<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 25, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission file number 1-11665
JEFFERIES GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-2848406
- -------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11100 Santa Monica Blvd., Los Angeles, California 90025
- ------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (310) 445-1199
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of September 25, 1998, the registrant had 21,029,862 common shares, $.01 par
value, outstanding.
Page 1 of 21
<PAGE> 2
JEFFERIES GROUP, INC. AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
SEPTEMBER 25, 1998
<TABLE>
<CAPTION>
Page
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1.Financial Statements
Consolidated Statements of Financial Condition -
September 25, 1998 (unaudited) and December 31, 1997 ................... 3
Consolidated Statements of Earnings (unaudited) -
Three Months and Nine Months Ended September 25, 1998 and
September 26, 1997 ..................................................... 4
Consolidated Statement of Changes in Stockholders' Equity (unaudited) -
Nine Months Ended September 25, 1998 ................................... 5
Consolidated Statements of Cash Flows (unaudited) -
Nine Months Ended September 25, 1998 and September 26, 1997 ............ 6
Notes to Consolidated Financial Statements (unaudited) ................... 8
Item 2.Management's Discussion and Analysis of Financial Condition
and Results of Operations .............................................. 13
PART II. OTHER INFORMATION
Item 1.Legal Proceedings ........................................................ 18
Item 6.Exhibits and Reports on Form 8-K ......................................... 18
</TABLE>
Page 2 of 21
<PAGE> 3
JEFFERIES GROUP, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
September 25, December 31,
1998 1997
------------- ------------
ASSETS (unaudited)
<S> <C> <C>
Cash and cash equivalents ......................... $ 157,950 $ 109,488
Cash and securities segregated and on deposit for
regulatory purposes or deposited with clearing
and depository organizations ..................... 48,498 30,977
Receivable from brokers and dealers ............... 1,835,225 1,269,664
Receivable from customers, officers and directors . 146,763 166,284
Securities owned .................................. 136,133 245,413
Investments ....................................... 150,427 154,584
Premises and equipment ............................ 39,692 42,828
Other assets ...................................... 73,738 80,304
----------- -----------
$ 2,588,426 $ 2,099,542
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank loans ........................................ $ 2,000 $ --
Payable to brokers and dealers .................... 1,580,937 981,705
Payable to customers .............................. 185,070 202,255
Securities sold, not yet purchased ................ 63,715 188,703
Accrued expenses and other liabilities ............ 280,053 318,258
----------- -----------
2,111,775 1,690,921
Long-term debt .................................... 149,363 149,290
Minority interest ................................. 23,665 16,575
----------- -----------
2,284,803 1,856,786
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value.
Authorized 1,000,000 shares; none issued....... -- --
Common stock, $.01 par value.
Authorized 100,000,000 shares; issued 23,156,143
shares in 1998 and 22,393,910 shares in 1997... 232 224
Additional paid-in capital ...................... 17,748 39
Retained earnings ............................... 323,807 271,589
Less:
Treasury stock, at cost; 2,126,281 shares in
1998 and 2,107,842 shares in 1997............ (35,738) (26,954)
Accumulated other comprehensive income (loss):
Currency translation adjustments ............ (906) (622)
Additional minimum pension liability ........ (1,520) (1,520)
---------- ----------
Total accumulated other comprehensive income
(loss)....................................... (2,426) (2,142)
---------- ----------
Total stockholders' equity ................ 303,623 242,756
---------- ----------
$2,588,426 $2,099,542
========== ==========
</TABLE>
See accompanying unaudited notes to consolidated financial statements.
Page 3 of 21
<PAGE> 4
JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
--------------------- ---------------------
Sept. 25, Sept. 26, Sept. 25, Sept. 26,
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Commissions .............. $106,655 $ 67,638 $279,242 $204,078
Principal transactions ... 32,773 47,299 121,343 132,331
Corporate finance ........ 13,489 47,511 109,604 140,476
Interest ................. 25,871 21,054 67,921 52,430
Other .................... 5,493 1,321 8,411 4,171
--------- --------- --------- ---------
Total revenues ............. 184,281 184,823 586,521 533,486
Interest expense ........... 20,349 18,560 57,330 46,004
--------- --------- --------- ---------
Revenues, net of interest
expense................... 163,932 166,263 529,191 487,482
--------- --------- --------- ---------
Non-interest expenses:
Compensation and benefits 79,855 96,647 279,439 281,682
Floor brokerage and
clearing fees .......... 10,882 8,658 29,953 25,823
Communications ........... 17,617 14,180 50,920 40,052
Occupancy and equipment
rental.................. 4,905 5,536 14,715 14,750
Travel and promotional ... 5,019 4,284 17,043 12,769
Software royalties ....... 4,416 2,308 11,177 7,272
Other .................... 9,229 8,245 26,793 21,835
--------- --------- --------- ---------
Total non-interest expenses 131,923 139,858 430,040 404,183
--------- --------- --------- ---------
Earnings before income taxes
and minority interest .... 32,009 26,405 99,151 83,299
Income taxes ............... 13,761 10,863 42,496 34,065
--------- --------- --------- ---------
Earnings before minority
interest.................. 18,248 15,542 56,655 49,234
Minority interest .......... 2,572 1,122 5,677 3,669
--------- --------- --------- ---------
Net earnings ............... $ 15,676 $ 14,420 $ 50,978 $ 45,565
========= ========= ========= =========
Earnings per share:
Basic .................... $ 0.70 $ 0.67 $ 2.29 $ 2.12
========= ========= ========= =========
Diluted .................. $ 0.66 $ 0.63 $ 2.18 $ 2.01
========= ========= ========= =========
Weighted average shares:
Basic .................... 22,432 21,408 22,233 21,508
Diluted .................. 22,965 22,300 22,918 22,310
</TABLE>
See accompanying unaudited notes to consolidated financial statements.
Page 4 of 21
<PAGE> 5
JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 25, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Accumulated Total
Additional Other Stock-
Common Paid-in Retained Treasury Comprehensive Holders'
Stock Capital Earnings Stock Income (Loss) Equity
--------- ---------- --------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance,
December 31, 1997 ............ $ 224 $ 39 $ 271,589 $ (26,954) $ (2,142) $ 242,756
Exercise of stock options,
including tax benefits
(536,500 shares) ............. 5 11,458 -- -- -- 11,463
Issuance of common stock
(53,286 shares) .............. -- 2,181 -- -- -- 2,181
Purchase of treasury stock
(271,468 shares) ............. -- -- -- (11,692) -- (11,692)
Capital Accumulation Plan
distributions, including tax
benefits (254,881 shares) .... 2 3,154 -- 2,930 -- 6,086
Change in proportionate
share of subsidiary's equity
related to stock issuances /
purchases at the subsidiary .. -- -- 4,353 -- -- 4,353
Issuance of restricted stock
(170,595 shares), net of
forfeitures, and additional
vesting of restricted stock
shares, including tax benefits 1 916 -- (22) -- 895
Quarterly dividends
($.05 per share per quarter) . -- -- (3,113) -- -- (3,113)
Comprehensive income:
Net earnings ................ -- -- 50,978 -- -- 50,978
Other comprehensive
income (loss), net of tax:
Translation adjustment ...... -- -- -- -- (284) (284)
---------
Comprehensive income .......... 50,694
--------- --------- --------- --------- --------- ---------
Balance,
September 25, 1998 ........... $ 232 $ 17,748 $ 323,807 $ (35,738) $ (2,426) $ 303,623
========= ========= ========= ========= ========= =========
</TABLE>
See accompanying unaudited notes to consolidated financial statements.
Page 5 of 21
<PAGE> 6
JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------
Sept. 25, Sept. 26,
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings ....................................... $ 50,978 $ 45,565
--------- ---------
Adjustments to reconcile net earnings to net cash
provided by (used in) operations:
Depreciation and/or amortization of premises and
equipment, capitalized software, goodwill and
discount on long-term debt ..................... 15,772 12,433
Additional vesting of restricted stock shares .... 917 365
Increase in cash and securities segregated
and on deposit for regulatory purposes.......... (17,521) (28,464)
(Increase) decrease in receivables:
Brokers and dealers ............................ (565,561) (483,028)
Customers, officers and directors .............. 19,521 2,499
Decrease in securities owned ..................... 109,280 432
Decrease (increase) in investments ............... 4,157 (87,866)
Decrease in other assets ......................... 4,543 2,410
Increase (decrease) in operating payables:
Brokers and dealers ............................ 599,232 337,169
Customers ...................................... (17,185) 44,999
(Decrease) increase in securities sold,
not yet purchased .............................. (124,988) 40,446
(Decrease) increase in accrued expenses and
other liabilities............................... (38,205) 57,730
Increase in minority interest .................... 7,090 3,123
--------- ---------
Total adjustments ........................ (2,948) (97,752)
--------- ---------
Net cash provided by (used in)
operating activities ................... 48,030 (52,187)
--------- ---------
</TABLE>
Continued on next page.
See accompanying unaudited notes to consolidated financial statements.
Page 6 of 21
<PAGE> 7
JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
------------------------
Sept. 25, Sept. 26,
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from financing activities:
Net proceeds from (payments on):
Additional term debt ............................... -- 99,722
Bank loans ......................................... 2,000 --
Repurchase of treasury stock ....................... (11,714) (21,143)
Dividends paid ..................................... (3,113) (1,500)
Exercise of stock options .......................... 11,463 1,378
Issuance of common stock shares .................... 2,181 882
Capital Accumulation Plan distributions ............ 6,086 1,797
Change in proportionate share of subsidiary's equity 4,353 826
--------- ---------
Net cash provided by financing activities ..... 11,256 81,962
--------- ---------
Cash flows from investing activities -
Purchase of premises and equipment ..................... (10,540) (22,526)
--------- ---------
Effect of foreign currency translation on cash ........... (284) (443)
--------- ---------
Net increase in cash and cash equivalents ..... 48,462 6,806
Cash and cash equivalents - beginning of period .......... 109,488 114,142
--------- ---------
Cash and cash equivalents - end of period ................ $ 157,950 $ 120,948
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ............................................. $ 56,714 $ 42,347
========= =========
Income taxes ......................................... $ 33,328 $ 42,648
========= =========
</TABLE>
See accompanying unaudited notes to consolidated financial statements.
Page 7 of 21
<PAGE> 8
JEFFERIES GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
CONSOLIDATED FINANCIAL STATEMENTS
The accompanying consolidated financial statements include the accounts of
Jefferies Group, Inc. and all subsidiaries, including Jefferies & Company, Inc.
(Jefferies) and Investment Technology Group, Inc. and all of its subsidiaries
(ITGI), including ITGI's wholly-owned subsidiary, ITG Inc. (ITG). The accounts
of W & D Securities, Inc. (W & D) are also consolidated because of the nature
and extent of the Company's ownership interest in W & D. The term "Company"
refers, unless the context requires otherwise, to Jefferies Group, Inc., its
subsidiaries, predecessor entities, and W & D. Operations of the Company include
agency and principal transactions and other securities-related financial
services.
All significant intercompany accounts and transactions are eliminated in
consolidation. The consolidated financial statements reflect all adjustments,
which are, in the opinion of management, necessary for the fair statement of the
results for the interim periods and should be read in conjunction with the
Company's annual report for the year ended December 31, 1997.
SECURITIES TRANSACTIONS
All transactions in securities, commission revenues and related expenses are
recorded on a trade-date basis.
Securities owned and securities sold, not yet purchased, are valued at
market, and unrealized gains or losses are reflected in revenues from principal
transactions.
COMMON STOCK
All share, share price and per share information included in the
consolidated financial statements and notes thereto has been restated to
retroactively reflect the effect of the November 19, 1997 two-for-one stock
split.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's amounts to
conform to the current period's presentation.
RECEIVABLE FROM, AND PAYABLE TO, BROKERS AND DEALERS
Receivable from and payable to brokers and dealers consists of the following
as of September 25, 1998 (in thousands of dollars):
<TABLE>
<S> <C>
Receivable from brokers and dealers:
Securities borrowed ................................ $1,676,271
Securities purchased under agreements to resell ... 97,845
Other .............................................. 61,109
----------
$1,835,225
==========
Payable to brokers and dealers:
Securities loaned .................................. $1,457,989
Securities sold under agreements to repurchase ..... 93,220
Other .............................................. 29,728
----------
$1,580,937
==========
</TABLE>
Page 8 of 21
<PAGE> 9
JEFFERIES GROUP, INC. AND SUBSIDIARIES
SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED
The following is a summary of the market value of major categories of
securities owned and securities sold, not yet purchased, as of September 25,
1998 (in thousands of dollars):
<TABLE>
<CAPTION>
Securities
Sold,
Securities Not Yet
Owned Purchased
-------- --------
<S> <C> <C>
Corporate equity securities .......... $ 50,152 $ 30,671
High-yield securities ................ 57,901 29,714
Corporate debt securities ............ 19,140 2,944
U.S. Government and agency obligations 8,461 --
Options .............................. 479 386
-------- --------
$136,133 $ 63,715
======== ========
</TABLE>
INVESTMENTS
Investments consist of the following as of September 25, 1998 (in thousands
of dollars):
<TABLE>
<S> <C>
Debt and equity investments................ $ 66,689
Partnership interests...................... 71,461
Equity and debt interests in affiliates.... 12,277
-----------
$ 150,427
===========
</TABLE>
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash in banks and short term investments.
Cash equivalents are part of the cash management activities of the Company and
generally mature within 90 days. The following is a summary of cash and cash
equivalents as of September 25, 1998 (in thousands of dollars):
<TABLE>
<S> <C>
Cash in banks.............................. $ 20,456
Short term investments..................... 137,494
-----------
$ 157,950
===========
</TABLE>
MINORITY INTEREST
Minority interest represents the minority stockholders' proportionate share
of the equity of ITGI. At September 25, 1998, Jefferies Group, Inc. owned
approximately 81.4% of ITGI's common stock.
Page 9 of 21
<PAGE> 10
JEFFERIES GROUP, INC. AND SUBSIDIARIES
EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for the three month and nine
month periods ended September 25, 1998 and September 26, 1997 (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
---------------------- ----------------------
Sept. 25, Sept. 26, Sept. 25, Sept. 26,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net earnings - basic calculation ......... $ 15,676 $ 14,420 $ 50,978 $ 45,565
Adjustment - stock options on subsidiary . (484) (267) (1,061) (789)
-------- -------- -------- --------
Adjusted earnings - diluted calculation .. $ 15,192 $ 14,153 $ 49,917 $ 44,776
======== ======== ======== ========
Shares for basic and diluted calculations:
Average number of common shares .......... 20,956 20,018 20,824 20,098
Capital Accumulation Plan unissued shares 1,476 1,390 1,409 1,410
-------- -------- -------- --------
Average shares used in basic computation . 22,432 21,408 22,233 21,508
Stock options ............................ 459 695 553 610
Other unissued common stock equivalents .. 74 197 132 192
-------- -------- -------- --------
Average shares used in diluted computation 22,965 22,300 22,918 22,310
======== ======== ======== ========
Earnings per share:
Basic .................................. $ 0.70 $ 0.67 $ 2.29 $ 2.12
======== ======== ======== ========
Diluted ................................ $ 0.66 $ 0.63 $ 2.18 $ 2.01
======== ======== ======== ========
</TABLE>
OTHER COMPREHENSIVE INCOME
The following summarizes other comprehensive income and accumulated other
comprehensive income at September 25, 1998 and for the nine months 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 ... $(284) $-- $(284)
Minimum pension liability adjustment -- -- --
----- --- -----
Other comprehensive income (loss) .. $(284) $-- $(284)
===== === =====
</TABLE>
<TABLE>
<CAPTION>
Minimum Accumulated
Currency Pension Other
Translation Liability Comprehensive
Adjustments Adjustment Income (Loss)
<S> <C> <C> <C>
Beginning at December 31, 1997 .... $(622) $(1,520) $(2,142)
Change in 1998 .................... (284) -- (284)
------ ------- -------
Ending at September 25, 1998 ...... $(906) $(1,520) $(2,426)
====== ======= =======
</TABLE>
NET CAPITAL REQUIREMENTS
As registered broker-dealers, Jefferies, ITG and W & D are subject to the
Securities and Exchange Commission's Uniform Net Capital Rule (Rule 15c3-1),
which requires the maintenance of minimum net capital. Jefferies, ITG and W & D
have elected to use the alternative method permitted by the Rule, which requires
that they each maintain minimum net capital, as defined, equal to the greater of
$250,000 or 2% of the aggregate debit balances arising from customer
transactions, as defined.
Page 10 of 21
<PAGE> 11
JEFFERIES GROUP, INC. AND SUBSIDIARIES
Net capital changes from day to day, but as of September 25, 1998,
Jefferies', ITG's and W & D's net capital was $167.1 million, $55.5 million and
$1.8 million, respectively, which exceeded minimum net capital requirements by
$163.0 million, $55.3 million and $1.5 million, respectively.
QUARTERLY DIVIDENDS
In 1988, the Company instituted a policy of paying regular quarterly
dividends. There are no restrictions on the Company's present ability to pay
dividends on common stock, other than the governing provisions of the Delaware
General Corporation Law.
Dividends per Common Share (declared and paid):
<TABLE>
<CAPTION>
1st Qtr. 2nd Qtr 3rd Qtr
-------- ------- -------
<S> <C> <C> <C>
1998..... $.050 $.050 $.050
1997..... $.025 $.025 $.025
</TABLE>
OFF-BALANCE SHEET RISK
In the normal course of business, the Company had letters of credit
outstanding aggregating $36.1 million at September 25, 1998, to satisfy various
collateral requirements in lieu of depositing cash or securities.
NASDAQ MARKET-MAKERS ANTITRUST LITIGATION
In re Nasdaq Market-Makers Antitrust Litigation. Beginning in July 1994,
antitrust class actions were commenced against Jefferies and 33 other defendants
in various federal courts (the "Lawsuits"). In October 1994, the Lawsuits were
consolidated alleging the defendants violated antitrust laws by conspiring to
fix the spread paid to trade in certain Nasdaq securities. In order to avoid the
uncertainties of litigation Jefferies has entered into a settlement agreement
which has received the preliminary approval of the United States District Court
for the Southern District of New York (the "Court"), but which is still subject
to final approval of the Court. The amount of the settlement has been previously
provided for and will not have a material adverse effect on the Company's
statement of earnings.
JEFFERIES GROUP, INC. ANNOUNCES INTENTION TO CONSIDER SEPARATING INTO TWO
INDEPENDENT COMPANIES
On March 17, 1998, Jefferies Group, Inc. announced that it is considering
the separation, through a spin-off and restructuring, of its two principal lines
of business: a full-service global investment bank serving institutions and
small to medium sized corporations ("JEFCO"); and 81.4% owned Investment
Technology Group, Inc. ("ITGI"), the leading provider of technology-based equity
trading services and transaction research to institutional investors and
brokers.
If the separation is completed, Jefferies Group, Inc. shareholders will own
100% of JEFCO and approximately 81.4% of ITGI. The public ITGI shareholders will
continue to own 18.6% of ITGI. (The ITGI percentage ownership could change
slightly as a result of ITGI stock repurchases or issuances before the
transaction closing date.) The spin-off will be accomplished by a tax-free
distribution of 100% of the shares of the new company, JEFCO, to Jefferies
Group, Inc. shareholders. Jefferies Group, Inc.'s 15 million shares of ITGI
would then be its only asset. The spin-off would be followed immediately by a
tax-free merger of Jefferies Group, Inc. and ITGI, in which ITGI's public
shareholders will exchange their shares of ITGI stock for shares of Jefferies
Group, Inc., which 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.
Page 11 of 21
<PAGE> 12
JEFFERIES GROUP, INC. AND SUBSIDIARIES
CONTINGENCIES
The Company recently received a "30-day letter" proposing certain
adjustments which, if sustained, would result in a tax deficiency of
approximately $10.0 million plus interest. Substantially all of the proposed
adjustments relate to Investment Technology Group, Inc., the Company's 81.4%
owned subsidiary and include (i) the disallowance of deductions taken in
connection with the termination of certain compensation plans at the time of
Investment Technology Group's initial public offering in 1994 and (ii) the
disallowance of tax credits taken in connection with certain research and
development expenditures. The Company intends to vigorously contest the proposed
adjustments and believes that resolution of this matter will not have a material
adverse effect on the Company.
SEGMENT REPORTING
The Company's operations have been classified into two business segments:
Financial services and ITGI. The Financial services segment includes the
traditional securities brokerage and investment banking activities of Jefferies
Group, Inc. and its subsidiaries, except ITGI and its subsidiaries. The ITGI
segment includes the automated equity trading and transaction research
activities of ITGI and its subsidiaries. Financial information by segment for
the three months and nine months ended September 25, 1998 and September 26, 1997
are summarized as follows (in thousands of dollars):
<TABLE>
<CAPTION>
FINANCIAL ELIMINATIONS /
THREE MONTHS ENDED SERVICES ITGI RECLASSIFICATIONS CONSOLIDATED
<S> <C> <C> <C> <C>
SEPTEMBER 25, 1998
Total revenues .................. $ 124,041 $ 57,697 $ 2,543 $ 184,281
Operating income ................ 6,278 25,731 -- 32,009
Identifiable assets ............. 2,430,991 166,652 (9,217) 2,588,426
Capital expenditures ............ 2,630 771 -- 3,401
Depreciation and amortization ... 3,435 2,624 -- 6,059
SEPTEMBER 26, 1997
Total revenues .................. 152,090 33,437 (704) 184,823
Operating income ................ 15,079 11,326 -- 26,405
Identifiable assets ............. 2,081,578 107,066 (9,507) 2,179,137
Capital expenditures ............ 4,381 3,191 -- 7,572
Depreciation and amortization ... 2,257 1,805 -- 4,062
FINANCIAL ELIMINATIONS /
NINE MONTHS ENDED SERVICES ITGI RECLASSIFICATIONS CONSOLIDATED
SEPTEMBER 25, 1998
Total revenues .................. $ 437,588 $ 149,989 $ (6,462) $ 586,521
Operating income ................ 41,703 57,448 -- 99,151
Identifiable assets ............. 2,430,991 166,652 (9,217) 2,588,426
Capital expenditures ............ 6,023 4,517 -- 10,540
Depreciation and amortization ... 9,095 6,677 -- 15,772
SEPTEMBER 26, 1997
Total revenues .................. 434,531 100,770 (1,815) 533,486
Operating income ................ 46,687 36,612 -- 83,299
Identifiable assets ............. 2,081,578 107,066 (9,507) 2,179,137
Capital expenditures ............ 9,122 13,404 -- 22,526
Depreciation and amortization ... 7,780 4,653 -- 12,433
</TABLE>
Page 12 of 21
<PAGE> 13
JEFFERIES GROUP, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
This document contains forward-looking statements concerning 1) the timing,
structure and ramifications of the proposed spin-off and related transactions
and 2) the Company's Year 2000 ("Y2K") Project. These statements are intended to
be "forward-looking statements", as that phrase is defined by the Private
Securities Litigation Reform Act of 1995. Forward-looking statements, which can
be identified by the use of terms such as "plan," "anticipate," "will," "would,"
"expect," "estimate" or variations of such terms, may not occur as presently
anticipated due to various uncertainties. As a result, no forward-looking
statement should be regarded as a representation by Jefferies Group, Inc., ITGI
or any other person that the presently anticipated events will occur as
described herein.
ANALYSIS OF FINANCIAL CONDITION
Total assets increased $488.9 million from $2,099.5 million at December 31,
1997 to $2,588.4 million at September 25, 1998. The increase in assets is mostly
due to an increase in the balances associated with the Jefferies' securities
borrowed and lending matched book business.
NINE MONTHS 1998 VERSUS NINE MONTHS 1997
Revenues, net of interest expense, increased 9% to $529.2 million, compared
to $487.5 million for the first nine months of 1997. The increase was due
primarily to a $75.2 million, or 37%, increase in commissions, partially offset
by a $30.9 million, or 22%, decrease in corporate finance and an $11.0 million,
or 8%, decrease in principal transactions. Commission revenues increased, led by
ITG and the Equities Division. Revenues from principal transactions decreased
primarily due to decreased trading gains in other investments. Corporate finance
revenues declined due to the currently difficult environment for underwritings.
Other revenue increased $4.2 million mostly due to a gain on ITGI's sale of its
interest in the LongView Group, Inc. Net interest income (interest revenues less
interest expense) was up $4.2 million mostly due to an excess of securities
borrowed interest income over securities loaned interest expense.
Total non-interest expenses increased 6% to $430.0 million, compared to
$404.2 million for the first nine months of 1997. Communications increased $10.9
million, or 27%, partly due to Y2K costs and partly due to increased trade
volume, personnel, and system upgrades. Other expense increased $5.0 million, or
23%, largely due to an increase in consulting fees and ITGI losses from
long-term investments made to enhance products and enter new markets via joint
ventures worldwide. Travel and promotional increased $4.3 million, or 33%,
largely due to increased business travel related to corporate finance
activities. Floor brokerage and clearing fees increased $4.1 million, or 16%,
due to increased volume of business executed on the various exchanges. Software
royalties increased $3.9 million, or 54%, due to higher POSIT(R) commission
revenues. Compensation and benefits decreased $2.2 million, or 1%, mostly due to
a decrease in incentive based compensation accruals. Occupancy and equipment
rental remained unchanged.
Earnings before income taxes and minority interest were up 19% to $99.2
million, compared to $83.3 million for the same prior year period. The effective
tax rate was approximately 43% for the first nine months of 1998 and
approximately 41% for the first nine months of 1997. The increase in the tax
rate is mostly due to an increase in non-deductible expenses and ITGI losses
from long-term investments.
Minority interest (approximately 18% of the earnings of ITGI) was $5.7
million for the first nine months of 1998 compared to $3.7 million in the
comparable 1997 period. The increase in minority interest expense was due to
increased ITGI earnings.
Page 13 of 21
<PAGE> 14
JEFFERIES GROUP, INC. AND SUBSIDIARIES
Basic earnings per share were $2.29 for the first nine months of 1998 on
22,233,000 shares compared to $2.12 in the 1997 period on 21,508,000 shares.
Diluted earnings per share were $2.18 for the first nine months of 1998 on
22,918,000 shares compared to $2.01 in the comparable 1997 period on 22,310,000
shares.
THIRD QUARTER 1998 VERSUS THIRD QUARTER 1997
Revenues, net of interest expense, decreased 1% to $163.9 million, compared
to $166.3 million for the third quarter of 1997. The decrease was due primarily
to a $34.0 million, or 72%, decrease in corporate finance and a $14.5 million,
or 31%, decrease in principal transactions, partially offset by a $39.0 million,
or 58%, increase in commissions. Commission revenues increased, led by ITG and
the Equities Division. Revenues from principal transactions decreased primarily
due to decreased trading gains from other investments. Corporate finance
revenues decreased due to the currently difficult environment for underwritings.
Other revenue increased $4.2 million mostly due to a gain on ITGI's sale of its
interest in the LongView Group, Inc. Net interest income (interest revenues less
interest expense) was up $3.0 million mostly due to the absence of interest
expense on temporary subordinated loans incurred in the 1997 third quarter.
Total non-interest expenses decreased 6% to $131.9 million, compared to
$139.9 million for the third quarter of 1997. Compensation and benefits
decreased $16.8 million, or 17%, mostly due to a reduction in incentive based
compensation accruals. Communications increased $3.4 million, or 24%, primarily
due to Y2K costs. Floor brokerage and clearing fees increased $2.2 million, or
26%, due to increased volume of business executed on the various exchanges.
Software royalties increased $2.1 million, or 91%, due to higher POSIT(R)
commission revenues. Other expense increased $1.0 million, or 12%, largely due
to an increase in consulting fees. Travel and promotional increased $735,000, or
17%, largely due to increased business travel related to corporate finance
activities. Occupancy and equipment rental decreased $631,000, or 11%, largely
due to a reduction in office move related expenses.
Earnings before income taxes and minority interest were up 21% to $32.0
million, compared to $26.4 million for the same prior year period. The effective
tax rate was approximately 43% for the third quarter of 1998 and approximately
41% for the third quarter of 1997. The increase in the tax rate is mostly due to
an increase in non-deductible expenses and ITGI losses from long-term
investments.
Minority interest (approximately 19% of the earnings of ITGI) was $2.6
million for the third quarter of 1998 as compared to $1.1 million in the
comparable 1997 period. The increase in minority interest expense was due to
increased ITGI earnings.
Basic earnings per share were $0.70 for the third quarter of 1998 on
22,432,000 shares compared to $0.67 in the 1997 period on 21,408,000 shares.
Diluted earnings per share were $0.66 for the third quarter of 1998 on
22,965,000 shares compared to $0.63 in the comparable 1997 period on 22,300,000
shares.
LIQUIDITY AND CAPITAL RESOURCES
During the first nine months of 1998, the Company repurchased 273,320 shares
(including 218,400 shares purchased in connection with the Company's Capital
Accumulation Plan) of its common stock versus 993,026 shares (including 279,200
shares purchased in connection with the Company's Capital Accumulation Plan) for
the comparable 1997 period.
During the third quarter of 1998, the Company repurchased 35,180 shares
(including 33,000 shares purchased in connection with the Company's Capital
Accumulation Plan) of its common stock versus 94,516 shares (including 90,800
shares purchased in connection with the Company's Capital Accumulation Plan) for
the comparable 1997 period.
Page 14 of 21
<PAGE> 15
JEFFERIES GROUP, INC. AND SUBSIDIARIES
REVENUES BY SOURCE
The following provides a breakdown of total revenues by source for the three
months and nine months ended September 25, 1998 and September 26, 1997.
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------------------
September 25, September 26,
1998 1997
------------------------ -----------------------
% of % of
Total Total
Amount Revenues Amount Revenues
------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commissions and principal transactions:
Equities .......................... $ 67,444 37% $ 47,028 25%
Investment Technology Group ....... 55,927 30 34,177 18
International ..................... 11,807 7 15,917 9
Taxable Fixed Income .............. 6,207 3 8,559 5
Convertible ....................... 3,231 2 2,178 1
Other proprietary trading ......... (5,188) (3) 7,078 4
------------------------ -----------------------
Total ........................ 139,428 76 114,937 62
Corporate finance ..................... 13,489 7 47,511 26
Interest .............................. 25,871 14 21,054 11
Other ................................. 5,493 3 1,321 1
------------------------ -----------------------
Total revenues .................. $ 184,281 100% $ 184,823 100%
======================== =======================
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------------------------------
September 25, September 26,
1998 1997
------------------------ -----------------------
% of % of
Total Total
Amount Revenues Amount Revenues
------ -------- ------ --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Commissions and principal transactions:
Equities .......................... $ 184,018 31% $ 141,724 27%
Investment Technology Group ....... 143,834 25 102,097 19
International ..................... 37,386 6 42,664 8
Taxable Fixed Income .............. 24,772 4 26,116 5
Convertible ....................... 8,619 2 6,329 1
Other proprietary trading ......... 1,956 0 17,479 3
------------------------ -----------------------
Total ........................ 400,585 68 336,409 63
Corporate finance ..................... 109,604 19 140,476 26
Interest .............................. 67,921 12 52,430 10
Other ................................. 8,411 1 4,171 1
------------------------ -----------------------
Total revenues .................. $ 586,521 100% $ 533,486 100%
======================== =======================
</TABLE>
THE YEAR 2000 PROJECT
The Y2K preparedness effort by the Company and its subsidiaries (for the
purposes of this Y2K disclosure only, the term "Company" does not include
Investment Technology Group, Inc. (Nasdaq: ITGI) and its subsidiaries, which
have developed their own Y2K plan, which is described in the excerpt from ITGI's
10-Q attached as Exhibit 99.1) began in late 1997 and early 1998 with an initial
assessment of the Company's systems,
Page 15 of 21
<PAGE> 16
JEFFERIES GROUP, INC. AND SUBSIDIARIES
its risk of exposure, the steps necessary to achieve Y2K compliance, and the
resources necessary to implement those steps. As a result, the Company engaged
Keane, Inc. as independent Y2K consultants, and Ernst & Young, LLP as
independent auditors of its Y2K Project. Together with the advice of these
professionals, the Company formulated and adopted a Y2K Master Plan.
The first phase of the plan, the Inventory, Assessment and Planning phase,
involved a complete assessment of the Company's systems, both information
technology ("IT") related and non-IT related, and a survey of all vendors and
key clients. Systems were categorized into one of three "Triage" Levels -
Mission Critical, Business Important, or Other, with "Mission Critical" defined
as those systems, the failure of which would result in the Company being unable
to conduct business. The Company also created the framework for the Remediation
and Testing phase that would follow, and set schedules for reaching the
Operational Sustainability and Fully Compliant phases. This planning process
provided a guide for each of the Company's divisions in its preparation of more
detailed project plans that outline specific areas of work on each system. The
Y2K Project calls for the devotion of resources primarily to Mission Critical
systems during 1998, and Business Important and Other systems primarily in the
first quarter of 1999.
Current State of Readiness
The Company is now well into the second phase of the plan, "Remediation and
Testing," with approximately 60% of its mission critical systems fully
remediated and tested as of September 25, 1998. The Company is now working
toward "Operational Sustainability" - the Y2K compliance of all Mission Critical
systems by the end of 1998. The Company also expects to achieve full compliance
(the remediation or elimination of all Business Important or Other systems the
Company has chosen to support) by mid 1999. Management currently believes the
Company will reach these goals. The Remediation and Testing phase involves
testing each system, remediating or replacing non-compliant systems, and then
re-testing each system using either compliant environment regression testing or
unit regression and forward date testing in the existing environment. All IT
systems are then subjected to system regression testing, followed by user group
testing before they are placed into production. Each system, (IT and non-IT)
will then be subjected to forward date testing in a simulated production
environment. The Company is also working with its major vendors to obtain
compliant versions of key systems and to fully test these systems prior to the
street-wide testing that will be sponsored by the Securities Industry
Association in the first quarter of 1999. The Company is working with its
landlords and lessors to assure the continued functionality of the Mission
Critical non-IT systems upon which it is dependent, and is in the process of
preparing contingency plans for non-IT failures.
Costs to Address Y2K Issues
Jefferies Group, Inc.'s 1998 consolidated budget for the Y2K Project is
$11.8 million, with $10.3 million attributable to JEFCO and $1.5 million
attributable to ITGI. Current spending rates and projected expenses indicate
that the Jefferies Group, Inc. and it subsidiaries will stay within that budget.
A discussion of the Y2K project of ITGI and its subsidiaries is contained in
ITGI's third quarter 10-Q under the heading "Year 2000" which is attached to
this 10-Q as Exhibit 99.1. As of September 1998, approximately $7.8 million of
costs in the 1998 consolidated budget have already been incurred. This budget
includes new software and hardware, consultants to assist with project
administration, quarterly audits by Ernst & Young, and a large number of the
present IT staff devoting a substantial portion of their time to the Y2K
Project. To meet the Company's goal of Operational Sustainability by the end of
1998, the vast majority of IT resources have been redirected into the Y2K
Project and new development unrelated to Y2K has been limited to only the most
essential projects. The budget for 1999 is projected to be approximately $5.4
million, which will be reassessed in the second half of 1999 to account for the
possible implementation of contingency plans if any vendors will not achieve Y2K
compliance.
Page 16 of 21
<PAGE> 17
JEFFERIES GROUP, INC. AND SUBSIDIARIES
Risks
Though the Company expects to achieve Operational Sustainability by the end
of 1998, and to be fully compliant by the middle of 1999, a number of material
risks remain which could have a materially adverse impact on the Company. These
risks generally arise as a result of either: (1) failures of the Company's
systems or (2) failures of third party systems.
Despite the considerable testing and remediation efforts the Company has
undertaken, latent errors in the Company's internal systems that remain
undetected could cause failures in those systems. Failures in one or more key
systems would almost certainly result in substantial impairment of the Company's
ability to efficiently process orders and trades or to perform its clearing
functions. Though the Company expects that the contingency plans discussed below
will allow the Company to continue operations, those contingency plans may not
support the volume of trading the Company is accustomed to and could therefore
cause substantial losses in revenue while they are relied upon. In the event
failures occur, lost data may result in failed trades and related violations of
NASD and SEC rules and regulations. To minimize the time during which it must
rely on any contingency plan, the Company plans to devote all available
resources to restoring normal system operations in the event any failures occur.
There is also a substantial risk that failures by third parties could
compromise the major order-processing systems upon which the Company is heavily
dependent. Vendors such as Automatic Data Processing, Inc. and the Securities
Industry Automation Corporation have represented to the Company that they either
are or intend to become Y2K compliant and the Company stands ready to test with
each of these parties as soon as they are prepared to do so, but the failure of
any one of these systems could result in a significant interruption of normal
business for the Company. Due to the interdependence of the Company's systems on
those third party systems, the Company does not believe any effective
replacement products could be adopted if those systems are not remediated and is
therefore focusing its attention on assisting with the remediation and testing
process and on developing contingency plans.
In addition, there is also a risk that the Company's ability to conduct
transactions will be materially impaired by the failure of any significant
component of the national clearing and settlement system, of major
counterparties, exchanges or financial institutions in the marketplace. Failures
by one or more of the New York Stock Exchange, Inc., the Nasdaq Stock Market,
the Depository Trust Company, the National Securities Clearing Corporation or
any of the largest banks or brokerage firms could prevent the entire market from
effectively transmitting and receiving data after the Year 2000, despite the Y2K
compliance of the Company's systems. Although it is expected that each of these
parties will conduct extensive testing to ensure that each is Y2K compliant,
there can be no assurance that an unforeseen problem will not create a market
disruption that in turn affects the Company's business.
Contingency Plans
The Company is in the process of preparing contingency plans to account for
the possible failure of every Mission Critical system and key Business Important
systems. The contingency planning process is well under way and approximately
80% of the Company's Mission Critical systems have been analyzed and preliminary
contingency plans discussed. The Company is now beginning to memorialize those
plans and to complete its assessment of the remaining Mission Critical systems
and Business Important systems. The Company expects to complete the planning
process by April 1999, and will continue to evaluate the need for those plans
and their continued effectiveness through the Year 2000. Funds to begin actual
implementation of contingency plans will be allocated in the second quarter of
1999 based upon perceived risk of failure of each system.
Page 17 of 21
<PAGE> 18
Forward Looking Statements
The Company's projections in this section are based upon assumptions which
it believes to be correct, but which are not guaranteed. Any change in those
assumptions could result in material variations in the Company's projections,
including the projected costs for remediation and testing, the feasibility of
using contingency plans, and the impact of third party failures. Any such change
could have a material adverse impact on the Company and its results of
operations.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In re Nasdaq Market-Makers Antitrust Litigation. Beginning in July 1994,
antitrust class actions were commenced against Jefferies and 33 other defendants
in various federal courts (the "Lawsuits"). Following the filing of the
Lawsuits, the Antitrust Division of the United States Department of Justice
("DOJ") and the Securities and Exchange Commission ("SEC") commenced
investigations into certain issues related to the allegations of the Lawsuits.
In August 1996, the DOJ entered into an antitrust consent decree with 24
defendants who are market makers in Nasdaq stocks. Jefferies was neither asked
nor required to settle with the DOJ. Shortly after the DOJ settlement, the SEC
filed a Section 21(a) report against the National Association of Securities
Dealers, Inc. ("NASD"), criticizing various practices by market makers, and the
NASD for failing to police adequately or discipline the market makers for those
practices. However, the SEC did not take any action at that time against the
market maker firms.
In October 1994, the Lawsuits were consolidated for discovery purposes in
the United States District Court for the Southern District of New York (the
"Court"). The consolidated complaint alleges that the defendants violated the
antitrust laws by conspiring to fix the spread paid by plaintiffs and class
members to trade in certain Nasdaq securities, by refusing to quote bids and
asks in so-called odd-eighths. The cases purport to be brought on behalf of all
persons who purchased or sold certain securities on the Nasdaq National Market
System during the period May 1, 1989 to May 27, 1994. The plaintiffs seek
damages in an unspecified amount.
In order to avoid the uncertainties of litigation, Jefferies has entered
into a settlement agreement which received the preliminary approval of the Court
on October 15, 1997, but which is still subject to final approval of the Court.
The amount of the settlement has been previously provided for and will not have
a material adverse effect on the Company.
Other. Many aspects of the Company's business involve substantial risks of
liability. In the normal course of business, the Company and its subsidiaries
have been named as defendants or co-defendants in lawsuits involving primarily
claims for damages. The Company's management believes that pending litigation
will not have a material adverse effect on the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(99.1) ITGI's 1998 Third Quarter Year 2000 Discussion. An excerpt from
ITGI's 1998 third quarter 10-Q.
(b) Reports on Form 8-K.
On August 7, 1998, the Company filed a Form 8-K updating financial
information related to the previously announced plans to separate the
Company's 100% owned subsidiary, Jefferies & Company, Inc., and its
81.4% owned subsidiary, Investment Technology Group, Inc., through a
proposed spin-off and related transactions.
Page 18 of 21
<PAGE> 19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
JEFFERIES GROUP, INC.
-----------------------------
(Registrant)
Date: November 6, 1998 By: /s/ Clarence T. Schmitz
------------------------- -----------------------------
Clarence T. Schmitz
Chief Financial Officer
Page 19 of 21
<PAGE> 1
EXHIBIT 99.1
ITGI'S 1998 THIRD QUARTER YEAR 2000 DISCUSSION.
AN EXCERPT FROM ITGI'S 1998 THIRD QUARTER 10-Q.
THE YEAR 2000 ISSUE
OVERVIEW
Some computer systems and software products were originally designed to
accept only two digit entries in the data code field. As a result, certain
computer systems and software packages will not be able to interpret dates
beyond December 31, 1999 and thus will interpret dates beginning January 1, 2000
incorrectly. This could potentially result in computer failure or
miscalculations, causing operating disruptions, including an inability to
process transactions, send invoices or engage in normal business operations.
Therefore, companies may have to upgrade or replace computer and software
systems in order to comply with the "Year 2000" requirements.
ITG'S STRATEGY
The Company is well aware of and is actively addressing the Year 2000 issue
and the potential problems that can arise in any computer and software system.
Planning and evaluation work began in 1997 including the identification of those
systems affected. A "Year 2000 working group" was established to address the
Company's Year 2000 issue. The Company has targeted its efforts into three major
areas:
i) Vendors;
ii) Company proprietary products; and
iii) Clients.
Vendors - The Company's ability to successfully meet the Year 2000 challenge
is in part dependent on its vendors. The Company has contacted its vendors to
determine the status of their Year 2000 programs and has created a database
recording each vendor's readiness status. The Company is in the process of
integrating Year 2000 compliant versions of its vendors' software and hardware
with the Company's proprietary products.
Company Proprietary Products - The Company has evaluated its trading systems
and has endeavored to examine all code contained in its internally produced
software. Remediation and internal testing of all mission critical systems is
scheduled to be completed by the end of 1998. The Company plans to release Year
2000 compliant versions of its products by the beginning of 1999. The Company
also intends to participate in the Securities Industry Association's
industry-wide testing program in 1999.
Clients - A letter explaining the Company's Year 2000 strategy was sent to
all clients in July of 1998. In addition, clients have been contacted on a
project by project basis to ascertain compatibility between the Company's
systems and changes made to the clients' systems. In 1999, the Company plans to
provide point-to-point-testing opportunities for its clients.
The Company is in the early stages of establishing a contingency plan to
deal with both internal and external failures of critical systems. The
contingency plan is intended to address failures of internal systems, client
connections, connections to trading destinations, as well as failures of major
infrastructure components. The Company intends to have its contingency plan in
place by July of 1999 and to update and refine such plan as needed throughout
the remainder of 1999.
RISKS
The Company currently expects to implement the necessary changes to ensure
that its internal operations are Year 2000 compliant prior to December 31, 1999.
However, if such changes are not completed in a timely manner, the Year 2000
issue could have a material impact on the Company's operations. The Company does
not believe that the costs incurred to ready its systems for the Year 2000 will
have a material effect on its financial condition. Total
Page 20 of 21
<PAGE> 2
costs for the whole project are estimated to be between $2.5 and $3.0 million,
which includes the cost of personnel, consultants and software and hardware
costs. To date, the Company has spent approximately $1,170,000 on the Year 2000
project.
The Year 2000 issue, however, can affect all businesses that rely heavily on
automated systems. A general failure of computer and communication systems
relied upon by the securities industry (such as the systems provided by long
distance telephone companies, the exchanges, Nasdaq, the Depository Trust
Company and ADP Brokerage Services) would prevent the Company from operating in
whole or in part until such systems have been restored. In such case or if the
Year 2000 issue adversely affects the Company's customers, this in turn could
have a material adverse effect on the Company's trading revenues and
collections. Should the Company, third party information vendors, other third
party electronic vendors, or the Company's customers fail to adequately address
this issue, the Company's business, financial condition and results of
operations could be materially adversely affected.
Page 21 of 21
<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 25, 1998 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 THIRD QUARTER 1998 JEFFERIES GROUP, INC. 10-Q FILING.
</LEGEND>
<CIK> 0000717867
<NAME> JEFFERIES GROUP, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-25-1998
<CASH> 157,950
<RECEIVABLES> 207,872
<SECURITIES-RESALE> 97,845
<SECURITIES-BORROWED> 1,676,271
<INSTRUMENTS-OWNED> 136,133
<PP&E> 39,692
<TOTAL-ASSETS> 2,588,426
<SHORT-TERM> 2,000
<PAYABLES> 214,798
<REPOS-SOLD> 93,220
<SECURITIES-LOANED> 1,457,989
<INSTRUMENTS-SOLD> 63,715
<LONG-TERM> 149,363
0
0
<COMMON> 232
<OTHER-SE> 303,391
<TOTAL-LIABILITY-AND-EQUITY> 2,588,426
<TRADING-REVENUE> 121,343
<INTEREST-DIVIDENDS> 67,921
<COMMISSIONS> 279,242
<INVESTMENT-BANKING-REVENUES> 109,604
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 57,330
<COMPENSATION> 279,439
<INCOME-PRETAX> 99,151
<INCOME-PRE-EXTRAORDINARY> 99,151
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 50,978
<EPS-PRIMARY> 2.29
<EPS-DILUTED> 2.18
</TABLE>
