-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, J8PjOZHMCGqui3xJunXynes8uTg1CInDGyoslKw1DrM2ofQf9RYJvP0Q7q7Wgc4D ovJXCtw3IgcGp90B9r+Xsg== 0000950148-96-000458.txt : 19960401 0000950148-96-000458.hdr.sgml : 19960401 ACCESSION NUMBER: 0000950148-96-000458 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960329 SROS: BSE SROS: NASD SROS: NYSE SROS: PSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: JEFFERIES GROUP INC CENTRAL INDEX KEY: 0000717867 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 952848406 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-11669 FILM NUMBER: 96540906 BUSINESS ADDRESS: STREET 1: 11100 SANTA MONICA BLVD CITY: LOS ANGELES STATE: CA ZIP: 90025 BUSINESS PHONE: 3104451199 MAIL ADDRESS: STREET 1: 11100 SANTA MONICA BLVD STREET 2: 10TH FLR CITY: LOS ANGELES STATE: CA ZIP: 90025 10-K 1 ANNUAL REPORT FOR YEAR ENDED 12/31/95 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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, 1995 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 BOULEVARD, 10TH FLOOR 90025 LOS ANGELES, CALIFORNIA (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 445-1199 SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $.01 PAR VALUE (TITLE OF CLASS) 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 / / 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 voting stock held by nonaffiliates of the registrant. $292,173,885 as of March 22, 1996. Indicate the number of shares outstanding of the registrant's class of common stock, as of the latest practical date. 11,197,048 shares as of the close of business March 22, 1996. 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 33. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 JEFFERIES GROUP, INC. 1995 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PART I
PAGE ---- Item 1. Business................................................................................. 1 Item 2. Properties............................................................................... 5 Item 3. Legal Proceedings........................................................................ 6 Item 4. Submission of Matters to a Vote of Security Holders...................................... 6 PART II Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters............. 7 Item 6. Selected Financial Data.................................................................. 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.... 9 Item 8. Financial Statements and Supplementary Data.............................................. 13 Item 9. Disagreements on Accounting and Financial Disclosure..................................... 33 PART III Item 10. Directors and Executive Officers of the Registrant....................................... 33 Item 11. Executive Compensation................................................................... 33 Item 12. Security Ownership of Certain Beneficial Owners and Management........................... 33 Item 13. Certain Relationships and Related Transactions........................................... 33 PART IV Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K........................ 33
DOCUMENTS INCORPORATED BY REFERENCE
TITLE OF DOCUMENT PART OF FORM 10-K - -------------------------------------------------------------------------------------------- ----------------- Proxy Statement relating to 1996 Annual Meeting of Shareholders (to be filed)................. Part III
Exhibit Index located on page 33 of this report. 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, 1995, the Company and its subsidiaries had 799 full-time employees, including 401 representatives registered with the National Association of Securities Dealers, Inc. ("NASD"). 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 and conducts such activities primarily 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. INVESTMENT TECHNOLOGY GROUP, INC. Investment Technology Group, Inc. is a holding company which is publicly traded (Nasdaq: ITGI) and is approximately 80% owned by Jefferies Group, Inc. Its wholly-owned subsidiary, ITG Inc. ("ITG") is a leading provider of technology-based equity trading services and transaction research to institutional investors and brokers. ITG services help clients to access liquidity, execute trades more efficiently, and make better trading decisions. ITG's expanding range of services includes: POSIT(R), the world's largest intra-day electronic equity matching system; QuantEX(R), a fully-integrated trade routing, analysis, and management system; and ISIS, a set of analytical tools for systematically lowering the costs of trading. 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 subsidiary, Jefferies (Switzerland) Ltd., in Switzerland. 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. JPL commenced operations in 1993 and has not yet generated material revenues. 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 1 4 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. The Company 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 the Company's 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 the Company's equity account executives are electronically interconnected through a system permitting simultaneous verbal and graphic communication of trading and order information by all participants. The Company 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, the Company 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, the Company exposes its own capital to the risk of fluctuations in market value. Trading profits (or losses) depend primarily upon the skills of the employees engaged in market-making and position taking, the amount of capital allocated to positions in securities and the general trend of prices in the securities markets. The Company 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 makes markets in over 400 over-the-counter equity and ADR securities, operates a specialist post on the Boston Stock Exchange, and trades securities for its own account, as well as to accommodate customer transactions. The International Division engages in hedged trading involving securities listed or traded in both domestic and foreign markets. 2 5 Taxable Fixed Income. The Taxable Fixed Income Department trades high grade and non-investment grade public and private debt securities. The Department 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, 1995, the aggregate long and short market value of these positions was $30.2 million and $13.5 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. The Company 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. The Company invests in merger related arbitrage activities through relationships with independent management firms pursuant to which the Company delegates investment decisions to the managers. In 1994, the Company hired an analytical trading group to engage in statistically-defined market-neutral strategies in the equities markets to earn above market rates on invested capital. In 1995, the Company hired a commodities trading group to engage in a hedged strategy involving exchange listed commodity index futures and the underlying commodity futures. CORPORATE FINANCE Jefferies' Corporate Finance Department offers corporations a full range of advisory as well as debt and equity financing services which include private placements and public offerings of debt and equity securities, debt refinancings, recapitalizations, mergers and acquisitions advice, exclusive sales advice, structured financings and securitizations, consent and waiver solicitations, and company and bondholder representations in corporate restructurings. 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 the Company's 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"). The Company 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 the Company is required to act as an underwriter or to trade on a proprietary basis with its customers, the Company may assume greater risk than would normally be assumed in certain other principal transactions. INTEREST The Company 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. The Company also earns interest on its securities portfolio, on its operating and segregated balances, on its margin lending activity and on certain of its investments. Securities Borrowed/Securities Loaned. In connection with both its trading and brokerage activities, the Company 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. The Company has an active securities borrowed and lending matched book business 3 6 ("Matched Book"), in which the Company borrows securities from one party and lends them to another party. When the Company borrows securities, the Company provides cash to the lender as collateral, which is reflected in the Company's financial statements as receivable from brokers and dealers. The Company earns interest revenues on this cash collateral. Similarly, when the Company lends securities to another party, that party provides cash to the Company as collateral, which is reflected in the Company's financial statements as payable to brokers and dealers. The Company pays interest expense on the cash collateral received from the party borrowing the securities. A substantial portion of the Company's 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, the Company 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, the Company 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, the Company 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 the Company 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. The Company 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 the Company's margin loans are made to United States citizens or to corporations which are domiciled in the United States. The Company may extend credit to investors or corporations who are citizens of foreign countries or who may reside outside the United States. The Company believes that should such foreign investors default upon their loans with the Company and should the collateral for those loans be insufficient to satisfy the investors' obligations to the Company, the Company 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 the Company attempts to minimize the risk associated with the extension of credit in margin accounts, there is no assurance that the assumptions on which the Company bases its decisions will be correct or that the Company 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 institutional investors are members of the NYSE, any removal of these prohibitions could adversely affect the Company's business. 4 7 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 NASD 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 and the District of Columbia. ITG Inc. is registered as a broker-dealer in 49 states and the District of Columbia. W & D is registered as a broker-dealer in 23 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 Inc. 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 or ITG to the Company. As of December 31, 1995, Jefferies', ITG's and W & D's net capital was $78.0 million, $24.6 million and $908,000, respectively, which exceeded minimum net capital requirements by $72.4 million, $24.4 million and $658,000, respectively. See note 13 of Notes to Consolidated Financial Statements. 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, 6 and 11 of Notes to Consolidated Financial Statements. 5 8 ITEM 3. LEGAL PROCEEDINGS. In re Nasdaq Market-Makers Antitrust Litigation. Beginning in July 1994, antitrust class actions were commenced against Jefferies and over thirty other defendants in various federal courts. Following the filing of those lawsuits, the Antitrust Division of the United States Department of Justice and the Securities and Exchange Commission commenced investigations into certain issues related to the allegations of the lawsuits. As far as Jefferies is aware, those investigations are continuing. In October 1994, the lawsuits were consolidated for discovery purposes in the United States District Court for the Southern District of New York. 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 during the period May 1, 1989 to May 27, 1994. The plaintiffs seek damages in an unspecified amount, injunctive relief, and attorneys' fees and costs. Discovery of the parties has commenced. Plaintiffs have not yet asked the Court to certify the case to proceed as a class action. Jefferies denies any wrongdoing and intends to vigorously defend the lawsuits. At this stage of the litigations and investigations, it is not possible to evaluate the likelihood of an unfavorable outcome or to estimate the amount or range of potential damages or fines in the event of an adverse finding on the merits. 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. 6 9 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 representative bid prices per share for the Common Stock as reported by Nasdaq, which prices do not include retail mark-ups, mark-downs or commissions and represent prices between dealers and not necessarily actual transactions. All price range and dividends per share information has been restated to retroactively reflect the effect of the two-for-one stock split approved by the Board of Directors on March 2, 1996. (See note 16 to the consolidated financial statements.)
HIGH LOW ---- ---- 1995 First Quarter........................................................ 16 14 1/4 Second Quarter....................................................... 19 15 1/4 Third Quarter........................................................ 20 3/4 18 Fourth Quarter....................................................... 24 1/4 19 1/4 1994 First Quarter........................................................ 22 7/8 14 1/4 Second Quarter....................................................... 22 1/4 18 1/2 Third Quarter........................................................ 19 14 1/2 Fourth Quarter....................................................... 18 3/8 14 1/4
There were approximately 301 holders of record of the Company's Common Stock at December 31, 1995. 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):
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- 1995........................................ $.025 $.025 $.025 $.025 1994........................................ $.025 $.025 $.025 $.025
7 10 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, 1995, 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 14 through 32. All share and per share information has been restated to retroactively reflect the effect of the two-for-one stock split approved by the Board of Directors on March 2, 1996. (See note 16 to the consolidated financial statements.)
YEAR ENDED DECEMBER 31, -------------------------------------------------------------- 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) EARNINGS STATEMENT DATA Revenues: Commissions.............................................. $ 178,248 $ 155,295 $ 138,133 $ 106,756 $ 84,339 Principal transactions................................... 97,954 67,013 83,361 86,364 69,972 Corporate finance........................................ 73,493 40,665 72,442 23,888 16,745 Interest................................................. 65,792 51,223 21,693 16,801 23,939 Other.................................................... 4,228 1,902 2,512 1,632 955 ---------- ---------- ---------- ---------- ---------- Total revenues......................................... 419,715 316,098 318,141 235,441 195,950 Interest expense........................................... 54,365 41,626 17,457 13,250 15,959 ---------- ---------- ---------- ---------- ---------- Revenues, net of interest expense.......................... 365,350 274,472 300,684 222,191 179,991 ---------- ---------- ---------- ---------- ---------- Non-interest expenses: Compensation and benefits................................ 195,278 145,372 167,546 118,253 92,294 Floor brokerage and clearing fees........................ 20,273 18,660 15,925 13,830 11,593 Telecommunications and data processing services.......... 24,960 20,997 19,040 17,059 16,034 Occupancy and equipment rental........................... 15,993 14,271 12,757 12,126 12,767 Travel and promotional................................... 10,804 8,909 8,587 5,574 3,880 Software royalties....................................... 5,987 5,028 4,026 2,229 1,444 Other.................................................... 38,817 30,456 25,459 19,451 24,134 ---------- ---------- ---------- ---------- ---------- Total non-interest expenses............................ 312,112 243,693 253,340 188,522 162,146 ---------- ---------- ---------- ---------- ---------- Operating income........................................... 53,238 30,779 47,344 33,669 17,845 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...... 53,238 39,036 47,344 33,669 17,845 Income taxes............................................... 21,911 17,568 19,755 14,937 7,975 ---------- ---------- ---------- ---------- ---------- Earnings before minority interest and cumulative effect of change in accounting principle........................... 31,327 21,468 27,589 18,732 9,870 Minority interest.......................................... 2,798 1,244 -- -- -- ---------- ---------- ---------- ---------- ---------- Earnings before cumulative effect of change in accounting principle................................................ 28,529 20,224 27,589 18,732 9,870 Cumulative effect on prior years of change in accounting principle................................................ -- -- 1,358 -- -- ---------- ---------- ---------- ---------- ---------- Net earnings........................................... $ 28,529 $ 20,224 $ 28,947 $ 18,732 $ 9,870 ========== ========== ========== ========== ========== Earnings per share of Common Stock: Primary earnings before cumulative effect of accounting change................................................. $ 2.39 $ 1.63 $ 2.69 $ 1.91 $ 0.87 Cumulative effect of accounting change................... -- -- .13 -- -- ---------- ---------- ---------- ---------- ---------- Primary earnings......................................... $ 2.39 $ 1.63 $ 2.82 $ 1.91 $ 0.87 ========== ========== ========== ========== ========== Fully diluted earnings before cumulative effect of accounting change...................................... $ 2.37 $ 1.63 $ 2.33 $ 1.54 $ 0.79 Cumulative effect of accounting change................... -- -- .11 -- -- ---------- ---------- ---------- ---------- ---------- Fully diluted earnings................................... $ 2.37 $ 1.63 $ 2.44 $ 1.54 $ 0.79 ========== ========== ========== ========== ========== Weighted average shares of Common Stock: Primary.................................................. 11,960 12,378 10,290 9,796 11,372 Fully diluted............................................ 12,034 12,378 12,354 13,388 15,040 SELECTED BALANCE SHEET DATA Total assets............................................... $1,536,969 $1,557,348 $1,388,403 $ 531,040 $ 528,984 Long-term debt............................................. $ 56,322 $ 59,570 $ 9,968 $ 40,978 $ 40,428 Total stockholders' equity................................. $ 186,261 $ 163,235 $ 144,558 $ 96,582 $ 78,085 Book value per share of Common Stock....................... $ 16.55 $ 14.56 $ 12.69 $ 10.42 $ 8.53 Shares outstanding......................................... 11,257 11,210 11,391 9,267 9,158
8 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 and extremely volatile. 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.
YEAR ENDED DECEMBER 31, --------------------------------------------------------------- 1995 1994 1993 ------------------- ------------------- ------------------- % OF % OF % OF TOTAL TOTAL TOTAL AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Equities Division..................... $139,865 33% $123,236 39% $115,678 36% Investment Technology Group........... 71,917 17 54,265 17 47,450 15 International Division................ 39,617 9 29,441 9 23,767 7 Taxable Fixed Income Department....... 11,007 3 7,945 2 24,928 8 Convertible Division.................. 7,155 2 5,154 2 6,995 2 Other Proprietary Trading............. 6,641 2 2,267 1 2,676 1 Corporate Finance..................... 73,493 17 40,665 13 72,442 23 Interest.............................. 65,792 16 51,223 16 21,693 7 Other................................. 4,228 1 1,902 1 2,512 1 -------- --- -------- --- -------- --- Total revenues.............. $419,715 100% $316,098 100% $318,141 100% ======== === ======== === ======== ===
1995 COMPARED TO 1994 Revenues, net of interest expense, increased $90.9 million, or 33%, in 1995 as compared to 1994. The increase was due to a $32.8 million, or 81%, increase in corporate finance, a $30.9 million, or 46%, increase in principal transactions, a $23.0 million, or 15%, increase in commissions, a $2.3 million increase in other revenues and a $1.8 million, or 19%, increase in net interest income (interest revenues less interest expense). Commission revenues increased, led by ITG and the Equities Division. Revenues from principal transactions increased primarily due to increased trading gains in the Equities Division, the Taxable Fixed Income Department and the International Division. Corporate finance revenues benefited from increases in underwriting and advisory fees. Other revenues increased largely due to higher ITG related investment income. Net interest income increased as the $14.6 million increase in interest revenues exceeded the $12.7 million increase in interest expense. Interest revenues increased due primarily to higher securities borrowed and customer margin interest income. The related increase in interest on securities loaned only partially offset the growth in interest revenues. Total non-interest expenses increased $68.4 million, or 28%, in 1995 as compared to 1994. Compensation and benefits increased $49.9 million, or 34% primarily due to a $29.1 million increase in performance-based compensation, a $13.4 million increase in sales commissions and a $1.8 million increase in salaries. Salaries increased due largely to expansion in the Corporate Finance Department and equity research. Other expense increased $8.4 million, or 27%, largely due to higher technology development expenses. Telecommunications and data processing services increased $4.0 million, or 19%, primarily due to increased trade volume and personnel. Travel and promotional expense increased $1.9 million, or 21%, mostly due to an increase in ITG's advertising and promotional costs as well as increased travel related to the Corporate Finance Department. Occupancy and equipment rental increased $1.7 million, or 12%, mostly due to the relocation and addition of offices. Floor brokerage and clearing fees increased $1.6 million, or 9%, mostly due to increased volume of business executed on the various exchanges. Software royalties increased $959,000, or 19%, due to an increase in POSIT(R) commissions. As a result of the above, operating income increased $22.5 million, or 73%. 9 12 In 1994, Jefferies Group, Inc. recorded a pre-tax gain of $8.3 million on the initial public offering of Investment Technology Group, Inc. The minority stockholders' ownership interest reduced Jefferies Group, Inc.'s ownership of Investment Technology Group, Inc. to approximately 80%. (See Initial Public Offering of Investment Technology Group, Inc. in the Notes to Consolidated Financial Statements.) Earnings before income taxes and minority interest were up $14.2 million, or 36%. Net earnings were up 41% to $28.5 million, as compared to $20.2 million in 1994. Minority interest of $2.8 million in 1995 represents approximately 20% of Investment Technology Group, Inc.'s net earnings. The effective tax rate was approximately 41% in 1995 compared to approximately 45% in 1994. The 1995 effective tax rate was lower due to a reduction in the effective state tax rates and research and development tax credits. Primary earnings per share were $2.39 in 1995 on 12.0 million shares compared to $1.63 in 1994 on 12.4 million shares. Fully diluted earnings per share were $2.37 in 1995 on 12.0 million shares compared to $1.63 in 1994 on 12.4 million shares. 1994 COMPARED TO 1993 Revenues, net of interest expense, decreased $26.2 million, or 9%, in 1994 as compared to 1993. The decrease was due primarily to a $31.8 million, or 44%, decrease in corporate finance, a $16.3 million, or 20%, decrease in principal transactions and a $610,000 decrease in other revenues. These decreases were partially offset by a $17.2 million, or 12%, increase in commissions and a $5.4 million increase in net interest income (interest revenues less interest expense). Commission revenues increased mostly due to higher commission revenues in ITG, the Equities Division and the International Division. Revenues from principal transactions declined primarily due to decreased Taxable Fixed Income Department trading revenues. Corporate finance revenues decreased in 1994 because of a reduction in underwriting and private placement activity. Additionally, 1993 included one transaction which accounted for $16 million of revenue. Other revenues decreased due mostly to the absence of 1993's $700,000 gain from the termination of an office lease. Net interest income increased as the $29.5 million increase in interest revenues exceeded the $24.2 million increase in interest expense. Interest revenues increased primarily due to interest on higher securities borrowed and investment balances. The related increases in interest on securities loaned and customer short balances only partially offset the higher interest revenues. Total non-interest expenses decreased $9.6 million, or 4%, in 1994 as compared to 1993. Compensation and benefits decreased $22.2 million, or 13%. A $40.6 million decrease in performance-based compensation was partially offset by a $7.7 million increase in salaries and a $5.8 million increase in sales commissions. Salaries increased due mostly to the increased number of employees in the International Division, ITG and the Corporate Finance Department. Sales commissions were up partly due to a change for certain account executives from departmental profitability-based to an individual production-based compensation and partly due to higher commission revenues and higher commission payout rates on certain types of transactions. Other expense increased $5.0 million, or 20%, primarily due to higher soft dollar and technology development expenses. Floor brokerage and clearing fees increased $2.7 million, or 17%, mostly due to increased futures business and higher trade volume. Telecommunications and data processing services increased $2.0 million, or 10%, due to higher trade volume and personnel increases. Occupancy and equipment rental increased $1.5 million, or 12%, mostly due to the addition of new sales offices. Software royalties increased $1.0 million, or 25%, due to the increase in POSIT(R) commissions. Travel and promotional expense remained relatively unchanged as compared to the prior year's period. As a result of the above, operating income decreased $16.6 million, or 35%. In addition, Jefferies Group, Inc. recorded an $8.3 million gain related to the initial public offering of Investment Technology Group, Inc. The minority stockholders' ownership interests reduced Jefferies Group, Inc.'s ownership of Investment Technology Group, Inc. to approximately 80%. (See Initial Public Offering of Investment Technology Group, Inc. in the Notes to Consolidated Financial Statements.) Earnings before income taxes, minority interest and cumulative effect of change in accounting principle were down $8.3 million, or 18%. 10 13 Earnings before cumulative effect of change in accounting principle were down 27% to $20.2 million, as compared to $27.6 million in 1993. Minority interest of $1.2 million in 1994 represents approximately 20% of Investment Technology Group, Inc.'s net earnings since the initial public offering. The effective tax rate was approximately 45% in 1994 compared to approximately 42% in 1993. The 1993 period included a $1.1 million adjustment of prior years' estimated tax liabilities to actual which resulted in a lower tax rate for 1993. The cumulative effect of the change in accounting for income taxes required by Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes", was a $1.4 million benefit in 1993. This increased 1993's net earnings to $28.9 million. Primary earnings per share were $1.63 in 1994 on 12.4 million shares compared to $2.82 in 1993 on 10.3 million shares. Primary shares increased largely due to the conversion, in late 1993, of $29,731,000 aggregate principal amount of 8 1/2% Convertible Subordinated Debentures and $1,690,000 aggregate principal amount of 7% Convertible Subordinated Notes into an aggregate of 2,732,184 shares of the Company's Common Stock. Fully diluted earnings per share were $1.63 in 1994 on 12.4 million shares compared to $2.44 in 1993 on 12.4 million shares. The cumulative effect of the change in accounting principle increased 1993's earnings per share by $.13 on primary shares and $.11 on fully diluted 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, 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, 1995, Jefferies', ITG's and W & D's net capital was $78.0 million, $24.6 million and $908,000, respectively, which exceeded minimum net capital requirements by $72.4 million, $24.4 million and $658,000, respectively. Jefferies, ITG Inc. and W & D use the alternative method of calculating their regulatory net capital. In 1995, 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 1995, the Company repurchased 727,738 shares (including 267,936 shares purchased in connection with the Company's Capital Accumulation Plan) of its Common Stock at prices ranging from $14.31 to $23.25. In April 1994, Jefferies Group, Inc. issued $50,000,000 face value of 8.875% Senior Notes due 2004 (the "Notes") in a private placement. Pursuant to a registration statement filed in July 1994, Jefferies Group, Inc. exchanged all of the Notes for new 8.875% Series B Senior Notes due 2004. Also in 1994, the Company repurchased 1,381,546 shares (including 261,920 shares purchased in connection with the Company's Capital Accumulation Plan) of its Common Stock at prices ranging from $15.63 to $18.73. The repurchased shares of Common Stock are presently being held as treasury shares. 11 14 EFFECTS OF CHANGES IN FOREIGN CURRENCY RATES The Company maintains a foreign securities business in its foreign offices (London, Hong Kong and Zurich) 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. For an assessment of risk, see Part I, Item 1, Business sections "Principal Transactions," "Corporate Finance," "Interest," and "Competition." 12 15 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO FINANCIAL STATEMENTS
PAGE ---- Consolidated Financial Statements of Jefferies Group, Inc. and Subsidiaries Independent Auditors' Report.......................................................... 14 Consolidated Statements of Financial Condition as of December 31, 1995 and 1994....... 15 Consolidated Statements of Earnings for the Three Years Ended December 31, 1995....... 16 Consolidated Statements of Changes in Stockholders' Equity for the Three Years Ended December 31, 1995................................................................... 17 Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1995..... 18 Notes to Consolidated Financial Statements............................................ 19
13 16 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, 1995 and 1994 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, 1995. 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, 1995 and 1994 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995 in conformity with generally accepted accounting principles. As discussed in note 1 to the consolidated financial statements, the Company changed its accounting for income taxes in 1993 to adopt the provisions of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." KPMG Peat Marwick LLP Los Angeles, California January 24, 1996, except as to note 16 to the consolidated financial statements, which is as of March 2, 1996. 14 17 JEFFERIES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 1995 AND 1994 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1995 1994 ---------- ---------- ASSETS Cash and cash equivalents.................................................... $ 68,318 $ 71,381 Receivable from brokers and dealers.......................................... 1,118,154 1,149,670 Receivable from customers, officers and directors............................ 107,158 105,880 Securities owned............................................................. 167,210 144,940 Premises and equipment....................................................... 26,206 21,071 Other assets................................................................. 49,923 64,406 ---------- ---------- $1,536,969 $1,557,348 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Bank loans................................................................... $ -- $ 866 Payable to brokers and dealers............................................... 864,456 840,833 Repurchase agreements........................................................ -- 18,696 Payable to customers......................................................... 214,555 325,396 Securities sold, not yet purchased........................................... 82,932 60,587 Accrued expenses and other liabilities....................................... 124,062 82,029 ---------- ---------- 1,286,005 1,328,407 Long-term debt............................................................... 56,322 59,570 Minority interest............................................................ 8,381 6,136 ---------- ---------- 1,350,708 1,394,113 ---------- ---------- Stockholders' equity: Preferred stock, $.01 par value. Authorized 1,000,000 shares; none issued.. -- -- Common stock, $.01 par value. Authorized 25,000,000 shares; issued 18,520,706 shares in 1995 and 18,035,420 shares in 1994................. 93 90 Additional paid-in capital................................................. 58,117 51,120 Retained earnings.......................................................... 192,234 165,597 Less: Treasury stock, at cost; 7,263,530 shares in 1995 and 6,825,344 shares in 1994......................................................... (63,075) (52,958) Currency translation adjustments........................................ (522) (465) Additional minimum pension liability.................................... (586) (149) ---------- ---------- Net stockholders' equity................................................ 186,261 163,235 ---------- ---------- $1,536,969 $1,557,348 ========== ==========
See accompanying notes to consolidated financial statements. 15 18 JEFFERIES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS THREE YEARS ENDED DECEMBER 31, 1995 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1995 1994 1993 ---------- ---------- ---------- Revenues: Commissions.......................................................... $ 178,248 $ 155,295 $ 138,133 Principal transactions............................................... 97,954 67,013 83,361 Corporate finance.................................................... 73,493 40,665 72,442 Interest............................................................. 65,792 51,223 21,693 Other................................................................ 4,228 1,902 2,512 ---------- ---------- ---------- Total revenues..................................................... 419,715 316,098 318,141 Interest expense....................................................... 54,365 41,626 17,457 --------- ---------- ---------- Revenues, net of interest expense...................................... 365,350 274,472 300,684 --------- ---------- ---------- Non-interest expenses: Compensation and benefits............................................ 195,278 145,372 167,546 Floor brokerage and clearing fees.................................... 20,273 18,660 15,925 Telecommunications and data processing services...................... 24,960 20,997 19,040 Occupancy and equipment rental....................................... 15,993 14,271 12,757 Travel and promotional............................................... 10,804 8,909 8,587 Software royalties................................................... 5,987 5,028 4,026 Other................................................................ 38,817 30,456 25,459 --------- ---------- ---------- Total non-interest expenses........................................ 312,112 243,693 253,340 --------- ---------- ---------- Operating income....................................................... 53,238 30,779 47,344 Other income -- gain on initial public offering of Investment Technology Group, Inc. (note 15)..................................... -- 8,257 -- --------- ---------- ---------- Earnings before income taxes, minority interest and cumulative effect of change in accounting principle............................. 53,238 39,036 47,344 Income taxes........................................................... 21,911 17,568 19,755 --------- ---------- ---------- Earnings before minority interest and cumulative effect of change in accounting principle....................................... 31,327 21,468 27,589 Minority interest in earnings of consolidated subsidiaries, net........ 2,798 1,244 -- --------- ---------- ---------- Earnings before cumulative effect of change in accounting principle.... 28,529 20,224 27,589 Cumulative effect of change in accounting principle.................... -- -- 1,358 --------- ---------- ---------- Net earnings....................................................... $ 28,529 $ 20,224 $ 28,947 ========== ========== ========== Primary earnings per share: Earnings before cumulative effect of change in accounting principle.. $ 2.39 $ 1.63 $ 2.69 Cumulative effect of change in accounting principle.................. -- -- .13 ---------- ---------- ---------- Net earnings....................................................... $ 2.39 $ 1.63 $ 2.82 ========== ========== ========== Fully diluted earnings per share: Earnings before cumulative effect of change in accounting principle.. $ 2.37 $ 1.63 $ 2.33 Cumulative effect of change in accounting principle.................. -- -- .11 ---------- ---------- ---------- Net earnings....................................................... $ 2.37 $ 1.63 $ 2.44 ========== ========== ========== Weighted average shares of common stock: Primary.............................................................. 11,960,000 12,378,000 10,290,000 Fully diluted........................................................ 12,034,000 12,378,000 12,354,000 ========== ========== ==========
See accompanying notes to consolidated financial statements. 16 19 JEFFERIES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY THREE YEARS ENDED DECEMBER 31, 1995 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ADDITIONAL ADDITIONAL CURRENCY MINIMUM NET COMMON PAID-IN RETAINED TREASURY TRANSLATION PENSION STOCKHOLDERS' STOCK CAPITAL EARNINGS STOCK ADJUSTMENT LIABILITY EQUITY ------ ---------- -------- -------- ----------- ---------- ------------- Balance, December 31, 1992.................. $ 89 $ 34,015 $118,994 $(55,980) $(536) $ -- $ 96,582 Exercise of stock options (85,130 shares)... -- 885 -- -- -- -- 885 Purchase of 703,674 shares of treasury stock -- -- -- (11,228) -- -- (11,228) Issuance of restricted stock (10,344 shares) -- -- -- 93 -- -- 93 Conversion of convertible debt into common shares (2,732,184 shares)................. -- 30 -- 31,420 -- -- 31,450 Additional minimum pension liability........ -- -- -- -- -- (1,063) (1,063) Net earnings................................ -- -- 28,947 -- -- -- 28,947 Dividends paid ($.10 per share)............. -- -- (992) -- -- -- (992) Currency translation adjustment............. -- -- -- -- (116) -- (116) --- ------- -------- -------- ----- ------- -------- Balance, December 31, 1993.................. 89 34,930 146,949 (35,695) (652) (1,063) 144,558 Exercise of stock options (249,786 shares).. 1 2,936 -- 216 -- -- 3,153 Purchase of 1,381,546 shares of treasury stock..................................... -- -- -- (24,190) -- -- (24,190) Issuance of common stock (876,984 shares)... -- 13,119 -- 5,945 -- -- 19,064 Issuance of restricted stock (38,636 shares) -- 135 -- 213 -- -- 348 Capital Accumulation Plan distribution (35,362 shares)........................... -- -- -- 553 -- -- 553 Reduction in additional minimum pension liability................................. -- -- -- -- -- 914 914 Increase in proportionate share of subsidiary's equity related to subsidiary's purchase of treasury stock..................................... -- -- (407) -- -- -- (407) Net earnings................................ -- -- 20,224 -- -- -- 20,224 Dividends paid ($.10 per share)............. -- -- (1,169) -- -- -- (1,169) Currency translation adjustment............. -- -- -- -- 187 -- 187 --- ------- -------- -------- ----- ------- -------- Balance, December 31, 1994.................. 90 51,120 165,597 (52,958) (465) (149) 163,235 Exercise of stock options (485,286 shares).. 2 5,613 -- -- -- -- 5,615 Purchase of 727,738 shares of treasury stock..................................... -- -- -- (12,768) -- -- (12,768) Issuance of common stock (159,664 shares)... 1 1,205 -- 1,237 -- -- 2,443 Issuance of restricted stock (82,606 shares)................................... -- 179 -- 626 -- -- 805 Capital Accumulation Plan distribution (47,282 shares)........................... -- -- -- 788 -- -- 788 Additional minimum pension liability........ -- -- -- -- -- (437) (437) Increase in proportionate share of subsidiary's equity related to subsidiary's purchase of treasury stock..................................... -- -- (766) -- -- -- (766) Net earnings................................ -- -- 28,529 -- -- -- 28,529 Dividends paid ($.10 per share)............. -- -- (1,126) -- -- -- (1,126) Currency translation adjustment............. -- -- -- -- (57) -- (57) --- ------- -------- -------- ----- ------- -------- Balance, December 31, 1995.................. $ 93 $ 58,117 $192,234 $(63,075) $(522) $ (586) $ 186,261 === ======= ======== ======== ===== ======= ========
See accompanying notes to consolidated financial statements. 17 20 JEFFERIES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS THREE YEARS ENDED DECEMBER 31, 1995 (DOLLARS IN THOUSANDS)
1995 1994 1993 --------- -------- --------- Cash flows from operating activities: Net earnings...................................................... $ 28,529 $ 20,224 $ 28,947 --------- -------- --------- Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization................................... 9,720 7,921 6,665 Deferred income taxes........................................... (4,110) 15,945 (7,438) (Increase) decrease in receivables: Brokers and dealers........................................... 31,516 (80,286) (797,034) Customers, officers and directors............................. (1,278) 11,055 (22,588) Increase in securities owned.................................... (22,270) (30,132) (11,815) (Increase) decrease in other assets............................. 13,024 (39,366) (13,484) Increase (decrease) in payables: Brokers and dealers........................................... 23,623 225,617 467,602 Customers..................................................... (110,841) (80,330) 254,641 Increase (decrease) in securities sold, not yet purchased....... 22,345 (13,648) 26,312 Increase (decrease) in accrued expenses and other liabilities... 45,708 (9,829) 45,507 --------- -------- --------- Net cash provided by (used in) operating activities........... 35,966 27,171 (22,685) --------- -------- --------- Cash flows from financing activities: Net proceeds from (payments on) bank loans........................ (866) (45,062) 45,928 Issuance of long-term debt........................................ -- 49,302 -- Net proceeds (payments) from: Repurchase of treasury stock.................................... (12,768) (24,190) (11,228) Redemption of 8 7/8% Subordinated Notes, due 1997............... (3,576) -- -- Dividends paid.................................................. (1,126) (1,169) (992) Proceeds from exercise of stock options........................... 5,615 3,153 885 Increase in minority interest..................................... 2,245 6,136 -- Increase in proportionate share of subsidiary's equity............ (766) (407) -- Distribution of Capital Accumulation Plan shares.................. 788 553 -- Proceeds (payments) -- repurchase agreements...................... (18,696) 18,696 -- Issuance of restricted shares..................................... 805 348 93 Issuance of common shares......................................... 2,443 19,064 -- --------- -------- --------- Net cash provided by (used in) financing activities........... (25,902) 26,424 34,686 --------- -------- --------- Cash flows from investing activities -- purchase of premises and equipment......................................................... (13,070) (9,311) (10,053) --------- -------- --------- Effect of currency translation on cash.............................. (57) 187 (116) --------- -------- --------- Net increase (decrease) in cash and cash equivalents............ (3,063) 44,471 1,832 Cash and cash equivalents at beginning of year...................... 71,381 26,910 25,078 --------- -------- --------- Cash and cash equivalents at end of year............................ $ 68,318 $ 71,381 $ 26,910 ========= ======== ========= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest........................................................ $ 54,934 $ 37,435 $ 15,970 Income taxes.................................................... 15,168 9,793 20,112 ========= ======== =========
Supplemental disclosure of non-cash financing activities: In September 1993, the Company called for redemption of all of its then outstanding convertible subordinated debentures and notes. Holders of $29,731,000 face value of 8-1/2% Convertible Subordinated Debentures and $1,690,000 face value of 7% Convertible Subordinated Notes elected to convert their debentures and notes into 2,732,184 shares of the Company's common stock. In 1993, the Company recognized an additional minimum pension liability of $1,063,000 related to the Company's pension plan, which resulted in an increase to accrued expenses and other liabilities and an offsetting decrease in stockholders' equity. In 1994, the additional minimum pension liability included in stockholders' equity of $149,000 resulted from a decrease of $914,000 to accrued expenses and other liabilities and an offsetting increase in stockholders' equity. In 1995, the additional minimum pension liability included in stockholders' equity of $586,000 resulted from an increase of $437,000 to accrued expenses and other liabilities and an offsetting decrease in stockholders' equity. See accompanying notes to consolidated financial statements. 18 21 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1994 (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 equity and taxable fixed income securities brokerage and trading. 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. 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. 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. 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. 19 22 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) GOODWILL Goodwill, which represents the excess of cost over net assets acquired, is amortized on a straight-line basis over ten 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 straightline method over one to five years, with an average remaining life of two years. Amortization begins when the product is available for release to the customers. As of December 31, 1995 and 1994, respectively, the Company had $2.8 million and $1.5 million of capitalized software costs, net of accumulated amortization included in other assets. In 1995, 1994 and 1993, the Company amortized software costs of $894,000, $173,000 and $173,000, respectively. 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 income taxes are provided for temporary differences in reporting certain items, principally state income taxes, depreciation, deferred compensation and unrealized gains and losses on securities owned. Tax credits are recorded as a reduction of income taxes when realized. In February 1992, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Statement 109 requires a change from the deferred method of accounting for income taxes of APB Opinion 11 to the asset and liability method of accounting for income taxes. Under the asset and liability method of Statement 109, 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. Under Statement 109, 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. Effective January 1, 1993, the Company adopted Statement 109 and has reported the cumulative effect of that change in the method of accounting for income taxes in the 1993 consolidated statement of earnings. RESEARCH AND DEVELOPMENT Research and development costs were $2.8 million, $3.2 million and $3.5 million in 1995, 1994 and 1993, respectively. CASH EQUIVALENTS The Company generally invests its excess cash in money market funds and other short-term investments. At December 31, 1995 and 1994, such cash equivalents amounted to $40,299,000 and $49,174,000, 20 23 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) respectively. Cash equivalents are part of the cash management activities of the Company and generally mature within 90 days. 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. At December 31, 1994, the Company had two repurchase agreements outstanding with Eastbridge Capital, Inc., which had a weighted average maturity of 28 days. The market value of the securities to be repurchased was $18,734,000. EARNINGS PER COMMON SHARE Primary earnings per share of common stock are computed by dividing net earnings by the average number of shares of common stock and dilutive common stock equivalents outstanding during the period. Fully diluted earnings per share of common stock have been further adjusted for conversion of convertible subordinated debt, if dilutive. All shares used in the earnings per share calculations were restated to retroactively reflect the two-for-one stock split approved by the Board of Directors on March 2, 1996. (See note 16 to the consolidated financial statements.) FOREIGN CURRENCY TRANSLATION In accordance with SFAS 52, "Accounting for 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 currently 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, 1995 and 1994, excess of purchase price over net assets acquired remaining was $3,021,000 and $3,701,000, net of accumulated amortization of $2,261,000 and $1,696,000, respectively, and is included in other assets. In March 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 121 (SFAS 121), "Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed of." SFAS 121 requires that long-lived assets and certain identifiable intangibles to be held and used by the entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The statement is effective for financial 21 24 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) statements for fiscal years beginning after December 15, 1995. The Company elected to implement the statement during the year ended December 31, 1995. Such implementation did not have a material financial impact on the Company. (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, 1995 and 1994 (in thousands of dollars):
1995 1994 ---------- ---------- Receivable from brokers and dealers: Securities borrowed............................................... $1,092,904 $1,132,930 Other............................................................. 25,250 16,740 ---------- ---------- $1,118,154 $1,149,670 ========== ========== Payable to brokers and dealers: Securities loaned................................................. $ 851,254 $ 835,069 Other............................................................. 13,202 5,764 ---------- ---------- $ 864,456 $ 840,833 ========== ==========
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, 1995 and 1994 (in thousands of dollars):
1995 1994 -------- -------- Customers (net of allowance for uncollectible accounts of $2,251 in 1995 and $1,882 in 1994)............................................. $103,953 $103,735 Officers and directors................................................. 3,205 2,145 -------- -------- $107,158 $105,880 ======== ========
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 $81,000, $712,000 and $708,000 for the years ended December 31, 1995, 1994 and 1993, respectively, and is included in other expense. 22 25 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (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, 1995 and 1994:
1995 1994 ------------------------- ------------------------- SECURITIES SECURITIES SOLD, SOLD, SECURITIES NOT YET SECURITIES NOT YET OWNED PURCHASED OWNED PURCHASED ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS) Corporate equity securities.................... $ 79,872 $ 67,617 $ 72,652 $ 52,068 High-yield securities.......................... 30,180 13,501 21,457 3,058 Corporate debt securities...................... 13,728 1,595 18,392 4,927 Certificate of deposit......................... -- -- 10,000 -- U.S. Government and agency obligations......... 34,884 -- 22,416 -- Municipal securities........................... 8,509 -- -- -- Options........................................ 37 219 23 534 -------- ------- -------- ------- $ 167,210 $ 82,932 $ 144,940 $ 60,587 ======== ======= ======== =======
(6) PREMISES AND EQUIPMENT The following is a summary of premises and equipment as of December 31, 1995 and 1994 (in thousands of dollars):
1995 1994 ------- ------- Furniture, fixtures and equipment........................................ $47,549 $38,553 Leasehold improvements................................................... 11,142 7,422 ------- ------- Total............................................................... 58,691 45,975 Less accumulated depreciation and amortization........................... 32,485 24,904 ------- ------- $26,206 $21,071 ======= =======
Depreciation and amortization expense amounted to $7,934,000, $6,878,000 and $4,350,000 for the years ended December 31, 1995, 1994 and 1993, respectively. Included in furniture, fixtures and equipment is leased computer and office equipment totaling $5,290,000 with related accumulated amortization of $4,734,000 and $4,031,000 at December 31, 1995 and 1994, respectively. (7) 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, 1995, there were no bank loans. At December 31, 1994, firm bank loans amounted to $866,000. The loans were fully collateralized by firm securities having a market value of $1,361,000. 23 26 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (8) LONG-TERM DEBT The following summarizes long-term debt outstanding at December 31, 1995 and 1994 (in thousands of dollars):
1995 1994 ------- ------- 8 7/8% Subordinated Notes, due 1997, less unamortized discount of $251 and $509 in 1995 and 1994, respectively, effective rate of 12%......... $ 6,903 $10,221 8 7/8% Series B Senior Notes, due 2004, less unamortized discount of $581 and $651 in 1995 and 1994, respectively, effective rate of 9%.......... 49,419 49,349 ------- ------- $56,322 $59,570 ======= =======
In April 1994, the Company issued $50,000,000 face value of 8 7/8% Senior Notes due 2004 (the Notes) in a private placement. Pursuant to a registration statement filed in July 1994, Jefferies Group, Inc. exchanged all of the Notes for new 8 7/8% Series B Senior Notes due 2004. In 1992, the Company issued $10,730,000 face value of 8 7/8% Subordinated Notes in exchange for 7% Convertible Subordinated Notes having the same face value. Beginning October 1, 1995, the Subordinated Notes have sinking fund requirements to redeem $3,577,000 annually through October 1, 1997. In September 1993, the Company called for redemption of all of its then outstanding convertible subordinated debentures and notes. Holders of $29,731,000 face value of 8 1/2% Convertible Subordinated Debentures and $1,690,000 face value of 7% Convertible Subordinated Notes elected to convert their debentures and notes into 2,732,184 shares of the Company's common stock. (9) INCOME TAXES Total income taxes for the years ended December 31, 1995, 1994 and 1993 were allocated as follows (in thousands of dollars):
1995 1994 1993 ------- ------- ------- Income from operations........................................ $21,911 $17,568 $19,755 Stockholders' equity, for compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes.......................................... (2,451) (1,230) 177 Goodwill, for initial recognition of acquired tax benefits.... (122) -- -- ------- ------- ------- $19,338 $16,338 $19,932 ======= ======= =======
Income taxes (benefit) for the years ended December 31, 1995, 1994 and 1993 consists of the following:
1995 1994 1993 ------- ------- ------- (DOLLARS IN THOUSANDS) Current: Federal..................................................... $17,361 $ 667 $19,407 State and city.............................................. 8,660 956 7,786 ------- ------- ------- 26,021 1,623 27,193 ======= ======= ======= Deferred: Federal..................................................... (1,692) 12,103 (5,473) State and city.............................................. (2,418) 3,842 (1,965) ------- ------- ------- (4,110) 15,945 (7,438) ------- ------- ------- $21,911 $17,568 $19,755 ======= ======= =======
24 27 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Income taxes differed from the amounts computed by applying the Federal income tax rate of 35% for 1995, 1994 and 1993 as a result of the following:
1995 1994 1993 -------------- -------------- -------------- AMOUNT % AMOUNT % AMOUNT % ------- ---- ------- ---- ------- ---- (DOLLARS IN THOUSANDS) Computed expected income taxes.................................... $18,633 35.0% $13,663 35.0% $16,570 35.0% Increase (decrease) in income taxes resulting from: State and city income taxes, net of Federal income tax benefit.. 4,057 7.6 3,119 8.0 3,784 8.0 Research and development tax credits............................ (1,114) (2.1) -- -- -- -- Limited deductibility of meals and entertainment................ 663 1.3 645 1.7 323 .7 Non-taxable interest income..................................... (308) (0.6) -- -- -- -- Adjustment of estimated tax liabilities to actual............... -- -- -- -- (1,094) (2.3) Other, net...................................................... (20) -- 141 .3 172 .3 ------- ---- ------- ---- ------- ---- Total income taxes...................................... $21,911 41.2% $17,568 45.0% $19,755 41.7% ======= ==== ======= ==== ======= ====
The deferred tax benefit of $7,438,000 for the year ended December 31, 1993 included a $101,000 benefit from adjustments to deferred tax assets and liabilities for enacted changes in tax laws and rates. The cumulative tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 1995 and 1994 are presented below (in thousands of dollars):
1995 1994 -------- -------- Deferred tax assets: Long-term compensation............................................... $ 10,214 $ 7,602 Lease allowances..................................................... 667 603 Accounts receivable.................................................. 2,390 1,612 State income taxes................................................... 1,051 402 Net operating loss carryforward...................................... -- 2,397 Royalty income....................................................... -- 220 Securities inventories............................................... -- 112 Premises and equipment............................................... -- 117 Other................................................................ 412 -- -------- -------- Total gross deferred tax assets.............................. 14,734 13,065 Valuation allowance.................................................. -- -- -------- -------- Net deferred tax assets...................................... 14,734 13,065 -------- -------- Deferred tax liabilities: Investment in subsidiaries........................................... (14,342) (16,512) Notes payable........................................................ (94) (219) Premises and equipment............................................... (78) -- Other................................................................ -- (224) -------- -------- Total gross deferred tax liabilities......................... (14,514) (16,955) -------- -------- Net deferred tax asset (liability)........................... $ 220 $ (3,890) ======== ========
There was no valuation allowance for deferred tax assets as of December 31, 1995, 1994 and 1993. 25 28 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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. (10) BENEFIT PLANS PENSION PLAN The Company has a defined benefit pension plan which covers substantially all 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 (in thousands of dollars):
DECEMBER 31 ------------------- 1995 1994 ------- ------- Actuarial present value of benefit obligations -- accumulated benefit obligation, including vested benefits of $11,270 and $8,030 as of December 31, 1995 and 1994, respectively............................... $11,983 $ 8,447 ======= ======= Projected benefit obligation for service rendered to date................ $12,809 $ 8,967 Plan assets, at fair market value........................................ 10,528 7,754 ------- ------- Excess of the projected benefit obligation over plan assets............ 2,281 1,213 Unrecognized prior service cost.......................................... 755 820 Unrecognized net transition obligation being recognized over 15 years.... (258) (300) Unrecognized net loss.................................................... (2,334) (1,188) Adjustment to recognize minimum liability................................ 1,011 149 ------- ------- Pension liability included in other liabilities........................ $ 1,455 $ 694 ======= =======
YEAR ENDED DECEMBER 31 ------------------------------- 1995 1994 1993 ------- ------- ------- (DOLLARS IN THOUSANDS) Net pension cost included the following components: Service cost -- benefits earned during the period........... $ 595 $ 683 $ 693 Interest cost on projected benefit obligation............... 851 843 765 Actual loss (return) on plan assets......................... (2,195) 539 (909) Net amortization............................................ 1,442 (1,111) 409 ------- ------- ------- Net periodic pension cost................................ $ 693 $ 954 $ 958 ======= ======= =======
The plan assets consist of approximately 60% equities and 40% fixed income securities. The weighted average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7.50% and 5.00%, respectively, in 1995 and 8.75% and 5.00%, respectively, in 1994. The expected long-term rate of return on assets was 8.40% in 1995 and 1994. 26 29 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) STOCK PLANS The Company has a stock ownership and long-term incentive plan (the 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 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 Plan or any predecessor plan, as of such date. The following is a summary of the stock option transactions under the Plan and predecessor stock option plans for the year ended December 31, 1995, 1994 and 1993:
1995 1994 1993 ------------------------ ------------------------ ----------------------- NUMBER OF OPTION NUMBER OF OPTION NUMBER OF OPTION SHARES PRICE SHARES PRICE SHARES PRICE --------- ------------ --------- ------------ --------- ----------- Stock options outstanding, beginning of year............... 952,066 $ 5.50-21.50 984,252 $ 5.50-17.00 838,682 $5.50- 8.88 Stock options granted............. 220,000 14.38-19.63 187,600 16.25-21.50 232,000 8.50-17.00 Stock options exercised........... (485,286) 5.50-16.38 (219,786) 5.50- 8.88 (85,130) 5.50- 8.50 Stock options canceled............ (4,550) 5.50-16.25 -- -- (1,300) 5.50 -------- -------- ------- Stock options outstanding, end of year............................ 682,230 $ 5.50-21.50 952,066 $ 5.50-21.50 984,252 $5.50-17.00 ======== ============ ======== ============ ======= ===========
At December 31, 1995, of the 682,230 options outstanding, 488,230 options were exercisable and 681,230 were nonqualified. At December 31, 1994, of the 952,066 options outstanding, 806,066 options were exercisable and 944,066 were nonqualified. Additionally, each director, who is not an employee of the Company, has nonqualified options to purchase shares of the Company's common stock at exercise prices ranging from $6.63 through $21.50. In 1995, 10,000 options were granted to directors at an exercise price of $16.88. In total, the directors have 36,000 options. At December 31, 1995 and 1994, all of the options were exercisable. During 1995 and 1994, there were restricted stock awards of 128,046 shares and 56,400 shares, respectively, with a corresponding market value of $2,249,000 and $1,019,000, respectively. As of December 31, 1995 and 1994, restricted stock awards covering 21,494 shares and 130,400 shares, respectively, were outstanding and 21,494 and 109,500, respectively, were vested. In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 123 (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. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by 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 statement is effective for fiscal years beginning after December 15, 1995. The Company elected not to implement the statement during the year ended December 31, 1995. SFAS 123 is not expected to have a material financial impact on the Company. 27 30 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) OTHER BENEFIT PLANS The Company incurs expenses related to various benefit plans covering substantially all employees, including an Employee Stock Purchase Plan (ESPP) and a profit sharing plan, which includes a salary reduction feature designed to qualify under Section 401(k) of the Internal Revenue Code. In 1993, the Company created a Capital Accumulation Plan 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 this plan. The Company has acquired 770,396 shares since the inception of the plan and has made distributions of 82,644 shares. Expenses related to these employee benefit plans amounted to $5,926,000, $3,300,000 and $3,945,000 in 1995, 1994 and 1993, respectively. PERFORMANCE SHARE PLAN The Company had a Performance Share Plan, until May 1994, awarding ownership in ITG in the form of phantom equity interest to key ITG employees, of which a 12.7% interest was outstanding at December 31, 1993. Expense under this plan was $8,635,000 in 1993. In connection with the initial public offering of ITGI (see note 15), the Performance Share Plan was terminated in May 1994. The Performance Share Plan expense for 1994 was $1,528,000, prior to the termination of the plan. (11) LEASES As lessee, the Company leases certain premises and equipment under noncancelable agreements expiring at various dates through 2006. Assets under capitalized leases are capitalized using interest rates appropriate at the inception of the lease. Future minimum lease payments for assets under capital leases at December 31, 1995 follow:
DOLLARS IN THOUSANDS ------------ 1996..................................................................... $537 1997..................................................................... 26 ---- Total minimum obligations.............................................. 563 Less interest............................................................ 34 ---- Present value of minimum lease obligations............................. $529 ====
28 31 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Future minimum lease payments for all noncancelable operating leases at December 31, 1995 are as follows:
DOLLARS IN THOUSANDS ------------ 1996..................................................................... $6,882 1997..................................................................... 6,719 1998..................................................................... 6,197 1999..................................................................... 5,361 2000..................................................................... 4,355 Thereafter............................................................... 8,259 ======
Rental expense, net of subleases, for the Company was $5,996,000 in 1995, $5,507,000 in 1994 and $5,118,000 in 1993. (12) 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, commodities futures 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 $22,515,000 at December 31, 1995 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 and derivative positions in commodities 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. Most of the index futures positions taken are commodity index futures and are part of a strategy in which offsetting positions in the underlying individual commodities futures are also taken. 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, 1995 and 1994. They do not represent amounts subject to 29 32 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) market risk and, in many cases, serve to reduce the Company's overall exposure to market and other risks (in thousands of dollars):
NOTIONAL OR CONTRACTED AMOUNT ---------------------------------------------- 1995 1994 --------------------- -------------------- PURCHASE SALE PURCHASE SALE --------- ------- --------- ------ Index futures contracts............................. $ -- $55,912 $ -- $ -- Commodities futures contracts....................... 53,602 -- -- -- Option contracts.................................... 1,300 1,500 1,515 5,874 Foreign exchange forward contracts.................. 303 291 524 1,130 ====== ======= ====== ======
FAIR VALUE OF DERIVATIVE FINANCIAL INSTRUMENTS The following is an aggregate summary of the average 1995 and 1994 and December 31, 1995 and 1994 fair values of derivative financial instruments (in thousands of dollars):
1995 1994 ------------------------ ------------------------ AVERAGE END OF PERIOD AVERAGE END OF PERIOD -------- ------------- -------- ------------- Index futures contracts: In a favorable position........................... $ 41 $ 330 $ -- $ -- In an unfavorable position........................ 34 -- -- -- Option contracts: Purchases......................................... 79 37 120 23 Sales............................................. 174 219 256 534 Foreign exchange forward contracts: Purchases......................................... 1,929 303 2,114 524 Sales............................................. 4,995 291 3,170 1,130 ====== ==== ====== ======
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. 30 33 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) (13) 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, 1995, Jefferies had net capital of $78,043,000, which was 28% of aggregate debit balances and $72,437,000 in excess of required net capital. At December 31, 1995, ITG had net capital of $24,648,000, which was $24,398,000 in excess of required net capital. At December 31, 1995, W & D had net capital of $908,000, which was $658,000 in excess of required net capital. (14) CONTINGENCIES In re Nasdaq Market-Makers Antitrust Litigation. Beginning in July 1994, antitrust class actions were commenced against Jefferies and over thirty other defendants in various federal courts. Following the filing of those lawsuits, the Antitrust Division of the United States Department of Justice and the Securities and Exchange Commission commenced investigations into certain issues related to the allegations of the lawsuits. As far as Jefferies is aware, those investigations are continuing. In October 1994, the lawsuits were consolidated for discovery purposes in the United States District Court for the Southern District of New York. 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 during the period May 1, 1989 to May 27, 1994. The plaintiffs seek damages in an unspecified amount, injunctive relief, and attorneys' fees and costs. Discovery of the parties has commenced. Plaintiffs have not yet asked the Court to certify the case to proceed as a class action. Jefferies denies any wrongdoing and intends to vigorously defend the lawsuits. At this stage of the litigations and investigations, it is not possible to evaluate the likelihood of an unfavorable outcome or to estimate the amount or range of potential damages or fines in the event of an adverse finding on the merits. 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. (15) INITIAL PUBLIC OFFERING OF INVESTMENT TECHNOLOGY GROUP, INC. The Company formed a new subsidiary (ITGI) in March 1994 for the purpose of holding 100% of the stock of ITG. ITGI provides automated securities trade execution and analysis services to institutional equity investors. In May 1994, ITGI issued 3,700,000 shares of common stock at $13 per share, in an initial public offering for net proceeds of $43.6 million ($48.1 million, less underwriting discounts and commissions of $3.4 million and offering expenses of $1.1 million). Following the offering, the Company owned over 80% of the outstanding common stock of ITGI. In conjunction with the offering, certain management employment agreements, the ITG Performance Share Plan and noncompensatory ITG stock options were terminated on May 1, 1994 in exchange for $40.5 million, of which $900,000 was recorded as expense in 1994 prior to the offering and $9.4 million had been accrued at December 31, 1993. The remaining liability of $30.2 million was recorded as a plan 31 34 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) termination expense at the time of the offering. A portion of the total plan termination payments amounting to $19.1 million was used to purchase 876,984 shares of Jefferies Group, Inc. common stock at $21.75 per share. The remaining $21.4 million of plan termination cost was to be paid in cash of which $20.6 million and $.8 million was paid during 1994 and 1995, respectively. Additionally, noncompensatory options to purchase 2,726,178 shares of ITGI common stock were granted to senior management and other employees at an exercise price equal to the initial public offering price. The net proceeds from the offering of $43.6 million, less the ownership interest sold in the offering of $5.1 million and plan termination expenses of $30.2 million, resulted in a pretax gain of $8.3 million in 1994. The Company recorded deferred taxes as a result of the gain recognized from the offering. (16) TWO-FOR-ONE STOCK SPLIT, DIVIDEND RATE DOUBLED AND NYSE LISTING APPLICATION 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. All share, share price and per share information included in the consolidated financial statements has been restated to retroactively reflect the effect of the two-for-one stock split. In addition, the Board of Directors, approved continuation of the quarterly cash dividend rate at $0.05 on the approximately 12,000,000 common shares to be outstanding after the split (effectively doubling the dividend rate), as well as repurchase of up to 1 million of the new common shares, on the open market or otherwise, from time to time. The Board of Directors also approved the filing of an application to list the Company's common shares for trading on the New York Stock Exchange. 32 35 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 1996 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 1996 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 1996 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 1996 Annual Meeting of Shareholders, which is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
PAGES ----- (a)1. FINANCIAL STATEMENTS Included in Part II of this report: Independent Auditors' Report..................................................... 14 Consolidated Statements of Financial Condition................................... 15 Consolidated Statements of Earnings.............................................. 16 Consolidated Statements of Changes in Stockholders' Equity....................... 17 Consolidated Statements of Cash Flows............................................ 18 Notes to Consolidated Financial Statements....................................... 19
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 (3.1) Amended 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) Specimen stock certificate of the Registrant is incorporated by reference to Exhibit 4.1 to Registrant's Registration Statement on Form S-1 (No. 2-85950) filed on August 18, 1983, including amendments thereto.
33 36 (4.2) Rights Agreement dated as of May 12, 1988, between the Registrant and the First National Bank of Chicago relating to Preferred Share Purchase Rights including Form of Rights Certificate and Form of Summary of Rights is incorporated by reference to Exhibit 1 of Registrant's Form 8-K filed on May 17, 1988. (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) Agreement among Raymond L. Killian, Jr., Investment Technology Group, Inc. and Jefferies Group, Inc., dated as of April 1, 1992 is incorporated by reference to Exhibit 10.2 of Registrant's Form 10-K filed for the fiscal year ended December 31, 1992. (10.3) Amendment to Agreement among Raymond L. Killian, Jr., Investment Technology Group, Inc. and Jefferies Group, Inc. dated as of August 18, 1993 is incorporated by reference to Exhibit 10.3 of Registrant's Form 10-K for the fiscal year ended December 31, 1993. (10.3.1) 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. (10.4) Second Modified Compensation Agreement between David A. Sydorick, Jefferies Group, Inc., and Jefferies & Company, Inc. dated as of February 1, 1994, is incorporated by reference to Exhibit 10.5 of Registrant's Form 10-K for the fiscal year ended December 31, 1993. (10.5) Second Modified Compensation Agreement among Jefferies Group, Inc., Jefferies & Company, Inc. and Richard B. Handler, dated as of February 1, 1994 is incorporated by reference to Exhibit 10.5 of Registrant's Form 10-K for the fiscal year ended December 31, 1994. (10.6) Restricted Stock Agreement among Jefferies Group, Inc., Jefferies & Company, Inc. and Richard B. Handler, dated as of April 1, 1994 is incorporated by reference to Exhibit 10.6 of Registrant's Form 10-K for the fiscal year ended December 31, 1994. (10.7)* Employment Agreement between Clarence T. Schmitz and Jefferies & Company, Inc. dated February 6, 1995. (10.8) Jefferies Group, Inc. 1983 Incentive Stock Option Plan filed as part of Registrant's Registration Statement on Form S-8 (No. 2-94727) filed on December 6, 1984. (10.9) 1985 Incentive Stock Option Plan of Jefferies Group, Inc. filed as part of Registrant's Registration Statement on Form S-8 (No. 33-17065) filed on September 8, 1987. (10.10) Jefferies Group, Inc. 1985 Nonqualified Stock Option Plan filed as part of Registrant's Registration Statement on Form S-8 (No. 33-17065) filed on September 8, 1987. (10.11)* Description of compensation arrangements for Named Executive Officers. (10.12) Jefferies Group, Inc. 1993 Stock Ownership and Long-Term Incentive Plan filed as part of Registrant's Registration Statement on Form S-8 (No. 33-64490) filed on June 15, 1993. (10.13) Jefferies Group, Inc. Capital Accumulation Plan for Key Employees filed as part of Registrant's Registration Statement on Form S-8 (No. 33-64490) filed on June 15, 1993.
34 37 (10.14) Jefferies Group, Inc. Non-Employee Directors' Stock Option Plan, incorporated by reference to Appendix C of Registrant's Proxy Statement filed on April 4, 1994. (10.15) Jefferies Group, Inc. Pay-for-Performance Incentive Plan, incorporated by reference to Appendix B of Registrant's Proxy Statement filed on April 4, 1994. (10.16) Material contracts filed as part of Registrant's Registration Statement on Form S-1 (No. 2-85950) filed on August 18, 1983, including amendments thereto. (10.17) Material contracts filed as part of Registrant's Registration Statement on Form S-1 (No. 2-96596) filed on March 22, 1985, including amendments thereto. (11)* Statement of computation of per share earnings is attached hereto as Exhibit 11. (20.1) Form of Letter to Shareholders dated May 24, 1988, announcing the adoption of the Stockholders Rights Plan is incorporated by reference to Exhibit 3 of Registrant's Form 8-K filed on May 17, 1988. (20.2) Form of Letter to Shareholders dated March 15, 1996 announcing the redemption of all outstanding Preferred Share Purchase Rights originally issued pursuant to the Stockholders Rights Plan is incorporated by reference to Exhibit 2 of Registrant's Form 8-K filed on March 26, 1996. (21)* List of Subsidiaries of Registrant. (23)* Consent of KPMG Peat Marwick LLP.
- --------------- * Filed herewith. ALL OTHER EXHIBITS ARE OMITTED BECAUSE THEY ARE NOT APPLICABLE. (b) No reports on Form 8-K have been filed by the Registrant. (c) Index to Exhibits. See list of exhibits at Item 14(a)3 above and exhibit following. Exhibits 10.1 to and including 10.15 are management contracts or compensatory plans or arrangements. 35 38 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 29, 1996 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.
SIGNATURE TITLE DATE - ------------------------------------- ------------------------------ --------------- FRANK E. BAXTER Chairman of the Board of March 29, 1996 - ------------------------------------- Directors, President and Chief Frank E. Baxter Executive Officer CLARENCE T. SCHMITZ Executive Vice President March 29, 1996 - ------------------------------------- and Chief Financial Officer Clarence T. Schmitz RICHARD G. DOOLEY Director March 29, 1996 - ------------------------------------- Richard G. Dooley TRACY G. HERRICK Director March 29, 1996 - ------------------------------------- Tracy G. Herrick MICHAEL L. KLOWDEN Director March 29, 1996 - ------------------------------------- Michael L. Klowden FRANK J. MACCHIAROLA Director March 29, 1996 - ------------------------------------- Frank J. Macchiarola BARRY M. TAYLOR Director March 29, 1996 - ------------------------------------- Barry M. Taylor MARK A. WOLFSON Director March 29, 1996 - ------------------------------------- Mark A. Wolfson
36 39 EXHIBIT INDEX
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - --------- ----------------------------------------------------------------------- ------------- (3.1) Amended 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) Specimen stock certificate of the Registrant is incorporated by reference to Exhibit 4.1 to Registrant's Registration Statement on Form S-1 (No. 2-85950) filed on August 18, 1983, including amendments thereto................................................................ (4.2) Rights Agreement dated as of May 12, 1988, between the Registrant and the First National Bank of Chicago relating to Preferred Share Purchase Rights including Form of Rights Certificate and Form of Summary of Rights is incorporated by reference to Exhibit 1 of Registrant's Form 8-K filed on May 17, 1988.............................................. (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) Agreement among Raymond L. Killian, Jr., Investment Technology Group, Inc. and Jefferies Group, Inc., dated as of April 1, 1992 is incorporated by reference to Exhibit 10.2 of Registrant's Form 10-K filed for the fiscal year ended December 31, 1992...................... (10.3) Amendment to Agreement among Raymond L. Killian, Jr., Investment Technology Group, Inc. and Jefferies Group, Inc. dated as of August 18, 1993 is incorporated by reference to Exhibit 10.3 of Registrant's Form 10-K for the fiscal year ended December 31, 1993....................... (10.3.1) 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................................................................ (10.4) Second Modified Compensation Agreement between David A. Sydorick, Jefferies Group, Inc., and Jefferies & Company, Inc. dated as of February 1, 1994, is incorporated by reference to Exhibit 10.5 of Registrant's Form 10-K for the fiscal year ended December 31, 1993..... (10.5) Second Modified Compensation Agreement among Jefferies Group, Inc., Jefferies & Company, Inc. and Richard B. Handler, dated as of February 1, 1994 is incorporated by reference to Exhibit 10.5 of Registrant's Form 10-K for the fiscal year ended December 31, 1994.................. (10.6) Restricted Stock Agreement among Jefferies Group, Inc., Jefferies & Company, Inc. and Richard B. Handler, dated as of April 1, 1994 is incorporated by reference to Exhibit 10.6 of Registrant's Form 10-K for the fiscal year ended December 31, 1994................................ (10.7)* Employment Agreement between Clarence T. Schmitz and Jefferies & Company, Inc. dated February 6, 1995................................... (10.8) Jefferies Group, Inc. 1983 Incentive Stock Option Plan filed as part of Registrant's Registration Statement on Form S-8 (No. 2-94727) filed on December 6, 1984....................................................... (10.9) 1985 Incentive Stock Option Plan of Jefferies Group, Inc. filed as part of Registrant's Registration Statement on Form S-8 (No. 33-17065) filed on September 8, 1987...................................................
40
SEQUENTIALLY EXHIBIT NUMBERED NUMBER DESCRIPTION PAGE - --------- ----------------------------------------------------------------------- ------------- (10.10) Jefferies Group, Inc. 1985 Nonqualified Stock Option Plan filed as part of Registrant's Registration Statement on Form S-8 (No. 33-17065) filed on September 8, 1987................................................... (10.11)* Description of compensation arrangements for Named Executive Officers............................................................... (10.12) Jefferies Group, Inc. 1993 Stock Ownership and Long-Term Incentive Plan filed as part of Registrant's Registration Statement on Form S-8 (No. 33-64490) filed on June 15, 1993....................................... (10.13) Jefferies Group, Inc. Capital Accumulation Plan for Key Employees filed as part of Registrant's Registration Statement on Form S-8 (No. 33-64490) filed on June 15, 1993....................................... (10.14) Jefferies Group, Inc. Non-Employee Directors' Stock Option Plan, incorporated by reference to Appendix C of Registrant's Proxy Statement filed on April 4, 1994................................................. (10.15) Jefferies Group, Inc. Pay-for-Performance Incentive Plan, incorporated by reference to Appendix B of Registrant's Proxy Statement filed on April 4, 1994.......................................................... (10.16) Material contracts filed as part of Registrant's Registration Statement on Form S-1 (No. 2-85950) filed on August 18, 1983, including amendments thereto..................................................... (10.17) Material contracts filed as part of Registrant's Registration Statement on Form S-1 (No. 2-96596) filed on March 22, 1985, including amendments thereto................................................................ (11)* Statement of computation of per share earnings is attached hereto as Exhibit 11............................................................. (20.1) Form of Letter to Shareholders dated May 24, 1988, announcing the adoption of the Stockholders Rights Plan is incorporated by reference to Exhibit 3 of Registrant's Form 8-K filed on May 17, 1988............ (20.2) Form of Letter to Shareholders dated March 15, 1996 announcing the redemption of all outstanding Preferred Share Purchase Rights originally issued pursuant to the Stockholders Rights Plan is incorporated by reference to Exhibit 2 of Registrant's Form 8-K filed on March 26, 1996...................................................... (21)* List of Subsidiaries of Registrant..................................... (23)* Consent of KPMG Peat Marwick LLP.......................................
- --------------- * Filed herewith. EX-10.7 2 EMPLOYMENT AGREEMENT 1 EXHIBIT 10.7 EMPLOYMENT AGREEMENT This Employment Agreement is entered into as of February 6, 1995, by and between Jefferies & Company, Inc., a Delaware corporation (the "Company"), and Clarence T. Schmitz (the "Employee"). 1. EMPLOYMENT Subject to the terms and conditions contained herein, the Company shall employ the Employee as an Executive Vice President--Office of the Chairman, and shall also hold a similar title, as well as the title of Chief Financial Officer of the Company's parent, Jefferies Group, Inc. ("Group"), and the Employee accepts such employment for the period February 6, 1995 to February 5, 1997. Employee's responsibilities shall include overseeing all financial and systems functions within the Company and Group, providing general administrative and systems support to the Company's revenue generating units, leading the Company in the pursuit, structuring and integration of new business opportunities, and participating in the general management of the Company with the other members of the Office of the Chairman. 2. LOCATION OF EMPLOYMENT The Employee's principal places of employment shall be at the Company's offices located in the metropolitan New York or Los Angeles areas. If the Employee wishes to relocate to the Company's offices in the metropolitan New York, the Company will reimburse the Employee for the reasonable moving expenses which he incurs, up to a maximum of $50,000,000. 3. COMPENSATION a. The Company shall pay to the Employee a base salary at the rate of $275,000, effective for the period beginning February 6, 1995, and ending February 5, 1997, payable in accordance with the Company's normal payment procedures. b. In addition to the base salary described in Section 3(a), above, the Company shall pay the Employee a guaranteed bonus in the amount of $275,000, effective for the period beginning February 6, 1995, and ending February 5, 1997, payable within 45 days of the end of the Company's fiscal year. c. The compensation described in Sections 3(a) and 3(b) are gross amounts, and the Company shall be required to withhold from such amounts deductions with respect to Federal, State and local taxes, FICA, unemployment compensation taxes and similar taxes, assessments or withholding requirements (collectively, "employment taxes"). 2 d. In any month in which the Employee shall be employed for less than the entire number of days in such month, the guaranteed compensation payable to the Employee pursuant to this Section 3 with respect to such month shall be prorated on the basis of the number of days during which he was actually employed divided by the number of days in such month. e. During the Employee's employment hereunder, the Employee shall also be reimbursed by the Company for reasonable business expenses actually incurred or paid by him in rendering to the Company the services provided for herein, upon presentation of expense statements or such other supporting information as is consistent with the policies of the Company. f. The Employee shall be entitled to those fringe benefits customarily made available to Executive Vice Presidents of the Company. 4. STOCK OPTION Upon the approval of the Compensation Committee of Group, Employee shall be granted an option to purchase 20,000 shares of Group's Common Stock pursuant to the Jefferies Group, Inc. Stock Ownership and Long-Term Incentive Plan. The Option will be immediately vested upon its grant, and will be exercisable for a period of four years, subject to your continued employment with the Company or for a period of sixty days after the termination of your employment with the Company. The Option will expire if not previously exercised or terminated on February 5, 1999. The exercise price of the Option will be $29.75. 5. TERMINATION. a. Without limiting the Company's rights under Section 5(c), the employment of the Employee hereunder may be terminated by the Company if the Employee becomes permanently disabled. For the purposes of the foregoing sentence, the Employee shall be deemed to be "permanently disabled" if he has been substantially unable to discharge his duties and obligations hereunder by reason of illness, accident or disability for a period of three consecutive months. b. The employment of the Employee hereunder shall be automatically terminated on the date of the Employee's death. c. The employment of the Employee hereunder may be terminated by the Company at any time, with or without cause, upon written notice to the Employee. For purposes of this Agreement, "cause" means that the Company has the right to terminate the Employee's employment for cause at any time that Employee: -2- 3 (1) Commits an act which, in the Company's reasonable opinion, constitutes fraud; (2) Willfully engages in misconduct which is injurious to Jefferies or conduct which violates material policies of the Company or procedures which have been provided to the Employee in writing or which have been explicitly communicated to the Employee orally; (3) Commits to act which, in the Company's reasonable opinion, will lead to the Employee's censure, suspension or bar by any regulatory body or self-regulatory organization having jurisdiction over the Company and/or the Employee; (4) Wilfully fails to execute a directive of the Office of the Chairman (unless such directive would result in the commission of an act which is illegal or unethical) or commits an act against a directive of the Office of the Chairman; or (5) Negotiates or accepts employment with a competitor of the Company prior to the termination of the Employee's employment hereunder. d. The employment of the Employee hereunder shall terminate upon receipt by the Office of the Chairman of a written notice of resignation signed by the Employee or, if no notice is given, on the date on which the Employee voluntarily terminates his employment relationship with the Company. e. If the Employee's employment is terminated because of involuntary termination by the Company for cause, or resignation, then the Employee and his estate shall not be entitled to any compensation or benefits under Section 3 hereof, following the date of such termination, except for such benefits, if any, as may be required to be provided by the Company under the Comprehensive Omnibus Budget Reconciliation Act ("COBRA"). f. If the Employee's employment is terminated because of death or permanent disability, then the Employee and his estate shall be entitled to all compensation or benefits under Section 3 which have been earned but not yet paid prior to the date of termination. g. If the Employee's employment is terminated because of involuntary termination by the Company without cause, then (1) The Company shall pay to the Employee (or his heirs or legal representatives) the Employee's Guaranteed Compensation, at the rate in -3- 4 effect on the termination date, net of employment taxes, for the period from the termination date through February 5, 1997, periodically in accordance with the Company's normal payment procedures; and (2) The Employee shall be entitled to such additional benefits, if any, as may be required to be provided by the Company pursuant to COBRA. 6. AGREEMENT BINDING UPON SUCCESSORS. The terms of this Agreement shall be binding upon the executors, administrators, heirs, successors, transferees and assignees of the Employee and the Company. 7. NECESSARY ACTS. The Employee agrees to perform all acts and execute and deliver any documents that may be reasonably necessary to carry out the provisions of this Agreement, including but not limited to all acts and documents related to compliance with federal and/or state securities laws. 8. COUNTERPARTS. For convenience, this Agreement may be executed in any number of identical counterparts, each of which shall be deemed a complete original in itself and may be introduced in evidence or used for any other purposes without the production of any other counterparts. 9. GOVERNING LAW. This Agreement shall be governed by and construed and enforced in accordance with the internal substantive laws (and not the laws of conflicts) of the State of New York. 10. ENTIRE AGREEMENT This Agreement constitutes the whole agreement of the parties hereto in reference to any employment of the Employee by the Company and in reference to any of the matters or things herein provided for or hereinabove discussed or mentioned in reference to such employment, all prior agreements, promises, representations and understandings relative thereto being herein merged. -4- 5 11. ASSIGNABILITY. a. This Agreement is personal in nature and neither of the parties hereto shall, without the written consent of the other party hereto, assign or transfer this Agreement or any rights or obligations hereunder, except by operation of law or pursuant to the terms of this Section 11. b. Nothing expressed or implied herein is intended or shall be construed to confer upon or give to any person, other than the parties hereto, any right, remedy or claim under or by reason of this Agreement or of any term, covenant, or condition hereof. 12. AMENDMENTS; WAIVERS. This Agreement may be amended, modified, superseded, canceled, renewed or extended and the terms or covenants hereof may be waived only by a written instrument executed by the parties hereto or, in the case of a waiver, by the party waiving compliance. The failure of any party at any time or times to require performance of any provision hereof shall in no manner affect the right at a later time to enforce the same. No waiver by any party of the breach of any term or provision contained in this Agreement, whether by conduct or otherwise, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such breach, or a waiver of the breach of any other term or covenant contained in this Agreement. 13. NOTICE. Any notice to be given hereunder shall be in writing and delivered personally or sent by registered or certified mail, postage prepaid, and, if to the Company, addressed to it at 11100 Santa Monica Boulevard, 12th Floor, Los Angeles, California 90025, Attn: General Counsel, and, if to the Employee, addressed to him at the address set forth below his signature hereto, or to such other address as any party may designate by written notice to the other. -5- 6 IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement as of the date first written above. JEFFERIES & COMPANY, INC. By: /s/ Frank E. Baxter _____________________ Frank E. Baxter Chief Executive Officer and President /s/ Clarence T. Schmitz -------------------------- Clarence T. Schmitz Address for notices: 1448 Floresta Place Pacific Palisades, California 90272 EX-10.11 3 COMPENSATION ARRANGEMENTS 1 EXHIBIT 10.11 COMPENSATION ARRANGEMENTS FOR NAMED EXECUTIVE OFFICERS Compensation paid to Louis v. Bellucci, Sr., Richard B. Handler, Jeremiah P. O'Grady and Clifford A. Siegel consists of a base salary and/or draw and an annual bonus which is determined by departmental or divisional profitability. EX-11 4 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11 JEFFERIES GROUP, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, --------------------------- 1995 1994 1993 ------- ------- ------- Common stock and common equivalents: Average number of common shares................................. 11,100 11,620 9,838 Common stock equivalent shares related to employee stock plans........................................................ 860 758 452 ------- ------- ------- Total average common stock and common stock equivalents used for primary computation.......................... 11,960 12,378 10,290 Average common stock assumed issued pursuant to convertible subordinated debentures and an adjustment of average common stock equivalents to period-end market price, if higher than average price................................................... 74 -- 2,064 ------- ------- ------- Total average common stock, common stock equivalents and other dilutive securities............................. 12,034 12,378 12,354 ======= ======= ======= Earnings: Net earnings.................................................... $28,529 $20,224 $28,947 Adjustment to subsidiary earnings -- common stock equivalents on subsidiary....................... -- (125) -- ------- ------- ------- Total earnings for primary computation.................. 28,529 20,099 28,947 Eliminate interest expense (net of taxes) on convertible subordinated debentures......................................... -- -- 1,191 ------- ------- ------- Total earnings for fully diluted computation............ $28,529 $20,999 $30,138 ======= ======= ======= Earnings per share: Primary......................................................... $ 2.39 $ 1.63 $ 2.82 ======= ======= ======= Fully diluted................................................... $ 2.37 $ 1.63 $ 2.44 ======= ======= =======
All share and per share information has been restated to retroactively reflect the effect of the two-for-one stock split approved by the Board of Directors on March 2, 1996. EX-21 5 SUBSIDIARIES 1 EXHIBIT 21 SUBSIDIARIES OF JEFFERIES GROUP, INC. NAME OF SUBSIDIARY PLACE OF INCORPORATION - ------------------ ---------------------- Jefferies & Company, Inc. Delaware Investment Technology Group, Inc. Delaware Jefferies International Limited England Jefferies Pacific Limited Hong Kong Jefferies Analytical Trading Group Inc. Delaware EX-23 6 CONSENT OF KPMG PEAT MARWICK LLP 1 EXHIBIT 23 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. 33-63418 dated May 27, 1993; No. 33-64490 dated June 15, 1993; No. 33-52139 dated February 3, 1994, and No. 33-54373 dated June 30, 1994, all on Form S-8, and No. 33-54265 dated July 14, 1994 on Form S-4 of Jefferies Group, Inc. of our report dated January 26, 1996, relating to the consolidated statements of financial condition of Jefferies Group, Inc. and subsidiaries as of December 31, 1995 and 1994 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, 1995, which report appears in the December 31, 1995 annual report on Form 10-K of Jefferies Group, Inc. KPMG PEAT MARWICK LLP Los Angeles, California March 26, 1996 EX-27 7 FINANCIAL DATA SCHEDULE
BD 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. 1,000 U.S. DOLLARS YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 1 68,318 132,408 0 1,092,904 167,210 26,206 1,536,969 0 227,757 0 851,254 82,932 56,322 93 0 0 186,168 1,536,969 97,954 65,792 178,248 73,493 0 54,365 195,278 53,238 53,238 0 0 28,529 2.39 2.37
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