-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V2hQ+gPQQ7Pt2jYnraYvHY22/XED9eeOAX+gu4LhNY/Sjsv8e/j7h/+oELtWGW3x WIsyJF7SuqHyTsUBoUUE9A== 0000950148-98-000536.txt : 19980323 0000950148-98-000536.hdr.sgml : 19980323 ACCESSION NUMBER: 0000950148-98-000536 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980320 SROS: BSE SROS: NASD SROS: NYSE SROS: PCX FILER: COMPANY DATA: COMPANY CONFORMED NAME: JEFFERIES GROUP INC CENTRAL INDEX KEY: 0000717867 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 952848406 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-11665 FILM NUMBER: 98570362 BUSINESS ADDRESS: STREET 1: 11100 SANTA MONICA BLVD STREET 2: 10TH FL CITY: LOS ANGELES STATE: CA ZIP: 90025 BUSINESS PHONE: 3104451199 MAIL ADDRESS: STREET 1: 11100 SANTA MONICA BLVD STREET 2: 10TH FLR CITY: LOS ANGELES STATE: CA ZIP: 90025 10-K/A 1 FORM 10-K/A 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K/A [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM ____________ TO ____________ COMMISSION FILE NUMBER: 1-11665 JEFFERIES GROUP, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 95-2848406 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 11100 SANTA MONICA BOULEVARD, 11TH FLOOR 90025 LOS ANGELES, CALIFORNIA (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (310) 445-1199 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: COMMON STOCK, $.01 PAR VALUE (TITLE OF CLASS) SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. [ ] State the aggregate market value of the common stock held by nonaffiliates of the registrant. $865,304,648 as of March 16, 1998. Indicate the number of shares outstanding of the registrant's class of common stock, as of the latest practical date. 20,775,495 shares as of the close of business March 16, 1998. DOCUMENTS INCORPORATED BY REFERENCE See list on following page. LOCATION OF EXHIBIT INDEX The index of exhibits is contained in Part IV herein on page 40. ================================================================================ 2 Jefferies Group, Inc. hereby amends Item 8 of its annual report on Form 10-K for 1997 as set forth in the pages attached hereto. 3 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. INDEX TO FINANCIAL STATEMENTS
PAGE ---- Consolidated Financial Statements of Jefferies Group, Inc. and Subsidiaries Independent Auditors' Report............. 15 Consolidated Statements of Financial Condition as of December 31, 1997 and 1996................................ 16 Consolidated Statements of Earnings for the Three Years Ended December 31, 1997................................... 17 Consolidated Statements of Changes in Stockholders' Equity for the Three Years Ended December 31, 1997............... 18 Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1997................................... 19 Notes to Consolidated Financial Statements.................. 20
14 4 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders JEFFERIES GROUP, INC.: We have audited the accompanying consolidated statements of financial condition of Jefferies Group, Inc. and subsidiaries as of December 31, 1997 and 1996 and the related consolidated statements of earnings, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Jefferies Group, Inc. and subsidiaries as of December 31, 1997 and 1996 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Los Angeles, California January 20, 1998, except as to note 19 to the consolidated financial statements, which is as of March 17, 1998 15 5 JEFFERIES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 1997 AND 1996 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997 1996 ---------- ---------- ASSETS Cash and cash equivalents................................... $ 109,488 $ 114,142 Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations............................................. 30,977 29,107 Receivable from brokers and dealers......................... 1,269,664 965,625 Receivable from customers, officers and directors........... 166,284 113,872 Securities owned............................................ 245,413 197,770 Investments................................................. 154,584 50,609 Premises and equipment...................................... 42,828 30,871 Other assets................................................ 80,304 66,091 ---------- ---------- $2,099,542 $1,568,087 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Payable to brokers and dealers.............................. $ 981,705 $ 805,713 Payable to customers........................................ 202,255 170,384 Securities sold, not yet purchased.......................... 188,703 124,315 Accrued expenses and other liabilities...................... 318,258 207,281 ---------- ---------- 1,690,921 1,307,693 Long-term debt.............................................. 149,290 52,987 Minority interest........................................... 16,575 11,962 ---------- ---------- 1,856,786 1,372,642 ---------- ---------- Stockholders' equity: Preferred stock, $.01 par value. Authorized 1,000,000 shares; none issued.................................... -- -- Common stock, $.01 par value. Authorized 25,000,000 shares; issued 22,393,910 shares in 1997 and 37,514,124 shares in 1996......................................... 224 188 Additional paid-in capital................................ 39 62,569 Retained earnings......................................... 271,589 232,741 Less: Treasury stock, at cost; 2,107,842 shares in 1997 and 16,788,226 shares in 1996............................. (26,954) (99,404) Accumulated other comprehensive income (loss): Currency translation adjustments..................... (622) (96) Additional minimum pension liability adjustment...... (1,520) (553) ---------- ---------- Total accumulated other comprehensive income (loss).... (2,142) (649) ---------- ---------- Net stockholders' equity............................. 242,756 195,445 ---------- ---------- $2,099,542 $1,568,087 ========== ==========
See accompanying notes to consolidated financial statements. 16 6 JEFFERIES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS THREE YEARS ENDED DECEMBER 31, 1997 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1997 1996 1995 -------- -------- -------- REVENUES: Commissions.............................................. $282,317 $222,048 $165,610 Principal transactions................................... 177,214 143,912 97,954 Corporate finance........................................ 228,640 97,870 72,003 Interest................................................. 70,740 47,803 65,792 Other.................................................... 5,593 4,993 4,228 -------- -------- -------- Total revenues........................................ 764,504 516,626 405,587 Interest expense......................................... 61,466 37,852 54,365 -------- -------- -------- Revenues, net of interest expense..................... 703,038 478,774 351,222 -------- -------- -------- NON-INTEREST EXPENSES: Compensation and benefits................................ 409,979 264,041 195,278 Floor brokerage and clearing fees........................ 35,066 27,323 20,273 Telecommunications and data processing services.......... 47,192 35,177 24,960 Occupancy and equipment rental........................... 21,297 17,207 15,993 Travel and promotional................................... 19,207 13,541 10,296 Software royalties....................................... 9,853 8,805 5,987 Other.................................................... 44,494 29,493 25,197 -------- -------- -------- Total non-interest expenses........................... 587,088 395,587 297,984 -------- -------- -------- Earnings before income taxes and minority interest......... 115,950 83,187 53,238 Income taxes............................................... 47,677 35,438 21,911 -------- -------- -------- Earnings before minority interest..................... 68,273 47,749 31,327 Minority interest in earnings of consolidated subsidiaries, net...................................................... 4,706 4,189 2,798 -------- -------- -------- Net earnings.......................................... $ 63,567 $ 43,560 $ 28,529 ======== ======== ======== EARNINGS PER SHARE: Basic.................................................... $ 2.95 $ 1.90 $ 1.23 ======== ======== ======== Diluted.................................................. $ 2.80 $ 1.84 $ 1.19 ======== ======== ======== WEIGHTED AVERAGE SHARES OF COMMON STOCK: Basic.................................................... 21,552 22,980 23,270 Diluted.................................................. 22,349 23,410 23,922
See accompanying notes to consolidated financial statements. 17 7 JEFFERIES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY THREE YEARS ENDED DECEMBER 31, 1997 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ACCUMULATED ADDITIONAL OTHER NET COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE STOCKHOLDERS' STOCK CAPITAL EARNINGS STOCK INCOME (LOSS) EQUITY ------ ---------- -------- -------- ------------- ------------- Balance, December 31, 1994............................ $ 90 $ 51,120 $165,597 $(52,958) $ (614) $ 163,235 Exercise of stock options (970,572 shares)............ 2 5,613 -- -- -- 5,615 Purchase of 1,455,476 shares of treasury stock........ -- -- -- (12,768) -- (12,768) Issuance of common stock (319,328 shares)............. 1 1,205 -- 1,237 -- 2,443 Issuance of restricted stock (165,212 shares)......... -- 179 -- 626 -- 805 Capital Accumulation Plan distribution (94,564 shares)............................................. -- -- -- 788 -- 788 Increase in proportionate share of subsidiary's equity related to subsidiary's purchase of treasury stock............................................... -- -- (766) -- -- (766) Comprehensive income: Net earnings........................................ -- -- 28,529 -- -- 28,529 Other comprehensive income (loss), net of tax: Currency translation adjustment..................... -- -- -- -- (57) (57) Additional minimum pension liability adjustment..... -- -- -- -- (437) (437) ------- --------- Other comprehensive income (loss)................... (494) (494) --------- Comprehensive income.................................. -- -- -- -- -- 28,035 Dividends paid ($.05 per share)....................... -- -- (1,126) -- -- (1,126) ---- -------- -------- -------- ------- --------- Balance, December 31, 1995............................ 93 58,117 192,234 (63,075) (1,108) 186,261 Exercise of stock options (352,460 shares)............ 1 2,555 -- 97 -- 2,653 Purchase of 2,320,352 shares of treasury stock........ -- -- -- (36,766) -- (36,766) Issuance of common stock (71,388 shares).............. -- 770 -- -- -- 770 Issuance of restricted stock (68,864 shares).......... -- 695 -- -- -- 695 Capital Accumulation Plan distribution (39,186 shares)............................................. -- 138 -- 340 -- 478 Increase in proportionate share of subsidiary's equity related to subsidiary's purchase of treasury stock............................................... -- -- (1,115) -- -- (1,115) Additional vesting of restricted stock shares......... -- 388 -- -- -- 388 Comprehensive income: Net earnings........................................ -- -- 43,560 -- -- 43,560 Other comprehensive income (loss), net of tax: Currency translation adjustment..................... -- -- -- -- 426 426 Additional minimum pension liability adjustment..... -- -- -- -- 33 33 ------- --------- Other comprehensive income (loss)................... 459 459 --------- Comprehensive income.................................. -- -- -- -- -- 44,019 Dividends paid ($.0875 per share)..................... -- -- (1,883) -- -- (1,883) Redemption of rights ($.0025 per right)............... -- -- (55) -- -- (55) Two-for-one stock split............................... 94 (94) -- -- -- ---- -------- -------- -------- ------- --------- Balance, December 31, 1996............................ 188 62,569 232,741 (99,404) (649) 195,445 Exercise of stock options (240,028 shares)............ 2 3,431 -- -- -- 3,433 Purchase of 1,063,026 shares of treasury stock........ -- -- -- (23,584) -- (23,584) Issuance of common stock (41,052 shares).............. -- 879 -- 3 -- 882 Issuance of restricted stock (198,888 shares)......... -- 3,282 -- -- -- 3,282 Capital Accumulation Plan distribution (143,228 shares)............................................. -- 508 -- 1,289 -- 1,797 Retirement of treasury shares (15,600,000 shares)..... (78) (70,902) (23,762) 94,742 -- -- Increase in proportionate share of subsidiary's equity related to subsidiary's purchase of treasury stock............................................... -- -- (45) -- -- (45) Decrease in proportionate share of subsidiary's equity related to stock issuances at the subsidiary........ -- -- 1,603 -- -- 1,603 Additional vesting and tax benefits on restricted stock shares........................................ -- 384 -- -- -- 384 Comprehensive income: Net earnings........................................ -- -- 63,567 -- -- 63,567 Other comprehensive income (loss), net of tax: Currency translation adjustment..................... -- -- -- -- (526) (526) Additional minimum pension liability adjustment..... -- -- -- -- (967) (967) ------- --------- Other comprehensive income (loss)................... (1,493) (1,493) --------- Comprehensive income.................................. 62,074 Dividends paid ($.125 per share)...................... -- -- (2,515) -- -- (2,515) Two-for-one stock split............................... 112 (112) -- -- -- -- ---- -------- -------- -------- ------- --------- Balance, December 31, 1997............................ $224 $ 39 $271,589 $(26,954) $(2,142) $(242,756) ==== ======== ======== ======== ======= =========
See accompanying notes to consolidated financial statements. 18 8 JEFFERIES GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS THREE YEARS ENDED DECEMBER 31, 1997 (DOLLARS IN THOUSANDS)
1997 1996 1995 --------- -------- --------- Cash flows from operating activities: Net earnings.............................................. $ 63,567 $ 43,560 $ 28,529 --------- -------- --------- Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization........................... 16,504 13,644 9,720 Deferred income taxes................................... (8,813) (10,462) (4,110) Additional vesting of restricted stock.................. 384 388 -- (Increase) decrease in cash and securities segregated... (1,870) (23,849) 8,000 (Increase) decrease in receivables: Brokers and dealers................................... (304,039) 152,529 31,516 Customers, officers and directors..................... (52,412) (6,714) (1,278) Increase in securities owned............................ (47,643) (30,560) (22,270) Increase in investments................................. (103,975) (25,452) (4,066) (Increase) decrease in other assets..................... (16,316) (38,044) 17,090 Increase (decrease) in payables: Brokers and dealers................................... 175,992 (58,743) 23,623 Customers............................................. 31,871 (44,171) (110,841) Increase in securities sold, not yet purchased.......... 64,388 41,383 22,345 Increase in accrued expenses and other liabilities...... 118,822 83,252 45,708 --------- -------- --------- Net cash provided by (used in) operating activities... (63,540) 96,761 43,966 --------- -------- --------- Cash flows from financing activities: Net payments on bank loans................................ -- -- (866) Issuance of term debt..................................... 99,722 -- -- Net payments on: Repurchase of treasury stock............................ (23,584) (36,766) (12,768) Redemption of 8 7/8% Subordinated Notes, due 1997....... (3,576) (3,576) (3,576) Dividends paid.......................................... (2,515) (1,883) (1,126) Redemption of rights.................................... -- (55) -- Proceeds from exercise of stock options................... 3,433 2,653 5,615 Increase in minority interest............................. 4,613 3,581 2,245 Net decrease (increase) in proportionate share of subsidiary's equity..................................... 1,558 (1,115) (766) Distribution of Capital Accumulation Plan shares.......... 1,797 478 788 Payments -- repurchase agreements......................... -- -- (18,696) Issuance of restricted shares............................. 3,282 695 805 Issuance of common shares................................. 882 770 2,443 --------- -------- --------- Net cash provided by (used in) financing activities 85,612 (35,218) (25,902) --------- -------- --------- Cash flows from investing activities -- purchase of premises and equipment............................................. (26,200) (16,145) (13,070) --------- -------- --------- Effect of currency translation on cash...................... (526) 426 (57) --------- -------- --------- Net (decrease) increase in cash and cash equivalents.......................................... (4,654) 45,824 4,937 Cash and cash equivalents at beginning of year.............. 114,142 68,318 63,381 --------- -------- --------- Cash and cash equivalents at end of year.................... $ 109,488 $114,142 $ 68,318 ========= ======== ========= Supplemental disclosures of cash flow information: Cash paid during the year for: Interest................................................ $ 58,038 $ 38,522 $ 54,934 Income taxes............................................ 52,030 42,724 15,168
Supplemental disclosure of non-cash financing activities: In 1995, the additional minimum pension liability included in stockholders' equity of $586 resulted from an increase of $437 to accrued expenses and other liabilities and an offsetting decrease in stockholders' equity. In 1996, the additional minimum pension liability included in stockholders' equity of $553 resulted from a decrease of $33 to accrued expenses and other liabilities and an offsetting increase in stockholders' equity. In 1997, the additional minimum pension liability included in stockholders' equity of $1,520 resulted from an increase of $967 to accrued expenses and other liabilities and an offsetting decrease in stockholders' equity. See accompanying notes to consolidated financial statements. 19 9 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1997 AND 1996 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of Jefferies Group, Inc. (Company) and all subsidiaries, including Jefferies & Company, Inc. (Jefferies) and Investment Technology Group, Inc. (ITGI) and its wholly owned subsidiary, ITG Inc. (ITG). The accounts of W & D Securities, Inc. (W & D) are also consolidated because of the nature and extent of the Company's ownership interest in W & D. The Company and its subsidiaries are primarily engaged in a single line of business as a securities broker-dealer, which includes several types of services, such as principal and agency transactions in equity, convertible debt and taxable fixed income securities, as well as corporate finance activities. Operations of the Company include agency and principal transactions and other securities-related financial services. All significant intercompany accounts and transactions are eliminated in consolidation. SECURITIES TRANSACTIONS All transactions in securities, commission revenues and related expenses are recorded on a trade-date basis. Securities owned and securities sold, not yet purchased, are valued at market, and unrealized gains or losses are reflected in revenues from principal transactions. INVESTMENTS Partnership interests are recorded at their initial cost. The carrying values of these investments are adjusted when the adjustment can be supported by quoted market prices, adjusted for liquidity and other relevant factors. In addition, the carrying values are reduced when the Company determines that the estimated realizable value is less than the carrying value based on relevant financial and market information. Debt and equity investments consist primarily of mutual funds which are valued at market, based on available quoted prices. Equity and debt interests in affiliates are recorded under either the equity or cost method depending on the Company's level of ownership and control. RECEIVABLE FROM, AND PAYABLE TO, CUSTOMERS, OFFICERS AND DIRECTORS Receivable from, and payable to, customers includes amounts receivable and payable on cash and margin transactions. Securities owned by customers and held as collateral for these receivables are not reflected in the accompanying consolidated financial statements. Receivable from officers and directors represents balances arising from their individual security transactions. Such transactions are subject to the same regulations as customer transactions. FAIR VALUE OF FINANCIAL INSTRUMENTS Substantially all of the Company's financial instruments are carried at fair value or amounts approximating fair value. Assets, including cash and cash equivalents, securities borrowed or purchased under agreements to sell, and certain receivables, are carried at fair value or contracted amounts, which approximate fair value due to the short period to maturity. Similarly, liabilities, including bank loans, securities loaned or sold under agreements to repurchase, long-term debt and certain payables, are carried at amounts approximating fair value. Securities owned and securities sold, not yet purchased, are valued at quoted market prices, if available. 20 10 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997 AND 1996 For securities without quoted prices, the reported fair value is estimated using various sources of information, including quoted prices for comparable securities. The Company has derivative financial instrument positions in option contracts, foreign exchange forward contracts and index futures contracts which are measured at fair value with gains and losses recognized in earnings. The gross contracted or notional amount of these contracts is not reflected in the consolidated statements of financial condition (see note 14 of the notes to consolidated financial statements.) PREMISES AND EQUIPMENT Premises and equipment are depreciated using the straight-line method over the estimated useful lives of the related assets (generally three to ten years). Leasehold improvements are amortized using the straight-line method over the term of related leases or the estimated useful lives of the assets, whichever is shorter. GOODWILL Goodwill, which represents the excess of cost over net assets acquired, is amortized on a straight-line basis over ten to fifteen years. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through future operating cash flows of the acquired business. CAPITALIZED SOFTWARE The Company capitalizes software development costs where technological feasibility of the product has been established. The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized software development costs requires considerable judgment by management with respect to certain external factors, including, but not limited to, technological feasibility, anticipated future gross revenues, estimated economic life and changes in software and hardware technologies. The Company is amortizing capitalized software costs using the straight-line method over one to two years, with an average remaining life of under two years. Amortization begins when the product is available for release to the customers. As of December 31, 1997 and 1996, respectively, the Company had $6.0 million and $3.0 million of capitalized software costs, net of accumulated amortization included in other assets. In 1997, 1996 and 1995, the Company amortized software costs of $1.5 million, $1.4 million, and $894,000, respectively. Research and development expenses related to software were $7.1 million, $6.0 million and $4.9 million in 1997, 1996 and 1995, respectively. In 1997, 1996 and 1995, $4.4 million, $1.6 million and $2.1 million, respectively, were capitalized. INCOME TAXES The Company files a consolidated U.S. Federal income tax return which includes all qualifying subsidiaries. Amounts provided for income taxes are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income taxes are provided for temporary differences in reporting certain items, principally state income taxes, depreciation, 21 11 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997 AND 1996 deferred compensation and unrealized gains and losses on securities owned. Tax credits are recorded as a reduction of income taxes when realized. CASH EQUIVALENTS The Company generally invests its excess cash in money market funds and other short-term investments. At December 31, 1997 and 1996, such cash equivalents amounted to $90,064,000 and $95,650,000, respectively. Cash equivalents are part of the cash management activities of the Company and generally mature within 90 days. REPURCHASE AND REVERSE REPURCHASE AGREEMENTS Repurchase agreements consist of sales of U.S. Treasury notes under agreements to repurchase. They are treated as collateralized financing transactions and are recorded at their contracted repurchase amount. Reverse repurchase agreements consist of purchases of U.S. Treasury notes under agreements to re-sell. They are treated as collateralized financing transactions and are recorded at their contracted re-sale amount. EARNINGS PER COMMON SHARE Basic earnings per share of common stock are computed by dividing net earnings by the average number of shares outstanding and certain other shares committed to, but not yet issued. Diluted earnings per share of common stock are computed by dividing net earnings by the average number of shares outstanding of common stock and all dilutive common stock equivalents outstanding during the period. All shares used in the earnings per share calculations were restated to retroactively reflect the two-for-one stock splits approved by the Board of Directors on November 19, 1997 and March 2, 1996. In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS 128 established new standards for computing and presenting earnings per share. SFAS No. 128 replaced the presentation of primary earnings per share with a presentation of basic earnings per share. SFAS No. 128 also requires dual presentation of basic and diluted earnings per share on the face of the statement of earnings for entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic earnings per share computation to the numerator and denominator of the diluted earnings per share computation. SFAS 128 did not have a material impact on the Company. Earnings per share information has been restated to retroactively reflect the adoption of Statement of Financial Accounting Standards No. 128. COMMON STOCK On November 19, 1997, the Company's Board of Directors approved a two-for-one split of all of the outstanding shares of the Company's common stock, payable December 15, 1997 to stockholders of record at the close of business on November 28, 1997. The stated par value of each share was not changed from $0.01. In addition, the Board of Directors, approved the quarterly cash dividend at $0.05 per share on the approximately 20,000,000 common shares outstanding after the split (effectively doubling the dividend rate). On March 2, 1996, the Company's Board of Directors approved a two-for-one split of all of the outstanding shares of the Company's common stock, payable March 29, 1996 to stockholders of record at the close of business on March 15, 1996. The stated par value of each share was not changed from $0.01. 22 12 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997 AND 1996 In addition, the Board of Directors, approved the quarterly cash dividend at $0.05 per share (pre November 1997 stock split) on the approximately 12,000,000 common shares (pre November 1997 stock split) to be outstanding after the March 2, 1996 split (effectively doubling the dividend rate), as well as repurchase of up to 1 million of the new common shares (pre November 1997 stock split), on the open market or otherwise, from time to time. All share, share price and per share information included in the consolidated financial statements has been restated to retroactively reflect the effect of the November 19, 1997 and the March 2, 1996 two-for-one stock splits. The amount of common stock shares issued as of December 31, 1996 has been restated to reflect the November 19, 1997 two-for-one stock split. Prior to restatement, the actual amount of common stock shares issued as of December 31, 1996 was 18,757,062 with 25,000,000 common stock shares authorized. TRANSFERS OF FINANCIAL ASSETS In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS 125 establishes, among other things, new criteria for determining whether a transfer of financial assets should be accounted for as a sale or as a pledge of collateral in a secured borrowing. SFAS No. 125 also establishes new accounting requirements for pledged collateral. As issued, SFAS No. 125 was to be effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996, and was to be applied prospectively. Earlier or retroactive application of SFAS No. 125 is not permitted. In November 1996, the FASB deferred for one year the effective date of significant provisions of SFAS No. 125. SFAS No. 125 did not have a material impact on the Company. COMPREHENSIVE INCOME In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. All items that are required to be recognized under accounting standards as components of comprehensive income are required to be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 130 does not require a specific format for that financial statement but requires that an enterprise display an amount representing total comprehensive income for the period in that financial statement. SFAS No. 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. The Company implemented SFAS No. 130 in 1997. The adoption of SFAS No. 130 did not have a material impact on the Company's consolidated financial position, results of operations, or liquidity. SEGMENT REPORTING In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to shareholders. It also 23 13 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997 AND 1996 establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS No. 131 requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments. SFAS No. 131 also requires that a public business enterprise report descriptive information about the way that the operating segments were determined, the products and services provided by the operating segments, differences between the measurements used in reporting segment information and those used in the enterprise's general-purpose financial statements, and changes in the measurement of segment amounts from period to period. SFAS No. 131 is effective for financial statements for periods beginning after December 15, 1997. SFAS No. 131 is not expected to have a material impact on the Company. FOREIGN CURRENCY TRANSLATION The Company's foreign revenues and expenses are translated at average current rates during each reporting period. Foreign currency transaction gains and losses are included in the consolidated statement of earnings. Gains and losses resulting from translation of financial statements are excluded from the consolidated statement of earnings and are recorded directly to a separate component of stockholders' equity. RECLASSIFICATIONS Certain reclassifications have been made to the prior years' amounts to conform to the current year's presentation. USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (2) GOODWILL At December 31, 1997 and 1996, excess of purchase price over net assets acquired remaining was $3,556,000 and $2,471,000, net of accumulated amortization of $3,436,000 and $2,811,000, respectively, and is included in other assets. 24 14 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997 AND 1996 (3) RECEIVABLE FROM, AND PAYABLE TO, BROKERS AND DEALERS The following is a summary of the major categories of receivable from, and payable to, brokers and dealers as of December 31, 1997 and 1996 (in thousands of dollars):
1997 1996 ---------- ---------- Receivable from brokers and dealers: Securities borrowed....................................... $1,197,227 $ 919,616 Other..................................................... 72,437 46,009 ---------- ---------- $1,269,664 $ 965,625 ========== ========== Payable to brokers and dealers: Securities loaned......................................... $ 966,132 $ 787,322 Other..................................................... 15,573 18,391 ---------- ---------- $ 981,705 $ 805,713 ========== ==========
The Company has a securities borrowed versus securities loaned business with other brokers. The Company also borrows securities to cover short sales and to complete transactions in which customers have failed to deliver securities by the required settlement date, and lends securities to other brokers and dealers for similar purposes. From these activities, the Company derives interest revenue and interest expense. (4) RECEIVABLE FROM, AND PAYABLE TO, CUSTOMERS, OFFICERS AND DIRECTORS The following is a summary of the major categories of receivables from customers, officers and directors as of December 31, 1997 and 1996 (in thousands of dollars):
1997 1996 -------- -------- Customers (net of allowance for uncollectible accounts of $2,453 in 1997 and $3,051 in 1996)........................ $164,099 $109,924 Officers and directors...................................... 2,185 3,948 -------- -------- $166,284 $113,872 ======== ========
Interest is paid on free credit balances in accounts of customers who have indicated that the funds will be used for investment at a future date. The rate of interest paid on such free credit balances varies between the thirteen-week treasury bill rate and 1% below that rate, depending upon the size of the customers' free credit balances. Uncollectible accounts expense amounted to $1,273,000, $18,000 and $81,000 for the years ended December 31, 1997, 1996 and 1995, respectively, and is included in other expense. 25 15 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997 AND 1996 (5) SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED The following is a summary of the market value of major categories of securities owned and securities sold, not yet purchased, as of December 31, 1997 and 1996 (in thousands of dollars):
1997 1996 ------------------------ ------------------------ SECURITIES SECURITIES SOLD, SOLD, SECURITIES NOT YET SECURITIES NOT YET OWNED PURCHASED OWNED PURCHASED ---------- ---------- ---------- ---------- Corporate equity securities..................... $120,316 $134,163 $122,608 $110,104 High-yield securities........................... 59,270 52,332 8,961 12,348 Corporate debt securities....................... 37,382 1,571 29,949 340 U.S. Government and agency obligations.......... 25,370 -- 31,435 -- Other........................................... 3,075 637 4,817 1,523 -------- -------- -------- -------- $245,413 $188,703 $197,770 $124,315 ======== ======== ======== ========
(6) INVESTMENTS The following is a summary of the major categories of investments, as of December 31, 1997 and 1996 (in thousands of dollars):
1997 1996 -------- ------- Partnership interests....................................... $ 75,814 $24,975 Debt and equity investments................................. 64,397 16,655 Equity and debt interests in affiliates..................... 14,373 8,979 -------- ------- $154,584 $50,609 ======== =======
(7) PREMISES AND EQUIPMENT The following is a summary of premises and equipment as of December 31, 1997 and 1996 (in thousands of dollars):
1997 1996 -------- ------- Furniture, fixtures and equipment........................... $ 88,683 $60,166 Leasehold improvements...................................... 12,352 14,669 -------- ------- Total............................................. 101,035 74,835 Less accumulated depreciation and amortization.............. 58,207 43,964 -------- ------- $ 42,828 $30,871 ======== =======
Depreciation and amortization expense amounted to $14,243,000, $11,480,000 and $7,934,000 for the years ended December 31, 1997, 1996 and 1995, respectively. (8) BANK LOANS Bank loans represent short-term borrowings that are payable on demand and generally bear interest at the brokers' call loan rate. At December 31, 1997 and 1996, there were no bank loans. 26 16 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997 AND 1996 (9) LONG TERM DEBT The following summarizes long term debt outstanding at December 31, 1997 and 1996 (in thousands of dollars):
1997 1996 -------- ------- 8 7/8% Subordinated Notes, due 1997, less unamortized discount of $79 in 1996, effective rate of 12%............ $ -- $ 3,499 8 7/8% Series B Senior Notes, due 2004, less unamortized discount of $442 and $512 in 1997 and 1996, respectively, effective rate of 9%...................................... 49,558 49,488 7 1/2% Senior Notes, due 2007, less unamortized discount of $268 in 1997, effective rate of 8%........................ 99,732 -- -------- ------- $149,290 $52,987 ======== =======
During 1997, the remainder of the Subordinated Notes were redeemed. Also, during 1997, Jefferies obtained a NASDR approved $200,000,000 revolving credit facility to be used in connection with underwriting activities. The revolving credit facility terminates on October 30, 1999. Loans under this facility bear interest at 2.5% over either the Federal funds rate or the London Interbank Offered Rate. During 1997, there were no borrowings against the revolving credit facility. (10) INCOME TAXES Total income taxes for the years ended December 31, 1997, 1996 and 1995 were allocated as follows (in thousands of dollars):
1997 1996 1995 ------- ------- ------- Income from operations...................................... $47,677 $35,438 $21,911 Stockholders' equity, for compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes........................................ (1,704) (1,568) (2,451) Goodwill, for initial recognition of acquired tax benefits.................................................. -- -- (122) ------- ------- ------- $45,973 $33,870 $19,338 ======= ======= =======
Income taxes (benefits) for the years ended December 31, 1997, 1996 and 1995 consists of the following (in thousands of dollars):
1997 1996 1995 ------- ------- ------- CURRENT: Federal................................................... $42,895 $35,059 $17,361 State and city............................................ 13,595 10,841 8,660 ------- ------- ------- 56,490 45,900 26,021 ------- ------- ------- DEFERRED: Federal................................................... (6,450) (8,756) (1,692) State and city............................................ (2,363) (1,706) (2,418) ------- ------- ------- (8,813) (10,462) (4,110) ------- ------- ------- $47,677 $35,438 $21,911 ======= ======= =======
27 17 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997 AND 1996 Income taxes differed from the amounts computed by applying the Federal income tax rate of 35% for 1997, 1996 and 1995 as a result of the following (in thousands of dollars):
1997 1996 1995 -------------- -------------- -------------- AMOUNT % AMOUNT % AMOUNT % ------- ---- ------- ---- ------- ---- Computed expected income taxes................ $40,583 35.0% $29,115 35.0% $18,633 35.0% Increase (decrease) in income taxes resulting from: State and city income taxes, net of Federal income tax benefit....................... 7,301 6.3 5,938 7.1 4,057 7.6 Limited deductibility of meals and entertainment............................ 1,263 1.1 867 1.1 663 1.3 Non-taxable interest income................. (481) (0.4) (473) (0.6) (308) (.06) Research and development tax credits........ (584) (0.5) (291) (0.3) (1,114) (2.1) Other, net.................................. (405) (0.4) 282 0.3 (20) -- ------- ---- ------- ---- ------- ---- Total income taxes.................. $47,677 41.1% $35,438 42.6% $21,911 41.2% ======= ==== ======= ==== ======= ====
The cumulative tax effects of temporary differences that give rise to significant portions of the deferred tax assets and liabilities at December 31, 1997 and 1996 are presented below (in thousands of dollars):
1997 1996 ------- ------- Deferred tax assets: Long-term compensation.................................... $25,018 $16,916 Lease allowances.......................................... 929 499 Accounts receivable....................................... 2,888 4,159 State income taxes........................................ 2,516 2,069 Securities inventories.................................... -- 417 Premises and equipment.................................... 1,328 952 Other..................................................... 581 272 ------- ------- Total gross deferred tax assets................... 33,260 25,284 Valuation allowance....................................... -- -- ------- ------- Net deferred tax assets........................... 33,260 25,284 ------- ------- Deferred tax liabilities: Investment in subsidiaries................................ (13,765) (14,342) Notes payable............................................. -- (30) Other..................................................... -- (230) ------- ------- Total gross deferred tax liabilities.............. (13,765) (14,602) ------- ------- Net deferred tax asset, included in other assets........................................... $19,495 $10,682 ======= =======
There was no valuation allowance for deferred tax assets as of December 31, 1997, 1996 and 1995. Management believes it is more likely than not that the Company will generate sufficient taxable income in the future to realize the deferred tax asset. 28 18 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997 AND 1996 (11) BENEFIT PLANS PENSION PLAN The Company has a defined benefit pension plan which covers certain employees of the Company and its subsidiaries. The plan is subject to the provisions of the Employee Retirement Income Security Act of 1974. Benefits are based on years of service and the employee's career average pay. The Company's funding policy is to contribute to the plan at least the minimum amount that can be deducted for Federal income tax purposes. The following tables set forth the plan's funded status and amounts recognized in the Company's accompanying consolidated statements of financial condition and consolidated statements of earnings (in thousands of dollars):
DECEMBER 31 ------------------ 1997 1996 ------- ------- Actuarial present value of benefit obligations -- accumulated benefit obligation, including vested benefits of $18,449 and $13,647 as of December 31, 1997 and 1996, respectively.............................................. $19,777 $14,607 ======= ======= Projected benefit obligation for service rendered to date... $22,603 $16,279 Plan assets, at fair market value........................... 16,479 13,102 ------- ------- Excess of the projected benefit obligation over plan assets................................................. 6,124 3,177 Unrecognized prior service cost............................. 624 689 Unrecognized net transition obligation being recognized over 15 years.................................................. (172) (215) Unrecognized net loss....................................... (5,876) (3,099) Adjustment to recognize minimum liability................... 2,598 953 ------- ------- Pension liability included in other liabilities........... $ 3,298 $ 1,505 ======= =======
YEAR ENDED DECEMBER 31 ----------------------------- 1997 1996 1995 ------- ------- ------- Net pension cost included the following components: Service cost -- benefits earned during the period......... $ 1,288 $ 1,125 $ 595 Interest cost on projected benefit obligation............. 1,222 1,064 851 Actual loss (return) on plan assets....................... (2,403) (1,691) (2,195) Net amortization.......................................... 1,516 1,000 1,442 ------- ------- ------- Net periodic pension cost.............................. $ 1,623 $ 1,498 $ 693 ======= ======= =======
The plan assets consist of approximately 60% equities and 40% fixed income securities. The weighted average discount rate and the rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7.00% and 5.00%, respectively, in 1997 and 7.50% and 5.00%, respectively, in both 1996 and 1995. The expected long-term rate of return on assets was 8.40% in 1997, 1996 and 1995. STOCK COMPENSATION PLANS In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based Compensation." SFAS 123 defines a fair value based method of accounting for an employee stock option or similar instrument and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. 29 19 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997 AND 1996 However, it allows an entity to continue to measure compensation cost for these plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." Entities electing to remain with the accounting in APB Opinion No. 25 must make pro forma disclosures of net earnings and earnings per share, as if the fair value based method of accounting defined in SFAS 123 had been applied. The Company implemented the statement during the year ended December 31, 1996. At December 31, 1997, the Company had six stock-based compensation plans and ITGI had two stock-based compensation plans, which are described below. The Company and ITGI applied APB Opinion No. 25 in accounting for their plans. Accordingly, no compensation cost has been recognized for fixed stock option plans. Had compensation cost for the Company's and ITGI's stock-based compensation plans been determined consistent with SFAS 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands of dollars, except per share amounts):
1997 1996 1995 ------- ------- ------- Net earnings: As reported............................................ $63,567 $43,560 $28,529 Pro forma.............................................. $58,927 $40,102 $25,474 Basic earnings per share: As reported............................................ $ 2.95 $ 1.90 $ 1.23 Pro forma.............................................. $ 2.73 $ 1.75 $ 1.09 Diluted earnings per share: As reported............................................ $ 2.80 $ 1.84 $ 1.19 Pro forma.............................................. $ 2.60 $ 1.69 $ 1.06
1993 PLAN The Company has a Stock Ownership and Long-Term Incentive Plan (1993 Plan) which allows awards in the form of incentive stock options (within the meaning of Section 422 of the Internal Revenue code), nonqualified stock options, stock appreciation rights, restricted stock, unrestricted stock, performance awards, dividend equivalents or other stock based awards. The maximum number of shares of common stock of the Company with respect to which any awards may be made in any calendar year during the term of the 1993 Plan may not exceed 20% of the number of shares of common stock issued and outstanding as of the first day of the calendar year in which awards are made, less the number of shares of common stock reserved for issuance with respect to, or underlying, any award, made pursuant to the 1993 Plan or any predecessor plan, as of such date. The 1993 Plan provides flexibility as to exercise price and term of each option. DIRECTOR PLAN The Company, also, has a Non-Employee Directors' Stock Option Plan (Director Plan) which provides for an annual grant to each non-employee director of an option to purchase 2,000 shares of the Company's common stock. Such grants will be made automatically on the date directors are elected or reelected at the Company's annual meeting. In addition, the Director Plan provides for the automatic grant to a non-employee director, at the time he or she is first elected or appointed, of an option to purchase 5,000 shares of the Company's common stock. A total of 300,000 shares of the Company's common stock are reserved under the Director Plan. Under the Director Plan, the exercise price of each option equals the market price of the Company's stock on the date of grant and the option's maximum term is five years. 30 20 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997 AND 1996 1996 PLAN Additionally, in 1996, the Company established a Non-Employee Directors' Deferred Compensation Plan (1996 Plan). The 1996 Plan permits each non-employee director to elect to be paid annual retainer fees and annual fees for service as chairman or a member of a Board committee in the form of stock options and to defer receipt of any director fees in an interest-bearing cash account or as deferred shares in a deferred share account. A total of 200,000 shares of the Company's common stock are reserved under the 1996 Plan. Under the 1996 Plan, the exercise price of each option equals the market price of the Company's stock on the date of grant and the options expire ten years after the date of grant. UNITED KINGDOM CAPITAL ACCUMULATION PLAN The Company has a United Kingdom Capital Accumulation Plan (UK CAP) for certain officers and key employees of the Company who work in the United Kingdom. Participation in the plan is optional, with those who elect to participate agreeing to defer graduated percentages of their compensation. The UK CAP allows selected employees to acquire the Company's common stock (through the granting of stock options) at a 15% discount with 40% of the amount deferred. The remaining 60% of the amount deferred is placed in a Profit-Based Deferred Compensation Account that earns interest at a rate based on the performance of the Company. OPTIONS ISSUED UNDER ALL PLANS The fair value of all option grants for all the Company's plans are estimated on the date of grant using the Black-Scholes option-pricing model with the weighted-average assumptions used for all fixed option grants in 1997, 1996 and 1995, respectively: dividend yield of 0.4%, 0.6%, and 0.7%; expected volatility of 33.4%, 33.3%, and 32.8%; risk-free interest rates of 6.4%, 5.4%, and 7.0%; and expected lives of 5.5 years, 3.3 years, and 4.0 years. A summary of the status of Company stock options in all its stock-based plans as of December 31, 1997, 1996 and 1995 and changes during the year then ended is presented below:
1997 1996 1995 --------------------- --------------------- --------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE --------- --------- --------- --------- --------- --------- Outstanding at beginning of year........................... 1,702,000 $ 9.37 1,467,832 $ 6.07 1,964,132 $ 4.44 Granted.......................... 367,061 22.91 594,628 13.28 483,372 7.61 Exercised........................ (240,028) 9.48 (352,460) 3.47 (970,572) 3.14 Forfeited........................ -- -- (8,000) 8.13 (9,100) 5.26 --------- --------- --------- Outstanding at end of year....... 1,829,033 12.05 1,702,000 9.37 1,467,832 6.07 ========= ========= ========= Options exercisable at year-end....................... 1,349,124 858,996 1,056,460 Weighted-average fair value of options granted during the year........................... $10.05 $ 4.19 $ 2.99
31 21 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997 AND 1996 The following table summarizes information about stock options outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------- ----------------------- NUMBER WEIGHTED NUMBER OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED AT REMAINING AVERAGE AT AVERAGE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE RANGE OF EXERCISE PRICES 1997 LIFE (YEARS) PRICE 1997 PRICE ------------------------ ------------ ------------ -------- ------------ -------- $1 to 6............................ 275,901 0.2 $ 4.05 240,000 $ 4.25 $7 to 12........................... 822,600 1.4 8.57 686,600 8.72 $13 to 21.......................... 473,000 2.8 15.92 274,992 15.31 $22 to 32.......................... 257,532 5.3 24.64 147,532 22.95 --------- --------- $1 to 32........................... 1,829,033 2.1 12.05 1,349,124 10.82 ========= =========
INVESTMENT TECHNOLOGY GROUP, INC.'S PLANS In 1994 ITGI, established the 1994 Employee Stock Option and Long-Term Incentive Plan (ITGI Plan) which allows for the granting of options to purchase a total of 3,650,000 shares of ITGI common stock. In 1995, the ITGI Board of Directors adopted, and the ITGI stockholders approved, the Non-Employee Directors' Plan (ITGI Director Plan). The ITGI Director Plan generally provides for an annual grant to each non-employee director an option to purchase 2,500 shares of ITGI common stock. In addition, the ITGI Director Plan provides for the automatic grant to a non-employee director, at the time he or she is initially elected, a stock option to purchase 10,000 shares of ITGI common stock. Stock options granted under the ITGI Director Plan are non-qualified stock options having an exercise price equal to 100% of the fair market value of ITGI common stock at the date of grant. A total of 125,000 shares of ITGI common stock are reserved for issuance under the ITGI Director Plan. There were a total of 2,311,059 fixed stock options outstanding and 18,254,800 ITGI common stock shares outstanding as of December 31, 1996. There were a total of 3,458,216 fixed stock options outstanding and 18,220,968 ITGI common stock shares outstanding as of December 31, 1997. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the weighted-average assumptions used for all fixed option grants in 1997, 1996 and 1995, respectively: dividend yield of 0.0%, 0.0% and 0.0%; expected volatility of 54%, 49% and 51%; risk-free interest rates of 6.6%, 6.1% and 6.3%; and expected lives of 5 years, 4 years and 4 years. The following table summarizes information about stock options outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------- ----------------------- NUMBER WEIGHTED NUMBER OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED AT REMAINING AVERAGE AT AVERAGE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE RANGE OF EXERCISE PRICES 1997 LIFE (YEARS) PRICE 1997 PRICE ------------------------ ------------ ------------ -------- ------------ -------- $ 7.33 - 10.00......................... 455,603 2.9 $ 9.07 9,934 $ 7.90 $11.00 - 15.00......................... 1,728,332 1.7 $12.52 1,296,008 $13.01 $16.00 - 20.00......................... 167,177 4.4 $19.23 12,377 $18.43 $21.00 - 25.00......................... 1,019,604 4.1 $22.21 419,604 $22.25 $26.00 - 27.80......................... 87,500 9.8 $27.60 -- -- --------- --------- $ 7.33 - 27.80......................... 3,458,216 2.9 $15.63 1,737,923 $15.25 ========= =========
32 22 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997 AND 1996 PERFORMANCE-BASED STOCK OPTIONS While the 1993 Plan allows for the granting of performance-based stock options, no such options were granted during 1997, 1996 and 1995, and no such options were outstanding at December 31, 1997, 1996 and 1995. RESTRICTED STOCK The 1993 Plan allows for grants of restricted stock awards, whereby certain key employees are granted restricted shares of common stock subject to forfeiture until the restrictions lapse or terminate. With certain exceptions, the employee must remain with the Company for a period of years after the date of grant to receive the full number of shares granted. During 1997, 1996 and 1995, there were restricted stock awards of 198,888 shares, 49,264 shares and 256,092 shares, respectively, with a corresponding market value of $4,189,000, $624,000 and $2,187,000, respectively. Certain grants are expensed over the vesting periods of one to three years, while others have been granted in settlement of previously accrued compensation liabilities. The compensation cost, excluding the cost associated with the settlement of previously accrued compensation liabilities, charged against earnings was $1,142,000, $394,000 and $1,788,000 in 1997, 1996 and 1995, respectively. As of December 31, 1997, 1996 and 1995, restricted stock shares outstanding were 203,468 shares, 95,160 shares and 234,676 shares, respectively. EMPLOYEE STOCK PURCHASE PLAN The Company has an Employee Stock Purchase Plan (ESPP). All regular full-time employees are eligible for the ESPP. Employee contributions are voluntary and are made via payroll deduction. The employee contributions are used to purchase the Company's common stock which is then held in an outside trust account. The Company matches employee contributions at a rate of 15% (more, if profits exceed targets set by the Company's Board of Directors). The Company's match vests after two years. The Company recognizes compensation cost related to its ESPP matching. The compensation cost charged against earnings was $228,000, $250,000 and $161,000 in 1997, 1996 and 1995, respectively. CAPITAL ACCUMULATION PLAN The Company has a Capital Accumulation Plan (CAP) for certain officers and key employees of the Company. Participation in the plan is optional, with those who elect to participate agreeing to defer graduated percentages of their compensation. The plan allows selected employees to acquire the Company's common stock at a 15% discount with 50% of the amount deferred. The remaining 50% of the amount deferred is placed in a Profit-Based Deferred Compensation Account that earns interest at a rate based on the performance of the Company. The Company will from time to time repurchase shares of its common stock in the open market for use in both the CAP and UK CAP plans. The Company has acquired 2,304,616 shares since the inception of the plans (CAP in 1993 and UK CAP in 1995) and has made distributions of 347,702 shares. The Company recognizes compensation cost related to the 15% discount and interest on Profit-Based Deferred Compensation Accounts. The compensation cost charged against earnings was $4,834,000, $2,742,000 and $2,200,000 in 1997, 1996 and 1995, respectively. 33 23 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997 AND 1996 PROFIT SHARING PLAN The Company has a profit sharing plan, covering substantially all employees, which includes a salary reduction feature designed to qualify under Section 401-K of the Internal Revenue Code. Expenses related to this plan amounted to $7,923,000, $5,713,000 and $3,565,000 in 1997, 1996 and 1995, respectively. (12) EARNINGS PER SHARE The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the years 1997, 1996 and 1995 (in thousands, except per share amounts):
YEAR ENDED DECEMBER 31, ----------------------------- 1997 1996 1995 ------- ------- ------- Net earnings for basic earnings per share................... $63,567 $43,560 $28,529 Earnings adjustment -- stock options on subsidiary........ (890) (501) -- ------- ------- ------- Adjusted earnings for diluted earnings per share.......... $62,677 $43,059 $28,529 ======= ======= ======= Shares of common stock and common stock equivalents: Average number of common shares........................... 20,148 21,644 22,198 Capital Accumulation Plan unissued shares................. 1,404 1,336 1,072 ------- ------- ------- Average shares used in basic computation.................. 21,552 22,980 23,270 Stock options............................................. 651 398 482 Other unissued common shares.............................. 146 32 170 ------- ------- ------- Average shares used in diluted computation................ 22,349 23,410 23,922 ======= ======= ======= Earnings per share: Basic..................................................... $ 2.95 $ 1.90 $ 1.23 ======= ======= ======= Diluted................................................... $ 2.80 $ 1.84 $ 1.19 ======= ======= =======
The Company had no anti-dilutive securities during 1997, 1996 and 1995. (13) LEASES As lessee, the Company leases certain premises and equipment under noncancelable agreements expiring at various dates through 2012. Future minimum lease payments for all noncancelable operating leases at December 31, 1997 are as follows (in thousands of dollars): 1998........................................................ $10,714 1999........................................................ 9,198 2000........................................................ 7,544 2001........................................................ 6,114 2002........................................................ 4,078 Thereafter.................................................. 23,892
Rental expense for the Company was $8,342,000 in 1997, $6,759,000 in 1996 and $5,996,000 in 1995. 34 24 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997 AND 1996 (14) FINANCIAL INSTRUMENTS OFF-BALANCE SHEET RISK The Company has contractual commitments arising in the ordinary course of business for securities loaned or purchased under agreements to sell, securities sold but not yet purchased, repurchase agreements, future purchases and sales of foreign currencies, securities transactions on a when-issued basis, options contracts, futures index contracts, and underwriting. Each of these financial instruments and activities contains varying degrees of off-balance sheet risk whereby the market values of the securities underlying the financial instruments may be in excess of, or less than, the contract amount. The settlement of these transactions is not expected to have a material effect upon the Company's consolidated financial statements. In the normal course of business, the Company had letters of credit outstanding aggregating $20,915,000 at December 31, 1997 to satisfy various collateral requirements in lieu of depositing cash or securities. The Company has derivative financial instrument positions in foreign exchange forward contracts, option contracts, and index futures contracts, all of which are measured at fair value with realized and unrealized gains and losses recognized in earnings. The foreign exchange forward contract positions are generally taken to lock in the dollar cost or proceeds of foreign currency commitments associated with unsettled foreign denominated securities purchases or sales. The average maturity of the forward contracts is generally less than two weeks. The option positions taken are generally part of a strategy in which offsetting equity positions are taken. Currently, the index futures positions are taken as a hedge against other securities positions. The gross contracted or notional amount of index futures contracts, commodities futures contracts, options contracts, and foreign exchange forward contracts, which are not reflected in the consolidated statement of financial condition, is set forth in the table below and provide only a measure of the Company's involvement in these contracts at December 31, 1997 and 1996. They do not represent amounts subject to market risk and, in many cases, serve to reduce the Company's overall exposure to market and other risks (in thousands of dollars):
NOTIONAL OR CONTRACTED AMOUNT ----------------------------------------- 1997 1996 ------------------ ------------------- PURCHASE SALE PURCHASE SALE -------- ------ -------- ------- Index futures contracts.............................. $ -- $8,173 $ -- $13,327 Commodities futures contracts........................ -- -- 11,833 -- Option contracts..................................... 6,277 4,803 60 4,681 Foreign exchange forward contracts................... 430 4,461 2,978 4,135
35 25 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997 AND 1996 FAIR VALUE OF DERIVATIVE FINANCIAL INSTRUMENTS The following is an aggregate summary of the average 1997 and 1996 and December 31, 1997 and 1996 fair values of derivative financial instruments (in thousands of dollars):
1997 1996 ------------------------ ------------------------ AVERAGE END OF PERIOD AVERAGE END OF PERIOD ------- ------------- ------- ------------- Index futures contracts: In a favorable position....................... $ 55 $ -- $ 104 $ 78 In an unfavorable position.................... 204 149 298 57 Option contracts: Purchases..................................... 682 799 208 9 Sales......................................... 372 637 706 1,523 Foreign exchange forward contracts: Purchases..................................... 3,406 430 4,031 2,978 Sales......................................... 3,291 4,461 5,177 4,135
CREDIT RISK In the normal course of business, the Company is involved in the execution, settlement and financing of various customer and principal securities transactions. Customer activities are transacted on a cash, margin or delivery-versus-payment basis. Securities transactions are subject to the risk of counterparty or customer nonperformance. However, transactions are collateralized by the underlying security, thereby reducing the associated risk to changes in the market value of the security through settlement date or to the extent of margin balances. The Company seeks to control the risk associated with these transactions by establishing and monitoring credit limits and by monitoring collateral and transaction levels daily. The Company may require counterparties to deposit additional collateral or return collateral pledged. In the case of aged securities failed to receive, the Company may, under industry regulations, purchase the underlying securities in the market and seek reimbursement for any losses from the counterparty. CONCENTRATION OF CREDIT RISK As a major securities firm, the Company's activities are executed primarily with and on behalf of other financial institutions, including brokers and dealers, banks and other institutional customers. Concentrations of credit risk can be affected by changes in economic, industry or geographical factors. The Company seeks to control its credit risk and the potential risk concentration through a variety of reporting and control procedures, including those described in the preceding discussion of credit risk. 36 26 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997 AND 1996 (15) OTHER COMPREHENSIVE INCOME The following summarizes other comprehensive income and accumulated other comprehensive income at December 31, 1997 and for the year then ended (in thousands of dollars):
TAX BEFORE-TAX (EXPENSE) NET-OF-TAX AMOUNT OR BENEFIT AMOUNT ---------- ---------- ---------- Currency translation adjustments........................... $ (526) $ -- $ (526) Minimum pension liability adjustment....................... (1,645) 678 (967) ------- ---- ------- Other comprehensive income (loss).......................... $(2,171) $678 $(1,493) ======= ==== =======
MINIMUM ACCUMULATED CURRENCY PENSION OTHER TRANSLATION LIABILITY COMPREHENSIVE ADJUSTMENTS ADJUSTMENT INCOME (LOSS) ----------- ----------- ------------- Beginning balance..................................... $ (96) $ (553) $ (649) Change in 1997........................................ (526) (967) (1,493) ----- ------- ------- Ending balance........................................ $(622) $(1,520) $(2,142) ===== ======= =======
(16) NET CAPITAL REQUIREMENTS As registered broker-dealers, Jefferies, ITG and W & D are subject to the Securities and Exchange Commission Uniform Net Capital Rule (Rule 15c3-1), which requires the maintenance of minimum net capital. Jefferies, ITG and W & D have elected to use the alternative method permitted by the Rule, which requires that they each maintain minimum net capital, as defined, equal to the greater of $250,000 or 2% of the aggregate debit balances arising from customer transactions, as defined. At December 31, 1997, Jefferies', ITG Inc.'s and W & D's net capital was $96.8 million, $35.0 million and $1.3 million, respectively, which exceeded minimum net capital requirements by $91.4 million, $34.8 million and $1.0 million, respectively. (17) CONTINGENCIES In re Nasdaq Market-Makers Antitrust Litigation. Beginning in July 1994, antitrust class actions were commenced against Jefferies and 33 other defendants in various federal courts (the "Lawsuits"). Following the filing of the Lawsuits, the Antitrust Division of the United States Department of Justice ("DOJ") and the Commission commenced investigations into certain issues related to the allegations of the Lawsuits. In August 1996, the DOJ entered into a antitrust consent decree with 24 defendants who are market makers in Nasdaq stocks. Jefferies was neither asked nor required to settle with the DOJ. Shortly after the DOJ settlement, the Commission filed a Section 21(a) report against the National Association of Securities Dealers, Inc. ("NASD"), criticizing various practices by market makers, and the NASD for failing to adequately police or discipline the market makers for those practices. However, the Commission did not take any action at that time against the market maker firms. In October 1994, the Lawsuits were consolidated for discovery purposes in the United States District Court for the Southern District of New York (the "Court"). The consolidated complaint alleges that the defendants violated the antitrust laws by conspiring to fix the spread paid by plaintiffs and class members to trade in certain Nasdaq securities, by refusing to quote bids and asks in so-called odd-eighths. The cases purport to be brought on behalf of all persons who purchased or sold certain securities on the Nasdaq National 37 27 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997 AND 1996 Market System during the period May 1, 1989 to May 27, 1994. The plaintiffs seek damages in an unspecified amount. In order to avoid the uncertainties of litigation, Jefferies has entered into a settlement agreement which received the preliminary approval of the Court on October 15, 1997, but which is still subject to final approval of the Court. The amount of the settlement has been previously provided for and will not have a material adverse effect on Jefferies. Other. Many aspects of the Company's business involve substantial risks of liability. In the normal course of business, the Company and its subsidiaries have been named as defendants or co-defendants in lawsuits involving primarily claims for damages. The Company's management believes that pending litigation will not have a material adverse effect on the Company. (18) SEGMENT REPORTING The Company's operations have been classified into two business segments: Financial services and ITGI. The Financial services segment includes the traditional securities brokerage and investment banking activities of Jefferies Group, Inc. and its subsidiaries, except ITGI and its subsidiaries. The ITGI segment includes the automated equity trading and transaction research activities of ITGI and its subsidiaries. Financial information by segment for the three years in the period ended December 31, 1997 are summarized as follows (in thousands of dollars):
FINANCIAL ELIMINATIONS/ SERVICES ITGI RECLASSIFICATIONS CONSOLIDATED ---------- -------- ----------------- ------------ 1997 Total revenues........................... $ 630,842 $137,042 $ (3,380) $ 764,504 Operating income......................... 68,690 47,260 -- 115,950 Identifiable assets...................... 1,994,684 113,641 (8,783) 2,099,542 Capital expenditures..................... 10,521 15,679 -- 26,200 Depreciation and amortization............ 9,862 6,642 -- 16,504 1996 Total revenues........................... $ 407,023 $111,556 $ (1,953) $ 516,626 Operating income......................... 42,186 41,001 -- 83,187 Identifiable assets...................... 1,493,117 82,798 (7,828) 1,568,087 Capital expenditures..................... 10,521 5,624 -- 16,145 Depreciation and amortization............ 9,687 3,957 -- 13,644 1995 Total revenues........................... $ 334,282 $ 72,381 $ (1,076) $ 405,587 Operating income......................... 28,350 24,888 -- 53,238 Identifiable assets...................... 1,497,351 55,318 (15,700) 1,536,969 Capital expenditures..................... 8,067 5,003 -- 13,070 Depreciation and amortization............ 7,472 2,248 -- 9,720
Financial services provided trade execution, clearance and administrative services to ITGI for $21.6 million, $14.7 million and $11.4 million in 1997, 1996 and 1995, respectively. ITGI provided automated trade execution services to Financial services for $3.1 million, $1.7 million and $1.1 million in 1997, 1996 and 1995, respectively. 38 28 JEFFERIES GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1997 AND 1996 (19) JEFFERIES GROUP, INC. AND INVESTMENT TECHNOLOGY GROUP, INC. ANNOUNCE INTENTION TO CONSIDER SEPARATING INTO TWO INDEPENDENT COMPANIES On March 17, 1998, Jefferies Group, Inc. and Investment Technology Group, Inc. jointly announced that they are considering the separation, through a spin-off and a restructuring, of Jefferies & Company, Inc. and other Jefferies Group, Inc. subsidiaries ("JEFCO") and Investment Technology Group, Inc. ("ITGI"). If the separation is completed, Jefferies Group, Inc. shareholders will own 100% of JEFCO and approximately 82.3% of ITGI. The public ITGI shareholders will continue to own 17.7% of ITGI. (The ITGI percentage ownership interests could change slightly as a result of ITGI stock repurchases or issuances before the transaction closing date.) The spin-off will be accomplished by a tax-free distribution of 100% of the shares of a new company, JEFCO, to Jefferies Group, Inc. shareholders. Jefferies Group, Inc.'s 15 million shares of ITGI would then be its only asset. The spin-off would be followed immediately by a tax-free merger of Jefferies Group, Inc. and ITGI, with ITGI's public shareholders receiving shares of Jefferies Group, Inc. Jefferies Group, Inc. would then be renamed Investment Technology Group, Inc. The spin-off and restructuring transactions are contingent on a number of factors, including receipt of all required Board of Directors and shareholder approvals of Jefferies Group, Inc. and ITGI, receipt of a favorable tax ruling from the Internal Revenue Service and other required regulatory and contractual approvals. (20) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of unaudited quarterly statements of earnings for the years ended December 31, 1997 and 1996 (in thousands of dollars, except per share amounts):
MARCH JUNE SEPTEMBER DECEMBER YEAR -------- -------- --------- -------- -------- 1997 Revenues.................................... $147,178 $201,485 $184,823 $231,018 $764,504 Earnings before income taxes and minority interest.................................. 21,567 35,327 26,405 32,651 115,950 Net earnings................................ 11,397 19,748 14,420 18,002 63,567 Basic earnings per share.................... 0.53 0.92 0.67 0.83 2.95 Diluted earnings per share.................. 0.50 0.87 0.63 0.79 2.80 1996 Revenues.................................... $121,854 $120,645 $127,353 $146,774 $516,626 Earnings before income taxes and minority interest.................................. 20,252 17,883 21,535 23,517 83,187 Net earnings................................ 10,632 9,140 11,455 12,333 43,560 Basic earnings per share.................... 0.45 0.40 0.50 0.55 1.90 Diluted earnings per share.................. 0.44 0.39 0.49 0.54 1.84
39 29 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. JEFFERIES GROUP, INC. By /s/ JERRY M. GLUCK ------------------------------------ Jerry M. Gluck Secretary Dated: March 20, 1998 43 -----END PRIVACY-ENHANCED MESSAGE-----