<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 September 26, 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 September 26, 1997, the registrant had 10,016,890 common shares, $.01 par
value, outstanding.
PAGE 1 OF 17
<PAGE> 2
JEFFERIES GROUP, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
SEPTEMBER 26, 1997
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition -
September 26, 1997 (unaudited) and December 31, 1996 ......... 3
Consolidated Statements of Earnings (unaudited) -
Three Months and Nine Months Ended September 26, 1997 and
September 27, 1996 ........................................... 4
Consolidated Statement of Changes in Stockholders' Equity
(unaudited) - Nine Months Ended September 26, 1997............ 5
Consolidated Statements of Cash Flows (unaudited) -
Nine Months Ended September 26, 1997 and September 27, 1996 .. 6
Notes to Consolidated Financial Statements (unaudited) ......... 8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings......................................... 15
Item 6. Exhibits and Reports on Form 8-K.......................... 15
</TABLE>
PAGE 2 OF 17
<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>
September 26, December 31,
1997 1996
----------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents ................. $ 120,948 $ 114,142
Cash and securities segregated and on
deposit for regulatory purposes or
deposited with clearing and depository
organizations............................ 57,573 29,109
Receivable from brokers and dealers ....... 1,448,653 965,625
Receivable from customers, officers and
directors ............................... 111,373 113,872
Securities owned .......................... 197,338 197,770
Investments ............................... 138,475 50,609
Premises and equipment .................... 42,646 30,871
Other assets .............................. 62,131 66,089
----------- ------------
$ 2,179,137 $ 1,568,087
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Payable to brokers and dealers ............ $ 1,142,882 $ 805,713
Payable to customers ...................... 215,383 170,384
Securities sold, not yet purchased ........ 164,761 124,315
Accrued expenses and other liabilities .... 265,011 207,281
----------- ------------
1,788,037 1,307,693
Term debt ................................. 152,843 52,987
Minority interest ......................... 15,085 11,962
----------- ------------
1,955,965 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 18,835,811
shares in 1997 and 18,757,062 shares
in 1996 ............................... 188 188
Additional paid-in capital .............. 65,699 62,569
Retained earnings ....................... 277,632 232,741
Less treasury stock, at cost; 8,818,921
shares in 1997 and 8,394,113 shares
in 1996 ............................... (119,255) (99,404)
Less currency translation adjustments ... (539) (96)
Less additional minimum pension liability (553) (553)
----------- ------------
Total stockholders' equity ........ 223,172 195,445
----------- ------------
$ 2,179,137 $ 1,568,087
=========== ============
</TABLE>
See accompanying unaudited notes to consolidated financial statements.
PAGE 3 OF 17
<PAGE> 4
JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- ----------------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Commissions .......................... $ 73,612 $ 57,641 $220,512 $176,311
Principal transactions ............... 47,299 40,474 132,331 108,121
Corporate finance .................... 48,734 21,846 145,348 63,542
Interest ............................. 21,054 11,212 52,430 36,180
Other ................................ 1,321 2,186 4,171 3,824
-------- -------- -------- --------
Total revenues ...................... 192,020 133,359 554,792 387,978
Interest expense ....................... 18,560 8,620 46,004 28,132
-------- -------- -------- --------
Revenues, net of interest expense ...... 173,460 124,739 508,788 359,846
-------- -------- -------- --------
Non-interest expenses:
Compensation and benefits ............ 96,649 64,224 281,685 187,739
Floor brokerage and clearing fees .... 8,696 6,958 25,861 19,694
Telecommunications and data
processing services ................ 11,448 8,702 33,041 24,924
Occupancy and equipment rental ....... 5,858 4,590 15,375 12,152
Travel and promotional ............... 5,151 3,870 14,380 11,703
Software royalties ................... 2,308 2,275 7,272 6,520
Other ................................ 16,945 12,585 47,875 37,444
-------- -------- -------- --------
Total non-interest expenses ......... 147,055 103,204 425,489 300,176
-------- -------- -------- --------
Earnings before income taxes and
minority interest .................. 26,405 21,535 83,299 59,670
Income taxes ........................... 10,863 9,031 34,065 25,412
-------- -------- -------- --------
Earnings before minority interest ...... 15,542 12,504 49,234 34,258
Minority interest ...................... 1,122 1,049 3,669 3,031
-------- -------- -------- --------
Net earnings ........................ $ 14,420 $ 11,455 $ 45,565 $ 31,227
======== ======== ======== ========
Earnings per share of common stock:
Primary ............................. $ 1.27 $ 0.98 $ 4.01 $ 2.62
======== ======== ======== ========
Fully diluted ....................... $ 1.27 $ 0.97 $ 3.99 $ 2.61
======== ======== ======== ========
Weighted average shares of common stock:
Primary ............................. 11,150 11,623 11,155 11,818
Fully diluted ....................... 11,171 11,662 11,218 11,858
</TABLE>
See accompanying unaudited notes to consolidated financial statements.
PAGE 4 OF 17
<PAGE> 5
JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 26, 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
------ ------- --------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1996 ....... $188 $62,569 $ 232,741 $ (99,404) $ (96) $(553) $ 195,445
Exercise of stock
options (58,314 shares) .. -- 1,378 -- -- -- -- 1,378
Issuance of common stock
(20,526 shares)........... -- 879 -- 3 -- -- 882
Purchase of 496,513
shares of treasury
stock.................... -- -- -- (21,143) -- -- (21,143)
Capital Accumulation
Plan distributions
(71,614 shares) ....... -- 508 -- 1,289 -- -- 1,797
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
issuances at the
subsidiary .............. -- -- 871 -- -- -- 871
Additional vesting of
restricted stock shares.. -- 365 -- -- -- -- 365
Quarterly dividends
($.05 per share) ....... -- -- (1,500) -- -- -- (1,500)
Translation adjustment.... -- -- -- -- (443) -- (443)
Net earnings ............. -- -- 45,565 -- -- -- 45,565
------------------------------------------------------------------------------------------
Balance,
September 26,1997 ........ $188 $65,699 $ 277,632 $(119,255) $(539) $(553) $ 223,172
==========================================================================================
</TABLE>
See accompanying unaudited notes to consolidated financial statements
PAGE 5 OF 17
<PAGE> 6
JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------
Sept. 26, Sept. 27,
1997 1996
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings ......................................... $ 45,565 $ 31,227
--------- ---------
Adjustments to reconcile net earnings to net cash
provided by (used in) operations:
Depreciation and/or amortization of premises and
equipment, capitalized software, goodwill and
discount on term debt ............................ 11,089 9,703
Additional vesting of restricted stock shares ...... 365 355
Increase in cash and securities segregated and on
deposit for regulatory purposes .................. (28,464) (62,958)
(Increase) decrease in receivables:
Brokers and dealers .............................. (483,028) 331,554
Customers, officers and directors ................ 2,499 25,870
(Increase) decrease in securities owned ............ 432 (35,082)
Increase in investments ............................ (87,866) (25,741)
(Increase) decrease in other assets ................ 2,410 (35,707)
Increase (decrease) in operating payables:
Brokers and dealers .............................. 337,169 (212,994)
Customers ........................................ 44,999 (84,418)
Increase in securities sold, not yet purchased ..... 40,446 37,521
Increase in accrued expenses and other liabilities . 57,730 47,164
Increase in minority interest ...................... 3,123 2,423
--------- ---------
Total adjustments ................................ (99,096) (2,310)
--------- ---------
Net cash provided by (used in) operating
activities...................................... (53,531) 28,917
--------- ---------
</TABLE>
Continued on next page.
See accompanying unaudited notes to consolidated financial statements.
PAGE 6 OF 17
<PAGE> 7
JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------
Sept. 26, Sept. 27,
1997 1996
--------- --------
<S> <C> <C>
Cash flows from financing activities:
Net proceeds from (payments on):
Additional term debt ....................................... 99,722 --
Repurchase of treasury stock ............................... (21,143) (24,690)
Dividends paid ............................................. (1,500) (1,360)
Redemption of rights ....................................... -- (55)
Exercise of stock options .................................. 1,378 2,652
Issuance of common stock shares ............................ 882 826
Issuance of restricted shares .............................. -- 496
Capital Accumulation Plan distributions .................... 1,797 --
Change in proportionate share of subsidiary's equity ....... 826 (1,115)
--------- --------
Net cash (used in) provided by financing activities 81,962 (23,246)
--------- --------
Cash flows from investing activities -
purchase of premises and equipment ............................... (21,182) (9,491)
--------- --------
Effect of foreign currency translation on cash ..................... (443) 7
--------- --------
Net increase (decrease) in cash and cash equivalents 6,806 (3,813)
Cash and cash equivalents - beginning of period .................... 114,142 68,318
--------- --------
Cash and cash equivalents - end of period .......................... $ 120,948 $ 64,505
========= ========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ....................................................... $ 42,327 $ 27,873
========= ========
Income taxes ................................................... $ 42,648 $ 32,333
========= ========
</TABLE>
See accompanying unaudited notes to consolidated financial statements.
PAGE 7 OF 17
<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 periods 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.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's amounts to
conform to the current year's presentation.
RECEIVABLE FROM, AND PAYABLE TO, BROKERS AND DEALERS
Receivable from and payable to brokers and dealers consists of the
following as of September 26, 1997 (in thousands of dollars):
<TABLE>
<S> <C>
Receivable from brokers and dealers:
Securities borrowed ........... $1,398,536
Other ......................... 50,117
----------
$1,448,653
==========
Payable to brokers and dealers:
Securities loaned ............. $1,119,400
Other ......................... 23,482
----------
$1,142,882
==========
</TABLE>
PAGE 8 OF 17
<PAGE> 9
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 September 26,
1997 (in thousands of dollars):
<TABLE>
<CAPTION>
Securities
Sold,
Securities Not Yet
Owned Purchased
-------- --------
<S> <C> <C>
Corporate equity securities ............ $128,025 $124,595
High-yield securities .................. 20,800 34,029
Corporate debt securities .............. 18,513 1,428
U.S. Government and agency obligations.. 25,474 4,090
Other .................................. 4,526 619
-------- --------
$197,338 $164,761
======== ========
</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.
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 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.
Jefferies monitors its risk by maintaining its securities positions at or
below certain pre-established levels.
INVESTMENTS
Investments consist of the following as of September 26, 1997 (in
thousands of dollars):
<TABLE>
<S> <C>
Debt and equity investments ........... $ 62,659
Partnership interests ................. 60,447
Equity and debt interests in affiliates 15,369
--------
$138,475
========
</TABLE>
PAGE 9 OF 17
<PAGE> 10
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash in banks and short term
investments. Cash equivalents are part of the cash management activities of the
Company and generally mature within 90 days. The following is a summary of cash
and cash equivalents as of September 26, 1997 (in thousands of dollars):
<TABLE>
<S> <C>
Cash in banks .......... $ 20,782
Short term investments.. 100,166
--------
$120,948
========
</TABLE>
TERM DEBT
In August 1997, the Company issued $100 million face value of 7-1/2% Senior
Notes, due 2007, at a discount of $278,000, with an effective rate of 7.54%.
MINORITY INTEREST
Minority interest represents the minority stockholders' proportionate share of
the equity of ITGI. At September 26, 1997, Jefferies Group, Inc. owned
approximately 83% of ITGI's common stock.
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 September 26, 1997,
Jefferies', ITG's and W & D's net capital was $131.1 million, $24.7 million and
$1.1 million, respectively, which exceeded minimum net capital requirements by
$127.3 million, $24.5 million and $827,000, respectively.
QUARTERLY DIVIDENDS
In 1988, the Company instituted a policy of paying regular quarterly
dividends. There are no restrictions on the Company's present ability to pay
dividends on common stock, other than the governing provisions of the Delaware
General Corporation Law. 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.
Dividends per Common Share (declared and paid):
<TABLE>
<CAPTION>
1st Qtr. 2nd Qtr. 3rd Qtr.
-------- -------- --------
<S> <C> <C> <C>
1997........ $.050 $.050 $.050
1996........ $.025 $.050 $.050
</TABLE>
OFF-BALANCE SHEET RISK
In the normal course of business, the Company had letters of credit
outstanding aggregating $20.9 million at September 26, 1997, to satisfy various
collateral requirements in lieu of depositing cash or securities.
PAGE 10 OF 17
<PAGE> 11
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NASDAQ MARKET-MAKERS ANTITRUST LITIGATION
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 has received the preliminary approval of the United States District Court
for the Southern District of New York (the "Court"), but which is still 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 earnings.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ANALYSIS OF FINANCIAL CONDITION
Total assets increased $611.0 million from $1,568.1 million at December
31, 1996 to $2,179.1 million at September 26, 1997. The increase in assets is
mostly due to an increase in securities borrowed (included in receivable from
brokers and dealers) and an increase in investments. The increase in securities
borrowed is related to an increase in securities loaned (included in payable to
brokers and dealers). During August 1997, the Company issued $100 million face
value of 7-1/2% Senior Notes, due 2007.
FIRST THREE QUARTERS 1997 VERSUS FIRST THREE QUARTERS 1996
Revenues, net of interest expense, increased 41% to $508.8 million,
compared to $359.8 million for the first nine months of 1996. The increase was
due primarily to an $81.8 million, or 129%, increase in corporate finance, a
$44.2 million, or 25%, increase in commissions, and a $24.2 million, or 22%,
increase in principal transactions. Commission revenues increased, led by ITG,
the Equities Division and the International Division. Revenues from principal
transactions increased primarily due to increased trading gains in the Equities
Division, the Taxable Fixed Income Division and the International Division.
Corporate finance revenues benefited from increased debt financing deals. Net
interest income (interest revenues less interest expense) decreased $1.6 million
as the increase in income on securities borrowed, partially offset by decreases
in margin interest income and investment interest income, was outpaced by the
increase in expense on securities loaned and subordinated loans.
Total non-interest expenses increased 42% to $425.5 million, compared to
$300.2 million for the first nine months of 1996. Compensation and benefits
increased $93.9 million, or 50%, mostly due to higher incentive based
compensation accruals. Other expense increased $10.4 million, or 28%, largely
due to higher soft dollar expenses and increased consulting expenses.
Telecommunications and data processing services increased $8.1 million, or 33%,
primarily due to increased trade volume, personnel, and system upgrades. Floor
brokerage and clearing fees increased $6.2 million, or 31%, due to increased
volume of business executed on the various exchanges. Occupancy and equipment
rental increased $3.2 million, or 27%, largely due to office space relocation
and expansion in several divisions. Travel and promotional increased $2.7
million, or 23%, largely due to increased business travel related to corporate
finance activities. Software royalties increased $752,000, or 12%, due to higher
POSIT(R) commission revenues.
Earnings before income taxes and minority interest were up 40% to $83.3
million, compared to $59.7 million for the same prior year period. The effective
tax rate was approximately 41% for the first nine months of 1997 versus
approximately 43% for the first nine months 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.
PAGE 11 OF 17
<PAGE> 12
JEFFERIES GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
Minority interest (approximately 17% of the earnings of ITGI) was $3.7
million for the first nine months of 1997 as compared to $3.0 million in the
comparable 1996 period. The increase in minority interest expense was due to
increased ITGI earnings.
Primary earnings per share were $4.01 for the first nine months of 1997 on
11,155,000 shares compared to $2.62 in the 1996 period on 11,818,000 shares.
Fully diluted earnings per share were $3.99 for the first nine months of 1997 on
11,218,000 shares compared to $2.61 in the 1996 period on 11,858,000 shares.
THIRD QUARTER 1997 VERSUS THIRD QUARTER 1996
Revenues, net of interest expense, increased 39% to $173.5 million,
compared to $124.7 million for the third quarter of 1996. The increase was due
primarily to a $26.9 million, or 123%, increase in corporate finance, a $16.0
million, or 28%, increase in commissions, and a $6.8 million, or 17%, increase
in principal transactions. Commission revenues increased, led by the Equities
Division, ITG and the International Division. Revenues from principal
transactions increased primarily due to increased trading gains in the
International Division and the Equities Division. Corporate finance revenues
benefited from increased debt financing deals. Net interest income was
comparable to the third quarter of 1996.
Total non-interest expenses increased 42% to $147.1 million, compared to
$103.2 million for the third quarter of 1996. Compensation and benefits
increased $32.4 million, or 50%, mostly due to higher incentive based
compensation accruals. Other expense increased $4.4 million, or 35%, largely due
to higher soft dollar expenses and increased consulting expenses.
Telecommunications and data processing services increased $2.7 million, or 32%,
primarily due to increased trade volume, personnel, and system upgrades. Floor
brokerage and clearing fees increased $1.7 million, or 25%, due to increased
volume of business executed on the various exchanges. Occupancy and equipment
rental increased $1.3 million, or 28%, largely due to office space relocation
and expansion in several divisions. Travel and promotional increased $1.3
million, or 33%, largely due to increased business travel related to corporate
finance activities. Software royalties were comparable to the third quarter of
1996.
Earnings before income taxes and minority interest were up 23% to $26.4
million, compared to $21.5 million for the same prior year period. The effective
tax rate was approximately 41% for the third quarter of 1997 versus
approximately 42% for the third quarter of 1996.
Minority interest (approximately 17% of the earnings of ITGI) was $1.1
million for the third 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 $1.27 for the third quarter of 1997 on
11,150,000 shares compared to $0.98 in the 1996 period on 11,623,000 shares.
Fully diluted earnings per share were $1.27 for the third quarter of 1997 on
11,171,000 shares compared to $0.97 in the 1996 period on 11,662,000 shares.
LIQUIDITY AND CAPITAL RESOURCES
Net capital changes from day to day, but as of September 26, 1997,
Jefferies', ITG's and W & D's net capital was $131.1 million, $24.7 million and
$1.1 million, respectively, which exceeded minimum net capital requirements by
$127.3 million, $24.5 million and $827,000, respectively.
In August 1997, the Company issued $100 million face value of 7-1/2%
Senior Notes, due 2007, at a discount of $278,000, with an effective rate of
7.54%.
PAGE 12 OF 17
<PAGE> 13
JEFFERIES GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
During the first nine months of 1997, the Company repurchased 496,513
shares (including 139,600 shares purchased in connection with the Company's
Capital Accumulation Plan) of its common stock versus 824,651 shares (including
163,612 shares purchased in connection with the Company's Capital Accumulation
Plan) for the comparable 1996 period.
During the third quarter of 1997, the Company repurchased 47,258 shares
(including 45,400 shares purchased in connection with the Company's Capital
Accumulation Plan) of its common stock versus 197,178 shares (including 46,500
shares purchased in connection with the Company's Capital Accumulation Plan) for
the comparable 1996 period.
PAGE 13 OF 17
<PAGE> 14
JEFFERIES GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
REVENUES BY SOURCE
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 nine months and three months ended September 26, 1997 and September 27,
1996.
<TABLE>
<CAPTION>
Nine Months Ended
-----------------------------------------------------
September 26, September 27,
1997 1996
--------------------- ---------------------
% of % of
Total Total
Amount Revenues Amount Revenues
-------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commissions and principal transactions:
Equities ................................ $158,158 29% $129,588 33%
Investment Technology Group ............. 102,097 18 83,487 22
International ........................... 42,664 8 33,108 9
Taxable Fixed Income .................... 26,116 5 20,023 5
Convertible ............................. 6,329 1 5,747 2
Other proprietary trading ............... 17,479 3 12,479 3
--------------------- ---------------------
Total ................................ 352,843 64 284,432 74
Corporate finance ............................. 145,348 26 63,542 16
Interest ...................................... 52,430 9 36,180 9
Other ......................................... 4,171 1 3,824 1
--------------------- ---------------------
Total revenues ....................... $554,792 100% $387,978 100%
===================== =====================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------------
September 26, September 27,
1997 1996
--------------------- ---------------------
% of % of
Total Total
Amount Revenues Amount Revenues
-------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commissions and principal transactions:
Equities ................................ $ 53,002 28% $ 42,186 32%
Investment Technology Group ............. 34,177 18 29,346 22
International ........................... 15,917 8 9,375 7
Taxable Fixed Income .................... 8,559 4 11,291 9
Convertible ............................. 2,178 1 1,880 1
Other proprietary trading ............... 7,078 4 4,037 3
--------------------- ---------------------
Total ................................ 120,911 63 98,115 74
Corporate finance ............................. 48,734 25 21,846 16
Interest ...................................... 21,054 11 11,212 8
Other ......................................... 1,321 1 2,186 2
--------------------- ---------------------
Total revenues ....................... $192,020 100% $133,359 100%
===================== =====================
</TABLE>
PAGE 14 OF 17
<PAGE> 15
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 an antitrust consent decree with 24
defendants who are market makers in Nasdaq stocks. Jefferies was neither asked
nor required to settle with the DOJ. 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. 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 received the preliminary approval of the Court on October 15, 1997, but
which is still 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 earnings.
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 16 attached)
(b) Reports on Form 8-K.
There were no reports filed on Form 8-K during the quarter ended
September 26, 1997.
PAGE 15 OF 17
<PAGE> 16
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 Nine Months Ended
----------------------- -----------------------
Sept. 26, Sept. 27, Sept. 26, Sept. 27,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Earnings ....................................... $ 14,420 $ 11,455 $ 45,565 $ 31,227
Adjustment to subsidiary earnings - common
stock equivalents on subsidiary ............... (267) (112) (789) (320)
-------- -------- -------- --------
Adjusted earnings ............................... $ 14,153 $ 11,343 $ 44,776 $ 30,907
======== ======== ======== ========
Shares of common stock and common stock equivalents:
Average number of common shares ................. 10,009 10,715 10,049 10,951
Average common stock equivalent shares
related to employee stock based plans ......... 1,141 908 1,106 867
-------- -------- -------- --------
Average shares used in primary computation ...... 11,150 11,623 11,155 11,818
Adjust average common stock equivalents to
period-end market price, if higher than
average price ................................. 21 39 63 40
-------- -------- -------- --------
Average shares used in fully diluted computation 11,171 11,662 11,218 11,858
======== ======== ======== ========
Earnings per share:
Primary ......................................... $ 1.27 $ 0.98 $ 4.01 $ 2.62
======== ======== ======== ========
Fully diluted ................................... $ 1.27 $ 0.97 $ 3.99 $ 2.61
======== ======== ======== ========
</TABLE>
PAGE 16 OF 17
<PAGE> 17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JEFFERIES GROUP, INC.
(Registrant)
Date: November 7, 1997 By: /s/ Clarence T. Schmitz
------------------------ -----------------------------
Clarence T. Schmitz
Chief Financial Officer
PAGE 17 OF 17
<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 SEPTEMBER 26, 1997 AND FOR THE NINE 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. THIRD QUARTER 10-Q FILING.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-26-1997
<CASH> 120,948
<RECEIVABLES> 161,490
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 1,398,536
<INSTRUMENTS-OWNED> 197,338
<PP&E> 42,646
<TOTAL-ASSETS> 2,179,137
<SHORT-TERM> 0
<PAYABLES> 238,865
<REPOS-SOLD> 0
<SECURITIES-LOANED> 1,119,400
<INSTRUMENTS-SOLD> 164,761
<LONG-TERM> 152,843
0
0
<COMMON> 188
<OTHER-SE> 222,984
<TOTAL-LIABILITY-AND-EQUITY> 2,179,137
<TRADING-REVENUE> 132,331
<INTEREST-DIVIDENDS> 52,430
<COMMISSIONS> 220,512
<INVESTMENT-BANKING-REVENUES> 145,348
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 46,004
<COMPENSATION> 281,685
<INCOME-PRETAX> 83,299
<INCOME-PRE-EXTRAORDINARY> 83,299
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 45,565
<EPS-PRIMARY> 4.01
<EPS-DILUTED> 3.99
</TABLE>
