<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 26, 1998
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 26, 1998, the registrant had 20,824,633 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 26, 1998
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition -
June 26, 1998 (unaudited) and December 31, 1997.............................. 3
Consolidated Statements of Earnings (unaudited) -
Three Months and Six Months Ended June 26, 1998 and June 27, 1997............ 4
Consolidated Statement of Changes in Stockholders' Equity (unaudited) -
Six Months Ended June 26, 1998............................................... 5
Consolidated Statements of Cash Flows (unaudited) -
Six Months Ended June 26, 1998 and June 27, 1997............................. 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............................ 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................................. 17
Item 6. Exhibits and Reports on Form 8-K............................................... 17
</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 26, December 31,
1998 1997
-------------------- --------------------
(unaudited)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................. $ 127,963 $ 109,488
Cash and securities segregated and on deposit for
regulatory purposes or deposited with clearing and
depository organizations................................. 76,158 30,977
Receivable from brokers and dealers....................... 1,929,831 1,269,664
Receivable from customers, officers and directors......... 176,269 166,284
Securities owned.......................................... 296,638 245,413
Investments............................................... 149,562 154,584
Premises and equipment.................................... 41,214 42,828
Other assets.............................................. 83,880 80,304
-------------------- --------------------
$ 2,881,515 $ 2,099,542
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank loans................................................ $ 2,000 $ --
Payable to brokers and dealers............................ 1,731,711 981,705
Payable to customers...................................... 198,244 202,255
Securities sold, not yet purchased........................ 213,628 188,703
Accrued expenses and other liabilities.................... 279,808 318,258
-------------------- --------------------
2,425,391 1,690,921
Long-term debt............................................ 149,338 149,290
Minority interest......................................... 21,231 16,575
-------------------- --------------------
2,595,960 1,856,786
-------------------- --------------------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value. Authorized 1,000,000
shares; none issued................................... -- --
Common stock, $.01 par value. Authorized 100,000,000
shares; issued 22,938,898 shares in 1998 and
22,393,910 shares in 1997............................. 229 224
Additional paid-in capital.............................. 15,812 39
Retained earnings....................................... 307,079 271,589
Less:
Treasury stock, at cost; 2,114,265 shares in 1998
and 2,107,842 shares in 1997........................ (34,811) (26,954)
Accumulated other comprehensive income (loss):
Currency translation adjustments.................... (1,234) (622)
Additional minimum pension liability................ (1,520) (1,520)
-------------------- --------------------
Total accumulated other comprehensive income (loss)... (2,754) (2,142)
-------------------- --------------------
Total stockholders' equity........................ 285,555 242,756
-------------------- --------------------
$ 2,881,515 $ 2,099,542
==================== ====================
</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 26, June 27, June 26, June 27,
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Commissions..................... $ 91,022 $ 71,597 $ 172,587 $ 136,440
Principal transactions.......... 41,158 44,812 88,570 85,032
Corporate finance............... 41,716 66,008 96,115 92,965
Interest ....................... 23,092 17,481 42,050 31,376
Other .......................... 1,844 1,587 2,918 2,850
-------------- -------------- -------------- --------------
Total revenues.................. 198,832 201,485 402,240 348,663
Interest expense................ 20,008 15,545 36,981 27,444
-------------- -------------- -------------- --------------
Revenues, net of interest expense. 178,824 185,940 365,259 321,219
-------------- -------------- -------------- --------------
Non-interest expenses:
Compensation and benefits....... 91,935 108,029 199,584 185,035
Floor brokerage and clearing fees 10,006 8,714 19,071 17,165
Communications.................. 17,799 14,468 33,303 25,872
Occupancy and equipment rental.. 4,835 4,611 9,810 9,214
Travel and promotional.......... 5,870 4,601 12,024 8,485
Software royalties.............. 3,775 2,581 6,761 4,964
Other........................... 9,587 7,609 17,564 13,590
-------------- -------------- -------------- --------------
Total non-interest expenses..... 143,807 150,613 298,117 264,325
-------------- -------------- -------------- --------------
Earnings before income taxes and
minority interest............. 35,017 35,327 67,142 56,894
Income taxes...................... 15,389 14,197 28,735 23,202
-------------- -------------- -------------- --------------
Earnings before minority interest. 19,628 21,130 38,407 33,692
Minority interest................. 1,802 1,382 3,105 2,547
-------------- -------------- -------------- --------------
Net earnings.................... $ 17,826 $ 19,748 $ 35,302 $ 31,145
============== ============== ============== ==============
Earnings per share:
Basic........................... $ 0.80 $ 0.92 $ 1.60 $ 1.44
============== ============== ============== ==============
Diluted......................... $ 0.76 $ 0.87 $ 1.51 $ 1.37
============== ============== ============== ==============
Weighted average shares:
Basic........................... 22,199 21,470 22,133 21,558
Diluted......................... 22,909 22,290 22,901 22,304
</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 26, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Accumulated Total
Additional Other Stock-
Common Paid-in Retained Treasury Comprehensive holders'
Stock Capital Earnings Stock Income (Loss) Equity
----- ------- -------- ----- ------------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1997................ $ 224 $ 39 $ 271,589 $ (26,954) $ (2,142) $ 242,756
Exercise of stock options,
including tax benefits
(460,500 shares)................. 4 9,675 -- -- -- 9,679
Issuance of common stock
(53,286 shares).................. -- 2,181 -- -- -- 2,181
Purchase of treasury stock
(238,140 shares)................. -- -- -- (10,286) -- (10,286)
Capital Accumulation Plan
distributions, including tax
benefits (231,717 shares)........ 1 3,000 -- 2,429 -- 5,430
Change in proportionate
share of subsidiary's equity
related to stock issuances/
purchases at the subsidiary...... -- -- 2,257 -- -- 2,257
Issuance of restricted stock
(31,202 shares) and
additional vesting of
restricted stock shares,
including tax benefits........... -- 917 -- -- -- 917
Quarterly dividends
($.05 per share)................. -- -- (2,069) -- -- (2,069)
Comprehensive income:
Net earnings.................... -- -- 35,302 -- -- 35,302
Other comprehensive
income (loss), net of tax:
Translation adjustment.......... -- -- -- -- (612) (612)
---------
Comprehensive income.............. -- -- -- -- -- 34,690
--------- --------- --------- --------- --------- ---------
Balance,
June 26, 1998.................... $ 229 $ 15,812 $ 307,079 $ (34,811) $ (2,754) $ 285,555
========= ========= ========= ========= ========= =========
</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 26, June 27,
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings ...................................... $ 35,302 $ 31,145
--------- ---------
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 long-term debt .................... 9,713 8,371
Additional vesting of restricted stock shares ... 917 304
Increase in cash and securities segregated and on
deposit for regulatory purposes ............... (45,181) (20,936)
Increase in receivables:
Brokers and dealers ........................... (660,167) (781,000)
Customers, officers and directors ............. (9,985) (15,505)
Increase in securities owned .................... (51,225) (89,209)
Decrease (increase) in investments .............. 5,022 (26,641)
(Increase) decrease in other assets ............. (4,488) 5,298
Increase (decrease) in operating payables:
Brokers and dealers ........................... 750,006 627,094
Customers ..................................... (4,011) 54,385
Increase in securities sold, not yet purchased .. 24,925 68,543
(Decrease) increase in accrued expenses and other
liabilities ................................... (38,450) 23,954
Increase in minority interest ................... 4,656 1,566
--------- ---------
Total adjustments ............................ (18,268) (143,776)
--------- ---------
Net cash provided by (used in) operating
activities ................................ 17,034 (112,631)
--------- ---------
</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 26, June 27,
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from financing activities:
Net proceeds from (payments on):
Subordinated loan ............................ -- 100,000
Bank loans ................................... 2,000 --
Repurchase of treasury stock ................. (10,286) (18,231)
Dividends paid ............................... (2,069) (999)
Exercise of stock options .................... 9,679 952
Issuance of common stock shares .............. 2,181 3
Capital Accumulation Plan distributions ...... 5,430 1,651
Change in proportionate share of
subsidiary's equity ........................ 2,257 12
--------- ---------
Net cash provided by financing
activities ........................ 9,192 83,388
--------- ---------
Cash flows from investing activities -
purchase of premises and equipment ................ (7,139) (14,954)
--------- ---------
Effect of foreign currency translation on cash ...... (612) 90
--------- ---------
Net increase (decrease) in cash
and cash equivalents .............. 18,475 (44,107)
Cash and cash equivalents - beginning of period ..... 109,488 114,142
--------- ---------
Cash and cash equivalents - end of period ........... $ 127,963 $ 70,035
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ........................................ $ 35,573 $ 25,074
========= =========
Income taxes .................................... $ 22,684 $ 20,669
========= =========
</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. The term "Company"
refers, unless the context requires otherwise, to Jefferies Group, Inc., its
subsidiaries, predecessor entities, and W & D. Operations of the Company include
agency and principal transactions and other securities-related financial
services.
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, 1997.
SECURITIES TRANSACTIONS
All transactions in securities, commission revenues and related expenses
are recorded on a trade-date basis.
Securities owned and securities sold, not yet purchased, are valued at
market, and unrealized gains or losses are reflected in revenues from principal
transactions.
COMMON STOCK
All share, share price and per share information included in the
consolidated financial statements and notes thereto has been restated to
retroactively reflect the effect of the November 19, 1997 two-for-one stock
split.
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 June 26, 1998 (in thousands of dollars):
<TABLE>
<S> <C>
Receivable from brokers and dealers:
Securities borrowed.............................. $ 1,830,748
Securities purchased under agreements to resell.. 72,864
Other............................................ 26,219
----------------
$ 1,929,831
================
Payable to brokers and dealers:
Securities loaned................................ $ 1,631,009
Securities sold under agreements to repurchase... 62,630
Other............................................ 38,072
----------------
$ 1,731,711
================
</TABLE>
Page 8 of 18
<PAGE> 9
JEFFERIES GROUP, INC. AND SUBSIDIARIES
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 26, 1998 (in
thousands of dollars):
<TABLE>
<CAPTION>
Securities
Sold,
Securities Not Yet
Owned Purchased
-------------- ---------------
<S> <C> <C>
Corporate equity securities.......................... $ 175,437 $ 153,062
High-yield securities................................ 69,967 59,692
Corporate debt securities............................ 24,332 633
U.S. Government and agency obligations............... 26,344 --
Options.............................................. 558 241
-------------- ---------------
$ 296,638 $ 213,628
============== ===============
</TABLE>
INVESTMENTS
Investments consist of the following as of June 26, 1998 (in thousands of
dollars):
<TABLE>
<S> <C>
Debt and equity investments.......................... $ 59,743
Partnership interests................................ 77,791
Equity and debt interests in affiliates.............. 12,028
--------------
$ 149,562
==============
</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 26, 1998 (in thousands of dollars):
<TABLE>
<S> <C>
Cash in banks........................................ $ 15,368
Short term investments............................... 112,595
--------------
$ 127,963
==============
</TABLE>
MINORITY INTEREST
Minority interest represents the minority stockholders' proportionate share
of the equity of ITGI. At June 26, 1998, Jefferies Group, Inc. owned
approximately 81.5% of ITGI's common stock.
Page 9 of 18
<PAGE> 10
JEFFERIES GROUP, INC. AND SUBSIDIARIES
EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for the three month and six
month periods ended June 26, 1998 and June 27, 1997 (in thousands, except per
share amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
--------------------------- ---------------------------
June 26, June 27, June 26, June 27,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net earnings - basic calculation ............ $ 17,826 $ 19,748 $ 35,302 $ 31,145
Adjustment - stock options on subsidiary .... (373) (271) (649) (499)
-------- -------- -------- --------
Adjusted earnings - diluted calculation ..... $ 17,453 $ 19,477 $ 34,653 $ 30,646
======== ======== ======== ========
Shares for basic and diluted calculations:
Average number of common shares ............. 20,846 20,046 20,758 20,138
Capital Accumulation Plan unissued shares.... 1,353 1,424 1,375 1,420
-------- -------- -------- --------
Average shares used in basic computation .... 22,199 21,470 22,133 21,558
Stock options ............................... 550 596 602 556
Other unissued common stock equivalents ..... 160 224 166 190
-------- -------- -------- --------
Average shares used in diluted computation .. 22,909 22,290 22,901 22,304
======== ======== ======== ========
Earnings per share:
Basic ....................................... $ 0.80 $ 0.92 $ 1.60 $ 1.44
======== ======== ======== ========
Diluted ..................................... $ 0.76 $ 0.87 $ 1.51 $ 1.37
======== ======== ======== ========
</TABLE>
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 26, 1998, Jefferies',
ITG's and W & D's net capital was $104.7 million, $50.5 million and $1.2
million, respectively, which exceeded minimum net capital requirements by $100.1
million, $50.3 million and $954,000, 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.
Dividends per Common Share (declared and paid):
<TABLE>
<CAPTION>
1st Qtr. 2nd Qtr
-------- -------
<S> <C> <C>
1998....... $.050 $.050
1997....... $.025 $.025
</TABLE>
Page 10 of 18
<PAGE> 11
JEFFERIES GROUP, INC. AND SUBSIDIARIES
OFF-BALANCE SHEET RISK
In the normal course of business, the Company had letters of credit
outstanding aggregating $36.2 million at June 26, 1998, to satisfy various
collateral requirements in lieu of depositing cash or securities.
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.
JEFFERIES GROUP, INC. AND INVESTMENT TECHNOLOGY GROUP, INC. ANNOUNCE INTENTION
TO CONSIDER SEPARATING INTO TWO INDEPENDENT COMPANIES
On March 17, 1998, Jefferies Group, Inc. and Investment Technology Group,
Inc. jointly announced that they are considering the separation, through a
spin-off and restructuring, of Jefferies & Company, Inc. and other Jefferies
Group, Inc. subsidiaries ("JEFCO") and Investment Technology Group, Inc.
("ITGI").
If the separation is completed, Jefferies Group, Inc. shareholders will own
100% of JEFCO and approximately 82.3% of ITGI. The public ITGI shareholders will
continue to own 17.7% of ITGI. (The ITGI percentage ownership could change
slightly as a result of ITGI stock repurchases or issuances before the
transaction closing date.) The spin-off will be accomplished by a tax-free
distribution of 100% of the shares of the new company, JEFCO, to Jefferies
Group, Inc. shareholders. Jefferies Group, Inc.'s 15 million shares of ITGI
would then be its only asset. The spin-off would be followed immediately by a
tax-free merger of Jefferies Group, Inc. and ITGI, with ITGI's public
shareholders receiving shares of Jefferies Group, Inc. Jefferies Group, Inc.
would then be renamed Investment Technology Group, Inc.
The spin-off and restructuring transactions are contingent on a number of
factors, including receipt of all required Board of Directors and shareholder
approvals of Jefferies Group, Inc. and ITGI, receipt of a favorable tax ruling
from the Internal Revenue Service and other required regulatory and contractual
approvals.
YEAR 2000
The Company is progressing with its Year 2000 (Y2K) project and still
expects to be completed before the end of 1999. The second quarter and first
half of 1998 were negatively impacted by year 2000 (Y2K) expenses totaling $3.5
million and $4.5 million, respectively. Y2K expenses include outside
consultants, software and project management, excluding costs associated with
system enhancements.
CONTINGENCIES
The Company recently received a "30-day letter" proposing certain
adjustments which, if sustained, would result in a tax deficiency of
approximately $10.0 million plus interest. Substantially all of the proposed
adjustments relate to Investment Technology Group, Inc., the Company's 81.5%
owned subsidiary and include i) the disallowance of deductions taken in
connection with the termination of certain compensation plans at the time of
Investment Technology Group's initial public offering in 1994 and ii) the
disallowance of tax credits taken in connection with certain research and
development expenditures. The Company intends to vigorously contest the proposed
adjustments and believes that resolution of this matter will not have a material
adverse effect on the Company's financial condition or results of operations.
Page 11 of 18
<PAGE> 12
JEFFERIES GROUP, INC. AND SUBSIDIARIES
SEGMENT REPORTING
The Company's operations have been classified into two business segments:
Financial services and ITGI. The Financial services segment includes the
traditional securities brokerage and investment banking activities of Jefferies
Group, Inc. and its subsidiaries, except ITGI and its subsidiaries. The ITGI
segment includes the automated equity trading and transaction research
activities of ITGI and its subsidiaries. Financial information by segment for
the three months and six months ended June 26, 1998 and June 27, 1997 are
summarized as follows (in thousands of dollars):
<TABLE>
<CAPTION>
FINANCIAL ELIMINATIONS /
THREE MONTHS ENDED SERVICES ITGI RECLASSIFICATIONS CONSOLIDATED
<S> <C> <C> <C> <C>
JUNE 26, 1988
Total revenues................. $ 149,699 $ 50,905 $ (1,772) $ 198,832
Operating income............... 16,350 18,667 -- 35,017
Identifiable assets............ 2,743,399 149,078 (10,962) 2,881,515
Capital expenditures........... 1,588 2,944 -- 4,532
Depreciation and amortization.. 2,548 2,070 -- 4,618
JUNE 27, 1997
Total revenues................. 165,448 36,679 (642) 201,485
Operating income............... 21,402 13,925 -- 35,327
Identifiable assets............ 2,368,432 100,149 (9,938) 2,458,643
Capital expenditures........... 2,826 6,003 -- 8,829
Depreciation and amortization.. 2,703 1,504 -- 4,207
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL ELIMINATIONS /
SIX MONTHS ENDED SERVICES ITGI RECLASSIFICATIONS CONSOLIDATED
<S> <C> <C> <C> <C>
JUNE 26, 1988
Total revenues................. $ 313,547 $ 92,292 $ (3,599) $ 402,240
Operating income............... 35,425 31,717 -- 67,142
Identifiable assets............ 2,743,399 149,078 (10,962) 2,881,515
Capital expenditures........... 3,393 3,746 -- 7,139
Depreciation and amortization.. 5,660 4,053 -- 9,713
JUNE 27, 1997
Total revenues................. 282,441 67,333 (1,111) 348,663
Operating income............... 31,608 25,286 -- 56,894
Identifiable assets............ 2,368,432 100,149 (9,938) 2,458,643
Capital expenditures........... 4,741 10,213 -- 14,954
Depreciation and amortization.. 5,523 2,848 -- 8,371
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
ANALYSIS OF FINANCIAL CONDITION
Total assets increased $782.0 million from $2,099.5 million at December 31,
1997 to $2,881.5 million at June 26, 1998. The increase in assets is mostly due
to an increase in the balances associated with the Jefferies' securities
borrowed and lending matched book business.
Page 12 of 18
<PAGE> 13
JEFFERIES GROUP, INC. AND SUBSIDIARIES
FIRST HALF 1998 VERSUS FIRST HALF 1997
Revenues, net of interest expense, increased 14% to $365.3 million,
compared to $321.2 million for the first half of 1997. The increase was due
primarily to a $36.1 million, or 26%, increase in commissions, a $3.5 million,
or 4%, increase in principal transactions, and a $3.2 million, or 3%, increase
in corporate finance. Commission revenues increased, led by ITG and the Equities
Division. Revenues from principal transactions increased primarily due to
increased trading gains in the Equities Division. Corporate finance revenues
benefited from increased advisory fees and equity transactions. Net interest
income (interest revenues less interest expense) was up $1.1 million mostly due
to an excess of securities borrowed interest income over securities loaned
interest expense and an increase in interest from investments, partially offset
by additional interest expense associated with the $100 million face value of
Senior Notes, due 2007.
Total non-interest expenses increased 13% to $298.1 million, compared to
$264.3 million for the first half of 1997. Compensation and benefits increased
$14.5 million, or 8%, mostly due to higher salaries expense associated with an
increase in personnel. Communications increased $7.4 million, or 29%, partly due
to year 2000 (Y2K) costs and partly due to increased trade volume, personnel,
and system upgrades. Other expense increased $4.0 million, or 29%, largely due
to ITGI losses from long-term investments made to enhance products and
enter new markets via joint ventures worldwide, fees related to Jefferies'
revolving subordinated loan and consulting fees. Travel and promotional
increased $3.5 million, or 42%, largely due to increased business travel related
to corporate finance activities. Floor brokerage and clearing fees increased
$1.9 million, or 11%, due to increased volume of business executed on the
various exchanges. Software royalties increased $1.8 million, or 36%, due to
higher POSIT(R) commission revenues. Occupancy and equipment rental increased
$596,000, or 6%, largely due to ITGI's relocation of its corporate headquarters.
Earnings before income taxes and minority interest were up 18% to $67.1
million, compared to $56.9 million for the same prior year period. The effective
tax rate was approximately 43% for the first half of 1998 and approximately 41%
for the first half of 1997. The increase in the tax rate is mostly due to
several unusual items. The 1998 tax rate was unfavorably impacted by
non-deductible ITGI losses from long-term investments. The 1997 tax rate was
favorably impacted by a reversal of deferred taxes related to ITGI shares that
were repurchased during 1997.
Minority interest (approximately 18% of the earnings of ITGI) was $3.1
million for the first half of 1998 as compared to $2.5 million in the comparable
1997 period. The increase in minority interest expense was due to increased ITGI
earnings.
Basic earnings per share were $1.60 for the first half of 1998 on
22,133,000 shares compared to $1.44 in the 1997 period on 21,558,000 shares.
Diluted earnings per share were $1.51 for the first half of 1998 on 22,901,000
shares compared to $1.37 in the comparable 1997 period on 22,304,000 shares.
Page 13 of 18
<PAGE> 14
JEFFERIES GROUP, INC. AND SUBSIDIARIES
SECOND QUARTER 1998 VERSUS SECOND QUARTER 1997
Revenues, net of interest expense, decreased 4% to $178.8 million, compared
to $185.9 million for the second quarter of 1997. The decrease was due primarily
to a $24.3 million, or 37%, decrease in corporate finance and a $3.7 million, or
8%, decrease in principal transactions, offset by a $19.4 million, or 27%,
increase in commissions. Commission revenues increased, led by ITG and the
Equities Division. Revenues from principal transactions decreased primarily due
to a decrease in managed investment account trading gains. Corporate finance
revenues decreased because the second quarter of 1997 benefited from one
sole-managed high-yield underwriting which accounted for approximately $40
million in revenues. Net interest income (interest revenues less interest
expense) was up $1.1 million mostly due to an excess of securities borrowed
interest income over securities loaned interest expense and an increase in
interest from investments, partially offset by additional interest expense
associated with the $100 million face value of Senior Notes, due 2007.
Total non-interest expenses decreased 5% to $143.8 million, compared to
$150.6 million for the second quarter of 1997. Compensation and benefits
decreased $16.1 million, or 15%, mostly due to a reduction in incentive based
compensation accruals. Communications increased $3.3 million, or 23%, primarily
due to Y2K costs. Other expense increased $2.0 million, or 26%, largely due to
ITGI losses from long-term investments made to enhance products and enter
new markets via joint ventures worldwide, fees related to Jefferies' revolving
subordinated loan and consulting fees. Floor brokerage and clearing fees
increased $1.3 million, or 15%, due to increased volume of business executed on
the various exchanges. Travel and promotional increased $1.3 million, or 28%,
largely due to increased business travel related to corporate finance
activities. Software royalties increased $1.2 million, or 46%, due to higher
POSIT(R) commission revenues. Occupancy and equipment rental increased $224,000,
or 5%, largely due to ITGI's relocation of its corporate headquarters.
Earnings before income taxes and minority interest were down 1% to $35.0
million, compared to $35.3 million for the same prior year period. The effective
tax rate was approximately 44% for the second quarter of 1998 and approximately
40% for the second quarter of 1997. The increase in the tax rate is mostly due
to several unusual items. The 1998 tax rate was unfavorably impacted by
non-deductible ITGI losses from long-term investments. The 1997 tax rate was
favorably impacted by a reversal of deferred taxes related to ITGI shares that
were repurchased during 1997.
Minority interest (approximately 18% of the earnings of ITGI) was $1.8
million for the second quarter of 1998 as compared to $1.4 million in the
comparable 1997 period. The increase in minority interest expense was due to
increased ITGI earnings.
Basic earnings per share were $0.80 for the second quarter of 1998 on
22,199,000 shares compared to $0.92 in the 1997 period on 21,470,000 shares.
Diluted earnings per share were $0.76 for the second quarter of 1998 on
22,909,000 shares compared to $0.87 in the comparable 1997 period on 22,290,000
shares.
LIQUIDITY AND CAPITAL RESOURCES
During the first half of 1998, the Company repurchased 238,140 shares
(including 185,400 shares purchased in connection with the Company's Capital
Accumulation Plan) of its common stock versus 898,510 shares (including 188,400
shares purchased in connection with the Company's Capital Accumulation Plan) for
the comparable 1997 period.
During the second quarter of 1998, the Company repurchased 157,575 shares
(including 150,900 shares purchased in connection with the Company's Capital
Accumulation Plan) of its common stock versus 82,342 shares (including 81,400
shares purchased in connection with the Company's Capital Accumulation Plan) for
the comparable 1997 period.
Page 14 of 18
<PAGE> 15
JEFFERIES GROUP, INC. AND SUBSIDIARIES
REVENUES BY SOURCE
The following provides a breakdown of total revenues by source for the
three months and six months ended June 26, 1998 and June 27, 1997.
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------------------------------------
June 26, June 27,
1998 1997
----------------------------- -----------------------------
% of % of
Total Total
Amount Revenues Amount Revenues
------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commissions and principal transactions:
Equities.................................... $ 58,891 30% $ 48,934 24%
Investment Technology Group................. 48,677 24 35,480 18
International............................... 11,804 6 14,594 7
Taxable Fixed Income........................ 8,863 4 8,899 4
Convertible................................. 2,415 1 2,041 1
Other proprietary trading................... 1,530 1 6,461 3
--------------- ---------- --------------- ----------
Total..................................... 132,180 66 116,409 57
Corporate finance................................ 41,716 21 66,008 33
Interest......................................... 23,092 12 17,481 9
Other .......................................... 1,844 1 1,587 1
--------------- ---------- --------------- ----------
Total revenues............................ $ 198,832 100% $ 201,485 100%
=============== ========== =============== ==========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
--------------------------------------------------------------
June 26, June 27,
1998 1997
----------------------------- -----------------------------
% of % of
Total Total
Amount Revenues Amount Revenues
------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commissions and principal transactions:
Equities.................................... $ 116,574 29% $ 97,513 28%
Investment Technology Group................. 87,907 22 65,103 19
International............................... 25,579 6 26,747 8
Taxable Fixed Income........................ 18,565 5 17,557 5
Convertible................................. 5,388 1 4,151 1
Other proprietary trading................... 7,144 2 10,401 3
--------------- ---------- --------------- ----------
Total..................................... 261,157 65 221,472 64
Corporate finance................................ 96,115 24 92,965 26
Interest......................................... 42,050 10 31,376 9
Other .......................................... 2,918 1 2,850 1
--------------- ---------- --------------- ----------
Total revenues............................ $ 402,240 100% $ 348,663 100%
=============== ========== =============== ==========
</TABLE>
Page 15 of 18
<PAGE> 16
JEFFERIES GROUP, INC. AND SUBSIDIARIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) Date of Meeting - - May 12, 1998
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
Richard B. Handler
Tracy G. Herrick
Raymond L. Killian, Jr.
Michael L. Klowden
Frank J. Macchiarola
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 WITHHELD
--- ------- ------- --------
<S> <C> <C> <C> <C>
Election of directors:
Frank E. Baxter 16,482,480 0 0 182,810
Richard G. Dooley 16,482,636 0 0 182,654
Richard B. Handler 16,269,719 0 0 395,571
Tracy G. Herrick 16,474,523 0 0 190,767
Raymond L. Killian, Jr. 16,482,636 0 0 182,654
Michael L. Klowden 16,482,596 0 0 182,694
Sheldon B. Lubar 16,482,286 0 0 183,004
Frank J. Macchiarola 16,482,636 0 0 182,654
Mark A. Wolfson 16,482,636 0 0 182,654
Amendment to Certificate of Incorporation 12,732,725 3,853,226 79,339 0
</TABLE>
(d) Not applicable
Page 16 of 18
<PAGE> 17
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 National Association of Securities
Dealers, Inc. ("NASD"), criticizing various practices by market makers, and the
NASD for failing to police adequately or discipline the market makers for those
practices. However, the SEC did not take any action at that time against 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 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.
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. REPORTS ON FORM 8-K
(b) Reports on Form 8-K.
On May 1, 1998, the Company filed a Form 8-K updating financial
information related to the previously announced plans to separate the
Company's 100% owned subsidiary, Jefferies & Company, Inc., and its
81.5% owned subsidiary, Investment Technology Group, Inc., through a
proposed spin-off and related transactions.
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: August 7, 1998 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 26, 1998 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 SECOND QUARTER 1998 JEFFERIES GROUP, INC. 10-Q FILING.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-26-1998
<CASH> 127,963
<RECEIVABLES> 202,488
<SECURITIES-RESALE> 72,864
<SECURITIES-BORROWED> 1,830,748
<INSTRUMENTS-OWNED> 149,562
<PP&E> 41,214
<TOTAL-ASSETS> 2,881,515
<SHORT-TERM> 2,000
<PAYABLES> 236,316
<REPOS-SOLD> 62,630
<SECURITIES-LOANED> 1,631,009
<INSTRUMENTS-SOLD> 213,628
<LONG-TERM> 149,338
0
0
<COMMON> 229
<OTHER-SE> 285,326
<TOTAL-LIABILITY-AND-EQUITY> 2,881,515
<TRADING-REVENUE> 88,570
<INTEREST-DIVIDENDS> 42,050
<COMMISSIONS> 172,587
<INVESTMENT-BANKING-REVENUES> 96,115
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 36,981
<COMPENSATION> 199,584
<INCOME-PRETAX> 67,142
<INCOME-PRE-EXTRAORDINARY> 67,142
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,302
<EPS-PRIMARY> 1.60
<EPS-DILUTED> 1.51
</TABLE>
