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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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)
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DELAWARE 95-2848406
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
11100 SANTA MONICA BOULEVARD, 11TH FLOOR 90025
LOS ANGELES, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(310) 445-1199
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE (TITLE OF CLASS)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. [ ]
State the aggregate market value of the common stock held by nonaffiliates
of the registrant. $865,304,648 as of March 16, 1998.
Indicate the number of shares outstanding of the registrant's class of
common stock, as of the latest practical date. 20,775,495 shares as of the close
of business March 16, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
See list on following page.
LOCATION OF EXHIBIT INDEX
The index of exhibits is contained in Part IV herein on page 40.
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JEFFERIES GROUP, INC.
1997 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
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PAGE
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Item 1. Business.................................................... 1
Item 2. Properties.................................................. 6
Item 3. Legal Proceedings........................................... 6
Item 4. Submission of Matters to a Vote of Security Holders......... 6
PART II
Market for the Registrant's Common Stock and Related
Item 5. Security Holder Matters..................................... 7
Item 6. Selected Financial Data..................................... 8
Management's Discussion and Analysis of Financial Condition
Item 7. and Results of Operations................................... 9
Item 8. Financial Statements and Supplementary Data................. 14
Item 9. Disagreements on Accounting and Financial Disclosure........ 40
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 40
Item 11. Executive Compensation...................................... 40
Security Ownership of Certain Beneficial Owners and
Item 12. Management.................................................. 40
Item 13. Certain Relationships and Related Transactions.............. 40
PART IV
Exhibits, Financial Statements, Schedules and Reports on
Item 14. Form 8-K.................................................... 40
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DOCUMENTS INCORPORATED BY REFERENCE
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TITLE OF DOCUMENT PART OF FORM 10-K
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Proxy Statement relating to 1998 Annual Meeting of
Shareholders (to be filed)................................ Part III
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Exhibit Index located on page 40 of this report.
<PAGE> 3
PART I
ITEM 1. BUSINESS.
Jefferies Group, Inc. is a holding company which, through its four primary
subsidiaries, Jefferies & Company, Inc., Investment Technology Group, Inc.,
Jefferies International Limited and Jefferies Pacific Limited, is 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
Securities, Inc. The Company was originally incorporated in 1973 as a holding
company for Jefferies & Company, Inc. and was reincorporated in Delaware on
August 10, 1983. The Company and its various subsidiaries maintain offices in
Los Angeles, New York, Short Hills, Jersey City, Chicago, Dallas, Boston,
Atlanta, New Orleans, Houston, San Francisco, Stamford, London, Hong Kong,
Zurich and Tokyo.
As of December 31, 1997, the Company and its subsidiaries had 1,086
full-time employees, including 521 representatives registered with NASD
Regulation, Inc. ("NASDR"). The Company's executive offices are located at 11100
Santa Monica Boulevard, Los Angeles, California 90025, and its telephone number
is (310) 445-1199.
JEFFERIES & COMPANY, INC.
Jefferies & Company, Inc. ("Jefferies") was founded in 1962 and is engaged
in equity, convertible debt and taxable fixed income securities brokerage and
trading and corporate finance. Jefferies is one of the leading national firms
engaged in the distribution and trading of blocks of equity securities both on
the national securities exchanges and in the "third market." The term "third
market" refers to transactions in listed equity securities effected away from
national securities exchanges. Jefferies' revenues are derived primarily from
commission revenues and market making or trading as principal in equity, taxable
fixed income and convertible securities with or on behalf of institutional
investors, with the balance generated by corporate finance and other activities.
Jefferies has continued to add to its equity research capabilities and currently
provides equity research in the areas of energy, health care,
telecommunications, consumer, real estate (including real estate investment
trusts [REITS]), gaming and entertainment, business services, and financial
services.
INVESTMENT TECHNOLOGY GROUP, INC.
Investment Technology Group, Inc. is a holding company which is publicly
traded (Nasdaq: ITGI) and is approximately 82% owned by Jefferies Group, Inc.
Its wholly-owned subsidiary, ITG Inc. ("ITG"), provides automated equity trading
services and transaction research to institutional investors and brokers. ITG, a
full service execution firm, utilizes transaction processing technology to
increase the effectiveness and lower the cost of institutional and other
trading. With an emphasis on ongoing research, ITG offers the following
services: ITG POSIT, an electronic stock crossing system; ITG QuantEX, a
decision-support and routing system; Electronic Trading Desk Services, offering
customers trading capabilities through the ITG trading desk, which utilizes
multiple sources of liquidity; ITG Platform, a PC based routing system; and ITG
ISIS, a set of analytical tools for systematically lowering transaction costs.
JEFFERIES INTERNATIONAL LIMITED AND JEFFERIES PACIFIC LIMITED
Jefferies International Limited ("JIL"), a broker-dealer subsidiary of the
Company, was incorporated in 1986 in England. JIL is a member of The
International Stock Exchange and The Securities and Futures Authority. JIL
introduces customers trading in U.S. securities to Jefferies and also trades as
a broker-dealer in international equity and convertible securities and American
Depositary Receipts ("ADRs"). In 1995, JIL formed a wholly owned Swiss
subsidiary, Jefferies (Switzerland) Ltd. In 1996, JIL formed a wholly-owned
English subsidiary, Jefferies (Japan) Limited, which maintains a branch office
in Tokyo.
Jefferies Pacific Limited ("JPL"), a broker subsidiary of the Company, was
incorporated in 1992 in Hong Kong. JPL presently introduces foreign customers
trading in U.S. securities to Jefferies.
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W & D SECURITIES, INC.
W & D Securities, Inc. ("W & D") primarily provides execution services on
the New York Stock Exchange ("NYSE") and other exchanges to Jefferies and ITG.
In order to comply with regulatory requirements of the NYSE that generally
prohibit NYSE members and their affiliates from executing, as principal and, in
certain cases, as agent, transactions in NYSE-listed securities off the NYSE,
the Company gave up its formal legal control of W & D, effective January 1,
1983, by exchanging all of the W & D common stock owned by it for non-voting
preferred stock of W & D. The common stock of W & D is presently held by an
officer of W & D who has agreed with the Company that, at the option of the
Company, he will sell such stock to the Company for nominal consideration. In
the event that the Company were to regain ownership of such common stock, the
Company believes that the NYSE would assert that W & D would be in violation of
the NYSE's rules unless similar arrangements satisfactory to the NYSE were made
with respect to the ownership of the common stock.
While the NYSE has generally approved the above arrangements, there can be
no assurance that it will not raise objections in the future. In light of these
arrangements and the high proportion of the equity of W & D represented by the
non-voting preferred stock held by the Company, W & D is consolidated as a
subsidiary of the Company for financial statement purposes. The Company believes
that it can make satisfactory alternative arrangements for executing
transactions in listed securities on the NYSE if it were precluded from doing so
through W & D.
COMMISSION BUSINESS
A substantial portion of the Company's revenues is derived from customer
commissions on brokerage transactions in equity (primarily listed) and debt
securities for domestic and international investors such as investment advisors,
banks, mutual funds, insurance companies and pension and profit sharing plans.
Such investors normally purchase and sell securities in block transactions, the
execution of which requires special marketing and trading expertise. Jefferies
is one of the leading national firms in the execution of equity block
transactions, and believes that its institutional customers are attracted by the
quality of Jefferies' execution (with respect to considerations of quantity,
timing and price) and its competitive commission rates, which are negotiated on
the basis of market conditions, the size of the particular transaction and other
factors. In addition to domestic equity securities, the Company executes
transactions in taxable fixed income securities, domestic and international
convertible securities, international equity securities, ADRs, options,
preferred stocks, financial futures and other similar products.
All of Jefferies' equity account executives are electronically
interconnected through a system permitting simultaneous verbal and graphic
communication of trading and order information by all participants. Jefferies
believes that its execution capability is significantly enhanced by this system,
which permits its account executives to respond to each other and to negotiate
order indications directly with customers rather than through a separate trading
department.
PRINCIPAL TRANSACTIONS
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.
Equities. The Equities Division of Jefferies makes markets in over 400
over-the-counter equity and ADR securities, and trades securities for its own
account, as well as to accommodate customer transactions.
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The Equities and International Divisions engage in hedged trading involving
securities listed or traded in both domestic and foreign markets.
Taxable Fixed Income. The Taxable Fixed Income Division of Jefferies trades
high grade and non-investment grade public and private debt securities. The
Division specializes in trading and making markets in over 300 unrated or less
than investment grade corporate debt securities and accounts for these positions
at market value. At December 31, 1997, the aggregate long and short market value
of these positions was $59.3 million and $52.3 million, respectively. Risk of
loss upon default by the borrower is significantly greater with respect to
unrated or less than investment grade corporate debt securities than with other
corporate debt securities. These securities are generally unsecured and are
often subordinated to other creditors of the issuer. These issuers usually have
high levels of indebtedness and are more sensitive to adverse economic
conditions, such as recession or increasing interest rates, than are investment
grade issuers. There is a limited market for some of these securities and market
quotes are generally available from a small number of dealers.
Convertible Securities and Warrants. Jefferies also trades domestic and
international convertible securities and warrants and assists corporate and
institutional clients in identifying attractive investments in these securities
and warrants.
Other Proprietary Trading. Jefferies invests in statistically-defined
market-neutral strategies in the equities markets and in merger-related
arbitrage activities. Jefferies conducts these activities through relationships
with independent management firms pursuant to which the Company delegates
investment decisions to the managers. In addition, the Company has investments
in partnerships and mutual funds as well as other relationships with independent
management firms which contribute to revenues from principal transactions.
CORPORATE FINANCE
Jefferies' Corporate Finance Division offers corporations (primarily middle
market growth companies) a full range of financial advisory service as well as
debt, equity, and convertible financing service. Products include acquisition
financing, bridge and senior loan financing, private placements and public
offerings of debt and equity securities, debt refinancings, restructuring,
merger and acquisition and exclusive sales advice, structured financings and
securitizations, consent and waiver solicitations, and company and bondholder
representations in corporate restructurings. Its research department covers 250
companies in 10 industries.
Investment banking activity involves both economic and regulatory risks. An
underwriter may incur losses if it is unable to sell the securities it is
committed to purchase or if it is forced to liquidate its commitments at less
than the agreed upon purchase price. In addition, under the Securities Act of
1933 and other laws and court decisions with respect to underwriters' liability
and limitations on indemnification of underwriters by issuers, an underwriter is
subject to substantial potential liability for material misstatements or
omissions in prospectuses and other communications with respect to underwritten
offerings. Further, underwriting commitments constitute a charge against net
capital and Jefferies' underwriting commitments may be limited by the
requirement that it must, at all times, be in compliance with the Uniform Net
Capital Rule 15c3-1 of the Securities and Exchange Commission (the
"Commission").
Jefferies intends to continue to pursue opportunities for its corporate
customers which may require it to finance and/or underwrite the issuance of
securities. Under circumstances where Jefferies is required to act as an
underwriter or to trade on a proprietary basis with its customers, Jefferies may
assume greater risk than would normally be assumed in certain other principal
transactions.
INTEREST
Jefferies derives a substantial portion of its interest revenues, and
incurs a substantial portion of its interest expenses, in connection with its
securities borrowed/securities loaned activity. Jefferies also earns interest on
its securities portfolio, on its operating and segregated balances, on its
margin lending activity and on certain of its investments.
3
<PAGE> 6
Securities Borrowed/Securities Loaned. In connection with both its trading
and brokerage activities, Jefferies borrows securities to cover short sales and
to complete transactions in which customers have failed to deliver securities by
the required settlement date, and lends securities to other brokers and dealers
for similar purposes. Jefferies has an active securities borrowed and lending
matched book business ("Matched Book"), in which Jefferies borrows securities
from one party and lends them to another party. When Jefferies borrows
securities, Jefferies provides cash to the lender as collateral, which is
reflected in the Company's financial statements as receivable from brokers and
dealers. Jefferies earns interest revenues on this cash collateral. Similarly,
when Jefferies lends securities to another party, that party provides cash to
Jefferies as collateral, which is reflected in the Company's financial
statements as payable to brokers and dealers. Jefferies pays interest expense on
the cash collateral received from the party borrowing the securities. A
substantial portion of the Jefferies' interest revenues and interest expense
results from the Matched Book activity.
Margin Lending. Customers' transactions are executed on either a cash or
margin basis. In a margin transaction, Jefferies extends credit to the customer,
collateralized by securities and cash in the customer's account, for a portion
of the purchase price, and receives income from interest charged on such
extensions of credit.
In permitting a customer to purchase securities on margin, Jefferies is
subject to the risk that a market decline could reduce the value of its
collateral below the amount of the customer's indebtedness and that the customer
might otherwise be unable to repay the indebtedness.
In addition to monitoring the creditworthiness of its customers, Jefferies
also considers the trading liquidity and volatility of the securities it accepts
as collateral for its margin loans. Trading liquidity and volatility may be
dependent, in part, upon the market on which the security is traded, the number
of outstanding shares of the issuer, events affecting the issuer and/or
securities markets in general, and whether or not there are any legal
restrictions on the sale of the securities. Certain types of securities have
historical trading patterns which may assist Jefferies in making its evaluation.
Historical trading patterns, however, may not be good indicators over relatively
short time periods or in markets which are affected by unusual or unexpected
developments. Jefferies considers all of these factors at the time it agrees to
extend credit to customers and continues to review its extensions of credit on
an ongoing basis.
The majority of Jefferies' margin loans are made to United States citizens
or to corporations which are domiciled in the United States. Jefferies may
extend credit to investors or corporations who are citizens of foreign countries
or who may reside outside the United States. Jefferies believes that should such
foreign investors default upon their loans with Jefferies and should the
collateral for those loans be insufficient to satisfy the investors' obligations
to Jefferies, Jefferies may experience more difficulty in collecting investors'
outstanding indebtedness than would be the case if investors were citizens or
residents of the United States.
Although Jefferies attempts to minimize the risk associated with the
extension of credit in margin accounts, there is no assurance that the
assumptions on which Jefferies bases its decisions will be correct or that
Jefferies is in a position to predict factors or events which will have an
adverse impact on any individual customer or issuer, or the securities markets
in general.
COMPETITION
All aspects of the business of the Company are intensely competitive. The
Company competes directly with numerous other brokers and dealers, investment
banking firms and banks. In addition to competition from firms currently in the
securities business, there has been increasing competition from others offering
financial services. These developments and others have resulted, and may
continue to result, in significant additional competition for the Company.
Member firms of the NYSE generally are prohibited from effecting
transactions when acting as principal and, in certain cases, as agents, in
listed equity securities off the NYSE, and therefore, unlike Jefferies, are
precluded from effecting such transactions in the third market. Such firms may
execute certain transactions in listed equity securities in the third market for
customers, although typically they do not do so. Since firms which the Company
regards as its major competitors in the execution of transactions in equity
securities for
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institutional investors are members of the NYSE, any removal of these
prohibitions could adversely affect the Company's business.
REGULATION
The securities industry in the United States is subject to extensive
regulation under both federal and state laws. The Commission is the federal
agency responsible for the administration of federal securities laws. In
addition, self-regulatory organizations, principally the NASDR and the
securities exchanges, are actively involved in the regulation of broker-dealers.
These self-regulatory organizations conduct periodic examinations of member
broker-dealers in accordance with rules they have adopted and amended from time
to time, subject to approval by the Commission. Securities firms are also
subject to regulation by state securities commissions in those states in which
they do business. Jefferies is registered as a broker-dealer in 50 states, the
District of Columbia and Puerto Rico. ITG is registered as a broker-dealer in 50
states, the District of Columbia and Puerto Rico. W & D is registered as a
broker-dealer in 3 states.
Broker-dealers are subject to regulations which cover all aspects of the
securities business, including sales methods, trade practices among
broker-dealers, use and safekeeping of customers' funds and securities, capital
structure of securities firms, record-keeping and the conduct of directors,
officers and employees. Additional legislation, changes in rules promulgated by
the Commission and self-regulatory organizations, or changes in the
interpretation or enforcement of existing laws and rules, may directly affect
the mode of operation and profitability of broker-dealers. The Commission,
self-regulatory organizations and state securities commissions may conduct
administrative proceedings which can result in censure, fine, suspension,
expulsion of a broker-dealer, its officers or employees, or revocation of
broker-dealer licenses. The principal purpose of regulation and discipline of
broker-dealers is the protection of customers and the securities markets, rather
than protection of creditors and stockholders of broker-dealers.
As registered broker-dealers, Jefferies, ITG and W & D are required by law
to belong to the Securities Investor Protection Corporation ("SIPC"). In the
event of a member's insolvency, the SIPC fund provides protection for customer
accounts up to $500,000 per customer, with a limitation of $100,000 on claims
for cash balances.
Net Capital Requirements. Every U.S. registered broker-dealer doing
business with the public is subject to the Commission's Uniform Net Capital Rule
(the "Rule"), which specifies minimum net capital requirements. Jefferies Group,
Inc. is not a registered broker-dealer and is therefore not subject to the Rule;
however, its United States broker-dealer subsidiaries are subject thereto.
The Rule provides that a broker-dealer doing business with the public shall
not permit its aggregate indebtedness to exceed 15 times its adjusted net
capital (the "basic method") or, alternatively, that it not permit its adjusted
net capital to be less than 2% of its aggregate debit balances (primarily
receivables from customers and broker-dealers) computed in accordance with such
Rule (the "alternative method"). Jefferies, ITG and W & D use the alternative
method of calculation.
Compliance with applicable net capital rules could limit operations of
Jefferies or ITG, such as underwriting and trading activities, that require use
of significant amounts of capital, and may also restrict loans, advances,
dividends and other payments by Jefferies, ITG or W & D to the Company. As of
December 31, 1997, Jefferies', ITG's and W & D's net capital was $96.8 million,
$35.0 million and $1.3 million, respectively, which exceeded minimum net capital
requirements by $91.4 million, $34.8 million and $1.0 million, respectively. See
note 16 of Notes to Consolidated Financial Statements.
JEFFERIES GROUP, INC. AND INVESTMENT TECHNOLOGY GROUP, INC. ANNOUNCE INTENTION
TO CONSIDER SEPARATING INTO TWO INDEPENDENT COMPANIES.
See Item 7. Management's discussion and analysis of financial condition and
results of operations for discussion of management's intention to consider
separating into two independent companies.
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ITEM 2. PROPERTIES.
The Company maintains sales offices in Los Angeles, New York, Short Hills,
Chicago, Dallas, Boston, Atlanta, New Orleans, Houston, San Francisco, Stamford,
London, Hong Kong, Zurich and Tokyo. In addition, the Company maintains
operations offices in Los Angeles and Jersey City. The Company leases all of its
office space which management believes is adequate for the Company's business.
For information concerning leasehold improvements and rental expense, see notes
1, 7 and 13 of Notes to Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS.
In re Nasdaq Market-Makers Antitrust Litigation. 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 Commission 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 Commission 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 Commission 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 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 was previously provided for in reserves and will not
have a material adverse effect on Jefferies.
Other. Many aspects of the Company's business involve substantial risks of
liability. In the normal course of business, the Company and its subsidiaries
have been named as defendants or co-defendants in lawsuits involving primarily
claims for damages. The Company's management believes that pending litigation
will not have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS.
The Company's Common Stock began trading on the NYSE on March 15, 1996,
under the symbol JEF. Previously, the Common Stock traded in the Nasdaq National
Market System under the symbol JEFG. The following table sets forth for the
periods indicated, the range of high and low prices per share for the Common
Stock as reported by the NYSE. All price range and dividends per share
information has been restated to retroactively reflect the effect of the
two-for-one stock splits declared by the Board of Directors on November 19, 1997
and March 2, 1996.
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1997
First Quarter............................................. $24.13 $19.38
Second Quarter............................................ 30.38 20.00
Third Quarter............................................. 38.16 26.63
Fourth Quarter............................................ 48.00 31.88
1996
First Quarter............................................. 17.25 11.13
Second Quarter............................................ 18.50 14.69
Third Quarter............................................. 18.25 13.13
Fourth Quarter............................................ 20.38 17.13
</TABLE>
There were approximately 307 holders of record of the Company's Common
Stock at December 31, 1997.
In 1988, the Company instituted a policy of paying regular quarterly cash
dividends. There are no restrictions on the Company's present ability to pay
dividends on Common Stock, other than the applicable provisions of the Delaware
General Corporation Law.
Dividends per Common Share (declared and paid):
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FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
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1997.................................... $.0250 $.0250 $.0250 $.0500
1996.................................... $.0125 $.0250 $.0250 $.0250
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ITEM 6. SELECTED FINANCIAL DATA.
The selected data presented below as of and for each of the years in the
five-year period ended December 31, 1997, are derived from the consolidated
financial statements of Jefferies Group, Inc. and its subsidiaries, which
financial statements have been audited by KPMG Peat Marwick LLP, independent
auditors. Such data should be read in connection with the consolidated financial
statements contained on pages 15 through 39. All share and per share information
has been restated to retroactively reflect the effect of the two-for-one stock
splits declared by the Board of Directors on November 19, 1997 and March 2,
1996. Earnings per share information has been restated to retroactively reflect
the adoption of Statement of Financial Accounting Standards No. 128.
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YEAR ENDED DECEMBER 31,
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1997 1996 1995 1994 1993
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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EARNINGS STATEMENT DATA
Revenues:
Commissions.............................................. $ 282,317 $ 222,048 $ 165,610 $ 144,208 $ 130,238
Principal transactions................................... 177,214 143,912 97,954 67,013 83,361
Corporate finance........................................ 228,640 97,870 72,003 39,818 72,442
Interest................................................. 70,740 47,803 65,792 51,223 21,693
Other.................................................... 5,593 4,993 4,228 1,902 2,512
---------- ---------- ---------- ---------- ----------
Total revenues......................................... 764,504 516,626 405,587 304,164 310,246
Interest expense........................................... 61,466 37,852 54,365 41,626 17,457
---------- ---------- ---------- ---------- ----------
Revenues, net of interest expense.......................... 703,038 478,774 351,222 262,538 292,789
---------- ---------- ---------- ---------- ----------
Non-interest expenses:
Compensation and benefits................................ 409,979 264,041 195,278 145,372 167,546
Floor brokerage and clearing fees........................ 35,066 27,323 20,273 18,660 15,925
Telecommunications and data processing services.......... 47,192 35,177 24,960 20,997 19,040
Occupancy and equipment rental........................... 21,297 17,207 15,993 14,271 12,757
Travel and promotional................................... 19,207 13,541 10,296 8,909 8,587
Software royalties....................................... 9,853 8,805 5,987 5,028 4,026
Other.................................................... 44,494 29,493 25,197 18,522 17,564
---------- ---------- ---------- ---------- ----------
Total non-interest expenses............................ 587,088 395,587 297,984 231,759 245,445
---------- ---------- ---------- ---------- ----------
Operating income........................................... 115,950 83,187 53,238 30,779 47,344
Other income:
Gain on initial public offering of Investment Technology
Group, Inc. ........................................... -- -- -- 8,257 --
---------- ---------- ---------- ---------- ----------
Earnings before income taxes, minority interest and
cumulative effect of change in accounting principle...... 115,950 83,187 53,238 39,036 47,344
Income taxes............................................... 47,677 35,438 21,911 17,568 19,755
---------- ---------- ---------- ---------- ----------
Earnings before minority interest and cumulative effect of
change in accounting principle........................... 68,273 47,749 31,327 21,468 27,589
Minority interest.......................................... 4,706 4,189 2,798 1,244 --
---------- ---------- ---------- ---------- ----------
Earnings before cumulative effect of change in accounting
principle................................................ 63,567 43,560 28,529 20,224 27,589
Cumulative effect on prior years of change in accounting
principle................................................ -- -- -- -- 1,358
---------- ---------- ---------- ---------- ----------
Net earnings........................................... $ 63,567 $ 43,560 $ 28,529 $ 20,224 $ 28,947
========== ========== ========== ========== ==========
Earnings per share of Common Stock:
Basic earnings before cumulative effect of accounting
change................................................. $ 2.95 $ 1.90 $ 1.23 $ 0.84 $ 1.39
Cumulative effect of accounting change................... -- -- -- -- .07
---------- ---------- ---------- ---------- ----------
Basic earnings........................................... $ 2.95 $ 1.90 $ 1.23 $ 0.84 $ 1.46
========== ========== ========== ========== ==========
Diluted earnings before cumulative effect of accounting
change................................................. $ 2.80 $ 1.84 $ 1.19 $ 0.81 $ 1.17
Cumulative effect of accounting change................... -- -- -- -- .05
---------- ---------- ---------- ---------- ----------
Diluted earnings......................................... $ 2.80 $ 1.84 $ 1.19 $ 0.81 $ 1.22
========== ========== ========== ========== ==========
Weighted average shares of Common Stock:
Basic.................................................... 21,552 22,980 23,270 23,956 19,766
Diluted.................................................. 22,349 23,410 23,922 24,756 24,664
SELECTED BALANCE SHEET DATA
Total assets............................................... $2,099,542 $1,568,087 $1,536,969 $1,557,348 $1,388,403
Long-term debt............................................. $ 149,290 $ 52,987 $ 56,322 $ 59,570 $ 9,968
Total stockholders' equity................................. $ 242,756 $ 195,445 $ 186,261 $ 163,235 $ 144,558
Book value per share of Common Stock....................... $ 11.97 $ 9.43 $ 8.28 $ 7.28 $ 6.35
Shares outstanding......................................... 20,286 20,726 22,514 22,420 22,782
</TABLE>
8
<PAGE> 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The Company's principal activities, securities brokerage and the trading of
and market making in securities, are highly competitive.
Total assets increased $531.4 million from $1,568.1 million at December 31,
1996 to $2,099.5 million at December 31, 1997. The increase is mostly due to a
$304.0 million increase in receivable from brokers and dealers related to
securities borrowed. The increase in securities borrowed is mostly a result of
an increase in payables to brokers and dealers (related to securities loaned).
Investments increased $104.0 million mostly due to increases in partnership
interests as well as debt and equity investments (mostly mutual funds).
Securities owned and securities sold, not yet purchased increased $47.6 million
and $64.4 million, respectively, from December 31, 1996 to December 31, 1997,
largely due to an increase in high yield securities.
Total liabilities increased $484.2 million from $1,372.6 million at
December 31, 1996 to $1,856.8 million at December 31, 1997. The increase is
largely due to the before-mentioned increases in payable to brokers and dealers
and securities sold, not yet purchased, as well as an increase in accrued
expenses and other liabilities and long-term debt. Accrued expenses and other
liabilities increased $111.0 million or 54%, from December 31, 1996, mostly due
to higher bonuses payable. Long-term debt increased $96.3 million mostly due to
the net proceeds from Jefferies Group, Inc.'s $100 million face value Senior
Note offering.
The earnings of the Company are subject to wide fluctuations since many
factors over which the Company has little or no control, particularly the
overall volume of trading and the volatility and general level of market prices,
may significantly affect its operations. The following provides a summary of
revenues by source for the past three years.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
1997 1996 1995
------------------- ------------------- -------------------
% OF % OF % OF
TOTAL TOTAL TOTAL
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commissions and principal
transactions:
Equities Division................. $199,268 26% $157,866 31% $127,227 31%
Investment Technology Group....... 138,672 18 113,452 22 71,917 18
International Division............ 56,525 7 43,288 8 39,617 9
Taxable Fixed Income Division..... 34,714 5 28,839 5 11,007 3
Convertible Division.............. 9,336 1 8,132 2 7,155 2
Other Proprietary Trading......... 21,016 3 14,383 3 6,641 2
-------- --- -------- --- -------- ---
Total..................... 459,531 60 365,960 71 263,564 65
-------- --- -------- --- -------- ---
Corporate Finance................... 228,640 30 97,870 19 72,003 18
Interest............................ 70,740 9 47,803 9 65,792 16
Other............................... 5,593 1 4,993 1 4,228 1
-------- --- -------- --- -------- ---
Total revenues............ $764,504 100% $516,626 100% $405,587 100%
======== === ======== === ======== ===
</TABLE>
1997 COMPARED TO 1996
Revenues, net of interest expense, increased $224.3 million, or 47%, in
1997 as compared to 1996. The increase was due to a $130.8 million, or 134%,
increase in corporate finance, a $60.3 million, or 27%, increase in commissions,
a $33.3 million, or 23%, increase in principal transactions, and a $600,000
increase in other revenues, offset by a $677,000, or 7%, decrease in net
interest income (interest revenues less interest expense). 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 International Division, and the
Taxable Fixed Income Division. Corporate finance revenues benefited from
increased debt financing deals. Net interest income decreased as the $22.9
million increase in interest revenues
9
<PAGE> 12
was surpassed by the $23.6 million increase in interest expense. Interest
revenues increased due primarily to higher securities borrowed activity.
Interest expense increased due primarily to higher securities loaned activity
and interest on temporary subordinated loans as well as the new 7 1/2% senior
notes.
Total non-interest expenses increased $191.5 million, or 48%, in 1997 as
compared to 1996. Compensation and benefits increased $145.9 million, or 55%
primarily due to a $102.6 million increase in performance-based compensation, a
$24.5 million increase in sales commissions and an $11.9 million increase in
salaries. Salaries increased due largely to expansion in ITG, the Corporate
Finance Division, the Equity Research Division and the Equities Division. Other
expense increased $15.0 million, or 51%, largely due to higher litigation
expenses and reserves. Telecommunications and data processing services increased
$12.0 million, or 34%, primarily due to increased trade volume and personnel.
Floor brokerage and clearing fees increased $7.7 million, or 28%, mostly due to
increased volume of business executed on the various exchanges. Travel and
promotional expense increased $5.7 million, or 42%, mostly due to increased
business travel. Occupancy and equipment rental increased $4.1 million, or 24%,
mostly due to the relocation and addition of office space. Software royalties
increased $1.0 million, or 12%, due to an increase in POSIT(R) commissions.
As a result of the above, earnings before income taxes and minority
interest were up $32.8 million, or 39%.
Net earnings were up 46% to $63.6 million, as compared to $43.6 million in
1996. Minority interest of $4.7 million in 1997 represents approximately 17% of
Investment Technology Group, Inc.'s net earnings. The effective tax rate was
approximately 41.1% in 1997 compared to approximately 42.6% in 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.
Basic earnings per share were $2.95 in 1997 on 21.6 million shares compared
to $1.90 in 1996 on 23.0 million shares. Diluted earnings per share were $2.80
in 1997 on 22.3 million shares compared to $1.84 in 1996 on 23.4 million shares.
1996 COMPARED TO 1995
Revenues, net of interest expense, increased $127.6 million, or 36%, in
1996 as compared to 1995. The increase was due to a $56.4 million, or 34%,
increase in commissions, a $46.0 million, or 47%, increase in principal
transactions, a $25.9 million, or 36%, increase in corporate finance, a $765,000
increase in other revenues, offset by a $1.5 million, or 13%, decrease in net
interest income (interest revenues less interest expense). Commission revenues
increased, led by ITG, the Equities Division, the International Division and the
Convertibles Division. Revenues from principal transactions increased primarily
due to increased trading gains in the Equities Division, the Taxable Fixed
Income Division, the Analytical Trading Division and the International Division.
Corporate finance revenues grew due to an increase in equity underwritings and
advisory fees. Other revenues increased largely due to a one time expense
reimbursement related to prior years. Net interest income decreased as the $18.0
million decrease in interest revenues exceeded the $16.5 million decrease in
interest expense. Interest revenues decreased due primarily to lower securities
borrowed. The related decrease in interest on securities loaned and customer
credit balances only partially offset the drop in interest revenues.
Total non-interest expenses increased $97.6 million, or 33%, in 1996 as
compared to 1995. Compensation and benefits increased $68.8 million, or 35%
primarily due to a $30.3 million increase in performance-based compensation, a
$19.1 million increase in sales commissions and a $10.2 million increase in
salaries. Salaries increased due largely to expansion in ITG, the Corporate
Finance Division, the Equity Research Division and the Equities Division. The
compensation costs of the Technology Department increased to support expansion
and to strengthen the trading and management information systems.
Telecommunications and data processing services increased $10.2 million, or 41%,
primarily due to increased trade volume and personnel. Floor brokerage and
clearing fees increased $7.1 million, or 35%, mostly due to increased volume of
business executed on the various exchanges. Travel and promotional expense
increased $3.2 million, or 32%, mostly due to increased business travel. Other
expense increased $4.3 million, or 17%, largely due to higher consulting,
printing and other expenses. Software royalties increased $2.8 million, or 47%,
due to an increase in POSIT(R)
10
<PAGE> 13
commissions. Occupancy and equipment rental increased $1.2 million, or 8%,
mostly due to the relocation and addition of office space.
As a result of the above, earnings before income taxes and minority
interest were up $29.9 million, or 56%.
Net earnings were up 53% to $43.6 million, as compared to $28.5 million in
1995. Minority interest of $4.2 million in 1996 represents approximately 18% of
Investment Technology Group, Inc.'s net earnings. The effective tax rate was
approximately 42.6% in 1996 compared to approximately 41.2% in 1995.
Basic earnings per share were $1.90 in 1996 on 23.0 million shares compared
to $1.23 in 1995 on 23.3 million shares. Diluted earnings per share were $1.84
in 1996 on 23.4 million shares compared to $1.19 in 1995 on 23.9 million shares.
LIQUIDITY AND CAPITAL RESOURCES
A substantial portion of the Company's assets are liquid, consisting of
cash or assets readily convertible into cash. The majority of securities
positions (both long and short) in the Company's trading accounts are readily
marketable and actively traded. Receivables from brokers and dealers are
primarily current open transactions or securities borrowed transactions which
can be settled or closed out within a few days. Receivables from customers,
officers and directors include margin balances and amounts due on uncompleted
transactions. Most of the Company's receivables are secured by marketable
securities.
The Company's assets are funded by equity capital, senior debt,
subordinated debt, securities loaned, customer free credit balances, bank loans
and other payables. Bank loans represent secured and unsecured short-term
borrowings (usually overnight) which are generally payable on demand. Secured
bank loans are collateralized by a combination of customer, noncustomer and firm
securities. The Company has always been able to obtain necessary short-term
borrowings in the past and believes that it will continue to be able to do so in
the future. Additionally, the Company has letters of credit outstanding which
are used in the normal course of business to satisfy various collateral
requirements in lieu of depositing cash or securities.
Jefferies, ITG and W & D are subject to the net capital requirements of the
Commission and other regulators, which are designed to measure the general
financial soundness and liquidity of broker-dealers. Jefferies, ITG and W & D
have consistently operated in excess of the minimum requirements. As of December
31, 1997, Jefferies', ITG's and W & D's net capital was $96.8 million, $35.0
million and $1.3 million, respectively, which exceeded minimum net capital
requirements by $91.4 million, $34.8 million and $1.0 million, respectively.
Jefferies, ITG and W & D use the alternative method of calculating their
regulatory net capital.
During 1997, Jefferies obtained a NASDR approved $200 million revolving
credit facility to be used in connection with underwriting activities.
In 1997, Jefferies Group, Inc. redeemed the remaining $3.6 million face
value of its 8.875% Subordinated Notes due 1997 in accordance with sinking fund
requirements. In 1997, Jefferies Group, Inc. issued $100 million face value of
7 1/2% Senior Notes due in 2007. Also in 1997, Jefferies Group, Inc. repurchased
1,063,026 shares (including 349,200 shares purchased in connection with the
Company's Capital Accumulation Plan) of its Common Stock at prices ranging from
$19.39 to $37.41.
In 1996, Jefferies Group, Inc. redeemed $3.6 million face value of its
8.875% Subordinated Notes due 1997 in accordance with sinking fund requirements.
Also in 1996, Jefferies Group, Inc. repurchased 2,320,352 shares (including
414,624 shares purchased in connection with the Company's Capital Accumulation
Plan) of its Common Stock at prices ranging from $11.31 to $18.63.
The repurchased shares of Common Stock, excluding the shares repurchased in
connection with the Company's Capital Accumulation Plan, were mostly retired.
11
<PAGE> 14
EFFECT OF THE COMMISSION'S ORDER HANDLING RULES
In late 1996 the Commission adopted a series of rules, referred to as the
Commission's Order Handling rules. These rules require market makers to display,
in certain circumstances, a customer's limit order. The implementation of these
rules was phased in during 1997 and has not materially affected the
profitability of Jefferies' activities as a market maker in Nasdaq securities.
EFFECTS OF CHANGES IN FOREIGN CURRENCY RATES
The Company maintains a foreign securities business in its foreign offices
(London, Hong Kong, Zurich and Tokyo) as well as in some of its domestic
offices. Most of these activities are hedged by related foreign currency
liabilities or by forward exchange contracts. However, the Company is still
subject to some foreign currency risk. A change in the foreign currency rates
could create either a foreign currency transaction gain/loss (recorded in the
Company's Consolidated Statements of Earnings) or a foreign currency translation
adjustment to the stockholders' equity section of the Company's Consolidated
Statements of Financial Condition.
NEW ACCOUNTING STANDARD ON EARNINGS PER SHARE
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share," establishes standards for computing and presenting earnings per share
("EPS"). SFAS No. 128 replaced the presentation of primary EPS with a
presentation of basic EPS. SFAS No. 128 also requires dual presentation of basic
and diluted EPS on the face of the statement of earnings for entities with
complex capital structures and requires a reconciliation of the numerator and
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. Basic earnings per share of common stock are computed
by dividing net earnings by the average number of shares outstanding and certain
other shares committed to, but not yet issued. Diluted earnings per share of
common stock are computed by dividing net earnings by the average number of
shares outstanding of common stock and all dilutive common stock equivalents
outstanding during the period. EPS information has been restated to
retroactively reflect the adoption of SFAS No. 128.
NEW ACCOUNTING STANDARD ON COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income," establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general-purpose financial
statements. All items that are required to be recognized under accounting
standards as components of comprehensive income are required to be reported in a
financial statement that is displayed with the same prominence as other
financial statements. SFAS No. 130 does not require a specific format for that
financial statement but requires that an enterprise display an amount
representing total comprehensive income for the period in that financial
statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position.
The Company implemented SFAS No. 130 in 1997. The adoption of SFAS No. 130
did not have any impact on the Company's consolidated financial position,
results of operations, or liquidity.
SEGMENT REPORTING
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and services,
geographic areas, and major customers.
12
<PAGE> 15
SFAS No. 131 requires that a public business enterprise report financial
and descriptive information about its reportable operating segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. Generally, financial information is required to be reported on the
basis that it is used internally for evaluating segment performance and deciding
how to allocate resources to segments.
SFAS No. 131 also requires that a public business enterprise report
descriptive information about the way that the operating segments were
determined, the products and services provided by the operating segments,
differences between the measurements used in reporting segment information and
those used in the enterprise's general-purpose financial statements, and changes
in the measurement of segment amounts from period to period.
SFAS No. 131 is effective for financial statements for periods beginning
after December 15, 1997. SFAS No. 131 is not expected to have a material impact
on the Company.
YEAR 2000
In 1996, the Company developed a plan to deal with the Year 2000 project
and began procedures for obtaining Year 2000 compliance with its computer
systems, as well as reviewing the systems of outside vendors. The plan provides
for the conversion efforts to be completed by the end of 1999. The Year 2000
project is the result of computer programs being written using two digits rather
than four to define the applicable year. The total cost of the project is
estimated to be approximately $14 million and is being funded through operating
cash flows. The Company expects to expense approximately $12 million (including
$1.6 million already expensed through December 31, 1997) of the total costs
associated with system upgrades and is expecting to capitalize the remaining
costs of $2 million associated with the acquisition of new hardware and
software.
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 a 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 interests 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 a 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.
For an assessment of risk, see Part I, Item 1, Business sections "Principal
Transactions," "Corporate Finance," "Interest," and "Competition."
13
<PAGE> 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements of Jefferies Group, Inc.
and Subsidiaries Independent Auditors' Report............. 15
Consolidated Statements of Financial Condition as of
December 31, 1997 and 1996................................ 16
Consolidated Statements of Earnings for the Three Years
Ended December 31, 1997................................... 17
Consolidated Statements of Changes in Stockholders' Equity
for the Three Years Ended December 31, 1997............... 18
Consolidated Statements of Cash Flows for the Three Years
Ended December 31, 1997................................... 19
Notes to Consolidated Financial Statements.................. 20
</TABLE>
14
<PAGE> 17
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
JEFFERIES GROUP, INC.:
We have audited the accompanying consolidated statements of financial
condition of Jefferies Group, Inc. and subsidiaries as of December 31, 1997 and
1996 and the related consolidated statements of earnings, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1997. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Jefferies
Group, Inc. and subsidiaries as of December 31, 1997 and 1996 and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Los Angeles, California
January 20, 1998, except as to
note 19 to the consolidated
financial statements, which
is as of March 17, 1998
15
<PAGE> 18
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 109,488 $ 114,142
Cash and securities segregated and on deposit for regulatory
purposes or deposited with clearing and depository
organizations............................................. 30,977 29,107
Receivable from brokers and dealers......................... 1,269,664 965,625
Receivable from customers, officers and directors........... 166,284 113,872
Securities owned............................................ 245,413 197,770
Investments................................................. 154,584 50,609
Premises and equipment...................................... 42,828 30,871
Other assets................................................ 80,304 66,091
---------- ----------
$2,099,542 $1,568,087
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Payable to brokers and dealers.............................. $ 981,705 $ 805,713
Payable to customers........................................ 202,255 170,384
Securities sold, not yet purchased.......................... 188,703 124,315
Accrued expenses and other liabilities...................... 318,258 207,281
---------- ----------
1,690,921 1,307,693
Long-term debt.............................................. 149,290 52,987
Minority interest........................................... 16,575 11,962
---------- ----------
1,856,786 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 22,393,910 shares in 1997 and 37,514,124
shares in 1996......................................... 224 188
Additional paid-in capital................................ 39 62,569
Retained earnings......................................... 271,589 232,741
Less:
Treasury stock, at cost; 2,107,842 shares in 1997 and
16,788,226 shares in 1996............................. (26,954) (99,404)
Accumulated other comprehensive income (loss):
Currency translation adjustments..................... (622) (96)
Additional minimum pension liability adjustment...... (1,520) (553)
---------- ----------
Total accumulated other comprehensive income (loss).... (2,142) (649)
---------- ----------
Net stockholders' equity............................. 242,756 195,445
---------- ----------
$2,099,542 $1,568,087
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE> 19
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
THREE YEARS ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Commissions.............................................. $282,317 $222,048 $165,610
Principal transactions................................... 177,214 143,912 97,954
Corporate finance........................................ 228,640 97,870 72,003
Interest................................................. 70,740 47,803 65,792
Other.................................................... 5,593 4,993 4,228
-------- -------- --------
Total revenues........................................ 764,504 516,626 405,587
Interest expense......................................... 61,466 37,852 54,365
-------- -------- --------
Revenues, net of interest expense..................... 703,038 478,774 351,222
-------- -------- --------
NON-INTEREST EXPENSES:
Compensation and benefits................................ 409,979 264,041 195,278
Floor brokerage and clearing fees........................ 35,066 27,323 20,273
Telecommunications and data processing services.......... 47,192 35,177 24,960
Occupancy and equipment rental........................... 21,297 17,207 15,993
Travel and promotional................................... 19,207 13,541 10,296
Software royalties....................................... 9,853 8,805 5,987
Other.................................................... 44,494 29,493 25,197
-------- -------- --------
Total non-interest expenses........................... 587,088 395,587 297,984
-------- -------- --------
Earnings before income taxes and minority interest......... 115,950 83,187 53,238
Income taxes............................................... 47,677 35,438 21,911
-------- -------- --------
Earnings before minority interest..................... 68,273 47,749 31,327
Minority interest in earnings of consolidated subsidiaries,
net...................................................... 4,706 4,189 2,798
-------- -------- --------
Net earnings.......................................... $ 63,567 $ 43,560 $ 28,529
======== ======== ========
EARNINGS PER SHARE:
Basic.................................................... $ 2.95 $ 1.90 $ 1.23
======== ======== ========
Diluted.................................................. $ 2.80 $ 1.84 $ 1.19
======== ======== ========
WEIGHTED AVERAGE SHARES OF COMMON STOCK:
Basic.................................................... 21,552 22,980 23,270
Diluted.................................................. 22,349 23,410 23,922
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE> 20
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER NET
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE STOCKHOLDERS'
STOCK CAPITAL EARNINGS STOCK INCOME (LOSS) EQUITY
------ ---------- -------- -------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994............................ $ 90 $ 51,120 $165,597 $(52,958) $ (614) $ 163,235
Exercise of stock options (970,572 shares)............ 2 5,613 -- -- -- 5,615
Purchase of 1,455,476 shares of treasury stock........ -- -- -- (12,768) -- (12,768)
Issuance of common stock (319,328 shares)............. 1 1,205 -- 1,237 -- 2,443
Issuance of restricted stock (165,212 shares)......... -- 179 -- 626 -- 805
Capital Accumulation Plan distribution (94,564
shares)............................................. -- -- -- 788 -- 788
Increase in proportionate share of subsidiary's equity
related to subsidiary's purchase of treasury
stock............................................... -- -- (766) -- -- (766)
Comprehensive income:
Net earnings........................................ -- -- 28,529 -- -- 28,529
Other comprehensive income (loss), net of tax:
Currency translation adjustment..................... -- -- -- -- (57) (57)
Additional minimum pension liability adjustment..... -- -- -- -- (437) (437)
------- ---------
Other comprehensive income (loss)................... (494) (494)
---------
Comprehensive income.................................. -- -- -- -- -- 28,035
Dividends paid ($.05 per share)....................... -- -- (1,126) -- -- (1,126)
---- -------- -------- -------- ------- ---------
Balance, December 31, 1995............................ 93 58,117 192,234 (63,075) (1,108) 186,261
Exercise of stock options (352,460 shares)............ 1 2,555 -- 97 -- 2,653
Purchase of 2,320,352 shares of treasury stock........ -- -- -- (36,766) -- (36,766)
Issuance of common stock (71,388 shares).............. -- 770 -- -- -- 770
Issuance of restricted stock (68,864 shares).......... -- 695 -- -- -- 695
Capital Accumulation Plan distribution (39,186
shares)............................................. -- 138 -- 340 -- 478
Increase in proportionate share of subsidiary's equity
related to subsidiary's purchase of treasury
stock............................................... -- -- (1,115) -- -- (1,115)
Additional vesting of restricted stock shares......... -- 388 -- -- -- 388
Comprehensive income:
Net earnings........................................ -- -- 43,560 -- -- 43,560
Other comprehensive income (loss), net of tax:
Currency translation adjustment..................... -- -- -- -- 426 426
Additional minimum pension liability adjustment..... -- -- -- -- 33 33
------- ---------
Other comprehensive income (loss)................... 459 459
---------
Comprehensive income.................................. -- -- -- -- -- 44,019
Dividends paid ($.0875 per share)..................... -- -- (1,883) -- -- (1,883)
Redemption of rights ($.0025 per right)............... -- -- (55) -- -- (55)
Two-for-one stock split............................... 94 (94) -- -- --
---- -------- -------- -------- ------- ---------
Balance, December 31, 1996............................ 188 62,569 232,741 (99,404) (649) 195,445
Exercise of stock options (240,028 shares)............ 2 3,431 -- -- -- 3,433
Purchase of 1,063,026 shares of treasury stock........ -- -- -- (23,584) -- (23,584)
Issuance of common stock (41,052 shares).............. -- 879 -- 3 -- 882
Issuance of restricted stock (198,888 shares)......... -- 3,282 -- -- -- 3,282
Capital Accumulation Plan distribution (143,228
shares)............................................. -- 508 -- 1,289 -- 1,797
Retirement of treasury shares (15,600,000 shares)..... (78) (70,902) (23,762) 94,742 -- --
Increase in proportionate share of subsidiary's equity
related to subsidiary's purchase of treasury
stock............................................... -- -- (45) -- -- (45)
Decrease in proportionate share of subsidiary's equity
related to stock issuances at the subsidiary........ -- -- 1,603 -- -- 1,603
Additional vesting and tax benefits on restricted
stock shares........................................ -- 384 -- -- -- 384
Comprehensive income:
Net earnings........................................ -- -- 63,567 -- -- 63,567
Other comprehensive income (loss), net of tax:
Currency translation adjustment..................... -- -- -- -- (526) (526)
Additional minimum pension liability adjustment..... -- -- -- -- (967) (967)
------- ---------
Other comprehensive income (loss)................... (1,493) (1,493)
---------
Comprehensive income.................................. 62,074
Dividends paid ($.125 per share)...................... -- -- (2,515) -- -- (2,515)
Two-for-one stock split............................... 112 (112) -- -- -- --
---- -------- -------- -------- ------- ---------
Balance, December 31, 1997............................ $224 $ 39 $271,589 $(26,954) $(2,142) $(242,756)
==== ======== ======== ======== ======= =========
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE> 21
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings.............................................. $ 63,567 $ 43,560 $ 28,529
--------- -------- ---------
Adjustments to reconcile net earnings to net cash provided
by operating activities:
Depreciation and amortization........................... 16,504 13,644 9,720
Deferred income taxes................................... (8,813) (10,462) (4,110)
Additional vesting of restricted stock.................. 384 388 --
(Increase) decrease in cash and securities segregated... (1,870) (23,849) 8,000
(Increase) decrease in receivables:
Brokers and dealers................................... (304,039) 152,529 31,516
Customers, officers and directors..................... (52,412) (6,714) (1,278)
Increase in securities owned............................ (47,643) (30,560) (22,270)
Increase in investments................................. (103,975) (25,452) (4,066)
(Increase) decrease in other assets..................... (16,316) (38,044) 17,090
Increase (decrease) in payables:
Brokers and dealers................................... 175,992 (58,743) 23,623
Customers............................................. 31,871 (44,171) (110,841)
Increase in securities sold, not yet purchased.......... 64,388 41,383 22,345
Increase in accrued expenses and other liabilities...... 118,822 83,252 45,708
--------- -------- ---------
Net cash provided by (used in) operating activities... (63,540) 96,761 43,966
--------- -------- ---------
Cash flows from financing activities:
Net payments on bank loans................................ -- -- (866)
Issuance of term debt..................................... 99,722 -- --
Net payments on:
Repurchase of treasury stock............................ (23,584) (36,766) (12,768)
Redemption of 8 7/8% Subordinated Notes, due 1997....... (3,576) (3,576) (3,576)
Dividends paid.......................................... (2,515) (1,883) (1,126)
Redemption of rights.................................... -- (55) --
Proceeds from exercise of stock options................... 3,433 2,653 5,615
Increase in minority interest............................. 4,613 3,581 2,245
Net decrease (increase) in proportionate share of
subsidiary's equity..................................... 1,558 (1,115) (766)
Distribution of Capital Accumulation Plan shares.......... 1,797 478 788
Payments -- repurchase agreements......................... -- -- (18,696)
Issuance of restricted shares............................. 3,282 695 805
Issuance of common shares................................. 882 770 2,443
--------- -------- ---------
Net cash provided by (used in) financing activities 85,612 (35,218) (25,902)
--------- -------- ---------
Cash flows from investing activities -- purchase of premises
and equipment............................................. (26,200) (16,145) (13,070)
--------- -------- ---------
Effect of currency translation on cash...................... (526) 426 (57)
--------- -------- ---------
Net (decrease) increase in cash and cash
equivalents.......................................... (4,654) 45,824 4,937
Cash and cash equivalents at beginning of year.............. 114,142 68,318 63,381
--------- -------- ---------
Cash and cash equivalents at end of year.................... $ 109,488 $114,142 $ 68,318
========= ======== =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest................................................ $ 58,038 $ 38,522 $ 54,934
Income taxes............................................ 52,030 42,724 15,168
</TABLE>
Supplemental disclosure of non-cash financing activities:
In 1995, the additional minimum pension liability included in stockholders'
equity of $586 resulted from an increase of $437 to accrued expenses and
other liabilities and an offsetting decrease in stockholders' equity. In
1996, the additional minimum pension liability included in stockholders'
equity of $553 resulted from a decrease of $33 to accrued expenses and other
liabilities and an offsetting increase in stockholders' equity. In 1997, the
additional minimum pension liability included in stockholders' equity of
$1,520 resulted from an increase of $967 to accrued expenses and other
liabilities and an offsetting decrease in stockholders' equity.
See accompanying notes to consolidated financial statements.
19
<PAGE> 22
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Jefferies Group, Inc. (Company) and all subsidiaries, including Jefferies &
Company, Inc. (Jefferies) and Investment Technology Group, Inc. (ITGI) and its
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 Company and its subsidiaries are primarily
engaged in a single line of business as a securities broker-dealer, which
includes several types of services, such as principal and agency transactions in
equity, convertible debt and taxable fixed income securities, as well as
corporate finance activities. 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.
SECURITIES TRANSACTIONS
All transactions in securities, commission revenues and related expenses
are recorded on a trade-date basis.
Securities owned and securities sold, not yet purchased, are valued at
market, and unrealized gains or losses are reflected in revenues from principal
transactions.
INVESTMENTS
Partnership interests are recorded at their initial cost. The carrying
values of these investments are adjusted when the adjustment can be supported by
quoted market prices, adjusted for liquidity and other relevant factors. In
addition, the carrying values are reduced when the Company determines that the
estimated realizable value is less than the carrying value based on relevant
financial and market information.
Debt and equity investments consist primarily of mutual funds which are
valued at market, based on available quoted prices.
Equity and debt interests in affiliates are recorded under either the
equity or cost method depending on the Company's level of ownership and control.
RECEIVABLE FROM, AND PAYABLE TO, CUSTOMERS, OFFICERS AND DIRECTORS
Receivable from, and payable to, customers includes amounts receivable and
payable on cash and margin transactions. Securities owned by customers and held
as collateral for these receivables are not reflected in the accompanying
consolidated financial statements. Receivable from officers and directors
represents balances arising from their individual security transactions. Such
transactions are subject to the same regulations as customer transactions.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all of the Company's financial instruments are carried at
fair value or amounts approximating fair value. Assets, including cash and cash
equivalents, securities borrowed or purchased under agreements to sell, and
certain receivables, are carried at fair value or contracted amounts, which
approximate fair value due to the short period to maturity. Similarly,
liabilities, including bank loans, securities loaned or sold under agreements to
repurchase, long-term debt and certain payables, are carried at amounts
approximating fair value. Securities owned and securities sold, not yet
purchased, are valued at quoted market prices, if available.
20
<PAGE> 23
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
For securities without quoted prices, the reported fair value is estimated using
various sources of information, including quoted prices for comparable
securities.
The Company has derivative financial instrument positions in option
contracts, foreign exchange forward contracts and index futures contracts which
are measured at fair value with gains and losses recognized in earnings. The
gross contracted or notional amount of these contracts is not reflected in the
consolidated statements of financial condition (see note 14 of the notes to
consolidated financial statements.)
PREMISES AND EQUIPMENT
Premises and equipment are depreciated using the straight-line method over
the estimated useful lives of the related assets (generally three to ten years).
Leasehold improvements are amortized using the straight-line method over the
term of related leases or the estimated useful lives of the assets, whichever is
shorter.
GOODWILL
Goodwill, which represents the excess of cost over net assets acquired, is
amortized on a straight-line basis over ten to fifteen years. The Company
assesses the recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through future operating cash flows of the acquired business.
CAPITALIZED SOFTWARE
The Company capitalizes software development costs where technological
feasibility of the product has been established. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized software development costs requires considerable judgment by
management with respect to certain external factors, including, but not limited
to, technological feasibility, anticipated future gross revenues, estimated
economic life and changes in software and hardware technologies. The Company is
amortizing capitalized software costs using the straight-line method over one to
two years, with an average remaining life of under two years. Amortization
begins when the product is available for release to the customers. As of
December 31, 1997 and 1996, respectively, the Company had $6.0 million and $3.0
million of capitalized software costs, net of accumulated amortization included
in other assets. In 1997, 1996 and 1995, the Company amortized software costs of
$1.5 million, $1.4 million, and $894,000, respectively.
Research and development expenses related to software were $7.1 million,
$6.0 million and $4.9 million in 1997, 1996 and 1995, respectively. In 1997,
1996 and 1995, $4.4 million, $1.6 million and $2.1 million, respectively, were
capitalized.
INCOME TAXES
The Company files a consolidated U.S. Federal income tax return which
includes all qualifying subsidiaries. Amounts provided for income taxes are
based on income reported for financial statement purposes and do not necessarily
represent amounts currently payable. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. Deferred
income taxes are provided for temporary differences in reporting certain items,
principally state income taxes, depreciation,
21
<PAGE> 24
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
deferred compensation and unrealized gains and losses on securities owned. Tax
credits are recorded as a reduction of income taxes when realized.
CASH EQUIVALENTS
The Company generally invests its excess cash in money market funds and
other short-term investments. At December 31, 1997 and 1996, such cash
equivalents amounted to $90,064,000 and $95,650,000, respectively. Cash
equivalents are part of the cash management activities of the Company and
generally mature within 90 days.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
Repurchase agreements consist of sales of U.S. Treasury notes under
agreements to repurchase. They are treated as collateralized financing
transactions and are recorded at their contracted repurchase amount.
Reverse repurchase agreements consist of purchases of U.S. Treasury notes
under agreements to re-sell. They are treated as collateralized financing
transactions and are recorded at their contracted re-sale amount.
EARNINGS PER COMMON SHARE
Basic earnings per share of common stock are computed by dividing net
earnings by the average number of shares outstanding and certain other shares
committed to, but not yet issued. Diluted earnings per share of common stock are
computed by dividing net earnings by the average number of shares outstanding of
common stock and all dilutive common stock equivalents outstanding during the
period. All shares used in the earnings per share calculations were restated to
retroactively reflect the two-for-one stock splits approved by the Board of
Directors on November 19, 1997 and March 2, 1996.
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share." SFAS 128 established new standards for computing and presenting earnings
per share. SFAS No. 128 replaced the presentation of primary earnings per share
with a presentation of basic earnings per share. SFAS No. 128 also requires dual
presentation of basic and diluted earnings per share on the face of the
statement of earnings for entities with complex capital structures and requires
a reconciliation of the numerator and denominator of the basic earnings per
share computation to the numerator and denominator of the diluted earnings per
share computation. SFAS 128 did not have a material impact on the Company.
Earnings per share information has been restated to retroactively reflect the
adoption of Statement of Financial Accounting Standards No. 128.
COMMON STOCK
On November 19, 1997, the Company's Board of Directors approved a
two-for-one split of all of the outstanding shares of the Company's common
stock, payable December 15, 1997 to stockholders of record at the close of
business on November 28, 1997. The stated par value of each share was not
changed from $0.01.
In addition, the Board of Directors, approved the quarterly cash dividend
at $0.05 per share on the approximately 20,000,000 common shares outstanding
after the split (effectively doubling the dividend rate).
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. The stated par value of each share was not changed from $0.01.
22
<PAGE> 25
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
In addition, the Board of Directors, approved the quarterly cash dividend
at $0.05 per share (pre November 1997 stock split) on the approximately
12,000,000 common shares (pre November 1997 stock split) to be outstanding after
the March 2, 1996 split (effectively doubling the dividend rate), as well as
repurchase of up to 1 million of the new common shares (pre November 1997 stock
split), on the open market or otherwise, from time to time.
All share, share price and per share information included in the
consolidated financial statements has been restated to retroactively reflect the
effect of the November 19, 1997 and the March 2, 1996 two-for-one stock splits.
The amount of common stock shares issued as of December 31, 1996 has been
restated to reflect the November 19, 1997 two-for-one stock split. Prior to
restatement, the actual amount of common stock shares issued as of December 31,
1996 was 18,757,062 with 25,000,000 common stock shares authorized.
TRANSFERS OF FINANCIAL ASSETS
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS 125
establishes, among other things, new criteria for determining whether a transfer
of financial assets should be accounted for as a sale or as a pledge of
collateral in a secured borrowing. SFAS No. 125 also establishes new accounting
requirements for pledged collateral. As issued, SFAS No. 125 was to be effective
for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996, and was to be applied
prospectively. Earlier or retroactive application of SFAS No. 125 is not
permitted. In November 1996, the FASB deferred for one year the effective date
of significant provisions of SFAS No. 125. SFAS No. 125 did not have a material
impact on the Company.
COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. All items that are
required to be recognized under accounting standards as components of
comprehensive income are required to be reported in a financial statement that
is displayed with the same prominence as other financial statements. SFAS No.
130 does not require a specific format for that financial statement but requires
that an enterprise display an amount representing total comprehensive income for
the period in that financial statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position.
The Company implemented SFAS No. 130 in 1997. The adoption of SFAS No. 130
did not have a material impact on the Company's consolidated financial position,
results of operations, or liquidity.
SEGMENT REPORTING
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to shareholders. It also
23
<PAGE> 26
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
establishes standards for related disclosures about products and services,
geographic areas, and major customers.
SFAS No. 131 requires that a public business enterprise report financial
and descriptive information about its reportable operating segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. Generally, financial information is required to be reported on the
basis that it is used internally for evaluating segment performance and deciding
how to allocate resources to segments.
SFAS No. 131 also requires that a public business enterprise report
descriptive information about the way that the operating segments were
determined, the products and services provided by the operating segments,
differences between the measurements used in reporting segment information and
those used in the enterprise's general-purpose financial statements, and changes
in the measurement of segment amounts from period to period.
SFAS No. 131 is effective for financial statements for periods beginning
after December 15, 1997. SFAS No. 131 is not expected to have a material impact
on the Company.
FOREIGN CURRENCY TRANSLATION
The Company's foreign revenues and expenses are translated at average
current rates during each reporting period. Foreign currency transaction gains
and losses are included in the consolidated statement of earnings. Gains and
losses resulting from translation of financial statements are excluded from the
consolidated statement of earnings and are recorded directly to a separate
component of stockholders' equity.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' amounts to
conform to the current year's presentation.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(2) GOODWILL
At December 31, 1997 and 1996, excess of purchase price over net assets
acquired remaining was $3,556,000 and $2,471,000, net of accumulated
amortization of $3,436,000 and $2,811,000, respectively, and is included in
other assets.
24
<PAGE> 27
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
(3) RECEIVABLE FROM, AND PAYABLE TO, BROKERS AND DEALERS
The following is a summary of the major categories of receivable from, and
payable to, brokers and dealers as of December 31, 1997 and 1996 (in thousands
of dollars):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Receivable from brokers and dealers:
Securities borrowed....................................... $1,197,227 $ 919,616
Other..................................................... 72,437 46,009
---------- ----------
$1,269,664 $ 965,625
========== ==========
Payable to brokers and dealers:
Securities loaned......................................... $ 966,132 $ 787,322
Other..................................................... 15,573 18,391
---------- ----------
$ 981,705 $ 805,713
========== ==========
</TABLE>
The Company has a securities borrowed versus securities loaned business
with other brokers. The Company also borrows securities to cover short sales and
to complete transactions in which customers have failed to deliver securities by
the required settlement date, and lends securities to other brokers and dealers
for similar purposes. From these activities, the Company derives interest
revenue and interest expense.
(4) RECEIVABLE FROM, AND PAYABLE TO, CUSTOMERS, OFFICERS AND DIRECTORS
The following is a summary of the major categories of receivables from
customers, officers and directors as of December 31, 1997 and 1996 (in thousands
of dollars):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Customers (net of allowance for uncollectible accounts of
$2,453 in 1997 and $3,051 in 1996)........................ $164,099 $109,924
Officers and directors...................................... 2,185 3,948
-------- --------
$166,284 $113,872
======== ========
</TABLE>
Interest is paid on free credit balances in accounts of customers who have
indicated that the funds will be used for investment at a future date. The rate
of interest paid on such free credit balances varies between the thirteen-week
treasury bill rate and 1% below that rate, depending upon the size of the
customers' free credit balances.
Uncollectible accounts expense amounted to $1,273,000, $18,000 and $81,000
for the years ended December 31, 1997, 1996 and 1995, respectively, and is
included in other expense.
25
<PAGE> 28
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
(5) SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED
The following is a summary of the market value of major categories of
securities owned and securities sold, not yet purchased, as of December 31, 1997
and 1996 (in thousands of dollars):
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
SECURITIES SECURITIES
SOLD, SOLD,
SECURITIES NOT YET SECURITIES NOT YET
OWNED PURCHASED OWNED PURCHASED
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Corporate equity securities..................... $120,316 $134,163 $122,608 $110,104
High-yield securities........................... 59,270 52,332 8,961 12,348
Corporate debt securities....................... 37,382 1,571 29,949 340
U.S. Government and agency obligations.......... 25,370 -- 31,435 --
Other........................................... 3,075 637 4,817 1,523
-------- -------- -------- --------
$245,413 $188,703 $197,770 $124,315
======== ======== ======== ========
</TABLE>
(6) INVESTMENTS
The following is a summary of the major categories of investments, as of
December 31, 1997 and 1996 (in thousands of dollars):
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Partnership interests....................................... $ 75,814 $24,975
Debt and equity investments................................. 64,397 16,655
Equity and debt interests in affiliates..................... 14,373 8,979
-------- -------
$154,584 $50,609
======== =======
</TABLE>
(7) PREMISES AND EQUIPMENT
The following is a summary of premises and equipment as of December 31,
1997 and 1996 (in thousands of dollars):
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Furniture, fixtures and equipment........................... $ 88,683 $60,166
Leasehold improvements...................................... 12,352 14,669
-------- -------
Total............................................. 101,035 74,835
Less accumulated depreciation and amortization.............. 58,207 43,964
-------- -------
$ 42,828 $30,871
======== =======
</TABLE>
Depreciation and amortization expense amounted to $14,243,000, $11,480,000
and $7,934,000 for the years ended December 31, 1997, 1996 and 1995,
respectively.
(8) BANK LOANS
Bank loans represent short-term borrowings that are payable on demand and
generally bear interest at the brokers' call loan rate. At December 31, 1997 and
1996, there were no bank loans.
26
<PAGE> 29
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
(9) LONG TERM DEBT
The following summarizes long term debt outstanding at December 31, 1997
and 1996 (in thousands of dollars):
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
8 7/8% Subordinated Notes, due 1997, less unamortized
discount of $79 in 1996, effective rate of 12%............ $ -- $ 3,499
8 7/8% Series B Senior Notes, due 2004, less unamortized
discount of $442 and $512 in 1997 and 1996, respectively,
effective rate of 9%...................................... 49,558 49,488
7 1/2% Senior Notes, due 2007, less unamortized discount of
$268 in 1997, effective rate of 8%........................ 99,732 --
-------- -------
$149,290 $52,987
======== =======
</TABLE>
During 1997, the remainder of the Subordinated Notes were redeemed. Also,
during 1997, Jefferies obtained a NASDR approved $200,000,000 revolving credit
facility to be used in connection with underwriting activities. The revolving
credit facility terminates on October 30, 1999. Loans under this facility bear
interest at 2.5% over either the Federal funds rate or the London Interbank
Offered Rate. During 1997, there were no borrowings against the revolving credit
facility.
(10) INCOME TAXES
Total income taxes for the years ended December 31, 1997, 1996 and 1995
were allocated as follows (in thousands of dollars):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Income from operations...................................... $47,677 $35,438 $21,911
Stockholders' equity, for compensation expense for tax
purposes in excess of amounts recognized for financial
reporting purposes........................................ (1,704) (1,568) (2,451)
Goodwill, for initial recognition of acquired tax
benefits.................................................. -- -- (122)
------- ------- -------
$45,973 $33,870 $19,338
======= ======= =======
</TABLE>
Income taxes (benefits) for the years ended December 31, 1997, 1996 and
1995 consists of the following (in thousands of dollars):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
CURRENT:
Federal................................................... $42,895 $35,059 $17,361
State and city............................................ 13,595 10,841 8,660
------- ------- -------
56,490 45,900 26,021
------- ------- -------
DEFERRED:
Federal................................................... (6,450) (8,756) (1,692)
State and city............................................ (2,363) (1,706) (2,418)
------- ------- -------
(8,813) (10,462) (4,110)
------- ------- -------
$47,677 $35,438 $21,911
======= ======= =======
</TABLE>
27
<PAGE> 30
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
Income taxes differed from the amounts computed by applying the Federal
income tax rate of 35% for 1997, 1996 and 1995 as a result of the following (in
thousands of dollars):
<TABLE>
<CAPTION>
1997 1996 1995
-------------- -------------- --------------
AMOUNT % AMOUNT % AMOUNT %
------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
Computed expected income taxes................ $40,583 35.0% $29,115 35.0% $18,633 35.0%
Increase (decrease) in income taxes resulting
from:
State and city income taxes, net of Federal
income tax benefit....................... 7,301 6.3 5,938 7.1 4,057 7.6
Limited deductibility of meals and
entertainment............................ 1,263 1.1 867 1.1 663 1.3
Non-taxable interest income................. (481) (0.4) (473) (0.6) (308) (.06)
Research and development tax credits........ (584) (0.5) (291) (0.3) (1,114) (2.1)
Other, net.................................. (405) (0.4) 282 0.3 (20) --
------- ---- ------- ---- ------- ----
Total income taxes.................. $47,677 41.1% $35,438 42.6% $21,911 41.2%
======= ==== ======= ==== ======= ====
</TABLE>
The cumulative tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and liabilities at December 31,
1997 and 1996 are presented below (in thousands of dollars):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Deferred tax assets:
Long-term compensation.................................... $25,018 $16,916
Lease allowances.......................................... 929 499
Accounts receivable....................................... 2,888 4,159
State income taxes........................................ 2,516 2,069
Securities inventories.................................... -- 417
Premises and equipment.................................... 1,328 952
Other..................................................... 581 272
------- -------
Total gross deferred tax assets................... 33,260 25,284
Valuation allowance....................................... -- --
------- -------
Net deferred tax assets........................... 33,260 25,284
------- -------
Deferred tax liabilities:
Investment in subsidiaries................................ (13,765) (14,342)
Notes payable............................................. -- (30)
Other..................................................... -- (230)
------- -------
Total gross deferred tax liabilities.............. (13,765) (14,602)
------- -------
Net deferred tax asset, included in other
assets........................................... $19,495 $10,682
======= =======
</TABLE>
There was no valuation allowance for deferred tax assets as of December 31,
1997, 1996 and 1995.
Management believes it is more likely than not that the Company will
generate sufficient taxable income in the future to realize the deferred tax
asset.
28
<PAGE> 31
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
(11) BENEFIT PLANS
PENSION PLAN
The Company has a defined benefit pension plan which covers certain
employees of the Company and its subsidiaries. The plan is subject to the
provisions of the Employee Retirement Income Security Act of 1974. Benefits are
based on years of service and the employee's career average pay. The Company's
funding policy is to contribute to the plan at least the minimum amount that can
be deducted for Federal income tax purposes.
The following tables set forth the plan's funded status and amounts
recognized in the Company's accompanying consolidated statements of financial
condition and consolidated statements of earnings (in thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 31
------------------
1997 1996
------- -------
<S> <C> <C>
Actuarial present value of benefit obligations --
accumulated benefit obligation, including vested benefits
of $18,449 and $13,647 as of December 31, 1997 and 1996,
respectively.............................................. $19,777 $14,607
======= =======
Projected benefit obligation for service rendered to date... $22,603 $16,279
Plan assets, at fair market value........................... 16,479 13,102
------- -------
Excess of the projected benefit obligation over plan
assets................................................. 6,124 3,177
Unrecognized prior service cost............................. 624 689
Unrecognized net transition obligation being recognized over
15 years.................................................. (172) (215)
Unrecognized net loss....................................... (5,876) (3,099)
Adjustment to recognize minimum liability................... 2,598 953
------- -------
Pension liability included in other liabilities........... $ 3,298 $ 1,505
======= =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net pension cost included the following components:
Service cost -- benefits earned during the period......... $ 1,288 $ 1,125 $ 595
Interest cost on projected benefit obligation............. 1,222 1,064 851
Actual loss (return) on plan assets....................... (2,403) (1,691) (2,195)
Net amortization.......................................... 1,516 1,000 1,442
------- ------- -------
Net periodic pension cost.............................. $ 1,623 $ 1,498 $ 693
======= ======= =======
</TABLE>
The plan assets consist of approximately 60% equities and 40% fixed income
securities.
The weighted average discount rate and the rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 7.00% and 5.00%, respectively, in 1997 and
7.50% and 5.00%, respectively, in both 1996 and 1995. The expected long-term
rate of return on assets was 8.40% in 1997, 1996 and 1995.
STOCK COMPENSATION PLANS
In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation." SFAS 123 defines a fair value based method of accounting for an
employee stock option or similar instrument and encourages all entities to adopt
that method of accounting for all of their employee stock compensation plans.
29
<PAGE> 32
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
However, it allows an entity to continue to measure compensation cost for these
plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees." Entities electing to remain with the accounting in APB Opinion
No. 25 must make pro forma disclosures of net earnings and earnings per share,
as if the fair value based method of accounting defined in SFAS 123 had been
applied. The Company implemented the statement during the year ended December
31, 1996.
At December 31, 1997, the Company had six stock-based compensation plans
and ITGI had two stock-based compensation plans, which are described below. The
Company and ITGI applied APB Opinion No. 25 in accounting for their plans.
Accordingly, no compensation cost has been recognized for fixed stock option
plans. Had compensation cost for the Company's and ITGI's stock-based
compensation plans been determined consistent with SFAS 123, the Company's net
earnings and earnings per share would have been reduced to the pro forma amounts
indicated below (in thousands of dollars, except per share amounts):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net earnings:
As reported............................................ $63,567 $43,560 $28,529
Pro forma.............................................. $58,927 $40,102 $25,474
Basic earnings per share:
As reported............................................ $ 2.95 $ 1.90 $ 1.23
Pro forma.............................................. $ 2.73 $ 1.75 $ 1.09
Diluted earnings per share:
As reported............................................ $ 2.80 $ 1.84 $ 1.19
Pro forma.............................................. $ 2.60 $ 1.69 $ 1.06
</TABLE>
1993 PLAN
The Company has a Stock Ownership and Long-Term Incentive Plan (1993 Plan)
which allows awards in the form of incentive stock options (within the meaning
of Section 422 of the Internal Revenue code), nonqualified stock options, stock
appreciation rights, restricted stock, unrestricted stock, performance awards,
dividend equivalents or other stock based awards. The maximum number of shares
of common stock of the Company with respect to which any awards may be made in
any calendar year during the term of the 1993 Plan may not exceed 20% of the
number of shares of common stock issued and outstanding as of the first day of
the calendar year in which awards are made, less the number of shares of common
stock reserved for issuance with respect to, or underlying, any award, made
pursuant to the 1993 Plan or any predecessor plan, as of such date. The 1993
Plan provides flexibility as to exercise price and term of each option.
DIRECTOR PLAN
The Company, also, has a Non-Employee Directors' Stock Option Plan
(Director Plan) which provides for an annual grant to each non-employee director
of an option to purchase 2,000 shares of the Company's common stock. Such grants
will be made automatically on the date directors are elected or reelected at the
Company's annual meeting. In addition, the Director Plan provides for the
automatic grant to a non-employee director, at the time he or she is first
elected or appointed, of an option to purchase 5,000 shares of the Company's
common stock. A total of 300,000 shares of the Company's common stock are
reserved under the Director Plan. Under the Director Plan, the exercise price of
each option equals the market price of the Company's stock on the date of grant
and the option's maximum term is five years.
30
<PAGE> 33
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
1996 PLAN
Additionally, in 1996, the Company established a Non-Employee Directors'
Deferred Compensation Plan (1996 Plan). The 1996 Plan permits each non-employee
director to elect to be paid annual retainer fees and annual fees for service as
chairman or a member of a Board committee in the form of stock options and to
defer receipt of any director fees in an interest-bearing cash account or as
deferred shares in a deferred share account. A total of 200,000 shares of the
Company's common stock are reserved under the 1996 Plan. Under the 1996 Plan,
the exercise price of each option equals the market price of the Company's stock
on the date of grant and the options expire ten years after the date of grant.
UNITED KINGDOM CAPITAL ACCUMULATION PLAN
The Company has a United Kingdom Capital Accumulation Plan (UK CAP) for
certain officers and key employees of the Company who work in the United
Kingdom. Participation in the plan is optional, with those who elect to
participate agreeing to defer graduated percentages of their compensation. The
UK CAP allows selected employees to acquire the Company's common stock (through
the granting of stock options) at a 15% discount with 40% of the amount
deferred. The remaining 60% of the amount deferred is placed in a Profit-Based
Deferred Compensation Account that earns interest at a rate based on the
performance of the Company.
OPTIONS ISSUED UNDER ALL PLANS
The fair value of all option grants for all the Company's plans are
estimated on the date of grant using the Black-Scholes option-pricing model with
the weighted-average assumptions used for all fixed option grants in 1997, 1996
and 1995, respectively: dividend yield of 0.4%, 0.6%, and 0.7%; expected
volatility of 33.4%, 33.3%, and 32.8%; risk-free interest rates of 6.4%, 5.4%,
and 7.0%; and expected lives of 5.5 years, 3.3 years, and 4.0 years.
A summary of the status of Company stock options in all its stock-based
plans as of December 31, 1997, 1996 and 1995 and changes during the year then
ended is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- --------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year........................... 1,702,000 $ 9.37 1,467,832 $ 6.07 1,964,132 $ 4.44
Granted.......................... 367,061 22.91 594,628 13.28 483,372 7.61
Exercised........................ (240,028) 9.48 (352,460) 3.47 (970,572) 3.14
Forfeited........................ -- -- (8,000) 8.13 (9,100) 5.26
--------- --------- ---------
Outstanding at end of year....... 1,829,033 12.05 1,702,000 9.37 1,467,832 6.07
========= ========= =========
Options exercisable at
year-end....................... 1,349,124 858,996 1,056,460
Weighted-average fair value of
options granted during the
year........................... $10.05 $ 4.19 $ 2.99
</TABLE>
31
<PAGE> 34
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- -----------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
AT REMAINING AVERAGE AT AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICES 1997 LIFE (YEARS) PRICE 1997 PRICE
------------------------ ------------ ------------ -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$1 to 6............................ 275,901 0.2 $ 4.05 240,000 $ 4.25
$7 to 12........................... 822,600 1.4 8.57 686,600 8.72
$13 to 21.......................... 473,000 2.8 15.92 274,992 15.31
$22 to 32.......................... 257,532 5.3 24.64 147,532 22.95
--------- ---------
$1 to 32........................... 1,829,033 2.1 12.05 1,349,124 10.82
========= =========
</TABLE>
INVESTMENT TECHNOLOGY GROUP, INC.'S PLANS
In 1994 ITGI, established the 1994 Employee Stock Option and Long-Term
Incentive Plan (ITGI Plan) which allows for the granting of options to purchase
a total of 3,650,000 shares of ITGI common stock. In 1995, the ITGI Board of
Directors adopted, and the ITGI stockholders approved, the Non-Employee
Directors' Plan (ITGI Director Plan). The ITGI Director Plan generally provides
for an annual grant to each non-employee director an option to purchase 2,500
shares of ITGI common stock. In addition, the ITGI Director Plan provides for
the automatic grant to a non-employee director, at the time he or she is
initially elected, a stock option to purchase 10,000 shares of ITGI common
stock. Stock options granted under the ITGI Director Plan are non-qualified
stock options having an exercise price equal to 100% of the fair market value of
ITGI common stock at the date of grant. A total of 125,000 shares of ITGI common
stock are reserved for issuance under the ITGI Director Plan. There were a total
of 2,311,059 fixed stock options outstanding and 18,254,800 ITGI common stock
shares outstanding as of December 31, 1996. There were a total of 3,458,216
fixed stock options outstanding and 18,220,968 ITGI common stock shares
outstanding as of December 31, 1997.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the weighted-average assumptions
used for all fixed option grants in 1997, 1996 and 1995, respectively: dividend
yield of 0.0%, 0.0% and 0.0%; expected volatility of 54%, 49% and 51%; risk-free
interest rates of 6.6%, 6.1% and 6.3%; and expected lives of 5 years, 4 years
and 4 years.
The following table summarizes information about stock options outstanding
at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- -----------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
AT REMAINING AVERAGE AT AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICES 1997 LIFE (YEARS) PRICE 1997 PRICE
------------------------ ------------ ------------ -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$ 7.33 - 10.00......................... 455,603 2.9 $ 9.07 9,934 $ 7.90
$11.00 - 15.00......................... 1,728,332 1.7 $12.52 1,296,008 $13.01
$16.00 - 20.00......................... 167,177 4.4 $19.23 12,377 $18.43
$21.00 - 25.00......................... 1,019,604 4.1 $22.21 419,604 $22.25
$26.00 - 27.80......................... 87,500 9.8 $27.60 -- --
--------- ---------
$ 7.33 - 27.80......................... 3,458,216 2.9 $15.63 1,737,923 $15.25
========= =========
</TABLE>
32
<PAGE> 35
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
PERFORMANCE-BASED STOCK OPTIONS
While the 1993 Plan allows for the granting of performance-based stock
options, no such options were granted during 1997, 1996 and 1995, and no such
options were outstanding at December 31, 1997, 1996 and 1995.
RESTRICTED STOCK
The 1993 Plan allows for grants of restricted stock awards, whereby certain
key employees are granted restricted shares of common stock subject to
forfeiture until the restrictions lapse or terminate. With certain exceptions,
the employee must remain with the Company for a period of years after the date
of grant to receive the full number of shares granted. During 1997, 1996 and
1995, there were restricted stock awards of 198,888 shares, 49,264 shares and
256,092 shares, respectively, with a corresponding market value of $4,189,000,
$624,000 and $2,187,000, respectively. Certain grants are expensed over the
vesting periods of one to three years, while others have been granted in
settlement of previously accrued compensation liabilities. The compensation
cost, excluding the cost associated with the settlement of previously accrued
compensation liabilities, charged against earnings was $1,142,000, $394,000 and
$1,788,000 in 1997, 1996 and 1995, respectively. As of December 31, 1997, 1996
and 1995, restricted stock shares outstanding were 203,468 shares, 95,160 shares
and 234,676 shares, respectively.
EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan (ESPP). All regular
full-time employees are eligible for the ESPP. Employee contributions are
voluntary and are made via payroll deduction. The employee contributions are
used to purchase the Company's common stock which is then held in an outside
trust account. The Company matches employee contributions at a rate of 15%
(more, if profits exceed targets set by the Company's Board of Directors). The
Company's match vests after two years. The Company recognizes compensation cost
related to its ESPP matching. The compensation cost charged against earnings was
$228,000, $250,000 and $161,000 in 1997, 1996 and 1995, respectively.
CAPITAL ACCUMULATION PLAN
The Company has a Capital Accumulation Plan (CAP) for certain officers and
key employees of the Company. Participation in the plan is optional, with those
who elect to participate agreeing to defer graduated percentages of their
compensation. The plan allows selected employees to acquire the Company's common
stock at a 15% discount with 50% of the amount deferred. The remaining 50% of
the amount deferred is placed in a Profit-Based Deferred Compensation Account
that earns interest at a rate based on the performance of the Company.
The Company will from time to time repurchase shares of its common stock in
the open market for use in both the CAP and UK CAP plans. The Company has
acquired 2,304,616 shares since the inception of the plans (CAP in 1993 and UK
CAP in 1995) and has made distributions of 347,702 shares. The Company
recognizes compensation cost related to the 15% discount and interest on
Profit-Based Deferred Compensation Accounts. The compensation cost charged
against earnings was $4,834,000, $2,742,000 and $2,200,000 in 1997, 1996 and
1995, respectively.
33
<PAGE> 36
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
PROFIT SHARING PLAN
The Company has a profit sharing plan, covering substantially all
employees, which includes a salary reduction feature designed to qualify under
Section 401-K of the Internal Revenue Code. Expenses related to this plan
amounted to $7,923,000, $5,713,000 and $3,565,000 in 1997, 1996 and 1995,
respectively.
(12) EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for the years 1997, 1996 and
1995 (in thousands, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Net earnings for basic earnings per share................... $63,567 $43,560 $28,529
Earnings adjustment -- stock options on subsidiary........ (890) (501) --
------- ------- -------
Adjusted earnings for diluted earnings per share.......... $62,677 $43,059 $28,529
======= ======= =======
Shares of common stock and common stock equivalents:
Average number of common shares........................... 20,148 21,644 22,198
Capital Accumulation Plan unissued shares................. 1,404 1,336 1,072
------- ------- -------
Average shares used in basic computation.................. 21,552 22,980 23,270
Stock options............................................. 651 398 482
Other unissued common shares.............................. 146 32 170
------- ------- -------
Average shares used in diluted computation................ 22,349 23,410 23,922
======= ======= =======
Earnings per share:
Basic..................................................... $ 2.95 $ 1.90 $ 1.23
======= ======= =======
Diluted................................................... $ 2.80 $ 1.84 $ 1.19
======= ======= =======
</TABLE>
The Company had no anti-dilutive securities during 1997, 1996 and 1995.
(13) LEASES
As lessee, the Company leases certain premises and equipment under
noncancelable agreements expiring at various dates through 2012. Future minimum
lease payments for all noncancelable operating leases at December 31, 1997 are
as follows (in thousands of dollars):
<TABLE>
<S> <C>
1998........................................................ $10,714
1999........................................................ 9,198
2000........................................................ 7,544
2001........................................................ 6,114
2002........................................................ 4,078
Thereafter.................................................. 23,892
</TABLE>
Rental expense for the Company was $8,342,000 in 1997, $6,759,000 in 1996
and $5,996,000 in 1995.
34
<PAGE> 37
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
(14) FINANCIAL INSTRUMENTS
OFF-BALANCE SHEET RISK
The Company has contractual commitments arising in the ordinary course of
business for securities loaned or purchased under agreements to sell, securities
sold but not yet purchased, repurchase agreements, future purchases and sales of
foreign currencies, securities transactions on a when-issued basis, options
contracts, futures index contracts, and underwriting. Each of these financial
instruments and activities contains varying degrees of off-balance sheet risk
whereby the market values of the securities underlying the financial instruments
may be in excess of, or less than, the contract amount. The settlement of these
transactions is not expected to have a material effect upon the Company's
consolidated financial statements.
In the normal course of business, the Company had letters of credit
outstanding aggregating $20,915,000 at December 31, 1997 to satisfy various
collateral requirements in lieu of depositing cash or securities.
The Company has derivative financial instrument positions in foreign
exchange forward contracts, option contracts, and index futures contracts, all
of which are measured at fair value with realized and unrealized gains and
losses recognized in earnings. The foreign exchange forward contract positions
are generally taken to lock in the dollar cost or proceeds of foreign currency
commitments associated with unsettled foreign denominated securities purchases
or sales. The average maturity of the forward contracts is generally less than
two weeks. The option positions taken are generally part of a strategy in which
offsetting equity positions are taken. Currently, the index futures positions
are taken as a hedge against other securities positions.
The gross contracted or notional amount of index futures contracts,
commodities futures contracts, options contracts, and foreign exchange forward
contracts, which are not reflected in the consolidated statement of financial
condition, is set forth in the table below and provide only a measure of the
Company's involvement in these contracts at December 31, 1997 and 1996. They do
not represent amounts subject to market risk and, in many cases, serve to reduce
the Company's overall exposure to market and other risks (in thousands of
dollars):
<TABLE>
<CAPTION>
NOTIONAL OR CONTRACTED AMOUNT
-----------------------------------------
1997 1996
------------------ -------------------
PURCHASE SALE PURCHASE SALE
-------- ------ -------- -------
<S> <C> <C> <C> <C>
Index futures contracts.............................. $ -- $8,173 $ -- $13,327
Commodities futures contracts........................ -- -- 11,833 --
Option contracts..................................... 6,277 4,803 60 4,681
Foreign exchange forward contracts................... 430 4,461 2,978 4,135
</TABLE>
35
<PAGE> 38
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
FAIR VALUE OF DERIVATIVE FINANCIAL INSTRUMENTS
The following is an aggregate summary of the average 1997 and 1996 and
December 31, 1997 and 1996 fair values of derivative financial instruments (in
thousands of dollars):
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------------------
AVERAGE END OF PERIOD AVERAGE END OF PERIOD
------- ------------- ------- -------------
<S> <C> <C> <C> <C>
Index futures contracts:
In a favorable position....................... $ 55 $ -- $ 104 $ 78
In an unfavorable position.................... 204 149 298 57
Option contracts:
Purchases..................................... 682 799 208 9
Sales......................................... 372 637 706 1,523
Foreign exchange forward contracts:
Purchases..................................... 3,406 430 4,031 2,978
Sales......................................... 3,291 4,461 5,177 4,135
</TABLE>
CREDIT RISK
In the normal course of business, the Company is involved in the execution,
settlement and financing of various customer and principal securities
transactions. Customer activities are transacted on a cash, margin or
delivery-versus-payment basis. Securities transactions are subject to the risk
of counterparty or customer nonperformance. However, transactions are
collateralized by the underlying security, thereby reducing the associated risk
to changes in the market value of the security through settlement date or to the
extent of margin balances.
The Company seeks to control the risk associated with these transactions by
establishing and monitoring credit limits and by monitoring collateral and
transaction levels daily. The Company may require counterparties to deposit
additional collateral or return collateral pledged. In the case of aged
securities failed to receive, the Company may, under industry regulations,
purchase the underlying securities in the market and seek reimbursement for any
losses from the counterparty.
CONCENTRATION OF CREDIT RISK
As a major securities firm, the Company's activities are executed primarily
with and on behalf of other financial institutions, including brokers and
dealers, banks and other institutional customers. Concentrations of credit risk
can be affected by changes in economic, industry or geographical factors. The
Company seeks to control its credit risk and the potential risk concentration
through a variety of reporting and control procedures, including those described
in the preceding discussion of credit risk.
36
<PAGE> 39
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
(15) OTHER COMPREHENSIVE INCOME
The following summarizes other comprehensive income and accumulated other
comprehensive income at December 31, 1997 and for the year then ended (in
thousands of dollars):
<TABLE>
<CAPTION>
TAX
BEFORE-TAX (EXPENSE) NET-OF-TAX
AMOUNT OR BENEFIT AMOUNT
---------- ---------- ----------
<S> <C> <C> <C>
Currency translation adjustments........................... $ (526) $ -- $ (526)
Minimum pension liability adjustment....................... (1,645) 678 (967)
------- ---- -------
Other comprehensive income (loss).......................... $(2,171) $678 $(1,493)
======= ==== =======
</TABLE>
<TABLE>
<CAPTION>
MINIMUM ACCUMULATED
CURRENCY PENSION OTHER
TRANSLATION LIABILITY COMPREHENSIVE
ADJUSTMENTS ADJUSTMENT INCOME (LOSS)
----------- ----------- -------------
<S> <C> <C> <C>
Beginning balance..................................... $ (96) $ (553) $ (649)
Change in 1997........................................ (526) (967) (1,493)
----- ------- -------
Ending balance........................................ $(622) $(1,520) $(2,142)
===== ======= =======
</TABLE>
(16) NET CAPITAL REQUIREMENTS
As registered broker-dealers, Jefferies, ITG and W & D are subject to the
Securities and Exchange Commission Uniform Net Capital Rule (Rule 15c3-1), which
requires the maintenance of minimum net capital. 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.
At December 31, 1997, Jefferies', ITG Inc.'s and W & D's net capital was
$96.8 million, $35.0 million and $1.3 million, respectively, which exceeded
minimum net capital requirements by $91.4 million, $34.8 million and $1.0
million, respectively.
(17) CONTINGENCIES
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 Commission commenced investigations into certain issues related
to the allegations of the Lawsuits. In August 1996, the DOJ entered into a
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 Commission 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 adequately
police or discipline the market makers for those practices. However, the
Commission 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
37
<PAGE> 40
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
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 Jefferies.
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.
(18) 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 years in the period ended December 31, 1997 are summarized as follows
(in thousands of dollars):
<TABLE>
<CAPTION>
FINANCIAL ELIMINATIONS/
SERVICES ITGI RECLASSIFICATIONS CONSOLIDATED
---------- -------- ----------------- ------------
<S> <C> <C> <C> <C>
1997
Total revenues........................... $ 630,842 $137,042 $ (3,380) $ 764,504
Operating income......................... 68,690 47,260 -- 115,950
Identifiable assets...................... 1,994,684 113,641 (8,783) 2,099,542
Capital expenditures..................... 10,521 15,679 -- 26,200
Depreciation and amortization............ 9,862 6,642 -- 16,504
1996
Total revenues........................... $ 407,023 $111,556 $ (1,953) $ 516,626
Operating income......................... 42,186 41,001 -- 83,187
Identifiable assets...................... 1,493,117 82,798 (7,828) 1,568,087
Capital expenditures..................... 10,521 5,624 -- 16,145
Depreciation and amortization............ 9,687 3,957 -- 13,644
1995
Total revenues........................... $ 334,282 $ 72,381 $ (1,076) $ 405,587
Operating income......................... 28,350 24,888 -- 53,238
Identifiable assets...................... 1,497,351 55,318 (15,700) 1,536,969
Capital expenditures..................... 8,067 5,003 -- 13,070
Depreciation and amortization............ 7,472 2,248 -- 9,720
</TABLE>
Financial services provided trade execution, clearance and administrative
services to ITGI for $21.6 million, $14.7 million and $11.4 million in 1997,
1996 and 1995, respectively. ITGI provided automated trade execution services to
Financial services for $3.1 million, $1.7 million and $1.1 million in 1997, 1996
and 1995, respectively.
38
<PAGE> 41
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31, 1997 AND 1996
(19) 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 a 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 interests 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 a 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.
39
<PAGE> 42
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Information with respect to this item will be contained in the Proxy
Statement for the 1998 Annual Meeting of Shareholders, which is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
Information with respect to this item will be contained in the Proxy
Statement for the 1998 Annual Meeting of Shareholders, which is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item will be contained in the Proxy
Statement for the 1998 Annual Meeting of Shareholders, which is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Information with respect to this item will be contained in the Proxy
Statement for the 1998 Annual Meeting of Shareholders, which is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
PAGES
-----
<S> <C> <C>
(a)1 FINANCIAL STATEMENTS
Included in Part II of this report:
Independent Auditors' Report................................ 15
Consolidated Statements of Financial Condition.............. 16
Consolidated Statements of Earnings......................... 17
Consolidated Statements of Changes in Stockholders'
Equity...................................................... 18
Consolidated Statements of Cash Flows....................... 19
Notes to Consolidated Financial Statements.................. 20
</TABLE>
All Schedules are omitted because they are not applicable or because the
required information is shown in the financial statements or notes thereto.
(a)3. EXHIBITS
<TABLE>
<C> <S>
(3.1) Amended and Restated Certificate of Incorporation is
incorporated by reference to Exhibit 3.1 of the Registrant's
Form 10-K filed for the fiscal year ended December 31, 1987.
(3.2) Amended By-Laws are incorporated by reference to Exhibit 3.2
of the Registrant's Form 10-K filed for the fiscal year
ended December 31, 1986.
(4.1) Indenture dated as of August 18, 1997 by and between the
Registrant and the Bank of New York as Trustee including
form of 7 1/2% Series B Senior Notes due 2007 is
incorporated by reference to Exhibit 4.1 to Registrant's
Registration Statement on Form S-4 (No. 333-40263) filed on
November 14, 1997 including amendments thereto.
</TABLE>
40
<PAGE> 43
<TABLE>
<C> <S>
(4.2) Registration Rights Agreement dated as of August 18, 1997 by and among the Registrant and the
purchasers of the Registrant's 7 1/2% Series B Senior Notes due 2007 is incorporated by
reference to Exhibit 10.2 to Registrant's Registration Statement on Form S-4 (No. 333-40263)
filed on November 14, 1997 including amendments thereto.
(10.1) Incentive Compensation Plan for Frank E. Baxter, Chairman, President and Chief Executive
Officer, Jefferies Group, Inc. is incorporated by reference to Exhibit 10.1 of Registrant's
Form 10-K filed for the fiscal year ended December 31, 1992.
(10.2) Form of Employment Agreement between Investment Technology Group, Inc. and Raymond L.
Killian, Jr. is incorporated by reference to Exhibit 10.3.2 of Investment Technology Group,
Inc.'s Registration Statement on Form S-1 (No. 33-76474) filed on March 15, 1994, including
amendments thereto.
(10.3) Amendment No. 2 to Employment Agreement between Investment Technology Group, Inc., ITG Inc.
and Raymond L. Killian, Jr. is incorporated by reference to Exhibit 3.2A of Investment
Technology Group, Inc.'s Form 10-K for the period ended December 31, 1996.
(10.4) Employment Agreement between Scott P. Mason and Investment Technology Group, Inc. dated as of
January 6, 1997, is incorporated by reference to Exhibit 10.3.18 of Investment Technology
Group, Inc.'s Form 10-K filed for the fiscal year ended December 31, 1996.
(10.5) Jefferies Group, Inc. 1983 Incentive Stock Option Plan is incorporated by reference to
Registrant's Registration Statement on Form S-8 (No. 2-94727) filed on December 6, 1984.
(10.6) 1985 Incentive Stock Option Plan of Jefferies Group, Inc. is incorporated by reference to
Registrant's Registration Statement on Form S-8 (No. 33-17065) filed on September 8, 1987.
(10.7) Jefferies Group, Inc. 1985 Non-qualified Stock Option Plan is incorporated by reference to
Registrant's Registration Statement on Form S-8 (No. 33-17065) filed on September 8, 1987.
(10.8) Jefferies Group, Inc. 1993 Stock Ownership and Long-Term Incentive Plan as Amended and
Restated is incorporated by reference to Appendix B to the Registrant's Proxy Statement filed
on March 29, 1997.
(10.9) Jefferies Group, Inc. Capital Accumulation Plan for Key Employees is incorporated by
reference to Registrant's Registration Statement on Form S-8 (No. 33-64490) filed on June 15,
1993.
(10.10) Jefferies Group, Inc. Non-Employee Directors' Stock Option Plan is incorporated by reference
to Appendix C of Registrant's Proxy Statement filed on April 4, 1994.
(10.11) Jefferies Group, Inc. Pay-for-Performance Incentive Plan is incorporated by reference to
Appendix B of Registrant's Proxy Statement filed on April 4, 1994.
(10.12) Jefferies Group, Inc. Non-Employee Directors' Deferred Compensation Plan is incorporated by
reference to Appendix B of Registrant's Proxy Statement filed on March 29, 1996.
(10.13) Jefferies Group, Inc. United Kingdom Capital Accumulation Plan for Key Employees is
incorporated by reference to Exhibit 10.13 of Registrant's Form 10-K filed for the fiscal
year ended December 31, 1996.
</TABLE>
41
<PAGE> 44
<TABLE>
<C> <S>
(21) List of Subsidiaries of Registrant is incorporated by reference to Exhibit 21 of Registrant's
Form 10-K filed for the fiscal year ended December 31, 1996.
(23)* Consent of KPMG Peat Marwick LLP.
(27) Financial Data Schedules.
</TABLE>
- ---------------
* Filed herewith.
Exhibits 10.1 to and including 10.13 are management contracts or
compensatory plans or arrangements.
ALL OTHER EXHIBITS ARE OMITTED BECAUSE THEY ARE NOT APPLICABLE.
(b) No reports on Form 8-K have been filed by the Registrant during the
fourth quarter of 1997.
42
<PAGE> 45
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
JEFFERIES GROUP, INC.
By FRANK E. BAXTER
------------------------------------
Frank E. Baxter
Chairman of the Board of Directors
Dated: March 18, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons in the capacities and on
the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
FRANK E. BAXTER Chairman of the Board of March 18, 1998
- ----------------------------------------------------- Directors and Chief
Frank E. Baxter Executive Officer
MICHAEL L. KLOWDEN President and Chief March 18, 1998
- ----------------------------------------------------- Operating Officer
Michael L. Klowden
CLARENCE T. SCHMITZ Executive Vice President March 18, 1998
- ----------------------------------------------------- and Chief Financial Officer
Clarence T. Schmitz
RICHARD G. DOOLEY Director March 18, 1998
- -----------------------------------------------------
Richard G. Dooley
TRACY G. HERRICK Director March 18, 1998
- -----------------------------------------------------
Tracy G. Herrick
RAYMOND L. KILLIAN, JR. Director March 18, 1998
- -----------------------------------------------------
Raymond L. Killian, Jr.
SHELDON B. LUBAR Director March 18, 1998
- -----------------------------------------------------
Sheldon B. Lubar
FRANK J. MACCHIAROLA Director March 18, 1998
- -----------------------------------------------------
Frank J. Macchiarola
BARRY M. TAYLOR Director March 18, 1998
- -----------------------------------------------------
Barry M. Taylor
MARK A. WOLFSON Director March 18, 1998
- -----------------------------------------------------
Mark A. Wolfson
</TABLE>
43
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Jefferies Group, Inc.:
We consent to incorporation by reference in the Registration Statements No.
2-94727 dated December 6, 1984; No. 33-17065 dated September 8, 1987; No.
33-19741 dated January 21, 1988; No. 33-65318 dated May 27, 1993; No. 33-64490
dated June 15, 1993; No. 33-52139 dated February 3, 1994; No. 33-54373 dated
June 30, 1994, and No. 333-02489 dated April 12, 1996, all on Form S-8, and No.
33-54265 dated July 14, 1994, and No. 333-40263 dated December 5, 1997, both on
Form S-4 of Jefferies Group, Inc. of our report dated January 20, 1998, except
as to note 19 to the consolidated financial statements, which is as of March 17,
1998, relating to the consolidated statements of financial condition of
Jefferies Group, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of earnings, changes in stockholders' equity and
cash flows for each of the years in the three-year period ended December 31,
1997, which report appears in the December 31, 1997 annual report on Form 10-K
of Jefferies Group, Inc.
/s/ KPMG Peat Marwick LLP
Los Angeles, California
March 18, 1998
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AND THE CONSOLIDATED STATEMENTS
OF EARNINGS AS OF DECEMBER 1997 AND FOR THE YEAR THEN ENDED AND THE NOTES
THERETO AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS FILED IN THE 1997 JEFFERIES GROUP, INC. 10-K FILING.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 109,488
<RECEIVABLES> 238,721
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 1,197,227
<INSTRUMENTS-OWNED> 245,413
<PP&E> 42,828
<TOTAL-ASSETS> 2,099,542
<SHORT-TERM> 0
<PAYABLES> 217,828
<REPOS-SOLD> 0
<SECURITIES-LOANED> 966,132
<INSTRUMENTS-SOLD> 188,703
<LONG-TERM> 149,290
0
0
<COMMON> 224
<OTHER-SE> 242,532
<TOTAL-LIABILITY-AND-EQUITY> 2,099,542
<TRADING-REVENUE> 177,214
<INTEREST-DIVIDENDS> 70,740
<COMMISSIONS> 305,737
<INVESTMENT-BANKING-REVENUES> 236,355
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 61,466
<COMPENSATION> 409,979
<INCOME-PRETAX> 115,950
<INCOME-PRE-EXTRAORDINARY> 115,950
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 63,567
<EPS-PRIMARY> 2.95
<EPS-DILUTED> 2.80
</TABLE>
<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>
<RESTATED>
<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> 204,078
<INVESTMENT-BANKING-REVENUES> 140,476
<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> 2.12
<EPS-DILUTED> 2.01
</TABLE>
<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>
<RESTATED>
<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> 136,440
<INVESTMENT-BANKING-REVENUES> 92,965
<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> 1.44
<EPS-DILUTED> 1.37
</TABLE>
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AND THE CONSOLIDATED STATEMENTS
OF EARNINGS AS OF MARCH 28, 1997 AND FOR THE THREE MONTHS ENDED AND THE NOTES
THERETO AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS FILED IN THE 1997 JEFFERIES GROUP, INC. FIRST QUARTER 10-Q FILING.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-28-1997
<EXCHANGE-RATE> 1
<CASH> 116,901
<RECEIVABLES> 180,268
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 1,497,887
<INSTRUMENTS-OWNED> 244,783
<PP&E> 33,421
<TOTAL-ASSETS> 2,217,604
<SHORT-TERM> 28,500
<PAYABLES> 205,967
<REPOS-SOLD> 0
<SECURITIES-LOANED> 1,392,832
<INSTRUMENTS-SOLD> 159,089
<LONG-TERM> 53,030
0
0
<COMMON> 188
<OTHER-SE> 191,752
<TOTAL-LIABILITY-AND-EQUITY> 2,217,604
<TRADING-REVENUE> 40,220
<INTEREST-DIVIDENDS> 13,895
<COMMISSIONS> 64,843
<INVESTMENT-BANKING-REVENUES> 26,957
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 11,899
<COMPENSATION> 77,010
<INCOME-PRETAX> 21,567
<INCOME-PRE-EXTRAORDINARY> 21,567
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,397
<EPS-PRIMARY> .53
<EPS-DILUTED> .50
</TABLE>
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AND THE CONSOLIDATED STATEMENTS
OF EARNINGS AS OF DECEMBER 31, 1996 AND FOR THE YEAR THEN ENDED AND THE NOTES
THERETO AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS FILED IN THE 1996 JEFFERIES GROUP, INC. 10-K FILING.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 114,142
<RECEIVABLES> 159,881
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 919,616
<INSTRUMENTS-OWNED> 197,770
<PP&E> 30,871
<TOTAL-ASSETS> 1,568,087
<SHORT-TERM> 0
<PAYABLES> 188,775
<REPOS-SOLD> 0
<SECURITIES-LOANED> 787,322
<INSTRUMENTS-SOLD> 124,315
<LONG-TERM> 52,987
0
0
<COMMON> 188
<OTHER-SE> 195,257
<TOTAL-LIABILITY-AND-EQUITY> 1,568,087
<TRADING-REVENUE> 143,912
<INTEREST-DIVIDENDS> 47,803
<COMMISSIONS> 222,048
<INVESTMENT-BANKING-REVENUES> 97,870
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 37,852
<COMPENSATION> 264,041
<INCOME-PRETAX> 83,187
<INCOME-PRE-EXTRAORDINARY> 83,187
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,560
<EPS-PRIMARY> 1.90
<EPS-DILUTED> 1.84
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<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 27, 1996 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 1996 JEFFERIES GROUP, INC. THIRD QUARTER 10-Q FILING.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-27-1996
<EXCHANGE RATE> 1
<CASH> 64,505
<RECEIVABLES> 110,207
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 757,681
<INSTRUMENTS-OWNED> 202,292
<PP&E> 27,883
<TOTAL-ASSETS> 1,335,207
<SHORT-TERM> 0
<PAYABLES> 144,728
<REPOS-SOLD> 0
<SECURITIES-LOANED> 636,871
<INSTRUMENTS-SOLD> 120,453
<LONG-TERM> 56,521
0
0
<COMMON> 187
<OTHER-SE> 194,417
<TOTAL-LIABILITY-AND-EQUITY> 1,335,207
<TRADING-REVENUE> 108,121
<INTEREST-DIVIDENDS> 36,180
<COMMISSIONS> 163,573
<INVESTMENT-BANKING-REVENUES> 58,154
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 28,132
<COMPENSATION> 187,739
<INCOME-PRETAX> 59,670
<INCOME-PRE-EXTRAORDINARY> 59,670
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,227
<EPS-PRIMARY> 1.35
<EPS-DILUTED> 1.31
</TABLE>
<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 28, 1996 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 1996 JEFFERIES GROUP, INC. SECOND QUARTER 10-Q FILING.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-28-1996
<CASH> 122,088
<RECEIVABLES> 138,060
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 737,430
<INSTRUMENTS-OWNED> 176,128
<PP&E> 27,035
<TOTAL-ASSETS> 1,296,379
<SHORT-TERM> 0
<PAYABLES> 168,539
<REPOS-SOLD> 0
<SECURITIES-LOANED> 637,750
<INSTRUMENTS-SOLD> 86,333
<LONG-TERM> 56,454
0
0
<COMMON> 187
<OTHER-SE> 188,629
<TOTAL-LIABILITY-AND-EQUITY> 1,296,379
<TRADING-REVENUE> 67,647
<INTEREST-DIVIDENDS> 24,968
<COMMISSIONS> 110,390
<INVESTMENT-BANKING-REVENUES> 37,856
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 19,512
<COMPENSATION> 123,515
<INCOME-PRETAX> 38,135
<INCOME-PRE-EXTRAORDINARY> 38,135
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,772
<EPS-PRIMARY> .85
<EPS-DILUTED> .83
</TABLE>
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AND THE CONSOLIDATED STATEMENTS
OF EARNINGS AS OF MARCH 29, 1996 AND FOR THE THREE MONTHS THEN ENDED AND THE
NOTES THERETO AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS FILED IN THE 1996 JEFFERIES GROUP, INC. FIRST QUARTER 10-Q FILING.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-29-1996
<CASH> 127,885
<RECEIVABLES> 137,854
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 769,172
<INSTRUMENTS-OWNED> 184,510
<PP&E> 25,995
<TOTAL-ASSETS> 1,311,542
<SHORT-TERM> 0
<PAYABLES> 149,954
<REPOS-SOLD> 0
<SECURITIES-LOANED> 671,398
<INSTRUMENTS-SOLD> 104,612
<LONG-TERM> 56,386
0
0
<COMMON> 187
<OTHER-SE> 192,141
<TOTAL-LIABILITY-AND-EQUITY> 1,311,542
<TRADING-REVENUE> 34,719
<INTEREST-DIVIDENDS> 13,059
<COMMISSIONS> 57,233
<INVESTMENT-BANKING-REVENUES> 15,849
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 10,066
<COMPENSATION> 61,458
<INCOME-PRETAX> 20,252
<INCOME-PRE-EXTRAORDINARY> 20,252
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,632
<EPS-PRIMARY> .45
<EPS-DILUTED> .44
</TABLE>
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AND THE CONSOLIDATED STATEMENTS
OF EARNINGS AS OF DECEMBER 31, 1995 AND FOR THE YEAR THEN ENDED AND THE NOTES
THERETO AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS FILED IN THE 1995 JEFFERIES GROUP, INC. 10-K FILING.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 68,318
<RECEIVABLES> 132,408
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 1,092,904
<INSTRUMENTS-OWNED> 167,210
<PP&E> 26,206
<TOTAL-ASSETS> 1,536,969
<SHORT-TERM> 0
<PAYABLES> 227,757
<REPOS-SOLD> 0
<SECURITIES-LOANED> 851,254
<INSTRUMENTS-SOLD> 82,932
<LONG-TERM> 56,322
93
0
<COMMON> 0
<OTHER-SE> 186,168
<TOTAL-LIABILITY-AND-EQUITY> 1,536,969
<TRADING-REVENUE> 97,954
<INTEREST-DIVIDENDS> 65,792
<COMMISSIONS> 165,610
<INVESTMENT-BANKING-REVENUES> 72,003
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 54,365
<COMPENSATION> 195,278
<INCOME-PRETAX> 53,238
<INCOME-PRE-EXTRAORDINARY> 53,238
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,529
<EPS-PRIMARY> 1.23
<EPS-DILUTED> 1.19
</TABLE>
