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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 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)
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DELAWARE 95-2848406
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
11100 SANTA MONICA BOULEVARD, 11TH FLOOR 90025
LOS ANGELES, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
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REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(310) 445-1199
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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.
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JEFFERIES GROUP, INC.
1996 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
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PAGE
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Item 1. Business..................................................................... 1
Item 2. Properties................................................................... 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
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DOCUMENTS INCORPORATED BY REFERENCE
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TITLE OF DOCUMENT PART OF FORM 10-K
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Proxy Statement relating to 1997 Annual Meeting of Shareholders (to be
filed)..................................................................... Part III
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Exhibit Index located on page 36 of this report.
<PAGE> 3
PART I
ITEM 1. BUSINESS.
Jefferies Group, Inc. is a holding company which, through its four primary
subsidiaries, Jefferies & Company, Inc., Investment Technology Group, Inc.,
Jefferies International Limited and Jefferies Pacific Limited, is engaged in
securities brokerage and trading, corporate finance and other financial
services. The term "Company" refers, unless the context requires otherwise, to
Jefferies Group, Inc., its subsidiaries, predecessor entities, and W & D
Securities, Inc. The Company was originally incorporated in 1973 as a holding
company for Jefferies & Company, Inc. and was reincorporated in Delaware on
August 10, 1983. The Company and its various subsidiaries maintain offices in
Los Angeles, New York, Short Hills, Jersey City, Chicago, Dallas, Boston,
Atlanta, New Orleans, Houston, San Francisco, Stamford, London, Hong Kong,
Zurich and Tokyo.
As of December 31, 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.
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W & D SECURITIES, INC.
W & D Securities, Inc. ("W & D") primarily provides execution services on
the New York Stock Exchange ("NYSE") and other exchanges to Jefferies and ITG.
In order to comply with regulatory requirements of the NYSE that generally
prohibit NYSE members and their affiliates from executing, as principal and, in
certain cases, as agent, transactions in NYSE-listed securities off the NYSE,
the Company gave up its formal legal control of W & D, effective January 1,
1983, by exchanging all of the W & D common stock owned by it for non-voting
preferred stock of W & D. The common stock of W & D is presently held by an
officer of W & D who has agreed with the Company that, at the option of the
Company, he will sell such stock to the Company for nominal consideration. In
the event that the Company were to regain ownership of such common stock, the
Company believes that the NYSE would assert that W & D would be in violation of
the NYSE's rules unless similar arrangements satisfactory to the NYSE were made
with respect to the ownership of the common stock.
While the NYSE has generally approved the above arrangements, there can be
no assurance that it will not raise objections in the future. In light of these
arrangements and the high proportion of the equity of W & D represented by the
non-voting preferred stock held by the Company, W & D is consolidated as a
subsidiary of the Company for financial statement purposes. The Company believes
that it can make satisfactory alternative arrangements for executing
transactions in listed securities on the NYSE if it were precluded from doing so
through W & D.
COMMISSION BUSINESS
A substantial portion of the Company's revenues is derived from customer
commissions on brokerage transactions in equity (primarily listed) and debt
securities for domestic and international investors such as investment advisors,
banks, mutual funds, insurance companies and pension and profit sharing plans.
Such investors normally purchase and sell securities in block transactions, the
execution of which requires special marketing and trading expertise. 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.
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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
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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
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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
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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.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS.
The Company's Common Stock began trading on the NYSE on March 15, 1996,
under the symbol JEF. Previously, the Common Stock traded in the Nasdaq National
Market System under the symbol JEFG. The following table sets forth for the
periods indicated, the range of high and low 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.
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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
</TABLE>
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):
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FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
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1996............................................. $.025 $.050 $.050 $.050
1995............................................. $.025 $.025 $.025 $.025
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ITEM 6. SELECTED FINANCIAL DATA.
The selected data presented below as of and for each of the years in the
five-year period ended December 31, 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.
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YEAR ENDED DECEMBER 31,
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1996 1995 1994 1993 1992
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(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
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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
</TABLE>
8
<PAGE> 11
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The Company's principal activities, securities brokerage and the trading of
and market making in securities, are highly competitive.
The earnings of the Company are subject to wide fluctuations since many
factors over which the Company has little or no control, particularly the
overall volume of trading and the volatility and general level of market prices,
may significantly affect its operations. The following provides a summary of
revenues by source for the past three years.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1996 1995 1994
------------------- ------------------- -------------------
% OF % OF % OF
TOTAL TOTAL TOTAL
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Commissions and principal
transactions:
Equities Division............... $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%
======== === ======== === ======== ===
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 15
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements of Jefferies Group, Inc. and Subsidiaries
Independent Auditors' Report.......................................................... 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
</TABLE>
13
<PAGE> 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
<PAGE> 17
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
15
<PAGE> 18
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
THREE YEARS ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
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
</TABLE>
See accompanying notes to consolidated financial statements.
16
<PAGE> 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)
<TABLE>
<CAPTION>
ADDITIONAL
ADDITIONAL CURRENCY MINIMUM NET
COMMON PAID-IN RETAINED TREASURY TRANSLATION PENSION STOCKHOLDERS'
STOCK CAPITAL EARNINGS STOCK ADJUSTMENT LIABILITY EQUITY
------ ---------- -------- -------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
==== ======= ======== ======== ====== ====== ========
</TABLE>
See accompanying notes to consolidated financial statements.
17
<PAGE> 20
JEFFERIES GROUP, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995 1994
-------- --------- --------
<S> <C> <C> <C>
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
</TABLE>
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
<PAGE> 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
<PAGE> 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
<PAGE> 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
<PAGE> 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):
<TABLE>
<CAPTION>
1996 1995
-------- ----------
<S> <C> <C>
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
======== ==========
</TABLE>
The Company has a securities borrowed versus securities loaned business
with other brokers. The Company also borrows securities to cover short sales and
to complete transactions in which customers have
22
<PAGE> 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):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
Interest is paid on free credit balances in accounts of customers who have
indicated that the funds will be used for investment at a future date. The rate
of interest paid on such free credit balances varies between the thirteen-week
treasury bill rate and 1% below that rate, depending upon the size of the
customers' free credit balances.
Uncollectible accounts expense amounted to $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):
<TABLE>
<CAPTION>
1996 1995
----------------------- -----------------------
SECURITIES SECURITIES
SOLD, SOLD,
SECURITIES NOT YET SECURITIES NOT YET
OWNED PURCHASED OWNED PURCHASED
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
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
======== ======== ======== =======
</TABLE>
23
<PAGE> 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):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
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
======= =======
</TABLE>
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):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
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
======= =======
</TABLE>
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):
<TABLE>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
24
<PAGE> 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):
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
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
======== ======= =======
</TABLE>
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):
<TABLE>
<CAPTION>
1996 1995 1994
-------------- -------------- --------------
AMOUNT % AMOUNT % AMOUNT %
------- ---- ------- ---- ------- ----
<S> <C> <C> <C> <C> <C> <C>
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%
======= ==== ======= ==== ======= ====
</TABLE>
25
<PAGE> 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):
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
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
<PAGE> 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):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1996 1995
------- -------
<S> <C> <C>
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
======= =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
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
<PAGE> 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):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C> <C>
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
</TABLE>
1993 PLAN
The Company has a Stock Ownership and Long-Term Incentive Plan (1993 Plan)
which allows awards in the form of incentive stock options (within the meaning
of Section 422 of the Internal Revenue Code), nonqualified stock options, stock
appreciation rights, restricted stock, unrestricted stock, performance awards,
dividend equivalents or other stock based awards. The maximum number of shares
of common stock of the Company with respect to which any awards may be made in
any calendar year during the term of the 1993 Plan may not exceed 20% of the
number of shares of common stock issued and outstanding as of the first day of
the calendar year in which awards are made, less the number of shares of common
stock reserved for issuance with respect to, or underlying, any award, made
pursuant to the 1993 Plan or any predecessor plan, as of such date. The 1993
Plan provides flexibility as to exercise price and term of each option.
DIRECTOR PLAN
The Company, also, has a Non-Employee Directors' Stock Option Plan
(Director Plan) which provides for an annual grant to each non-employee director
of an option to purchase 2,000 shares of the Company's common stock. Such grants
will be made automatically on the date directors are elected or reelected at the
Company's annual meeting. In addition, the Director Plan provides for the
automatic grant to a non-employee director, at the time he or she is first
elected or appointed, of an option to purchase 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
<PAGE> 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:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------- -------------------- ---------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
SHARES EXERCISE SHARES EXERCISE SHARES EXERCISE
(000) PRICE (000) PRICE (000) PRICE
-------- --------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
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 ***
</TABLE>
- ---------------
*** SFAS 123 required fair value calculations for 1996 and 1995 only.
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- -----------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
AT REMAINING AVERAGE AT AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICES 1996 LIFE (YEARS) PRICE 1996 PRICE
- --------------------------------------- ------------ ------------ -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$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
======= =======
</TABLE>
29
<PAGE> 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:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- -----------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
AT REMAINING AVERAGE AT AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICES 1996 LIFE (YEARS) PRICE 1996 PRICE
- --------------------------------------- ------------ ------------ -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$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
=========
</TABLE>
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
<PAGE> 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
<PAGE> 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):
<TABLE>
<S> <C>
1997............................................................................... $ 7,835
1998............................................................................... 8,925
1999............................................................................... 7,768
2000............................................................................... 6,550
2001............................................................................... 5,236
Thereafter......................................................................... 27,185
</TABLE>
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
<PAGE> 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):
<TABLE>
<CAPTION>
NOTIONAL OR CONTRACTED AMOUNT
-----------------------------------------
1996 1995
------------------ ------------------
PURCHASE SALE PURCHASE SALE
-------- ------- -------- -------
<S> <C> <C> <C> <C>
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
</TABLE>
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):
<TABLE>
<CAPTION>
1996 1995
----------------------- -----------------------
AVERAGE END OF PERIOD AVERAGE END OF PERIOD
------- ------------- ------- -------------
<S> <C> <C> <C> <C>
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
</TABLE>
CREDIT RISK
In the normal course of business, the Company is involved in the execution,
settlement and financing of various customer and principal securities
transactions. Customer activities are transacted on a cash, margin or
delivery-versus-payment basis. Securities transactions are subject to the risk
of counterparty or customer nonperformance. However, transactions are
collateralized by the underlying security, thereby reducing the associated risk
to changes in the market value of the security through settlement date or to the
extent of margin balances.
The Company seeks to control the risk associated with these transactions by
establishing and monitoring credit limits and by monitoring collateral and
transaction levels daily. The Company may require counterparties to deposit
additional collateral or return collateral pledged. In the case of aged
securities failed to receive, the Company may, under industry regulations,
purchase the underlying securities in the market and seek reimbursement for any
losses from the counterparty.
CONCENTRATION OF CREDIT RISK
As a major securities firm, the Company's activities are executed primarily
with and on behalf of other financial institutions, including brokers and
dealers, banks and other institutional customers. Concentrations of credit risk
can be affected by changes in economic, industry or geographical factors. The
Company seeks to
33
<PAGE> 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
<PAGE> 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
<PAGE> 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.
<TABLE>
<CAPTION>
PAGES
----
<S> <C> <C>
(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
</TABLE>
All Schedules are omitted because they are not applicable or because the
required information is shown in the financial statements or notes thereto.
(a)3. EXHIBITS
<TABLE>
<C> <S>
(3.1) Amended 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.
</TABLE>
36
<PAGE> 39
<TABLE>
<C> <S>
(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.
</TABLE>
- ---------------
* 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
<PAGE> 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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------- --------------------------- ----------------
<C> <S> <C>
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
</TABLE>
38
<PAGE> 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.
<PAGE> 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.
<PAGE> 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.
<PAGE> 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.
<PAGE> 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,
<PAGE> 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.
<PAGE> 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
<PAGE> 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
<PAGE> 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.
<PAGE> 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.
<PAGE> 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.
<PAGE> 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.
<PAGE> 1
EXHIBIT 11
JEFFERIES GROUP, INC. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
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
======= ======= =======
</TABLE>
<PAGE> 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
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
The Board of Directors
Jefferies Group, Inc.:
We consent to incorporation by reference in the Registration Statements No.
2-94727 dated December 6, 1984; No. 33-17065 dated September 8, 1987; No.
33-19741 dated January 21, 1988; No. 33-64318 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
<TABLE> <S> <C>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AND THE CONSOLIDATED STATEMENTS
OF EARNINGS AS OF DECEMBER 31, 1996 AND FOR THE YEAR THEN ENDED AND THE NOTES
THERETO AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS FILED IN THE 1996 JEFFERIES GROUP, INC. 10-K FILING.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-1-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 114,142
<RECEIVABLES> 159,881
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 919,616
<INSTRUMENTS-OWNED> 197,770
<PP&E> 30,871
<TOTAL-ASSETS> 1,568,087
<SHORT-TERM> 0
<PAYABLES> 188,775
<REPOS-SOLD> 0
<SECURITIES-LOANED> 787,322
<INSTRUMENTS-SOLD> 124,315
<LONG-TERM> 52,987
0
0
<COMMON> 188
<OTHER-SE> 195,257
<TOTAL-LIABILITY-AND-EQUITY> 1,568,087
<TRADING-REVENUE> 143,912
<INTEREST-DIVIDENDS> 47,803
<COMMISSIONS> 239,771
<INVESTMENT-BANKING-REVENUES> 104,309
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 37,852
<COMPENSATION> 264,041
<INCOME-PRETAX> 83,187
<INCOME-PRE-EXTRAORDINARY> 83,187
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,560
<EPS-PRIMARY> 3.68
<EPS-DILUTED> 3.66
</TABLE>
