fees and other expense both
remained relatively unchanged.
Earnings before income taxes were up 6% to $20.4 million, compared to $19.2
million for the same prior year period. The effective tax rate was approximately
42.7% for the first quarter of 1999 and approximately 39.8% for the first
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 $98,000 to $11.7 million,
compared to $11.6 million for the same prior year period.
Earnings from discontinued operations, net of income taxes, were down $1.0
million, or 16%, due to a $2.8 million increase in spin-off related expenses.
Basic earnings from continuing operations per share were $0.50 for the
first quarter of 1999 on 23,217,000 shares compared to $0.52 in the 1998 period
on 22,067,000 shares. Diluted earnings from continuing operations per share were
$0.50 for the first quarter of 1999 on 23,514,000 shares compared to $0.51 in
the comparable 1998 period on 22,864,000 shares.
Basic net earnings per share were $0.72 for the first quarter of 1999 on
23,217,000 shares compared to $0.79 in the 1998 period on 22,067,000 shares.
Diluted net earnings per share were $0.69 for the first quarter of 1999 on
23,514,000 shares compared to $0.75 in the comparable 1998 period on 22,864,000
shares.
LIQUIDITY AND CAPITAL RESOURCES
During the first quarter of 1999, the Company repurchased 346,709 shares
(no shares were purchased in connection with the Company's Capital Accumulation
Plan) of its common stock versus 35,180 shares (including 33,000 shares
purchased in connection with the Company's Capital Accumulation Plan) for the
comparable 1998 period.
REVENUES BY SOURCE
The following provides a breakdown of total revenues by source for the
three months ended March 26, 1999 and March 27, 1998.
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------------------
March 26, 1999 March 27, 1998
------------------------------ ------------------------------
% of % of
Total Total
Amount Revenues Amount Revenues
-------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commissions and principal transactions:
Equities ......................... $ 68,742 46% $ 57,684 35%
International .................... 14,806 10 13,775 8
Taxable Fixed Income ............. 14,361 10 9,702 6
Convertible ...................... 5,196 3 2,973 2
Other proprietary trading ........ 2,854 2 5,614 4
-------- -------- -------- --------
Total ........................ 105,959 71 89,748 55
Corporate finance ..................... 14,308 10 54,399 33
Interest .............................. 27,199 18 18,968 12
Other ................................. 1,212 1 733 0
-------- -------- -------- --------
Total revenues ................. $148,678 100% $163,848 100%
======== ======== ======== ========
</TABLE>
Page 14 of 19
<PAGE> 15
THE YEAR 2000 PROJECT
The Y2K preparedness effort by the Company (the "Y2K Project") and its
subsidiaries (for the purposes of this Y2K disclosure only, the term "Company"
does not include Investment Technology Group, Inc. (Nasdaq: ITGI) 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.
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 calls 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 March 26, 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. The
Company is actively attempting to obtain assurances from the remaining vendors,
though none of the remaining vendors provides Mission Critical services.
Notwithstanding these representations from its vendors, the Company is not
relying on vendor statements of readiness but is independently testing each
system and connection as part of the Y2K Project. 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
therefore determined to review the filings made by those clients during the
second quarter of 1999 before conducting a broad based survey of client Y2K
readiness. Depending on the result of this review, the Company may find it
necessary to survey its clients or to request written certification of their Y2K
compliance.
Page 15 of 19
<PAGE> 16
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 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
Group's consolidated budget for the Y2K Project is $19.8 million, with
$16.8 million attributable to JEFCO and $3.0 million attributable to ITGI.
Current spending rates and projected expenses indicate that Group will stay
within that budget. A discussion of the Y2K project of ITGI and its subsidiaries
is contained in ITGI's first quarter 1999 10-Q under the heading "The Year 2000
Issue". As of March 1999, approximately $14.4 million of costs in the
consolidated 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
Operational Sustainability is achieved, 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 1999 is
projected to be approximately $6.3 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
Though the Company expects to achieve Operational Sustainability by
mid-1999, and 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 JEFCO'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 JEFCO 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.
Page 16 of 19
<PAGE> 17
In addition, there is also a risk that JEFCO'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 is in the final drafting stages of its 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, Taxable Fixed
Income, 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 completed portion of 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.
As of the date of hereof, the Contingency Plan was complete with respect to
Mission Critical systems, except for finalization of the business continuity
section, which should be completed by the end of the second quarter of 1999.
Funds to begin actual implementation of Contingency Plans will be allocated in
the second or third quarter of 1999 based upon perceived risk of failure of each
system.
Page 17 of 19
<PAGE> 18
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
Income Taxes. The Company received a "30-day letter" from the Internal
Revenue Service proposing certain adjustments which, if sustained, would result
in a tax deficiency of approximately $10.0 million plus interest. Substantially
all of the proposed adjustments relate to ITGI and include (i) the disallowance
of deductions taken in connection with the termination of certain compensation
plans at the time of ITGI's initial public offering in 1994 and (ii) the
disallowance of tax credits taken in connection with certain research and
development expenditures. The Company intends to vigorously contest the proposed
adjustments and believes that resolution of this matter will not have a material
adverse effect on the Company. Pursuant to the Tax Sharing and Indemnification
Agreement among Group, JEF Holding Company, Inc. and ITGI, dated as of March 17,
1999, ITGI has agreed to assume, after the spin-off, any liabilities arising
from the adjustments which relate to it.
Other. 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 February 23, 1999, the Company filed a Form 8-K updating financial
information related to the previously announced plans to separate the
Company's 100% owned subsidiary, Jefferies & Company, Inc., and its
80.4% owned subsidiary, Investment Technology Group, Inc., through a
proposed spin-off and related transactions.
Page 18 of 19
<PAGE> 19
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: May 7, 1999 By: /s/ Clarence T. Schmitz
--------------------- ---------------------------------
Clarence T. Schmitz
Chief Financial Officer
Page 19 of 19
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AND THE CONSOLIDATED STATEMENTS
OF EARNINGS AS OF MARCH 26, 1999 AND FOR THE THREE MONTHS THEN ENDED AND THE
NOTES THERETO AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS FILED IN THE FIRST QUARTER OF 1999 JEFFERIES GROUP, INC. 10-Q FILING.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-26-1999
<CASH> 80,681
<RECEIVABLES> 227,284
<SECURITIES-RESALE> 37,659
<SECURITIES-BORROWED> 2,635,037
<INSTRUMENTS-OWNED> 145,972
<PP&E> 19,937
<TOTAL-ASSETS> 3,501,717
<SHORT-TERM> 0
<PAYABLES> 255,204
<REPOS-SOLD> 37,699
<SECURITIES-LOANED> 2,440,815
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 0
80,006
149,411
<COMMON> 244
<OTHER-SE> 413,837
<TOTAL-LIABILITY-AND-EQUITY> 3,501,717
<TRADING-REVENUE> 56,274
<INTEREST-DIVIDENDS> 27,199
<COMMISSIONS> 49,685
<INVESTMENT-BANKING-REVENUES> 14,308
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 22,574
<COMPENSATION> 76,421
<INCOME-PRETAX> 20,370
<INCOME-PRE-EXTRAORDINARY> 20,370
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,621
<EPS-PRIMARY> 0.72
<EPS-DILUTED> 0.69
</TABLE>
