-----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, C5k23lJp9L8w+4YD3KkCrd1Wvwg1g161wXVtGIA7+38vSKsRjhFBhvZAk/4RlCLp BPzJPwfE7pOe82efZeSktw== 0000950148-97-000691.txt : 19970328 0000950148-97-000691.hdr.sgml : 19970328 ACCESSION NUMBER: 0000950148-97-000691 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970327 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: 001-11665 FILM NUMBER: 97565769 BUSINESS ADDRESS: STREET 1: 11100 SANTA MONICA BLVD STREET 2: 10TH FL 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 FORM 10-K 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, 1996 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, 11TH 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. $344,463,027 as of March 24, 1997. Indicate the number of shares outstanding of the registrant's class of common stock, as of the latest practical date. 10,032,327 shares as of the close of business March 24, 1997. 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 36. ================================================================================ 2 JEFFERIES GROUP, INC. 1996 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......................... 36 PART III Item 10. Directors and Executive Officers of the Registrant........................... 36 Item 11. Executive Compensation....................................................... 36 Item 12. Security Ownership of Certain Beneficial Owners and Management............... 36 Item 13. Certain Relationships and Related Transactions............................... 36 PART IV Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K............ 36
DOCUMENTS INCORPORATED BY REFERENCE
TITLE OF DOCUMENT PART OF FORM 10-K - ----------------------------------------------------------------------------- ----------------- Proxy Statement relating to 1997 Annual Meeting of Shareholders (to be filed)..................................................................... Part III
Exhibit Index located on page 36 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, 1996, the Company and its subsidiaries had 909 full-time employees, including 429 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 both on the national securities exchanges and in the "third market." The term "third market" refers to transactions in listed equity securities effected away from national securities exchanges. Jefferies' revenues are derived primarily from commission revenues and market making or trading as principal in equity, taxable fixed income and convertible securities with or on behalf of institutional investors, with the balance generated by corporate finance and other activities. Jefferies has continued to add to its equity research capabilities and currently provides equity research in the areas of energy, health care, telecommunications, consumer, real estate investment trusts, gaming and entertainment, business services, and financial services. INVESTMENT TECHNOLOGY GROUP, INC. Investment Technology Group, Inc. is a holding company which is publicly traded (Nasdaq: ITGI) and is approximately 82% owned by Jefferies Group, Inc. Its wholly-owned subsidiary, ITG Inc. ("ITG"), 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 Depository Receipts ("ADRs"). In 1995, JIL formed a wholly owned Swiss subsidiary, Jefferies (Switzerland) Ltd. In 1996, JIL formed a wholly owned English subsidiary, Jefferies (Japan) Limited, which maintains a branch office in Tokyo. Jefferies Pacific Limited ("JPL"), a broker subsidiary of the Company, was incorporated in 1992 in Hong Kong. JPL presently introduces foreign customers trading in U.S. securities to Jefferies. JPL commenced operations in 1993 and has not yet generated material revenues. 1 4 W & D SECURITIES, INC. W & D Securities, Inc. ("W & D") primarily provides execution services on the New York Stock Exchange ("NYSE") and other exchanges to Jefferies and ITG. In order to comply with regulatory requirements of the NYSE that generally prohibit NYSE members and their affiliates from executing, as principal and, in certain cases, as agent, transactions in NYSE-listed securities off the NYSE, the Company gave up its formal legal control of W & D, effective January 1, 1983, by exchanging all of the W & D common stock owned by it for non-voting preferred stock of W & D. The common stock of W & D is presently held by an officer of W & D who has agreed with the Company that, at the option of the Company, he will sell such stock to the Company for nominal consideration. In the event that the Company were to regain ownership of such common stock, the Company believes that the NYSE would assert that W & D would be in violation of the NYSE's rules unless similar arrangements satisfactory to the NYSE were made with respect to the ownership of the common stock. While the NYSE has generally approved the above arrangements, there can be no assurance that it will not raise objections in the future. In light of these arrangements and the high proportion of the equity of W & D represented by the non-voting preferred stock held by the Company, W & D is consolidated as a subsidiary of the Company for financial statement purposes. The Company believes that it can make satisfactory alternative arrangements for executing transactions in listed securities on the NYSE if it were precluded from doing so through W & D. COMMISSION BUSINESS A substantial portion of the Company's revenues is derived from customer commissions on brokerage transactions in equity (primarily listed) and debt securities for domestic and international investors such as investment advisors, banks, mutual funds, insurance companies and pension and profit sharing plans. Such investors normally purchase and sell securities in block transactions, the execution of which requires special marketing and trading expertise. 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. 2 5 Equities. The Equities Division makes markets in over 400 over-the-counter equity and ADR securities, and trades securities for its own account, as well as to accommodate customer transactions. The International Division engages in hedged trading involving securities listed or traded in both domestic and foreign markets. Taxable Fixed Income. The Taxable Fixed Income Division trades high grade and non-investment grade public and private debt securities. The Division specializes in trading and making markets in over 300 unrated or less than investment grade corporate debt securities and accounts for these positions at market value. At December 31, 1996, the aggregate long and short market value of these positions was $9.0 million and $12.3 million, respectively. Risk of loss upon default by the borrower is significantly greater with respect to unrated or less than investment grade corporate debt securities than with other corporate debt securities. These securities are generally unsecured and are often subordinated to other creditors of the issuer. These issuers usually have high levels of indebtedness and are more sensitive to adverse economic conditions, such as recession or increasing interest rates, than are investment grade issuers. There is a limited market for some of these securities and market quotes are generally available from a small number of dealers. Convertible Securities and Warrants. 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. In 1994, the Company started the Analytical Trading Division to engage in statistically-defined market-neutral strategies in the equities markets to earn above market rates on invested capital. In 1995, the Analytical Trading Division added a commodities trading group to engage in a hedged strategy involving exchange listed commodity index futures and the underlying commodity futures. The Company also invests in merger-related arbitrage activities through relationships with independent management firms pursuant to which the Company delegates investment decisions to the managers. CORPORATE FINANCE Jefferies' Corporate Finance Division 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. 3 6 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 ("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 4 7 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. 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, the District of Columbia and Puerto Rico. ITG 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 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, 1996, Jefferies', ITG's and W & D's net capital was $54.4 million, $29.8 million and $950,000, respectively, which exceeded minimum net capital requirements by $50.8 million, $29.6 million and $700,000, 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 5 8 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. ITEM 3. LEGAL PROCEEDINGS. In re Nasdaq Market-Makers Antitrust Litigation. Beginning in July 1994, antitrust class actions were commenced against Jefferies and 33 other defendants in various federal courts (the "Lawsuits"). Following the filing of the Lawsuits, the Antitrust Division of the United States Department of Justice ("DOJ") and the Commission commenced investigations into certain issues related to the allegations of the Lawsuits. In August 1996, the DOJ entered into a proposed antitrust consent decree with 24 defendants who are market makers in Nasdaq stocks. Jefferies was neither asked nor required to settle with the DOJ. The settlement has not yet been approved by the court. Shortly after the DOJ settlement, the Commission filed a Section 21(a) report against the NASD, criticizing various practices by market makers, and the NASD for failing to adequately police or discipline the market makers for those practices. However, the Commission did not take any action at that time against the market maker firms. Jefferies has been informed that the Commission is continuing its investigation of the market maker firms. In October 1994, the Lawsuits were consolidated for discovery purposes in the United States District Court for the Southern District of New York. The consolidated complaint alleges that the defendants violated the antitrust laws by conspiring to fix the spread paid by plaintiffs and class members to trade in certain Nasdaq securities, by refusing to quote bids and asks in so-called odd-eighths. The cases purport to be brought on behalf of all persons who purchased or sold certain securities on the Nasdaq National Market System during the period May 1, 1989 to May 27, 1994. The plaintiffs seek damages in an unspecified amount. In November 1996, the court granted, in part, the plaintiffs' motion to certify a class, and a motion to further define what types of purchasers and sellers of stock are included and not included in the definition of the certified class is pending before the court. Discovery will now proceed as appropriate. Jefferies denies any wrongdoing and intends to vigorously defend the Lawsuits. At this stage of the litigation, it is not possible to evaluate the likelihood of an unfavorable outcome or to estimate the amount or range of potential damages 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.
HIGH LOW ---- --- 1996 First Quarter........................................................ 34 1/2 22 1/4 Second Quarter....................................................... 37 29 3/8 Third Quarter........................................................ 36 1/2 26 1/4 Fourth Quarter....................................................... 40 3/4 34 1/4 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
There were approximately 296 holders of record of the Company's Common Stock at December 31, 1996. 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 ------- ------- ------- ------- 1996............................................. $.025 $.050 $.050 $.050 1995............................................. $.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, 1996, 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 35. 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.
YEAR ENDED DECEMBER 31, ------------------------------------------------------------ 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- -------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) EARNINGS STATEMENT DATA REVENUES: Commissions................................................ $ 239,771 $ 178,248 $ 155,295 $ 138,133 $106,756 Principal transactions..................................... 143,912 97,954 67,013 83,361 86,364 Corporate finance.......................................... 104,309 73,493 40,665 72,442 23,888 Interest................................................... 47,803 65,792 51,223 21,693 16,801 Other...................................................... 4,993 4,228 1,902 2,512 1,632 ---------- ---------- ---------- ---------- -------- Total revenues........................................... 540,788 419,715 316,098 318,141 235,441 Interest expense............................................. 37,852 54,365 41,626 17,457 13,250 ---------- ---------- ---------- ---------- -------- Revenues, net of interest expense............................ 502,936 365,350 274,472 300,684 222,191 ---------- ---------- ---------- ---------- -------- Non-interest expenses: Compensation and benefits.................................. 264,041 195,278 145,372 167,546 118,253 Floor brokerage and clearing fees.......................... 27,323 20,273 18,660 15,925 13,830 Telecommunications and data processing services............ 35,177 24,960 20,997 19,040 17,059 Occupancy and equipment rental............................. 17,207 15,993 14,271 12,757 12,126 Travel and promotional..................................... 15,371 10,804 8,909 8,587 5,574 Software royalties......................................... 8,805 5,987 5,028 4,026 2,229 Other...................................................... 51,825 38,817 30,456 25,459 19,451 ---------- ---------- ---------- ---------- -------- Total non-interest expenses.............................. 419,749 312,112 243,693 253,340 188,522 ---------- ---------- ---------- ---------- -------- Operating income............................................. 83,187 53,238 30,779 47,344 33,669 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........ 83,187 53,238 39,036 47,344 33,669 Income taxes................................................. 35,438 21,911 17,568 19,755 14,937 ---------- ---------- ---------- ---------- -------- Earnings before minority interest and cumulative effect of change in accounting principle............................. 47,749 31,327 21,468 27,589 18,732 Minority interest............................................ 4,189 2,798 1,244 -- -- ---------- ---------- ---------- ---------- -------- Earnings before cumulative effect of change in accounting principle.................................................. 43,560 28,529 20,224 27,589 18,732 Cumulative effect on prior years of change in accounting principle.................................................. -- -- -- 1,358 -- ---------- ---------- ---------- ---------- -------- Net earnings............................................. $ 43,560 $ 28,529 $ 20,224 $ 28,947 $ 18,732 ========== ========== ========== ========== ======== Earnings per share of Common Stock: Primary earnings before cumulative effect of accounting change................................................... $ 3.68 $ 2.39 $ 1.63 $ 2.69 $ 1.91 Cumulative effect of accounting change..................... -- -- -- .13 -- ---------- ---------- ---------- ---------- -------- Primary earnings........................................... $ 3.68 $ 2.39 $ 1.63 $ 2.82 $ 1.91 ========== ========== ========== ========== ======== Fully diluted earnings before cumulative effect of accounting change........................................ $ 3.66 $ 2.37 $ 1.63 $ 2.33 $ 1.54 Cumulative effect of accounting change..................... -- -- -- .11 -- ---------- ---------- ---------- ---------- -------- Fully diluted earnings..................................... $ 3.66 $ 2.37 $ 1.63 $ 2.44 $ 1.54 ========== ========== ========== ========== ======== Weighted average shares of Common Stock: Primary.................................................... 11,705 11,960 12,378 10,290 9,796 Fully diluted.............................................. 11,762 12,034 12,378 12,354 13,388 SELECTED BALANCE SHEET DATA Total assets............................................... $1,568,087 $1,536,969 $1,557,348 $1,388,403 $531,040 Term debt.................................................. $ 52,987 $ 56,322 $ 59,570 $ 9,968 $ 40,978 Total stockholders' equity................................. $ 195,445 $ 186,261 $ 163,235 $ 144,558 $ 96,582 Book value per share of Common Stock....................... $ 18.86 $ 16.55 $ 14.56 $ 12.69 $ 10.42 Shares outstanding......................................... 10,363 11,257 11,210 11,391 9,267
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. 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, ------------------------------------------------------------------- 1996 1995 1994 ------------------- ------------------- ------------------- % OF % OF % OF TOTAL TOTAL TOTAL AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES -------- -------- -------- -------- -------- -------- (DOLLARS IN THOUSANDS) Commissions and principal transactions: Equities Division............... $175,589 32% $139,865 33% $123,236 39% Investment Technology Group..... 113,452 21 71,917 17 54,265 17 International Division.......... 43,288 8 39,617 9 29,441 9 Taxable Fixed Income Division... 28,839 5 11,007 3 7,945 2 Convertible Division............ 8,132 2 7,155 2 5,154 2 Other Proprietary Trading....... 14,383 3 6,641 2 2,267 1 -------- --- -------- --- -------- --- Total................... 383,683 71 276,202 66 222,308 70 -------- --- -------- --- -------- --- Corporate Finance................. 104,309 19 73,493 17 40,665 13 Interest.......................... 47,803 9 65,792 16 51,223 16 Other............................. 4,993 1 4,228 1 1,902 1 -------- --- -------- --- -------- --- Total revenues.......... $540,788 100% $419,715 100% $316,098 100% ======== === ======== === ======== ===
1996 COMPARED TO 1995 Revenues, net of interest expense, increased $137.6 million, or 38%, in 1996 as compared to 1995. The increase was due to a $61.5 million, or 35%, increase in commissions, a $46.0 million, or 47%, increase in principal transactions, a $30.8 million, or 42%, increase in corporate finance, a $765,000 increase in other revenues, offset by a $1.5 million, or 13%, decrease in net interest income (interest revenues less interest expense). Commission revenues increased, led by ITG, the Equities Division, the International Division and the Convertibles Division. Revenues from principal transactions increased primarily due to increased trading gains in the Equities Division, the Taxable Fixed Income Division, the Analytical Trading Division and the International Division. Corporate finance revenues grew due to an increase in equity underwritings and advisory fees. Other revenues increased largely due to a one time expense reimbursement related to prior years. Net interest income decreased as the $18.0 million decrease in interest revenues exceeded the $16.5 million decrease in interest expense. Interest revenues decreased due primarily to lower securities borrowed. The related decrease in interest on securities loaned and customer credit balances only partially offset the drop in interest revenues. Total non-interest expenses increased $107.6 million, or 34%, in 1996 as compared to 1995. Compensation and benefits increased $68.8 million, or 35% primarily due to a $30.3 million increase in performance-based compensation, a $19.1 million increase in sales commissions and a $10.2 million increase in salaries. Salaries increased due largely to expansion in ITG, the Corporate Finance Division, the Equity Research Division and the Equities Division. The compensation costs of the Technology Department increased to support expansion and to strengthen the trading and management information systems. Other expense increased $13.0 million, or 34%, largely due to higher soft dollar expenses. Telecommunications and data processing services increased $10.2 million, or 41%, primarily due to increased trade volume and personnel. Floor brokerage and clearing fees increased $7.1 million, or 35%, mostly due to increased volume of business 9 12 executed on the various exchanges. Travel and promotional expense increased $4.6 million, or 42%, mostly due to increased business travel. Software royalties increased $2.8 million, or 47%, due to an increase in POSIT(R) commissions. Occupancy and equipment rental increased $1.2 million, or 8%, mostly due to the relocation and addition of office space. As a result of the above, earnings before income taxes and minority interest were up $29.9 million, or 56%. Net earnings were up 53% to $43.6 million, as compared to $28.5 million in 1995. Minority interest of $4.2 million in 1996 represents approximately 18% of Investment Technology Group, Inc.'s net earnings. The effective tax rate was approximately 42.6% in 1996 compared to approximately 41.2% in 1995. Primary earnings per share were $3.68 in 1996 on 11.7 million shares compared to $2.39 in 1995 on 12.0 million shares. Fully diluted earnings per share were $3.66 in 1996 on 11.8 million shares compared to $2.37 in 1995 on 12.0 million shares. 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 Division 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 Division 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 Division. 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%. 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 41.2% in 1995 compared to approximately 45.0% in 1994. The 1995 10 13 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. LIQUIDITY AND CAPITAL RESOURCES A substantial portion of the Company's assets are liquid, consisting of cash or assets readily convertible into cash. The majority of securities positions (both long and short) in the Company's trading accounts are readily marketable and actively traded. Receivables from brokers and dealers are primarily current open transactions or securities borrowed transactions which can be settled or closed out within a few days. Receivables from customers, officers and directors include margin balances and amounts due on uncompleted transactions. Most of the Company's receivables are secured by marketable securities. The Company's assets are funded by equity capital, senior debt, subordinated debt, securities loaned, customer free credit balances, bank loans and other payables. Bank loans represent secured and unsecured short-term borrowings (usually overnight) which are generally payable on demand. Secured bank loans are collateralized by a combination of customer, noncustomer and firm securities. The Company has always been able to obtain necessary short-term borrowings in the past and believes that it will continue to be able to do so in the future. Additionally, the Company has letters of credit outstanding which are used in the normal course of business to satisfy various collateral requirements in lieu of depositing cash or securities. Jefferies, ITG and W & D are subject to the net capital requirements of the Commission and other regulators, which are designed to measure the general financial soundness and liquidity of broker-dealers. Jefferies, ITG and W & D have consistently operated in excess of the minimum requirements. As of December 31, 1996, Jefferies', ITG's and W & D's net capital was $54.4 million, $29.8 million and $950,000, respectively, which exceeded minimum net capital requirements by $50.8 million, $29.6 million and $700,000, respectively. Jefferies, ITG and W & D use the alternative method of calculating their regulatory net capital. In 1996, Jefferies Group, Inc. redeemed $3.6 million face value of its 8.875% Subordinated Notes due 1997 in accordance with sinking fund requirements. Also in 1996, the Company repurchased 1,160,176 shares (including 207,312 shares purchased in connection with the Company's Capital Accumulation Plan) of its Common Stock at prices ranging from $22.63 to $37.25. 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. The repurchased shares of Common Stock are presently being held as treasury shares. EFFECT OF THE COMMISSION'S ORDER HANDLING RULES In late 1996 the Commission adopted a series of rules which may have a significant impact on the Company's market making activities in Nasdaq securities. These rules, referred to as the Commission's Order Handling rules, require market makers to display, in certain circumstances, a customer's limit order. The implementation of these rules is being phased in during 1997. The impact on the profitability of the Company's activities as a market maker in Nasdaq securities is unclear, although these rules may have the effect of reducing the spread for certain Nasdaq securities, thereby decreasing, potentially, the profitability from such market making activity. EFFECTS OF CHANGES IN FOREIGN CURRENCY RATES The Company maintains a foreign securities business in its foreign offices (London, Hong Kong, Zurich and Tokyo) as well as in some of its domestic offices. Most of these activities are hedged by related foreign 11 14 currency liabilities or by forward exchange contracts. However, the Company is still subject to some foreign currency risk. A change in the foreign currency rates could create either a foreign currency transaction gain/loss (recorded in the Company's Consolidated Statements of Earnings) or a foreign currency translation adjustment to the stockholders' equity section of the Company's Consolidated Statements of Financial Condition. NEW ACCOUNTING STANDARD ON STOCK-BASED COMPENSATION Statement of Financial Accounting Standards (SFAS) 123, "Accounting for Stock-Based Compensation," 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 allows an entity to continue to measure compensation cost for these plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." Entities electing to remain with the accounting in APB Opinion No. 25 must make pro forma disclosures of net earnings and earnings per share, as if the fair value based method of accounting defined in SFAS 123 had been applied. The Company elected to remain with the accounting in APB Opinion No. 25. Accordingly, no compensation cost has been recognized for fixed stock option plans. 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, 1996 and 1995....... 15 Consolidated Statements of Earnings for the Three Years Ended December 31, 1996....... 16 Consolidated Statements of Changes in Stockholders' Equity for the Three Years Ended December 31, 1996................................................................... 17 Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1996..... 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, 1996 and 1995 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, 1996. 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, 1996 and 1995 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Los Angeles, California January 24, 1997 14 17 JEFFERIES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 1996 AND 1995 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996 1995 ---------- ---------- ASSETS Cash and cash equivalents........................................... $ 114,142 $ 68,318 Cash and securities segregated and on deposit for regulatory purposes.......................................................... 23,849 -- Receivable from brokers and dealers................................. 965,625 1,118,154 Receivable from customers, officers and directors................... 113,872 107,158 Securities owned.................................................... 197,770 167,210 Premises and equipment.............................................. 30,871 26,206 Other assets........................................................ 121,958 49,923 ---------- ---------- $1,568,087 $1,536,969 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Payable to brokers and dealers...................................... $ 805,713 $ 864,456 Payable to customers................................................ 170,384 214,555 Securities sold, not yet purchased.................................. 124,315 82,932 Accrued expenses and other liabilities.............................. 207,281 124,062 ---------- ---------- 1,307,693 1,286,005 Term debt........................................................... 52,987 56,322 Minority interest................................................... 11,962 8,381 ---------- ---------- 1,372,642 1,350,708 ---------- ---------- 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 18,757,062 shares in 1996 and 18,520,706 shares in 1995........ 188 93 Additional paid-in capital........................................ 62,569 58,117 Retained earnings................................................. 232,741 192,234 Less: Treasury stock, at cost; 8,394,113 shares in 1996 and 7,263,530 shares in 1995................................................ (99,404) (63,075) Currency translation adjustments............................... (96) (522) Additional minimum pension liability........................... (553) (586) ---------- ---------- Net stockholders' equity..................................... 195,445 186,261 ---------- ---------- $1,568,087 $1,536,969 ========== ==========
See accompanying notes to consolidated financial statements. 15 18 JEFFERIES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS THREE YEARS ENDED DECEMBER 31, 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1996 1995 1994 ---------- ---------- ---------- REVENUES: Commissions.............................................. $ 239,771 $ 178,248 $ 155,295 Principal transactions................................... 143,912 97,954 67,013 Corporate finance........................................ 104,309 73,493 40,665 Interest................................................. 47,803 65,792 51,223 Other.................................................... 4,993 4,228 1,902 ---------- ---------- ---------- Total revenues........................................ 540,788 419,715 316,098 Interest expense......................................... 37,852 54,365 41,626 ---------- ---------- ---------- Revenues, net of interest expense..................... 502,936 365,350 274,472 ---------- ---------- ---------- NON-INTEREST EXPENSES: Compensation and benefits................................ 264,041 195,278 145,372 Floor brokerage and clearing fees........................ 27,323 20,273 18,660 Telecommunications and data processing services.......... 35,177 24,960 20,997 Occupancy and equipment rental........................... 17,207 15,993 14,271 Travel and promotional................................... 15,371 10,804 8,909 Software royalties....................................... 8,805 5,987 5,028 Other.................................................... 51,825 38,817 30,456 ---------- ---------- ---------- Total non-interest expenses........................... 419,749 312,112 243,693 ---------- ---------- ---------- Operating income........................................... 83,187 53,238 30,779 Other income -- gain on initial public offering of Investment Technology Group, Inc. (note 15).............. -- -- 8,257 ---------- ---------- ---------- Earnings before income taxes and minority interest......... 83,187 53,238 39,036 Income taxes............................................... 35,438 21,911 17,568 ---------- ---------- ---------- Earnings before minority interest..................... 47,749 31,327 21,468 Minority interest in earnings of consolidated subsidiaries, net...................................................... 4,189 2,798 1,244 ---------- ---------- ---------- Net earnings.......................................... $ 43,560 $ 28,529 $ 20,224 ========== ========== ========== EARNINGS PER SHARE: Primary............................................... $ 3.68 $ 2.39 $ 1.63 ========== ========== ========== Fully diluted......................................... $ 3.66 $ 2.37 $ 1.63 ========== ========== ========== WEIGHTED AVERAGE SHARES OF COMMON STOCK: Primary.................................................. 11,705,000 11,960,000 12,378,000 Fully diluted............................................ 11,762,000 12,034,000 12,378,000
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, 1996 (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, 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 ($.10 per share)............. -- -- (1,126) -- -- -- (1,126) Currency translation adjustment............. -- -- -- -- (57) -- (57) ---- ------- -------- -------- ------ ------ -------- Balance, December 31, 1995.................. 93 58,117 192,234 (63,075) (522) (586) 186,261 Exercise of stock options (176,230 shares)................................... 1 2,555 -- 97 -- -- 2,653 Purchase of 1,160,176 shares of treasury stock..................................... -- -- -- (36,766) -- -- (36,766) Issuance of common stock (35,694 shares).... -- 770 -- -- -- -- 770 Issuance of restricted stock (34,432 shares)................................... -- 695 -- -- -- -- 695 Capital Accumulation Plan distribution (19,593 shares)........................... -- 138 -- 340 -- -- 478 Additional minimum pension liability........ -- -- -- -- -- 33 33 Increase in proportionate share of subsidiary's equity related to subsidiary's purchase of treasury stock... -- -- (1,115) -- -- -- (1,115) Additional vesting of restricted stock shares.................................... -- 388 -- -- -- -- 388 Net earnings................................ -- -- 43,560 -- -- -- 43,560 Dividends paid ($.175 per share)............ -- -- (1,883) -- -- -- (1,883) Redemption of rights ($.005 per right)...... -- -- (55) -- -- -- (55) Two-for-one stock split..................... 94 (94) -- -- -- -- -- Currency translation adjustment............. -- -- -- -- 426 -- 426 ---- ------- -------- -------- ------ ------ -------- Balance, December 31, 1996.................. $188 $ 62,569 $232,741 $(99,404) $ (96) $ (553) $195,445 ==== ======= ======== ======== ====== ====== ========
See accompanying notes to consolidated financial statements. 17 20 JEFFERIES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS THREE YEARS ENDED DECEMBER 31, 1996 (DOLLARS IN THOUSANDS)
1996 1995 1994 -------- --------- -------- Cash flows from operating activities: Net earnings.......................................................... $ 43,560 $ 28,529 $ 20,224 -------- --------- -------- Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization....................................... 13,644 9,720 7,921 Deferred income taxes............................................... (10,462) (4,110) 15,945 Additional vesting of restricted stock.............................. 388 -- -- (Increase) decrease in cash and securities segregated............... (23,849) 8,000 (8,000) (Increase) decrease in receivables: Brokers and dealers................................................. 152,529 31,516 (80,286) Customers, officers and directors................................... (6,714) (1,278) 11,055 Increase in securities owned........................................ (30,560) (22,270) (30,132) (Increase) decrease in other assets................................. (63,496) 13,024 (39,366) Increase (decrease) in payables: Brokers and dealers................................................. (58,743) 23,623 225,617 Customers........................................................... (44,171) (110,841) (80,330) Increase (decrease) in securities sold, not yet purchased........... 41,383 22,345 (13,648) Increase (decrease) in accrued expenses and other liabilities....... 83,252 45,708 (9,829) -------- --------- -------- Net cash provided by operating activities........................... 96,761 43,966 19,171 -------- --------- -------- Cash flows from financing activities: Net payments on bank loans............................................ -- (866) (45,062) Issuance of term debt................................................. -- -- 49,302 Net payments on: Repurchase of treasury stock........................................ (36,766) (12,768) (24,190) Redemption of 8 7/8% Subordinated Notes, due 1997................... (3,576) (3,576) -- Dividends paid...................................................... (1,883) (1,126) (1,169) Redemption of rights................................................ (55) -- -- Proceeds from exercise of stock options............................... 2,653 5,615 3,153 Increase in minority interest......................................... 3,581 2,245 6,136 Increase in proportionate share of subsidiary's equity................ (1,115) (766) (407) Distribution of Capital Accumulation Plan shares...................... 478 788 553 Proceeds (payments) -- repurchase agreements.......................... -- (18,696) 18,696 Issuance of restricted shares......................................... 695 805 348 Issuance of common shares............................................. 770 2,443 19,064 -------- --------- -------- Net cash provided by (used in) financing activities................. (35,218) (25,902) 26,424 -------- --------- -------- Cash flows from investing activities -- purchase of premises and equipment............................................................. (16,145) (13,070) (9,311) -------- --------- -------- Effect of currency translation on cash.................................. 426 (57) 187 -------- --------- -------- Net increase in cash and cash equivalents........................... 45,824 4,937 36,471 Cash and cash equivalents at beginning of year.......................... 68,318 63,381 26,910 -------- --------- -------- Cash and cash equivalents at end of year................................ $114,142 $ 68,318 $ 63,381 ======== ========= ======== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest............................................................ $ 38,522 $ 54,934 $ 37,435 Income taxes........................................................ 42,724 15,168 9,793
Supplemental disclosure of non-cash financing activities: 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. In 1996, the additional minimum pension liability included in stockholders' equity of $553,000 resulted from a decrease of $33,000 to accrued expenses and other liabilities and an offsetting increase in stockholders' equity. See accompanying notes to consolidated financial statements. 18 21 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 (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, convertible debt and taxable fixed income securities brokerage and trading and corporate finance. 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 (see note 12 of the notes to consolidated financial statements.) PREMISES AND EQUIPMENT Premises and equipment are depreciated using the straight-line method over the estimated useful lives of the related assets (generally three to ten years). Leasehold improvements are amortized using the straight-line method over the term of related leases or the estimated useful lives of the assets, whichever is shorter. 19 22 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1996 AND 1995 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 straight-line method over one to two years, with an average remaining life of under two years. Amortization begins when the product is available for release to the customers. As of December 31, 1996 and 1995, respectively, the Company had $3.0 million and $2.8 million of capitalized software costs, net of accumulated amortization included in other assets. In 1996, 1995 and 1994, the Company amortized software costs of $1.4 million, $894,000 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 tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income taxes are provided for temporary differences in reporting certain items, principally state income taxes, depreciation, deferred compensation and unrealized gains and losses on securities owned. Tax credits are recorded as a reduction of income taxes when realized. RESEARCH AND DEVELOPMENT Research and development costs were $6.0 million, $4.9 million and $3.2 million in 1996, 1995 and 1994, respectively. In 1996, 1995 and 1994, $1.6 million, $2.1 million and $1.3 million, respectively, were capitalized. CASH EQUIVALENTS The Company generally invests its excess cash in money market funds and other short-term investments. At December 31, 1996 and 1995, such cash equivalents amounted to $95,650,000 and $40,299,000, respectively. Cash equivalents are part of the cash management activities of the Company and generally mature within 90 days. 20 23 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1996 AND 1995 REPURCHASE AND REVERSE REPURCHASE AGREEMENTS Repurchase agreements consist of sales of U.S. Treasury notes under agreements to repurchase. They are treated as collateralized financing transactions and are recorded at their contracted repurchase amount. Reverse repurchase agreements consist of purchases of U.S. Treasury notes under agreements to re-sell. They are treated as collateralized financing transactions and are recorded at their contracted re-sale amount. At December 31, 1996, the Company had a reverse repurchase agreement outstanding with Wells Fargo Bank N.A., which had a weighted average maturity of two days. The market value of the securities to be re-sold was $35,001,000. EARNINGS PER COMMON SHARE 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. 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. COMMON STOCK 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. TRANSFERS OF FINANCIAL ASSETS In June 1996, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS 125 establishes, among other things, new criteria for determining whether a transfer of financial assets should be accounted for as a sale or as a pledge of collateral in a secured borrowing. SFAS 125 also establishes new accounting requirements for pledged collateral. As issued, SFAS 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and is to be applied prospectively. Earlier or retroactive application of SFAS 125 is not permitted. In November 1996, the FASB deferred for one year the effective date of significant provisions of SFAS 125. SFAS 125 is not expected to have a material impact on the Company. IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF In 1995, the Company adopted the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed Of." SFAS No. 121 requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstance indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and 21 24 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1996 AND 1995 used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of carrying amount or fair value less costs to sell. Adoption of SFAS No. 121 did not have a material impact on the Company's consolidated financial position, results of operations, or liquidity. FOREIGN CURRENCY TRANSLATION The Company's foreign revenues and expenses are translated at average current rates during each reporting period. Foreign currency transaction gains and losses are included in the consolidated statement of earnings. Gains and losses resulting from translation of financial statements are excluded from the consolidated statement of earnings and are recorded directly to a separate component of stockholders' equity. RECLASSIFICATIONS Certain reclassifications have been made to the prior years' amounts to conform to the current year's presentation. USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (2) GOODWILL At December 31, 1996 and 1995, excess of purchase price over net assets acquired remaining was $2,471,000 and $3,021,000, net of accumulated amortization of $2,811,000 and $2,261,000, respectively, and is included in other assets. (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, 1996 and 1995 (in thousands of dollars):
1996 1995 -------- ---------- Receivable from brokers and dealers: Securities borrowed................................................ $919,616 $1,092,904 Other.............................................................. 46,009 25,250 -------- ---------- $965,625 $1,118,154 ======== ========== Payable to brokers and dealers: Securities loaned.................................................. $787,322 $ 851,254 Other.............................................................. 18,391 13,202 -------- ---------- $805,713 $ 864,456 ======== ==========
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 22 25 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1996 AND 1995 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, 1996 and 1995 (in thousands of dollars):
1996 1995 -------- -------- Customers (net of allowance for uncollectible accounts of $3,051 in 1996 and $2,251 in 1995)............................................. $109,924 $103,953 Officers and directors................................................. 3,948 3,205 -------- -------- $113,872 $107,158 ======== ========
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 $18,000, $81,000 and $712,000 for the years ended December 31, 1996, 1995 and 1994, respectively, and is included in other expense. (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, 1996 and 1995 (in thousands of dollars):
1996 1995 ----------------------- ----------------------- SECURITIES SECURITIES SOLD, SOLD, SECURITIES NOT YET SECURITIES NOT YET OWNED PURCHASED OWNED PURCHASED ---------- ---------- ---------- ---------- Corporate equity securities............................ $ 122,608 $ 110,104 $ 79,872 $ 67,617 High-yield securities.................................. 8,961 12,348 30,180 13,501 Corporate debt securities.............................. 29,949 340 13,728 1,595 U.S. Government and agency obligations................. 31,435 -- 34,884 -- Municipal securities................................... 4,808 -- 8,509 -- Options................................................ 9 1,523 37 219 -------- -------- -------- ------- $ 197,770 $ 124,315 $ 167,210 $ 82,932 ======== ======== ======== =======
23 26 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1996 AND 1995 (6) PREMISES AND EQUIPMENT The following is a summary of premises and equipment as of December 31, 1996 and 1995 (in thousands of dollars):
1996 1995 ------- ------- Furniture, fixtures and equipment........................................ $60,166 $47,549 Leasehold improvements................................................... 14,669 11,142 ------- ------- Total.......................................................... 74,835 58,691 Less accumulated depreciation and amortization........................... 43,964 32,485 ------- ------- $30,871 $26,206 ======= =======
Depreciation and amortization expense amounted to $11,480,000, $7,934,000 and $6,878,000 for the years ended December 31, 1996, 1995 and 1994, respectively. Included in furniture, fixtures and equipment is leased computer and office equipment totaling $5,290,000 with related accumulated amortization of $5,272,000 and $4,734,000 at December 31, 1996 and 1995, 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, 1996 and 1995, there were no bank loans. (8) TERM DEBT The following summarizes term debt outstanding at December 31, 1996 and 1995 (in thousands of dollars):
1996 1995 ------- ------- 8 7/8% Subordinated Notes, due 1997, less unamortized discount of $79 and $251 in 1996 and 1995, respectively, effective rate of 12%............. $ 3,499 $ 6,903 8 7/8% Series B Senior Notes, due 2004, less unamortized discount of $512 and $581 in 1996 and 1995, respectively, effective rate of 9%.......... 49,488 49,419 ------- ------- $52,987 $56,322 ======= =======
Beginning October 1, 1995, the Subordinated Notes have sinking fund requirements to redeem $3,577,000 annually through October 1, 1997. (9) INCOME TAXES Total income taxes for the years ended December 31, 1996, 1995 and 1994 were allocated as follows (in thousands of dollars):
1996 1995 1994 ------- ------- ------- Income from operations........................................ $35,438 $21,911 $17,568 Stockholders' equity, for compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes.......................................... (1,568) (2,451) (1,230) Goodwill, for initial recognition of acquired tax benefits.... -- (122) -- ------- ------- ------- $33,870 $19,338 $16,338 ======= ======= =======
24 27 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1996 AND 1995 Income taxes (benefits) for the years ended December 31, 1996, 1995 and 1994 consists of the following (in thousands of dollars):
1996 1995 1994 -------- ------- ------- CURRENT: Federal.................................................... $ 35,059 $17,361 $ 667 State and city............................................. 10,841 8,660 956 -------- ------- ------- 45,900 26,021 1,623 -------- ------- ------- DEFERRED: Federal.................................................... (8,756) (1,692) 12,103 State and city............................................. (1,706) (2,418) 3,842 -------- ------- ------- (10,462) (4,110) 15,945 -------- ------- ------- $ 35,438 $21,911 $17,568 ======== ======= =======
Income taxes differed from the amounts computed by applying the Federal income tax rate of 35% for 1996, 1995 and 1994 as a result of the following (in thousands of dollars):
1996 1995 1994 -------------- -------------- -------------- AMOUNT % AMOUNT % AMOUNT % ------- ---- ------- ---- ------- ---- Computed expected income taxes................ $29,115 35.0% $18,633 35.0% $13,663 35.0% Increase (decrease) in income taxes resulting from: State and city income taxes, net of Federal income tax benefit....................... 5,938 7.1 4,057 7.6 3,119 8.0 Limited deductibility of meals and entertainment.......................... 867 1.1 663 1.3 645 1.7 Non-taxable interest income................. (473) (0.6) (308) (0.6) -- -- Research and development tax credits........ (291) (0.3) (1,114) (2.1) -- -- Other, net.................................. 282 0.3 (20) -- 141 0.3 ------- ---- ------- ---- ------- ---- Total income taxes.................. $35,438 42.6% $21,911 41.2% $17,568 45.0% ======= ==== ======= ==== ======= ====
25 28 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1996 AND 1995 The cumulative tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 1996 and 1995 are presented below (in thousands of dollars):
1996 1995 -------- -------- Deferred tax assets: Long-term compensation................................................. $ 16,916 $ 10,214 Lease allowances....................................................... 499 667 Accounts receivable.................................................... 4,159 2,390 State income taxes..................................................... 2,069 1,051 Securities inventories................................................. 417 -- Premises and equipment................................................. 952 -- Other.................................................................. 272 412 -------- -------- Total gross deferred tax assets.............................. 25,284 14,734 Valuation allowance.................................................... -- -- -------- -------- Net deferred tax assets...................................... 25,284 14,734 -------- -------- Deferred tax liabilities: Investment in subsidiaries............................................. (14,342) (14,342) Notes payable.......................................................... (30) (94) Premises and equipment................................................. -- (78) Other.................................................................. (230) -- -------- -------- Total gross deferred tax liabilities......................... (14,602) (14,514) -------- -------- Net deferred tax asset (liability)........................... $ 10,682 $ 220 ======== ========
There was no valuation allowance for deferred tax assets as of December 31, 1996, 1995 and 1994. 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. 26 29 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1996 AND 1995 The following tables set forth the plan's funded status and amounts recognized in the Company's accompanying consolidated statements of financial condition and consolidated statements of earnings (in thousands of dollars):
DECEMBER 31, ------------------- 1996 1995 ------- ------- Actuarial present value of benefit obligations -- accumulated benefit obligation, including vested benefits of $13,647 and $11,270 as of December 31, 1996 and 1995, respectively............................... $14,607 $11,983 ======= ======= Projected benefit obligation for service rendered to date................ $16,279 $12,809 Plan assets, at fair market value........................................ 13,102 10,528 ------- ------- Excess of the projected benefit obligation over plan assets............ 3,177 2,281 Unrecognized prior service cost.......................................... 689 755 Unrecognized net transition obligation being recognized over 15 years.... (215) (258) Unrecognized net loss.................................................... (3,099) (2,334) Adjustment to recognize minimum liability................................ 953 1,011 ------- ------- Pension liability included in other liabilities........................ $ 1,505 $ 1,455 ======= =======
YEAR ENDED DECEMBER 31, ------------------------------- 1996 1995 1994 ------- ------- ------- Net pension cost included the following components: Service cost -- benefits earned during the period........... $ 1,125 $ 595 $ 683 Interest cost on projected benefit obligation............... 1,064 851 843 Actual loss (return) on plan assets......................... (1,648) (2,195) 539 Net amortization............................................ 957 1,442 (1,111) ------- ------- ------- Net periodic pension cost................................ $ 1,498 $ 693 $ 954 ======= ======= =======
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 both 1996 and 1995. The expected long-term rate of return on assets was 8.40% in both 1996 and 1995. STOCK COMPENSATION PLANS In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based Compensation." SFAS 123 defines a fair value based method of accounting for an employee stock option or similar instrument and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it allows an entity to continue to measure compensation cost for these plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." Entities electing to remain with the accounting in APB Opinion No. 25 must make pro forma disclosures of net earnings and earnings per share, as if the fair value based method of accounting defined in SFAS 123 had been applied. The Company implemented the statement during the year ended December 31, 1996. At December 31, 1996, the Company had six stock-based compensation plans and ITGI had two stock-based compensation plans, which are described below. The Company and ITGI applied APB Opinion No. 25 27 30 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1996 AND 1995 in accounting for their plans. Accordingly, no compensation cost has been recognized for fixed stock option plans. Had compensation cost for the Company's and ITGI's stock-based compensation plans been determined consistent with SFAS 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands of dollars, except per share amounts):
1996 1995 ------- ------- Net earnings: As reported............................................................... $43,560 $28,529 Pro forma................................................................. $40,102 $25,474 Primary earnings per share: As reported............................................................... $ 3.68 $ 2.39 Pro forma................................................................. $ 3.38 $ 2.13 Fully diluted earnings per share: As reported............................................................... $ 3.66 $ 2.37 Pro forma................................................................. $ 3.37 $ 2.12
1993 PLAN The Company has a Stock Ownership and Long-Term Incentive Plan (1993 Plan) which allows awards in the form of incentive stock options (within the meaning of Section 422 of the Internal Revenue Code), nonqualified stock options, stock appreciation rights, restricted stock, unrestricted stock, performance awards, dividend equivalents or other stock based awards. The maximum number of shares of common stock of the Company with respect to which any awards may be made in any calendar year during the term of the 1993 Plan may not exceed 20% of the number of shares of common stock issued and outstanding as of the first day of the calendar year in which awards are made, less the number of shares of common stock reserved for issuance with respect to, or underlying, any award, made pursuant to the 1993 Plan or any predecessor plan, as of such date. The 1993 Plan provides flexibility as to exercise price and term of each option. DIRECTOR PLAN The Company, also, has a Non-Employee Directors' Stock Option Plan (Director Plan) which provides for an annual grant to each non-employee director of an option to purchase 2,000 shares of the Company's common stock. Such grants will be made automatically on the date directors are elected or reelected at the Company's annual meeting. In addition, the Director Plan provides for the automatic grant to a non-employee director, at the time he or she is first elected or appointed, of an option to purchase 10,000 shares of the Company's common stock. A total of 150,000 shares of the Company's common stock are reserved under the Director Plan. Under the Director Plan, the exercise price of each option equals the market price of the Company's stock on the date of grant and the option's maximum term is five years. 1996 PLAN Additionally, in 1996, the Company established a Non-Employee Directors' Deferred Compensation Plan (1996 Plan). The 1996 Plan permits each non-employee director to elect to be paid annual retainer fees and annual fees for service as chairman or a member of a Board committee in the form of stock options and to defer receipt of any director fees in an interest-bearing cash account or as deferred shares in a deferred share account. A total of 100,000 shares of the Company's common stock are reserved under the 1996 Plan. Under the 1996 Plan, the exercise price of each option equals the market price of the Company's stock on the date of grant and the options expire ten years after the date of grant. 28 31 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1996 AND 1995 UNITED KINGDOM CAPITAL ACCUMULATION PLAN The Company has a United Kingdom Capital Accumulation Plan (UK CAP) for certain officers and key employees of the Company who work in the United Kingdom. Participation in the plan is optional, with those who elect to participate agreeing to defer graduated percentages of their compensation. The UK CAP allows selected employees to acquire the Company's common stock (through the granting of stock options) at a 15% discount with 40% of the amount deferred. The remaining 60% of the amount deferred is placed in a Profit-Based Deferred Compensation Account that earns interest at a rate based on the performance of the Company. OPTIONS ISSUED UNDER ALL PLANS The fair value of all option grants for all the Company's plans are estimated on the date of grant using the Black-Scholes option-pricing model with the weighted-average assumptions used for all fixed option grants in 1996 and 1995, respectively: dividend yield of 0.6%, and 0.7%; expected volatility of 33.3%, and 32.8%; risk-free interest rates of 5.4%, and 7.0%; and expected lives of 3.3 years, and 4.0 years. A summary of the status of Company stock options in all its stock-based plans as of December 31, 1996, 1995 and 1994 and changes during the year then ended is presented below:
1996 1995 1994 -------------------- -------------------- --------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE (000) PRICE (000) PRICE (000) PRICE -------- --------- -------- --------- --------- --------- Outstanding at beginning of year... 733,916 $12 982,066 $ 9 1,034,252 $ 7 Granted............................ 297,314 $27 241,686 $15 197,600 $17 Exercised.......................... (176,230) $ 7 (485,286) $ 6 (249,786) $ 7 Forfeited.......................... (4,000) $16 (4,550) $11 -- -- -------- -------- --------- Outstanding at end of year......... 851,000 $19 733,916 $12 982,066 $ 9 ======== ======== ========= Options exercisable at year-end.... 429,498 528,230 836,066 Weighted-average fair value of options granted during the year............................. $ 8 $ 6 ***
- --------------- *** SFAS 123 required fair value calculations for 1996 and 1995 only. The following table summarizes information about stock options outstanding at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------- ----------------------- NUMBER WEIGHTED NUMBER OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED AT REMAINING AVERAGE AT AVERAGE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE RANGE OF EXERCISE PRICES 1996 LIFE (YEARS) PRICE 1996 PRICE - --------------------------------------- ------------ ------------ -------- ------------ -------- $2 to 9................................ 139,500 1.2 $ 7.83 120,000 $ 8.50 $14 to 20.............................. 392,000 2.3 $16.13 212,000 $16.39 $21 to 30.............................. 295,000 2.3 $26.16 82,998 $26.52 $31 to 33.............................. 24,500 4.2 $31.81 14,500 $32.38 ------- ------- $2 to 33............................... 851,000 2.2 $18.70 429,498 $16.68 ======= =======
29 32 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1996 AND 1995 INVESTMENT TECHNOLOGY GROUP, INC.'S PLANS In 1994 ITGI, established the 1994 Employee Stock Option and Long-Term Incentive Plan (ITGI Plan) which allows for the granting of options to purchase a total of 3,650,000 shares of ITGI common stock. In 1995, the ITGI Board of Directors adopted, subject to ITGI stockholder approval, the Non-Employee Directors' Plan (ITGI Director Plan). The ITGI Director Plan generally provides for an annual grant to each non-employee director an option to purchase 2,500 shares of ITGI common stock. In addition, the ITGI Director Plan provides for the automatic grant to a non-employee director, at the time he or she is initially elected, a stock option to purchase 10,000 shares of ITGI common stock. Stock options granted under the ITGI Director Plan are non-qualified stock options having an exercise price equal to 100% of the fair market value of ITGI common stock at the date of grant. A total of 125,000 shares of ITGI common stock are reserved for issuance under the ITGI Director Plan. There were a total of 2,271,351 fixed stock options outstanding and 18,389,800 ITGI common stock shares outstanding as of December 31, 1995. There were a total of 2,318,461 fixed stock options outstanding and 18,254,800 ITGI common stock shares outstanding as of December 31, 1996. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the weighted-average assumptions used for all fixed option grants in 1996, and 1995, respectively: dividend yield of 0.0%, and 0.0%; expected volatility of 49%, and 51%; risk-free interest rates of 6.1%, and 6.3%; and expected lives of 5 years, and 4 years. The following table summarizes information about stock options outstanding at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------- ----------------------- NUMBER WEIGHTED NUMBER OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED AT REMAINING AVERAGE AT AVERAGE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE RANGE OF EXERCISE PRICES 1996 LIFE (YEARS) PRICE 1996 PRICE - --------------------------------------- ------------ ------------ -------- ------------ -------- $7.33.................................. 3,334 1.8 $ 7.33 -- -- $7.50.................................. 7,500 3.5 $ 7.50 -- -- $8.25.................................. 10,000 3.3 $ 8.25 -- -- $9.13.................................. 434,769 3.9 $ 9.13 -- -- $11.06................................. 434,760 3.9 $11.06 -- -- $13.00................................. 1,370,819 2.3 $13.00 -- -- $13.75................................. 7,500 4.5 $13.75 -- -- $14.00................................. 10,000 4.2 $14.00 -- -- $18.20................................. 20,000 4.8 $18,20 -- -- $18.43................................. 19,779 4.9 $18.43 -- -- --------- $7.33-$18.43........................... 2,318,461 3.0 $11.96 =========
PERFORMANCE-BASED STOCK OPTIONS While the 1993 Plan allows for the granting of performance-based stock options, no such options were granted during 1996, 1995 and 1994, and no such options were outstanding at December 31, 1996, 1995 and 1994. 30 33 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1996 AND 1995 RESTRICTED STOCK The 1993 Plan allows for the issuance of restricted stock awards. During 1996, 1995 and 1994, there were restricted stock awards of 24,632 shares, 128,046 shares and 56,400 shares, respectively, with a corresponding market value of $623,724, $2,187,000 and $1,019,000, respectively. As of December 31, 1996, 1995 and 1994, restricted stock shares outstanding were 47,580 shares, 117,338 shares and 113,734 shares, respectively. The compensation cost charged against earnings was $394,000, $1,788,000 and $850,000 in 1996, 1995 and 1994, respectively. EMPLOYEE STOCK PURCHASE PLAN The Company has an Employee Stock Purchase Plan (ESPP). All regular full-time employees are eligible for the ESPP. Employee contributions are voluntary and are made via payroll deduction. The employee contributions are used to purchase the Company's common stock which is then held in an outside trust account. The Company matches employee contributions at a rate of 15% (more, if profits exceed targets set by the Company's Board of Directors). The Company's match vests after two years. The Company recognizes compensation cost related to its ESPP matching. The compensation cost charged against earnings was $250,000, $161,000 and $174,000 in 1996, 1995 and 1994, respectively. CAPITAL ACCUMULATION PLAN The Company has a Capital Accumulation Plan (CAP) for certain officers and key employees of the Company. Participation in the plan is optional, with those who elect to participate agreeing to defer graduated percentages of their compensation. The plan allows selected employees to acquire the Company's common stock at a 15% discount with 50% of the amount deferred. The remaining 50% of the amount deferred is placed in a Profit-Based Deferred Compensation Account that earns interest at a rate based on the performance of the Company. The Company will from time to time repurchase shares of its common stock in the open market for use in both the CAP and UK CAP plans. The Company has acquired 977,708 shares since the inception of the plans (CAP in 1993 and UK CAP in 1995) and has made distributions of 102,237 shares. The Company recognizes compensation cost related to the 15% discount and interest on Profit-Based Deferred Compensation Accounts. The compensation cost charged against earnings was $2,742,000, $2,200,000 and $1,207,000 in 1996, 1995 and 1994, respectively. PROFIT SHARING PLAN The Company has a profit sharing plan, covering substantially all employees, which includes a salary reduction feature designed to qualify under Section 401-K of the Internal Revenue Code. Expenses related to this plan amounted to $5,713,000, $3,565,000 and $1,919,000 in 1996, 1995 and 1994, 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. 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. 31 34 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1996 AND 1995 (11) LEASES As lessee, the Company leases certain premises and equipment under noncancelable agreements expiring at various dates through 2012. Future minimum lease payments for all noncancelable operating leases at December 31, 1996 are as follows (in thousands of dollars): 1997............................................................................... $ 7,835 1998............................................................................... 8,925 1999............................................................................... 7,768 2000............................................................................... 6,550 2001............................................................................... 5,236 Thereafter......................................................................... 27,185
Rental expense for the Company was $6,759,000 in 1996, $5,996,000 in 1995 and $5,507,000 in 1994. (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 $22,915,000 at December 31, 1996 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, 1996 and 1995. They do not represent amounts subject to 32 35 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1996 AND 1995 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 ----------------------------------------- 1996 1995 ------------------ ------------------ PURCHASE SALE PURCHASE SALE -------- ------- -------- ------- Index futures contracts................................. $ -- $13,327 $ -- $55,192 Commodities futures contracts........................... 11,833 -- 53,602 -- Option contracts........................................ 60 4,681 1,300 1,500 Foreign exchange forward contracts...................... 2,978 4,135 303 291
FAIR VALUE OF DERIVATIVE FINANCIAL INSTRUMENTS The following is an aggregate summary of the average 1996 and 1995 and December 31, 1996 and 1995 fair values of derivative financial instruments (in thousands of dollars):
1996 1995 ----------------------- ----------------------- AVERAGE END OF PERIOD AVERAGE END OF PERIOD ------- ------------- ------- ------------- Index futures contracts: In a favorable position........................... $ 104 $ 78 $ 41 $ 330 In an unfavorable position........................ 298 57 34 -- Option contracts: Purchases......................................... 208 9 79 37 Sales............................................. 706 1,523 174 219 Foreign exchange forward contracts: Purchases......................................... 4,031 2,978 1,929 303 Sales............................................. 5,177 4,135 4,995 291
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 33 36 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1996 AND 1995 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. (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, 1996, Jefferies', ITG Inc.'s and W & D's net capital was $54.4 million, $29.8 million and $950,000, respectively, which exceeded minimum net capital requirements by $50.8 million, $29.6 million and $700,000, respectively. (14) CONTINGENCIES In re Nasdaq Market-Makers Antitrust Litigation. Beginning in July 1994, antitrust class actions were commenced against Jefferies and 33 other defendants in various federal courts (the "Lawsuits"). Following the filing of the Lawsuits, the Antitrust Division of the United States Department of Justice ("DOJ") and the Securities and Exchange Commission ("SEC") commenced investigations into certain issues related to the allegations of the Lawsuits. In August 1996, the DOJ entered into a proposed antitrust consent decree with 24 defendants who are market makers in Nasdaq stocks. Jefferies was neither asked nor required to settle with the DOJ. The settlement has not yet been approved by the court. Shortly after the DOJ settlement, the SEC filed a Section 21(a) report against the NASD, criticizing various practices by market makers, and the NASD for failing to adequately police or discipline the market makers for those practices. However, the SEC did not take any action at that time against the market maker firms. Jefferies has been informed that the SEC is continuing its investigation of the market maker firms. In October 1994, the Lawsuits were consolidated for discovery purposes in the United States District Court for the Southern District of New York. The consolidated complaint alleges that the defendants violated the antitrust laws by conspiring to fix the spread paid by plaintiffs and class members to trade in certain Nasdaq securities, by refusing to quote bids and asks in so-called odd-eighths. The cases purport to be brought on behalf of all persons who purchased or sold certain securities on the Nasdaq National Market System during the period May 1, 1989 to May 27, 1994. The plaintiffs seek damages in an unspecified amount. In November 1996, the court granted, in part, the plaintiffs' motion to certify a class, and a motion to further define what types of purchasers and sellers of stock are included and not included in the definition of the certified class is pending before the court. Discovery will now proceed as appropriate. Jefferies denies any wrongdoing and intends to vigorously defend the Lawsuits. At this stage of the litigation, it is not possible to evaluate the likelihood of an unfavorable outcome or to estimate the amount or range of potential damages 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. 34 37 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1996 AND 1995 (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 non-compensatory 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 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, non-compensatory 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. 35 38 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 1997 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 1997 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 1997 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 1997 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. (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.
36 39 (10.2) Form of Employment Agreement between Investment Technology Group, Inc. and Raymond L. Killian, Jr. is incorporated by reference to Exhibit 10.3.2 of Investment Technology Group, Inc.'s Registration Statement on Form S-1 (No. 33-76474) filed on March 15, 1994, including amendments thereto. (10.3) Employment Agreement between Clarence T. Schmitz and Jefferies & Company, Inc. dated February 6, 1995 is incorporated by reference to Exhibit 10.7 of Registrant's Form 10-K for the fiscal year ended December 31, 1995. (10.4) Employment Agreement between Scott P. Mason and Investment Technology Group, Inc. dated as of January 6, 1997, is incorporated by reference to Exhibit 10.3.18 of Investment Technology Group, Inc.'s Form 10-K filed for the fiscal year ended December 31, 1996. (10.5) Jefferies Group, Inc. 1983 Incentive Stock Option Plan filed as part of Registrant's Registration Statement on Form S-8 (No. 2-94727) filed on December 6, 1984. (10.6) 1985 Incentive Stock Option Plan of Jefferies Group, Inc. filed as part of Registrant's Registration Statement on Form S-8 (No. 33-17065) filed on September 8, 1987. (10.7) Jefferies Group, Inc. 1985 Non-Qualified Stock Option Plan filed as part of Registrant's Registration Statement on Form S-8 (No. 33-17065) filed on September 8, 1987. (10.8) Jefferies Group, Inc. 1993 Stock Ownership and Long-Term Incentive Plan filed as part of Registrant's Registration Statement on Form S-8 (No. 33-64490) filed on June 15, 1993. (10.9) 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. (10.10) 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. (10.11) Jefferies Group, Inc. Pay-for-Performance Incentive Plan, incorporated by reference to Appendix B of Registrant's Proxy Statement filed on April 4, 1994. (10.12) Jefferies Group, Inc. Non-Employee Directors' Deferred Compensation Plan, incorporated by reference to Appendix B of Registrant's Proxy Statement filed on March 29, 1996. (10.13)* Jefferies Group, Inc. United Kingdom Capital Accumulation Plan for Key Employees. (11)* Statement of computation of per share earnings is attached hereto as Exhibit 11. (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 10.13 are management contracts or compensatory plans or arrangements. 37 40 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 27, 1997 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 27, 1997 - ----------------------------------------------- Directors and Chief Frank E. Baxter Executive Officer MICHAEL L. KLOWDEN President and Chief March 27, 1997 - ----------------------------------------------- Operating Officer Michael L. Klowden CLARENCE T. SCHMITZ Executive Vice President March 27, 1997 - ----------------------------------------------- and Chief Financial Officer Clarence T. Schmitz RICHARD G. DOOLEY Director March 27, 1997 - ----------------------------------------------- Richard G. Dooley TRACY G. HERRICK Director March 27, 1997 - ----------------------------------------------- Tracy G. Herrick RAYMOND L. KILLIAN, JR. Director March 27, 1997 - ----------------------------------------------- Raymond L. Killian, Jr. FRANK J. MACCHIAROLA Director March 27, 1997 - ----------------------------------------------- Frank J. Macchiarola BARRY M. TAYLOR Director March 27, 1997 - ----------------------------------------------- Barry M. Taylor MARK A. WOLFSON Director March 27, 1997 - ----------------------------------------------- Mark A. Wolfson
38 EX-10.13 2 EXHIBIT 10.13 1 EXHIBIT 10.13 JEFFERIES GROUP, INC. UNITED KINGDOM CAPITAL ACCUMULATION PLAN FOR KEY EMPLOYEES DECEMBER 1996 1 PURPOSE OF THE PLAN The purposes of the Jefferies Group, Inc. United Kingdom Capital Accumulation Plan for Key Employees (the "Plan") are to advance the interests of the Company and to increase stockholder value by providing certain of the Company's officers and other key employees who are working in the United Kingdom with an incentive to acquire and increase their proprietary interest in the Company, and by providing an additional programme that will help to attract and retain qualified officers and key employees. 2 DEFINITIONS As used in the Plan, the following terms shall have the meanings set forth below: 2.1 "Available Shares" means the shares of Common Stock purchased by the Company in the open market for purposes of the Plan, designated as such by the Committee, which are held by the Company at any one time and over which Options have not previously been granted to any Participant under the Plan, subject to Section 5.1. 2.2 "Beneficiary" means the beneficiary or beneficiaries designated by a Participant, pursuant to the terms of the Plan, to receive the amounts, if any, payable following the death of such Participant, and to exercise Options following the death of such Participant. 2.3 "Board" means the Board of Directors of Jefferies Group, Inc. 2.4 "Cash Balance Account" and "Profit-Based Deferred Compensation Account" means the memorandum accounts established for a Participant in accordance with Section 7. 2.5 "Committee" means the Compensation Committee of the Board and such other committee of persons nominated by the Compensation Committee and delegated authority under Section 3.3 hereof. 2.6 "Common Stock" means the Common Stock of the Company, $0.01 par value, and such other securities as may be substituted for Common Stock or such other securities pursuant to Section 7.8. 2 2.7 "Company" means Jefferies Group, Inc., its subsidiaries and affiliates, if any, unless used in conjunction with "Common Stock", in which case it means Jefferies Group, Inc. 2.8 "Director" means a member of the Board. 2.9 "Disability" means the inability to substantially perform the usual duties of the person's occupation by reason of a medically determinable physical or mental impairment which can be expected to be of long, continued and indefinite duration, as determined by the Committee. 2.10 "Enrolment Period" means the thirty-day period, or other period specified by the Committee, following notification by the Committee of an officer's or other key employee's selection in respect of a given calendar year to become a Participant in the Plan. The Committee may, in its discretion, require that the Enrolment Period with respect to any calendar year will expire six months or more before the time Options will first be granted to a Participant under Section 7.4 hereof in such year, in order to comply with Rule 16b-3(d)(1)(i) (or a successor to such Rule) promulgated under the Securities Exchange Act. In any case the Enrolment Period shall end prior to the commencement of the year to which the Plan Election relates or, in the case of an employee joining the Company or transferring to the United Kingdom, the Enrolment Period shall end prior to his commencing employment. 2.11 "Exercise Price" means the price per share payable by a Participant on the exercise of an Option to acquire shares which the Exercise Price shall equal seventeen percent (17%) of the average cost per Share (as determined by the Committee) incurred by the Company in purchasing the Available Shares as at the date on which that Option is granted. 2.12 "Fair Market Value", as of any date, means the mean of the closing bid/ask prices of the Common Stock as reported on the NASDAQ National market as determined on a daily basis and averaged over the day as of which the valuation is to be made and the four trading days immediately prior thereto. 2.13 "Investment Letter" means a letter, in a form approved by the Committee, by which a Participant makes such representations and agreements as the Committee may deem advisable in order to ensure that the Plan and transactions thereunder comply with applicable United States, United Kingdom and other laws and regulations. 2.14 "Option" means a right to acquire Shares granted under the Plan, which right is granted to a Participant under the provisions of the Stock Ownership Plan as a Non-Qualified Stock Option (as defined under the Stock Ownership Plan). 2.15 "Option Divisor" means the number resulting when the Exercise Price of Options to be granted on a given date is subtracted from eighty-five percent (85%) of the average cost per share of Available Shares designated as of that date. For the purposes of calculating the Option Divisor, the average cost per share of Available Shares shall be converted to sterling using the average exchange rate, as determined by the Committee, for the quarter that includes the date on which the Option Divisor is being determined. 3 2.16 "Participant" means an officer or other key employee of the Company who has been selected for participation by the Committee and who has executed a Plan Election for a given calendar year. 2.17 "Plan" means the Jefferies Group, Inc. United Kingdom Capital Accumulation Plan for Key Employees. 2.18 "Plan Election" means an agreement filed during the Enrolment Period in respect of any calendar year that constitutes an election to (a) become a Participant in the Plan in respect of such year; (b) forgo receipt of annual compensation; and (c) accept the terms and conditions of the Plan in connection with such forgoing. 2.19 "Plan Term" means the period commencing on 1 January in any calendar year in respect of which a Plan Election has been filed ("the commencement date") and ending on 15 February immediately following the fourth anniversary of the commencement date (where the Participant has so elected) or 15 February immediately following the fifth anniversary (where the Participant has so elected) or 15 February immediately following the six anniversary of the commencement date (where the Participant has so elected); provided, however, that the expiration of the Plan Term will be accelerated to an earlier date in the circumstances set forth in Sections 6.6, 8.4, 8.7 and 17.2. 2.20 "Registration Statement" means the form required under the United States Securities Act of 1933, as amended, pursuant to which any offer or sale of Common Stock or other securities of the Company may be registered for purposes of this Plan. 2.21 "Reporting Person" means a Participant who is then subject to the reporting requirements of Section 16(a) of the Securities Exchange Act with respect to equity securities of the Company. 2.22 "Rules" means the rules of the Plan as set out herein. 2.23 "Securities Exchange Act" means the United States Securities Exchange Act of 1934, as amended and the rules and regulations promulgated thereunder. 2.24 "Share" means a share of Common Stock. 2.25 "Stock Ownership Plan" means the Jefferies Group, Inc. 1993 Stock Ownership and Long-Term Incentive Plan. 2.26 "Valuation Date" means the last day of a fiscal month or year of the Company as determined by the Committee under uniform rules, immediately preceding a distribution under the Plan. 4 3 ADMINISTRATION 3.1 The Plan shall be administered and interpreted by the Committee. Where an Option is granted in accordance with these Rules of the Stock Ownership Plan shall also apply in connection with the Option, and if there is any doubt as to which rules apply in particular circumstances these Rules shall take precedence, except to the extent that these Rules may contravene the Stock Ownership Plan. 3.2 The Committee shall have the authority to (a) establish such additional rules and regulations as it deems necessary for the proper operation and administration of the Plan; (b) select in its absolute discretion the officers and other key employees of the Company who are working in the United Kingdom to participate in the Plan; (c) engage such professional advisors, who may or may not already be rendering services to the Company, as it shall require or may deem advisable for purposes of the Plan, and make use of such agents and clerical or other personnel as it shall require or may deem advisable for purposes of the Plan; (d) determine amounts to be credited to Participant memorandum accounts; and (e) make any other determination or take any other action that the Committee is authorised to take under the Plan or that the Committee may deem necessary or desirable for the administration of the Plan. 3.3 The Committee may delegate to officers or managers of the Company the authority, subject to such terms as the Committee shall determine, to perform administrative functions and, in respect of officers and key employees who are not Reporting Persons and who are eligible under Section 4 hereof, to perform all functions of the Committee under the Plan other than those specifically excluded by the terms of such delegation. 3.4 Any decision, interpretation or other action made or taken in good faith by or at the direction of the Company, the Board, or the Committee (or any of its members, pursuant to any authority duly delegated to any such member) arising out of or in connection with the Plan shall be within the absolute discretion of any or all of them, as the case may be and shall be final, binding and conclusive on the Company and all employees and Participants and their respective beneficiaries, heirs, executors, administrators, successors and assigns (subject to the terms of any Committee delegation). 4 ELIGIBILITY 4.1 Officers and other key employees of the Company who are, at the time of selection, working in the United Kingdom and who are responsible for or contribute to the management, growth and profitability of the business of the Company are eligible to participate in the Plan, subject to their selection by the Committee and provided that such individual elects irrevocably to forgo annual compensation pursuant to the terms of the Plan, and agrees (a) to execute such documents and (b) to accept such restrictions, including, but not limited to, the execution of an Investment Letter, as the Committee, in its sole discretion, may require. 4.2 Participation in any given year does not guarantee selection by the Committee for participation in any subsequent year. Eligible officers and other key employees selected for participation will be notified each year of their selection by the Committee. 5 5 SHARES RESERVED FOR ISSUANCE UNDER THE PLAN IN CONJUNCTION WITH THE STOCK OWNERSHIP PLAN 5.1 Shares issued under the Plan shall be counted against shares available under the Stock Ownership Plan. Neither new nor treasury shares of Company's Common Stock held as of the date of adoption of the Plan shall be used or reserved for issuance under the Plan. Shares will not be deemed Available Shares under the Plan if and to the extent that such shares exceed the limitation on shares available under the Stock Ownership Plan. 5.2 The Company shall, from time to time, purchase Shares in the open market during the term of the Plan for issuance to Participants on exercise of Options in accordance with the terms hereof and of the Stock Ownership Plan. The Company will specifically designate all such Shares at the time they are purchased as Available Shares having been purchased for the purpose of granting Options under the Plan; provided, however, that prior to exercise by Participants of Options granted under the Plan, any such Available Shares so purchased shall be the sole property of the Company, and no Participant or Beneficiary shall have any right, title or interest whatsoever in or to any such Shares. 5.3 The acquisition of Common Stock, as described herein, will be made on behalf of the Company solely under the direction of the Committee, subject to applicable law. 6 FORGOING OF COMPENSATION 6.1 Each officer or other key employee selected for participation in the Plan may elect to participate by executing and filing a Plan Election with the Committee during the Enrolment Period, in a form and manner approved by the Committee. 6.2 The Plan Election shall indicate the amount the Participant is required to forgo pursuant to the Plan and the Plan Term. 6.3 The amount that must be forgone by any Participant for any calendar year, shall be an amount equal to the sum of (a) 10% of the first 200,000 pound sterling of the Participant's annual compensation in respect of duties performed in the United Kingdom, plus (b) 15% of the next 200,000 pound sterling of the Participant's annual compensation in respect of duties performed in the United Kingdom, plus (c) 20% of the Participant's annual compensation over 400,000 pound sterling in respect of duties performed in the United Kingdom. The preceding notwithstanding, the Committee may set a limit on the amount of compensation which may be deferred in a year. 6.4 In the event an officer or other key employee does not elect to participate or otherwise does not file a Plan Election within the Enrollment Period in respect of a calendar year, such officer or other key employee shall not be a Plan Participant in respect of such a calendar year but such event will have no effect on Plan Elections filed in prior or subsequent years, if any. 6.5 The election to forgo annual compensation pursuant to a Plan Election, once made, is irrevocable and not subject to cancellation by the Participant for any reason whatsoever, including, but not limited to, upon termination of the Participant's employment, 6 except as expressly provided herein. However, the Committee may consider a written request by a Participant, to discontinue participation in the Plan for a particular Plan Term based on an emergency or other unforeseen circumstance which causes substantial economic hardship to the Participant. The Committee shall retain sole and absolute discretion to determine whether a Participant's request to discontinue participation shall be granted, and the terms and conditions, if any, including, but not limited to, whether any accrued amounts will be paid out prior to the expiration of the Plan Term and the timing and amount thereof, a financial penalty imposed, or reimbursement required of any cost incurred by the Company to process the request (which penalty or reimbursement shall not exceed the amounts accrued to the Participant's Plan accounts under Section 7.3, 7.6 and 7.7), on which the request shall be granted. The Committee's decision to allow one Participant to discontinue participation in the Plan shall not require the Committee to act similarly with respect to a request by any other Participant, whether or not such Participant is in similar circumstances or assert the same or similar reasons for such relief. On electing irrevocably to forgo annual compensation pursuant to the Plan a Participant shall have no rights whatsoever in respect of the amount forgone except as provided in the Plan (including Section 8.7 hereof). 6.6 Notwithstanding anything to the contrary set forth above in this Section 6, the Committee may modify the terms of the Plan Election, Enrolment Period or Plan Term, if the Committee believes that such modifications are necessary in order to comply with the rules and regulations of the United States Securities and Exchange Commission, or any other governmental authority, or otherwise to assure that the purposes and objectives of the Plan are met. 7 PLAN ACCOUNTS 7.1 The Company shall maintain two memorandum accounts for each Participant under the Plan. These shall consist of a Cash Balance Account and a Profit-Based Deferred Compensation Account. 7.2 Forty percent (40%) of the compensation forgone by a Participant shall be credited to the Participant's Cash Balance Account as of the date such compensation would have been paid to the Participant had it not been forgone pursuant to the terms of the Plan. The remaining sixty percent (60%) of the compensation forgone by a Participant shall be credited to the Participant's Profit-Based Deferred Compensation Account as of the date such compensation would have been paid to the Participant had it not been forgone pursuant to the terms of the Plan. 7.3 At the end of each calendar quarter, the Company shall credit each Cash Balance Account with interest equal to the amount determined by multiplying (a) the average percentage the Company paid on its margin accounts carrying credit balances during such calendar quarter, by (b) the daily weighted average amount of such Cash Balance Account (such weighted average to be determined by adding the amounts in the Participant's Cash Balance Account on each day during such quarter and dividing the total so obtained by the number of days in such quarter); provided, however, that interest will be credited only if there shall exist a balance in the Cash Balance Account on the last day of such calendar quarter. 7 7.4 If there shall exist a balance in the Cash Balance Account of any Participant on the last day of any calendar quarter, the Committee shall grant Options to the Participant over Common Stock such that the whole number of Shares over which Options are granted is calculated by dividing that balance in the Cash Balance Account by the Option Divisor. Notwithstanding the foregoing, if the aggregate number of Options that would otherwise be granted to all Participants pursuant to this section would exceed the number of Available Shares, then the aggregate number of Options to be granted to all Participants shall be limited to the number of Available Shares and such aggregate number of Options shall be granted on a pro rata basis, based on the respective balance in the Cash Balance Account of each Participant. 7.5 Each Participant's Cash Balance Account shall be reduced on the last day of each calendar quarter by an amount equal to the product of the number of Shares over which Options were granted to the Participant on that date and the Option Divisor. If, after such reduction, any balance remains in the Cash Balance Account, such balance shall be carried forward to the next occasion on which options are granted by the Committee notwithstanding that the Participant may not have filed an election in respect of the year in which that occasion may fall. 7.6 The Company shall credit each Participant's Cash Balance Account with an amount determined by multiplying the number of Shares over which Options have been granted to the Participant in respect of such Cash Balance Account and remain outstanding on the record date for a dividend or distribution, other than a dividend or distribution in the form of Common Stock, by an amount equal to the sterling equivalent amount of cash dividends (as determined by the Committee) declared per Share, as of the date of payment of such dividends or distribution, using the exchange rate for that date. 7.7 Until the end of the third calendar year following the year compensation is forgone, the Company shall credit or charge as the case may be the Profit-Based Deferred Compensation Account of each Participant, as of the last day of each fiscal year, with an amount of deemed "interest" determined by multiplying (a) 85% of the fully-diluted earnings per share or loss per share as the case may be of the Company's Common Stock for such fiscal year divided by the Fair Market Value of the Common Stock determined as of the last trading day of the preceding fiscal year by (b) the daily weighted average amount of such Profit-Based Deferred Compensation Account (such weighted average to be determined by adding the amounts in the Participant's Profit-Based Deferred Compensation Account on each day during such fiscal year and dividing the total so obtained by the number of days in such fiscal year). After the end of the third calendar year following the year compensation is forgone, amounts credited to the Profit-Based Deferred Compensation Account will be credited, as of the last day of each fiscal year of the Company, with deemed interest at an annual percentage rate equal to (i) the one- or two-year Treasury note rate (depending upon the number of years remaining in the stated Plan Term), as of [the last day of the third calendar year following the year the compensation is forgone], plus (ii) 100 basis points. The foregoing notwithstanding, no interest will be credited for any calendar year under the Section 7.7 unless there shall exist a balance in the Profit-based Deferred Compensation Account on the last day of such calendar year. 7.8 If there shall be any other change in the number or kind of outstanding shares of the Company's Common Stock as a result of a stock split, dividend or distribution in 8 the form of property other than cash, recapitalization, combination of shares, merger, consolidation or otherwise, the number and kind of Shares over which Options have been granted to each Participant and the Exercise Price thereof shall be equitably adjusted (as determined by the Committee in its sole discretion) to reflect such event. In such case, the average cost per share of Available Shares, if any, on the date of such event shall also be equitably adjusted for purposes of calculating the number of Shares over which Options may be granted to a Participant pursuant to Section 7.4 above. 7.9 Once a Cash Balance Account or Profit-Based Deferred Compensation Account has been established in respect of any Participant, or an Option has been granted to such Participant, such accounts and Options cannot be withdrawn or cancelled by any unilateral action of the Company; provided, however, that the establishment and maintenance of, or credits to, such memorandum Accounts shall not entitle any Participant or his Beneficiary to any right, title or interest in or to any specific asset of the Company. A Participant will not forfeit Options solely because of a termination of the Participant's employment (although the termination of the Plan Term may occur in accordance with Section 8.6, which may also accelerate the expiration of an Option). 8 PAYMENT AT THE END OF THE PLAN TERM 8.1 Within two months after the end of the applicable Plan Term (including an accelerated expiration as provided under Section 6.6,8 and 17.2), a Participant shall be entitled to exercise the Options granted to him under this Plan in respect of such Plan Term in accordance with the procedures set out in the Stock Ownership Plan, rules under the Plan and the Option agreement. No Option shall be exercisable under any circumstances prior to the expiration of the Plan Term in respect of which the Option was granted, and such Option may be exercised following the expiration of the Plan Term for a period of (i) two months if the Plan Term expires at the stated expiration date specified by the Participant in his or her Plan Election or earlier following the death or disability of the Participant or under Section 17.2, or (ii) fourteen days if the Plan Term expires due to the acceleration by the Committee in the event of hardship of the Participant or otherwise in its discretion under Section 8.6 or 8.7. The Option will lapse at the end of the specified exercise period following expiration of the Plan Term. 8.2 Notwithstanding the provisions of Section 8.3 below if there is sufficient balance in the Profit Based Deferred Compensation Account and/or the Cash Balance Account at the end of the Plan Term after deduction of all or any amounts required to be deducted in accordance with Section 10.3, a Participant may elect for the Exercise Price in respect of the Option granted to him under the Plan to be deducted by the Company from the proceeds of the cash payment referred to in section 8.3 in satisfaction of the Exercise Price payable by him. 8.3 As soon as practicable after exercise of a Participant's Options granted under this Plan in connection with a Cash Balance Account relating to a specified Plan Term (or upon expiration of such Options unexercised), such Participant shall be entitled to receive from the Company an amount in cash equal to the sum of (a) the balance in such Cash Balance Account, if any, and (b) the balance in his Profit-Based Deferred Compensation Account, if any, relating to such Plan Term. In the event that cash payments due under this Section 8.3 are not 9 made within fourteen days after the Participant has exercised his Options, the Cash Balance Account and the Profit-Based Deferred Compensation Account shall accrue interest from the day after the end of the Plan Term until the date on which payment is made at a rate equal to the amount which the Company paid on its margin accounts carrying credit balances during that period. The foregoing notwithstanding, distributions shall be made following the death or Disability of the Participant in accordance with Section 8.4. 8.4 In the event of a Participant's death or Disability prior to the stated expiration of a Plan term, the Plan Term in respect of such Participant will expire at the end of the calendar year during which such death or disability occurred. In such case, the Participant, the Participant's Beneficiary, or the Participant's estate, as may be appropriate, shall be entitled to exercise the Options granted to the Participant under this Plan in respect of such Plan Term during the period specified in Section 8.1, and to receive from the Company, as soon as practicable thereafter, an amount in cash equal to the balance in his Cash Balance Account, if any and, as soon as practicable after the determination of the fully diluted earnings or loss per share for the fiscal year in which such death or Disability occurred, an amount in cash equal to the balance in his Profit-Based Deferred Compensation Account, if any. In the event that cash payments due under this Section 8.4 are not made by April 15 of the year following expiration of the Plan term, the Cash Balance Account and the Profit-Based Deferred Compensation Account shall accrue interest from the day after the expiration of the Plan Term until the date on which payment is made at the rate specified in Section 8.3 above. 8.5 If a Participant's employment with the Company shall terminate for any reason prior to the end of a Plan Term (other than by reason of death or Disability), then the Participant shall, unless otherwise determined by the Committee, as hereinafter provided, continue to be bound by and be subject to, all the terms and provisions of the Plan. 8.6 Notwithstanding the provisions of Section 8.5 above the Committee shall have the right in its sole discretion to accelerate the end of a Plan Term, with respect to all Plan Terms of a Participant whose employment with the Company terminates other than due to death or Disability, to the last day of the calendar quarter during which such termination occurs or to any subsequent date deemed appropriate by the Committee. The date determined by the Committee shall be deemed to be the expiration of the Plan Term with respect to all such Plan Terms of the Participant, and a distribution shall be made pursuant to Section 8.3 above. 8.7 In the event of hardship, change in tax laws or other unforeseen circumstances, the Committee may in its absolute discretion accelerate the expiration of any Plan Term of any Participant to the last day of any calendar quarter, in which case, the date determined by the Committee shall be deemed to be the expiration of the Plan Term with respect to any or all such Plan Terms of the Participant, and a distribution shall be made pursuant to Section 8.3 above. 8.8 In the event that the Committee so determines pursuant to Section 8.6 or 8.7, above the Committee shall notify the Participant of the date which is deemed to be the expiration of a specified Plan Term on or before that date, and the Participant shall be entitled to exercise the Options granted to him under this Plan in accordance with the Section 8.1 above. 10 8.9 Notwithstanding the preceding, if so required to comply with Securities Exchange Act Rule 16b-3 no shares of Common Stock acquired upon exercise of an Option may be sold by any Participant who is a Reporting Person less than six months after the grant of the Option unless such shares may be disposed of by such Reporting Person without incurring liability under Section 16(b) of the Securities Exchange Act of 1934. 9. UNFUNDED PLAN The Plan is intended to constitute an "unfunded" plan. Unless otherwise determined by the Committee, the Plan shall be unfunded and shall not create (or be construed to create) a trust or a separate fund or funds. To the extent that any person acquires a right to receive payments from the Company pursuant to this Plan, such right (unless otherwise determined by the Committee) shall be no greater than the right of any unsecured general creditor of the Company. 10. MISCELLANEOUS PROVISIONS RELATED TO PARTICIPANTS 10.1 Participation in the Plan shall not be construed as giving a Participant the right to be retained in the employ of the Company. The Company may at any time dismiss a Participant from employment, free from any liability or any claim under the Plan, unless otherwise expressly provided in the Plan. No Participant or other person shall have any claim to participate, and there is no obligation for uniformity of treatment of Participants or of a Participant's Beneficiary. 10.2 Nothing under the Plan, unless otherwise provided in the Plan, shall entitle a Participant to any dividend, voting or other right of a stockholder unless and until the date of delivery under the Plan of the Shares acquired on exercise of Options. 10.3 A Participant may be required to pay to the Company, and the Company shall have the right to deduct from all amounts paid to a Participant (whether under the Plan or otherwise), any taxes required by law to be paid or withheld in respect of payments or distributions hereunder to such Participant or Option exercises by Participants, and any taxes (including Social Security contributions) required by law to be paid or withheld in respect of compensation forgone under the Plan. At the election of a Participant, the Committee may withhold shares or accept the transfer of shares to the Company, in such amounts as are equivalent to the Fair Market Value of any withholding obligation arising at the end of the Plan Term. 10.4 No right to any amount payable at any time under the Plan may be assigned, transferred, pledged or encumbered, either voluntarily or by operation of law, except as expressly provided herein or as may otherwise be required by law. No Option or other right which may constitute a "derivative security" within the general definition of Rule 16a-1(c)(3) under the Securities Exchange Act shall be transferable by a Participant other than by will or the laws of descent and distribution and any such Options or other right shall be exercisable during the lifetime of the Participant only by the Participant or his guardian or legal representative. 11 11 DESIGNATION OF BENEFICIARIES Each Participant may file and maintain with the Company a written designation of one or more persons as the Beneficiary or Beneficiaries who shall be entitled to receive payments or distributions, if any, of cash payable or to exercise Options under the Plan upon the Participant's death. If no such designation is in effect at the time of a Participant's death, or if no designated Beneficiary survives the Participant or if such designation conflicts with the law, the Participant's estate shall be entitled to receive such payment, if any, payable and to exercise Options under the Plan upon the Participant's death. 12 EFFECT ON OTHER PLANS Neither the adoption of the Plan nor anything contained in the Plan shall prevent the Company from adopting or continuing other or additional compensation arrangement or discontinuing or terminating such arrangements, and such other arrangements as may be either generally applicable or applicable only in specific cases. 13 PLAN EXPENSES The Company shall pay the fees and expenses of accountants, counsel, agents and other personnel and all other costs of administration of the Plan, including brokerage commissions and other costs of repurchasing shares pursuant to Section 5.2. 14 SEVERABILITY If any provision of the Plan or any Plan Election is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction or as to any Participant or Plan Election under any law deemed applicable by the Committee, such provision shall be construed or deemed amended to conform to applicable laws, or if it cannot be construed or deemed amended without, in the determination of the Committee, materially altering the intent of the Plan or a Plan Election, such provision shall be stricken as to such jurisdiction or Participant and the remainder of the Plan and any such Plan Election shall remain in full force and effect. 15 GOVERNING LAW The validity, construction and effect of the Plan, any rules and regulations relating to the Plan and any Plan Election shall be determined in accordance with the laws of the State of Delaware and applicable U.S. federal law. 16 TERM OF PLAN The Plan shall remain in effect until terminated by the Committee or the Board. 12 17 AMENDMENT AND TERMINATION OF THE PLAN 17.1 The Plan may be amended by the Board in any respect, without the consent of stockholders or Participants. No amendments may materially impair the rights of a Participant, other than as may be provided in Sections 8 and 17.2 of the Plan, without the consent of such Participant, unless required by law. 17.2 The Plan may be terminated at any time by the Board and the end of all Plan Terms may be accelerated to a date concurrent with such termination. EX-11 3 EXHIBIT 11 1 EXHIBIT 11 JEFFERIES GROUP, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE (AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, --------------------------- 1996 1995 1994 ------- ------- ------- Net earnings...................................................... $43,560 $28,529 $20,224 Adjustment to subsidiary earnings -- common stock equivalents on subsidiary................................................... (501) -- (125) ------- ------- ------- Adjusted earnings............................................... $43,059 $28,529 $20,099 ======= ======= ======= Shares of common stock and common stock equivalents: Average number of common shares 10,822 11,100 11,620 Average common stock equivalent shares related to employee stock based plans.................................................. 883 860 758 ------- ------- ------- Average shares used in primary computation...................... 11,705 11,960 12,378 Adjust average common stock equivalents to period-end market price, if higher than average price.......................... 57 74 -- ------- ------- ------- Average shares used in fully diluted computation................ 11,762 12,034 12,378 ======= ======= ======= Earnings per share: Primary......................................................... $ 3.68 $ 2.39 $ 1.63 ======= ======= ======= Fully diluted................................................... $ 3.66 $ 2.37 $ 1.63 ======= ======= =======
EX-21 4 EXHIBIT 21 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 JEF Investment Company Delaware EX-23 5 EXHIBIT 23 1 INDEPENDENT AUDITORS' CONSENT The Board of Directors Jefferies Group, Inc.: We consent to incorporation by reference in the Registration Statements No. 2-94727 dated December 6, 1984; No. 33-17065 dated September 8, 1987; No. 33-19741 dated January 21, 1988; No. 33-64318 dated May 27, 1993; No. 33-64490 dated June 15, 1993; No. 33-52139 dated February 3, 1994; No. 33-54373 dated June 30, 1994, and No. 333-02489, 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 24, 1997, relating to the consolidated statements of financial condition of Jefferies Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1996, which report appears in the December 31, 1996 annual report on Form 10-K of Jefferies Group, Inc. KPMG PEAT MARWICK, LLP ------------------------ KPMG Peat Marwick, LLP Los Angeles, California March 27, 1997 EX-27 6 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, 1996 AND FOR THE YEAR THEN ENDED AND THE NOTES THERETO AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS FILED IN THE 1996 JEFFERIES GROUP, INC. 10-K FILING. 1,000 U.S. DOLLARS YEAR DEC-31-1996 JAN-1-1996 DEC-31-1996 1 114,142 159,881 0 919,616 197,770 30,871 1,568,087 0 188,775 0 787,322 124,315 52,987 0 0 188 195,257 1,568,087 143,912 47,803 239,771 104,309 0 37,852 264,041 83,187 83,187 0 0 43,560 3.68 3.66
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