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  2. 2. 1. One Firm We 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 $3.1 billion*. Our principal operating subsidiaries include Jefferies & Company, Inc., Jefferies Execution Services, Inc., Jefferies International Ltd., Jefferies Asset Management, LLC and Jefferies Financial Products, LLC. * year-end, fully diluted
  3. 3. 2. Focused on Growth Growth is what drives us. Growing and mid-sized companies and their investors comprise the most dynamic, thriving sector of the economy—and their businesses and opportunities are as unique as their needs. We believe these companies are often overlooked and underserved. Our mission is to meet their needs. From providing capital and delivering unbiased advice, to matching buyers and sellers and selecting research coverage, these companies and their investors inspire us. In 2005, we were recognized as the “Middle Market Investment Bank of the Year” by Investment Dealers’ Digest, while achieving our sixth consecutive year of record results and creating significant returns for our shareholders. JEFFERIES GROUP, INC .
  4. 4. Total Revenues Equity Market Capitalization ($ in millions) (at year-end, fully diluted, $ in millions) $1,498 $3,103 $2,608 $1,199 $2,016 $927 $785 $755 $1,153 $1,159 01 02 03 04 05 01 02 03 04 05
  5. 5. FINANCIAL HIGHLIGHTS At or for the year ended December 31, (in millions, except per share amounts) 2005 2004 Change 4. 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% 2000 2005 $617 million $1,205 million 41% 15% 2% 5% 6% 78% 3% 50% Sales & Trading (1) Investment Banking Asset Management Other (2) Net Revenues by Division (1) Includes commission and principal transaction revenues. (2) Includes net interest and other revenues.
  6. 6. Fellow Shareholders: Six years ago, we analyzed our Firm, our competitors, our clients and our future, and recognized there was 5. 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 2005 ANNUAL REPORT
  7. 7. We are proud to have delivered our sixth consecutive year of record net revenues, earnings and earnings per share. Across the board, our Firm delivered solid results and our financial position remains strong, with $2 billion in capital. Rich Handler 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. JEFFERIES GROUP, INC .
  8. 8. We have a solid foundation for future growth and scalability, and have tremendous momentum going into 2006. We are gaining traction in our focus markets, as demonstrated by our recently being named Middle Market Investment Bank of the Year by Investment Dealers’ Digest. Brian Friedman A Strong & Liquid Capital Position 7. 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. Investment Dealers’ 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). Forbes Magazine 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). (3) The Wall Street Journal, annual “Shareholder Scoreboard” survey, published March 3, 2003; March 8, 2004; February 28, 2005, respectively. Based on 10-year annualized 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.
  9. 9. 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. JEFFERIES GROUP, INC .
  10. 10. EPS * Net Earnings (fully diluted) ($ in millions) $2.32 $157 $2.06 9. $131 $1.42 $84 $1.14 $1.14 $60 $63 01 02 03 04 05 01 02 03 04 05 Book Value JEF vs. Indices ($ in millions) (annualized return, 4/99-12/05) $1,287 21.61% $1,039 $838 11.72% $629 $566 9.36% 6.51% 01 02 03 04 05 -.96% aler In ies 500 00 400 JEF dex ell 20 er/De curit S&P Cap x Se Russ Mid Ame S&P Brok Highlights * 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.
  11. 11. Jefferies embodies the now-rare Wall Street culture of a creative, hands-on, client-focused, and relationship-driven firm. Brian Friedman 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 GROUP, INC .
  12. 12. We believe we are executing successfully on our strategy to be the leading Wall Street firm focused on growing and mid-sized companies and their investors. Our opportunity in the marketplace is vast. Rich Handler A Solid, Flexible and Integrated Platform 11. 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 $2.6 million for cancer research. Our educational grant program, now in its 25th year, supports the education of the children of Jefferies employees, and has granted nearly 650 scholarship awards. In addition, the Firm continues its valuable employee contribution matching program.We hope to continue making a difference where and when we can as our platform allows. An Aligned and Motivated Management Team Each day our business becomes more complex, challenging and competitive. Over the past few years, together with our fellow Board and Executive Committee members, and the hard work of our employee- shareholders, we have taken many steps to improve our ability to respond to our clients’ needs, and meet the challenges of the marketplace and our industry.We remain focused on the execution of our strategy. We will be true to our culture and continue to be heavily employee-owned, client-focused, highly ethical, entrepreneurial, cost-conscious, non-bureaucratic and dedicated to serving growing and mid-sized companies and their investors. 2005 ANNUAL REPORT
  13. 13. Net Revenues Investment Banking Revenues ($ in millions) ($ in millions) $1,205 $495 12. $1,058 $353 $830 $670 $675 $230 $124 $140 01 02 03 04 05 01 02 03 04 05 Asset Management Revenues (7) Investment in Human Capital ($ in millions) (no. of employees) $81 $82 2,045 1,783 1,594 1,357 1,201 $33 $26 $20 01 02 03 04 05 01 02 03 04 05 Highlights (7) Includes asset management fees and investment income from managed funds.
  14. 14. We have a solid foundation for future growth and scalability. We remain opportunistic, yet focused; 13. 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
  15. 15. 14. Built on Relationships We 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.
  16. 16. Genstar Capital LLC Jefferies served as joint book running agent for the September 2005 $151 million senior subordinated notes offering for Panolam Industries, a leading manufacturer of decorative laminates, and sole manager for the April 2005 $60 million senior secured notes offering for North American Energy Partners, a leading provider of mining services, on behalf of Genstar Capital, a prominent private equity investment firm. “ When it comes to managing transactions for good middle market companies with business and financial complexity, Jefferies is one of the best in the business.Whether it be in healthcare, industrial or energy, they have the multi-sector industry expertise and relationships to get the transaction done, and deliver on what they say with impeccable execution.We have come to rely on Jefferies over the years and enjoy 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
  17. 17. LHC Group Jefferies served as lead manager and book runner on the June 2005 $77 million initial public offering for LHC Group, a provider of post-acute healthcare services. “ You only get one chance when it comes to an IPO, and “ Our initial public offering was a pivotal event in the history of our we’re glad we chose Jefferies as our partner.They helped us company, and we needed an underwriter we could trust.They spent more raise 20 percent more than we expected.We got the capital than a year with us preparing and conducted a very comprehensive marketing we needed to foster organic growth and to fund strategic process.The result was a strong demand among investors with our stock acquisitions to expand our network and geographic reach.” pricing at the top of the filing range during a difficult IPO market.” – JOHN INDEST, COO – KEITH G. MYERS, Chairman & CEO
  18. 18. General Dynamics Corporation Jefferies Quarterdeck advised General Dynamics Corporation, a leading supplier of sophisticated defense systems, on the February 2005 divestment of its Propulsion Systems unit to L-3 Communications and the January 2005 divestment of its Aeronautics Services unit to Wyle Laboratories, Inc. “ The unique insight of the Jefferies Quarterdeck team into the value drivers coupled with their in-depth knowledge of the potential buyer 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 agreement terms.The senior level attention we received throughout the process proved invaluable.” – MICHAEL J. MANCUSO, Senior Vice President & Chief Financial Officer
  19. 19. PalmSource, Inc. Jefferies Broadview advised PalmSource, a leading developer of software for mobile devices and provider of Palm OS®, in its negotiations with Japanese software company ACCESS Co. Ltd., a global provider of mobile content delivery and Internet access software, completed November 2005. “ Jefferies Broadview was able to effectively “ They helped us evaluate and maximize “ Jefferies Broadview provided guidance and communicate our unique value proposition acquisition proposals and come to a mutual support during a transitional time for our and diverse capabilities to potential agreement with ACCESS, a very innovative company.They brought in additional bidders buyers with very different interests in company with a broad set of device vendor and and led a very dynamic and competitive an accelerated time frame.” operator relationships, at a very high premium— process.We could not have been happier – MIKE KELLEY, Sr. VP, Engineering delivering great value to our shareholders.” with the outcome.” – JEANNE SEELEY, CFO – PATRICK MCVEIGH, Interim CEO
  20. 20. Spinnaker Exploration Randall & Dewey, a division of Jefferies, advised Spinnaker Exploration, a leading independent Houston-based energy company, on its merger with Norsk Hydro, completed in December 2005. “ Randall & Dewey’s strong E&P industry expertise and execution capabilities, combined with an in-depth understanding of our company’s opportunities, were key factors in completing this merger successfully.They made it possible for Spinnaker Exploration shareholders 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
  21. 21. 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 notes offering for Hornbeck Offshore Services, Inc., a leading provider of marine transportation services to the offshore oil and gas industry. “ We chose Jefferies because of our access to their senior management, “ Jefferies delivered flawless execution within a very tight time frame their creative approach to financing and their unique insight and during what was a fairly choppy market in the immediate aftermath understanding of the maritime oilfield service industry.They know of Hurricane Rita.They provided access to the capital we needed our business in-depth, and we value them as a strategic financial for the construction of new vessels that will significantly expand partner in the on-going growth and success of our Company.” our fleet, and for the funding of future growth initiatives.” – TODD M. HORNBECK, Chairman, President and CEO – JAMES O. HARP, JR., Executive Vice President and CFO
  22. 22. Majestic Star Casino, LLC Jefferies served as sole manager on the December 2005 three-tranche $303.5 million senior notes offering for Majestic Star Casino, LLC, a multi-jurisdictional gaming company. “ We have had a long-standing relationship with Jefferies and are continually impressed by their client focus, superior execution and determination. In a very short time frame, Jefferies provided us a committed financing so that we could realize our long-term strategic goal 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
  23. 23. Sandler Capital Management For more than 20 years, Jefferies has been serving Sandler Capital Management, an investment manager of hedge funds and private equity funds with a multi-sector focus and $1.3 billion in assets and commitments. “ We use Jefferies as one of our primary brokers because of their ability to provide liquidity for small- and mid-cap stocks in virtually all market 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
  24. 24. ICO Global Communications Jefferies served as lead manager of the August 2005 $650 million convertible notes offering for ICO North America, the wholly-owned subsidiary of ICO Global Communications (Holdings), a leading satellite communications company. “ We went in to the transaction hoping “ We were extremely impressed by Jefferies’ “ Jefferies helped raise the capital needed to to raise 400 million dollars and, at the industry expertise, targeted approach, and develop ICO’s advanced hybrid satellite end of the day, we raised 650 million commitment.We received senior level attention terrestrial MSS/ATC system and lay dollars—fully funding our plan. throughout the transaction and they did what the foundation for next generation Jefferies far exceeded our expectations.” they said they would, every step of the way.” wireless communications.” – CRAIG JORGENS, President – DONNA P. ALDERMAN, Vice Chairman – J. TIMOTHY BRYAN, CEO
  25. 25. Para Advisors LLC Jefferies has been assisting Para Advisors LLC, a hedge fund with more than $1 billion under management, achieve its trading objectives for fifteen years. “ As a mid-sized hedge fund, we are always impressed by the level of attention and service we receive from Jefferies.They are among the best brokerage firms on the Street, providing outstanding execution and liquidity, particularly with illiquid or difficult to move stocks, and they have only improved over the years.Their research has also become a very valuable tool, giving us great analytical coverage of the small and mid-cap universe that is hard to find at other firms.” – NED SADAKA, President
  26. 26. 26. Full-Service Our 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. JEFFERIES GROUP, INC .
  28. 28. Trusted Jefferies bankers provide growing and mid-sized companies with advisory and underwriting services through creative and idea-driven M&A, leveraged finance, equity and equity-linked financing and restructuring solutions. We serve a range of industries in the U.S., Europe and Asia. Business Overview 28. 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 (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 with debtor 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 transactions as 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.
  29. 29. Investment Banking Revenues by Product 2000 2005 $91 million $495 million 11% 29. 21% 20% 69% 55% 24% M&A/Advisory/Restructuring Equity/Equity-Linked Leveraged Finance Investment Banking Revenues by Industry Investment Banking Transaction Value ($ in billions, approximations) $67.0* Energy 25% $56.7 Technology 15% Industrials 15% $28.1 $29.2 Other 6% Aerospace & Defense 8% $16.5 Financial/Business Services 6% Gaming/Leisure 4% Media/Communications 6% Healthcare 3% Consumer/Retail 12% 01 02 03 04 05 Investment Banking * includes pending transactions 2005 ANNUAL REPORT
  30. 30. Jefferies’ industry specialists offer deep expertise in aerospace & defense, energy, financial & business services, gaming & leisure, healthcare, industrials, maritime & oil service, media & communications, retail & consumer, and technology. 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 (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.
  31. 31. Jefferies’ knowledge-driven sales and trading force provides investors outstanding liquidity in the global markets, trading equity, convertible, high yield, investment grade fixed income and commodity-linked financial products. We also offer top-tier private client, correspondent clearing, prime brokerage, securities lending and NYSE floor brokerage services. equity clients during the year, as well as implementing directed share programs.We assisted many of the 31. 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. 2005 ANNUAL REPORT
  32. 32. Sales & Trading Revenues by Product ( 15) 2000 2005 $485 million $617 million 32. Execution/Other 7% Execution/Other 2% Convertibles 6% Equities 81% Convertibles 11% High Yield 10% High Yield 6% Bonds Direct 5% Equities 64% Jefferies Financial Products 7% Other 1% Equities Fixed Income Equity Market Making Companies Under Research Coverage (no. of stocks, approximations) 5,000 1,112 959 4,000 873 826 731 3,000 2,000 1,500 01 02 03 04 05 01 02 03 04 05 Sales, Trading & Research (15) Includes commission and principal transaction revenues.
  33. 33. Jefferies award-winning research team provides unique investment ideas in equity, high yield, convertible and investment grade fixed income securities around the globe—focusing on small-, mid-cap and growth companies. Forward Thinking In Research 33. 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. 2005 ANNUAL REPORT
  34. 34. Strategic fund and portfolio managers seek to manage risk effectively and to consistently deliver favorable returns in all market conditions. Products managed by Jefferies include equities, fixed income securities, convertible securities and real assets. 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. JEFFERIES GROUP, INC .
  35. 35. Equity Research Companies Under Equity Research Companies Under Coverage by Market Cap Coverage by Industry Industrials 9% Services 11% 35. Over $5B 24.2% Aerospace/Defense 3% Gaming/Lodging 4% Healthcare 18% Media/Telecom 8% Technology 21% $ 2.0 – $ 5B 17.4% Consumer/Retail 4% Energy 22% $0 – $2B 58.4% Equity Research Assets Under Management (by predominant asset strategy) 2001 2005 $1,531 million (16) $4,260 million(16) Fixed Income 27% Equities/Fixed Private Equity(17) 15% Income(17) 7% Private Equity(17) 29% Real Assets 3% Fixed Income 24% Equities 12% Convertibles 44% Convertibles 39% Asset Management (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 the management or incentive fees).
  36. 36. 36. 2,045 Employee-Partners Our 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 .
  37. 37. 38. Global Opportunity The 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. JEFFERIES GROUP, INC .
  38. 38. 39. United States International New York Jersey City London San Francisco Chapel Hill Calgary Silicon Valley Nashville Paris Los Angeles Dallas Tokyo Denver Austin Zurich Stamford Houston Atlanta Richmond Chicago Washington DC Boston 2005 ANNUAL REPORT
  39. 39. 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, 2006 and is also available on our website at
  40. 40. CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS 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 41. 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 2005 ANNUAL REPORT
  41. 41. 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 42. 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 JEFFERIES GROUP, INC .
  42. 42. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS 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 43. 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 2005 ANNUAL REPORT
  43. 43. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS continued 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: 44. 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 $6,125 resulted from a decrease of $743 to accrued expenses and other liabilities and an offsetting increase in stockholders’ equity. JEFFERIES GROUP, INC .