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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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)
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DELAWARE 95-4719745
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
11100 SANTA MONICA BOULEVARD, 11TH FLOOR 90025
LOS ANGELES, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(310) 445-1199
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, $.0001 PAR VALUE (TITLE OF CLASS)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. [ ]
State the aggregate market value of the common stock held by nonaffiliates
of the registrant. $346,932,216 as of March 22, 2000.
Indicate the number of shares outstanding of the registrant's class of
common stock, as of the latest practical date. 24,417,431 shares as of the close
of business March 22, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Registrant's Definitive Proxy Statement with respect to the 2000 Annual
Meeting of Stockholders to be held on May 26, 2000.
LOCATION OF EXHIBIT INDEX
THE INDEX OF EXHIBITS IS CONTAINED IN PART IV HEREIN ON PAGE 39.
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JEFFERIES GROUP, INC.
1999 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Business.............................................................. 1
Item 2. Properties............................................................ 6
Item 3. Legal Proceedings..................................................... 6
Item 4. Submission of Matters to a Vote of Security Holders................... 6
PART II
Item 5. Market for the Registrant's Common Stock and Related Security Holder
Matters............................................................... 7
Item 6. Selected Financial Data............................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................. 9
Item 8. Financial Statements and Supplementary Data........................... 13
Item 9. Disagreements on Accounting and Financial Disclosure.................. 39
PART III
Item 10. Directors and Executive Officers of the Registrant.................... 39
Item 11. Executive Compensation................................................ 39
Item 12. Security Ownership of Certain Beneficial Owners and Management........ 39
Item 13. Certain Relationships and Related Transactions........................ 39
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K..... 39
</TABLE>
Exhibit Index located on page 39 of this report.
<PAGE> 3
PART I
ITEM 1. BUSINESS.
Jefferies Group, Inc. is a holding company which, through its three primary
subsidiaries, Jefferies & Company, Inc., Jefferies International Limited and
Jefferies Pacific Limited, is engaged as an international investment bank that
focuses on capital raising, research, mergers and acquisitions, advisory and
restructuring services for small- to medium-sized companies and trading in
equity and high yield securities, convertible bonds, options, futures and
international securities for institutional clients. The term "Company" refers,
unless the context requires otherwise, to Jefferies Group, Inc., its
subsidiaries and W & D Securities, Inc. The Company and its various subsidiaries
maintain offices in Los Angeles, New York, Short Hills, Jersey City, Chicago,
Dallas, Boston, Atlanta, New Orleans, Houston, San Francisco, Stamford, London,
Hong Kong, Zurich and Tokyo.
As of December 31, 1999, the Company and its subsidiaries had 885 full-time
employees, including 432 representatives registered with NASD Regulation, Inc.
("NASDR"). The Company's executive offices are located at 11100 Santa Monica
Boulevard, Los Angeles, California 90025, and its telephone number is (310)
445-1199.
SEPARATION OF INVESTMENT TECHNOLOGY GROUP, INC. FROM JEFFERIES GROUP, INC.
The Company was originally incorporated in 1998 as a holding company under
the name JEF Holding Company, Inc. At the time of its incorporation, JEF Holding
Company, Inc. was a wholly owned subsidiary of a predecessor company also named
Jefferies Group, Inc. ("Old Group"). On April 20, 1999, the stockholders of Old
Group approved and adopted the Agreement and Plan of Merger (the "Merger
Agreement") between Old Group and Old Group's approximately 80.5% owned
subsidiary, Investment Technology Group, Inc. ("ITGI"). The Merger Agreement
provided for the merger (the "Merger") of ITGI with and into Old Group and for
the issuance of shares of the common stock of Old Group to all stockholders of
ITGI other than Old Group.
Prior to the effective date of the Merger, Old Group distributed all of the
outstanding common stock of JEF Holding Company, Inc. to Old Group stockholders
in a spin-off transaction (the "Spin-Off"). Prior to the Spin-Off, Old Group
transferred all of the assets of Old Group, except for the common stock of ITGI,
and all of Old Group's liabilities other than liabilities related to ITGI to JEF
Holding Company, Inc. (the "Transfer" and, together with the Spin-Off, the
"Transactions"). Coincident with the Merger, Old Group, as the surviving
corporation in the Merger, changed its name to Investment Technology Group, Inc.
and JEF Holding Company, Inc. changed its name to Jefferies Group, Inc.
JEFFERIES & COMPANY, INC.
Jefferies & Company, Inc. ("JEFCO") was founded in 1962 and is engaged in
equity, convertible debt and high yield securities brokerage and trading and
corporate finance. JEFCO is one of the leading national firms engaged in the
distribution and trading of blocks of equity securities both on the national
securities exchanges and in the "third market." The term "third market" refers
to transactions in listed equity securities effected away from national
securities exchanges. JEFCO's revenues are derived primarily from commission
revenues and market making or trading as principal in equity, high yield,
convertible securities, options, futures and international securities with or on
behalf of institutional investors, with the balance generated by corporate
finance and other activities. JEFCO currently provides equity and/or high yield
research in the areas of e-commerce; electric utilities; exploration and
production; natural gas/energy services providers; oil service; communications
technology; enterprise software; internet, media & communications;
telecommunications equipment; telecommunications services; home building and
real estate; gaming and entertainment; shipping; special situations and
financial services.
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JEFFERIES INTERNATIONAL LIMITED AND JEFFERIES PACIFIC LIMITED
Jefferies International Limited ("JIL"), a broker-dealer subsidiary, was
incorporated in 1986 in England. JIL is a member of The International Stock
Exchange and The Securities and Futures Authority. JIL introduces customers
trading in U.S. securities to JEFCO and also trades as a broker-dealer in
international equity and convertible securities and American Depositary Receipts
("ADRs"). In 1995, JIL formed a wholly owned Swiss subsidiary, Jefferies
(Switzerland) Ltd. In 1996, JIL formed a wholly owned English subsidiary,
Jefferies (Japan) Limited, which maintains a branch office in Tokyo.
Jefferies Pacific Limited ("JPL"), a broker subsidiary, was incorporated in
1992 in Hong Kong. JPL presently introduces foreign customers trading in U.S.
securities to JEFCO.
W & D SECURITIES, INC.
W & D Securities, Inc. ("W & D") primarily provides execution services on
the New York Stock Exchange ("NYSE") and other exchanges to Jefferies and
others. In order to comply with regulatory requirements of the NYSE that
generally prohibit NYSE members and their affiliates from executing, as
principal and, in certain cases, as agent, transactions in NYSE-listed
securities off the NYSE, the Company gave up its formal legal control of W & D,
effective January 1, 1983, by exchanging all of the W & D common stock owned by
it for non-voting preferred stock of W & D. The common stock of W & D is
presently held by an officer of W & D who has agreed with the Company that, at
the option of the Company, he will sell such stock to the Company for nominal
consideration. In light of these arrangements and the high proportion of the
equity of W & D represented by the non-voting preferred stock held by the
Company, W & D is consolidated as a subsidiary of the Company for financial
statement purposes.
On February 23, 2000, the NYSE filed a proposed rule change which if
approved by the Securities and Exchange Commission (the "Commission") would
rescind the regulatory requirements which prohibit NYSE members and their
affiliates from executing as principal and, in certain cases, as agent,
transactions in NYSE listed securities off the NYSE. If such regulatory
requirements were rescinded the Company could reconsider the above referenced
arrangements and could re-acquire its ownership interest in the common stock of
W & D. However, the Company has made no determination on such arrangements.
DISCONTINUED OPERATIONS OF ITGI
On April 27, 1999, Old Group and ITGI consummated the Transactions that
resulted in the separation of ITGI from the other Old Group businesses. On April
22, 1999, Old Group transferred all non-ITGI assets and liabilities to JEF
Holding Company, Inc., a holding company. Old Group then distributed all of the
common stock of JEF Holding Company, Inc. to Old Group stockholders through a
tax-free Spin-Off. After the transfers, Old Group's 15 million shares of ITGI
became its only asset. The Spin-Off was immediately followed by a tax-free
Merger of ITGI with and into Old Group. Following the Merger, Old Group was
renamed Investment Technology Group, Inc. and JEF Holding Company, Inc. was
renamed Jefferies Group, Inc., the Registrant in this annual report.
The Transactions were treated for financial reporting purposes as if Old
Group had spun-off its entire 80.5% stake in ITGI to Old Group stockholders.
Accordingly, since the results of ITGI were previously consolidated with Old
Group, all financial information for the periods prior to April 27, 1999 have
been restated to reflect the results of ITGI as a discontinued operation. The
net assets of ITGI have been segregated for prior periods from the other assets
and liabilities of Old Group. For financial reporting purposes, the net assets
of ITGI as of April 27, 1999 have been treated as if they were distributed to
Old Group stockholders.
COMMISSION BUSINESS
A substantial portion of the Company's revenues is derived from customer
commissions on brokerage transactions in equity (primarily listed) and debt
securities for domestic and international investors such as investment advisors,
banks, mutual funds, insurance companies and pension and profit sharing plans.
Such investors normally purchase and sell securities in block transactions, the
execution of which requires special
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marketing and trading expertise. JEFCO, for example, is one of the leading
national firms in the execution of equity block transactions, and believes that
its institutional customers are attracted by the quality of its execution (with
respect to considerations of quantity, timing and price) and its competitive
commission rates, which are negotiated on the basis of market conditions, the
size of the particular transaction and other factors. In addition to domestic
equity securities, JEFCO executes transactions in high yield securities,
domestic and international convertible securities, international equity
securities, ADRs, options, preferred stocks, financial futures and other similar
products.
All of JEFCO's equity account executives are electronically interconnected
through a system permitting simultaneous verbal and graphic communication of
trading and order information by all participants. JEFCO believes that its
execution capability is significantly enhanced by this system, which permits its
account executives to respond to each other and to negotiate order indications
directly with customers rather than through a separate trading department.
Prime Brokerage. JEFCO offers centralized custody and clearance of security
trades for professional money managers who require institutional execution,
financial services, and stock loan access.
PRINCIPAL TRANSACTIONS
In the regular course of its business, JEFCO takes securities positions as
a market maker to facilitate customer transactions and for investment purposes.
In making markets and when trading for its own account, JEFCO exposes its own
capital to the risk of fluctuations in market value. Trading profits (or losses)
depend primarily upon the skills of the employees engaged in market making and
position taking, the amount of capital allocated to positions in securities and
the general trend of prices in the securities markets.
JEFCO monitors its risk by maintaining its securities positions at or below
certain pre-established levels. These levels reduce certain opportunities to
realize profits in the event that the value of such securities increases.
However, they also reduce the risk of loss in the event of a decrease in such
value and result in controlled interest costs incurred on funds provided to
maintain such positions.
Equities. The Equities Division of JEFCO makes markets in over 700
over-the-counter equity and ADR securities, and trades securities for its own
account, as well as to accommodate customer transactions. The Equities and
International Divisions engage in hedged trading involving securities listed or
traded in both domestic and foreign markets.
High Yield. The High Yield Division of Jefferies trades high grade and
non-investment grade public and private debt securities. The Division
specializes in trading and making markets in over 400 unrated or less than
investment grade corporate debt securities and accounts for these positions at
market value. At December 31, 1999, the aggregate long and short market value of
these positions was $114.2 million and $15.0 million, respectively. Risk of loss
upon default by the borrower is significantly greater with respect to unrated or
less than investment grade corporate debt securities than with other corporate
debt securities. These securities are generally unsecured and are often
subordinated to other creditors of the issuer. These issuers usually have high
levels of indebtedness and are more sensitive to adverse economic conditions,
such as recession or increasing interest rates, than are investment grade
issuers. There is a limited market for some of these securities and market
quotes are generally available from a small number of dealers.
Convertible Securities and Warrants. JEFCO also trades domestic and
international convertible securities and warrants and assists corporate and
institutional clients in identifying attractive investments in these securities
and warrants.
Other Proprietary Trading. JEFCO has investments in partnerships and mutual
funds as well as other relationships with independent management firms, which
contribute to revenues from principal transactions.
CORPORATE FINANCE
JEFCO's Corporate Finance Division offers corporations (primarily middle
market growth companies) a full range of financial advisory services as well as
debt, equity, and convertible financing services. Products
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include acquisition financing, bridge and senior loan financing, private
placements and public offerings of debt and equity securities, debt
refinancings, restructuring, merger and acquisition and exclusive sales advice,
structured financings and securitizations, consent and waiver solicitations, and
company and bondholder representations in corporate restructurings. Investment
banking activity involves both economic and regulatory risks. An underwriter may
incur losses if it is unable to sell the securities it is committed to purchase
or if it is forced to liquidate its commitments at less than the agreed upon
purchase price. In addition, under the Securities Act and other laws and court
decisions with respect to underwriters' liability and limitations on
indemnification of underwriters by issuers, an underwriter is subject to
substantial potential liability for material misstatements or omissions in
prospectuses and other communications with respect to underwritten offerings.
Further, underwriting commitments constitute a charge against net capital and
JEFCO's underwriting commitments may be limited by the requirement that it must,
at all times, be in compliance with the Uniform Net Capital Rule 15c3-1 of the
Commission.
JEFCO intends to continue to pursue opportunities for its corporate
customers, which may require it to finance and/or underwrite the issuance of
securities. Under circumstances where JEFCO is required to act as an underwriter
or to trade on a proprietary basis with its customers, JEFCO may assume greater
risk than would normally be assumed in certain other principal transactions.
INTEREST
JEFCO derives a substantial portion of its interest revenues, and incurs a
substantial portion of its interest expenses, in connection with its securities
borrowed/securities loaned activity. JEFCO also earns interest on its securities
portfolio, on its operating and segregated balances, on its margin lending
activity and on certain of its investments.
Securities Borrowed/Securities Loaned. In connection with both its trading
and brokerage activities, JEFCO borrows securities to cover short sales and to
complete transactions in which customers have failed to deliver securities by
the required settlement date, and lends securities to other brokers and dealers
for similar purposes. JEFCO has an active securities borrowed and lending
matched book business ("Matched Book"), in which JEFCO borrows securities from
one party and lends them to another party. When JEFCO borrows securities, JEFCO
provides cash to the lender as collateral, which is reflected in the Company's
financial statements as receivable from brokers and dealers. JEFCO earns
interest revenues on this cash collateral. Similarly, when JEFCO lends
securities to another party, that party provides cash to JEFCO as collateral,
which is reflected in the Company's financial statements as payable to brokers
and dealers. JEFCO pays interest expense on the cash collateral received from
the party borrowing the securities. A substantial portion of JEFCO's interest
revenues and interest expense results from the Matched Book activity.
Margin Lending. Customers' transactions are executed on either a cash or
margin basis. In a margin transaction, JEFCO extends credit to the customer,
collateralized by securities and cash in the customer's account, for a portion
of the purchase price, and receives income from interest charged on such
extensions of credit.
In permitting a customer to purchase securities on margin, JEFCO is subject
to the risk that a market decline could reduce the value of its collateral below
the amount of the customer's indebtedness and that the customer might otherwise
be unable to repay the indebtedness.
In addition to monitoring the creditworthiness of its customers, JEFCO also
considers the trading liquidity and volatility of the securities it accepts as
collateral for its margin loans. Trading liquidity and volatility may be
dependent, in part, upon the market on which the security is traded, the number
of outstanding shares of the issuer, events affecting the issuer and/or
securities markets in general, and whether or not there are any legal
restrictions on the sale of the securities. Certain types of securities have
historical trading patterns, which may assist JEFCO in making its evaluation.
Historical trading patterns, however, may not be good indicators over relatively
short time periods or in markets which are affected by unusual or unexpected
developments. JEFCO considers all of these factors at the time it agrees to
extend credit to customers and continues to review its extensions of credit on
an ongoing basis.
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The majority of JEFCO's margin loans are made to United States citizens or
to corporations which are domiciled in the United States. JEFCO may extend
credit to investors or corporations who are citizens of foreign countries or who
may reside outside the United States. JEFCO believes that should such foreign
investors default upon their loans and should the collateral for those loans be
insufficient to satisfy the investors' obligations, it may be more difficult to
collect such investors' outstanding indebtedness than would be the case if
investors were citizens or residents of the United States.
Although JEFCO attempts to minimize the risk associated with the extension
of credit in margin accounts, there is no assurance that the assumptions on
which JEFCO bases its decisions will be correct or that it is in a position to
predict factors or events which will have an adverse impact on any individual
customer or issuer, or the securities markets in general.
COMPETITION
All aspects of the business of the Company are intensely competitive. The
Company competes directly with numerous other brokers and dealers, investment
banking firms and banks. In addition to competition from firms currently in the
securities business, there has been increasing competition from others offering
financial services. These developments and others have resulted, and may
continue to result, in significant additional competition for the Company.
Member firms of the NYSE generally are prohibited from effecting
transactions when acting as principal and, in certain cases, as agents, in
listed equity securities off the NYSE, and therefore, unlike JEFCO, are
precluded from effecting such transactions in the third market. Such firms may
execute certain transactions in listed equity securities in the third market for
customers, although typically they do not do so. Since firms which the Company
regards as its major competitors in the execution of transactions in equity
securities for institutional investors are members of the NYSE, any removal of
these prohibitions could adversely affect the Company's business.
REGULATION
The securities industry in the United States is subject to extensive
regulation under both federal and state laws. The Commission is the federal
agency responsible for the administration of federal securities laws. In
addition, self-regulatory organizations, principally the NASDR and the
securities exchanges, are actively involved in the regulation of broker-dealers.
These self-regulatory organizations conduct periodic examinations of member
broker-dealers in accordance with rules they have adopted and amended from time
to time, subject to approval by the Commission. Securities firms are also
subject to regulation by state securities commissions in those states in which
they do business. JEFCO is registered as a broker-dealer in 50 states, the
District of Columbia and Puerto Rico. W & D is registered as a broker-dealer in
3 states.
Broker-dealers are subject to regulations which cover all aspects of the
securities business, including sales methods, trade practices among
broker-dealers, use and safekeeping of customers' funds and securities, capital
structure of securities firms, record-keeping and the conduct of directors,
officers and employees. Additional legislation, changes in rules promulgated by
the Commission and self-regulatory organizations, or changes in the
interpretation or enforcement of existing laws and rules, may directly affect
the mode of operation and profitability of broker-dealers. The Commission,
self-regulatory organizations and state securities commissions may conduct
administrative proceedings which can result in censure, fine, suspension,
expulsion of a broker-dealer, its officers or employees, or revocation of
broker-dealer licenses. The principal purpose of regulation and discipline of
broker-dealers is the protection of customers and the securities markets, rather
than protection of creditors and stockholders of broker-dealers.
As registered broker-dealers, JEFCO and W & D are required by law to belong
to the Securities Investor Protection Corporation ("SIPC"). In the event of a
member's insolvency, the SIPC fund provides protection for customer accounts up
to $500,000 per customer, with a limitation of $100,000 on claims for cash
balances.
Net Capital Requirements. Every U.S. registered broker-dealer doing
business with the public is subject to the Commission's Uniform Net Capital Rule
(the "Rule"), which specifies minimum net capital
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requirements. Jefferies Group, Inc. is not a registered broker-dealer and is
therefore not subject to the Rule; however, its United States broker-dealer
subsidiaries are subject thereto.
The Rule provides that a broker-dealer doing business with the public shall
not permit its aggregate indebtedness to exceed 15 times its adjusted net
capital (the "basic method") or, alternatively, that it not permit its adjusted
net capital to be less than 2% of its aggregate debit balances (primarily
receivables from customers and broker-dealers) computed in accordance with such
Rule (the "alternative method"). JEFCO and W & D use the alternative method of
calculation.
Compliance with applicable net capital rules could limit operations of
JEFCO, such as underwriting and trading activities, that require use of
significant amounts of capital, and may also restrict loans, advances, dividends
and other payments by JEFCO or W & D to the Company. As of December 31, 1999,
JEFCO's and W & D's net capital was $145.7 million and $2.3 million,
respectively, which exceeded minimum net capital requirements by $139.2 million
and $2.0 million, respectively. See note 15 of Notes to Consolidated Financial
Statements.
RISK MANAGEMENT
As an international investment bank, risk is an inherent part of the
Company's business. Global markets, by their nature, are prone to uncertainty
and subject participants to a variety of risks. The Company has developed
policies and procedures to identify, measure and monitor each of the risks
involved in its trading, brokerage and corporate finance activities on an
international basis. Risk management is considered to be of paramount
importance. The Company devotes significant resources across all of its
worldwide trading operations to the measurement, management and analysis of
risk, including investments in personnel, information technology infrastructure
and systems.
ITEM 2. PROPERTIES.
The Company maintains sales offices in Los Angeles, New York, Short Hills,
Chicago, Dallas, Boston, Atlanta, New Orleans, Houston, San Francisco, Stamford,
London, Hong Kong, Zurich and Tokyo. In addition, the Company maintains
operations offices in Los Angeles and Jersey City. The Company leases all of its
office space which management believes is adequate for its business. For
information concerning leasehold improvements and rental expense, see notes 1, 6
and 12 of Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS.
The Company's Common Stock began trading on the NYSE on March 15, 1996,
under the symbol JEF. Previously, the Common Stock traded in the Nasdaq National
Market System under the symbol JEFG. The following table sets forth for the
periods indicated, the range of high and low prices per share for the Common
Stock as reported by the NYSE. Stock prices prior to April 27, 1999 are not
presented, due to the nature and extent of the spin-off of ITGI and the related
ITGI special dividend and their effect on the comparability of the Company's
stock price.
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HIGH LOW
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1999
Second Quarter........................................... $27.63 $22.00
Third Quarter............................................ 30.38 20.13
Fourth Quarter........................................... 23.94 18.50
</TABLE>
There were approximately 367 holders of record of the Company's Common
Stock at December 31, 1999.
In 1988, the Company instituted a policy of paying regular quarterly cash
dividends. There are no restrictions on the Company's present ability to pay
dividends on Common Stock, other than the applicable provisions of the Delaware
General Corporation Law.
Dividends per Common Share (declared and paid):
<TABLE>
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FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
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1999..................................... $.05 $.05 $.05 $.05
1998..................................... $.05 $.05 $.05 $.05
</TABLE>
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ITEM 6. SELECTED FINANCIAL DATA.
The selected data presented below as of and for each of the years in the
five-year period ended December 31, 1999, are derived from the consolidated
financial statements of Jefferies Group, Inc. and its subsidiaries, which
financial statements have been audited by KPMG LLP, independent auditors. Such
data should be read in connection with the consolidated financial statements
contained on pages 14 through 38. Certain reclassifications have been made to
the prior period amounts to conform to the current period's presentation.
<TABLE>
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YEAR ENDED DECEMBER 31,
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1999 1998 1997 1996 1995
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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EARNINGS STATEMENT DATA
Revenues:
Commissions....................................... $ 202,803 $ 190,870 $ 148,940 $ 113,512 $ 95,892
Principal transactions.......................... 232,239 177,189 179,081 145,207 98,629
Corporate finance............................... 80,749 126,651 228,640 97,870 72,003
Interest........................................ 115,425 91,024 70,656 47,443 65,784
Other........................................... 8,931 4,881 3,525 2,991 1,974
---------- ---------- ---------- ---------- ----------
Total revenues................................ 640,147 590,615 630,842 407,023 334,282
Interest expense.................................. 96,496 75,153 61,314 37,840 54,343
---------- ---------- ---------- ---------- ----------
Revenues, net of interest expense................. 543,651 515,462 569,528 369,183 279,939
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Non-interest expenses:
Compensation and benefits....................... 329,769 321,943 373,619 234,446 175,101
Floor brokerage and clearing fees............... 33,815 32,425 26,754 21,606 15,874
Communications.................................. 42,427 47,210 40,305 24,474 18,762
Occupancy and equipment rental.................. 16,003 14,036 15,701 13,003 13,047
Travel and promotional.......................... 16,676 17,710 15,300 10,703 7,770
Other........................................... 20,866 22,945 29,159 22,765 21,035
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Total non-interest expenses................... 459,556 456,269 500,838 326,997 251,589
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Earnings before income taxes...................... 84,095 59,193 68,690 42,186 28,350
Income taxes...................................... 35,256 22,992 27,334 17,772 11,928
---------- ---------- ---------- ---------- ----------
Earnings from continuing operations............... 48,839 36,201 41,356 24,414 16,422
Discontinued operations of ITGI, net of tax....... 12,888 33,481 22,211 19,146 12,107
---------- ---------- ---------- ---------- ----------
Net earnings.................................... $ 61,727 $ 69,682 $ 63,567 $ 43,560 $ 28,529
========== ========== ========== ========== ==========
Earnings per share of Common Stock:
Basic:
Continuing operations......................... $ 2.05 $ 1.62 $ 1.92 $ 1.06 $ 0.71
Discontinued operations of ITGI, net of tax... 0.55 1.50 1.03 0.84 0.52
---------- ---------- ---------- ---------- ----------
Net earnings.................................. $ 2.60 $ 3.12 $ 2.95 $ 1.90 $ 1.23
========== ========== ========== ========== ==========
Diluted:
Continuing operations......................... $ 2.04 $ 1.58 $ 1.85 $ 1.04 $ 0.69
Discontinued operations of ITGI, net of tax... 0.51 1.38 0.95 0.80 0.50
---------- ---------- ---------- ---------- ----------
Net earnings.................................. $ 2.55 $ 2.96 $ 2.80 $ 1.84 $ 1.19
========== ========== ========== ========== ==========
Weighted average shares of Common Stock:
Basic........................................... 23,778 22,346 21,552 22,980 23,270
Diluted......................................... 23,992 22,954 22,349 23,410 23,922
Cash dividends per common share................... $ 0.200 $ 0.200 $ 0.125 $ 0.087 $ 0.050
SELECTED BALANCE SHEET DATA
Total assets...................................... $2,896,252 $2,617,864 $2,058,106 $1,533,906 $1,519,949
Long-term debt.................................... $ 149,485 $ 149,387 $ 149,290 $ 52,987 $ 56,322
Total stockholders' equity........................ $ 396,577 $ 334,775 $ 242,756 $ 195,445 $ 186,261
Book value per share of Common Stock.............. $ 16.52 $ 15.77 $ 11.97 $ 9.43 $ 8.28
Shares outstanding................................ 24,000 21,230 20,286 20,726 22,514
</TABLE>
8
<PAGE> 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The Company's principal activities, securities brokerage and the trading of
and market making in securities, are highly competitive.
Total assets increased $278.4 million from $2,617.9 million at December 31,
1998 to $2,896.3 million at December 31, 1999. The increase is mostly due to a
$275.7 million increase in securities owned and a $132.9 million increase in
receivable from customers, officer and directors, partially offset by a $108.3
million reduction in investment in discontinued operations of ITGI.
Total liabilities increased $216.6 million from $2,283.1 million at
December 31, 1998 to $2,499.7 million at December 31, 1999. The increase is
largely due to a $147.1 million increase in securities sold, not yet purchased.
The earnings of the Company are subject to wide fluctuations since many
factors over which the Company has little or no control, particularly the
overall volume of trading and the volatility and general level of market prices,
may significantly affect its operations. The following provides a summary of
revenues by source for the past three years.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
1999 1998 1997
-------------------- -------------------- --------------------
% OF % OF % OF
TOTAL TOTAL TOTAL
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commissions and principal transactions:
Equities Division.......................... $282,711 44% $261,664 44% $206,430 33%
International Division..................... 62,604 10 50,889 9 56,525 9
High Yield Division........................ 45,346 7 40,071 7 34,714 6
Convertible Division....................... 19,367 3 13,011 2 9,336 1
Other Proprietary Trading.................. 25,014 4 2,424 -- 21,016 3
-------- --- -------- --- -------- ---
Total.............................. 435,042 68 368,059 62 328,021 52
-------- --- -------- --- -------- ---
Corporate Finance............................ 80,749 13 126,651 22 228,640 36
Interest..................................... 115,425 18 91,024 15 70,656 11
Other........................................ 8,931 1 4,881 1 3,525 1
-------- --- -------- --- -------- ---
Total revenues..................... $640,147 100% $590,615 100% $630,842 100%
======== === ======== === ======== ===
</TABLE>
1999 COMPARED TO 1998
Revenues, net of interest expense, increased $28.2 million, or 5%, in 1999
as compared to 1998. The increase was due to a $55.1 million, or 31%, increase
in principal transactions, an $11.9 million, or 6%, increase in commissions, a
$4.1 million increase in other revenues and a $3.1 million, or 19% increase in
net interest income (interest income less interest expense), partially offset by
a $45.9 million, or 36%, decrease in corporate finance. Commission revenues
increased, led by the Equities and Convertible Divisions. Revenues from
principal transactions increased primarily due to increase trading gains in
other proprietary trading (mostly investments in clients or funds of clients),
the Equities Division and International Division. Corporate finance revenues
declined due to the currently difficult environment for underwritings. Net
interest income increased mostly due to interest from investments.
Total non-interest expenses increased $3.3 million, or 1%, in 1999 as
compared to 1998. Compensation and benefits increased $7.8 million, or 2%,
mostly due to an increase in incentive based compensation accruals.
Communications decreased $4.8 million, or 10%, primarily due to a reduction in
Y2K costs. Other expense decreased $2.1 million, or 9%, mostly due to reductions
in printing and postage/courier expense. Occupancy and equipment rental
increased $2.0 million, or 14%, due mostly to office space relocation expenses.
Floor
9
<PAGE> 12
brokerage and clearing fees increased $1.4 million, or 4%, mostly due to
increased volume of business executed on the various exchanges. Travel and
promotional expense decreased $1.0 million, or 6%, largely due to a reduction in
airfare and hotel rates paid by the Company. The reduction is mostly due to new
negotiated agreements with service providers.
As a result of the above, earnings before income taxes and discontinued
operations were up $24.9 million, or 42%. The effective tax rate was
approximately 41.9% in 1999 and approximately 38.8% in 1998. The increase in the
tax rate is mostly due to the favorable impact on the 1998 tax rate of a
reversal of deferred taxes. The net effect of the increase in earnings before
income taxes and the increase in effective tax rate was that earnings from
continuing operations were up 35% to $48.8 million, compared to $36.2 million
for the prior year.
Earnings from discontinued operations of ITGI, net of income taxes, were
down $20.6 million, or 62%, mostly due to the cessation of ITGI as a subsidiary
of the Company in April 1999.
Basic earnings from continuing operations per share were $2.05 in 1999 on
23.8 million shares compared to $1.62 in 1998 on 22.3 million shares. Diluted
earnings from continuing operations per share were $2.04 in 1999 on 24.0 million
shares compared to $1.58 in 1998 on 23.0 million shares.
Basic net earnings per share were $2.60 in 1999 on 23.8 million shares
compared to $3.12 in 1998 on 22.3 million shares. Diluted earnings from
continuing operations per share were $2.55 in 1999 on 24.0 million shares
compared to $2.96 in 1998 on 23.0 million shares.
1998 COMPARED TO 1997
Revenues, net of interest expense, decreased $54.1 million, or 9%, in 1998
as compared to 1997. The decrease was due to a $102.0 million, or 45%, decrease
in corporate finance, partially offset by a $41.9 million, or 28%, increase in
commissions. Commission revenues increased mostly due to the Equities Division.
Revenues from principal transactions decreased $1.9 million, or 1%, primarily
due to reduced trading gains in other investments. Corporate finance revenues
declined due to the difficult environment for underwritings during 1998. Net
interest income increased by $6.5 million mostly due to an excess of securities
borrowed interest income over securities loaned interest expense.
Total non-interest expenses decreased $44.6 million, or 9%, in 1998 as
compared to 1997. Compensation and benefits decreased $51.7 million, or 14%,
primarily due to a $65.6 million decrease in performance-based compensation,
partially offset by an $8.1 million increase in salaries, a $4.4 million
increase in payroll taxes and employee benefits and a $2.0 million increase in
sales commissions. Other expense decreased $6.2 million, or 21%, largely due to
lower provisions and litigation expenses. Communications increased $6.9 million,
or 17%, primarily due to increased Y2K costs. Floor brokerage and clearing fees
increased $5.7 million, or 21%, mostly due to increased volume of business
executed on the various exchanges. Travel and promotional expense increased $2.4
million, or 16%, mostly due to increased business travel. Occupancy and
equipment rental decreased $1.7 million, or 11%, mostly due to a reduction in
office move related expenses.
As a result of the above, earnings from continuing operations before income
taxes were down $5.2 million, or 12%.
The discontinued operations of ITGI increased $11.3 million, or 51%, in
1998 as compared to 1997.
Net earnings were up 10% to $69.7 million, as compared to $63.6 million in
1997. The effective tax rate on earnings from continuing operations was
approximately 38.8% in 1998 compared to approximately 39.8% in 1997. The
reduction in the effective tax rate was due largely to a reduction in the
effective state tax rate.
Basic earnings from continuing operations per share were $1.62 in 1998 on
22.3 million shares compared to $1.92 in 1997 on 21.6 million shares. Diluted
earnings from continuing operations per share were $1.58 in 1998 on 23.0 million
shares compared to $1.85 in 1997 on 22.3 million shares.
Basic net earnings per share were $3.12 in 1998 on 22.3 million shares
compared to $2.95 in 1997 on 21.6 million shares. Diluted net earnings per share
were $2.96 in 1998 on 23.0 million shares compared to $2.80 in 1997 on 22.3
million shares.
10
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
A substantial portion of the Company's assets are liquid, consisting of
cash or assets readily convertible into cash. The majority of securities
positions (both long and short) in the Company's trading accounts are readily
marketable and actively traded. Receivables from brokers and dealers are
primarily current open transactions or securities borrowed transactions, which
can be settled or closed out within a few days. Receivables from customers,
officers and directors include margin balances and amounts due on uncompleted
transactions. Most of the Company's receivables are secured by marketable
securities.
The Company's assets are funded by equity capital, senior debt,
subordinated debt, securities loaned, customer free credit balances, bank loans
and other payables. Bank loans represent secured and unsecured short-term
borrowings (usually overnight) which are generally payable on demand. Secured
bank loans are collateralized by a combination of customer, non-customer and
firm securities. The Company has always been able to obtain necessary short-term
borrowings in the past and believes that it will continue to be able to do so in
the future. Additionally, the Company has letters of credit outstanding, which
are used in the normal course of business to satisfy various collateral
requirements in lieu of depositing cash or securities.
JEFCO and W & D are subject to the net capital requirements of the
Commission and other regulators, which are designed to measure the general
financial soundness and liquidity of broker-dealers. JEFCO and W & D have
consistently operated in excess of the minimum requirements. As of December 31,
1999, JEFCO's and W & D's net capital was $145.7 million and $2.3 million,
respectively, which exceeded minimum net capital requirements by $139.2 million
and $2.0 million, respectively. JEFCO and W & D use the alternative method of
calculating their regulatory net capital.
During 1999, JEFCO obtained an NASDR-approved $120 million revolving credit
facility to be used in connection with underwriting activities.
MARKET RISK
The Company adopted SEC Release No. 33-7386, issued in 1997, which requires
qualitative disclosures of market risk exposure and quantitative disclosures of
the magnitude of market risk.
The Company maintains equity securities inventories in exchange-listed,
Nasdaq and private securities on both a long and short basis. The fair value of
these securities at December 31, 1999, was $163 million in long positions and
$166 million in short positions. The potential loss in fair value, using a
hypothetical 10% decline in prices, is estimated to be approximately $300,000
due to the offset of losses in long positions with gains in short positions. In
addition, the Company generally enters into exchange-traded option and index
futures contracts to hedge against potential losses in inventory positions, thus
reducing this potential loss exposure. This hypothetical 10% decline in prices
would not be material to the Company's financial position, results of operations
or cash flows.
The Company also invests in money market funds, high-yield, corporate and
U.S. Government agency debt and mutual bond funds. Money market funds do not
have maturity dates and do not present a material market risk. The fair value of
the Company's high yield, corporate and U.S. Government agency debt at December
31, 1999 was $211 million in long positions and $19 million in short positions.
Mutual bond funds also do not have maturity dates; the Company's position in
such funds totalled $23 million at December 31, 1999. The potential loss in fair
value of the high-yield, corporate and U.S. Government agency debt and the
mutual bond funds, using a hypothetical 5% decline in value, is estimated to be
approximately $11 million due to the offset of losses in long positions with
gains in short positions. This hypothetical 5% decline in value would not be
material to the Company's financial position, results of operations or cash
flows.
At December 31, 1999, the Company had $150 million aggregate principal
amount of Senior Notes outstanding, with fixed interest rates. The Company has
no cash flow exposure regarding these Notes due to the fixed rate of interest.
11
<PAGE> 14
The table below provides information about the Company's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates, exchange rates and stock price movements (in
thousands of dollars.) For debt obligations and reverse repurchase agreements,
the table presents principal cash flows with expected maturity dates. For
foreign exchange forward contracts, index futures contracts and option
contracts, the table presents notional amounts with expected maturity dates.
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
-----------------------
2000 AFTER 2004 TOTAL FAIR VALUE
-------- ----------- -------- ----------
<S> <C> <C> <C> <C>
INTEREST RATE SENSITIVITY
8.875% Senior Notes...................... $ 50,000 $ 50,000 $49,000
7.5% Senior Notes........................ $100,000 $100,000 $90,000
Reverse repurchase agreements, weighted
average interest rate of 4.40%......... $ 2,370 $ 2,370 $ 2,370
Repurchase agreements, weighted average
interest rate of 2.62%................. $31,685 $ 31,685 $31,685
EXCHANGE RATE SENSITIVITY
Foreign exchange forward contracts
Purchase............................... $ 4,089 $ 4,089 $ 4,089
Sale................................... $ 5,588 $ 5,588 $ 5,588
STOCK PRICE SENSITIVITY
Index futures contracts
Sale................................... $ 1,792 $ 1,792 $ (63)
Option contracts
Purchase............................... $18,260 $ 18,260 $ 3,047
Sale................................... $ 7,953 $ 7,953 $ 676
</TABLE>
EFFECTS OF CHANGES IN FOREIGN CURRENCY RATES
The Company maintains a foreign securities business in its foreign offices
(London, Hong Kong, Zurich and Tokyo) as well as in some of its domestic
offices. Most of these activities are hedged by related foreign currency
liabilities or by forward exchange contracts. However, the Company is still
subject to some foreign currency risk. A change in the foreign currency rates
could create either a foreign currency transaction gain/loss (recorded in the
Company's Consolidated Statements of Earnings) or a foreign currency translation
adjustment to the stockholders' equity section of the Company's Consolidated
Statements of Financial Condition.
NEW ACCOUNTING STANDARD ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value.
This Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. SFAS No. 133 is not expected to have a material
impact on the Company.
THE YEAR 2000 PROJECT
The Year 2000 preparedness effort by the Company and its subsidiaries began
in late 1997 and early 1998 and continued throughout 1998 and 1999. The Company
has now completed the transition to the Year 2000 without any material
exceptions in its mission critical systems and does not expect to encounter any
significant Year 2000 issues in the future. As of December 31, 1999, the Company
had spent approximately $14.4 million, of which $3.8 million were incurred
during 1999.
12
<PAGE> 15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements of Jefferies Group, Inc.
and Subsidiaries Independent Auditors' Report............. 14
Consolidated Statements of Financial Condition as of
December 31, 1999 and 1998................................ 15
Consolidated Statements of Earnings for the Three Years
Ended December 31, 1999................................... 16
Consolidated Statements of Changes in Stockholders' Equity
for the Three Years Ended December 31, 1999............... 17
Consolidated Statements of Cash Flows for the Three Years
Ended December 31, 1999................................... 18
Notes to Consolidated Financial Statements.................. 19
</TABLE>
13
<PAGE> 16
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
JEFFERIES GROUP, INC.:
We have audited the accompanying consolidated statements of financial
condition of Jefferies Group, Inc. and subsidiaries as of December 31, 1999 and
1998 and the related consolidated statements of earnings, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Jefferies
Group, Inc. and subsidiaries as of December 31, 1999 and 1998 and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1999 in conformity with generally accepted accounting
principles.
KPMG LLP
Los Angeles, California
January 18, 2000
14
<PAGE> 17
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1999 AND 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 77,197 $ 55,581
Cash and securities segregated and on deposit for regulatory
purposes or deposited with clearing and depository
organizations............................................. 18,317 62,518
Receivable from brokers and dealers......................... 1,965,469 2,018,090
Receivable from customers, officers and directors........... 226,449 93,526
Securities owned............................................ 376,506 100,797
Investments................................................. 119,100 93,463
Investment in discontinued operations of ITGI............... -- 108,333
Premises and equipment...................................... 39,117 20,524
Other assets................................................ 74,097 65,032
---------- ----------
$2,896,252 $2,617,864
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank loans.................................................. $ -- $ 21,000
Payable to brokers and dealers.............................. 1,663,955 1,602,906
Payable to customers........................................ 271,811 226,774
Securities sold, not yet purchased.......................... 186,420 39,365
Accrued expenses and other liabilities...................... 228,004 243,657
---------- ----------
2,350,190 2,133,702
Long-term debt.............................................. 149,485 149,387
---------- ----------
2,499,675 2,283,089
---------- ----------
Stockholders' equity:
Preferred stock, $.0001 par value. Authorized 10,000,000
shares; none issued.................................... -- --
Common stock, $.0001 par value. Authorized 100,000,000
shares; issued 24,027,899 shares in 1999 and 23,368,268
shares in 1998. ....................................... 2 234
Additional paid-in capital................................ 62,367 28,943
Retained earnings......................................... 334,742 344,441
Less:
Treasury stock, at cost; 28,012 shares in 1999 and
2,138,238 shares
in 1998................................................ (587) (37,125)
Accumulated other comprehensive income (loss):
Currency translation adjustments....................... 236 (49)
Additional minimum pension liability adjustment........ (183) (1,669)
---------- ----------
Total accumulated other comprehensive income (loss)....... 53 (1,718)
---------- ----------
Net stockholders' equity............................... 396,577 334,775
---------- ----------
$2,896,252 $2,617,864
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE> 18
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
THREE YEARS ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Commissions.............................................. $202,803 $190,870 $148,940
Principal transactions................................... 232,239 177,189 179,081
Corporate finance........................................ 80,749 126,651 228,640
Interest................................................. 115,425 91,024 70,656
Other.................................................... 8,931 4,881 3,525
-------- -------- --------
Total revenues........................................ 640,147 590,615 630,842
Interest expense........................................... 96,496 75,153 61,314
-------- -------- --------
Revenues, net of interest expense..................... 543,651 515,462 569,528
-------- -------- --------
NON-INTEREST EXPENSES:
Compensation and benefits................................ 329,769 321,943 373,619
Floor brokerage and clearing fees........................ 33,815 32,425 26,754
Communications........................................... 42,427 47,210 40,305
Occupancy and equipment rental........................... 16,003 14,036 15,701
Travel and promotional................................... 16,676 17,710 15,300
Other.................................................... 20,866 22,945 29,159
-------- -------- --------
Total non-interest expenses........................... 459,556 456,269 500,838
-------- -------- --------
Earnings before income taxes............................... 84,095 59,193 68,690
Income taxes............................................... 35,256 22,992 27,334
-------- -------- --------
Earnings from continuing operations........................ 48,839 36,201 41,356
Discontinued operations of ITGI, net of tax................ 12,888 33,481 22,211
-------- -------- --------
Net earnings............................................... $ 61,727 $ 69,682 $ 63,567
======== ======== ========
EARNINGS PER SHARE:
Basic:
Continuing operations.................................... $ 2.05 $ 1.62 $ 1.92
Discontinued operations of ITGI, net of tax.............. 0.55 1.50 1.03
-------- -------- --------
Net earnings............................................. $ 2.60 $ 3.12 $ 2.95
======== ======== ========
Diluted:
Continuing operations.................................... $ 2.04 $ 1.58 $ 1.85
Discontinued operations of ITGI, net of tax.............. 0.51 1.38 0.95
-------- -------- --------
Net earnings............................................. $ 2.55 $ 2.96 $ 2.80
======== ======== ========
WEIGHTED AVERAGE SHARES OF COMMON STOCK:
Basic.................................................... 23,778 22,346 21,552
Diluted.................................................. 23,992 22,954 22,349
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE> 19
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1999
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
ADDITIONAL COMPREHENSIVE NET
COMMON PAID-IN RETAINED TREASURY INCOME STOCKHOLDERS'
STOCK CAPITAL EARNINGS STOCK (LOSS) EQUITY
------ ---------- -------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996........................... $ 188 $62,569 $232,741 $ (99,404) $ (649) $195,445
Exercise of stock options, including tax benefits
(240,028 shares)................................... 2 3,431 -- -- -- 3,433
Purchase of 1,063,026 shares of treasury stock....... -- -- -- (23,584) -- (23,584)
Issuance of common stock (41,052 shares)............. -- 879 -- 3 -- 882
Issuance of restricted stock, including tax benefits
and additional vesting (198,888 shares)............ -- 3,666 -- -- -- 3,666
Capital Accumulation Plan distributions, including
tax benefits (143,228 shares)...................... -- 508 -- 1,289 -- 1,797
Retirement of treasury shares (15,600,000 shares).... (78) (70,902) (23,762) 94,742 -- --
Net decrease in proportionate share of subsidiary's
equity............................................. -- -- 1,558 -- -- 1,558
Comprehensive income:
Net earnings....................................... -- -- 63,567 -- -- 63,567
Other comprehensive income (loss), net of tax:
Currency translation adjustment.................... -- -- -- -- (526) (526)
Additional minimum pension liability adjustment.... -- -- -- -- (967) (967)
------- --------
Other comprehensive income (loss).................. (1,493) (1,493)
--------
Comprehensive income................................. 62,074
Dividends paid ($.125 per share)..................... -- -- (2,515) -- -- (2,515)
Two-for-one stock split.............................. 112 (112) -- -- -- --
----- ------- -------- --------- ------- --------
Balance, December 31, 1997........................... 224 39 271,589 (26,954) (2,142) 242,756
Exercise of stock options, including tax benefits
(737,125 shares)................................... 7 15,144 -- -- -- 15,151
Purchase of 334,234 shares of treasury stock......... -- -- -- (13,815) -- (13,815)
Issuance of common stock (53,286 shares)............. 1 2,180 -- -- -- 2,181
Issuance of restricted stock, including tax benefits
and additional vesting (182,095 shares)............ 2 8,170 -- (22) -- 8,150
Capital Accumulation Plan distributions, including
tax benefits (305,690 shares)...................... -- 3,410 -- 3,666 -- 7,076
Net decrease in proportionate share of subsidiary's
equity............................................. -- -- 7,337 -- -- 7,337
Comprehensive income:
Net earnings....................................... -- -- 69,682 -- -- 69,682
Other comprehensive income (loss), net of tax:
Currency translation adjustment.................... -- -- -- -- 573 573
Additional minimum pension liability adjustment.... -- -- -- -- (149) (149)
------- --------
Other comprehensive income (loss).................. 424 424
--------
Comprehensive income................................. 70,106
Dividends paid ($.20 per share)...................... -- -- (4,167) -- -- (4,167)
----- ------- -------- --------- ------- --------
Balance, December 31, 1998........................... $ 234 $28,943 $344,441 $ (37,125) $(1,718) $334,775
Exercise of stock options, including tax benefits
(1,108,880 shares)................................. 10 28,957 -- -- -- 28,967
Purchase of 375,601 shares of treasury stock......... -- -- -- (17,587) -- (17,587)
Issuance of restricted stock, net of forfeitures,
including tax benefits and additional vesting
(324,029 shares)................................... 3 9,862 -- -- -- 9,865
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
Spin-off of ITGI, net of $60,000 cash dividend....... (245) (23,143) (67,806) 23,388 -- (67,806)
Employee stock ownership plan........................ -- (6,587) -- -- -- (6,587)
Comprehensive income:
Net earnings....................................... -- -- 61,727 -- -- 61,727
Other comprehensive income (loss), net of tax:
Currency translation adjustment.................... -- -- -- -- 285 285
Additional minimum pension liability adjustment.... -- -- -- -- 1,486 1,486
------- --------
Other comprehensive income (loss).................. 1,771 1,771
--------
Comprehensive income................................. 63,498
Dividends paid ($.20 per share)...................... -- -- (4,741) -- -- (4,741)
----- ------- -------- --------- ------- --------
Balance, December 31, 1999........................... $ 2 $62,367 $334,742 $ (587) $ 53 $396,577
===== ======= ======== ========= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE> 20
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 61,727 $ 69,682 $ 63,567
--------- --------- ---------
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization........................... 9,181 10,027 9,862
Deferred income taxes................................... 24,537 (5,285) (8,710)
(Increase) decrease in cash and securities segregated... 44,201 (31,541) (1,870)
(Increase) decrease in receivables:
Brokers and dealers................................... 52,621 (748,426) (304,039)
Customers, officers and directors..................... (132,923) 72,758 (52,412)
(Increase) decrease in securities owned................. (275,709) 144,258 (52,093)
(Increase) decrease in investments...................... (25,637) 41,373 (91,577)
(Increase) decrease in investment in discontinued
operations of ITGI.................................... 40,527 (43,276) (24,268)
Increase in other assets................................ (9,065) (535) (9,087)
Increase (decrease) in payables:
Brokers and dealers................................... 61,049 621,201 175,992
Customers............................................. 45,037 24,519 31,871
Increase in securities sold, not yet purchased.......... 147,055 (149,335) 65,611
Increase in accrued expenses and other liabilities...... 16,368 (37,531) 116,652
--------- --------- ---------
Net cash provided by (used in) operating activities... 58,969 (32,111) (80,501)
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from (payments on) bank loans................ (21,000) 21,000 --
Issuance of long term debt................................ -- -- 99,722
Net payments on:
Repurchase of treasury stock............................ (17,587) (13,815) (23,584)
Redemption of 8 7/8% Subordinated Notes, due 1997....... -- -- (3,576)
Dividends paid.......................................... (4,741) (4,167) (2,515)
Proceeds from exercise of stock options................... 28,967 15,151 3,433
Net decrease (increase) in proportionate share of
subsidiary's equity..................................... 1,121 7,337 1,558
Employee Stock Ownership Plan............................. (6,587) -- --
Issuance of restricted shares............................. 9,865 8,150 3,666
Issuance of common shares................................. -- 2,181 882
--------- --------- ---------
Net cash provided by financing activities............. (9,962) 35,837 79,586
--------- --------- ---------
Cash flows from investing activities -- purchase of premises
and equipment............................................. (27,676) (6,943) (10,521)
--------- --------- ---------
Effect of currency translation on cash...................... 285 573 (526)
--------- --------- ---------
Net (decrease) increase in cash and cash
equivalents......................................... 21,616 (2,644) (11,962)
Cash and cash equivalents at beginning of year.............. 55,581 58,225 70,187
--------- --------- ---------
Cash and cash equivalents at end of year.................... $ 77,197 $ 55,581 $ 58,225
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest................................................ $ 93,221 $ 73,757 $ 58,038
Income taxes............................................ 19,364 50,018 52,030
</TABLE>
Supplemental disclosure of non-cash financing activities:
In 1997, the additional minimum pension liability included in stockholders'
equity of $1,520 resulted from an increase of $967 to accrued expenses and
other liabilities and an offsetting decrease in stockholders' equity. In
1998, the additional minimum pension liability included in stockholders'
equity of $1,669 resulted from an increase of $149 to accrued expenses and
other liabilities and an offsetting decrease in stockholders' equity. In
1999, the additional minimum pension liability included in stockholders'
equity of $183 resulted from a decrease of $1,486 to accrued expenses and
other liabilities and an offsetting increase in stockholders' equity.
In April 1999, Jefferies Group, Inc. spun-off its investment in Investment
Technology Group, Inc., which resulted in a $67,806 reduction in
stockholders' equity.
See accompanying notes to consolidated financial statements.
18
<PAGE> 21
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Jefferies Group, Inc. and all its subsidiaries ("Company"), including Jefferies
& Company, Inc. ("JEFCO"). The accounts of Investment Technology Group, Inc. and
all its subsidiaries ("ITGI"), including its wholly owned subsidiary, ITG Inc.
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 operate and are managed as a single business segment, that of a
securities broker-dealer, which includes several types of services, such as
principal and agency transactions in equity, convertible debt and high yield, as
well as corporate finance activities. Since the Company's services are provided
using the same distribution channels, support services and facilities and all
are provided to meet client needs, the Company does not identify assets or
allocate all expenses to any service, or class of service as a separate business
segment.
The Company was originally incorporated in 1998 as a holding company under
the name JEF Holding Company, Inc. At the time of its incorporation, JEF Holding
Company, Inc. was a wholly owned subsidiary of a predecessor company also named
Jefferies Group, Inc. ("Old Group"). On April 20, 1999, the stockholders of Old
Group approved and adopted the Agreement and Plan of Merger (the "Merger
Agreement") between Old Group and Old Group's approximately 80.5% owned
subsidiary, Investment Technology Group, Inc. ("ITGI"). The Merger Agreement
provided for the merger (the "Merger") of ITGI with and into Old Group and for
the issuance of shares of the common stock of Old Group to all stockholders of
ITGI other than Old Group.
Prior to the effective date of the Merger, Old Group distributed all of the
outstanding common stock of JEF Holding Company, Inc. to Old Group stockholders
in a spin-off transaction (the "Spin-Off"). Prior to the Spin-Off, Old Group
transferred all of the assets of Old Group, except for the common stock of ITGI,
and all of Old Group's liabilities other than liabilities related to ITGI to JEF
Holding Company, Inc. (the "Transfer" and, together with the Spin-Off, the
"Transactions"). Coincident with the Merger, Old Group, as the surviving
corporation in the Merger, changed its name to Investment Technology Group, Inc.
and JEF Holding Company, Inc. changed its name to Jefferies Group, Inc.
All significant intercompany accounts and transactions are eliminated in
consolidation.
DISCONTINUED OPERATIONS OF ITGI
On April 27, 1999, Old Group and ITGI consummated the Transactions that
resulted in the separation of ITGI from the other Old Group businesses. On April
22, 1999, Old Group transferred all non-ITGI assets and liabilities to JEF
Holding Company, Inc., a holding company. Old Group then distributed all of the
common stock of JEF Holding Company, Inc. to Old Group stockholders through a
tax-free Spin-Off. After the transfers, Old Group's 15 million shares of ITGI
became its only asset. The Spin-Off was immediately followed by a tax-free
Merger of ITGI with and into Old Group. Following the Merger, Old Group was
renamed Investment Technology Group, Inc. and JEF Holding Company, Inc. was
renamed Jefferies Group, Inc., the Registrant in this annual report.
The Transactions were treated for financial reporting purposes as if Old
Group had spun-off its entire 80.5% stake in ITGI to Old Group stockholders.
Accordingly, since the results of ITGI were previously consolidated with Old
Group, all financial information for the periods prior to April 27, 1999 have
been restated to reflect the results of ITGI as a discontinued operation. The
net assets of ITGI have been
19
<PAGE> 22
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND 1998
segregated for prior periods from the other assets and liabilities of Old Group.
For financial reporting purposes, the net assets of ITGI as of April 27, 1999
have been treated as if they were distributed to Old Group stockholders.
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.
INVESTMENTS
Partnership interests are recorded at their initial cost. The carrying
values of these investments are adjusted when the adjustment can be supported by
quoted market prices, adjusted for liquidity and other relevant factors. In
addition, the carrying values are reduced when the Company determines that the
estimated realizable value is less than the carrying value based on relevant
financial and market information.
Debt and equity investments consist primarily of mutual funds, which are
valued at market, based on available quoted prices.
Equity and debt interests in affiliates are recorded under either the
equity or cost method depending on the Company's level of ownership and control.
RECEIVABLE FROM, AND PAYABLE TO, CUSTOMERS, OFFICERS AND DIRECTORS
Receivable from, and payable to, customers includes amounts receivable and
payable on cash and margin transactions. Securities owned by customers and held
as collateral for these receivables are not reflected in the accompanying
consolidated financial statements. Receivable from officers and directors
represents balances arising from their individual security transactions. Such
transactions are subject to the same regulations as customer transactions.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all of the Company's financial instruments are carried at
fair value or amounts approximating fair value. Assets, including cash and cash
equivalents, securities borrowed or purchased under agreements to sell, and
certain receivables, are carried at fair value or contracted amounts, which
approximate fair value due to the short period to maturity. Similarly,
liabilities, including bank loans, securities loaned or sold under agreements to
repurchase and certain payables, are carried at amounts approximating fair
value. Long-term debt is carried at face value less unamortized discount.
Securities owned and securities sold, not yet purchased, are valued at quoted
market prices, if available. For securities without quoted prices, the reported
fair value is estimated using various sources of information, including quoted
prices for comparable securities.
The Company has derivative financial instrument positions in option
contracts, foreign exchange forward contracts and index futures contracts, which
are measured at fair value with gains and losses recognized in earnings. The
gross contracted or notional amount of these contracts is not reflected in the
consolidated statements of financial condition (see note 13 of the notes to
consolidated financial statements.)
20
<PAGE> 23
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND 1998
PREMISES AND EQUIPMENT
Premises and equipment are depreciated using the straight-line method over
the estimated useful lives of the related assets (generally three to ten years).
Leasehold improvements are amortized using the straight-line method over the
term of related leases or the estimated useful lives of the assets, whichever is
shorter.
INCOME TAXES
The Company files a consolidated U.S. Federal income tax return, which
includes all qualifying subsidiaries. Amounts provided for income taxes are
based on income reported for financial statement purposes and do not necessarily
represent amounts currently payable. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. Deferred
income taxes are provided for temporary differences in reporting certain items,
principally state income taxes, depreciation, deferred compensation and
unrealized gains and losses on securities owned. Tax credits are recorded as a
reduction of income taxes when realized.
CASH EQUIVALENTS
The Company generally invests its excess cash in money market funds and
other short-term investments. At December 31, 1999 and 1998, such cash
equivalents amounted to $54,105,000 and $25,865,000, respectively. Cash
equivalents are part of the cash management activities of the Company and
generally mature within 90 days.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
Repurchase agreements consist of sales of U.S. Treasury notes under
agreements to repurchase. They are treated as collateralized financing
transactions and are recorded at their contracted repurchase amount.
Reverse repurchase agreements consist of purchases of U.S. Treasury notes
under agreements to re-sell. They are treated as collateralized financing
transactions and are recorded at their contracted re-sale amount.
EARNINGS PER COMMON SHARE
Basic earnings per share of common stock are computed by dividing net
earnings by the average number of shares outstanding and certain other shares
committed to, but not yet issued. Diluted earnings per share of common stock are
computed by dividing net earnings by the average number of shares outstanding of
common stock and all dilutive common stock equivalents outstanding during the
period.
COMMON STOCK
On November 19, 1997, the Company's Board of Directors approved a
two-for-one split of all of the outstanding shares of the Company's common
stock, payable December 15, 1997 to stockholders of record at the close of
business on November 28, 1997. The stated par value of each share was not
changed from $0.01.
In conjunction with the spin-off of ITGI, 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
21
<PAGE> 24
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND 1998
total of $245,000 was reclassified to the Company's additional paid-in capital
account from the Company's common stock account.
NEW ACCOUNTING STANDARD ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities," establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value.
This Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. SFAS No. 133 is not expected to have a material
impact on the Company.
FOREIGN CURRENCY TRANSLATION
The Company's foreign revenues and expenses are translated at average
current rates during each reporting period. Foreign currency transaction gains
and losses are included in the consolidated statement of earnings. Gains and
losses resulting from translation of financial statements are excluded from the
consolidated statement of earnings and are recorded directly to a separate
component of stockholders' equity.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' amounts to
conform to the current year's presentation.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(2) RECEIVABLE FROM, AND PAYABLE TO, BROKERS AND DEALERS
The following is a summary of the major categories of receivable from, and
payable to, brokers and dealers as of December 31, 1999 and 1998 (in thousands
of dollars):
<TABLE>
<CAPTION>
1999 1998
---------- ----------
<S> <C> <C>
Receivable from brokers and dealers:
Securities borrowed....................................... $1,842,888 $1,922,691
Reverse repurchase agreements............................. 2,370 5,066
Other..................................................... 120,211 90,333
---------- ----------
$1,965,469 $2,018,090
========== ==========
Payable to brokers and dealers:
Securities loaned......................................... $1,616,493 $1,580,811
Repurchase agreement...................................... 31,685 5,061
Other..................................................... 15,777 17,034
---------- ----------
$1,663,955 $1,602,906
========== ==========
</TABLE>
22
<PAGE> 25
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND 1998
The Company has a securities borrowed versus securities loaned business
with other brokers. The Company also borrows securities to cover short sales and
to complete transactions in which customers have failed to deliver securities by
the required settlement date, and lends securities to other brokers and dealers
for similar purposes. From these activities, the Company derives interest
revenue and interest expense.
(3) RECEIVABLE FROM, AND PAYABLE TO, CUSTOMERS, OFFICERS AND DIRECTORS
The following is a summary of the major categories of receivables from
customers, officers and directors as of December 31, 1999 and 1998 (in thousands
of dollars):
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Customers (net of allowance for uncollectible accounts of
$4,505 in 1999 and $3,427 in 1998)........................ $218,334 $92,646
Officers and directors...................................... 8,115 880
-------- -------
$226,449 $93,526
======== =======
</TABLE>
Interest is paid on free credit balances in accounts of customers who have
indicated that the funds will be used for investment at a future date. The rate
of interest paid on such free credit balances varies between the thirteen-week
treasury bill rate and 1% below that rate, depending upon the size of the
customers' free credit balances.
Uncollectible accounts expense amounted to $82,000, $308,000 and $1,273,000
for the years ended December 31, 1999, 1998 and 1997, respectively, and is
included in other expense.
(4) 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 December 31, 1999
and 1998 (in thousands of dollars):
<TABLE>
<CAPTION>
1999 1998
------------------------ ------------------------
SECURITIES SECURITIES
SOLD, SOLD,
SECURITIES NOT YET SECURITIES NOT YET
OWNED PURCHASED OWNED PURCHASED
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Corporate equity securities...................... $162,958 $166,443 $ 43,468 $26,471
High yield securities............................ 114,223 15,037 28,684 8,253
Corporate debt securities........................ 65,443 4,264 20,903 4,067
U.S. Government and agency obligations........... 30,835 -- 7,076 --
Other............................................ 3,047 676 666 574
-------- -------- -------- -------
$376,506 $186,420 $100,797 $39,365
======== ======== ======== =======
</TABLE>
23
<PAGE> 26
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND 1998
(5) INVESTMENTS
The following is a summary of the major categories of investments, as of
December 31, 1999 and 1998 (in thousands of dollars):
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Partnership interests....................................... $ 74,124 $42,638
Debt and equity investments................................. 35,709 44,088
Equity and debt interests in affiliates..................... 9,267 6,737
-------- -------
$119,100 $93,463
======== =======
</TABLE>
(6) PREMISES AND EQUIPMENT
The following is a summary of premises and equipment as of December 31,
1999 and 1998 (in thousands of dollars):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Furniture, fixtures and equipment........................... $56,370 $58,341
Leasehold improvements...................................... 27,028 17,316
------- -------
Total............................................. 83,398 75,657
Less accumulated depreciation and amortization.............. 44,281 55,133
------- -------
$39,117 $20,524
======= =======
</TABLE>
Depreciation and amortization expense amounted to $9,083,000, $9,741,000
and $9,629,000 for the years ended December 31, 1999, 1998 and 1997,
respectively. Depreciation and amortization expense included in discontinued
operations of ITGI amounted to $2,515,000, $7,503,000 and $4,614,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
(7) BANK LOANS
Bank loans represent short-term borrowings that are payable on demand and
generally bear interest at the brokers' call loan rate. At December 31, 1999,
there were no bank loans. At December 31, 1998, the Company had unsecured bank
loans amounting to $21,000,000.
(8) LONG TERM DEBT
The following summarizes long term debt outstanding at December 31, 1999
and 1998 (in thousands of dollars):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
8 7/8% Series B Senior Notes, due 2004, less unamortized
discount of $302 and $372 in 1999 and 1998, respectively,
effective rate of 9%...................................... $ 49,698 $ 49,628
7 1/2% Senior Notes, due 2007, less unamortized discount of
$213 and $241 in 1999 and 1998, respectively, effective
rate of 8%................................................ 99,787 99,759
-------- --------
$149,485 $149,387
======== ========
</TABLE>
During 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.
During 1999, there were no borrowings against the revolving credit facility.
24
<PAGE> 27
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND 1998
(9) INCOME TAXES
Total income taxes for the years ended December 31, 1999, 1998 and 1997
were allocated as follows (in thousands of dollars):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- -------
<S> <C> <C> <C>
Continuing operations....................................... $ 35,256 $ 22,992 $27,334
Discontinued operations of ITGI............................. (5,952) 37,541 20,343
Stockholders' equity, for compensation expense for tax
purposes in excess of amounts recognized for financial
reporting purposes........................................ (37,588) (12,804) (1,704)
-------- -------- -------
$ (8,284) $ 47,729 $45,973
======== ======== =======
</TABLE>
Income taxes (benefits) for the years ended December 31, 1999, 1998 and
1997 consist of the following (in thousands of dollars):
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
CURRENT:
Federal................................................... $ 8,027 $22,650 $28,675
State and city............................................ 2,692 5,627 7,369
------- ------- -------
10,719 28,277 36,044
------- ------- -------
DEFERRED:
Federal................................................... 20,495 (3,921) (6,388)
State and city............................................ 4,042 (1,364) (2,322)
------- ------- -------
24,537 (5,285) (8,710)
------- ------- -------
$35,256 $22,992 $27,334
======= ======= =======
</TABLE>
Income taxes differed from the amounts computed by applying the Federal
income tax rate of 35% for 1999, 1998 and 1997 as a result of the following (in
thousands of dollars):
<TABLE>
<CAPTION>
1999 1998 1997
--------------- --------------- ---------------
AMOUNT % AMOUNT % AMOUNT %
------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Computed expected income taxes.......... $29,433 35.0% $20,718 35.0% $24,042 35.0%
Increase (decrease) in income taxes
resulting from:
State and city income taxes, net of
Federal income tax benefit............ 4,377 5.2 2,770 4.7 3,281 4.8
Limited deductibility of meals and
entertainment......................... 946 1.1 1,142 1.9 1,054 1.5
Foreign income.......................... 369 0.4 654 1.1 -- --
Non-taxable interest income............. (416) (0.5) (304) (0.5) (164) (0.2)
Research and development tax credits.... (264) (0.3) (264) (0.5) (264) (0.4)
Other, net.............................. 811 1.0 (1,724) (2.9) (615) (0.9)
------- ---- ------- ---- ------- ----
Total income taxes............ $35,256 41.9% $22,992 38.8% $27,334 39.8%
======= ==== ======= ==== ======= ====
</TABLE>
25
<PAGE> 28
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND 1998
The cumulative tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities at December 31,
1999 and 1998 are presented below (in thousands of dollars):
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Long-term compensation......................................... $ 8,270 $28,752
Accounts receivable............................................ 4,538 3,518
State income taxes............................................. (998) 1,012
Other.......................................................... 315 1,437
Lease allowances............................................... -- 582
Premises and equipment......................................... -- 1,361
------- -------
Total gross deferred tax assets........................ 12,125 36,662
Valuation allowance............................................ -- --
------- -------
Net deferred tax asset, included in other assets....... $12,125 $36,662
======= =======
</TABLE>
There was no valuation allowance for deferred tax assets as of December 31,
1999, 1998 and 1997.
Management believes it is more likely than not that the Company will
generate sufficient taxable income in the future to realize the deferred tax
asset.
(10) BENEFIT PLANS
PENSION PLAN
The Company has a defined benefit pension plan which covers certain
employees of the Company and its subsidiaries. The plan is subject to the
provisions of the Employee Retirement Income Security Act of 1974. Benefits are
based on years of service and the employee's career average pay. The Company's
funding policy is to contribute to the plan at least the minimum amount that can
be deducted for Federal income tax purposes.
The following tables set forth the plan's funded status and amounts
recognized in the Company's accompanying consolidated statements of financial
condition and consolidated statements of earnings (in thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Projected benefit obligation for service rendered to date... $20,889 $24,837
Plan assets, at fair market value........................... 17,037 17,203
------- -------
Excess of the projected benefit obligation over plan
assets................................................. 3,852 7,634
Unamortized prior service cost.............................. 208 420
Unrecognized net transition obligation being recognized over
15 years.................................................. (63) (129)
Unrecognized net loss....................................... (2,645) (6,841)
Adjustment to recognize minimum liability................... 313 2,853
------- -------
Pension liability included in other liabilities........... $ 1,665 $ 3,937
======= =======
</TABLE>
26
<PAGE> 29
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Net pension cost included the following components:
Service cost -- benefits earned during the period......... $ 1,773 $ 1,895 $ 1,288
Interest cost on projected benefit obligation............. 1,592 1,551 1,222
Expected return on plan assets............................ (1,438) (1,310) (1,065)
Curtailment loss/(gain)................................... (51) -- --
Net amortization.......................................... 305 363 178
------- ------- -------
Net periodic pension cost......................... $ 2,181 $ 2,499 $ 1,623
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Fair value of assets, beginning of year..................... $17,203 $16,479
Employer contributions...................................... 1,914 2,114
Benefit payments made....................................... (1,127) (2,124)
Total investment return..................................... (953) 734
------- -------
Fair value of assets, end of year........................... $17,037 $17,203
======= =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1999 1998
------- -------
<S> <C> <C>
Projected benefit obligation, beginning of year............. $24,837 $22,603
Service cost................................................ 1,773 1,895
Interest cost............................................... 1,592 1,551
Actuarial gains and losses.................................. (4,934) 763
Benefits paid............................................... (1,127) (2,124)
Recognized curtailment loss/(gain).......................... (1,338) --
Plan amendments............................................. 86 149
------- -------
Projected benefit obligation, end of year................... $20,889 $24,837
======= =======
</TABLE>
The net periodic pension costs above include the costs related to
discontinued operations of ITGI of $0, $385,000 and $208,000 in 1999, 1998 and
1997, respectively.
The plan assets consist of approximately 60% equities and 40% fixed income
securities.
The weighted average discount rate and the rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 7.75% and 5.00%, respectively, in 1999, 6.75%
and 5.00%, respectively, in 1998 and 7.00% and 5.00%, respectively, in 1997. The
expected long-term rate of return on assets was 8.40% in 1999, 1998 and 1997.
STOCK COMPENSATION PLANS
In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS 123, "Accounting for Stock-Based Compensation." SFAS 123 defines a fair
value based method of accounting for an employee stock option or similar
instrument and encourages all entities to adopt that method of accounting for
all of their employee stock compensation plans. However, it allows an entity to
continue to measure compensation cost for these plans using the intrinsic value
based method of accounting prescribed by Accounting Principles
27
<PAGE> 30
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND 1998
Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees."
Entities electing to remain with the accounting in APB Opinion No. 25 must make
pro forma disclosures of net earnings and earnings per share, as if the fair
value based method of accounting defined in SFAS 123 had been applied.
At December 31, 1999, the Company had four stock-based compensation plans,
which are described below. The Company applied APB Opinion No. 25 in accounting
for its plans. Accordingly, no compensation cost has been recognized for fixed
stock option plans. Had compensation cost for the Company's stock-based
compensation plans been determined consistent with SFAS 123, the Company's net
earnings and earnings per share would have been reduced to the pro forma amounts
indicated below (in thousands of dollars, except per share amounts):
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- -------------------- --------------------
PRO PRO PRO
REPORTED FORMA REPORTED FORMA REPORTED FORMA
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS:
Earnings from continuing operations.......... $48,839 $46,553 $36,201 $33,131 $41,356 $39,633
Earnings from discontinued operations........ 12,888 12,446 33,481 32,109 22,211 19,284
------- ------- ------- ------- ------- -------
Net earnings................................. $61,727 $58,999 $69,682 $65,240 $63,567 $58,917
======= ======= ======= ======= ======= =======
BASIC EARNINGS PER SHARE:
Earnings from continuing operations.......... $ 2.05 $ 1.96 $ 1.62 $ 1.48 $ 1.92 $ 1.84
Earnings from discontinued operations........ 0.55 0.52 1.50 1.44 1.03 0.89
------- ------- ------- ------- ------- -------
Net earnings................................. $ 2.60 $ 2.48 $ 3.12 $ 2.92 $ 2.95 $ 2.73
======= ======= ======= ======= ======= =======
DILUTED EARNINGS PER SHARE:
Earnings from continuing operations.......... $ 2.04 $ 1.94 $ 1.58 $ 1.44 $ 1.85 $ 1.78
Earnings from discontinued operations........ 0.51 0.50 1.38 1.33 0.95 0.82
------- ------- ------- ------- ------- -------
Net earnings................................. $ 2.55 $ 2.44 $ 2.96 $ 2.77 $ 2.80 $ 2.60
======= ======= ======= ======= ======= =======
</TABLE>
INCENTIVE PLAN.
The Company has an Incentive Compensation Plan ("Incentive Plan") which
allows awards in the form of incentive stock options (within the meaning of
Section 422 of the Internal Revenue code), nonqualified stock options, stock
appreciation rights, restricted stock, unrestricted stock, performance awards,
dividend equivalents or other stock based awards. The plan imposes a limit on
the number of shares of common stock of the Company that may be subject to
awards. An award relating to shares may be granted if the aggregate number of
shares subject to then-outstanding awards plus the number of shares subject to
the award being granted do not exceed 25% of the number of shares issued and
outstanding immediately prior to the grant. Under the Incentive Plan, the
exercise price of each option is generally not less than the market price of the
Company's stock on the date of grant and the option's maximum term is ten years.
Restricted Stock. The Incentive Plan allows for grants of restricted stock
awards, whereby certain key employees are granted restricted shares of common
stock subject to forfeiture until the restrictions lapse or terminate. With
certain exceptions, the employee must remain with the Company for a period of
years after the date of grant to receive the full number of shares granted.
During 1999, 1998 and 1997, there were restricted stock awards of 400,000
shares, 183,947 shares and 198,888 shares, respectively, with a corresponding
market value of $15,791,000, $6,488,000 and $4,189,000, respectively. Certain
grants are expensed over the vesting periods of one to four years, while others
have been granted in settlement of previously accrued compensation liabilities.
The compensation cost, excluding the cost associated with the settlement of
previously accrued compensation liabilities, charged against earnings was
$4,003,000, $993,000 and $1,142,000 in 1999, 1998 and 1997, respectively. As of
December 31, 1999, 1998 and 1997, restricted stock shares outstanding were
507,905 shares, 381,585 shares and 203,468 shares, respectively.
28
<PAGE> 31
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND 1998
Performance-based Stock Options. While the Incentive Plan allows for the
granting of performance-based stock options, no such options were granted during
1999, 1998 and 1997, and no such options were outstanding at December 31, 1999,
1998 and 1997.
DIRECTOR PLAN
The Company also has a Directors' Stock Compensation Plan ("Directors'
Plan") which provides for an annual grant to each non-employee director of an
option to purchase 4,000 shares of the Company's common stock. Such grants will
be made automatically on the date directors are elected or reelected at the
Company's annual meeting. In addition, the Directors' Plan provides for the
automatic grant to a non-employee director, at the time he or she is first
elected or appointed, of an option to purchase 5,000 shares of the Company's
common stock.
Additionally, the Directors' Plan permits each non-employee director to
elect to be paid annual retainer fees and annual fees for service as chairman of
a Board committee in the form of stock options and to defer receipt of any
director fees in an interest-bearing cash account or as deferred shares in a
deferred share account.
A total number of 500,000 shares of the Company's common stock are reserved
under the Directors' Plan. Under the Directors' Plan, the exercise price of each
option equals the market price of the Company's stock on the date of grant and
the option's maximum term is ten years.
EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan ("ESPP") which qualifies
under Section 423 of the U.S. Internal Revenue Code. All regular full-time
employees and employees who work part-time over 20 hours per week are eligible
for the ESPP. Employee contributions are voluntary and are made via payroll
deduction. The employee contributions are used to purchase the Company's common
stock. The stock purchase price is based on the lower of 85 percent of the stock
price at the beginning or end of the period. The stock price used is the Volume
Weighted Average Price ("VWAP") for the particular day. The difference between
the employees' stock purchase price and the market value of the stock is
considered a Company contribution. The Company's contribution vests after a
minimum of one year. The Company does not recognize compensation cost related to
its ESPP contributions.
In addition, the Company has a Supplemental Stock Purchase Plan ("SSPP")
which is a non-qualified plan that is similar to the Company's ESPP. The Company
recognizes compensation cost related to its SSPP contributions.
In the past, the Company's stock purchase plan matched employee
contributions at a rate of 15% (more, if profits exceeded targets set by the
Company's Board of Directors). The Company recognized compensation cost related
to its matching.
The compensation cost charged against continuing operations was $34,000,
$293,000 and $187,000 in 1999, 1998 and 1997, respectively. The charge against
discontinued operations of ITGI was $0, $4,000 and $41,000 in 1999, 1998 and
1997, respectively.
CAPITAL ACCUMULATION PLAN
The Company had a Capital Accumulation Plan (CAP) for certain officers and
key employees of the Company. Participation in the plan was optional, with those
who elected to participate agreeing to defer graduated percentages of their
compensation. The plan allowed selected employees to acquire the Company's
29
<PAGE> 32
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND 1998
common stock at a 15% discount with 50% of the amount deferred. The remaining
50% of the amount deferred was placed in a Profit-Based Deferred Compensation
Account that earned interest at a rate based on the performance of the Company.
In January 1999, the Company liquidated its CAP plan. The Company had
recognized compensation cost related to the 15% discount and interest on
Profit-Based Deferred Compensation Accounts. The compensation cost charged
against continuing operations was $0, $4,115,000 and $4,480,000 in 1999, 1998
and 1997, respectively. The charge against discontinued operations of ITGI was
$0, $219,000 and $354,000 in 1999, 1998 and 1997, respectively.
EMPLOYEE STOCK OWNERSHIP PLAN
The Company has an Employee Stock Ownership Plan ("ESOP") which was
established in 1988. In 1999, the Company re-established annual contributions to
the ESOP. In 1999, 278,744 shares of common stock were purchased for $6,487,000,
which was funded by a loan from the Company. The loan is being repaid over 4
years at an annual interest rate of 5.22%. The Company makes contributions to
the ESOP sufficient to fund principal and interest payments and may make
additional contributions at the discretion of the Board of Directors.
Additionally, during 1999, 100,000 shares of common stock were purchased for
$2,441,000. These shares were paid for substantially through a Company
contribution.
PROFIT SHARING PLAN
The Company has a profit sharing plan, covering substantially all
employees, which includes a salary reduction feature designed to qualify under
Section 401(k) of the Internal Revenue Code. Expenses of this plan related to
continuing operations amounted to $2,954,000, $6,778,000 and $6,222,000 in 1999,
1998 and 1997, respectively. Expenses of this plan related to discontinued
operations of ITGI amounted to $43,000, $2,362,000 and $1,701,000 in 1999, 1998
and 1997, respectively.
OPTIONS ISSUED UNDER ALL PLANS
The fair value of all option grants for all the Company's plans are
estimated on the date of grant using the Black-Scholes option-pricing model with
the weighted-average assumptions used for all fixed option grants in 1999, 1998
and 1997, respectively: dividend yield of 0.9%, 0.6%, and 0.4%; expected
volatility of 42.0%, 32.6%, and 33.4%; risk-free interest rates of 5.2%, 5.5%,
and 6.4%; and expected lives of 5.0 years, 5.0 years, and 5.5 years.
30
<PAGE> 33
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND 1998
A summary of the status of Company stock options in all its stock-based
plans as of December 31, 1999 and changes during the year then ended is
presented below:
<TABLE>
<CAPTION>
1999
------------------------------
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Outstanding at beginning of year................................. 1,442,817 $21.12
Granted.......................................................... 2,389,213 20.01
Exercised........................................................ (1,108,882) 15.07
Exchanged for cash............................................... (111,444) 40.00
Exchanged for options............................................ (283,494) 36.47
Forfeited........................................................ (51,045) 22.56
----------
Outstanding at end of year....................................... 2,227,165 $20.04
==========
Options exercisable at year-end.................................. 1,279,235
Weighted-average fair value of options granted during the year... $ 8.51
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- ------------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
AT REMAINING AVERAGE AT AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICES 1999 LIFE (YEARS) PRICE 1999 PRICE
------------------------ ------------ ------------ -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$ 3.23 to 9.99.................. 123,242 3.1 $ 6.78 123,242 $ 6.78
$10.00 to 19.99.................. 694,901 3.3 16.06 694,901 16.06
$20.00 to 29.63.................. 1,459,022 4.4 23.06 461,092 23.13
--------- ---------
$ 3.23 to 29.63.................. 2,227,165 4.0 $20.04 1,279,235 $17.71
========= =========
</TABLE>
31
<PAGE> 34
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND 1998
(11) EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for the years 1999, 1998 and
1997 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Earnings from continuing operations......................... $48,839 $36,201 $41,356
Discontinued operations of ITGI, net of tax................. 12,888 33,481 22,211
------- ------- -------
Net earnings for basic earnings per share................... 61,727 69,682 63,567
Earnings adjustment -- stock options on subsidiary........ (475) (1,672) (890)
------- ------- -------
Adjusted earnings for diluted earnings per share.......... $61,252 $68,010 $62,677
======= ======= =======
Shares of common stock and common stock equivalents:
Average number of common shares........................... 23,773 20,902 20,148
Capital Accumulation Plan unissued shares................. 5 1,444 1,404
------- ------- -------
Average shares used in basic computation.................. 23,778 22,346 21,552
Stock options............................................. 191 508 651
Other unissued common shares.............................. 23 100 146
------- ------- -------
Average shares used in diluted computation................ 23,992 22,954 22,349
======= ======= =======
Earnings per share:
Basic:
Earnings from continuing operations....................... $ 2.05 $ 1.62 $ 1.92
Discontinued operations of ITGI, net of tax............... 0.55 1.50 1.03
------- ------- -------
Net earnings.............................................. $ 2.60 $ 3.12 $ 2.95
======= ======= =======
Diluted:
Earnings from continuing operations....................... $ 2.04 $ 1.58 $ 1.85
Discontinued operations of ITGI, net of tax............... 0.51 1.38 0.95
------- ------- -------
Net earnings.............................................. $ 2.55 $ 2.96 $ 2.80
======= ======= =======
</TABLE>
The Company had no anti-dilutive securities during 1999, 1998 and 1997.
(12) LEASES
As lessee, the Company leases certain premises and equipment under
noncancelable agreements expiring at various dates through 2013. Future minimum
lease payments for all noncancelable operating leases at December 31, 1999 are
as follows (in thousands of dollars):
<TABLE>
<CAPTION>
GROSS SUB-LEASES NET
------- ---------- -------
<S> <C> <C> <C>
2000........................................................ $11,763 $839 $10,924
2001........................................................ 10,719 816 9,903
2002........................................................ 7,532 273 7,259
2003........................................................ 7,041 31 7,010
2004........................................................ 6,771 6,771
Thereafter.................................................. 41,503 41,503
</TABLE>
32
<PAGE> 35
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND 1998
Rental expense related to continuing operations amounted to $9,326,000,
$7,295,000 and $5,742,000, in 1999, 1998 and 1997, respectively. Rental expense
related to discontinued operations of ITGI amounted to $873,000, $2,556,000 and
$2,600,000, in 1999, 1998 and 1997, respectively.
(13) FINANCIAL INSTRUMENTS
OFF-BALANCE SHEET RISK
The Company has contractual commitments arising in the ordinary course of
business for securities loaned or purchased under agreements to sell, securities
sold but not yet purchased, repurchase agreements, future purchases and sales of
foreign currencies, securities transactions on a when-issued basis, options
contracts, futures index contracts, and underwriting. Each of these financial
instruments and activities contains varying degrees of off-balance sheet risk
whereby the market values of the securities underlying the financial instruments
may be in excess of, or less than, the contract amount. The settlement of these
transactions is not expected to have a material effect upon the Company's
consolidated financial statements.
In the normal course of business, the Company had letters of credit
outstanding aggregating $31,324,000 at December 31, 1999 to satisfy various
collateral requirements in lieu of depositing cash or securities.
The Company has derivative financial instrument positions in foreign
exchange forward contracts, option contracts, and index futures contracts, all
of which are measured at fair value with realized and unrealized gains and
losses recognized in earnings. The foreign exchange forward contract positions
are generally taken to lock in the dollar cost or proceeds of foreign currency
commitments associated with unsettled foreign denominated securities purchases
or sales. The average maturity of the forward contracts is generally less than
two weeks. The option positions taken are generally part of a strategy in which
offsetting equity positions are taken. The index futures positions are taken as
a hedge against securities positions.
The gross contracted or notional amount of index futures contracts,
commodities futures contracts, options contracts, and foreign exchange forward
contracts, which are not reflected in the consolidated statement of financial
condition, is set forth in the table below (in thousands of dollars) and provide
only a measure of the Company's involvement in these contracts at December 31,
1999 and 1998. They do not represent amounts subject to market risk and, in many
cases, serve to reduce the Company's overall exposure to market and other risks.
<TABLE>
<CAPTION>
NOTIONAL OR CONTRACTED AMOUNT
----------------------------------------
1999 1998
------------------ ------------------
PURCHASE SALE PURCHASE SALE
-------- ------ -------- ------
<S> <C> <C> <C> <C>
Index futures contracts............................... $ -- $1,792 $ -- $3,559
Option contracts...................................... 18,260 7,953 2,950 2,927
Foreign exchange forward contracts.................... 4,089 5,588 -- 8,759
</TABLE>
33
<PAGE> 36
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND 1998
FAIR VALUE OF DERIVATIVE FINANCIAL INSTRUMENTS
The following is an aggregate summary of the average 1999 and 1998 and
December 31, 1999 and 1998 fair values of derivative financial instruments (in
thousands of dollars):
<TABLE>
<CAPTION>
1999 1998
------------------------ ------------------------
AVERAGE END OF PERIOD AVERAGE END OF PERIOD
------- ------------- ------- -------------
<S> <C> <C> <C> <C>
Index futures contracts:
In a favorable position....................... $ 42 $ -- $ 42 $ --
In an unfavorable position.................... 50 63 150 178
Option contracts:
Purchase...................................... 1,249 3,047 500 666
Sale.......................................... 830 676 506 574
Foreign exchange forward contracts:
Purchase...................................... 7,013 4,089 2,093 --
Sale.......................................... 7,079 5,588 6,623 8,759
</TABLE>
CREDIT RISK
In the normal course of business, the Company is involved in the execution,
settlement and financing of various customer and principal securities
transactions. Customer activities are transacted on a cash, margin or
delivery-versus-payment basis. Securities transactions are subject to the risk
of counterparty or customer nonperformance. However, transactions are
collateralized by the underlying security, thereby reducing the associated risk
to changes in the market value of the security through settlement date or to the
extent of margin balances.
The Company seeks to control the risk associated with these transactions by
establishing and monitoring credit limits and by monitoring collateral and
transaction levels daily. The Company may require counterparties to deposit
additional collateral or return collateral pledged. In the case of aged
securities failed to receive, the Company may, under industry regulations,
purchase the underlying securities in the market and seek reimbursement for any
losses from the counterparty.
CONCENTRATION OF CREDIT RISK
As a major securities firm, the Company's activities are executed primarily
with and on behalf of other financial institutions, including brokers and
dealers, banks and other institutional customers. Concentrations of credit risk
can be affected by changes in economic, industry or geographical factors. The
Company seeks to control its credit risk and the potential risk concentration
through a variety of reporting and control procedures, including those described
in the preceding discussion of credit risk.
(14) OTHER COMPREHENSIVE INCOME
The following summarizes other comprehensive income and accumulated other
comprehensive income at December 31, 1999 and for the year 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.......................... $ 285 $ -- $ 285
Minimum pension liability adjustment...................... 2,540 (1,054) 1,486
------ ------- ------
Other comprehensive income (loss)......................... $2,825 $(1,054) $1,771
====== ======= ======
</TABLE>
34
<PAGE> 37
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
ACCUMULATED
MINIMUM OTHER
CURRENCY PENSION COMPREHENSIVE
TRANSLATION LIABILITY INCOME
ADJUSTMENTS ADJUSTMENT (LOSS)
----------- ---------- -------------
<S> <C> <C> <C>
Beginning balance...................................... $ (49) $(1,669) $(1,718)
Change in 1999......................................... 285 1,486 1,771
----------- ------- -------
Ending balance......................................... $ 236 $ (183) $ 53
=========== ======= =======
</TABLE>
The following summarizes other comprehensive income and accumulated other
comprehensive income at December 31, 1998 and for the year 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.......................... $ 573 $ -- $ 573
Minimum pension liability adjustment...................... (254) 105 (149)
----- ---- -----
Other comprehensive income (loss)......................... $ 319 $105 $ 424
===== ==== =====
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
MINIMUM OTHER
CURRENCY PENSION COMPREHENSIVE
TRANSLATION LIABILITY INCOME
ADJUSTMENTS ADJUSTMENT (LOSS)
----------- ---------- -------------
<S> <C> <C> <C>
Beginning balance...................................... $(622) $(1,520) $(2,142)
Change in 1998......................................... 573 (149) 424
----- ------- -------
Ending balance......................................... $ (49) $(1,669) $(1,718)
===== ======= =======
</TABLE>
The following summarizes other comprehensive income and accumulated other
comprehensive income at December 31, 1997 and for the year 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.......................... $ (526) $ -- $ (526)
Minimum pension liability adjustment...................... (1,645) 678 (967)
------- ---- -------
Other comprehensive income (loss)......................... $(2,171) $678 $(1,493)
======= ==== =======
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
MINIMUM OTHER
CURRENCY PENSION COMPREHENSIVE
TRANSLATION LIABILITY INCOME
ADJUSTMENTS ADJUSTMENT (LOSS)
----------- ---------- -------------
<S> <C> <C> <C>
Beginning balance...................................... $ (96) $ (553) $ (649)
Change in 1997......................................... (526) (967) (1,493)
----- ------- -------
Ending balance......................................... $(622) $(1,520) $(2,142)
===== ======= =======
</TABLE>
(15) NET CAPITAL REQUIREMENTS
As registered broker-dealers, JEFCO and W & D are subject to the Securities
and Exchange Commission 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.
35
<PAGE> 38
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND 1998
At December 31, 1999, JEFCO's and W & D's net capital was $145,721,000 and
$2,261,000, respectively, which exceeded minimum net capital requirements by
$139,200,000 and $2,011,000, respectively.
(16) CONTINGENCIES
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.
(17) SEGMENT REPORTING
The Company's operations have been classified into one business segment:
Financial Services. The Financial Services segment includes the traditional
securities brokerage and investment banking activities of the Company. The
Company's business is predominantly in the United States with under 10% of
revenues and under 2% of assets attributable to international operations. In
April 1999, the Company spun-off its only other segment, ITGI, which included
the automated equity trading and transaction research activities of ITGI and its
subsidiaries.
Financial information for the discontinued business segment is summarized
as follows (in thousands of dollars):
ITGI CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
ASSETS
Cash and cash equivalents................................... $116,924
Securities owned............................................ 15
Investment in limited partnership........................... 11,532
Trade receivables........................................... 13,576
Premises and equipment...................................... 19,662
Other assets................................................ 18,803
--------
$180,512
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses....................... $ 36,515
Securities sold, not yet purchased.......................... 288
--------
36,803
Stockholders' equity........................................ 143,709
--------
$180,512
========
COMPONENTS OF INVESTMENT IN DISCONTINUED OPERATIONS OF ITGI
Stockholders' equity of ITGI................................ $143,709
Add: Goodwill on Company's books related to ITGI............ 5,300
Less: Deferred taxes on ITGI initial public offering gain... (12,922)
Less: Minority interest in ITGI............................. (27,754)
--------
Investment in discontinued operations of ITGI............... $108,333
========
</TABLE>
36
<PAGE> 39
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND 1998
ITGI CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED DECEMBER 31,
APRIL 27, ------------------------
1999 1998 1997
------------ ---------- ----------
<S> <C> <C> <C>
Revenues................................................. $ 76,180 $212,205 $137,042
Expenses................................................. 56,536 131,270 89,782
-------- -------- --------
Earnings before income tax expense....................... 19,644 80,935 47,260
Income tax expense....................................... 9,250 37,541 20,343
-------- -------- --------
Net earnings............................................. $ 10,394 $ 43,394 $ 26,917
======== ======== ========
COMPONENTS OF DISCONTINUED OPERATIONS OF ITGI
Net earnings of ITGI..................................... $ 10,394 $ 43,394 $ 26,917
Deferred taxes on ITGI's IPO gain........................ 12,843 -- --
Less: Write-off of goodwill on JEF related to ITGI....... (5,208) -- --
Less: Company's spin-off related expenses................ (3,116) (1,936) --
Less: Minority interest in ITGI.......................... (2,025) (7,977) (4,706)
-------- -------- --------
Discontinued operations of ITGI.......................... $ 12,888 $ 33,481 $ 22,211
======== ======== ========
</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.
<TABLE>
<CAPTION>
1999 1998 1997
------ ------- -------
<S> <C> <C> <C>
Interest paid............................................... $ 31 $ 20 $ 146
Income taxes paid to affiliate.............................. 6,538 30,296 19,947
</TABLE>
37
<PAGE> 40
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1999 AND 1998
(18) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited quarterly statements of earnings
for the years ended December 31, 1999 and 1998 (in thousands of dollars, except
per share amounts):
<TABLE>
<CAPTION>
MARCH JUNE SEPTEMBER DECEMBER YEAR
-------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
1999
Revenues............................................... $148,678 $175,329 $145,808 $170,332 $640,147
Earnings before income taxes........................... 20,370 25,047 15,491 23,187 84,095
Earnings from continuing operations.................... 11,666 14,777 8,840 13,556 48,839
Earnings from discontinued operations of ITGI.......... 4,955 6,192 91 1,650 12,888
Net earnings........................................... 16,621 20,969 8,931 15,206 61,727
Basic:
Earnings from continuing operations per share.......... $ 0.50 $ 0.62 $ 0.37 $ 0.56 $ 2.05
Earnings from discontinued operations.................. 0.22 0.26 -- 0.07 0.55
-------- -------- -------- -------- --------
Net earnings per share................................. $ 0.72 $ 0.88 $ 0.37 $ 0.63 $ 2.60
======== ======== ======== ======== ========
Diluted:
Earnings from continuing operations per share.......... $ 0.50 $ 0.61 $ 0.36 $ 0.56 $ 2.04
Earnings from discontinued operations.................. 0.19 0.26 0.01 0.07 0.51
-------- -------- -------- -------- --------
Net earnings per share................................. $ 0.69 $ 0.87 $ 0.37 $ 0.63 $ 2.55
======== ======== ======== ======== ========
1998
Revenues............................................... $163,848 $149,699 $124,041 $153,027 $590,615
Earnings before income taxes........................... 19,226 16,751 6,830 16,386 59,193
Earnings from continuing operations.................... 11,568 10,101 4,916 9,616 36,201
Earnings from discontinued operations of ITGI.......... 5,908 7,725 10,760 9,088 33,481
Net earnings........................................... 17,476 17,826 15,676 18,704 69,682
Basic:
Earnings from continuing operations per share.......... $ 0.52 $ 0.46 $ 0.22 $ 0.42 $ 1.62
Earnings from discontinued operations.................. 0.27 0.34 0.48 0.40 1.50
-------- -------- -------- -------- --------
Net earnings per share................................. $ 0.79 $ 0.80 $ 0.70 $ 0.82 $ 3.12
======== ======== ======== ======== ========
Diluted:
Earnings from continuing operations per share.......... $ 0.51 $ 0.44 $ 0.21 $ 0.42 $ 1.58
Earnings from discontinued operations.................. 0.24 0.32 0.45 0.37 1.38
-------- -------- -------- -------- --------
Net earnings per share................................. $ 0.75 $ 0.76 $ 0.66 $ 0.79 $ 2.96
======== ======== ======== ======== ========
</TABLE>
38
<PAGE> 41
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to this item will be contained in the Proxy
Statement for the 2000 Annual Meeting of Stockholders, which is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information with respect to this item will be contained in the Proxy
Statement for the 2000 Annual Meeting of Stockholders, which is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item will be contained in the Proxy
Statement for the 2000 Annual Meeting of Stockholders, which is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information with respect to this item will be contained in the Proxy
Statement for the 2000 Annual Meeting of Stockholders, which is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
PAGES
-----
<S> <C> <C>
(a)1. FINANCIAL STATEMENTS
Included in Part II of this report:
Independent Auditors' Report.............................. 14
Consolidated Statements of Financial Condition............ 15
Consolidated Statements of Earnings....................... 16
Consolidated Statements of Changes in Stockholders'
Equity.................................................... 17
Consolidated Statements of Cash Flows..................... 18
Notes to Consolidated Financial Statements................ 19
</TABLE>
All Schedules are omitted because they are not applicable or because the
required information is shown in the financial statements or notes thereto.
(a)3. EXHIBITS
<TABLE>
<C> <S>
(3.1) Registrant's Amended and Restated Certificate of
Incorporation is incorporated by reference to Exhibit 3.1 of
the Registrant's Form 8-K filed on April 30, 1999.
(3.2) Registrant's By-Laws are incorporated by reference to
Exhibit 3.2 of Registrant's Form 10 filed on April 20, 1999.
(4.1) Indenture dated as of August 18, 1997 by and between
Jefferies Group, Inc. and The Bank of New York, as Trustee,
including form of 7 1/2% Series B Senior Notes due 2007 is
incorporated by reference to Exhibit 4.1 to Jefferies Group,
Inc.'s Registration Statement on Form S-4 (No. 333-40263)
filed on November 14, 1997 including amendments thereto.
</TABLE>
39
<PAGE> 42
<TABLE>
<C> <S>
[(4.1(a)]* First Supplemental Indenture dated as of March 15, 1999
between Jefferies Group, Inc. and The Bank of New York, as
Trustee, supplementing the Indenture dated as of August 18,
1997.
[(4.1(b)]* Second Supplemental Indenture dated as of March 17, 1999
between JEF Holding Company, Inc., Jefferies Group, Inc. and
The Bank of New York, as Trustee, supplementing the
Indenture dated as of August 18, 1997, as amended on March
15, 1999.
(4.2) Registration Rights Agreement dated as of August 18, 1997 by
and among Jefferies Group, Inc. and the purchasers of
Jefferies Group, Inc.'s 7 1/2% Series B Senior Notes due
2007 is incorporated by reference to Exhibit 10.2 to
Jefferies Group, Inc.'s Registration Statement on Form S-4
(No. 333-40263) filed on November 14, 1997 including
amendments thereto.
(4.3) Indenture dated as of April 28, 1994 by and between
Jefferies Group, Inc. and The Bank of New York, as Trustee,
including form of 8 7/8% Senior Notes due 2004 is
incorporated by reference to Exhibit 4.1 of Amendment No. 1
to Jefferies Group, Inc.'s Registration Statement on Form
S-4 (No. 333-54265) filed on July 14, 1994.
[(4.3(a)] Form of first Supplemental Indenture dated as of July 14,
1994 by and between Jefferies Group, Inc. and The Bank of
New York, as Trustee, is incorporated by reference to
Exhibit 4.2 of Amendment No. 1 to Jefferies Group, Inc.'s
Registration Statement on Form S-4 (No. 333-54265) filed on
July 14, 1994.
[(4.3(b)]* Second Supplemental Indenture dated as of March 26, 1999
between JEF Holding Company, Inc., Jefferies Group, Inc. and
The Bank of New York, as Trustee, supplementing the
Indenture dated as of April 28, 1994, as amended on July 14,
1994.
[(4.3(c)]* Third Supplemental Indenture dated as of April 1, 1999
between JEF Holding Company, Inc., Jefferies Group, Inc. and
The Bank of New York, as Trustee, supplementing the
Indenture dated as of April 28, 1994, as amended on July 14,
1994 and March 26, 1999.
(4.4) Registration Rights Agreement dated as of April 28, 1994 by
and among Jefferies Group, Inc. and the purchasers of the
8 7/8% Series B Senior Notes due 2004 is incorporated by
reference to Exhibit 10.2 of Amendment No. 1 to Jefferies
Group, Inc.'s Registration Statement on Form S-4 (No.
333-54265) filed on July 14, 1994.
(10.1) Registrant's 1999 Incentive Compensation Plan is
incorporated by reference to Exhibit 10.1 of Registrant's
Form 10 filed on April 20, 1999.
(10.2) Registrant's 1999 Directors' Stock Incentive Plan is
incorporated by reference to Exhibit 10.2 of Registrant's
Form 10 filed on April 20, 1999.
(10.3) Distribution Agreement, dated as of March 17, 1999, by and
between Jefferies Group, Inc. and JEF Holding Company, Inc.
is incorporated by reference to Exhibit 10.3 of Registrant's
Form 10 filed on April 20, 1999.
(10.4) Tax Sharing and Indemnification Agreement, dated as of March
17, 1999, by and among Investment Technology Group, Inc.,
Jefferies Group, Inc. and JEF Holding Company, Inc. is
incorporated by reference to Exhibit 10.4 of Registrant's
Form 10 filed on April 20, 1999.
(10.5) Amended and Restated Tax Sharing Agreement, dated as of
March 17, 1999, by and among Investment Technology Group,
Inc., Jefferies Group, Inc. and JEF Holding Company, Inc. is
incorporated by reference to Exhibit 10.5 of Registrant's
Form 10 filed on April 20, 1999.
</TABLE>
40
<PAGE> 43
<TABLE>
<S> <C>
(10.6) Benefits Agreement, dated as of March 17, 1999, by and between Jefferies Group, Inc. and
JEF Holding Company, Inc. is incorporated by reference to Exhibit 10.6 of Registrant's
Form 10 filed on April 20, 1999.
(21)* List of Subsidiaries of Registrant.
(23)* Consent of KPMG LLP.
(27) Financial Data Schedules.
</TABLE>
- ---------------
* Filed herewith.
Exhibits 10.1 to and including 10.6 are management contracts or
compensatory plans or arrangements.
ALL OTHER EXHIBITS ARE OMITTED BECAUSE THEY ARE NOT APPLICABLE.
(b) No reports on Form 8-K have been filed by the Registrant during the
fourth quarter of 1999.
41
<PAGE> 44
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By /s/ FRANK E. BAXTER
------------------------------------
Frank E. Baxter
Chairman of the Board of Directors
Dated: March 27, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ FRANK E. BAXTER Chairman of the Board of March 27, 2000
- ----------------------------------------------------- Directors, and Chief
Frank E. Baxter Executive Officer
/s/ MICHAEL L. KLOWDEN Vice Chairman of the Board March 27, 2000
- ----------------------------------------------------- of Directors
Michael L. Klowden
/s/ RICHARD B. HANDLER Director, Co-President and March 27, 2000
- ----------------------------------------------------- Co-Chief Operating Officer
Richard B. Handler
/s/ JOHN C. SHAW, JR. Director, Co-President and March 27, 2000
- ----------------------------------------------------- Co-Chief Operating Officer
John C. Shaw, Jr.
/s/ JOSEPH A. SCHENK Executive Vice President March 27, 2000
- ----------------------------------------------------- and Chief Financial Officer
Joseph A. Schenk
/s/ W. PATRICK CAMPBELL Director March 27, 2000
- -----------------------------------------------------
W. Patrick Campbell
/s/ RICHARD G. DOOLEY Director March 27, 2000
- -----------------------------------------------------
Richard G. Dooley
/s/ SHELDON B. LUBAR Director March 27, 2000
- -----------------------------------------------------
Sheldon B. Lubar
/s/ FRANK J. MACCHIAROLA Director March 27, 2000
- -----------------------------------------------------
Frank J. Macchiarola
</TABLE>
42
<PAGE> 1
EXHIBIT 4.1(a)
================================================================================
JEFFERIES GROUP, INC.,
ISSUER
AND
THE BANK OF NEW YORK,
TRUSTEE
---------------------------
FIRST SUPPLEMENTAL INDENTURE
DATED AS OF MARCH 15, 1999
---------------------------
$100,000,000
7 1/2% SENIOR NOTES DUE 2007
----------------------------
SUPPLEMENTING THE INDENTURE DATED AS OF AUGUST 18, 1997
================================================================================
<PAGE> 2
FIRST SUPPLEMENTAL INDENTURE, dated as of March 15, 1999, between
Jefferies Group, Inc., a Delaware corporation (the "Company"), and The Bank of
New York, a New York banking corporation, as trustee (the "Trustee").
WHEREAS, the Company and the Trustee executed and delivered that certain
indenture, dated as of August 18, 1997 (the "Indenture"), providing for the
issuance thereunder by the Company, and the authentication and delivery by the
Trustee, of the Company's 7 1/2% Senior Notes due 2007 (the "Securities"). Any
capitalized terms used herein and not otherwise defined shall have the meanings
given thereto in the Indenture.
WHEREAS, Section 9.02 of the Indenture authorizes the Company and the
Trustee, with the consent of the holders of not less than a majority in the
aggregate principal amount of then outstanding securities excluding Securities
held by the Company and its affiliates (the "Requisite Consent"), to enter into
a supplemental indenture for the purpose of adding provisions to, or changing or
eliminating any of the provisions of the Indenture or the Securities or
modifying the rights of holders of the Securities under the Indenture.
WHEREAS, the Company has solicited all registered holders of record of
the Securities as of the close of business on February 5, 1999 and obtained at
least the Requisite Consent of such holders.
WHEREAS, the Company and the Trustee, by appropriate corporate action,
have determined to supplement the Indenture in the manner described below and
all acts and proceedings required by law, by the Indenture, and by the
Certificate of Incorporation and the Bylaws of the Company necessary to
authorize and constitute this First Supplemental Indenture a valid and binding
agreement in accordance with the terms hereof, have been done and taken.
NOW, THEREFORE, in consideration of the foregoing, the Company covenants
and agrees with the Trustee, for the equal and proportionate benefit of the
respective holders from time to time of the Securities, as follows:
1. Modification or Addition of Certain Definitions in Section 1.01 of
the Indenture. The following definitions are hereby added to or modified in
Section 1.01 of the Indenture to read as follows:
"Assumption" means JEF Holding Company, Inc., a Delaware Corporation and
a wholly-owned subsidiary of Jefferies Group, Inc. ("New JEF") prior to
the Spin-Off, succeeding to every right, power, obligation and covenant
of Jefferies Group, Inc. under this Indenture and the Securities in
connection with the Transfers and pursuant to Section 5.01 and 5.03 of
this Indenture, as amended.
"Change of Control" means any "person" or "group" (as such terms are
used for purposes of Sections 13(d) and 14(d) of the Exchange Act,
whether or not applicable) becomes the
- 1 -
<PAGE> 3
"beneficial owner" (as the term is used in Rules 13d-3 and 13d-5 under
the Exchange Act, whether or not applicable, except that a person shall
be deemed to have "beneficial ownership" of all shares that any such
person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly,
of more than 50% of the total voting power entitled to vote in the
election of directors of the Company; provided, however, that a Change
of Control shall not be deemed to have occurred (i) as a result of the
formation of such a "group" or the acquisition of shares of Capital
Stock of the Company by such group if such group includes existing
Affiliates and/or persons who beneficially own in the aggregate, as of
the date of the Indenture, 20% or more of the outstanding shares of
Capital Stock of the Company on the date of the Indenture, or (ii) by
virtue of the Company, any Subsidiary, any employee stock ownership plan
or any other employee benefit plan of the Company or any Subsidiary, or
any other person holding Capital Stock of the Company for or pursuant to
the terms of any such employee benefit plan, becoming a beneficial
owner, directly or indirectly, of more than 50% of the total voting
power entitled to vote in the election of directors of the Company or
(iii) as a result of the Transfers, the Assumption, the Spin-Off and the
ITGI Merger, individually or in the aggregate.
"Distribution Agreement" is defined within the definition of "Transfers"
set forth herein.
"ITGI" is defined within the definition of "Transfers" set forth herein.
"ITGI Merger" means the merger of ITGI with and into Jefferies Group,
Inc., as contemplated by the Merger Agreement dated March 17, 1999,
between Jefferies Group, Inc. and ITGI.
"New JEF" is defined within the definition of "Assumption" set forth
herein.
"Spin-Off" means the pro rata distribution of all outstanding shares of
common stock of New JEF by Jefferies Group, Inc. to the holders of
common stock of Jefferies Group, Inc., as contemplated by the
Distribution Agreement.
"Transfers" means Jefferies Group, Inc.'s transfer of its assets
(excluding the capital stock and assets of Investment Technology Group,
Inc., a Delaware corporation ("ITGI"), and ITGI's subsidiaries) and
liabilities (excluding the liabilities of or related to ITGI and ITGI's
subsidiaries) to New JEF and a subsidiary of Jefferies Group, Inc. that
will become a subsidiary of New JEF in connection with the
aforementioned transfers to New JEF, as contemplated by a Distribution
Agreement dated March 17, 1999, between Jefferies Group, Inc. and New
JEF (the "Distribution Agreement").
2. Modification of Section 4.03 of the Indenture. Section 4.03 of the
Indenture is hereby amended to read as follows:
- 2 -
<PAGE> 4
SECTION 4.03 Corporate Existence.
Subject to Article Five, the Company shall do or cause to be done all
things necessary to preserve and keep in full force and effect its
corporate existence and the corporate or other existence of each of its
Subsidiaries in accordance with the respective organizational documents
of each of them and the rights (charter and statutory) and corporate
franchises of the Company and each of its Subsidiaries; provided,
however, that the Company shall not be required to preserve, with
respect to itself, any right or franchise, and with respect to any of
its Subsidiaries, any such existence, right or franchise, if (a) the
Board of Directors of the Company shall determine that the preservation
thereof is no longer desirable in the conduct of the business of the
Company and (b) the loss thereof is not disadvantageous in any material
respect to the Holders. Notwithstanding the foregoing provisions of this
Section 4.03, the Transfers, the Assumption, the Spin-Off and the ITGI
Merger, individually or in the aggregate, shall not be impaired or
affected by the provisions of this Section 4.03 and in all events shall
be exclusively governed by and subject to Article Five hereof.
3. Addition of Section 5.03 of the Indenture. Section 5.03 of the
Indenture is added to read as follows:
Section 5.03. Transactions Expressly Subject to Section 5.01.
The Transfers and the Assumption are expressly permitted pursuant
to this Article Five and Section 5.01 of this Indenture, as amended,
and, in connection with the Assumption, Jefferies Group, Inc. shall be
relieved of the performance and observance of all obligations under the
Indenture and the Securities.
4. Full Force and Effect; Operative Effect of Amendments. The Indenture,
as amended by this First Supplemental Indenture shall be in full force and
effect as of the date hereof; provided, however, in the event the Transfers do
not occur prior to May 1, 1999, the amendments set forth in Sections 1, 2 and 3
of this First Supplemental Indenture shall cease to have effect and shall be
void and this First Supplemental Indenture shall thereupon have no effect on the
Indenture.
5. Governing Law. This First Supplemental Indenture shall be governed by
and construed in accordance with the laws of the State of New York.
6. Duplicate Originals. This First Supplemental Indenture may be
executed in any number of counterparts and by the parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same agreement.
- 3 -
<PAGE> 5
IN WITNESS WHEREOF, the parties hereto have caused this First Supplemental
Indenture to be duly executed as of the date first written above.
JEFFERIES GROUP, INC.
By: /s/ Clarence T. Schmitz
------------------------------------
Name: Clarence T. Schmitz
Title: Exec. V.P. and CFO
THE BANK OF NEW YORK,
as Trustee
By: /s/ Thomas C. Knight
------------------------------------
Name: Thomas C. Knight
Title: Assistant Vice President
- 4 -
<PAGE> 1
EXHIBIT 4.1(b)
================================================================================
JEF HOLDING COMPANY, INC.
JEFFERIES GROUP, INC.
AND
THE BANK OF NEW YORK,
TRUSTEE
---------------------------
SECOND SUPPLEMENTAL INDENTURE
DATED AS OF MARCH 17, 1999
---------------------------
$100,000,000
7 1/2% SENIOR NOTES DUE 2007
----------------------------
SUPPLEMENTING THE INDENTURE OF JEFFERIES GROUP, INC.
DATED AS OF AUGUST 18, 1997, AS AMENDED ON MARCH 15, 1999
================================================================================
<PAGE> 2
SECOND SUPPLEMENTAL INDENTURE, dated as of March 17, 1999, between JEF
Holding Company, Inc., a Delaware corporation (the "New JEF"), Jefferies Group,
Inc., a Delaware Corporation ("Group") and The Bank of New York, a New York
banking corporation, as trustee (the "Trustee").
WHEREAS, Group and the Trustee executed and delivered that certain
indenture, dated as of August 18, 1997 and as amended on March 15, 1999
(collectively, the "Indenture"), concerning Group's 7 1/2% Senior Notes due 2007
(the "Securities"). Any capitalized terms used herein and not otherwise defined
shall have the meanings given thereto in the Indenture.
WHEREAS, as of the date hereof, New JEF is a wholly owned subsidiary of
Group.
WHEREAS, Group has taken appropriate corporate action to effect the
Spin-Off prior to the ITGI Merger, as of April 27, 1999.
WHEREAS, New JEF, Group and the Trustee, by appropriate corporate
action, have determined to supplement the Indenture in the manner described
below and all acts and proceedings required by law, by the Indenture, and by the
Certificate of Incorporation and the Bylaws of New JEF and Group necessary to
authorize and constitute this Second Supplemental Indenture a valid and binding
agreement in accordance with the terms hereof, have been done and taken.
NOW, THEREFORE, in consideration of the foregoing, each of New JEF and
Group covenants and agrees with the Trustee, for the equal and proportionate
benefit of the respective holders from time to time of the Securities, as
follows:
1. Assumption. New JEF hereby agrees that, upon completion of the
Transfers in accordance with the Distribution Agreement (excluding any transfers
subject to Section 3.01(e) of the Distribution Agreement), New JEF shall succeed
to, be substituted for, and exercise every right and power of Group under the
Indenture, as amended hereby, and shall assume, without executing any further
document or instrument, all of the obligations of Group pursuant to the
Indenture, as amended hereby, and pursuant to the Securities. Upon the
completion of the Transfers in accordance with the Distribution Agreement
(excluding any transfers subject to Section 3.01(e) of the Distribution
Agreement), and the succession and substitution set forth in the preceding
sentence, Group shall thereby be relieved of the performance and observance of
all obligations and covenants of the Indenture, as amended hereby, and of the
Securities, including but not limited to the obligation to make payment of the
principal of and interest, if any, on all the Securities.
2. Full Force and Effect; Operative Effect of Amendment through Second
Supplemental Indenture. The Indenture, as amended by this Second Supplemental
Indenture, shall be in full force and effect as of the date hereof; provided,
however, the provisions of Paragraph 1 shall only become operative in connection
with the completion of the Transfers in
- 1 -
<PAGE> 3
accordance with the Distribution Agreement (excluding any transfers subject to
Section 3.01(e) of the Distribution Agreement), if such completion of Transfers
(excluding the exceptions noted in the preceding parenthetical) is so effected
prior to May 1, 1999.
3. Governing Law. This Second Supplemental Indenture shall be governed
by and construed in accordance with the laws of the State of New York.
4. Duplicate Originals. This Second Supplemental Indenture may be
executed in any number of counterparts and by the parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Second
Supplemental Indenture to be duly executed as of the date first written above.
JEF HOLDING COMPANY, INC.
By: /s/ Jerry M. Gluck
------------------------------------
Name: Jerry M. Gluck
Title: Secretary
JEFFERIES GROUP, INC.
By: /s/ Clarence T. Schmitz
------------------------------------
Name: Clarence T. Schmitz
Title: Executive Vice President
THE BANK OF NEW YORK,
as Trustee
By: /s/ Mary La Gumina
------------------------------------
Name: Mary La Gumina
Title: Assistant Vice President
- 2 -
<PAGE> 1
================================================================================
JEF HOLDING COMPANY, INC.
JEFFERIES GROUP, INC.
AND
THE BANK OF NEW YORK,
TRUSTEE
-------------------
SECOND SUPPLEMENTAL INDENTURE
DATED AS OF MARCH 26, 1999
-------------------
$50,000,000
8 7/8% SENIOR NOTES DUE 2004
-------------------
SUPPLEMENTING THE INDENTURE OF JEFFERIES GROUP, INC.
DATED AS OF APRIL 28, 1994, AND AS AMENDED ON JULY 14, 1994
================================================================================
<PAGE> 2
SECOND SUPPLEMENTAL INDENTURE, dated as of March 26, 1999, among Jefferies
Group, Inc., a Delaware Corporation ("Group"), JEF Holding Company, Inc., a
Delaware corporation ("New JEF"), and The Bank of New York, a New York banking
corporation, as trustee (the "Trustee").
WHEREAS, Group and the Trustee executed and delivered that certain
indenture, dated as of April 28, 1994 and as amended on July 14, 1994 by a
First Supplemental Indenture (collectively, the "Indenture"), providing for the
issuance thereunder by Group, and the authentication and delivery by the
Trustee, of Group's 8 7/8% Senior Notes due 2004 (the "Securities"). Any
capitalized terms used herein and not otherwise defined shall have the meanings
given thereto in the Indenture.
WHEREAS, as of the date hereof, New JEF is a wholly owned subsidiary of
Group.
WHEREAS, as of March 17, 1999, the Board of Directors of each of Group and
New JEF authorized and approved the execution and delivery of a Distribution
Agreement dated March 17, 1999 between Group and New JEF (the "Distribution
Agreement") and the transactions contemplated thereby;
WHEREAS, Group has agreed, pursuant to and subject to the conditions set
forth in the Distribution Agreement, to transfer its assets (excluding the
capital stock and assets of Investment Technology Group, Inc., a Delaware
corporation and approximately 80.5% subsidiary of Group as of the date hereof
("ITGI") and ITGI's subsidiaries) and liabilities (excluding the liabilities of
or related to ITGI and ITGI's subsidiaries) to New JEF and a subsidiary of
Group that will become a subsidiary of New JEF in connection with such
transfers (collectively, the "Transfers");
WHEREAS, it is anticipated that the Transfers will be made on or about
April 21, 1999, except for the limited transfers that are the subject of, and
will be effected thereafter in accordance with, Section 3.01(e) of the
Distribution Agreement;
WHEREAS, the assets of Group that are the subject of the Transfers
constitute approximately 98% of the consolidated assets of Group, as set forth
in Group's consolidated balance sheet as of December 31, 1998;
WHEREAS, following completion of the Transfers, Group, in accordance with
the provisions and conditions of the Distribution Agreement, will effect a pro
rata distribution of 100% of the outstanding New JEF common stock owned by
Group to the holders of outstanding common stock of Group (the "Distribution");
WHEREAS, the Distribution Agreement provides that before the Distribution,
effective as of the date of the Transfers, New JEF shall execute the
Supplemental Indenture;
- 1 -
<PAGE> 3
WHEREAS, New JEF, Group and the Trustee, by appropriate corporate action,
have determined to supplement the Indenture in the manner described below and
all acts and proceedings required by law, by the Indenture, and by the
Certificate of Incorporation and the Bylaws of New JEF and Group necessary to
authorize and constitute this Second Supplemental Indenture a valid and binding
agreement in accordance with the terms hereof, have been done and taken.
NOW, THEREFORE, in consideration of the foregoing, each of New JEF and
Group covenants and agrees with the Trustee, for the equal and proportionate
benefit of the respective holders from time to time of the Securities, as
follows:
1. Assumption. New JEF hereby agrees that, effective immediately upon
completion of the Transfers (excluding any transfers that may be the subject of
Section 3.01(e) of the Distribution Agreement), New JEF thereby shall succeed
to, be substituted for, and exercise every right and power of Group under the
Indenture, as amended hereby, and shall assume all of the obligations of Group
pursuant hereto and pursuant to the Securities. Group shall be relieved of the
performance and observance of all obligations and covenants of the Indenture,
as amended hereby, and the Securities, including but not limited to the
obligation to make payment of the principal of and interest, if any, on all the
Securities.
2. Full Force and Effect; Operative Effect of Amendment and First
Supplemental Indenture. The Indenture, as amended by this Second Supplemental
Indenture, shall be in full force and effect as of the date hereof.
3. Governing Law. This Second Supplemental Indenture shall be governed
by and construed in accordance with the laws of the State of New York.
4. Duplicate Originals. This Second Supplemental Indenture may be
executed in any number of counterparts and by the parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same agreement.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
-2-
<PAGE> 4
IN WITNESS WHEREOF, the parties hereto have caused this Second
Supplemental Indenture to be duly executed as of the date first written above.
JEF HOLDING COMPANY, INC.
By: /s/ JERRY M. GLUCK
--------------------------------
Name: Jerry M. Gluck
Title: General Counsel and Secretary
JEFFERIES GROUP, INC.
By: /s/ FRANK E. BAXTER
--------------------------------
Name: Frank E. Baxter
Title: Chairman and Chief Executive Officer
THE BANK OF NEW YORK,
as Trustee
By: /s/ MARY BETH LEWICKI
--------------------------------
Name: Mary Beth Lewicki
Title: Assistant Vice President
-3-
<PAGE> 1
EXHIBIT 4.3(c)
================================================================================
JEFFERIES GROUP, INC.,
JEF HOLDING COMPANY, INC.
AND
THE BANK OF NEW YORK,
TRUSTEE
---------------------------
THIRD SUPPLEMENTAL INDENTURE
DATED AS OF APRIL 1, 1999
---------------------------
$50,000,000
8 7/8% SENIOR NOTES DUE 2004
----------------------------
SUPPLEMENTING THE INDENTURE DATED AS OF APRIL 28, 1994,
AS AMENDED ON JULY 14, 1994
AND MARCH 26, 1999
================================================================================
<PAGE> 2
THIRD SUPPLEMENTAL INDENTURE, dated as of April 1, 1999, between JEF
Holding Company, Inc. ("New JEF"), Jefferies Group, Inc., a Delaware corporation
("Group"), and The Bank of New York, a New York banking corporation, as trustee
(the "Trustee").
WHEREAS, Group and the Trustee executed and delivered that certain
indenture, dated as of April 28, 1994 (the "Original Indenture"), providing for
the issuance thereunder by Group, and the authentication and delivery by the
Trustee, of Group's 8 7/8% Senior Notes due 2004 (the "Securities"), Group and
the Trustee executed and delivered a First Supplemental Indenture dated July 14,
1994 and Group, New JEF and the Trustee executed and delivered a Second
Supplemental Indenture dated March 26, 1999 (the Original Indenture, as amended
by such First Supplemental Indenture and Second Supplemental Indenture,
collectively, the "Indenture"). Any capitalized terms used herein and not
otherwise defined shall have the meanings given thereto in the Indenture.
WHEREAS, as of the date hereof, New JEF is a wholly owned subsidiary of
Group.
WHEREAS, Section 9.02 of the Indenture authorizes Group and the Trustee,
with the consent of the holders of not less than a majority in the aggregate
principal amount of then outstanding securities excluding Securities held by
Group and its affiliates (the "Requisite Consent"), to enter into a supplemental
indenture for the purpose of adding provisions to, or changing or eliminating
any of the provisions of the Indenture or the Securities or modifying the rights
of holders of the Securities under the Indenture.
WHEREAS, Group has solicited all registered holders of record of the
Securities as of the close of business on February 5, 1999 and, as of the date
hereof, obtained at least the Requisite Consent of such holders.
WHEREAS, as of March 17, 1999, the Board of Directors of each of Group
and New JEF authorized and approved the execution and delivery of the
Distribution Agreement (as defined in Section 1 hereof) and the transactions
contemplated thereby;
WHEREAS, it is anticipated that the Transfers (as defined in Section 1
hereof) will be made on or about April 21, 1999, except for the limited
transfers that are the subject of, and will be effected thereafter in accordance
with, Section 3.01(e) of Distribution Agreement;
WHEREAS, Group has taken all necessary corporate action to effect the
Spin-Off (as defined in Section 1 hereof) prior to the ITGI Merger (as defined
in Section 1 hereof), as of April 27, 1999.
WHEREAS, New JEF, Group and the Trustee, by appropriate corporate
action, have determined to supplement the Indenture in the manner described
below and all acts and proceedings required by law, by the Indenture, and by the
Certificate of Incorporation and the Bylaws of New JEF and Group necessary to
authorize and constitute this Third Supplemental Indenture a valid and binding
agreement in accordance with the terms hereof, have been done and taken.
- 1 -
<PAGE> 3
NOW, THEREFORE, in consideration of the foregoing, New JEF and Group
covenant and agree with the Trustee, for the equal and proportionate benefit of
the respective holders from time to time of the Securities, as follows:
1. Modification or Addition of Certain Definitions in Section 1.01 of
the Indenture. The following definitions are hereby added to or modified in
Section 1.01 of the Indenture to read as follows:
"Assumption" means JEF Holding Company, Inc., a Delaware Corporation and a
wholly-owned subsidiary of Jefferies Group, Inc. ("New JEF") prior to the
Spin-Off, succeeding to every right, power, obligation and covenant of Jefferies
Group, Inc. under this Indenture and the Securities in connection with the
Transfers and pursuant to Section 5.01 and 5.03 of this Indenture, as amended.
"Change of Control" means any "person" or "group" (as such terms are used for
purposes of Sections 13(d) and 14(d) of the Exchange Act, whether or not
applicable) becomes the "beneficial owner" (as the term is used in Rules 13d-3
and 13d-5 under the Exchange Act, whether or not applicable, except that a
person shall be deemed to have "beneficial ownership" of all shares that any
such person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of more
than 50% of the total voting power entitled to vote in the election of directors
of the Company; provided, however, that a Change of Control shall not be deemed
to have occurred (i) as a result of the formation of such a "group" or the
acquisition of shares of Capital Stock of the Company by such group if such
group includes existing Affiliates and/or persons who beneficially own in the
aggregate, as of the date of the Indenture, 20% or more of the outstanding
shares of Capital Stock of the Company on the date of the Indenture, or (ii) by
virtue of the Company, any Subsidiary, any employee stock ownership plan or any
other employee benefit plan of the Company or any Subsidiary, or any other
person holding Capital Stock of the Company for or pursuant to the terms of any
such employee benefit plan, becoming a beneficial owner, directly or indirectly,
of more than 50% of the total voting power entitled to vote in the election of
directors of the Company or (iii) as a result of the Transfers, the Assumption,
the Spin-Off and the ITGI Merger, individually or in the aggregate.
"Distribution Agreement" is defined within the definition of "Transfers" set
forth herein.
"ITGI" is defined within the definition of "Transfers" set forth herein.
"ITGI Merger" means the merger of ITGI with and into Jefferies Group, Inc., as
contemplated by the Merger Agreement dated March 17, 1999, between Jefferies
Group, Inc. and ITGI.
"New JEF" is defined within the definition of "Assumption" set forth herein.
"Spin-Off" means the pro rata distribution of all outstanding shares of common
stock of New JEF by Jefferies Group, Inc. to the holders of common stock of
Jefferies Group, Inc., as contemplated by the Distribution Agreement.
- 2 -
<PAGE> 4
"Transfers" means Jefferies Group, Inc.'s transfer of its assets (excluding the
capital stock and assets of Investment Technology Group, Inc., a Delaware
corporation ("ITGI"), and ITGI's subsidiaries) and liabilities (excluding the
liabilities of or related to ITGI and ITGI's subsidiaries) to New JEF and a
subsidiary of Jefferies Group, Inc. that will become a subsidiary of New JEF in
connection with the aforementioned transfers to New JEF, as contemplated by a
Distribution Agreement dated March 17, 1999, between Jefferies Group, Inc. and
New JEF (the "Distribution Agreement").
2. Modification of Section 4.03 of the Indenture. Section 4.03 of the
Indenture is hereby amended to read as follows:
SECTION 4.03 Corporate Existence.
Subject to Article Five, the Company shall do or cause to be done all things
necessary to preserve and keep in full force and effect its corporate existence
and the corporate or other existence of each of its Subsidiaries in accordance
with the respective organizational documents of each of them and the rights
(charter and statutory) and corporate franchises of the Company and each of its
Subsidiaries; provided, however, that the Company shall not be required to
preserve, with respect to itself, any right or franchise, and with respect to
any of its Subsidiaries, any such existence, right or franchise, if (a) the
Board of Directors of the Company shall determine that the preservation thereof
is no longer desirable in the conduct of the business of the Company and (b) the
loss thereof is not disadvantageous in any material respect to the Holders.
Notwithstanding the foregoing provisions of this Section 4.03, the Transfers,
the Assumption, the Spin-Off and the ITGI Merger, individually or in the
aggregate, shall not be impaired or affected by the provisions of this Section
4.03 and in all events shall be exclusively governed by and subject to Article
Five hereof.
3. Addition of Section 5.03 of the Indenture. Section 5.03 of the
Indenture is added to read as follows:
Section 5.03. Transactions Expressly Subject to Section 5.01.
The Transfers and the Assumption are expressly permitted pursuant
to this Article Five and Section 5.01 of this Indenture, as amended,
and, in connection with the Assumption, Jefferies Group, Inc. shall be
relieved of the performance and observance of all obligations under the
Indenture and the Securities.
4. Assumption. New JEF hereby agrees that, upon completion of the
Transfers in accordance with the Distribution Agreement (excluding any transfers
that may be the subject of Section 3.01(e) of the Distribution Agreement), New
JEF shall succeed to, be substituted for, and exercise every right and power of
Group under the Indenture, as amended hereby, and shall assume, without
executing any further document or instrument, all of the obligations of Group
pursuant to the Indenture, as amended hereby, and pursuant to the Securities.
Upon the completion of the Transfers in accordance with the Distribution
Agreement (excluding any transfers subject to Section 3.01(e) of the
Distribution Agreement), and the succession and substitution set forth in the
preceding sentence, Group shall thereby be relieved of the performance and
observance of all obligations and covenants of the Indenture, as amended
- 3 -
<PAGE> 5
hereby, and of the Securities, including but not limited to the obligation to
make payment of the principal of and interest, if any, on all the Securities.
5. Full Force and Effect; Operative Effect of Amendments. This Third
Supplemental Indenture hereby supersedes in its entirety the Second Supplemental
Indenture dated March 26, 1999 among Group, New JEF and the Trustee. The
Indenture, as amended by this Third Supplemental Indenture shall be in full
force and effect as of the date hereof; provided, however, in the event the
Transfers and the Assumption (as set forth in Section 4 of this Third
Supplemental Indenture) do not occur prior to May 1, 1999, the amendments set
forth in Sections 1, 2, 3 and 4 of this Third Supplemental Indenture shall cease
to have effect and shall be void and this Third Supplemental Indenture shall
thereupon have no effect on the Indenture.
6. Governing Law. This Third Supplemental Indenture shall be governed by
and construed in accordance with the laws of the State of New York.
7. Duplicate Originals. This Third Supplemental Indenture may be
executed in any number of counterparts and by the parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same agreement.
- 4 -
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have caused this Third
Supplemental Indenture to be duly executed as of the date first written above.
JEF HOLDING COMPANY, INC.
By: /s/ Jerry M. Gluck
-----------------------------------------
Name: Jerry M. Gluck
Title: Secretary
JEFFERIES GROUP, INC.
By: /s/ Clarence T. Schmitz
-----------------------------------------
Name: Clarence T. Schmitz
Title: Executive Vice President and CFO
THE BANK OF NEW YORK,
as Trustee
By: /s/ Thomas C. Knight
-----------------------------------------
Name: Thomas C. Knight
Title: Assistant Vice President
- 5 -
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF JEFFERIES GROUP, INC.
NAME OF SUBSIDIARY PLACE OF INCORPORATION
- ------------------ ----------------------
Jefferies & Company, Inc. Delaware
Jefferies International Limited England
Jefferies Pacific Limited Hong Kong
Jefferies Analytical Trading Group, Inc. Delaware
JEF Investment Company Delaware
Jefferies Advisers, Inc. Delaware
Jefferies FOF Manager, Inc. Delaware
Jefferies MB Manager, Inc. Delaware
Jefferies International Corporation Panama
Jefferies Realty Investment Corporation California
Jefferies Pacific, Inc. Delaware
<PAGE> 1
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Jefferies Group, Inc.
We consent to incorporation by reference in the Registration Statements No.
2-94727 dated December 6, 1984; No. 33-17065 dated September 8, 1987; No.
33-19741 dated January 21, 1998; No. 33-64318 dated May 27, 1993; No. 33-64490
dated June 15, 1993; No. 33-52139 dated February 3, 1994; No. 33-54373 dated
June 30, 1994. No. 33-02489 dated April 12, 1996, and No. 333-84079 dated July
29, 1999, all on Form S-8, and No. 33-54265 dated July 14, 1994, and No.
33-40263 dated December 5, 1997, both on Form S-4 of Jefferies Group, Inc. of
our report dated January 18, 2000, relating to the consolidated statements of
financial condition of Jefferies Group, Inc. and subsidiaries as of December 31,
1999 and 1998, and the related consolidated statements of earnings, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1999, which report appears in the December 31, 1999
annual report on Form 10-K of Jefferies Group, Inc.
KPMG LLP
Los Angeles, California
March 27, 2000
<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 DECEMBER 31, 1999 AND FOR THE YEAR THEN ENDED AND THE NOTES
THERETO AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS FILED IN THE 1999 JEFFERIES GROUP, INC. 10-K FILING.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 77,197
<RECEIVABLES> 346,660
<SECURITIES-RESALE> 2,370
<SECURITIES-BORROWED> 1,842,888
<INSTRUMENTS-OWNED> 376,506
<PP&E> 39,117
<TOTAL-ASSETS> 2,896,252
<SHORT-TERM> 0
<PAYABLES> 287,588
<REPOS-SOLD> 31,685
<SECURITIES-LOANED> 1,616,493
<INSTRUMENTS-SOLD> 186,420
<LONG-TERM> 149,485
0
0
<COMMON> 2
<OTHER-SE> 396,575
<TOTAL-LIABILITY-AND-EQUITY> 2,896,252
<TRADING-REVENUE> 232,239
<INTEREST-DIVIDENDS> 115,425
<COMMISSIONS> 202,803
<INVESTMENT-BANKING-REVENUES> 80,749
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 96,496
<COMPENSATION> 329,769
<INCOME-PRETAX> 84,095
<INCOME-PRE-EXTRAORDINARY> 84,095
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 61,727
<EPS-BASIC> 2.60
<EPS-DILUTED> 2.55
</TABLE>
