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Jefferies Group, Inc.520 Madison Avenue New York, NY 10022
www.jefferies.com
DRIVEN EQUITY & EQUITY-LINKED FINANCING AEROSPACE & DEFENSE UNITED STATES RELATIONSHIPS LEVERAGED & STRUCTURED FINANCE ENERGY GREAT BRITAIN FOCUSED ON GROWTH FINANCIAL &
BUSINESS SERVICES FRANCE WASHINGTON DC INDUSTRIALS SWITZERLAND COMMODITY-LINKED GAMING JAPAN INVESTMENT BANK PRIVATE CLIENT SERVICES HEALTHCARE SECURITIES FIRM
RECAPITALIZATION & RESTRUCTURING CORRESPONDENT CLEARING MARITIME & OIL SERVICE MERGERS & ACQUISITIONS ADVISORY SECURITIES LENDING RETAIL & CONSUMER CANADA EQUITIES FINANCIAL
SPONSORS PRIME BROKERAGE MEDIA & COMMUNICATIONS ATLANTA PARIS INVESTMENT GRADE FIXED INCOME DENVER GLOBAL CREATIVE STRUCTURING FIXED INCOME ENTREPRENEURIAL SPIRIT
NYSE FLOOR BROKERAGE TECHNOLOGY BOSTON SERVING HIGH NET WORTH INDIVIDUALS SERVING GROWING & MID-SIZED COMPANIES CHICAGO COMMITMENT GLOBAL HIGH YIELD BONDS GLOBAL CON-
VERTIBLE BONDS DALLAS INTERNATIONAL CONVERTIBLE BONDS PROPRIETARY INDICES AWARD WINNING RESEARCH & ANALYSIS INVESTMENT BANKING & INSTITUTIONAL SECURITIES FIRM PRIVATE EQUITY
SILICON VALLEY LONDON SECURITIES ORIGINATION BLOCK TRADES LOS ANGELES ASSET-BASED BANK LOANS ZURICH BEST EXECUTION PRIVATE DEBT PLACEMENTS EXPERIENCED STRUCTURED
FINANCE MOTIVATED COLLATERALIZED BOND OBLIGATIONS BEST EXECUTION TENACIOUS SENIOR LOANS INDUSTRY EXPERTISE IPOs NEW YORK TRUSTED PARTNER BROAD PRODUCT CAPABILITIES
FOLLOW-ON OFFERINGS DIRECT PLACEMENTS SENIOR LEVEL ATTENTION CONSENT SOLICITATIONS GLOBAL NETWORK SERVING GROWING & MID-SIZED COMPANIES DRIVEN SERVING INSTITUTIONAL
INVESTORS BANK LOANS DIVERSIFIED JOINT VENTURES/STRATEGIC ALLIANCE NASDAQ MARKET MAKING LIQUIDITY PROVIDER One Firm FULL-SERVICE FOCUSED ON GROWTH
HANDS-ON MERGER ADVISORY SECTOR FOCUS TENDER OFFERS GROWTH-ORIENTED SINCE 1962 2,045 EMPLOYEE-PARTNERS Annual Report 2005 IDEA-DRIVEN SOLUTIONS EXCLUSIVE SALE &
DIVESTITURE TAKEOVER DEFENSE FIRST & SECOND LIEN FINANCING BRIDGE FINANCING SECURITIES RESEARCH SPECIAL SITUATIONS MIDDLE MARKET INVESTMENT BANK OF THE YEAR GROWING & MID-SIZED
COMPANIES DRIVEN AEROSPACE & DEFENSE UNITED STATES RELATIONSHIPS ENERGY GREAT BRITAIN ACQUISITIONS FINANCIAL & BUSINESS SERVICES RESPECTED UNDERWRITER CREATIVE FULL-
SERVICE INDUSTRIALS SWITZERLAND GLOBAL NETWORK GAMING RESTRUCTURING ADVICE FAIRNESS OPINIONS EXCHANGE OFFERS TRUSTED ADVISOR DEDICATED DISTRESSED CAPITAL RAISING
RECAPITALIZATION LOYAL CLIENT BASE DISTRESSED M&A RESEARCH SALES PORTFOLIO TRADING QUANTITATIVE EXECUTION STRATEGIES CAPITAL MARKETS ORIGINATION PRIVATE CLIENT SERVICES CORPO-
RATE SERVICES OPTIONS DERIVATIVES LISTED BLOCK TRADING INTERNATIONAL EQUITY SALES BULLETIN BOARD TRADING DIRECT MARKET ACCESS ELECTRONIC TRADING RISK ARBITRAGE TRADING
ETFs PROPRIETARY TRADING CLOSED-END FUNDS HIGH YIELD BONDS BANK DEBT TRADING CORPORATE BONDS GOVERNMENT AGENCY BONDS TREASURY NOTES AND BONDS MORTGAGE-BACKED SECURI-
TIES MUNICIPAL BONDS COMMODITIES INDICES COMMODITIES-LINKED FINANCIAL PRODUCTS LONG/SHORT EQUITY U.S. EQUITY SALES LONG/SHORT COMMODITIES COLLATERALIZED DEBT OBLIGATIONS
CONVERTIBLE SECURITIES DISTRESSED SECURITIES INVENTIVE REVOLVING CREDIT FACILITIES TERM LENDING NEW YORK CLIENT-FIRST CULTURE SAN FRANCISCO MEDIA & COMMUNICATIONS
RETAIL & CONSUMER SECURITIES FIRM TECHNOLOGY BOSTON SERVING HIGH NET WORTH INDIVIDUALS CHICAGO INVESTMENT BANK FINANCIAL SPONSORS MARITIME & OIL SERVICE ATLANTA SER
JEFFE
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05
1.
One FirmWe are one integrated firm. We are an investment banking and institutional
securities firm, serving growing and mid-sized companies and their investors.
We are focused on growth and providing world-class investment banking, sales and
trading, research and asset management services to our clients—while driving to
create lasting wealth for our shareholders and a rewarding professional environment
for our employee-partners. We are well over 2,000 strong, with record total revenues
of $1.5 billion in 2005 and an equity market capitalization of $3.1 billion*.
Our principal operating subsidiaries include Jefferies & Company, Inc., Jefferies Execution Services, Inc., Jefferies International Ltd., Jefferies Asset Management, LLC and Jefferies Financial Products, LLC.
* year-end, fully diluted
JEFFERIES GROUP, INC.
2.
Focused on GrowthGrowth is what drives us. Growing and mid-sized companies and their investors
comprise the most dynamic, thriving sector of the economy—and their businesses
and opportunities are as unique as their needs. We believe these companies are often
overlooked and underserved. Our mission is to meet their needs. From providing
capital and delivering unbiased advice, to matching buyers and sellers and selecting
research coverage, these companies and their investors inspire us. In 2005,
we were recognized as the “Middle Market Investment Bank of the Year” by
Investment Dealers’ Digest, while achieving our sixth consecutive year of
record results and creating significant returns for our shareholders.
01 02 03 04 05
Total Revenues($ in millions)
$785$755
$1,199
$1,498
01 02 03 04 05
Equity Market Capitalization(at year-end, fully diluted, $ in millions)
$1,153 $1,159
$2,016
$3,103
$927
$2,608
4.
2%
15%
50%
41%
3%
6%
2000$617 million
Net Revenues by Division
2005$1,205 million
At or for the year ended December 31,
(in millions, except per share amounts) 2005 2004 Change
Total Revenues $ 1,497.9 $ 1,198.6 + 25%
Net Revenues 1,204.7 1,058.2 + 14%
Operating Income 268.4 227.0 + 18%
Net Earnings 157.4 131.4 + 20%
Earnings Per Share (diluted) 2.32 2.06 + 13%
Dividends Paid Per Share .51 .36 + 42%
Book Value Per Share 22.14 18.14 + 22%
Stockholders’ Equity 1,286.9 1,039.1 + 24%
Closing Stock Price 44.98 40.28 + 12%
Equity Market Capitalization (fully diluted) 3,103 2,608 + 19%
FINANCIAL HIGHLIGHTS
Sales & Trading (1) Investment Banking Asset Management Other (2)
78%
(1) Includes commission and principal transaction revenues. (2) Includes net interest and other revenues.
5%
2005 ANNUAL REPORT
5.
Fellow Shareholders:
Six years ago, we analyzed our Firm, our competitors, our clients and our future, and recognized there was
a tremendous opportunity to fill a much-needed role serving growing and mid-sized companies and their
investors—a market segment in which we had naturally and increasingly specialized since our founding in
1962. Our goal was to understand their industries, and give these companies and their investors the tools
and support needed for all stages of growth, investment and transition. In true Jefferies fashion, we rolled
up our sleeves and went to work.
We began by investing in and leveraging our powerful equity, high yield and convertible trading platforms.
We revamped our research and research sales groups, with a focus on superior analysis, breadth and depth
of coverage and forward thinking ideas to create value for our buy-side clients.At the same time, we
sought to expand our investment banking platform in terms of breadth of industry coverage and full-service
product capabilities through a combination of key hires, acquisitions of outstanding specialty firms, and
joint ventures with world-class partners. Finally, we diversified and sought to balance our platform with
quality asset management teams and vehicles to leverage our relationships.
Meanwhile, the trend of consolidation and retrenchment in investment banking has worked in our favor.
Our primary competitors of the 1980s and 1990s are virtually all gone, swallowed up by huge banks.
These banks have in turn continued their own evolution, placing their priorities away from growth
companies and the middle market. Meantime, our focus has become only stronger, and our Firm even
more nimble and responsive.We believe we embody the now-rare Wall Street culture of a creative, hands-on,
client-focused and relationship-driven firm.
Six Years of Record Results
We are proud to have delivered our sixth consecutive year of record net revenues, earnings and earnings
per share.These results were achieved through both challenging and favorable environments, and are the
direct result of the dedication of our more than 2,000 employee-partners, and the loyalty of our broad and
unique client base.Total revenues in 2005 were up 25 percent over the prior year to a record $1.5 billion,
with net revenues up 14 percent to $1.2 billion. Net earnings were up 20 percent to a record $157.4 million
and earnings per share (diluted) were up 13 percent to a record $2.32. Investment banking revenues were up
40 percent to a record $495 million.Total stockholders’ equity was up 24 percent to $1.3 billion, or $22.14
JEFFERIES GROUP, INC.
6. per share, and we ended the year with an equity market capitalization of over $3.1 billion (fully diluted).
Across the board, our Firm delivered solid results and we believe we are executing well on our strategy to
become the leading Wall Street firm focused on growing and mid-sized companies and their investors.
Compensation and benefits as a percentage of net revenues were down slightly, while non-comp expenses,
excluding interest expense, were up modestly, as we invested in increased occupancy, technology and
business development costs associated with the integration of acquisitions and a 15 percent increase in
headcount. Our pre-tax operating margin was 22.3 percent for the year.
Growing & Diversifying Our Revenues
We have worked very hard to build on our capital markets expertise, and expand the breadth of our
capabilities and industry reach. Compared with six years ago, there is a healthy shift from a primarily
brokerage-driven revenue stream to a more balanced mix of sales and trading, investment banking and asset
management. Investment banking revenues totaled $495 million and accounted for more than 40 percent
of the Firm’s net revenues in 2005, up from 15 percent six years ago. Revenues from investment banking
are a combination of advisory services and capital markets products, with broad industry representation.
Our sales and trading platform, the backbone of our Firm, represented 50 percent of our net revenues,
totaling nearly $600 million from primarily equity-based products, with a healthy increase in fixed-income
revenues.The reputation of our research product continued to make great strides.We now cover over
1,100 companies, up nearly 15 percent over the prior year, primarily comprised of growth and mid-cap
companies in our focus industries. Our asset management activities, including asset management fees and
investment income from managed funds, now account for nearly 6 percent of revenues, representing the
foundation of a third leg to our platform.We are confident that this business is well-positioned to grow
significantly in the coming years.
We believe we can best serve growing and mid-sized companies and their investors by continuing to
enhance our core competencies, as we strive to build a great firm.The specific activities of our business
units are covered in more detail in our business review later in our Annual Report.
We are proud to have delivered our sixth consecutive year of record net revenues, earningsand earnings per share. Across the board, ourFirm delivered solid results and our financial position remains strong, with $2 billion in capital. Rich Handler
7.A Strong & Liquid Capital Position
Our balance sheet is solid, with $2 billion in capital, 83 percent of our book value tangible, and cash,
cash equivalents and short-term investments (including required deposits) exceeding $900 million as of
year-end. During the year, we repurchased nearly 2 million shares at an average price of $38.73 per share.
Employee ownership remains high, with the Jefferies family, which includes employees, board members and
retirees serving as consultants, owning approximately 50 percent of the fully diluted outstanding equity of
the firm. Our stock continues to outperform all relevant benchmarks, with a compounded annualized
return of nearly 22 percent since 1999.Within the past two years, quarterly dividends paid per share
increased nearly 90 percent, from 8 cents to 15 cents. The Wall Street Journal ranked ours the #1 stock in
Investment Services for 10-year stock performance for the past three years(3).
Moody’s Investment Services upgraded our long-term debt rating to BAA1 in January 2005.We have
been rated BBB by Standard & Poor’s since November 2003, and we were rated BBB+ by Fitch Ratings
in January 2006.We continue to maintain relatively low leverage and strong liquidity, with a pro forma
debt/equity ratio at year-end of approximately 109 percent.This compares to approximately 380 percent
for a cross-section of other full-service broker-dealers, reflecting the subsequent to year-end sale of
$500 million in aggregate principal amount of unsecured 6.25 percent 30-year senior debentures, and
MassMutual’s purchase of $125 million of our Series A convertible preferred stock, initially convertible
at $62 per share.
Gaining Recognition in Our Markets
More than ever before, our Firm is being recognized publicly for our leadership position. InvestmentDealers’ Digest named our Firm the “2005 Middle Market Investment Bank of the Year(4).” We maintained
leadership in the M&A and underwriting league tables, as well as equity trading rankings, and our equity
research effort ranked second in The Wall Street Journal’s 2005 “Best on the Street” analyst ranking (5). ForbesMagazine named our Firm as one of the 2005 “Platinum 400 – America’s Best Big Companies,” ranking
us as the third Best Managed Company in Diversified Financials (6).
We have a solid foundation for future growth andscalability, and have tremendous momentum goinginto 2006. We are gaining traction in our focus markets, as demonstrated by our recently beingnamed Middle Market Investment Bank of the Year by Investment Dealers’ Digest. Brian Friedman
(3) The Wall Street Journal, annual “Shareholder Scoreboard” survey, published March 3, 2003; March 8, 2004; February 28, 2005, respectively. Based on 10-yearannualized returns. (4) Investment Dealers’ Digest, published January 16, 2006. (5) The Wall Street Journal and Thomson Financial, published May 16, 2005. (6) Forbes Magazine, published January 9, 2005.
JEFFERIES GROUP, INC.
8. Acquisitions, Expansion and Strategic Partnerships
In February 2005, Jefferies acquired Randall & Dewey, a leading Oil & Gas industry M&A advisor, adding
meaningful depth to our strong presence in the energy sector and adding approximately 100 valuable new
partners to our platform. R&D’s deep industry knowledge, technical depth, strong commercial expertise
and long-term relationships with quality clients have quickly contributed to our Firm.This group closed
over 30 transactions in 2005, valued at more than $10 billion, and experienced a 50 percent increase in
dollar deal volume over their pre-acquisition performance in 2004.We are pleased with the integration of
this unit with our existing energy practice, and post-acquisition have made additions to our London- and
Calgary-based teams. Our integration of Randall & Dewey has followed a similar model to that of Jefferies
Quarterdeck, acquired in 2002, and Jefferies Broadview, acquired in 2003, both strong contributors to our
investment banking revenues in 2005. Our investment banking professionals now number nearly 400,
including technical specialists. During the year, we made key additions to our media & communications
and healthcare industry investment banking groups, among others, and have enhanced our M&A effort
since year-end.
On the trading side, we significantly enhanced our private client services, global commodity derivatives and
investment grade fixed income businesses. In research, we welcomed 10 analysts in the areas of energy,
technology, healthcare, industrials, telecommunications and investment grade fixed income, and hosted a
growing number of industry conferences for clients.We have more than 800 sales, trading and execution
professionals, and more than 120 research professionals worldwide. Since year-end, we made significant
additions in prime brokerage, electronic trading and equity products.
In May 2005, Jefferies acquired London-based Helix Associates, a leading private equity fund placement
firm. Helix was named “Boutique of the Year” at the 2005 European Private Equity Awards. Helix has
significantly expanded our offerings for the private equity, buyout and venture capital community.
Post-acquisition, we have taken steps to help drive the U.S. activities of this group. In April 2005, we
entered into a strategic alliance with Leumi & Company, the wholly owned Investment Banking unit of
Bank Leumi, Israel’s leading domestic markets securities underwriter, to enhance our Israeli technology
investment banking effort.
9.
Net Earnings($ in millions)
$157
$131
$84
$63$60
01 02 03 04 05
Highlights
EPS *
(fully diluted)
$2.32
$2.06
$1.42
$1.14$1.14
01 02 03 04 05
Book Value($ in millions)
$1,287
$1,039
$838
$629$566
01 02 03 04 05
JEF vs. Indices(annualized return, 4/99-12/05)
21.61%
11.72%
9.36%
6.51%
-.96%
S&
P 5
00
Rus
sell
2000
S
&P
Mid
Cap
400
Am
ex S
ecur
ities
Bro
ker/
Dea
ler
Inde
x
JEF
* All per share information has been restated to retroactively reflect the effect of the two-for-one stock split declared by the Board of Directors on July 14, 2003 and effected as a stock dividend on August 15, 2003.
JEFFERIES GROUP, INC.
10. In January 2006, MassMutual, a AAA-rated world-class insurance company and investment manager, took
a strategic equity stake in Jefferies with the aforementioned purchase of a private placement of $125 million
of convertible preferred stock. Both Jefferies and MassMutual agreed to double our commitments to
Jefferies Babson Finance, our middle-market finance company joint venture formed in October 2004,
increasing the equity capital base to $500 million.With leverage, this will enable us to originate over
$10 billion of loans, and potentially offer multi-tranche, bridge, second lien, mezzanine and similar financings,
in addition to more traditional senior loans—adding a critical component to our leveraged finance capabilities.
We are confident this entity, now operating as Jefferies Finance, will provide cost-effective, long-term
capital to our corporate clients and support the continued growth of our investment bank.
In February 2006, Jefferies Asset Management, LLC became registered with the U.S. Securities and
Exchange Commission as an investment adviser.
A Global Opportunity
We have been operating outside the U.S. for over 20 years and today are delivering a full-service offering
to growing and mid-sized companies and their investors internationally. As in the U.S., we believe that our
focus and approach, coupled with our broad product offering and industry expertise, differentiates us in
the global markets, and the future holds significant growth potential.
With the addition of a UK corporate broking team, we have invested in our UK equities business to
support our ability to raise capital in the London capital markets.We also added a UK equity research sales
team and research analysts to enhance coverage of UK energy and gaming companies, augmenting existing
coverage of technology, healthcare and special situations.We made significant inroads in India and Asia as
a sole manager of capital raising transactions and maintained our strength in M&A, as well as technology,
media & communications, healthcare, aerospace & defense and energy. Randall & Dewey and Helix
have significantly enriched our industry and product expertise overseas.We currently have nearly 300
employee-partners in Europe and Asia.
Jefferies embodies the now-rare Wall Street culture of a creative, hands-on, client-focused,and relationship-driven firm. Brian Friedman
2005 ANNUAL REPORT
11.A Solid, Flexible and Integrated Platform
Our focus remains on driving growth, effectively managing our costs and maintaining strong operating
margins. Our legal, compliance, finance, accounting, clearing, support staff, marketing, operations, facilities
and technology backbone continues to develop, grow and improve to support the increased demands of
our overall business. Our investment in information technology has allowed the Firm to handle record
volumes, personnel additions and integration of new products, and we remain committed to further
innovation.We foster an environment that values a one-firm approach and client-first culture, and is
conducive to communication and appropriate information flow.We are deeply committed to maintaining
the highest of ethical standards and complying with our regulatory and legal obligations. In 2005, we
welcomed a Global Head of Compliance with more than 35 years of compliance experience.
A Social Responsibility
With an expanding global network of more than 25 offices in six countries spanning three continents,
contributing to society is important to us.Together with the help of clients and vendors, our Firm and its
employees contributed more than $5 million in donations toward the relief efforts in response to the
December 2004 Asian Tsunami and Hurricane Katrina, which struck very close to home in New Orleans
and the Mississippi Gulf Coast on August 29th, 2005.To date, our new partners at Randall & Dewey have
helped raise more than $2.6 million for cancer research. Our educational grant program, now in its 25th
year, supports the education of the children of Jefferies employees, and has granted nearly 650 scholarship
awards. In addition, the Firm continues its valuable employee contribution matching program.We hope
to continue making a difference where and when we can as our platform allows.
An Aligned and Motivated Management Team
Each day our business becomes more complex, challenging and competitive. Over the past few years,
together with our fellow Board and Executive Committee members, and the hard work of our employee-
shareholders, we have taken many steps to improve our ability to respond to our clients’ needs, and meet
the challenges of the marketplace and our industry.We remain focused on the execution of our strategy.
We will be true to our culture and continue to be heavily employee-owned, client-focused, highly ethical,
entrepreneurial, cost-conscious, non-bureaucratic and dedicated to serving growing and mid-sized
companies and their investors.
We believe we are executing successfully on our strategy to be the leading Wall Street firmfocused on growing and mid-sized companiesand their investors. Our opportunity in the marketplace is vast. Rich Handler
12.
Highlights
$1,205
$1,058
$830
$675$670
01 02 03 04 05
Investment in Human Capital(no. of employees)
Net Revenues($ in millions)
$495
$353
$230
$140$124
01 02 03 04 05
Investment Banking Revenues($ in millions)
(7) Includes asset management fees and investment income from managed funds.
2,045
1,7831,594
1,3571,201
01 02 03 04 05
Asset Management Revenues(7)
($ in millions)
$82$81
$33
$20$26
01 02 03 04 05
We have a solid foundation for future growth and scalability.We remain opportunistic, yet focused;
growth-oriented, yet prudent; and intensely committed to providing the best execution on all fronts.
Six years of growth and progress have only served to inspire us that much more is possible, and we believe
our opportunity in the global marketplace is unlimited.
We would like to acknowledge and thank John Shaw, former President, COO and Board member, without
whom we would not be the Firm we are today. John, who spent more than 20 years building this Firm,
retired in July.We are extremely grateful for his contribution and wish him well.
Since year-end, we appointed Bob Joyal to our Board of Directors. Bob was the President of MassMutual’s
Babson Capital Management LLC and brings with him a great deal of experience and wisdom.
Tremendous Momentum Going into 2006
This is the most exciting time in Jefferies’ 43-year history. Investment banking, sales and trading, research
and asset management remain the cornerstones of our Firm as we look to the future. Diversification
will continue to be a primary focus. Infrastructure and integration of new partners and products is always a
challenge, but we believe there are many opportunities still available.We’re still in the early innings as we
explore opportunities that can and will expand our horizons.We are very excited about what the future
holds, as we continue to build our special Firm.
As always, we are deeply appreciative of our loyal clients for trusting and relying on Jefferies to assist and
guide them in achieving their goals.We are grateful to our fellow shareholders for joining and supporting
us in our mission, and very thankful to our partners for their tireless hard work, dedication and faith in us
to guide our Firm forward. Our work is far from done.
Thank you all for your continued support.
RICHARD B. HANDLER BRIAN P. FRIEDMAN
Chairman of the Board and Chief Executive Officer Chairman of the Executive Committee
2005 ANNUAL REPORT
13.
14.
Built on RelationshipsWe value our relationships above all else. Whether it’s a trading client whom we help
on a daily basis, or an investment banking client whom we help periodically, our goal
is to partner with our clients as they develop and grow their businesses. For more
than 43 years, our Firm has fostered long-term, deep-seated relationships based on
trust, integrity and mutual respect. In 2005, we assisted more than 250 corporate
clients and 2,000 institutional investors in achieving their goals.
Client testimonials may not be representative of the experience of other clients or indicative of future performance or success.
“ When it comes to managing transactions for good middle market companies with business and financial complexity, Jefferies is one of thebest in the business.Whether it be in healthcare, industrial or energy, they have the multi-sector industry expertise and relationships toget the transaction done, and deliver on what they say with impeccable execution.We have come to rely on Jefferies over the years andenjoy working with them because of the quality and commitment of the people and high energy culture. It’s a great relationship.”
– JEAN-PIERRE L. CONTE, Chairman & Managing Director
Genstar Capital LLCJefferies served as joint book running agent for theSeptember 2005 $151 million senior subordinatednotes offering for Panolam Industries, a leadingmanufacturer of decorative laminates, and solemanager for the April 2005 $60 million seniorsecured notes offering for North American EnergyPartners, a leading provider of mining services, on behalf of Genstar Capital, a prominent privateequity investment firm.
LHC GroupJefferies served as lead managerand book runner on the June2005 $77 million initial publicoffering for LHC Group, aprovider of post-acute healthcare services.
“ You only get one chance when it comes to an IPO, and we’re glad we chose Jefferies as our partner.They helped us raise 20 percent more than we expected.We got the capital we needed to foster organic growth and to fund strategic acquisitions to expand our network and geographic reach.”
– JOHN INDEST, COO
“ Our initial public offering was a pivotal event in the history of our company, and we needed an underwriter we could trust.They spent morethan a year with us preparing and conducted a very comprehensive marketingprocess.The result was a strong demand among investors with our stockpricing at the top of the filing range during a difficult IPO market.”
– KEITH G. MYERS, Chairman & CEO
“ The unique insight of the Jefferies Quarterdeck team into the value drivers coupled with their in-depth knowledge of the potentialbuyer universe resulted in the highly successful divestiture of both our Aeronautics Services and Propulsion Systems business units.They conducted a competitive auction process in both cases, resulting in a strong valuation and advantageous transaction agreementterms.The senior level attention we received throughout the process proved invaluable.”
– MICHAEL J. MANCUSO, Senior Vice President & Chief Financial Officer
General Dynamics CorporationJefferies Quarterdeck advised General DynamicsCorporation, a leading supplier of sophisticateddefense systems, on the February 2005 divestmentof its Propulsion Systems unit to L-3 Communicationsand the January 2005 divestment of its AeronauticsServices unit to Wyle Laboratories, Inc.
PalmSource, Inc.Jefferies Broadview advised PalmSource, a leadingdeveloper of software for mobile devices and provider of Palm OS®, in its negotiations with Japanese softwarecompany ACCESS Co. Ltd., a global provider of mobilecontent delivery and Internet access software, completedNovember 2005.
“ Jefferies Broadview was able to effectivelycommunicate our unique value propositionand diverse capabilities to potential buyers with very different interests inan accelerated time frame.”
– MIKE KELLEY, Sr. VP, Engineering
“ They helped us evaluate and maximize acquisition proposals and come to a mutualagreement with ACCESS, a very innovativecompany with a broad set of device vendor andoperator relationships, at a very high premium—delivering great value to our shareholders.”
– JEANNE SEELEY, CFO
“ Jefferies Broadview provided guidance and support during a transitional time for our company.They brought in additional biddersand led a very dynamic and competitiveprocess.We could not have been happier with the outcome.”
– PATRICK MCVEIGH, Interim CEO
“ Randall & Dewey’s strong E&P industry expertise and execution capabilities, combined with an in-depth understanding of ourcompany’s opportunities, were key factors in completing this merger successfully.They made it possible for Spinnaker Explorationshareholders to realize substantial and immediate value at an attractive premium while giving Spinnaker employees the opportunity to join Hydro—a company offering complementary technical capabilities, a proven track record as a high-quality operator of assets, greater resources and a management eager to preserve Spinnaker’s entrepreneurial spirit.”
– ROBERT SNELL, CFO
Spinnaker ExplorationRandall & Dewey, a division ofJefferies, advised SpinnakerExploration, a leading independentHouston-based energy company, on its merger with Norsk Hydro,completed in December 2005.
Hornbeck Offshore Services, Inc.Jefferies served as joint book-running manager for the October 2005 $286 million follow-on public equity offering and $75 million tack-on senior notesoffering for Hornbeck Offshore Services, Inc., aleading provider of marine transportation services to the offshore oil and gas industry.
“ We chose Jefferies because of our access to their senior management,their creative approach to financing and their unique insight andunderstanding of the maritime oilfield service industry.They know our business in-depth, and we value them as a strategic financial partner in the on-going growth and success of our Company.”
– TODD M. HORNBECK, Chairman, President and CEO
“ Jefferies delivered flawless execution within a very tight time frameduring what was a fairly choppy market in the immediate aftermathof Hurricane Rita.They provided access to the capital we needed for the construction of new vessels that will significantly expand our fleet, and for the funding of future growth initiatives.”
– JAMES O. HARP, JR., Executive Vice President and CFO
“ We have had a long-standing relationship with Jefferies and are continually impressed by their client focus, superior execution anddetermination. In a very short time frame, Jefferies provided us a committed financing so that we could realize our long-term strategicgoal of acquiring Trump Indiana, our closest competitor. Jefferies put together an innovative deal structure which gave us absolute surety in execution and the best pricing possible. Jefferies was able to deliver what they promised and even exceeded our expectations.”
– DON H. BARDEN, Manager, Chairman, President and Chief Executive Officer
Majestic Star Casino, LLCJefferies served as sole manager on the December2005 three-tranche $303.5 million senior notes offeringfor Majestic Star Casino, LLC, a multi-jurisdictionalgaming company.
“ We use Jefferies as one of our primary brokers because of their ability to provide liquidity for small- and mid-cap stocks in virtually allmarket conditions with a focus on minimizing market impact.Their sales traders are extremely knowledgeable, experienced, responsive and accessible.They know us better than other brokers on The Street, how we like transactions done, and their execution is exceptional.When we need to get a trade executed, we use Jefferies.”
– CHERYL DEMAREE, Vice President of Trading
Sandler Capital ManagementFor more than 20 years, Jefferies has been servingSandler Capital Management, an investment manager ofhedge funds and private equity funds with a multi-sectorfocus and $1.3 billion in assets and commitments.
ICO Global CommunicationsJefferies served as lead manager of the August 2005$650 million convertible notes offering for ICO NorthAmerica, the wholly-owned subsidiary of ICO GlobalCommunications (Holdings), a leading satellite communications company.
“ We went in to the transaction hoping to raise 400 million dollars and, at the end of the day, we raised 650 milliondollars—fully funding our plan.Jefferies far exceeded our expectations.”
– CRAIG JORGENS, President
“ We were extremely impressed by Jefferies’industry expertise, targeted approach, and commitment.We received senior level attentionthroughout the transaction and they did whatthey said they would, every step of the way.”
– DONNA P. ALDERMAN, Vice Chairman
“ Jefferies helped raise the capital needed to develop ICO’s advanced hybrid satellite terrestrial MSS/ATC system and lay the foundation for next generation wireless communications.”
– J. TIMOTHY BRYAN, CEO
“ As a mid-sized hedge fund, we are always impressed by the level of attention and service we receive from Jefferies.They are amongthe best brokerage firms on the Street, providing outstanding execution and liquidity, particularly with illiquid or difficult to movestocks, and they have only improved over the years.Their research has also become a very valuable tool, giving us great analyticalcoverage of the small and mid-cap universe that is hard to find at other firms.”
– NED SADAKA, President
Para Advisors LLCJefferies has been assisting Para Advisors LLC, a hedge fund with more than $1 billion under management, achieve its trading objectives for fifteen years.
JEFFERIES GROUP, INC.
26.
Full-ServiceOur mission is to serve. Growing and mid-sized companies and their investors need
a full-service firm that they can rely on to deliver tailored, customized solutions
and assist them in achieving their objectives. We are that firm. We provide a full array
of investment banking, sales and trading, research and asset management services.
We have solid expertise in aerospace & defense, energy, financial & business services,
gaming & leisure, healthcare, industrials, maritime & oil service, media & communications,
retail & consumer, and technology. In 2005, we made significant personnel
additions across all our product and industry groups.
27.
GROWTH COMPANIES& INVESTORS
ENERGYTECHNOLOGY
INDUSTRIALS
MARITIME & OIL SERVICE
RETAIL & CONSUMER FINANCIAL &BUSINESS SERVICES
FINANCIALSPONSORS
GAMING &LEISURE
HEALTHCARE
MEDIA & COMMUNICATIONS
AEROSPACE & DEFENSE
INVESTMENT BANKING SALES & TRADING
ASSET MANAGEMENT RESEARCH
28.
Business Overview
Driving Growth Through Investment Banking
In 2005, our investment banking division worked with growing and mid-sized companies on more than
250 advisory and capital markets transactions, valued at more than $65 billion, in our focus industries across
the U.S., in Europe and in Asia. Record revenues, totaling $495 million, were achieved in large part due to
tremendous contributions from some of our recently-added partners, including Randall & Dewey (Energy)
and Jefferies Broadview (Technology).
Our product groups all performed exceptionally well during the year, and we made key additions to our
equity and debt capital markets teams. On the advisory side, we advised on more than 135 M&A and
restructuring transactions, valued at over $45.4 billion.We ranked as a Top 10 Middle Market M&A
Advisor(8), and among the top 3 middle market investment banks in providing advisory services(9). On the
capital markets side, we completed nearly 120 equity and equity-linked financings and leveraged finance
transactions, valued at approximately $21.6 billion.We ranked among the top 3 firms on Wall Street in the
performance of lead-managed equity underwritings(10) and have ranked as the top underwriter of U.S.
Single B new issues under $150 million for the past four years(11). In addition, our financial sponsors group, a
key element of our middle market strategy, completed nearly 75 transactions, valued at $5.5 billion.
On the industry side, virtually every sector was strong. During the year, we hired experienced banking
professionals to lead our dedicated media & communications and healthcare industry investment banking
groups, and made key additions to our energy, technology, and aerospace & defense groups.We completed
70 energy transactions (including maritime & oil service) valued at $17.4 billion, and ranked as the #2
energy M&A advisor (12).We completed nearly 90 technology transactions, valued at $12.5 billion, and we
ranked as the #1 technology M&A advisor (12).We completed over 30 aerospace & defense transactions,
valued at $6.7 billion, and ranked as the #1 defense M&A advisor(12). In addition, we completed nearly 40
industrial transactions, valued at $7.9 billion; 30 healthcare transactions, valued at $4.2 billion; 30 retail and
Trusted Jefferies bankers provide growing and mid-sized companies with advisory andunderwriting services through creative andidea-driven M&A, leveraged finance, equity and equity-linked financing and restructuringsolutions. We serve a range of industries in the U.S., Europe and Asia.
(8) Thomson Financial. Based on the number of U.S. transactions announced in 2005, under $500 million. Excludes: tender offers, exchange offers, self-tenders, repurchases, remaining interests, privatizations. Includes transactions where the value was undisclosed. (9) Bankruptcy Insider (The Deal). Based on bankruptcies withdebtor pre-petition liabilities between $100 million and $1.0 billion. Rankings include only traditional investment banks as of 1/5/06. (10) Equidesk. January 1, 2005 -December 31, 2005, Lead-managed IPOs & FOs, U.S. issuer, excludes best efforts & closed end funds, for leads with 10 or more deals. (11) Thomson Financial. 2001-2005.Excludes split rated, mortgage and asset-backed securities. Full credit to lead manager, equal if joint. (12) Thomson Financial. Includes all industry related transactionsas classified by Thomson Financial announced in 2005. Excludes tender offers, exchange offers, self-tenders, repurchases, remaining interests and privatizations.Includes transactions where the value was undisclosed. Defense transactions based in North America or Western Europe, all values. Technology transactions based in North America or Western Europe, $0-500 million OR based in the US, $0-1000 million. Energy transactions based in the U.S., all values.
2005 ANNUAL REPORT
29.
Investment Banking Revenues by Industry Investment Banking Transaction Value($ in billions, approximations)
$67.0*
$56.7
$29.2$28.1
$16.5
20%
11%
24%
55%
21%
2000$91 million
Investment Banking
2005$495 million
M&A/Advisory/Restructuring Equity/Equity-Linked Leveraged Finance
69%
Investment Banking Revenues by Product
Technology 15%
Other 6%
Financial/Business Services 6%
Gaming/Leisure 4%Healthcare 3%
Energy 25%
Industrials 15%
Aerospace & Defense 8%
Media/Communications 6%Consumer/Retail 12%
01 02 03 04 05
* includes pending transactions
30. consumer transactions, valued at $3 billion; 15 financial & business services transactions, valued at $2.8 billion;
16 media & communications transactions, valued at $1.9 billion; and eight gaming & leisure transactions,
valued at $3 billion.
Our international presence in investment banking is growing, with the additions of Helix Associates and a
UK broking team, our Bank Leumi alliance and enhanced technology and energy teams.The completion
of eight sole-managed Indian and European convertible offerings, and more than $10 billion in cross-border
M&A transactions further established our reputation in the international markets.We now have 40 investment
banking professionals in London, serving the UK and European Markets.We are committed to building upon
our success in Europe and Asia, and are focused on bringing our full array of capabilities to these markets.
Since year-end, we appointed an experienced industry veteran to oversee and lead our thriving Mergers &
Acquisitions business and, in the UK, we were granted Nominated Adviser (NOMAD) status on the
London Stock Exchange’s Alternative Investment Market (AIM).
Adding Value In Sales & Trading
Sales and trading performed very well in 2005, with strong contributions from equities, high yield,
convertible and commodity-linked products, as well as correspondent clearing and securities lending.
We maintained our position as a leading provider of liquidity for the securities of small-cap, mid-cap and
growing companies—the core focus of our sales, trading and research efforts.
Our equities division traded over 19 billion shares (excluding Bulletin Boards), despite decreased industry-
wide block trading.We increased our market making capabilities 20 percent, now making markets in 5,000
securities.We ranked as the #3 trader of combined NASDAQ and Bulletin Board stocks(13) and #1 for best
execution of all exchange-listed stock trades(14).
We welcomed an industry veteran to head our Private Client Services group, focused on corporate clients
and their senior executives, private equity firms, middle market institutions and high net worth individuals.
We completed a number of significant distributions and block trades for our venture capital and private
Jefferies’ industry specialists offer deep expertisein aerospace & defense, energy, financial & businessservices, gaming & leisure, healthcare, industrials,maritime & oil service, media & communications,retail & consumer, and technology.
(13) AutEx®, BLOCKDATA, 1/31/05-12/31/05. Ranking among investment banks, based on NASDAQ, NNM, SCM and advertised OTCBB combined share volume.(14) Pensions & Investments, “Tradewatch”, Plexus Universe, period ending 12/31/05.
2005 ANNUAL REPORT
31.equity clients during the year, as well as implementing directed share programs.We assisted many of the
Firm’s corporate clients in managing their assets and partnered with several leading firms for the distribution
of structured products and alternative investments.
On the execution side, Jefferies Execution Services accounted for nearly 9 percent of the average daily
volume on the NYSE during the year, and is represented on virtually all of the committees involved in
the building and implementation of the NYSE/Archipelago Hybrid Market we believe will create new
opportunities in equities, as well as other asset classes. On the international front, our international equity
commission business registered an increase of over 40 percent and we hired experienced UK equity sales and
research sales teams.
Our U.S. and international high yield trading desks traded a combined $24 billion in securities (face value),
and provided tremendous support for our leveraged finance activities. Our international and domestic
convertible desks traded nearly $17 billion in securities (face value), and were heavily involved in our
equity-linked financings.We expanded our investment grade fixed income capabilities with the additions
of mortgage-backed trading, U.S. government agency trading and emerging markets teams.This desk now
trades 2,300 investment grade fixed income issues, including corporate, agency and U.S. treasury bonds.
In June 2005, Jefferies Financial Products, in conjunction with Reuters America LLC, announced a major
revision to the CRB index, now renamed the Reuters/Jefferies CRB Index. Since 1957, the CRB index
has been the most widely followed global benchmark for commodities as an asset class.We had significant
additional customer interest in our commodity index products and serve a growing roster of blue-chip
institutional clients seeking exposure to commodities as an asset class.We welcomed a senior commodity
derivatives professional to spearhead the growth of our commodity index derivatives business.
Since year-end, we added experienced professionals to lead our established prime brokerage effort and a
new quantitative strategies team, complementing our electronic and portfolio trading capabilities.We also
appointed co-heads of equity products to help expand the Firm’s leading institutional trading platform.
Jefferies’ knowledge-driven sales and tradingforce provides investors outstanding liquidity inthe global markets, trading equity, convertible,high yield, investment grade fixed income andcommodity-linked financial products. We alsooffer top-tier private client, correspondentclearing, prime brokerage, securities lendingand NYSE floor brokerage services.
32.
Equity Market Making(no. of stocks, approximations)
5,000
4,000
3,000
2,0001,500
01 02 03 04 05 01 02 03 04 05
Companies Under Research Coverage
1,112
959873826
731
Sales, Trading & Research
Equities Fixed Income
Sales & Trading Revenues by Product (15)
(15) Includes commission and principal transaction revenues.
Equities 64%
High Yield 10%
Bonds Direct 5%
Jefferies Financial Products 7%
Other 1%
Equities 81%
Execution/Other 7%
Convertibles 6%Execution/Other 2%
Convertibles 11%
High Yield 6%
2005$617 million
2000$485 million
2005 ANNUAL REPORT
33.Forward Thinking In Research
In 2005, the scope and reputation of our research product continued to make great strides. Jefferies ranked
as the #2 provider of equity research on Wall Street in WSJ’s “Best on the Street 2005 Analysts Survey”
(May, 2005). Forbes and StarMine ranked Jefferies’ equity research effort among the Top 10 in their “North
America’s Top Research Analysts Survey” (May, 2005). In addition, equity analysts were represented in
Institutional Investor’s research survey,“Home Run Hitters” (April, 2005) and ranked #1 in Oil & Gas
Drilling research in Bloomberg Markets’ survey,“Oil Prophets” (October, 2005).
We enhanced energy, technology, gaming, life sciences, industrials, and telecom research coverage,
incorporating semiconductor devices, medical devices and diagnostics, U.S. and UK oil and gas exploration
and production, dry bulk shipping, emerging telecom, wireless and data services, specialty chemicals,
alternative energy (clean technology), and UK hotel and gaming. Over 100 equity research professionals
now cover more than 700 U.S. and European companies. Nearly 60 percent of companies under coverage
have a market capitalization of less than $2 billion.
Outside of Equities, we earned the #2 spot in Metals and Mining in Institutional Investor’s “2005
All-America Fixed Income Research Team” (September, 2005).We added high yield coverage of E&P, oil
service, and refining, and maintained coverage of more than 300 companies. Coverage of the convertible
universe increased to nearly 100 companies.We added high grade and corporate credit research to
complement our investment grade fixed income trading capabilities, and enhanced our quantitative
research for our portfolio trading offering.
Jefferies hosted our 1st annual Internet, 2nd annual Shipping, and 3rd annual Communications & Media
conferences. Other conference topics included Automotive, Offshore Technology, Specialty and Post-Acute
Healthcare Services. In addition, we introduced a weekly conference call series covering timely topics.
Jefferies award-winning research team providesunique investment ideas in equity, high yield,convertible and investment grade fixed incomesecurities around the globe—focusing on small-,mid-cap and growth companies.
JEFFERIES GROUP, INC.
34. Since year-end, we launched equity research coverage of the restaurant industry.We also hosted our
2nd annual Internet and 1st Wireless Broadband conferences, as well as a Q1 ‘06 High Yield Sector
Outlook roadshow.We are looking forward to upcoming conferences focused on Gaming/Lodging/
Media/Entertainment, Industrials,Alternative Energy & Cleantech, and Life Sciences.
Achieving Balance Through Asset Management
Our growing asset management effort, still in its early years, has quickly established itself as a solid
contributor.We are confident that it will present us with many rewarding opportunities as it evolves.
Revenues from our asset management activities have increased nearly 70 percent in the past 5 years. In 2005,
assets under our management increased 27 percent to $3.3 billion, comprised of fixed income securities,
equities, convertible securities and real assets. Including third party managed funds, assets under management
increased from $3.77 billion to $4.26 billion.Alignment of interests is important to us, and, across these
asset classes, alongside our clients, we’ve had an average investment of $224 million during the year.
During the year, we welcomed a Chief Investment Officer to drive the activities of Jefferies Asset
Management, LLC.We manage two new CLOs, with over $600 million in assets, and made inroads toward
the addition of new products and managers to the platform.
We have a solid and scalable infrastructure for growing our asset management business. Our goal is to
expand into new asset classes and strategies, recruit talented managers, and achieve consistent returns in all
market conditions.We are seeking to grow our asset management business with a view to providing more
balance to our overall Firm results, as well as to leverage our relationships and opportunities.
Since year-end, Jefferies Asset Management, LLC became a registered adviser and we welcomed an
additional portfolio management team.
Strategic fund and portfolio managers seek to manage risk effectively and to consistentlydeliver favorable returns in all market conditions.Products managed by Jefferies include equities,fixed income securities, convertible securities and real assets.
35.
Equity Research Companies UnderCoverage by Industry
Equity Research Companies UnderCoverage by Market Cap
Asset Management
Industrials 9%Aerospace/Defense 3%
Healthcare 18%
Consumer/Retail 4%
Energy 22%
Services 11%
Gaming/Lodging 4%
Media/Telecom 8%
Technology 21%
$2.0 – $5B 17.4%
$0 – $2B 58.4%
Over $5B 24.2%
Equity Research
2001$1,531 million(16)
2005$4,260 million(16)
Assets Under Management(by predominant asset strategy)
Equities/FixedIncome(17) 7%
Real Assets 3%
Equities 12%
Private Equity(17) 29%
Private Equity(17) 15%
Fixed Income 24%
Convertibles 44%
Fixed Income 27%
Convertibles 39%
(16) Includes the Company’s managed or co-managed assets as well as third party managed funds. Jefferies’ managed and co-managed assets totaled $1,078 million in 2001 and$3,344 million in 2005. (17) Third party managed funds (funds in which the Company has an interest in the entities that manage these assets or otherwise receives a portion of themanagement or incentive fees).
JEFFERIES GROUP, INC.
36.
2,045 Employee-PartnersOur people are our most important asset. Intellectual capital is vital. We attract and retain
some of the brightest minds on Wall Street and foster a one-firm, creative-thinking approach.
Our absolute goal is to provide our clients with the best advice, the best ideas and the best
opportunities, across all our products and services. We seek to advise them, to identify and
overcome any obstacles, and help them reach their objectives effectively. We are a firm of
shareholders, vested deeply in the success of our Firm and the success of our clients.
This alignment makes us highly effective and unique.
JEFFERIES GROUP, INC.
38.
Global OpportunityThe markets and our clients know no geographic boundaries. Jefferies serves
thousands of institutions and hundreds of growing and mid-sized companies around
the world. We pair a client-first approach with a regionally-focused sensibility, and have
offices across the U.S., in Canada, the UK, Switzerland, France and Japan. 2005
marked twenty years of Jefferies’ presence outside of the U.S., and we made
significant inroads to serving companies based in Israel, India and China and their
global-minded investors. We are committed to serving the needs of a
growing client base wherever they do business.
2005 ANNUAL REPORT
39.
United States
New YorkSan FranciscoSilicon Valley Los AngelesDenverStamfordAtlantaChicagoBoston
Jersey CityChapel HillNashvilleDallasAustinHoustonRichmondWashington DC
International
LondonCalgaryParisTokyoZurich
Six Years of Record Results
The financial information presented in this Annual Report should be read in conjunction with our complete Consolidated Financial Statements (including the notes) contained in our Form 10-K for the year ended December 31, 2005. Our Form 10-K for the year ended December 31, 2005 was filed with the SEC on March 1, 2006and is also available on our website at www.jefferies.com.
2005 ANNUAL REPORT
41.
Year ended December 31,
(in thousands, except per share amounts) 2005 2004 2003
REVENUES:Commissions $ 246,943 $ 258,838 $ 250,191
Principal transactions 349,489 358,213 301,299
Investment banking 495,014 352,804 229,608
Asset management fees and investment income from managed funds 82,052 81,184 32,769
Interest 304,053 134,450 102,403
Other 20,322 13,150 10,446
Total revenues 1,497,873 1,198,639 926,716
Interest expense 293,173 140,394 97,102
Revenues, net of interest expense 1,204,700 1,058,245 829,614
NON-INTEREST EXPENSES:Compensation and benefits 669,957 595,887 474,709
Floor brokerage and clearing fees 46,644 52,922 48,217
Technology and communications 67,666 64,555 58,581
Occupancy and equipment rental 47,040 39,553 32,534
Business development 42,512 35,006 26,481
Other 62,474 43,333 44,559
Total non-interest expenses 936,293 831,256 685,081
Earnings before income taxes and minority interest 268,407 226,989 144,533
Income taxes 104,089 83,955 52,851
Earnings before minority interest 164,318 143,034 91,682
Minority interest 6,875 11,668 7,631
Net earnings $ 157,443 $ 131,366 $ 84,051
EARNINGS PER SHARE OF COMMON STOCK:Basic $ 2.55 $ 2.29 $ 1.58
Diluted $ 2.32 $ 2.06 $ 1.42
WEIGHTED AVERAGE SHARES OF COMMON STOCK:Basic 61,823 57,453 53,090
Diluted 67,784 63,908 59,266
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
JEFFERIES GROUP, INC.
42.
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
December 31,
(in thousands) 2005 2004
ASSETS
Cash and cash equivalents $ 255,933 $ 284,111
Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations 629,360 553,720
Short term bond funds 7,037 6,861
Investments 107,684 97,586
Investments in managed funds 278,116 195,982
Securities borrowed 8,143,478 10,232,950
Receivable from brokers, dealers and clearing organizations 389,994 312,973
Receivable from customers 457,839 371,842
Securities owned 1,612,782 649,299
Securities pledged to creditors 178,686 597,434
Premises and equipment 69,821 57,749
Goodwill 220,607 134,936
Other assets 429,594 329,185
$ 12,780,931 $ 13,824,628
LIABILITIES AND STOCKHOLDERS’ EQUITY
Bank loans $ – $ 70,000
Securities loaned 7,729,544 9,330,980
Payable to brokers, dealers and clearing organizations 303,480 376,735
Payable to customers 813,896 702,200
Securities sold, not yet purchased 1,260,565 1,120,173
Accrued expenses and other liabilities 570,229 361,254
10,677,714 11,961,342
Long-term debt 779,873 789,067
Minority interest 36,494 35,086
11,494,081 12,785,495
STOCKHOLDERS’ EQUITY:Preferred stock – –
Common stock 7 7
Additional paid-in capital 709,447 508,221
Retained earnings 803,262 677,464
Less:Treasury stock (220,703) (149,039)
Currency translation adjustments 962 9,348
Additional minimum pension liability (6,125) (6,868)
Net stockholders’ equity 1,286,850 1,039,133
$ 12,780,931 $ 13,824,628
42.
2005 ANNUAL REPORT
43.
Year ended December 31,
(in thousands) 2005 2004 2003
Cash flows from operating activities:Net earnings $ 157,443 $ 131,366 $ 84,051
Adjustments to reconcile net earnings to net cash provided by (used in)operating activities:Depreciation and amortization 15,556 14,544 15,519
Accruals related to various benefit plans, stock issuances,net of forfeitures 118,276 117,720 73,989
Deferred income taxes (23,475) (31,532) (17,570)
(Increase) decrease in cash and securities segregated (75,640) (371,079) 106,395
(Increase) decrease in receivables:Securities borrowed 2,089,418 (1,864,593) (3,249,005)
Brokers, dealers and clearing organizations (92,263) (20,370) (187,936)
Customers (105,113) (88,251) (73,803)
(Increase) decrease in securities owned (964,112) (298,150) 101,226
Decrease (increase) in securities pledged to creditors 418,748 (39,707) (501,379)
Increase in other assets (71,318) (68,114) (68,173)
Increase (decrease) in payables:Securities loaned (1,601,436) 1,244,397 3,381,255
Brokers, dealers and clearing organizations (58,856) 263,386 (89)
Customers 127,959 211,503 9,351
Increase in securities sold, not yet purchased 140,392 446,951 433,345
Increase in accrued expenses and other liabilities 213,102 89,710 90,964
Increase (decrease) in minority interest 1,408 (14,834) 23,538
Net cash used in (provided by) operating activities 290,089 (277,053) 221,678
Cash flows from investing activities:(Increase) decrease in short term bond funds (176) 208,929 (23,130)
(Increase) decrease in investments (9,277) (11,623) 3,835
Increase in investments in managed funds (82,134) (68,796) (75,003)
Purchase of premises and equipment (27,186) (17,012) (15,850)
Acquisitions (53,030) (8,894) (26,879)
Net cash flows (used in) provided by investing activities (171,803) 102,604 (137,027)
Cash flows from financing activities:Net proceeds from (payments on) bank loans (70,000) 70,000 (12,000)
Issuance of long term debt – 347,809 –
Retirement of long term debt – (300) (1,000)
Payments on:Repurchase of treasury stock (76,291) (59,492) (6,563)
Dividends paid (31,645) (21,534) (11,807)
Proceeds from exercise of stock options 33,661 10,184 5,913
Common shares – – 5,027
Net cash (used in) provided by financing activities (144,275) 346,667 (20,430)
Effect of currency translation on cash (2,189) 4,017 3,707
Net (decrease) increase in cash and cash equivalents (28,178) 176,235 67,928
Cash and cash equivalents at beginning of year 284,111 107,876 39,948
Cash and cash equivalents at end of year $ 255,933 $ 284,111 $ 107,876
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
JEFFERIES GROUP, INC.
44.
Year ended December 31,
(in thousands, except share data) 2005 2004 2003
Supplemental disclosures of cash flow information:Cash paid during the year for:
Interest $ 283,318 $ 121,444 $ 93,592
Income taxes 87,013 91,954 55,436
Randall & Dewey acquisition:Fair value of assets acquired, including goodwill $ 53,503
Liabilities assumed (8,769)
Stock issued (456,442 shares) (17,500)
Cash paid for acquisition 27,234
Cash acquired in acquisition 1,435
Net cash paid for acquisition $ 25,799
Helix acquisition:Fair value of assets acquired, including goodwill $ 41,615
Liabilities assumed (5,085)
Stock issued (315,597 shares) (9,498)
Cash paid for acquisition 27,032
Cash acquired in acquisition –
Net cash paid for acquisition $ 27,032
Bonds Direct acquisition:Fair value of assets acquired, including goodwill $ 20,643
Liabilities assumed (863)
Stock issued (311,842 shares) (10,886)
Cash paid for acquisition 8,894
Cash acquired in acquisition 11
Net cash paid for acquisition $ 8,883
Broadview acquisition:Fair value of assets acquired, including goodwill $ 58,904
Liabilities assumed (22,495)
Stock issued (557,711 shares) (15,833)
Cash paid for acquisition 20,576
Cash acquired in acquisition 7,090
Net cash paid for acquisition $ 13,486
Supplemental disclosure of non-cash financing activities:
In 2003, the additional minimum pension liability included in stockholders’ equity of $7,464 resulted from an increase of $1,695 to accrued expenses and other liabilities and an offsetting decrease in stockholders’ equity. In 2004, the additional minimum pension liability included in stockholders’ equity of $6,868 resulted from a decrease of $596 to accrued expenses and other liabilities and an offsetting increase in stockholders’ equity. In 2005, the additional minimum pension liability included in stockholders’ equity of $6,125resulted from a decrease of $743 to accrued expenses and other liabilities and an offsetting increase in stockholders’ equity.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS continued
2005 ANNUAL REPORT
45.
SELECTED QUARTERLY DATA (UNAUDITED)
(in thousands, except per share and percentage data) March June September December Year
2005EARNINGS STATEMENT DATA
Revenues $ 343,893 $ 344,163 $ 378,084 $ 431,733 $ 1,497,873
Interest expense 57,883 67,605 78,804 88,881 293,173
Revenues, net of interest expense 286,010 276,558 299,280 342,852 1,204,700
Non-interest expenses 223,837 216,248 231,743 264,465 936,293
Earnings before income taxes and minority interest 62,173 60,310 67,537 78,387 268,407
Income taxes 23,445 23,621 26,143 30,880 104,089
Minority interest 2,056 1,252 2,799 768 6,875
Net earnings $ 36,672 $ 35,437 $ 38,595 $ 46,739 $ 157,443
Earnings per share of Common Stock:Basic $ 0.61 $ 0.58 $ 0.62 $ 0.74 $ 2.55
Diluted $ 0.56 $ 0.53 $ 0.57 $ 0.68 $ 2.32
Weighted average shares of Common Stock:Basic 60,570 61,468 62,224 62,985 61,823
Diluted 65,997 67,422 68,112 68,979 67,784
OTHER SELECTED DATA
Total assets $ 13,570,684 $ 12,729,233 $ 13,601,570 $ 12,780,931 $ 12,780,931
Long term debt $ 780,988 $ 788,765 $ 781,443 $ 779,873 $ 779,873
Total stockholders’ equity $ 1,121,386 $ 1,170,872 $ 1,201,860 $ 1,286,850 $ 1,286,850
Book value per share of Common Stock $ 19.30 $ 20.27 $ 20.69 $ 22.14 $ 22.14
Common stock shares outstanding 58,090 57,759 58,083 58,110 58,110
Annualized return on equity 13.7% 13.1% 13.1% 15.3% 13.7%
2004EARNINGS STATEMENT DATA
Revenues $ 303,094 $ 277,170 $ 293,102 $ 325,273 $ 1,198,639
Interest expense 24,587 29,303 39,316 47,188 140,394
Revenues, net of interest expense 278,507 247,867 253,786 278,085 1,058,245
Non-interest expenses 217,288 193,191 198,836 221,941 831,256
Earnings before income taxes and minority interest 61,219 54,676 54,950 56,144 226,989
Income taxes 21,257 21,207 21,516 19,975 83,955
Minority interest 8,053 1,683 1,159 773 11,668
Net earnings $ 31,909 $ 31,786 $ 32,275 $ 35,396 $ 131,366
Earnings per share of Common Stock:Basic $ 0.57 $ 0.55 $ 0.56 $ 0.61 $ 2.29
Diluted $ 0.51 $ 0.50 $ 0.51 $ 0.55 $ 2.06
Weighted average shares of Common Stock:Basic 56,298 57,559 57,833 58,112 57,453
Diluted 63,078 63,927 63,867 64,744 63,908
OTHER SELECTED DATA
Total assets $ 11,045,626 $ 13,058,203 $ 14,084,052 $ 13,824,628 $ 13,824,628
Long term debt $ 795,399 $ 783,421 $ 788,905 $ 789,067 $ 789,067
Total stockholders’ equity $ 903,149 $ 949,649 $ 968,150 $ 1,039,133 $ 1,039,133
Book value per share of Common Stock $ 15.90 $ 16.60 $ 17.02 $ 18.14 $ 18.14
Common stock shares outstanding 56,808 57,202 56,872 57,289 57,289
Annualized return on equity 14.6% 13.7% 13.6% 14.1% 14.0%
2005 ANNUAL REPORT
JEFFERIES GROUP, INC.
46.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Jefferies Group, Inc.:
We have audited, in accordance with the standards of the Public Company Accounting Oversight Board
(United States), the consolidated statements of financial condition of Jefferies Group, Inc. and subsidiaries
as of December 31, 2005 and 2004, and the related consolidated statements of earnings, changes in
stockholders’ equity and comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2005 (not presented herein); and in our report dated February 28, 2006, we
expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying condensed consolidated financial statements
on pages 41-44 is fairly stated, in all material respects, in relation to the consolidated financial statements
from which it has been derived.
New York, New York
February 28, 2006
2005 ANNUAL REPORT
47.
(1) Member of Audit Committee(2) Member of Compensation Committee(3) Member of Corporate Governance and Nominating Committee
JEFFERIES GROUP, INC. BOARD OF DIRECTORS &
JEFFERIES & COMPANY, INC. EXECUTIVE COMMITTEE
Richard B. Handler (44) (BOD)(EC)15 years with Jefferies Chairman of the Board,Chief Executive Officer (JG)(JC)
Brian P. Friedman (50) (BOD)(EC)Board member since July 2005 5 years with JefferiesChairman of the Executive Committee (JC)
W. Patrick Campbell (60)(BOD) (1) (2) (3)
6 years on BoardIndependent Consultant
Richard G. Dooley (76) (BOD) (1) (2) (3)
12 years on BoardRetired Chief Investment Officer,Massachusetts Mutual LifeInsurance Company
Frank J. Macchiarola (64) (BOD) (1) (2) (3)
14 years on BoardPresident, St. Francis College
Jonathan R. Cunningham (43)(EC)19 years with JefferiesExecutive Vice PresidentHead of Convertible Securities (JC)
Lloyd H. Feller (63) (EC)3 years with JefferiesGeneral Counsel, SecretaryExecutive Vice President (JG)(JC)
Scott W. Jones (49) (EC)24 years with JefferiesExecutive Vice PresidentHead of Equities (JC)
Chris M. Kanoff (49)(EC)14 years with JefferiesExecutive Vice PresidentCo-Head Investment Banking (JC)
Joseph A. Schenk (47) (EC)12 years with JefferiesChief Financial Officer (JG)Executive Vice President (JC)
Clifford A. Siegel (48) (EC)15 years with JefferiesChief Executive Officer (JIL)Executive Vice President (JC)
Andrew R. Whittaker (44) (EC)15 years with JefferiesVice ChairmanCo-Head Investment Banking (JC)
(BOD)– Board of Directors(EC) – Executive Committee(JG) – Jefferies Group, Inc.(JC) – Jefferies & Company, Inc. (JIL) – Jefferies International Limited
Not Pictured:Robert E. Joyal (BOD)Board member since January 2006Retired President of Babson Capital Management LLC
JEFFERIES GROUP, INC.
48.
CORPORATE DIRECTORY
Primary offices of Jefferies Group, Inc. and Subsidiaries:
UNITED STATES
New York Area
520 Madison Avenue(Corporate Headquarters)New York, NY 10022(212) 284 2300
30 Broad StreetNew York, NY 10004(212) 425 7460
One Station PlaceStamford, CT 06902(203) 708 5800
51 JFK Parkway Short Hills, NJ 07078 (973) 912 2900
Harborside Financial Center34 Exchange Place(Operations Office)Jersey City, NJ 07311(201) 200 1222
Atlanta
3414 Peachtree Road, NEAtlanta, GA 30326(404) 264 5000
Boston
One Post Office SquareBoston, MA 02109(617) 342 7800
1050 Winter Street Waltham, MA 02451(781) 522 8400
Chicago
55 West Monroe StreetChicago, IL 60603(312) 750 4700
Dallas
13355 Noel RoadDallas,TX 75240(972) 701 3000
Houston
909 Fannin StreetHouston,TX 77010(713) 658 1100
333 Clay StreetHouston,TX 77002(281) 774 2000
Los Angeles
11100 Santa Monica BoulevardLos Angeles, CA 90025(310) 445 1199
Nashville
2525 West End AvenueNashville,TN 37203(615) 963 8300
San Francisco
650 California StreetSan Francisco, CA 94108(415) 229 1400
Silicon Valley
950 Tower LaneFoster City, CA 94404(650) 573 4800
Washington, DC
1399 New York Avenue, NWWashington, DC 20005(202) 639 3980
2005 ANNUAL REPORT
49.
INTERNATIONAL
United Kingdom
Bracken HouseOne Friday StreetLondon EC4M 9JAUnited Kingdom+44 20 7618 3500
St. James’s House23 King StreetLondon SW1Y 6QYUnited Kingdom+44 20 7968 8000
Japan
Hibiya Marine Building1-5-1,Yuraku-choChiyoda-ku,Tokyo 100-0006Japan+81 3 5251 6100
Switzerland
Uraniastrasse 128023 ZurichSwitzerland+411 227 1600
France
8 rue Halevy75009 ParisFrance+331 5343 6700
Canada
Stock Exchange Tower300 5th Avenue SWCalgary,Alberta T2P 3C4(403) 444 0973
Corporate Counsel
Morgan, Lewis & Bockius LLP
Transfer Agent, Registrar
American Stock Transfer & Trust Company
Independent Registered Public Accounting Firm
KPMG LLP
Form 10-K
Additional supporting detail to thefinancial statements is provided annually to the Securities andExchange Commission on Form 10-K.Copies may be obtained withoutcharge, upon request.
Common Stock
Jefferies Group, Inc.’s Common Stockis listed on the New York StockExchange under the symbol JEF.
Shareholder Inquiries
(203) 708 5975
Internet Address
http://www.jefferies.com
Member SIPC
Forward-Looking StatementsThis annual report contains statements that may constitute “forward-looking statements” within the meaning of the safe harbor provisions of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934.These forward-looking statementsmay contain expectations regarding revenues, earnings, operations and other financial projections, and may include statements of future performance,positioning, plans and objectives. These forward-looking statements usually include the words “become,” “continue,” “intend,” “may,” “plan,” “will”and other similar expressions.These forward-looking statements represent only our belief regarding future events, many of which, by their nature, areinherently uncertain and outside of our control. Actual results could differ materially from those projected in these forward-looking statements.Please refer to our most recent Annual Report on Form 10-K filed with the Securities and Exchange Commission and other filings we make with the Securities and Exchange Commission for a discussion of important factors that could cause actual results to differ materially from those projected in these forward-looking statements.We do not assume any obligation to update any forward-looking statement we make.
50.
PRODUCTS AND SERVICES
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INVESTMENT BANKING
Equity & Equity-Linked IPOsFollow-on OfferingsDirect PlacementsPIPEsPrivate EquityConvertible Securities
Leveraged Finance High Yield Capital MarketsLeveraged Bank Loan Arrangement Asset-Based Bank Loan ArrangementPrivate Debt Placements Structured FinanceCollateralized Bond Obligations Senior LoansRevolving Credit Facilities*Term Lending*
First & Second Lien Financing*
Bridge Financing*
Mergers & Acquisitions Exclusive Sale & Divestiture Acquisitions Merger Advisory Tender OffersJoint Ventures/Strategic Alliance Takeover DefenseFairness Opinion
Restructuring & Recapitalization Exchange Offers Consent SolicitationsDistressed Capital Raising RecapitalizationRestructuring AdviceDistressed M&A
SALES & TRADING
EquityU.S. SalesInternational SalesResearch SalesPortfolio Trading/QESCapital Markets/OriginationListed Block TradingNASDAQ Market MakingBulletin Board TradingDirect Market AccessElectronic TradingRisk Arbitrage Trading NYSE Floor Brokerage
Equity ProductsPrime BrokerageSecurities LendingCorrespondent ClearingOptionsDerivativesETFs
ConvertiblesTraditional and Mandatory Convertible StructuresCapital Markets/Origination U.S./International Proprietary TradingClosed-end funds
High YieldSales/Trading of High Yield BondsDistressed and Special SituationsBank Debt Trading
Bonds Direct Corporate Bonds Government Agency BondsTreasury Notes and BondsMortgage-backed SecuritiesMunicipal BondsStructured Products
Jefferies Financial ProductsCommodities Indices Commodities-Linked Financial Products
Private Client ServicesWealth Management Restricted Stock Sales Corporate Services Venture ServicesMiddle Market Equity SalesCorporate Cash Management
RESEARCH
U.S. & International Equity Distressed SecuritiesSpecial Situations Post-reorganization Equity U.S. & International High YieldU.S. & International ConvertibleIndustry ConferencesCompany Management MeetingsSite ToursProprietary Channel Checks
ASSET MANAGEMENT
High YieldDistressedSpecial SituationsLong/Short EquityLong/Short Commodities Collateralized Debt Obligations Long/Short Convertible Bonds Convertible Securities Arbitrage Long-Only Strategies
INDUSTRIES/AREAS OF FOCUS
Aerospace & DefenseEnergyFinancial & Business ServicesGamingHealthcareIndustrialMaritime & Oil ServiceMedia & CommunicationsRetail & ConsumerTechnologyFinancial Sponsors
*Services offered as of February 2006
Jefferies Group, Inc.520 Madison Avenue New York, NY 10022
www.jefferies.com
DRIVEN EQUITY & EQUITY-LINKED FINANCING AEROSPACE & DEFENSE UNITED STATES RELATIONSHIPS LEVERAGED & STRUCTURED FINANCE ENERGY GREAT BRITAIN FOCUSED ON GROWTH FINANCIAL &
BUSINESS SERVICES FRANCE WASHINGTON DC INDUSTRIALS SWITZERLAND COMMODITY-LINKED GAMING JAPAN INVESTMENT BANK PRIVATE CLIENT SERVICES HEALTHCARE SECURITIES FIRM
RECAPITALIZATION & RESTRUCTURING CORRESPONDENT CLEARING MARITIME & OIL SERVICE MERGERS & ACQUISITIONS ADVISORY SECURITIES LENDING RETAIL & CONSUMER CANADA EQUITIES FINANCIAL
SPONSORS PRIME BROKERAGE MEDIA & COMMUNICATIONS ATLANTA PARIS INVESTMENT GRADE FIXED INCOME DENVER GLOBAL CREATIVE STRUCTURING FIXED INCOME ENTREPRENEURIAL SPIRIT
NYSE FLOOR BROKERAGE TECHNOLOGY BOSTON SERVING HIGH NET WORTH INDIVIDUALS SERVING GROWING & MID-SIZED COMPANIES CHICAGO COMMITMENT GLOBAL HIGH YIELD BONDS GLOBAL CON-
VERTIBLE BONDS DALLAS INTERNATIONAL CONVERTIBLE BONDS PROPRIETARY INDICES AWARD WINNING RESEARCH & ANALYSIS INVESTMENT BANKING & INSTITUTIONAL SECURITIES FIRM PRIVATE EQUITY
SILICON VALLEY LONDON SECURITIES ORIGINATION BLOCK TRADES LOS ANGELES ASSET-BASED BANK LOANS ZURICH BEST EXECUTION PRIVATE DEBT PLACEMENTS EXPERIENCED STRUCTURED
FINANCE MOTIVATED COLLATERALIZED BOND OBLIGATIONS BEST EXECUTION TENACIOUS SENIOR LOANS INDUSTRY EXPERTISE IPOs NEW YORK TRUSTED PARTNER BROAD PRODUCT CAPABILITIES
FOLLOW-ON OFFERINGS DIRECT PLACEMENTS SENIOR LEVEL ATTENTION CONSENT SOLICITATIONS GLOBAL NETWORK SERVING GROWING & MID-SIZED COMPANIES DRIVEN SERVING INSTITUTIONAL
INVESTORS BANK LOANS DIVERSIFIED JOINT VENTURES/STRATEGIC ALLIANCE NASDAQ MARKET MAKING LIQUIDITY PROVIDER One Firm FULL-SERVICE FOCUSED ON GROWTH
HANDS-ON MERGER ADVISORY SECTOR FOCUS TENDER OFFERS GROWTH-ORIENTED SINCE 1962 2,045 EMPLOYEE-PARTNERS Annual Report 2005 IDEA-DRIVEN SOLUTIONS EXCLUSIVE SALE &
DIVESTITURE TAKEOVER DEFENSE FIRST & SECOND LIEN FINANCING BRIDGE FINANCING SECURITIES RESEARCH SPECIAL SITUATIONS MIDDLE MARKET INVESTMENT BANK OF THE YEAR GROWING & MID-SIZED
COMPANIES DRIVEN AEROSPACE & DEFENSE UNITED STATES RELATIONSHIPS ENERGY GREAT BRITAIN ACQUISITIONS FINANCIAL & BUSINESS SERVICES RESPECTED UNDERWRITER CREATIVE FULL-
SERVICE INDUSTRIALS SWITZERLAND GLOBAL NETWORK GAMING RESTRUCTURING ADVICE FAIRNESS OPINIONS EXCHANGE OFFERS TRUSTED ADVISOR DEDICATED DISTRESSED CAPITAL RAISING
RECAPITALIZATION LOYAL CLIENT BASE DISTRESSED M&A RESEARCH SALES PORTFOLIO TRADING QUANTITATIVE EXECUTION STRATEGIES CAPITAL MARKETS ORIGINATION PRIVATE CLIENT SERVICES CORPO-
RATE SERVICES OPTIONS DERIVATIVES LISTED BLOCK TRADING INTERNATIONAL EQUITY SALES BULLETIN BOARD TRADING DIRECT MARKET ACCESS ELECTRONIC TRADING RISK ARBITRAGE TRADING
ETFs PROPRIETARY TRADING CLOSED-END FUNDS HIGH YIELD BONDS BANK DEBT TRADING CORPORATE BONDS GOVERNMENT AGENCY BONDS TREASURY NOTES AND BONDS MORTGAGE-BACKED SECURI-
TIES MUNICIPAL BONDS COMMODITIES INDICES COMMODITIES-LINKED FINANCIAL PRODUCTS LONG/SHORT EQUITY U.S. EQUITY SALES LONG/SHORT COMMODITIES COLLATERALIZED DEBT OBLIGATIONS
CONVERTIBLE SECURITIES DISTRESSED SECURITIES INVENTIVE REVOLVING CREDIT FACILITIES TERM LENDING NEW YORK CLIENT-FIRST CULTURE SAN FRANCISCO MEDIA & COMMUNICATIONS
RETAIL & CONSUMER SECURITIES FIRM TECHNOLOGY BOSTON SERVING HIGH NET WORTH INDIVIDUALS CHICAGO INVESTMENT BANK FINANCIAL SPONSORS MARITIME & OIL SERVICE ATLANTA SER
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