<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 27, 1997
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 1-11665
JEFFERIES GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-2848406
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11100 Santa Monica Blvd, Los Angeles, California 90025
- --------------------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 445-1199
-------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
As of June 27, 1997, the registrant had 10,016,193 common shares, $.01 par
value, outstanding.
Page 1 of 18
<PAGE> 2
JEFFERIES GROUP, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
JUNE 27, 1997
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition -
June 27, 1997 (unaudited) and December 31, 1996 . . . . . . . . . . 3
Consolidated Statements of Earnings (unaudited) -
Three Months and Six Months Ended June 27, 1997 and June 28, 1996 . 4
Consolidated Statement of Changes in Stockholders' Equity (unaudited) -
Six Months Ended June 27, 1997 . . . . . . . . . . . . . . . . . . . 5
Consolidated Statements of Cash Flows (unaudited) -
Six Months Ended June 27, 1997 and June 28, 1996 . . . . . . . . . . 6
Notes to Consolidated Financial Statements (unaudited) . . . . . . . . 8
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . . 12
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . 16
</TABLE>
Page 2 of 18
<PAGE> 3
JEFFERIES GROUP, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
June 27, December 31,
1997 1996
----------- -----------
ASSETS (unaudited)
<S> <C> <C>
Cash and cash equivalents ............................................. $ 70,035 $ 114,142
Cash and securities segregated and on deposit for
regulatory purposes ................................................. 44,785 23,849
Receivable from brokers and dealers ................................... 1,746,625 965,625
Receivable from customers, officers and directors ..................... 129,377 113,872
Securities owned ...................................................... 286,979 197,770
Investments ........................................................... 77,250 50,609
Premises and equipment ................................................ 38,639 30,871
Other assets .......................................................... 64,953 71,349
----------- -----------
$ 2,458,643 $ 1,568,087
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Subordinated loan ..................................................... $ 100,000 $ --
Payable to brokers and dealers ........................................ 1,432,807 805,713
Payable to customers .................................................. 224,769 170,384
Securities sold, not yet purchased .................................... 192,858 124,315
Accrued expenses and other liabilities ................................ 231,235 207,281
----------- -----------
2,181,669 1,307,693
Term debt ............................................................. 53,074 52,987
Minority interest ..................................................... 13,528 11,962
----------- -----------
2,248,271 1,372,642
=========== ===========
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value. Authorized 1,000,000
shares; none issued ............................................... -- --
Common stock, $.01 par value. Authorized 25,000,000
shares; issued 18,794,062 shares in 1997 and
18,757,062 shares in 1996 ........................................ 188 188
Additional paid-in capital .......................................... 64,333 62,569
Retained earnings ................................................... 262,899 232,741
Less treasury stock, at cost; 8,777,869 shares in 1997
and 8,394,113 shares in 1996 ..................................... (116,489) (99,404)
Less currency translation adjustments ............................... (6) (96)
Less additional minimum pension liability ........................... (553) (553)
----------- -----------
Total stockholders' equity .................................... 210,372 195,445
----------- -----------
$ 2,458,643 $ 1,568,087
=========== ===========
</TABLE>
See accompanying unaudited notes to consolidated financial statements.
Page 3 of 18
<PAGE> 4
JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------- ---------------------
June 27, June 28, June 27, June 28,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Commissions .......................... $ 77,002 $ 57,391 $146,900 $118,670
Principal transactions ............... 44,812 32,928 85,032 67,647
Corporate finance .................... 68,479 24,989 96,614 41,696
Interest ............................. 17,481 11,909 31,376 24,968
Other ................................ 1,587 644 2,850 1,638
-------- -------- -------- --------
Total revenues ..................... 209,361 127,861 362,772 254,619
Interest expense ....................... 15,545 9,446 27,444 19,512
-------- -------- -------- --------
Revenues, net of interest expense ...... 193,816 118,415 335,328 235,107
-------- -------- -------- --------
Non-interest expenses:
Compensation and benefits ............ 108,026 62,057 185,036 123,515
Floor brokerage and clearing fees .... 8,714 6,374 17,165 12,736
Telecommunications and data
processing services ................ 11,823 8,425 21,593 16,222
Occupancy and equipment rental ....... 4,825 3,777 9,517 7,562
Travel and promotional ............... 4,637 4,299 9,229 7,833
Software royalties ................... 2,581 2,022 4,964 4,245
Other ................................ 17,883 13,578 30,930 24,859
-------- -------- -------- --------
Total non-interest expenses ........ 158,489 100,532 278,434 196,972
-------- -------- -------- --------
Earnings before income taxes and
minority interest .................. 35,327 17,883 56,894 38,135
Income taxes ........................... 14,197 7,749 23,202 16,381
-------- -------- -------- --------
Earnings before minority interest ...... 21,130 10,134 33,692 21,754
Minority interest ...................... 1,382 994 2,547 1,982
-------- -------- -------- --------
Net earnings ....................... $ 19,748 $ 9,140 $ 31,145 $ 19,772
======== ======== ======== ========
Earnings per share of common stock:
Primary ............................ $ 1.75 $ 0.78 $ 2.75 $ 1.66
======== ======== ======== ========
Fully diluted ...................... $ 1.74 $ 0.78 $ 2.74 $ 1.66
======== ======== ======== ========
Weighted average shares of common stock:
Primary ............................ 11,145 11,783 11,152 11,915
Fully diluted ...................... 11,169 11,788 11,192 11,924
</TABLE>
See accompanying unaudited notes to consolidated financial statements.
Page 4 of 18
<PAGE> 5
JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
SIX MONTHS ENDED JUNE 27, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Additional Total
Additional Currency Minimum Stock-
Common Paid-in Retained Treasury Translation Pension holders'
Stock Capital Earnings Stock Adjustment Liability Equity
Balance, ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1996 ...... $ 188 $ 62,569 $ 232,741 $(99,404) $ (96) $ (553) $ 195,445
Exercise of stock options
(37,000 shares) ........ -- 952 -- -- -- -- 952
Issuance of common
stock (91 shares) ...... -- -- -- 3 -- -- 3
Purchase of 449,255
shares of treasury stock -- -- -- (18,231) -- -- (18,231)
Capital Accumulation
Plan distributions
(65,408 shares) ....... -- 508 -- 1,143 -- -- 1,651
Increase in proportionate
share of subsidiary's
equity related to
subsidiary's purchase of
treasury stock ......... -- -- (45) -- -- -- (45)
Decrease in proportionate
share of subsidiary's
equity related to stock
option exercises at the
subsidiary ............. -- -- 57 -- -- -- 57
Additional vesting of
restricted stock shares -- 304 -- -- -- -- 304
Quarterly dividends
($.05 per share) ....... -- -- (999) -- -- -- (999)
Translation adjustment .. -- -- -- -- 90 -- 90
Net earnings ............ -- -- 31,145 -- -- -- 31,145
----------------------------------------------------------------------------------------------------
Balance,
June 27, 1997 .......... $ 188 $ 64,333 $ 262,899 $(116,489) $ (6) $ (553) $ 210,372
====================================================================================================
</TABLE>
See accompanying unaudited notes to consolidated financial statements.
Page 5 of 18
<PAGE> 6
JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
------------------------
June 27, June 28,
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings ................................................ $ 31,145 $ 19,772
--------- ---------
Adjustments to reconcile net earnings to
net cash provided by operations:
Depreciation and/or amortization of premises and
equipment, capitalized software, goodwill and
discount on term debt ................................... 7,027 5,718
Additional vesting of restricted stock shares ............. 304 242
Increase in cash and securities segregated and on
deposit for regulatory purposes ......................... (20,936) --
(Increase) decrease in receivables:
Brokers and dealers ..................................... (781,000) 343,750
Customers, officers and directors ....................... (15,505) 6,072
Increase in securities owned .............................. (89,209) (8,918)
Increase in investments ................................... (26,641) --
(Increase) decrease in other assets ....................... 5,298 (46,548)
Increase (decrease) in operating payables:
Brokers and dealers ..................................... 627,094 (201,413)
Customers ............................................... 54,385 (71,309)
Increase in securities sold, not yet purchased ............ 68,543 3,401
Increase in accrued expenses and other liabilities ........ 23,954 25,041
Increase in minority interest ............................. 1,566 1,399
--------- ---------
Total adjustments ................................. (145,120) 57,435
--------- ---------
Net cash provided by (used in) operating activities (113,975) 77,207
--------- ---------
</TABLE>
Continued on next page.
See accompanying unaudited notes to consolidated financial statements.
Page 6 of 18
<PAGE> 7
JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Six Months Ended
------------------------
June 27, June 28,
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from financing activities:
Net proceeds from (payments on):
Subordinated loan ............................................ 100,000 --
Repurchase of treasury stock ................................. (18,231) (18,865)
Dividends paid ............................................... (999) (823)
Redemption of rights ......................................... -- (55)
Exercise of stock options .................................... 952 2,317
Issuance of common stock shares .............................. 3 648
Capital Accumulation Plan distributions ...................... 1,651 --
Change in proportionate share of subsidiary's equity ......... 12 (1,065)
--------- ---------
Net cash (used in) provided by financing activities 83,388 (17,843)
--------- ---------
Cash flows from investing activities -
purchase of premises and equipment ............................... (13,610) (5,582)
--------- ---------
Effect of foreign currency translation on cash ..................... 90 (12)
--------- ---------
Net increase (decrease) in cash and cash equivalents (44,107) 53,770
Cash and cash equivalents - beginning of period .................... 114,142 68,318
--------- ---------
Cash and cash equivalents - end of period .......................... $ 70,035 $ 122,088
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ....................................................... $ 25,074 $ 20,761
========= =========
Income taxes ................................................... $ 20,669 $ 22,529
========= =========
</TABLE>
See accompanying unaudited notes to consolidated financial statements.
Page 7 of 18
<PAGE> 8
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements include the
accounts of Jefferies Group, Inc. and all subsidiaries, including Jefferies &
Company, Inc. (Jefferies) and Investment Technology Group, Inc. and all of its
subsidiaries (ITGI), including ITGI's wholly-owned subsidiary, ITG Inc. (ITG).
The accounts of W & D Securities, Inc. (W & D) are also consolidated because of
the nature and extent of the Company's ownership interest in W & D. Jefferies
Group, Inc. and its subsidiaries are primarily engaged in securities brokerage
and trading, corporate finance and other financial services. The term
"Company" refers, unless the context requires otherwise, to Jefferies Group,
Inc., its subsidiaries, predecessor entities, and W & D.
All significant intercompany accounts and transactions are eliminated
in consolidation. The consolidated financial statements reflect all
adjustments which are, in the opinion of management, necessary for the fair
statement of the results for the interim period and should be read in
conjunction with the Company's annual report for the year ended December 31,
1996.
SECURITIES TRANSACTIONS
All transactions in securities, commission revenues and related
expenses are recorded on a trade-date basis.
Securities owned, debt and equity investments, some partnership
interests and securities sold, not yet purchased are carried at market value,
and unrealized gains and losses relating thereto are reflected in revenues.
Market values are generally based on quoted market prices, when available. Some
partnership interests are recorded at their initial cost and are adjusted when
the market values are supported by quoted market prices, including discounts 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 financial and market information relevant to
the investment. The equity ownerships in affiliates are accounted for under the
cost or the equity method dependent upon percentage ownership and other factors.
COMMON STOCK
On March 2, 1996, 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 March 29, 1996 to stockholders of record at the close of business
on March 15, 1996. A total of 9,349,668 shares of common stock were issued in
connection with the split. The stated par value of each share was not changed
from $0.01. A total of $94,000 was reclassified from the Company's additional
paid-in capital account to the Company's common stock account. All share and per
share amounts have been restated to retroactively reflect the stock split.
On March 15, 1996, the Company's common stock began trading on the NYSE
under the symbol JEF. Previously, the common stock traded in the Nasdaq National
Market System under the symbol JEFG.
Page 8 of 18
<PAGE> 9
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
RECEIVABLE FROM, AND PAYABLE TO, BROKERS AND DEALERS
The components, at June 27, 1997, of receivable from and payable to
brokers and dealers are as follows (in thousands of dollars):
<TABLE>
<S> <C>
Receivable from brokers and dealers:
Securities borrowed ........................... $1,620,267
Other ......................................... 126,358
----------
$1,746,625
==========
Payable to brokers and dealers:
Securities loaned ............................. $1,407,494
Other ......................................... 25,313
----------
$1,432,807
==========
</TABLE>
SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED
The following is a summary of the market value of major categories of
securities owned and securities sold, not yet purchased, as of June 27, 1997 (in
thousands of dollars):
<TABLE>
<CAPTION>
Securities
Sold,
Securities Not Yet
Owned Purchased
-------- --------
<S> <C> <C>
Corporate equity securities ............... $165,339 $137,827
High-yield securities ..................... 69,477 41,974
Corporate debt securities ................. 20,171 2,820
U.S. Government and agency obligations .... 28,501 10,000
Municipal obligations ..................... 3,077 --
Options ................................... 414 237
-------- --------
$286,979 $192,858
======== ========
</TABLE>
In the regular course of its business, Jefferies 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,
Jefferies 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.
Jefferies 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.
The Taxable Fixed Income Division trades high grade and non-investment
grade public and private debt securities. The Division specializes in trading
and making markets in over 300 unrated or less than investment grade corporate
debt securities and accounts for these positions at market value. 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
Page 9 of 18
<PAGE> 10
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
INVESTMENTS
Investments consist of the following as of June 27, 1997 (in thousands
of dollars):
<TABLE>
<S> <C>
Partnership interests ................................ $40,802
Debt and equity investments .......................... 25,958
Equity and debt interests in affiliates .............. 10,490
-------
$77,250
=======
</TABLE>
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash in banks and short term
investments. Cash equivalents are part of the cash management activities of the
Company and generally mature within 90 days. The following is a summary of cash
and cash equivalents as of June 27, 1997 (in thousands of dollars):
<TABLE>
<S> <C>
Cash in banks .................................... $10,940
Short term investments ........................... 59,095
------
$70,035
=======
</TABLE>
SUBORDINATED LOAN
The loan was a temporary subordinated loan borrowed by Jefferies in
connection with a corporate finance debt offering. The loan was repaid on July
10, 1997.
MINORITY INTEREST
Minority interest represents the minority stockholders' proportionate
share of the equity of ITGI. At June 27, 1997, Jefferies Group, Inc. owned
approximately 83% of ITGI's common stock.
INCOME TAXES
Deferred tax liabilities and assets are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse.
NET CAPITAL REQUIREMENTS
As registered broker-dealers, Jefferies, ITG and W & D are subject to
the Securities and Exchange Commission's Uniform Net Capital Rule (Rule
15c3-1), which requires the maintenance of minimum net capital. Jefferies, ITG
and W & D have elected to use the alternative method permitted by the Rule,
which requires that they each maintain minimum net capital, as defined, equal
to the greater of $250,000 or 2% of the aggregate debit balances arising from
customer transactions, as defined.
Net capital changes from day to day, but as of June 27, 1997,
Jefferies', ITG's and W&D's net capital was $100.7 million, $32.6 million and
$1.5 million, respectively, which exceeded minimum net capital requirements by
$95.9 million, $32.4 million and $1.3 million, respectively.
Page 10 of 18
<PAGE> 11
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
QUARTERLY DIVIDENDS
In 1988, the Company instituted a policy of paying regular quarterly
dividends. There are no restrictions on the Company's present ability to pay
dividends on common stock, other than the governing provisions of the Delaware
General Corporation Law. On March 2, 1996, the Board of Directors approved a
two-for-one stock split and the continuation after the split of the quarterly
dividend rate at $0.05 per share. This effectively doubled the quarterly
dividend rate.
Dividends per Common Share (declared and paid):
<TABLE>
<CAPTION>
1st Qtr. 2nd Qtr.
-------- --------
<S> <C> <C>
1997 . . $.050 $.050
1996 . . $.025 $.050
</TABLE>
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, future purchases and sales of foreign
currencies, securities transactions on a when-issued basis, options contracts,
futures index contracts, commodities futures 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 $20.9 million at June 27, 1997, to satisfy various
collateral requirements in lieu of depositing cash or securities.
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.
Page 11 of 18
<PAGE> 12
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
SUBSEQUENT EVENT
In re Nasdaq Market-Makers Antitrust Litigation. Beginning in July 1994,
antitrust class actions were commenced against Jefferies and 33 other defendants
in various federal courts (the "Lawsuits"). In October 1994, the Lawsuits were
consolidated alleging the defendants violated antitrust laws by conspiring to
fix the spread paid to trade in certain Nasdaq securities. In order to avoid the
uncertainties of litigation Jefferies has entered into a settlement agreement
which is subject to final approval of the Court. The amount of the settlement
has been previously provided for and will not have a material adverse effect on
the Company's statement of operations or financial condition.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ANALYSIS OF FINANCIAL CONDITION
Total assets increased $890.5 million from $1,568.1 million at December
31, 1996 to $2,458.6 million at June 27, 1997. The increase is mostly due to an
increase in receivable from brokers and dealers related to securities borrowed.
The increase in securities borrowed is related to an increase in securities
loaned (included in payable to brokers and dealers).
FIRST HALF 1997 VERSUS FIRST HALF 1996
Revenues, net of interest expense, increased 43% to $335.3 million,
compared to $235.1 million for the first half of 1996. The increase was due
primarily to a $54.9 million, or 132%, increase in corporate finance, a $28.2
million, or 24%, increase in commissions, and a $17.4 million, or 26%, increase
in principal transactions. Commission revenues increased, led by ITG and the
Equities Division. Revenues from principal transactions increased primarily
due to increased trading gains in the Taxable Fixed Income Division and the
Equities Division. Corporate finance revenues benefited from increased fees
from financings. Net interest income (interest revenues less interest expense)
decreased $1.5 million as the increase in income on securities borrowed,
partially offset by decreases in investment interest income and margin interest
income, was outpaced by the increase in expense on securities loaned.
Total non-interest expenses increased 41% to $278.4 million, compared
to $197.0 million for the first half of 1996. Compensation and benefits
increased $61.5 million, or 50%, mostly due to higher incentive based
compensation accruals. Other expense increased $6.1 million, or 24%, largely
due to higher soft dollar expenses and increased reserves. Telecommunications
and data processing services increased $5.4 million, or 33%, primarily due to
increased trade volume, personnel, and system upgrades. Floor brokerage and
clearing fees increased $4.4 million, or 35%, due to increased volume of
business executed on the various exchanges. Occupancy and equipment rental
increased $2.0 million, or 26%, largely due to office space relocation and
expansion in several divisions. Travel and promotional increased $1.4 million,
or 18%, mostly due to increased business travel related to corporate finance
activities. Software royalties increased $719,000, or 17%, due to higher
POSIT(R) commission revenues.
Earnings before income taxes and minority interest were up 49% to
$56.9 million, compared to $38.1 million for the same prior year period. The
effective tax rate was approximately 41% for the first half of 1997 versus
approximately 43% for the first half of 1996. The reduction in the effective
tax rate was due largely to a reversal of deferred taxes related to ITGI shares
that were repurchased during 1997.
Minority interest (approximately 18% of the earnings of ITGI) was $2.5
million for the first half of 1997 as compared to $2.0 million in the
comparable 1996 period. The increase in minority interest expense was due to
increased ITGI earnings.
Page 12 of 18
<PAGE> 13
JEFFERIES GROUP, INC. AND SUBSIDIARIES
Primary earnings per share were $2.75 for the first half of 1997 on
11,152,000 shares compared to $1.66 in the 1996 period on 11,915,000 shares.
Fully diluted earnings per share were $2.74 for the first half of 1997 on
11,192,000 shares compared to $1.66 in the 1996 period on 11,924,000 shares.
During the first half of 1997, the Company repurchased 449,255 shares
(including 94,200 shares purchased in connection with the Company's Capital
Accumulation Plan) of its common stock versus 627,473 shares (including 117,112
shares purchased in connection with the Company's Capital Accumulation Plan)
for the comparable 1996 period.
SECOND QUARTER 1997 VERSUS SECOND QUARTER 1996
Revenues, net of interest expense, increased 64% to $193.8 million,
compared to $118.4 million for the second quarter of 1996. The increase was
due primarily to a $43.5 million, or 174%, increase in corporate finance, a
$19.6 million, or 34%, increase in commissions, and an $11.9 million, or 36%,
increase in principal transactions. Commission revenues increased, led by ITG
and the Equities Division. Revenues from principal transactions increased
primarily due to increased trading gains in the Taxable Fixed Income Division
and the Equities Division. Corporate finance revenues benefited from increased
fees from financings. One sole-managed high-yield offering alone accounted for
approximately $40 million in gross fees. Net interest income (interest
revenues less interest expense) decreased $527,000 as the increase in income on
securities borrowed, partially offset by decreases in investment interest
income and margin interest income, was outpaced by the increase in expense on
securities loaned.
Total non-interest expenses increased 58% to $158.5 million, compared
to $100.5 million for the second quarter of 1996. Compensation and benefits
increased $46.0 million, or 74%, mostly due to higher incentive based
compensation accruals. Other expense increased $4.3 million, or 32%, largely
due to higher soft dollar expenses and increased reserves. Telecommunications
and data processing services increased $3.4 million, or 40%, primarily due to
increased trade volume, personnel, and system upgrades. Floor brokerage and
clearing fees increased $2.3 million, or 37%, due to increased volume of
business executed on the various exchanges. Occupancy and equipment rental
increased $1.0 million, or 28%, largely due to office space relocation and
expansion in several divisions. Software royalties increased $559,000, or 28%,
due to higher POSIT(R) commission revenues. Travel and promotional increased
$338,000, or 8%, mostly due to increased business travel related to corporate
finance activities.
Earnings before income taxes and minority interest were up 98% to
$35.3 million, compared to $17.9 million for the same prior year period. The
effective tax rate was approximately 40% for the second quarter of 1997 versus
approximately 43% for the second quarter of 1996. The reduction in the
effective tax rate was due primarily to a reversal of deferred taxes related to
ITGI shares that were repurchased during the 1997 quarter.
Minority interest (approximately 17% of the earnings of ITGI) was $1.4
million for the second quarter of 1997 as compared to $1.0 million in the
comparable 1996 period. The increase in minority interest expense was due to
increased ITGI earnings.
Primary earnings per share were $1.75 for the second quarter of 1997
on 11,145,000 shares compared to $0.78 in the 1996 period on 11,783,000 shares.
Fully diluted earnings per share were $1.74 for the second quarter of 1997 on
11,169,000 shares compared to $0.78 in the 1996 period on 11,788,000 shares.
During the second quarter of 1997, the Company repurchased 41,171
shares (including 40,700 shares purchased in connection with the Company's
Capital Accumulation Plan) of its common stock versus 383,715 shares (including
55,000 shares purchased in connection with the Company's Capital Accumulation
Plan) for the comparable 1996 period.
Page 13 of 18
<PAGE> 14
JEFFERIES GROUP, INC. AND SUBSIDIARIES
The Company's principal activities, securities brokerage and the
trading of and market-making in securities, are highly competitive. 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 breakdown of total revenues by source
for the six months and three months ended June 27, 1997 and June 28, 1996.
<TABLE>
<CAPTION>
Six Months Ended
--------------------------------------------------
June 27, June 28,
1997 1996
----------------------- ----------------------
% of % of
Total Total
Amount Revenues Amount Revenues
------ -------- ------ --------
(Dollars in thousands)
Commissions and principal transactions:
<S> <C> <C> <C> <C>
Equities ............................... $105,156 29% $ 87,402 34%
Investment Technology Group ............ 67,920 19 54,141 21
International .......................... 26,747 7 23,733 9
Taxable Fixed Income ................... 17,557 5 8,732 4
Convertible ............................ 4,151 1 3,867 2
Other proprietary trading .............. 10,401 3 8,442 3
Corporate finance ........................... 96,614 26 41,696 16
Interest .................................... 31,376 9 24,968 10
Other ....................................... 2,850 1 1,638 1
----------------------- ----------------------
Total revenues ....................... $362,772 100% $254,619 100%
======================= ======================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------
June 27, June 28,
1997 1996
----------------------- ----------------------
% of % of
Total Total
Amount Revenues Amount Revenues
------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commissions and principal transactions:
Equities ............................... $ 52,853 25% $ 42,588 33%
Investment Technology Group ............ 36,966 18 26,913 21
International .......................... 14,574 7 10,400 8
Taxable Fixed Income ................... 8,919 4 3,968 3
Convertible ............................ 2,041 1 1,878 1
Other proprietary trading .............. 6,461 3 4,572 4
Corporate finance ........................... 68,479 33 24,989 20
Interest .................................... 17,481 8 11,909 9
Other ....................................... 1,587 1 644 1
------------------------ ----------------------
Total revenues ....................... $209,361 100% $127,861 100%
======================== ======================
</TABLE>
Page 14 of 18
<PAGE> 15
JEFFERIES GROUP, INC. AND SUBSIDIARIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Date of Meeting - - May 6, 1997
Type of Meeting - - Annual Meeting of Shareholders
(b) At the meeting, the following directors were elected by the
shareholders to hold office until the next annual meeting of
shareholders or until their successors have been duly elected and
qualified:
Frank E. Baxter
Richard G. Dooley
Tracy G. Herrick
Raymond L. Killian, Jr.
Michael L. Klowden
Frank J. Macchiarola
Barry M. Taylor
Mark A. Wolfson
(c)(1) At the meeting, with respect to the matters under consideration, the
following votes were cast in the following manner:
<TABLE>
<CAPTION>
FOR AGAINST ABSTAIN NON-VOTE
--- ------- ------- --------
<S> <C> <C> <C> <C>
Election of eight Directors 6,257,277 0 107,621 0
Approval of the 1993 Stock Ownership and
Long-Term Incentive Plan, as amended and
restated 3,916,186 1,688,250 351,098 409,364
</TABLE>
The outstanding voting securities of the Company consisted of
10,032,327 shares of Common Stock on March 24, 1997 which was the
record date for determining shareholders entitled to vote at the Annual
Meeting of Shareholders.
(d) Not applicable
Page 15 of 18
<PAGE> 16
JEFFERIES GROUP, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In re Nasdaq Market-Makers Antitrust Litigation. Beginning in July 1994,
antitrust class actions were commenced against Jefferies and 33 other defendants
in various federal courts (the "Lawsuits"). Following the filing of the
Lawsuits, the Antitrust Division of the United States Department of Justice
("DOJ") and the Securities and Exchange Commission ("SEC") commenced
investigations into certain issues related to the allegations of the Lawsuits.
In August 1996, the DOJ entered into a proposed antitrust consent decree with 24
defendants who are market makers in Nasdaq stocks. Jefferies was neither asked
nor required to settle with the DOJ. The settlement has not yet been approved by
the court. Shortly after the DOJ settlement, the SEC filed a Section 21(a)
report against the NASD, criticizing various practices by market makers, and the
NASD for failing to adequately police or discipline the market makers for those
practices. However, the SEC did not take any action at that time against the
market maker firms. Jefferies has been informed that the SEC is continuing its
investigation of the market maker firms.
In October 1994, the Lawsuits were consolidated for discovery purposes in
the United States District Court for the Southern District of New York (the
"Court"). The consolidated complaint alleges that the defendants violated the
antitrust laws by conspiring to fix the spread paid by plaintiffs and class
members to trade in certain Nasdaq securities, by refusing to quote bids and
asks in so-called odd-eighths. The cases purport to be brought on behalf of all
persons who purchased or sold certain securities on the Nasdaq National Market
System during the period May 1, 1989 to May 27, 1994. The plaintiffs seek
damages in an unspecified amount.
In November 1996 and by further order of April 1997, the court granted the
plaintiffs' motion to certify a class, and a motion to further define what types
of purchasers and sellers of stock are included and not included in the
definition of the certified class is pending before the court. Discovery will
now proceed as appropriate. Jefferies denies any wrongdoing. In order to avoid
the uncertainties of litigation Jefferies has entered into a settlement
agreement which is subject to final approval of the Court. The amount of the
settlement has been previously provided for and will not have a material adverse
effect on the Company's statement of operations or financial condition.
Other. Many aspects of the Company's business involve substantial risks of
liability. In the normal course of business, the Company and its subsidiaries
have been named as defendants or co-defendants in lawsuits involving primarily
claims for damages. The Company's management believes that pending litigation
will not have a material adverse effect on the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11. Computation of Earnings Per Share (page 17 attached)
(b) Reports on Form 8-K.
There were no reports filed on Form 8-K during the quarter ended June
27, 1997.
Page 16 of 18
<PAGE> 17
EXHIBIT 11
JEFFERIES GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------- ----------------------
June 27, June 28, June 27, June 28,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Earnings ..................................... $ 19,748 $ 9,140 $ 31,145 $ 19,772
Adjustment to subsidiary earnings - common
stock equivalents on subsidiary .............. (271) -- (499) --
-------- -------- -------- --------
Adjusted earnings .............................. $ 19,477 $ 9,140 30,646 19,772
======== ======== ======== ========
Shares of common stock and common stock
equivalents:
Average number of common shares ................ 10,023 10,900 10,069 11,068
Average common stock equivalent shares
related to employee stock based plans ........ 1,122 883 1,083 847
-------- -------- -------- --------
Average shares used in primary computation ..... 11,145 11,783 11,152 11,915
Adjust average common stock equivalents to
period-end market price, if higher than
average price ................................ 24 5 40 9
-------- -------- -------- --------
Average shares used in fully diluted computation 11,169 11,788 11,192 11,924
======== ======== ======== ========
Earnings per share:
Primary ........................................ $ 1.75 $ 0.78 $ 2.75 $ 1.66
======== ======== ======== ========
Fully diluted .................................. $ 1.74 $ 0.78 $ 2.74 $ 1.66
======== ======== ======== ========
</TABLE>
Page 17 of 18
<PAGE> 18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JEFFERIES GROUP, INC.
(Registrant)
Date: July 24, 1997 By: /s/ Clarence T. Schmitz
------------- ----------------------------
Clarence T. Schmitz
Chief Financial Officer
Page 18 of 18
<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 JUNE 27, 1997 AND FOR THE SIX MONTHS THEN ENDED AND THE NOTES
THERETO AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS FILED IN THE 1997 JEFFERIES GROUP, INC. SECOND QUARTER 10-Q FILING.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-27-1997
<CASH> 70,035
<RECEIVABLES> 255,735
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 1,620,267
<INSTRUMENTS-OWNED> 286,979
<PP&E> 38,639
<TOTAL-ASSETS> 2,458,643
<SHORT-TERM> 100,000
<PAYABLES> 0
<REPOS-SOLD> 0
<SECURITIES-LOANED> 1,407,494
<INSTRUMENTS-SOLD> 250,082
<LONG-TERM> 53,074
0
0
<COMMON> 188
<OTHER-SE> 210,184
<TOTAL-LIABILITY-AND-EQUITY> 2,458,643
<TRADING-REVENUE> 85,032
<INTEREST-DIVIDENDS> 31,376
<COMMISSIONS> 146,900
<INVESTMENT-BANKING-REVENUES> 96,614
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 27,444
<COMPENSATION> 185,036
<INCOME-PRETAX> 56,894
<INCOME-PRE-EXTRAORDINARY> 56,894
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,145
<EPS-PRIMARY> 2.75
<EPS-DILUTED> 2.74
</TABLE>
