<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR 12 (G) OF
THE SECURITIES EXCHANGE ACT OF 1934
JEF HOLDING COMPANY, INC.
(to be renamed "Jefferies Group, Inc." following the
ITGI Merger as described in Part I hereof)
-------------------------------------------------------
(Exact name of registrant as specified in its charter.)
Delaware 95-4719745
- -------------------------------------- --------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11100 Santa Monica Boulevard
Los Angeles, California 90025
- -------------------------------------- --------------------------------------
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code:
310-914-1300
------------------------------------
Securities to be registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
Common Stock, par value $0.0001 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
NONE
<PAGE>
JEF HOLDING COMPANY, INC.
("New JEF")
I. INFORMATION INCLUDED IN PROXY STATEMENT
AND INCORPORATED IN FORM 10 BY REFERENCE
In March 1998, Jefferies Group, Inc. ("Group") announced an intention
to engage in a series of transactions designed to separate its approximately
80.5% subsidiary, Investment Technology Group, Inc. ("ITGI") from the other
Group businesses. This separation would be achieved through the transfer of all
Group's assets, except for Group's interest in the outstanding capital stock of
ITGI, and all of Group's liabilities, other than liabilities of or related to
ITGI (the "Transfers"), to New JEF, a wholly-owned Group subsidiary, or to
Jefferies & Company, Inc., which will become a subsidiary of New JEF in
connection with the Transfers. Following the Transfers, the aforementioned
separation would be completed by means of a pro rata distribution to Group's
stockholders of 100% of the outstanding shares of common stock of New JEF (the
"Spin-Off"). This Registration Statement on Form 10 is being filed
to register the class of New JEF Common Stock to be distributed in the
Spin-Off, pursuant to Section 12(b) of the Securities Exchange Act of
1934, as amended (the "Exchange Act").
Following the Transfers and Spin-Off, ITGI will merge with and into
Group (the "ITGI Merger"). In connection with the ITGI Merger, Group will be
renamed Investment Technology Group, Inc. and New JEF will change its name to
Jefferies Group, Inc. An application has been made to list New JEF Common
Stock on the New York Stock Exchange under the symbol "JEF."
Group filed, in accordance with Regulation 14A under the Exchange Act, a
definitive proxy/information statement with the Securities and Exchange
Commission on March 18, 1999 (the "Group Disclosure Document"), which was
mailed to Group stockholders on or about March 19, 1999. The Group Disclosure
Document provides detailed information concerning New JEF, the Spin-Off,
ITGI and the ITGI Merger. New JEF hereby incorporates by reference into this
Form 10, in response to the requirements of Form 10, the following
information concerning New JEF and the Spin-Off that is set forth in the
Group Disclosure Document.
Cross-reference Sheet Between
Group Proxy Statement (File No. 1-11665)
and Items of Form 10
<TABLE>
<CAPTION>
ITEM
NO. ITEM CAPTION LOCATION IN PROXY STATEMENT
- ----- ------------ ---------------------------
<S> <C>
1. Business......................................... "Summary;" "The Transactions -- The Transfers and
Spin-Off; "-- Background of and Reasons for the
Transactions;" "Business of New JEF;" and
"Management's Discussion and Analysis of
Supplemental Financial Condition and Results of
Operations of New JEF."
2. Financial Information............................ "Unaudited Supplemental Selected Historical Financial
Data of New JEF;" "Management's Discussion and
Analysis of Supplemental Financial Condition and
Results of Operations of New JEF;" "Unaudited Pro
Forma Condensed Consolidated Statement of Financial
Condition of New JEF (Excluding Discontinued
Operations);" and "Index to Financial Statements."
3. Properties....................................... "Business of New JEF -- Properties."
</TABLE>
2
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<TABLE>
<CAPTION>
<S> <C>
4. Security Ownership of Certain "Beneficial Ownership Of Group Common Stock by
Beneficial Owners and Management................. Directors, Officers and Principal Stockholders of
Group."
5. Directors and Executive Officers................. "Management of Group and New JEF."
6. Executive Compensation........................... "Management of Group and New JEF."
7. Certain Relationships and "The Transactions -- Agreements Between Group and
Related Transactions............................. New JEF Relating to the Spin-Off;" "Risk Factors;"
"Management of Group and New JEF;" and "Index to
Financial Statements."
8. Legal Proceedings................................ "Business of New JEF-- Legal Proceedings."
9. Market Price of and Dividends on "Summary;" "Market Price of and Dividends on
the Registrant's Common Equity Common Stock and Related Stockholder Matters;" and
and Related Stockholder Matters.................. "Risk Factors."
11. Description of Registrant's Securities to be "Summary;" "Risk Factors;" and "Description of New
Registered...................................... JEF Capital Stock."
12. Indemnification of Directors "Description of New JEF Capital Stock -- Other
and Officers..................................... Delaware Corporate Law Provisions Affecting New JEF
Stockholders."
13. Financial Statements and "Unaudited Supplemental Selected Historical Financial
Supplementary Data............................... Data of New JEF;" "Management's Discussion and
Analysis of Supplemental Financial Condition and
Results of Operations of New JEF;" and "Unaudited Pro
Forma Condensed Consolidated Statement of Financial
Condition of New JEF (Excluding Discontinued
Operations)."
</TABLE>
3
<PAGE>
II. INFORMATION NOT INCLUDED IN PROXY STATEMENT
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Group extended credit to certain of its Directors, Officers,
employees and stockholders in connection with their purchase of securities on
margin. New JEF has assumed such obligations in connection with the
Transfers. Receivables from Group's Officers and Directors were $880,310 at
December 31, 1998. Such extensions of credit were made in the ordinary course
of business, on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons and did not involve more than the normal risk of collectibility
or present other unfavorable features.
The Board of Directors has adopted a policy which provides that New
JEF will not enter into any transactions with its Directors, Officers, or
affiliates (not including companies consolidated with it for financial
reporting purposes), other than those related to compensation or expense
reimbursement and other than those having terms no less favorable to New JEF
than could have been obtained from unaffiliated parties, unless approved by
New JEF's disinterested and independent Directors.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES
On December 23, 1998, New JEF issued approximately 10,000 shares of
its common stock to Group, its direct parent, at par value for aggregate
consideration of $1.00. In the opinion of New JEF, this transaction is exempt
from registration under the Securities Act of 1933, as amended, by virtue of
Section 4(2) thereof in that such transaction did not involve any public
offering.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
4
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JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Independent Auditors' Report............................................................................... 6
Consolidated Statements of Financial Condition as of December 31, 1998 and 1997............................ 7
Consolidated Statements of Earnings for the Three Years Ended
December 31, 1998........................................................................................ 8
Consolidated Statements of Changes in Stockholders' Equity for the
Three Years Ended December 31, 1998...................................................................... 9
Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1998.......................... 10
Notes to Consolidated Financial Statements................................................................. 11
</TABLE>
5
<PAGE>
INDEPENDENT AUDITORS' REPORT
We have audited the accompanying consolidated statements of financial
condition of JEF Holding Company, Inc. and subsidiaries as of December 31, 1998
and 1997 and the related consolidated statements of earnings, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of JEF Holding
Company, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
KPMG LLP
Los Angeles, California
January 19, 1999, except as to
Note 17 to the consolidated
financial statements, which
is as of April 20, 1999
6
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents............................................................. $ 55,581 $ 58,225
Cash and securities segregated and on deposit for regulatory purposes or deposited
with clearing and depository organizations.......................................... 62,518 30,977
Receivable from brokers and dealers................................................... 2,018,090 1,269,664
Receivable from customers, officers and directors..................................... 93,526 166,284
Securities owned...................................................................... 100,797 245,055
Investments........................................................................... 93,463 134,836
Investment in discontinued operations of ITGI......................................... 108,333 65,057
Premises and equipment................................................................ 20,524 23,322
Other assets.......................................................................... 65,032 64,686
------------ ------------
$ 2,617,864 $ 2,058,106
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Bank loans............................................................................ $ 21,000 $ --
Payable to brokers and dealers........................................................ 1,602,906 981,705
Payable to customers.................................................................. 226,774 202,255
Securities sold, not yet purchased.................................................... 39,365 188,700
Accrued expenses and other liabilities................................................ 243,657 293,400
------------ ------------
2,133,702 1,666,060
Long-term debt........................................................................ 149,387 149,290
------------ ------------
2,283,089 1,815,350
------------ ------------
------------ ------------
Stockholders' equity:
Preferred stock, $.01 par value. Authorized 1,000,000 shares; none issued........... -- --
Common stock, $.01 par value. Authorized 100,000,000 shares; issued 23,368,268
shares in 1998 and 22,393,910 shares in 1997...................................... 234 224
Additional paid-in capital.......................................................... 28,943 39
Retained earnings................................................................... 344,441 271,589
Less:
Treasury stock, at cost; 2,138,238 shares in 1998 and 2,107,842 shares in 1997.... (37,125) (26,954)
Accumulated other comprehensive income (loss):
Currency translation adjustments................................................ (49) (622)
Additional minimum pension liability adjustment................................. (1,669) (1,520)
------------ ------------
Total accumulated other comprehensive income (loss)............................... (1,718) (2,142)
------------ ------------
Net stockholders' equity............................................................ 334,775 242,756
------------ ------------
$ 2,617,864 $ 2,058,106
------------ ------------
------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
THREE YEARS ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
Commissions................................................................ $ 190,870 $ 148,940 $ 113,512
Principal transactions..................................................... 177,189 179,081 145,207
Corporate finance.......................................................... 126,651 228,640 97,870
Interest................................................................... 91,024 70,656 47,443
Other...................................................................... 4,881 3,525 2,991
---------- ---------- ----------
Total revenues......................................................... 590,615 630,842 407,023
Interest expense........................................................... 75,153 61,314 37,840
---------- ---------- ----------
Revenues, net of interest expense...................................... 515,462 569,528 369,183
---------- ---------- ----------
NON-INTEREST EXPENSES:
Compensation and benefits.................................................. 321,943 373,619 234,446
Floor brokerage and clearing fees.......................................... 32,425 26,754 21,606
Communications............................................................. 47,210 40,305 24,474
Occupancy and equipment rental............................................. 14,036 15,701 13,003
Travel and promotional..................................................... 17,710 15,300 10,703
Other...................................................................... 22,945 29,159 22,765
---------- ---------- ----------
Total non-interest expenses............................................ 456,269 500,838 326,997
---------- ---------- ----------
Earnings before income taxes................................................. 59,193 68,690 42,186
Income taxes................................................................. 22,992 27,334 17,772
---------- ---------- ----------
Earnings from continuing operations.......................................... 36,201 41,356 24,414
Discontinued operations of ITGI, net of tax.................................. 33,481 22,211 19,146
---------- ---------- ----------
Net earnings................................................................. $ 69,682 $ 63,567 $ 43,560
---------- ---------- ----------
---------- ---------- ----------
EARNINGS PER SHARE:
Basic:
Continuing operations...................................................... $ 1.62 $ 1.92 $ 1.06
Discontinued operations of ITGI, net of tax................................ 1.50 1.03 0.84
---------- ---------- ----------
Net earnings............................................................... $ 3.12 $ 2.95 $ 1.90
---------- ---------- ----------
---------- ---------- ----------
Diluted:
Continuing operations...................................................... $ 1.58 $ 1.85 $ 1.04
Discontinued operations of ITGI, net of tax................................ 1.38 0.95 0.80
---------- ---------- ----------
Net earnings............................................................... $ 2.96 $ 2.80 $ 1.84
---------- ---------- ----------
---------- ---------- ----------
WEIGHTED AVERAGE SHARES OF COMMON STOCK:
Basic...................................................................... 22,346 21,552 22,980
Diluted.................................................................... 22,954 22,349 23,410
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE YEARS ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER NET
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE STOCKHOLDERS'
STOCK CAPITAL EARNINGS STOCK INCOME (LOSS) EQUITY
--------- ---------- --------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995........................... $ 93 $ 58,117 $ 192,234 $ (63,075) $ (1,108) $ 186,261
Exercise of stock options, including tax benefits
(352,460 shares)................................... 1 2,555 -- 97 -- 2,653
Purchase of 2,320,352 shares of treasury stock....... -- -- -- (36,766) -- (36,766)
Issuance of common stock (71,388 shares)............. -- 770 -- -- -- 770
Issuance of restricted stock, including tax benefits
and additional vesting (68,864 shares)............. -- 1,083 -- -- -- 1,083
Capital Accumulation Plan distributions, including
tax benefits (39,186 shares)....................... -- 138 -- 340 -- 478
Net increase in proportionate share of subsidiary's
equity............................................. -- -- (1,115) -- -- (1,115)
Comprehensive income:
Net earnings....................................... -- -- 43,560 -- -- 43,560
Other comprehensive income (loss), net of tax:
Currency translation adjustment.................... -- -- -- -- 426 426
Additional minimum pension liability adjustment.... -- -- -- -- 33 33
--------- -------
Other comprehensive income (loss).................. 459 459
--------- -------
Comprehensive income................................. -- -- -- -- -- 44,019
Dividends paid ($.0875 per share).................... -- -- (1,883) -- -- (1,833)
Redemption of rights ($.0025 per right).............. -- -- (55) -- -- (55)
Two-for-one stock split.............................. 94 (94) -- -- -- --
----- -------- -------- ---------- --------- ----------
Balance, December 31, 1996........................... 188 62,569 232,741 (99,404) (649) 195,445
Exercise of stock options, including tax benefits
(240,028 shares)................................... 2 3,431 -- -- -- 3,433
Purchase of 1,063,026 shares of treasury stock....... -- -- -- (23,584) -- (23,584)
Issuance of common stock (41,052 shares)............. -- 879 -- 3 -- 882
Issuance of restricted stock, including tax benefits
and additional vesting (198,888 shares)........... -- 3,666 -- -- -- 3,666
Capital Accumulation Plan distributions, including tax
benefits (143,228 shares)........................... -- 508 -- 1,289 -- 1,797
Retirement of treasury shares (15,600,000 shares)..... (78) (70,902) (23,762) 94,742 -- --
Net decrease in proportionate share of subsidiary's
equity.............................................. -- -- 1,558 -- -- 1,558
Comprehensive income:
Net earnings........................................ -- -- 63,567 -- -- 63,567
Other comprehensive income (loss), net of tax:
Currency translation adjustment..................... -- -- -- -- (526) (526)
Additional minimum pension liability adjustment..... -- -- -- -- (967) (967)
------ -------
Other comprehensive income (loss)................... (1,493) (1,493)
------ -------
Comprehensive income.................................. 62,074
Dividends paid ($.125 per share)...................... -- -- (2,515) -- -- (2,515)
Two-for-one stock split............................... 112 (112) -- -- -- --
----- -------- --------- ----------- -------- -------
Balance, December 31, 1997............................ 224 39 271,589 (26,954) (2,142) 242,756
Exercise of stock options, including tax benefits
(737,125 shares)................................... 7 15,144 -- -- -- 15,151
Purchase of 334,234 shares of treasury stock.......... -- -- -- (13,815) -- (13,815)
Issuance of common stock (53,286 shares).............. 1 2,180 -- -- -- 2,181
Issuance of restricted stock, including tax benefits
and additional vesting (182,095 shares)........... 2 8,170 -- (22) -- 8,150
Capital Accumulation Plan distributions, including tax
benefits (305,690 shares)........................... -- 3,410 -- 3,666 -- 7,076
Net decrease in proportionate share of subsidiary's
equity.............................................. -- -- 7,337 -- -- 7,337
Comprehensive income:
Net earnings........................................ -- -- 69,682 -- 69,682 69,682
Other comprehensive income (loss), net of tax:
Currency translation adjustment..................... -- -- -- -- 573 573
Additional minimum pension liability adjustment..... -- -- -- -- (149) (149)
----- -------
Other comprehensive income (loss)................... 424 424
----- -------
Comprehensive income.................................. 70,106
Dividends paid ($.20 per share)....................... -- -- (4,167) -- -- (4,167)
----- -------- --------- --------- --------- ---------
Balance, December 31, 1998............................ $ 234 $ 28,943 $ 344,441 $ (37,125) $ (1,718) $ 334,775
----- -------- --------- --------- --------- ---------
----- -------- --------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
9
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE YEARS ENDED DECEMBER 31, 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings.................................................................... $ 69,682 $ 63,567 $ 43,560
Adjustments to reconcile net earnings to net cash provided by (used in)
operating
activities:
Depreciation and amortization................................................... 12,052 9,862 9,687
Deferred income taxes........................................................... (5,285) (8,710) (8,435)
Increase in cash and securities segregated...................................... (31,541) (1,870) (26,813)
(Increase) decrease in receivables:
Brokers and dealers........................................................... (748,426) (304,039) 152,529
Customers, officers and directors............................................. 72,758 (52,412) (6,714)
(Increase) decrease in securities owned......................................... 144,258 (52,093) (34,261)
(Increase) decrease in investments.............................................. 41,373 (91,577) (20,080)
Increase in investment in discontinued operations of ITGI....................... (43,276) (24,268) (18,033)
Increase in other assets........................................................ (535) (9,087) (39,523)
Increase (decrease) in payables:
Brokers and dealers............................................................. 621,201 175,992 (58,743)
Customers....................................................................... 24,519 31,871 (44,171)
Increase (decrease) in securities sold, not yet purchased....................... (149,335) 65,611 40,157
Increase (decrease) in accrued expenses and other liabilities................... (44,607) 114,855 79,175
--------- --------- ---------
Net cash provided by (used in) operating activities............................. (37,162) (82,298) 68,335
--------- --------- ---------
Cash flows from financing activities:
Net proceeds from bank loans.................................................... 21,000 -- --
Issuance of term debt........................................................... -- 99,722 --
Net payments on:
Repurchase of treasury stock.................................................... (13,815) (23,584) (36,766)
Redemption of 8 7/8% Subordinated Notes, due 1997............................... -- (3,576) (3,576)
Dividends paid.................................................................. (4,167) (2,515) (1,883)
Redemption of rights............................................................ -- -- (55)
Proceeds from exercise of stock options......................................... 15,151 3,433 2,653
Net decrease (increase) in proportionate share of subsidiary's equity........... 7,337 1,558 (1,115)
Distribution of Capital Accumulation Plan shares................................ 7,076 1,797 478
Issuance of restricted shares................................................... 8,150 3,666 1,083
Issuance of common shares....................................................... 2,181 882 770
--------- --------- ---------
Net cash provided by (used in) financing activities........................... 42,913 81,383 (38,411)
--------- --------- ---------
Cash flows from investing activities--purchase of premises and equipment.......... (8,968) (10,521) (10,521)
--------- --------- ---------
Effect of currency translation on cash............................................ 573 (526) 426
--------- --------- ---------
Net (decrease) increase in cash and cash equivalents............................ (2,644) (11,962) 19,829
Cash and cash equivalents at beginning of year.................................... 58,225 70,187 50,358
--------- --------- ---------
Cash and cash equivalents at end of year.......................................... $ 55,581 $ 58,225 $ 70,187
--------- --------- ---------
--------- --------- ---------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest...................................................................... $ 73,757 $ 58,038 $ 38,522
Income taxes.................................................................. 50,018 52,030 42,724
</TABLE>
Supplemental disclosure of non-cash financing activities:
In 1996, the additional minimum pension liability included in
stockholders' equity of $553 resulted from a decrease of $33 to accrued
expenses and other liabilities and an offsetting increase in stockholders'
equity. In 1997, the additional minimum pension liability included in
stockholders' equity of $1,520 resulted from an increase of $967 to accrued
expenses and other liabilities and an offsetting decrease in stockholders'
equity. In 1998, the additional minimum pension liability included in
stockholders' equity of $1,669 resulted from an increase of $149 to accrued
expenses and other liabilities and an offsetting decrease in stockholders'
equity.
See accompanying notes to consolidated financial statements.
10
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
JEF Holding Company, Inc., as successor to Jefferies Group, Inc. ("Group") and
all its subsidiaries ("Company"), including Jefferies & Company, Inc.
("JEFCO")(See Note 17). The accounts of Investment Technology Group, Inc. and
all its subsidiaries (collectively "ITGI"), including its wholly owned
subsidiary, ITG Inc. ("ITG") are included in the consolidated financial
statements as discontinued operations. The accounts of W & D Securities, Inc.
("W & D") are consolidated because of the nature and extent of the Company's
ownership interest in W & D. The Company and its subsidiaries (after the
discontinuance of ITGI) are primarily engaged in a single line of business as a
securities broker-dealer, which includes several types of services, such as
principal and agency transactions in equity, convertible debt and taxable fixed
income securities, as well as corporate finance activities. Operations of the
Company include agency and principal transactions and other securities-related
financial services.
All significant intercompany accounts and transactions are eliminated in
consolidation.
SECURITIES TRANSACTIONS
All transactions in securities, commission revenues and related expenses are
recorded on a trade-date basis.
Securities owned and securities sold, not yet purchased, are valued at
market, and unrealized gains or losses are reflected in revenues from principal
transactions.
INVESTMENTS
Partnership interests are recorded at their initial cost. The carrying
values of these investments are adjusted when the adjustment can be supported by
quoted market prices, adjusted for liquidity and other relevant factors. In
addition, the carrying values are reduced when the Company determines that the
estimated realizable value is less than the carrying value based on relevant
financial and market information.
Debt and equity investments consist primarily of mutual funds which are
valued at market, based on available quoted prices.
Equity and debt interests in affiliates are recorded under either the equity
or cost method depending on the Company's level of ownership and control.
RECEIVABLE FROM, AND PAYABLE TO, CUSTOMERS, OFFICERS AND DIRECTORS
Receivable from, and payable to, customers includes amounts receivable and
payable on cash and margin transactions. Securities owned by customers and held
as collateral for these receivables are not reflected in the accompanying
consolidated financial statements. Receivable from officers and directors
represents balances arising from their individual security transactions. Such
transactions are subject to the same regulations as customer transactions.
11
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all of the Company's financial instruments are carried at fair
value or amounts approximating fair value. Assets, including cash and cash
equivalents, securities borrowed or purchased under agreements to sell, and
certain receivables, are carried at fair value or contracted amounts, which
approximate fair value due to the short period to maturity. Similarly,
liabilities, including bank loans, securities loaned or sold under agreements to
repurchase, long-term debt and certain payables, are carried at amounts
approximating fair value. Securities owned and securities sold, not yet
purchased, are valued at quoted market prices, if available. For securities
without quoted prices, the reported fair value is estimated using various
sources of information, including quoted prices for comparable securities.
The Company has derivative financial instrument positions in option
contracts, foreign exchange forward contracts and index futures contracts which
are measured at fair value with gains and losses recognized in earnings. The
gross contracted or notional amount of these contracts is not reflected in the
consolidated statements of financial condition (see note 13 of the notes to
consolidated financial statements.)
PREMISES AND EQUIPMENT
Premises and equipment are depreciated using the straight-line method over
the estimated useful lives of the related assets (generally three to ten years).
Leasehold improvements are amortized using the straight-line method over the
term of related leases or the estimated useful lives of the assets, whichever is
shorter.
GOODWILL
Goodwill, which represents the excess of cost over net assets acquired, is
amortized on a straight-line basis over ten to fifteen years. The Company
assesses the recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can be recovered
through future operating cash flows of the acquired business.
INCOME TAXES
The Company files a consolidated U.S. Federal income tax return which
includes all qualifying subsidiaries. Amounts provided for income taxes are
based on income reported for financial statement purposes and do not necessarily
represent amounts currently payable. Deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date. Deferred
income taxes are provided for temporary differences in reporting certain items,
principally state income taxes, depreciation, deferred compensation and
unrealized gains and losses on securities owned. Tax credits are recorded as a
reduction of income taxes when realized.
12
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH EQUIVALENTS
The Company generally invests its excess cash in money market funds and
other short-term investments. At December 31, 1998 and 1997, such cash
equivalents amounted to $25,865,000 and $40,776,000, respectively. Cash
equivalents are part of the cash management activities of the Company and
generally mature within 90 days.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS
Repurchase agreements consist of sales of U.S. Treasury notes under
agreements to repurchase. They are treated as collateralized financing
transactions and are recorded at their contracted repurchase amount.
Reverse repurchase agreements consist of purchases of U.S. Treasury notes
under agreements to re-sell. They are treated as collateralized financing
transactions and are recorded at their contracted re-sale amount.
EARNINGS PER COMMON SHARE
Basic earnings per share of common stock are computed by dividing net
earnings by the average number of shares outstanding and certain other shares
committed to, but not yet issued. Diluted earnings per share of common stock are
computed by dividing net earnings by the average number of shares outstanding of
common stock and all dilutive common stock equivalents outstanding during the
period. All shares used in the earnings per share calculations were restated to
retroactively reflect the two-for-one stock splits approved by the Board of
Directors on November 19, 1997 and March 2, 1996.
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share." SFAS 128 established new standards for computing and presenting earnings
per share. SFAS No. 128 replaced the presentation of primary earnings per share
with a presentation of basic earnings per share. SFAS No. 128 also requires dual
presentation of basic and diluted earnings per share on the face of the
statement of earnings for entities with complex capital structures and requires
a reconciliation of the numerator and denominator of the basic earnings per
share computation to the numerator and denominator of the diluted earnings per
share computation. SFAS 128 did not have a material impact on the Company.
Earnings per share information has been restated to retroactively reflect the
adoption of Statement of Financial Accounting Standards No. 128.
COMMON STOCK
On November 19, 1997, the Company's Board of Directors approved a
two-for-one split of all of the outstanding shares of the Company's common
stock, payable December 15, 1997 to stockholders of record at the close of
business on November 28, 1997. The stated par value of each share was not
changed from $0.01. In addition, the Board of Directors, approved the quarterly
cash dividend at $0.05 per share on the approximately 20,000,000 common shares
outstanding after the split (effectively doubling the dividend rate).
13
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
On March 2, 1996, the Company's Board of Directors approved a two-for-one
split of all of the outstanding shares of the Company's common stock, payable
March 29, 1996 to stockholders of record at the close of business on March 15,
1996. The stated par value of each share was not changed from $0.01. In
addition, the Board of Directors, approved the quarterly cash dividend at $0.05
per share (pre November 1997 stock split) on the approximately 12,000,000 common
shares (pre November 1997 stock split) to be outstanding after the March 2, 1996
split (effectively doubling the dividend rate), as well as the repurchase of up
to one million of the new common shares (pre November 1997 stock split), on the
open market or otherwise, from time to time.
All share, share price and per share information included in the
consolidated financial statements has been restated to retroactively reflect the
effect of the November 19, 1997 and the March 2, 1996 two-for-one stock splits.
TRANSFERS OF FINANCIAL ASSETS
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." SFAS 125
which establishes, among other things, new criteria for determining whether a
transfer of financial assets should be accounted for as a sale or as a pledge of
collateral in a secured borrowing. SFAS No. 125 also establishes new accounting
requirements for pledged collateral. The Company implemented SFAS No. 125 in
1997. SFAS No. 125 did not have a material impact on the Company.
COMPREHENSIVE INCOME
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general-purpose financial statements. All items that are
required to be recognized under accounting standards as components of
comprehensive income are required to be reported in a financial statement that
is displayed with the same prominence as other financial statements. SFAS No.
130 does not require a specific format for that financial statement but requires
that an enterprise display an amount representing total comprehensive income for
the period in that financial statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position.
The Company implemented SFAS No. 130 in 1997. The adoption of SFAS No. 130
did not have a material impact on the Company.
SEGMENT REPORTING
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports issued to
14
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers.
SFAS No. 131 requires that a public business enterprise report financial and
descriptive information about its reportable operating segments. Operating
segments are components of an enterprise about which separate financial
information is available that is evaluated regularly by the chief operating
decision-maker in deciding how to allocate resources and in assessing
performance. Generally, financial information is required to be reported on the
basis that it is used internally for evaluating segment performance and deciding
how to allocate resources to segments.
SFAS No. 131 also requires that a public business enterprise report
descriptive information about the way that the operating segments were
determined, the products and services provided by the operating segments,
differences between the measurements used in reporting segment information and
those used in the enterprise's general-purpose financial statements, and changes
in the measurement of segment amounts from period to period.
The Company implemented SFAS No. 131 in 1998. The adoption of SFAS No. 131
did not have a material impact on the Company.
PENSION DISCLOSURE
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure About
Pensions and Other Post-retirement Benefits," which revises employers'
disclosures about pension and other post-retirement benefit plans. It does not
change the measurement or recognition of those plans. It standardizes the
disclosure requirements for pensions and other post-retirement benefits to the
extent practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures.
The Company implemented SFAS No. 132 in 1998. The adoption of SFAS No. 132
did not have a material impact on the Company.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts, (collectively referred to as derivatives) and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value.
This Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. SFAS No. 133 is not expected to have a material
impact on the Company.
FOREIGN CURRENCY TRANSLATION
The Company's foreign revenues and expenses are translated at average
current rates during each reporting period. Foreign currency transaction gains
and losses are included in the unaudited proforma consolidated statement of
earnings. Gains and losses resulting from translation of financial statements
15
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
are excluded from the consolidated statement of earnings and are recorded
directly to a separate component of stockholders' equity.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' amounts to
conform to the current year's presentation.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities to prepare these financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates.
(2) RECEIVABLE FROM, AND PAYABLE TO, BROKERS AND DEALERS
The following is a summary of the major categories of receivable from, and
payable to, brokers and dealers as of December 31, 1998 and 1997 (in thousands
of dollars):
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Receivable from brokers and dealers:
Securities borrowed................................................................. $ 1,922,691 $ 1,197,227
Reverse repurchase agreements....................................................... 5,066 --
Other............................................................................... 90,333 72,437
------------ ------------
$ 2,018,090 $ 1,269,664
------------ ------------
------------ ------------
Payable to brokers and dealers:
Securities loaned................................................................... $ 1,580,811 $ 966,132
Repurchase agreements............................................................... 5,061 --
Other............................................................................... 17,034 15,573
------------ ------------
$ 1,602,906 $ 981,705
------------ ------------
------------ ------------
</TABLE>
The Company has a securities borrowed versus securities loaned business with
other brokers. The Company also borrows securities to cover short sales and to
complete transactions in which customers have failed to deliver securities by
the required settlement date, and lends securities to other brokers and dealers
for similar purposes. From these activities, the Company derives interest
revenue and interest expense.
16
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(3) RECEIVABLE FROM, AND PAYABLE TO, CUSTOMERS, OFFICERS AND DIRECTORS
The following is a summary of the major categories of receivables from
customers, officers and directors as of December 31, 1998 and 1997 (in thousands
of dollars):
<TABLE>
<CAPTION>
1998 1997
--------- ----------
<S> <C> <C>
Customers (net of allowance for uncollectible accounts of $3,427 in 1998 and $2,453 in
1997).................................................................................... $ 92,646 $ 164,099
Officers and directors..................................................................... 880 2,185
--------- ----------
$ 93,526 $ 166,284
--------- ----------
--------- ----------
</TABLE>
Interest is paid on free credit balances in accounts of customers who have
indicated that the funds will be used for investment at a future date. The rate
of interest paid on such free credit balances varies between the thirteen-week
treasury bill rate and 1% below that rate, depending upon the size of the
customers' free credit balances.
(4) SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED
The following is a summary of the market value of major categories of
securities owned and securities sold, not yet purchased, as of December 31, 1998
and 1997 (in thousands of dollars):
<TABLE>
<CAPTION>
1998 1997
----------------------- ----------------------
<S> <C> <C> <C> <C>
SECURITIES SECURITIES
SOLD, SOLD,
SECURITIES NOT YET SECURITIES NOT YET
OWNED PURCHASED OWNED PURCHASED
---------- ----------- ---------- ----------
Corporate equity securities...................................... $ 43,468 $ 26,471 $ 120,316 $ 134,160
High-yield securities............................................ 28,684 8,253 59,270 52,332
Corporate debt securities........................................ 20,903 4,067 37,382 1,571
U.S. Government and agency obligations........................... 7,076 -- 25,012 --
Other............................................................ 666 574 3,075 637
---------- ----------- ---------- ----------
$ 100,797 $ 39,365 $ 245,055 $ 188,700
---------- ----------- ---------- ----------
---------- ----------- ---------- ----------
</TABLE>
(5) INVESTMENTS
The following is a summary of the major categories of investments, as of
December 31, 1998 and 1997 (in thousands of dollars):
<TABLE>
<CAPTION>
1998 1997
--------- ----------
<S> <C> <C>
Partnership interests...................................................................... $ 44,638 $ 64,874
Debt and equity investments................................................................ 42,088 64,397
Equity and debt interests in affiliates.................................................... 6,737 5,565
--------- ----------
$ 93,463 $ 134,836
--------- ----------
--------- ----------
</TABLE>
17
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(6) PREMISES AND EQUIPMENT
The following is a summary of premises and equipment as of December 31, 1998
and 1997 (in thousands of dollars):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Furniture, fixtures and equipment........................................................... $ 60,365 $ 56,320
Leasehold improvements...................................................................... 17,316 16,338
--------- ---------
Total....................................................................................... 77,681 72,658
Less accumulated depreciation and amortization.............................................. 57,157 49,336
--------- ---------
$ 20,524 $ 23,322
--------- ---------
--------- ---------
</TABLE>
Depreciation and amortization expense amounted to $11,766,000, $9,629,000
and $9,446,000 for the years ended December 31, 1998, 1997 and 1996,
respectively. Depreciation and amortization expense included in discontinued
operations of ITGI amounted to $7,502,000, $4,614,000 and $2,034,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.
(7) BANK LOANS
Bank loans represent short-term borrowings that are payable on demand and
generally bear interest at the brokers' call loan rate. At December 31, 1998,
the Company had unsecured bank loans amounting to $21,000,000 with a weighted
average interest rate of 5.6%. At December 31, 1997, there were no bank loans.
(8) LONG TERM DEBT
The following summarizes long term debt outstanding at December 31, 1998 and
1997 (in thousands of dollars):
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
8 7/8% Series B Senior Notes, due 2004, less unamortized discount of $372 and $442 in 1998
and 1997, respectively, effective rate of 9%............................................ $ 49,628 $ 49,558
7 1/2% Senior Notes, due 2007, less unamortized discount of $241 and $268 in 1998 and
1997, effective rate of 8%.............................................................. 99,759 99,732
---------- ----------
$ 149,387 $ 149,290
---------- ----------
---------- ----------
</TABLE>
During 1997, JEFCO obtained a NASDR approved $200,000,000 revolving credit
facility to be used in connection with underwriting activities. The revolving
credit facility terminates on October 30, 1999. Loans under this facility bear
interest at 2.5% over either the Federal funds rate or the London Interbank
Offered Rate. During 1998, there were several borrowings against the revolving
credit facility. During 1997, there were no borrowings against the revolving
credit facility.
18
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(9) INCOME TAXES
Total income taxes for the years ended December 31, 1998, 1997 and 1996 were
allocated as follows (in thousands of dollars):
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Income from continuing operations............................................... $ 22,992 $ 27,334 $ 17,772
Income from discontinued operations of ITGI, net of tax......................... 37,541 20,343 17,666
Stockholders' equity, for compensation expense for tax purposes in excess of
amounts recognized for financial reporting purposes........................... (12,804) (1,704) (1,568)
---------- --------- ---------
$ 47,729 $ 45,973 $ 33,870
---------- --------- ---------
---------- --------- ---------
</TABLE>
Income taxes (benefits) for the years ended December 31, 1998, 1997 and 1996
consist of the following (in thousands of dollars):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CURRENT:
Federal........................................................................ $ 22,650 $ 28,675 $ 21,337
State and city................................................................. 5,627 7,369 4,870
--------- --------- ---------
28,277 36,044 26,207
--------- --------- ---------
--------- --------- ---------
DEFERRED:
Federal........................................................................ (3,921) (6,388) (7,348)
State and city................................................................. (1,364) (2,322) (1,087)
--------- --------- ---------
(5,285) (8,710) (8,435)
--------- --------- ---------
$ 22,992 $ 27,334 $ 17,772
--------- --------- ---------
--------- --------- ---------
</TABLE>
Income taxes differed from the amounts computed by applying the Federal
income tax rate of 35% for 1998, 1997 and 1996 as a result of the following (in
thousands of dollars):
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
AMOUNT % AMOUNT % AMOUNT %
--------- --------- --------- --------- --------- ---------
Computed expected income taxes............................. $ 20,718 35.0% $ 24,042 35.0% $ 14,765 35.0%
Increase (decrease) in income taxes resulting from:
State and city income taxes, net of Federal income tax
benefit................................................ 2,770 4.7 3,281 4.8 2,459 5.8
Limited deductibility of meals and entertainment......... 1,142 1.9 1,054 1.5 699 1.6
Foreign income........................................... 654 1.1 -- -- -- --
Non-taxable interest income.............................. (304) (0.5) (164) (0.2) -- --
Research and development tax credits..................... (264) (0.5) (264) (0.4) (132) (0.3)
Other, net............................................... (1,724) (2.9) (615) (0.9) (19) --
--------- --- --------- --- --------- ---
Total income taxes................................... $ 22,992 38.8% $ 27,334 39.8% $ 17,772 42.1%
--------- --- --------- --- --------- ---
--------- --- --------- --- --------- ---
</TABLE>
19
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(9) INCOME TAXES (CONTINUED)
The cumulative tax effects of temporary differences that give rise to
significant portions of the deferred tax assets at December 31, 1998 and 1997
are presented below (in thousands of dollars):
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Deferred tax assets:
Long-term compensation...................................................................... $ 28,752 $ 22,874
Lease allowances............................................................................ 582 929
Accounts receivable......................................................................... 3,518 2,888
State income taxes.......................................................................... 1,012 1,646
Premises and equipment...................................................................... 1,361 2,298
Other....................................................................................... 1,437 742
--------- ---------
Total gross deferred tax assets....................................................... 36,662 31,377
Valuation allowance......................................................................... -- --
--------- ---------
Net deferred tax asset, included in other assets...................................... $ 36,662 $ 31,377
--------- ---------
--------- ---------
</TABLE>
There was no valuation allowance for deferred tax assets as of December 31,
1998 and 1997.
Management believes it is more likely than not that the Company will
generate sufficient taxable income in the future to realize the deferred tax
asset.
(10) BENEFIT PLANS
PENSION PLAN
The Company has a defined benefit pension plan which covers certain
employees of the Company and its subsidiaries. The plan is subject to the
provisions of the Employee Retirement Income Security Act of 1974. Benefits are
based on years of service and the employee's career average pay. The Company's
funding policy is to contribute to the plan at least the minimum amount that can
be deducted for Federal income tax purposes.
20
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(10) BENEFIT PLANS (CONTINUED)
The following tables set forth the plan's funded status and amounts
recognized in the Company's accompanying consolidated statements of financial
condition and consolidated statements of earnings (in thousands of dollars):
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
<S> <C> <C>
1998 1997
--------- ---------
Actuarial present value of benefit obligations--accumulated benefit obligation, including
vested benefits of $19,594 and $18,449 as of December 31, 1998 and 1997, respectively..... $ 21,141 $ 19,777
--------- ---------
--------- ---------
Projected benefit obligation for service rendered to date................................... $ 24,837 $ 22,603
Plan assets, at fair market value........................................................... 17,203 16,479
--------- ---------
Excess of the projected benefit obligation over plan assets................................. 7,634 6,124
Unamortized prior service cost.............................................................. 420 624
Unrecognized net transition obligation being recognized over 15 years....................... (129) (172)
Unrecognized net loss....................................................................... (6,841) (5,876)
Adjustment to recognize minimum liability................................................... 2,853 2,598
--------- ---------
Pension liability included in other liabilities............................................. $ 3,937 $ 3,298
--------- ---------
--------- ---------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
Net pension cost included the following components:
Service cost--benefits earned during the period...................................... $ 1,895 $ 1,288 $ 1,125
Interest cost on projected benefit obligation........................................ 1,551 1,222 1,064
Expected return on plan assets....................................................... (1,310) (1,065) (889)
Net amortization..................................................................... 363 178 198
--------- --------- ---------
Net periodic pension cost............................................................ $ 2,499 $ 1,623 $ 1,498
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following tables reconcile the fair value of assets and the projected
benefit obligation for the years ending December 31, 1998 and 1997 (in thousands
of dollars):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
<S> <C> <C>
1998 1997
--------- ---------
Fair value of assets, beginning of year............................................... $ 16,479 $ 13,102
Employer contributions................................................................ 2,114 1,476
Benefit payments made................................................................. (2,124) (544)
Total investment return............................................................... 734 2,445
--------- ---------
Fair value of assets, end of year..................................................... $ 17,203 $ 16,479
--------- ---------
--------- ---------
</TABLE>
21
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(10) BENEFIT PLANS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
<S> <C> <C>
1998 1997
--------- ---------
Projected benefit obligation, beginning of year....................................... $ 22,603 $ 16,279
Service cost.......................................................................... 1,895 1,288
Interest cost......................................................................... 1,551 1,222
Actuarial gains and losses............................................................ 763 4,358
Benefits paid......................................................................... (2,124) (544)
Plan amendments....................................................................... 149 --
--------- ---------
Projected benefit obligation, end of year............................................. $ 24,837 $ 22,603
--------- ---------
--------- ---------
</TABLE>
The net periodic pension costs above include the costs related to
discontinued operations of ITGI of $385,000, $208,000 and $151,000 in 1998, 1997
and 1996, respectively.
The plan assets consist of approximately 60% equities and 40% fixed income
securities.
The weighted average discount rate and the rate of increase in future
compensation levels used in determining the actuarial present value of the
projected benefit obligation were 6.75% and 5.00%, respectively, in 1998, 7.00%
and 5.00%, respectively, in 1997 and 7.50% and 5.00%, respectively, in 1996. The
expected long-term rate of return on assets was 8.40% in 1998, 1997 and 1996.
STOCK COMPENSATION PLANS
In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based
Compensation." SFAS 123 defines a fair value based method of accounting for an
employee stock option or similar instrument and encourages all entities to adopt
that method of accounting for all of their employee stock compensation plans.
However, it allows an entity to continue to measure compensation cost for these
plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued
to Employees." Entities electing to remain with the accounting in APB Opinion
No. 25 must make pro forma disclosures of net earnings and earnings per share,
as if the fair value based method of accounting defined in SFAS 123 had been
applied. The Company implemented the statement during the year ended December
31, 1996.
At December 31, 1998, the Company had six stock-based compensation plans,
which are described below. The Company applied APB Opinion No. 25 in accounting
for their plans. Accordingly, no compensation cost has been recognized for fixed
stock option plans. Had compensation cost for the Company's stock-based
compensation plans been determined consistent with SFAS 123, the Company's
22
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(10) BENEFIT PLANS (CONTINUED)
net earnings and earnings per share would have been reduced to the pro forma
amounts indicated below (in thousands of dollars, except per share amounts):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net earnings:
As reported.................................................................... $ 69,682 $ 63,567 $ 43,560
Pro forma...................................................................... $ 65,240 $ 58,927 $ 40,102
Basic earnings per share:
As reported.................................................................... $ 3.12 $ 2.95 $ 1.90
Pro forma...................................................................... $ 2.92 $ 2.73 $ 1.75
Diluted earnings per share:
As reported.................................................................... $ 2.96 $ 2.80 $ 1.84
Pro forma...................................................................... $ 2.77 $ 2.60 $ 1.69
</TABLE>
1993 PLAN
The Company has a Stock Ownership and Long-Term Incentive Plan (1993 Plan)
which allows awards in the form of incentive stock options (within the meaning
of Section 422 of the Internal Revenue code), nonqualified stock options, stock
appreciation rights, restricted stock, unrestricted stock, performance awards,
dividend equivalents or other stock based awards. The maximum number of shares
of common stock of the Company with respect to which any awards may be made in
any calendar year during the term of the 1993 Plan may not exceed 20% of the
number of shares of common stock issued and outstanding as of the first day of
the calendar year in which awards are made, less the number of shares of common
stock reserved for issuance with respect to, or underlying, any award, made
pursuant to the 1993 Plan or any predecessor plan, as of such date. The 1993
Plan provides flexibility as to exercise price and term of each option.
DIRECTOR PLAN
The Company, also, has a Non-Employee Directors' Stock Option Plan (Director
Plan) which provides for an annual grant to each non-employee director of an
option to purchase 2,000 shares of the Company's common stock. Such grants will
be made automatically on the date directors are elected or reelected at the
Company's annual meeting. In addition, the Director Plan provides for the
automatic grant to a non-employee director, at the time he or she is first
elected or appointed, of an option to purchase 5,000 shares of the Company's
common stock. A total of 300,000 shares of the Company's common stock are
reserved under the Director Plan. Under the Director Plan, the exercise price of
each option equals the market price of the Company's stock on the date of grant
and the option's maximum term is five years.
1996 PLAN
Additionally, in 1996, the Company established a Non-Employee Directors'
Deferred Compensation Plan (1996 Plan). The 1996 Plan permits each non-employee
director to elect to be paid annual retainer fees and annual fees for service as
chairman or a member of a Board committee in the
23
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(10) BENEFIT PLANS (CONTINUED)
form of stock options and to defer receipt of any director fees in an
interest-bearing cash account or as deferred shares in a deferred share account.
A total of 200,000 shares of the Company's common stock are reserved under the
1996 Plan. Under the 1996 Plan, the exercise price of each option equals the
market price of the Company's stock on the date of grant and the options expire
ten years after the date of grant.
UNITED KINGDOM CAPITAL ACCUMULATION PLAN
The Company has a United Kingdom Capital Accumulation Plan (UK CAP) for
certain officers and key employees of the Company who work in the United
Kingdom. Participation in the plan is optional, with those who elect to
participate agreeing to defer graduated percentages of their compensation. The
UK CAP allows selected employees to acquire the Company's common stock (through
the granting of stock options) at a 15% discount with 40% of the amount
deferred. The remaining 60% of the amount deferred is placed in a Profit-Based
Deferred Compensation Account that earns interest at a rate based on the
performance of the Company.
OPTIONS ISSUED UNDER ALL PLANS
The fair value of all option grants for all the Company's plans are
estimated on the date of grant using the Black-Scholes option-pricing model with
the weighted-average assumptions used for all fixed option grants in 1998, 1997
and 1996, respectively: dividend yield of 0.6%, 0.4%, and 0.6%; expected
volatility of 32.6%, 33.4%, and 33.3%; risk-free interest rates of 5.5%, 6.4%,
and 5.4%; and expected lives of 5.0 years, 5.5 years, and 3.3 years.
A summary of the status of Company stock options in all its stock-based
plans as of December 31, 1998, 1997 and 1996 and changes during the year then
ended is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
---------- ----------- ---------- ----------- ---------- -----------
Outstanding at beginning of year.................... 1,829,033 $ 12.05 1,702,000 $ 9.35 1,467,832 $ 6.34
Granted............................................. 377,949 39.70 367,061 22.91 594,628 13.28
Exercised........................................... (748,142) 7.93 (240,028) 9.48 (352,460) 3.47
Forfeited........................................... (16,023) 40.00 -- -- (8,000) 8.13
---------- ---------- ----------
Outstanding at end of year.......................... 1,442,817 21.12 1,829,033 12.05 1,702,000 9.35
---------- ---------- ----------
---------- ---------- ----------
Options exercisable at year-end..................... 941,955 1,349,124 858,996
---------- ---------- ----------
---------- ---------- ----------
Weighted-average fair value of options granted
during the year................................... $ 13.43 $ 10.05 $ 4.19
</TABLE>
24
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(10) BENEFIT PLANS (CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ -------------------------
<S> <C> <C> <C> <C> <C>
NUMBER WEIGHTED NUMBER
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
AT REMAINING AVERAGE AT AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICES 1998 LIFE (YEARS) PRICE 1998 PRICE
- -------------------------------------------------- ------------ --------------- ----------- ------------ -----------
$1.28 to 9.99..................................... 346,437 0.8 $ 7.33 302,470 $ 7.60
$10.00 to 19.99................................... 412,600 0.7 14.20 408,600 14.21
$20.00 to 29.99................................... 287,532 3.4 22.56 217,532 22.06
$30.00 to 39.99................................... 45,000 8.2 32.15 5,000 35.38
$40.00 to 47.94................................... 351,248 4.1 40.26 8,353 47.68
------------ ------------
$1.28 to 47.94.................................... 1,442,817 2.3 21.12 941,955 14.31
------------ ------------
------------ ------------
</TABLE>
PERFORMANCE-BASED STOCK OPTIONS
While the 1993 Plan allows for the granting of performance-based stock
options, no such options were granted during 1998, 1997 and 1996, and no such
options were outstanding at December 31, 1998, 1997 and 1996.
RESTRICTED STOCK
The 1993 Plan allows for grants of restricted stock awards, whereby certain
key employees are granted restricted shares of common stock subject to
forfeiture until the restrictions lapse or terminate. With certain exceptions,
the employee must remain with the Company for a period of years after the date
of grant to receive the full number of shares granted. During 1998, 1997 and
1996, there were restricted stock awards of 183,947 shares, 198,888 shares and
49,264 shares, respectively, with a corresponding market value of $6,488,000,
$4,189,000 and $624,000, respectively. Certain grants are expensed over the
vesting periods of one to three years, while others have been granted in
settlement of previously accrued compensation liabilities. The compensation
cost, excluding the cost associated with the settlement of previously accrued
compensation liabilities, charged against earnings was $993,000, $1,142,000 and
$394,000 in 1998, 1997 and 1996, respectively. As of December 31, 1998, 1997 and
1996, restricted stock shares outstanding were 381,585 shares, 203,468 shares
and 95,160 shares, respectively.
EMPLOYEE STOCK PURCHASE PLAN
The Company has an Employee Stock Purchase Plan (ESPP). All regular
full-time employees are eligible for the ESPP. Employee contributions are
voluntary and are made via payroll deduction. The employee contributions are
used to purchase the Company's common stock which is then held in an outside
trust account. The Company matches employee contributions at a rate of 15%
(more, if profits exceed targets set by the Company's Board of Directors). The
Company's match vests after two years. The Company recognizes compensation cost
related to its ESPP matching. The compensation cost charged against continuing
operations was $293,000, $187,000 and $213,000 in 1998, 1997 and 1996,
25
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(10) BENEFIT PLANS (CONTINUED)
respectively. The charge against discontinued operations was $4,000, $41,000 and
$37,000 in 1998, 1997 and 1996, respectively.
CAPITAL ACCUMULATION PLAN
The Company has a Capital Accumulation Plan (CAP) for certain officers and
key employees of the Company. Participation in the plan is optional, with those
who elect to participate agreeing to defer graduated percentages of their
compensation. The plan allows selected employees to acquire the Company's common
stock at a 15% discount with 50% of the amount deferred. The remaining 50% of
the amount deferred is placed in a Profit-Based Deferred Compensation Account
that earns interest at a rate based on the performance of the Company.
The Company will from time to time repurchase shares of its common stock in
the open market for use in both the CAP and UK CAP plans. The Company has
acquired 2,580,034 shares since the inception of the plans (CAP in 1993 and UK
CAP in 1995) and has made distributions of 653,410 shares. The Company
recognizes compensation cost related to the 15% discount and interest on Profit-
Based Deferred Compensation Accounts. The compensation cost charged against
continuing operations was $4,115,000, $4,480,000 and $2,448,000 in 1998, 1997
and 1996, respectively. The charge against discontinued operations was $219,000,
$354,000 and $294,000 in 1998, 1997 and 1996, respectively.
PROFIT SHARING PLAN
The Company has a profit sharing plan, covering substantially all employees,
which includes a salary reduction feature designed to qualify under Section
401-K of the Internal Revenue Code. Expenses of this plan related to continuing
operations amounted to $6,778,000, $6,222,000 and $4,454,000 in 1998, 1997 and
1996, respectively. Expenses of this plan related to discontinued operations
amounted to $2,362,000, $1,701,000 and $1,259,000 in 1998, 1997 and 1996,
respectively.
26
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(11) EARNINGS PER SHARE
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for the years 1998, 1997 and
1996 (in thousands of dollars, except per share amounts):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1998 1997 1996
--------- ----------------------- ---------
<S> <C> <C> <C>
Earnings from continuing operations................................ $ 36,201 $ 41,356 $ 24,414
Discontinued operations of ITGI, net of tax........................ 33,481 22,211 19,146
--------- ------- ---------
Net earnings for basic earnings per share.......................... 69,682 63,567 43,560
Earnings adjustment--stock options on subsidiary................... (1,672) (890) (501)
--------- ------- ---------
Adjusted earnings for diluted earnings per share................... $ 68,010 $ 62,677 $ 43,059
--------- ------- ---------
--------- ------- ---------
Shares of common stock and common stock equivalents:
Average number of common shares.................................... 20,902 20,148 21,644
Capital Accumulation Plan unissued shares.......................... 1,444 1,404 1,336
--------- ------- ---------
Average shares used in basic computation........................... 22,346 21,552 22,980
Stock options...................................................... 508 651 398
Other unissued common shares....................................... 100 146 32
--------- ------- ---------
Average shares used in diluted computation......................... 22,954 22,349 23,410
--------- ------- ---------
--------- ------- ---------
Earnings per share:
Basic:
Earnings from continuing operations................................ $ 1.62 $ 1.92 $ 1.06
Discontinued operations of ITGI, net of tax........................ 1.50 1.03 0.84
--------- ------- ---------
Net earnings....................................................... $ 3.12 $ 2.95 $ 1.90
--------- ------- ---------
--------- ------- ---------
Diluted:
Earnings from continuing operations................................ $ 1.58 $ 1.85 $ 1.04
Discontinued operations of ITGI, net of tax........................ 1.38 0.95 0.80
--------- ------- ---------
Net earnings....................................................... $ 2.96 $ 2.80 $ 1.84
--------- ------- ---------
--------- ------- ---------
</TABLE>
The Company had no anti-dilutive securities during 1998, 1997 and 1996.
27
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(12) LEASES
As lessee, the Company leases certain premises and equipment under
noncancelable agreements expiring at various dates through 2014. Future minimum
lease payments for all noncancelable operating leases at December 31, 1998 are
as follows (in thousands of dollars):
<TABLE>
<CAPTION>
DISCONTINUED CONTINUING
OPERATIONS OPERATIONS TOTAL
------------- ----------- ---------
<S> <C> <C> <C>
1999........................................................................ $ 3,059 $ 9,632 $ 12,691
2000........................................................................ 3,116 10,803 13,919
2001........................................................................ 2,712 9,696 12,408
2002........................................................................ 2,524 6,460 8,984
2003........................................................................ 2,914 6,008 8,922
Thereafter.................................................................. 18,818 54,280 73,098
</TABLE>
Rental expense related to continuing operations amounted to $7,295,000,
$5,742,000 and $4,859,000, in 1998, 1997 and 1996, respectively. Rental expense
related to discontinued operations amounted to $2,556,000, $2,600,000 and
$1,900,000, in 1998, 1997 and 1996, respectively.
(13) FINANCIAL INSTRUMENTS
OFF-BALANCE SHEET RISK
The Company has contractual commitments arising in the ordinary course of
business for securities loaned or purchased under agreements to sell, securities
sold but not yet purchased, repurchase agreements, future purchases and sales of
foreign currencies, securities transactions on a when-issued basis, options
contracts, futures index contracts, and underwriting. Each of these financial
instruments and activities contains varying degrees of off-balance sheet risk
whereby the market values of the securities underlying the financial instruments
may be in excess of, or less than, the contract amount. The settlement of these
transactions is not expected to have a material effect upon the Company's
consolidated financial statements.
In the normal course of business, the Company had letters of credit
outstanding aggregating $35,825,000 at December 31, 1998 to satisfy various
collateral requirements in lieu of depositing cash or securities.
The Company has derivative financial instrument positions in foreign
exchange forward contracts, option contracts, and index futures contracts, all
of which are measured at fair value with realized and unrealized gains and
losses recognized in earnings. The foreign exchange forward contract positions
are generally taken to lock in the dollar cost or proceeds of foreign currency
commitments associated with unsettled foreign denominated securities purchases
or sales. The average maturity of the forward contracts is generally less than
two weeks. The option positions taken are generally part of a strategy in which
offsetting equity positions are taken. The index futures positions are taken as
a hedge against securities positions.
The gross contracted or notional amount of index futures contracts, options
contracts, and foreign exchange forward contracts, which are not reflected in
the consolidated statements of financial condition, is set forth in the table
below and provide only a measure of the Company's involvement in these contracts
at December 31, 1998 and 1997. They do not represent amounts subject
28
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(13) FINANCIAL INSTRUMENTS (CONTINUED)
to market risk and, in many cases, serve to reduce the Company's overall
exposure to market and other risks (in thousands of dollars):
<TABLE>
<CAPTION>
NOTIONAL OR CONTRACTED AMOUNT
----------------------------------------------
<S> <C> <C> <C> <C>
1998 1997
---------------------- ----------------------
<CAPTION>
PURCHASE SALE PURCHASE SALE
----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
Index futures contracts.................................................. $ -- $ 3,559 $ -- $ 8,173
Option contracts......................................................... 2,950 2,927 6,277 4,803
Foreign exchange forward contracts....................................... -- 8,759 430 4,461
</TABLE>
FAIR VALUE OF DERIVATIVE FINANCIAL INSTRUMENTS
The following is an aggregate summary of the average 1998 and 1997 and
December 31, 1998 and 1997 fair values of derivative financial instruments (in
thousands of dollars):
<TABLE>
<CAPTION>
1998 1997
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
AVERAGE END OF PERIOD AVERAGE END OF PERIOD
----------- --------------- ----------- ---------------
Index futures contracts:
In a favorable position........................................ $ 42 $ -- $ 55 $ --
In an unfavorable position..................................... 150 178 204 149
Option contracts:
Purchase....................................................... 500 666 682 799
Sale........................................................... 506 574 372 637
Foreign exchange forward contracts:
Purchase....................................................... 2,093 -- 3,406 430
Sale........................................................... 6,623 8,759 3,291 4,461
</TABLE>
CREDIT RISK
In the normal course of business, the Company is involved in the execution,
settlement and financing of various customer and principal securities
transactions. Customer activities are transacted on a cash, margin or
delivery-versus-payment basis. Securities transactions are subject to the risk
of counterparty or customer nonperformance. However, transactions are
collateralized by the underlying security, thereby reducing the associated risk
to changes in the market value of the security through settlement date or to the
extent of margin balances.
The Company seeks to control the risk associated with these transactions by
establishing and monitoring credit limits and by monitoring collateral and
transaction levels daily. The Company may require counterparties to deposit
additional collateral or return collateral pledged. In the case of aged
securities failed to receive, the Company may, under industry regulations,
purchase the underlying securities in the market and seek reimbursement for any
losses from the counterparty.
CONCENTRATION OF CREDIT RISK
As a major securities firm, the Company's activities are executed primarily
with and on behalf of other financial institutions, including brokers and
dealers, banks and other institutional customers. Concentrations of credit risk
can be affected by changes in economic, industry or geographical factors. The
Company seeks to control its credit risk and the potential risk concentration
through a variety of reporting and control procedures, including those described
in the preceding discussion of credit risk.
29
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(14) OTHER COMPREHENSIVE INCOME
The following summarizes other comprehensive income and accumulated other
comprehensive income at December 31, 1998 and for the year then ended (in
thousands of dollars):
<TABLE>
<CAPTION>
BEFORE-TAX INCOME TAX NET-OF-TAX
AMOUNT OR BENEFIT AMOUNT
----------- ------------- -----------
<S> <C> <C> <C>
Currency translation adjustments......................... $ 573 $ -- $ 573
Minimum pension liability adjustment..................... (254) 105 (149)
----- ----- -----
Other comprehensive income (loss)........................ $ 319 $ 105 $ 424
----- ----- -----
----- ----- -----
</TABLE>
<TABLE>
<CAPTION>
MINIMUM ACCUMULATED
CURRENCY PENSION OTHER
TRANSLATION LIABILITY COMPREHENSIVE
ADJUSTMENTS ADJUSTMENT INCOME (LOSS)
------------- ----------- --------------
<S> <C> <C> <C>
Beginning balance................................. $ (622) $ (1,520) $ (2,142)
Change in 1998.................................... 573 (149) 424
----- ----------- -------
Ending balance.................................... $ (49) $ (1,669) $ (1,718)
----- ----------- -------
----- ----------- -------
</TABLE>
The following summarizes other comprehensive income and accumulated other
comprehensive income at December 31, 1997 and for the year then ended (in
thousands of dollars):
<TABLE>
<CAPTION>
BEFORE-TAX INCOME TAX NET-OF-TAX
AMOUNT OR BENEFIT AMOUNT
----------- ------------- -----------
<S> <C> <C> <C>
Currency translation adjustments......................... $ (526) $ -- $ (526)
Minimum pension liability adjustment..................... (1,645) 678 (967)
----------- ----- -----------
Other comprehensive income (loss)........................ $ (2,171) $ 678 $ (1,493)
----------- ----- -----------
----------- ----- -----------
</TABLE>
<TABLE>
<CAPTION>
MINIMUM ACCUMULATED
CURRENCY PENSION OTHER
TRANSLATION LIABILITY COMPREHENSIVE
ADJUSTMENTS ADJUSTMENT INCOME (LOSS)
------------- ----------- --------------
<S> <C> <C> <C>
Beginning balance................................. $ (96) $ (553) $ (649)
Change in 1997.................................... (526) (967) (1,493)
----- ----------- -------
Ending balance.................................... $ (622) $ (1,520) $ (2,142)
----- ----------- -------
----- ----------- -------
</TABLE>
30
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(14) OTHER COMPREHENSIVE INCOME (CONTINUED)
The following summarizes other comprehensive income and accumulated other
comprehensive income at December 31, 1996 and for the year then ended (in
thousands of dollars):
<TABLE>
<CAPTION>
BEFORE-TAX INCOME TAX NET-OF-TAX
AMOUNT OR BENEFIT AMOUNT
------------- ------------- -----------
<S> <C> <C> <C>
Currency translation adjustments......................... $ 426 $ -- $ 426
Minimum pension liability adjustment..................... 58 (25) 33
----- --- -----
Other comprehensive income (loss)........................ $ 484 $ (25) $ 459
----- --- -----
----- --- -----
</TABLE>
<TABLE>
<CAPTION>
MINIMUM ACCUMULATED
CURRENCY PENSION OTHER
TRANSLATION LIABILITY COMPREHENSIVE
ADJUSTMENTS ADJUSTMENT INCOME (LOSS)
------------- ------------- --------------
<S> <C> <C> <C>
Beginning balance................................. $ (522) $ (586) $ (1,108)
Change in 1996.................................... 426 33 459
----- ----- -------
Ending balance.................................... $ (96) $ (553) $ (649)
----- ----- -------
----- ----- -------
</TABLE>
(15) NET CAPITAL REQUIREMENTS
As registered broker-dealers, JEFCO, ITG and W & D are subject to the
Securities and Exchange Commission Uniform Net Capital Rule (Rule 15c3-1), which
requires the maintenance of minimum net capital. JEFCO, ITG and W & D have
elected to use the alternative method permitted by the Rule, which requires that
they each maintain minimum net capital, as defined, equal to the greater of
$250,000 or 2% of the aggregate debit balances arising from customer
transactions, as defined.
At December 31, 1998, JEFCO's, ITG's and W & D's net capital was
$217,367,000, $71,996,000, and $2,026,000, respectively, which exceeded minimum
net capital requirements by $213,362,000, $71,746,000, and $1,776,000,
respectively.
(16) CONTINGENCIES
IN RE NASDAQ MARKET-MAKERS ANTITRUST LITIGATION. Beginning in July 1994,
antitrust class actions were commenced against JEFCO and 33 other defendants in
various federal courts (the "Lawsuits"). Following the filing of the Lawsuits,
the Antitrust Division of the United States Department of Justice ("DOJ") and
the Commission commenced investigations into certain issues related to the
allegations of the Lawsuits. In August 1996, the DOJ entered into an antitrust
consent decree with 24 defendants who are market makers in Nasdaq stocks. JEFCO
was neither asked nor required to settle with the DOJ. Shortly after the DOJ
settlement, the Commission filed a Section 21(a) report against the National
Association of Securities Dealers, Inc. ("NASD"), criticizing various practices
by market makers, and the NASD for failing to adequately police or discipline
the market makers for those practices. However, the Commission did not take any
action at that time against the market maker firms.
In October 1994, the Lawsuits were consolidated for discovery purposes in
the United States District Court for the Southern District of New York (the
"Court"). The consolidated complaint alleges
31
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(16) CONTINGENCIES (CONTINUED)
that the defendants violated the antitrust laws by conspiring to fix the spread
paid by plaintiffs and class members to trade in certain Nasdaq securities, by
refusing to quote bids and asks in so-called odd-eighths. The cases purport to
be brought on behalf of all persons who purchased or sold certain securities on
the Nasdaq National Market System during the period May 1, 1989 to May 27, 1994.
The plaintiffs seek damages in an unspecified amount.
In order to avoid the uncertainties of litigation, JEFCO has entered into a
settlement agreement which received the preliminary approval of the Court on
October 15, 1997. The settlement received the final approval of the Court on
November 9, 1998. The amount of the settlement has been previously provided for
and will not have a material adverse effect on the Company.
INCOME TAXES. The Company received a "30-day letter" proposing certain
adjustments which, if sustained, would result in a tax deficiency of
approximately $10.0 million plus interest. Substantially all of the proposed
adjustments relate to Investment Technology Group, Inc., the Company's
approximately 80.5% owned subsidiary and include (i) the disallowance of
deductions taken in connection with the termination of certain compensation
plans at the time of Investment Technology Group's initial public offering in
1994 and (ii) the disallowance of tax credits taken in connection with certain
research and development expenditures. The Company intends to vigorously contest
the proposed adjustments and believes that resolution of this matter will not
have a material adverse effect on the Company.
OTHER. Many aspects of the Company's business involve substantial risks of
liability. In the normal course of business, the Company and its subsidiaries
have been named as defendants or co-defendants in lawsuits involving primarily
claims for damages. The Company's management believes that pending litigation
will not have a material adverse effect on the Company.
(17) SEGMENT REPORTING
The Company's operations have been classified into two business segments:
Financial Services and ITGI. The Financial Services segment includes the
traditional securities brokerage and investment banking activities of the
Company. The ITGI segment includes the automated equity trading and transaction
research activities of ITGI and its subsidiaries.
On March 17, 1998, Group and ITGI jointly announced plans for a series of
transactions (the "Transactions") that would result in the separation of ITGI
from the other Group businesses. Group would transfer all non-ITGI assets and
liabilities to the Company (the "Transfers"). After the Transfers, Group's 15
million shares of ITGI would be its only asset. Group would then distribute all
of the common stock of the Company to the Group stockholders (the "Spin-Off").
Immediately following the Spin-Off, ITGI would merge with and into Group with
Group as the surviving corporation (the "Merger"). In connection with the
Merger, Group would be renamed Investment Technology Group, Inc. (the "Surviving
Corporation"). Subject to the terms and conditions of the merger agreement, each
issued and outstanding share of ITGI common stock (other than any shares held by
Group or held in the Treasury of ITGI) will be converted into the right to
receive a number of shares of common stock of the Surviving Corporation equal to
the ratio derived after dividing the number of shares of Group Common Stock
outstanding immediately prior to the effective time of the Merger by
32
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(17) SEGMENT REPORTING (CONTINUED)
the number of shares of ITGI Common Stock owned by Group immediately prior to
the effective time of the Merger.
As a result of the Transactions, Group stockholders will own 100% of the
Company and approximately 80.5% of the Surviving Corporation. The public ITGI
stockholders will own 19.5% of the Surviving Corporation, the same proportionate
ownership they held in ITGI prior to the Transactions.
On March 12, 1999, Group received tax rulings from the Internal Revenue
Service (the "IRS") with the concurrence of the IRS concerning the tax-free
treatment of the Transfers and the Spin-Off for Group and its stockholders,
respectively. On March 17, 1999, Group's Board of Directors unanimously approved
the Transfers and the Spin-Off. The Transactions are contingent on a number of
factors, including receipt of stockholders approvals. All stockholder
approvals were received on April 20, 1999.
In anticipation of the Spin-Off, Group liquidated its CAP plan, a deferred
compensation plan consisting of cash and stock, to nearly 200 employees on
January 25, 1999. The liquidation of this plan resulted in a capital infusion
into the Company and in employees receiving approximately 1.5 million shares of
Group.
Financial information for the discontinued business segment is summarized as
follows (in thousands of dollars):
ITGI CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1997
---------- ----------
<S> <C> <C>
ASSETS
Cash and cash equivalents............................................. $ 77,324 $ 14,263
Securities owned...................................................... 39,615 37,358
Receivables from brokers, dealers and others.......................... 24,127 10,131
Premises and equipment................................................ 19,662 19,506
Other assets.......................................................... 19,784 32,383
---------- ----------
$ 180,512 $ 113,641
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses................................. $ 36,515 $ 19,875
Securities sold, not yet purchased.................................... 288 3
---------- ----------
36,803 19,878
Stockholders' equity.................................................. 143,709 93,763
---------- ----------
$ 180,512 $ 113,641
---------- ----------
---------- ----------
</TABLE>
33
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(17) SEGMENT REPORTING (CONTINUED)
COMPONENTS OF INVESTMENT IN DISCONTINUED OPERATIONS OF ITGI:
<TABLE>
<S> <C> <C>
Stockholders' equity of ITGI............................ $ 143,709 $ 93,763
Add: Goodwill on Company's books related to ITGI........ 5,300 1,635
Less: Deferred taxes on ITGI initial public offering
gain.................................................. (12,922) (13,766)
Less: Minority interest in ITGI......................... (27,754) (16,575)
--------- ---------
Investment in discontinued operations of ITGI........... $ 108,333 $ 65,057
--------- ---------
--------- ---------
</TABLE>
ITGI CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1998 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Revenues................................................. $ 212,205 $ 137,042 $ 111,556
Expenses................................................. 131,270 89,782 70,555
---------- ---------- ----------
Earnings before income tax expense....................... 80,935 47,260 41,001
Income tax expense....................................... 37,541 20,343 17,666
---------- ---------- ----------
Net earnings............................................. $ 43,394 $ 26,917 $ 23,335
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
COMPONENTS OF DISCONTINUED OPERATIONS OF ITGI:
<TABLE>
<S> <C> <C> <C>
Net earnings of ITGI.......................... $ 43,394 $ 26,917 $ 23,335
Less: Company's spin-off related expenses..... 1,936 -- --
Less: Minority interest in ITGI............... 7,977 4,706 4,189
--------- --------- ---------
Discontinued operations of ITGI............... $ 33,481 $ 22,211 $ 19,146
--------- --------- ---------
--------- --------- ---------
</TABLE>
CAPITALIZED SOFTWARE
ITGI capitalizes software development costs where technological feasibility
of the product has been established. The establishment of technological
feasibility and the ongoing assessment of recoverability of capitalized software
development costs requires considerable judgment by management with respect to
certain external factors, including, but not limited to, technological
feasibility, anticipated future gross revenues, estimated economic life and
changes in software and hardware technologies. The Company is amortizing
capitalized software costs using the straight-line method over one to two years,
with an average remaining life of under two years. Amortization begins when the
product is available for release to the customers. As of December 31, 1998 and
1997, respectively, the Company had $6.5 million and $6.0 million of capitalized
software costs, net of accumulated amortization included in investment in
discontinued operations of ITGI. In 1998, 1997 and 1996, the Company amortized
software costs of $3.5 million, $1.5 million, and $1.4 million, respectively.
Research and development expenses related to software were $11.0 million,
$8.4 million and $6.8 million in 1998, 1997 and 1996, respectively. In 1998,
1997 and 1996, $4.0 million, $4.4 million and $1.6 million, respectively, were
capitalized.
34
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(17) SEGMENT REPORTING (CONTINUED)
GOODWILL
At December 31, 1998 and 1997, excess of purchase price over net assets
acquired remaining was $6,673,000 and $3,556,000, net of accumulated
amortization of $4,174,000 and $3,436,000, respectively and is included in other
assets on ITGI's Condensed Consolidated Statements of Financial Condition.
BENEFIT PLANS
In 1994 ITGI, established the 1994 Employee Stock Option and Long-Term
Incentive Plan (ITGI Plan) which allows for the granting of options to purchase
a total of 3,650,000 shares of ITGI common stock. In 1995, the ITGI Board of
Directors adopted, and the ITGI stockholders approved, the Non-Employee
Directors' Plan (ITGI Director Plan). The ITGI Director Plan generally provides
for an annual grant to each non-employee director an option to purchase 2,500
shares of ITGI common stock. In addition, the ITGI Director Plan provides for
the automatic grant to a non-employee director, at the time he or she is
initially elected, a stock option to purchase 10,000 shares of ITGI common
stock. Stock options granted under the ITGI Director Plan are non-qualified
stock options having an exercise price equal to 100% of the fair market value of
ITGI common stock at the date of grant. A total of 125,000 shares of ITGI common
stock are reserved for issuance under the ITGI Director Plan. There were a total
of 3,458,216 fixed stock options outstanding and 18,220,968 ITGI common stock
shares outstanding as of December 31, 1997. There were a total of 2,888,106
fixed stock options outstanding and 18,590,361 ITGI common stock shares
outstanding as of December 31, 1998.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the weighted-average assumptions
used for all fixed option grants in 1998, 1997 and 1996, respectively: dividend
yield of 0.0%, 0.0% and 0.0%; expected volatility of 45%, 54% and 49%; risk-free
interest rates of 5.5%, 6.6% and 6.1%; and expected lives of 7 years, 5 years
and 4 years.
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ -------------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
AT REMAINING AVERAGE AT AVERAGE
RANGE OF EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
PRICES 1998 LIFE (YEARS) PRICE 1998 PRICE
- ---------------------- ------------ --------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
$ 7.50-- 9.99....... 445,909 1.9 $ 9.08 445,909 $ 9.08
$10.00--14.99....... 1,167,117 0.9 $ 12.30 1,167,117 $ 12.30
$15.00--19.99....... 157,976 3.4 $ 19.22 73,256 $ 18.94
$20.00--24.99....... 1,019,604 3.1 $ 22.21 1,010,000 $ 22.19
$25.00--29.99....... 92,500 8.4 $ 27.80 26,000 $ 27.97
$30.00--32.10....... 5,000 4.3 $ 32.10 -- --
------------ ------------
$7.50--32.10........ 2,888,106 2.2 $ 16.21 2,722,282 $ 15.77
------------ ------------
------------ ------------
</TABLE>
35
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(17) SEGMENT REPORTING (CONTINUED)
CASH PAID FOR INTEREST AND INCOME TAXES
The interest paid and income taxes paid amounts included in the Consolidated
Statements of Cash Flows included amounts related to discontinued operations of
ITGI (in thousands of dollars).
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Interest paid................................................ $ 20 $ 146 $ 223
Income taxes paid to affiliate............................... $ 30,296 $ 19,947 $ 18,798
</TABLE>
(18) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following is a summary of unaudited quarterly statements of earnings for
the years ended December 31, 1998 and 1997 (in thousands of dollars, except per
share amounts):
<TABLE>
<CAPTION>
MARCH JUNE SEPTEMBER DECEMBER YEAR
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
1998
Revenues............................................. $ 163,848 $ 149,699 $ 124,041 $ 153,027 $ 590,615
Earnings before income taxes......................... 19,226 16,751 6,830 16,386 59,193
Earnings from continuing operations.................. 11,568 10,101 4,916 9,616 36,201
Earnings from discontinued operations
of ITGI............................................ 5,908 7,725 10,760 9,088 33,481
Net earnings......................................... 17,476 17,826 15,676 18,704 69,682
Basic:
Earnings from continuing operations
per share.......................................... 0.52 0.46 0.22 0.42 1.62
Net earnings per share............................... 0.79 0.80 0.70 0.82 3.12
Diluted:
Earnings from continuing operations
per share.......................................... 0.51 0.44 0.21 0.42 1.58
Net earnings per share............................... 0.75 0.76 0.66 0.79 2.96
1997
Revenues............................................. $ 116,993 $ 165,448 $ 152,090 $ 196,311 $ 630,842
Earnings before income taxes......................... 10,206 21,402 15,079 22,003 68,690
Earnings from continuing operations.................. 6,031 13,122 9,073 13,130 41,356
Earnings from discontinued operations
of ITGI............................................ 5,366 6,626 5,347 4,872 22,211
Net earnings......................................... 11,397 19,748 14,420 18,002 63,567
Basic:
Earnings from continuing operations
per share.......................................... 0.28 0.61 0.42 0.61 1.92
Net earnings per share............................... 0.53 0.92 0.67 0.83 2.95
Diluted:
Earnings from continuing operations
per share.......................................... 0.27 0.59 0.41 0.59 1.85
Net earnings per share............................... 0.50 0.87 0.63 0.79 2.80
</TABLE>
36
<PAGE>
(b) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
3.1 -- Amended and Restated Certificate of Incorporation of JEF Holding
Company, Inc. ("New JEF")*
3.2 -- By-Laws of New JEF*
10.1 -- 1999 Incentive Compensation Plan of New JEF*
10.2 -- 1999 Directors' Stock Incentive Plan of New JEF*
10.3 -- Distribution Agreement, dated as of March 17, 1999, by and between
Group and New JEF. *
10.4 -- Tax Sharing and Indemnification Agreement, dated as of March 17,
1999, by and among Investment Technology Group, Inc. ("ITGI"), Group
and New JEF. *
10.5 -- Amended and Restated Tax Sharing Agreement, dated as of March 17,
1999, by and among ITGI, Group and New JEF. *
10.6 -- Benefits Agreement, dated as of March 17, 1999, by and between Group
and New JEF. *
10.7 -- Fully Disclosed Clearing Agreement, dated as of January 1, 1999, by
and between Jefferies & Company, Inc. and ITG Inc. *
10.8 -- Amendment No. 1 dated as of January 1, 1999 to Service Agreement
dated March 15, 1994, by and between Jefferies & Company, Inc. and
ITG Inc. *
10.9 -- Execution Agreement, dated as of January 1, 1999, by and between W&D
Securities, Inc. and ITGI. *
10.10 -- Form of Pre-Closing and Escrow Agreement by and among The Bank of
New York, Group, New JEF and ITGI.*
21 -- List of Subsidiaries*
27 -- Financial Data Schedule *
99.1 -- The identified portions, as set forth in detail in Part I hereof,
of the Jeffries Group, Inc. definitive proxy statement
(File No. 1-11665) filed with the Securities and Exchange
Commission on March 18, 1999 (the "1999 Definitive Proxy
Statement") are incorporated in this Registration Statement on
Form 10 by reference to the 1999 Definitive Proxy Statement,
pursuant to Rule 12b-32(a) under the Exchange Act.
- -----------------
* Filed herewith
</TABLE>
<PAGE>
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
JEF HOLDING COMPANY, INC.
By: /s/ Frank E. Baxter
----------------------------------
Name: Frank E. Baxter
Title: Chairman of the Board of Directors
<PAGE>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
JEF HOLDING COMPANY, INC.
JEF Holding Company, Inc., a corporation organized and existing under
the laws of the State of Delaware, hereby certifies as follows:
1. The name of the corporation is JEF Holding Company, Inc. The date of filing
of its original Certificate of Incorporation with the Secretary of State was
December 23, 1998.
2. This Amended and Restated Certificate of Incorporation restates and
integrates and further amends the Certificate of Incorporation of this
corporation by revising the provisions for director removal and by providing
additional director indemnification as permitted by Section 145 of the Delaware
General Corporation Law.
3. The Text of the Certificate of Incorporation as amended or supplemented
heretofore is further amended hereby to read as herein set forth in full:
FIRST: The name of the corporation is JEF Holding Company, Inc.
(hereinafter referred to as the "Corporation").
SECOND: The registered office of the Corporation is to be located at
Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, in the
County of New Castle, in the State of Delaware. The name of its registered agent
at that address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware ("GCL").
FOURTH:
A. AUTHORIZED STOCK.
The total number of shares of stock which the Corporation
shall have authority to issue is one hundred ten million (110,000,000)
shares, consisting of one hundred million (100,000,000) shares of
common stock, each with a par value of $0.0001 per share (hereinafter
referred to as the "Common Stock"), and ten million (10,000,000) shares
of preferred stock, each with a par value of $0.0001 per share
(hereinafter referred to as the "Preferred Stock"). The powers,
designations, preferences and relative, participating, optional or
other special rights (and the qualifications, limitations or
restrictions thereof) of the Common Stock and the Preferred Stock are
as follows:
B. PREFERRED STOCK.
The Board of Directors is hereby expressly authorized at any
time, and from time to time, to create and provide for the issuance of
shares of Preferred Stock in one or more series (the "Series Preferred
Stock") and, by filing a certificate pursuant to the GCL (hereinafter
referred to as a "Preferred Stock Designation"), to establish the
number of shares to be included in each such series, and to fix the
designations, preferences and relative, participating, optional or
other special rights of the shares of each such series and the
qualifications,
-1-
<PAGE>
limitations or restrictions thereof, as shall be stated and expressed
in the resolution or resolutions providing for the issue thereof
adopted by the Board of Directors, including, but not limited to, the
following:
(i) the designation of and the number of shares constituting
such series, which number the Board of Director may thereafter
(except as otherwise provided in the Preferred Stock
Designation) increase or decrease (but not below the number of
shares of such series then outstanding);
(ii) the dividend rate for the payment of dividends on such
series, if any, the conditions and dates upon which such
dividends shall be payable, the preference or relation which
such dividends, if any, shall bear to the dividends payable on
any other class or classes of or any other series of capital
stock, the conditions and dates upon which such dividends, if
any, shall be payable, and whether such dividends, if any,
shall be cumulative or non-cumulative;
(iii) whether the shares of such series shall be subject to
redemption by the Corporation, and, if made subject to such
redemption, the times, prices and other terms and conditions
of such redemption;
(iv) the terms and amount of any sinking fund provided for the
purchase or redemption of the shares of such series;
(v) whether or not the shares of such series shall be
convertible into or exchangeable for shares of any other class
or classes of, any other series of any class or classes of
capital stock of, or any other security of, the Corporation or
any other corporation, and, if provision be made for any such
conversion or exchange, the times, prices, rates, adjustments
and any other terms and conditions of such conversion or
exchange;
(vi) the extent, if any, to which the holders of the shares of
such series shall be entitled to vote as a class or otherwise
with respect to the election of directors or otherwise;
(vii) the restrictions, if any, on the issue or reissue of
shares of the same series or of any other class or series;
(viii) the amounts payable on and the preferences, if any, of
the shares of such series in the event of any voluntary or
involuntary liquidation, dissolution or winding up of the
Corporation; and
-2-
<PAGE>
(ix) any other relative rights, preferences and limitations of
that series.
C. COMMON STOCK.
Each holder of Common Stock shall have one vote in respect of
each share of Common Stock held by such holder of record on the books
of the Corporation for the election of directors and on all other
matters on which stockholders of the Corporation are entitled to vote.
Subject to any rights that may be conferred upon any holders of
Preferred Stock or any other series or class of stock as set forth in
this Certificate of Incorporation (excluding Common Stock), upon
dissolution, the holders of Common Stock then outstanding shall be
entitled to receive the net assets of the Corporation. Such net assets
shall be divided among and paid to the holders of Common Stock, on a
pro-rata basis, according to the number of shares of Common Stock held
by them. Subject to any rights that may be conferred upon any holders
of Preferred Stock or any other series or class of stock as set forth
in this Certificate of Incorporation (excluding Common Stock), the
holders of shares of Common Stock shall be entitled to receive, when
and if declared by the Board of Directors, out of the assets of the
Corporation which are by law available therefor, dividends payable
either in cash, in stock or otherwise.
FIFTH: The Corporation is to have perpetual existence.
SIXTH:
A. Subject to the rights of the holders of any series of
Preferred Stock or any other series or class of stock as set forth in
this Certificate of Incorporation (excluding Common Stock) to elect
additional directors under specified circumstances, the number of
directors of the Corporation shall be fixed, and may be increased or
decreased from time to time, in such a manner as may be prescribed by
the By-laws of the Corporation.
B. Unless and except to the extent that the By-laws of the
Corporation shall so require, the election of directors of the
Corporation need not be by written ballot.
C. Directors shall be elected and hold such terms of office as
provided in the By-laws of the Corporation.
D. Advance notice of stockholder nominations for the election
of directors and advance notice of other stockholder action proposed to
be taken at a stockholder's meeting shall be given in the manner
provided in the By-laws of the Corporation.
-3-
<PAGE>
E. Subject to the rights of the holders of any Preferred Stock
or any other series or class of stock (excluding Common Stock) set
forth in the Certificate of Incorporation, a special meeting of the
stockholders shall be called only by the secretary of the Corporation
at the request of (i) a majority of the total number of directors which
the Corporation at the time would have if there were no vacancies or
(ii) by any person authorized by the Board of Directors (through a vote
of a majority of the total number of directors which the Corporation at
the time would have if there were no vacancies) to call a special
meeting. Notwithstanding the foregoing, stockholders shall have no
right to call a special meeting of stockholders.
F. Subject to the rights of the holders of any series of
Preferred Stock or any other series or class of stock (excluding Common
Stock) set forth in the Certificate of Incorporation to elect
additional directors under specified circumstances or to consent to
specific actions taken by the Corporation, any action required or
permitted to be taken by the stockholders of the Corporation must be
taken at an annual or special meeting of the stockholders and may not
be taken by any consent in writing by such stockholders.
G. Notwithstanding anything contained in this Certificate of
Incorporation to the contrary, the affirmative vote of the holders of
shares representing at least 66-2/3% of the voting power of the then
outstanding voting stock of the Corporation entitled to vote in
elections of directors generally, voting together as a single class,
shall be required to amend, repeal or adopt any provisions inconsistent
with this Article SIXTH.
SEVENTH: The Board of Directors shall have the power, in addition to
the stockholders, to make, alter, or repeal the By-laws of the Corporation.
EIGHTH: A director of the Corporation shall not be liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the GCL, or (iv) for any
transaction from which the director derived an improper personal benefit.
The Corporation shall, to the fullest extent permitted by section 145
of the DGCL, as the same may be amended and supplemented, indemnify each
director and officer of the Corporation from and against any and all expenses,
liabilities or other matters referred to in or covered by said section and the
indemnification provided for herein shall not be deemed exclusive of any other
rights to which those indemnified may be entitled under any by-laws, agreement,
vote of stockholders, vote of disinterested directors or otherwise, and shall
continue as to a person who has ceased to be a director of officer and shall
inure to the benefit of heirs, executors
-4-
<PAGE>
and administrators of such persons and the Corporation may purchase and maintain
insurance on behalf of any director or officer to the extent permitted by
section 145 of the DGCL.
Neither the amendment nor repeal of this Article EIGHTH, nor the
adoption of any provision of this Certificate of Incorporation inconsistent with
this Article EIGHTH, shall eliminate or reduce the effect of this Article EIGHTH
in respect of any matter occurring, or any cause of action, suit or claim that,
but for this Article EIGHTH, would accrue or arise, prior to such amendment,
repeal or adoption of an inconsistent provision.
NINTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders are granted subject to this reservation.
4. This Amended and Restated Certificate of Incorporation was duly adopted by
the Board of Directors and approved by the stockholders in accordance with
Sections 242 and 245 of the Delaware General Corporation Law.
IN WITNESS WHEREOF, said JEF Holding Company, Inc. has caused this
Certificate to be signed by the duly authorized officer below on this 17th
day of March, 1999.
JEF HOLDING COMPANY, INC.
By:/s/ Jerry M. Gluck
-------------------------
Name: Jerry M. Gluck
Title: Secretary and
General Counsel
-5-
<PAGE>
JEF HOLDING, INC.
(a Delaware corporation)
----------------------------------
BYLAWS
----------------------------------
<PAGE>
BY-LAWS
OF
JEF HOLDING, INC.
(a Delaware Corporation)
ARTICLE I
OFFICES AND FISCAL YEAR
SECTION 1.01. REGISTERED OFFICE. The registered office of the
Corporation shall be in the City of Wilmington, County of New Castle, State of
Delaware and the name and address of its registered agent is The Corporation
Trust Company, 1209 Orange Street, Wilmington, Delaware.
SECTION 1.02. OTHER OFFICES. The Corporation may also have offices at
such other places within or without the State of Delaware as the Board of
Directors may from time to time determine or the business of the Corporation
requires.
SECTION 1.03. FISCAL YEAR. The fiscal year of the Corporation shall end
on the 31st of December in each year unless the Board of Directors determines
otherwise.
ARTICLE II
MEETINGS OF STOCKHOLDERS
SECTION 2.01. PLACE OF MEETING. All meetings of the stockholders of the
Corporation shall be held at the registered office of the Corporation, or at
such other place within or without the State of Delaware as shall be designated
by the Board of Directors in the notice of such meeting.
SECTION 2.02. ANNUAL MEETING. The Board of Directors shall fix the date
and time of the annual meeting of the stockholders, and at said meeting the
stockholders then entitled to vote shall elect directors and shall transact such
other business as may properly be brought before the meeting.
-2-
<PAGE>
SECTION 2.03. SPECIAL MEETINGS. Subject to the rights of the holders of
any series of stock having a preference over the Common Stock of the Corporation
as to dividends or upon liquidation ("Preferred Stock") with respect to such
series of Preferred Stock or any other series or class of stock (excluding
Common Stock) set forth in the Certificate of Incorporation, a special meeting
of the stockholders shall be called only by the secretary of the Corporation at
the request of (i) a majority of the total number of directors which the
Corporation at the time would have if there were no vacancies or (ii) by any
person authorized by the Board of Directors (through a vote of a majority of the
total number of directors which the Corporation at the time would have if there
were no vacancies) to call a special meeting. Notwithstanding the foregoing,
stockholders shall have no right to call a special meeting of stockholders.
SECTION 2.04. NOTICE OF MEETINGS. Written notice of the place, date and
hour of every meeting of the stockholders, whether annual or special, shall be
given to each stockholder of record entitled to vote at the meeting not less
than ten nor more than sixty days before the date of the meeting. Every notice
of a special meeting shall state the purpose or purposes thereof.
SECTION 2.05. QUORUM, MANNER OF ACTING AND ADJOURNMENT. The holders of
a majority of the stock issued and outstanding (not including treasury stock)
and entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute, by the Certificate of
Incorporation or by these By-laws. If, however, such quorum shall not be present
or represented at any meeting of the stockholders, the Board of Directors or the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum shall be present or
represented. At any such adjourned meeting, at which a quorum shall be present
or represented, any business may be transacted which might have been transacted
at the meeting as originally notified. If the adjournment is for more than
thirty days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting. When a quorum is present
at any meeting, the vote by stockholders present or represented by proxy
entitled to cast a majority of the votes which all stockholders present are
entitled to cast thereon shall decide any question brought before such meeting,
unless the question is one upon which, by express provision of the applicable
statute, the Certificate of Incorporation or these By-laws, a different vote is
required in which case such express provision shall govern and control the
decision of such question. Except upon those questions governed by the aforesaid
express provisions, the stockholders present in person or by proxy at a duly
organized meeting can continue to do business until adjournment, notwithstanding
withdrawal of enough stockholders to leave less than a quorum.
-3-
<PAGE>
SECTION 2.06. ORGANIZATION. At every meeting of the stockholders, the
chairman of the board, if there be one, shall act as chairman or in the case of
a vacancy in the office or absence of the chairman of the board, one of the
following persons present in the following order stated shall act as chairman:
the vice chairman, if one has been appointed, the president, a chairman
designated by the Board of Directors, the vice presidents in their order or
rank, or a chairman chosen by the stockholders entitled to cast a majority of
the votes which all stockholders present in person or by proxy are entitled to
cast, shall act as chairman, and the secretary, or, in his or her absence, an
assistant secretary, or in the absence of the secretary and the assistant
secretaries, a person appointed by the chairman, shall act as secretary.
SECTION 2.07. VOTING. Unless otherwise provided in the Certificate of
Incorporation, each stockholder shall at every meeting of the stockholders be
entitled to one vote in person or by proxy for each share of capital stock
having voting power held by such stockholder. No proxy shall be voted or acted
upon after three years from its date, unless the proxy provides for a longer
period. Every proxy shall be executed in writing by the stockholder or by such
stockholder's duly authorized attorney-in-fact and filed with the secretary of
the Corporation; provided, however, the foregoing clause shall not preclude the
giving of proxies by electronic, telephonic or other means so long as such
procedure is expressly approved by the Corporation's Board of Directors and is
permitted by law. A proxy may be made irrevocable regardless of whether the
interest with which it is coupled is an interest in the stock itself or an
interest in the Corporation generally. A proxy shall not be revoked by the death
or incapacity of the maker unless, before the vote is counted or the authority
is exercised, written notice of such death or incapacity is given to the
secretary of the Corporation.
SECTION 2.08. NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS.
(A) ANNUAL MEETING OF STOCKHOLDERS.
(1) Nominations of persons for election to the
Board of Directors of the Corporation and the proposal of business to be
considered by the stockholders may be made at an annual meeting of stockholders
(a) by or at the direction of the Board of Directors pursuant to a resolution
adopted by a majority of the total number of directors which the Corporation at
the time would have if there were no vacancies or (b) by any stockholder of the
Corporation who is entitled to vote at the meeting with respect to the election
of directors or the business to be proposed by such stockholder, as the case may
be, who complies with the notice procedures set forth in clauses (2) and (3) of
paragraph (A) of this Section 2.08 and who is a stockholder of record at the
time such notice is delivered to the secretary of the Corporation as provided
below.
(2) For nominations or other business to be
properly brought before an annual meeting by a stockholder pursuant to clause
(b) of paragraph (A) (1) of this Section 2.08, the stockholder must have given
timely notice thereof in writing to the secretary of the
-4-
<PAGE>
Corporation and such business must be a proper subject for stockholder action
under the Delaware General Corporation Law (the "DGCL"). To be timely, a
stockholder's notice shall be delivered to the secretary of the Corporation at
the principal executive office of the Corporation not less than 60 days nor more
than 90 days prior to the first anniversary of the preceding year's annual
meeting (or action taken by consent in lieu of annual meeting); PROVIDED,
HOWEVER, that in the event that the date of the annual meeting is advanced by
more than 30 days, or delayed by more than 30 days, from such anniversary date,
notice by the stockholder to be timely must be so delivered not earlier than the
90th day prior to such annual meeting and not later than either the close of
business on (a) the 10th day following the day on which notice of the date of
such meeting was mailed or (b) the 10th day following the day on which public
announcement of the date of such meeting is first made, whichever first occurs
in (a) or (b). Such stockholder's notice shall set forth (x) as to each person
whom the stockholder proposes to nominate for election or reelection as a
director all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), including such person's written
consent to being named in the proxy statement as a nominee and to serving as a
director if elected; (y) as to any other business that the stockholder proposes
to bring before the meeting, a brief description of the business desired to be
brought before the meeting, the reasons for conducting such business at the
meeting and any material interest in such business of such stockholder and the
beneficial owner, if any, on whose behalf the proposal is made; and (z) as to
the stockholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made (i) the name and address of such
stockholder, as they appear on the Corporation's books, and of such beneficial
owner and (ii) the class and number of shares of the Corporation which are owned
beneficially and of record by such stockholder and such beneficial owner.
(3) Notwithstanding anything in the second
sentence of paragraph (A) (2) of this Section 2.08 to the contrary, in the event
that the number of directors to be elected to the Board of Directors is
increased and there is no public announcement naming all of the nominees for
director or specifying the size of the increased Board of Directors made by the
Corporation at least 80 days prior to the first anniversary of the preceding
year's annual meeting, a stockholder's notice required by paragraph (A) (2) of
this Section 2.08 shall also be considered timely, but only with respect to
nominees for any new positions created by such increase, if it shall be
delivered to the secretary of the Corporation at the principal executive offices
of the Corporation not later than the close of business on the 10th day
following the day on which such public announcement is first made by the
Corporation.
(B) SPECIAL MEETING OF STOCKHOLDERS. Only such business shall
be conducted at a special meeting of stockholders as shall have been brought
before the meeting pursuant to the Corporation's notice of meeting and in
accordance with these By-laws. Nominations of persons for election to the Board
of Directors may be made at a special meeting of stockholders
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at which directors are to be elected pursuant to the Corporation's notice of
meeting (a) by or at the direction of the Board of Directors or (b) provided
that the Board of Directors has determined that directors shall be elected at
such meeting, by any stockholder of the Corporation who is a stockholder of
record at the time of giving of notice provided for in this Section 2.08, who
shall be entitled to vote at the meeting and who complies with the notice
procedures set forth in this Section 2.08. In the event the Corporation calls a
special meeting of stockholders for the purpose of electing one or more
directors to the Board of Directors, any such stockholder may nominate a person
or persons (as the case may be), for election to such position(s) as specified
in the Corporation's notice of meeting, if the stockholder's notice required by
paragraph (A)(2) of this Section 2.08 shall be delivered to the Secretary at the
principal executive offices of the Corporation not earlier than the close of
business on the 90th day prior to such special meeting and not later than the
close of business on the later of the 60th day prior to such special meeting or
the 10th day following the day on which public announcement is first made of the
date of the special meeting and of the nominees proposed by the Board of
Directors to be elected at such meeting. In no event shall the public
announcement of an adjournment of a special meeting commence a new time period
for the giving of a stockholders notice as described above.
(C) GENERAL.
(1) Only persons who are nominated in accordance
with the procedures set forth in this Section 2.08 shall be eligible to serve as
directors and only such business shall be conducted at a meeting of stockholders
as shall have been brought before the meeting in accordance with the procedures
set forth in this Section 2.08.
(2) Except as otherwise provided by law, the
Certificate of Incorporation or this Section 2.08, the chairman of the meeting
shall have the power and duty to determine whether a nomination or any business
proposed to be brought before the meeting was made in accordance with the
procedures set forth in this Section 2.08 and, if any proposed nomination or
business is not in compliance with his Section 2.08, to declare that such
defective nomination or proposal shall be disregarded.
(3) For purposes of this Section 2.08, "public
announcement" shall mean disclosure on a press release reported by the Dow Jones
News Service, Associated Press or comparable national news service or in a
document publicly filed by the Corporation with the Securities and Exchange
Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.
(4) Notwithstanding the foregoing provisions of
this Section 2.08, a stockholder shall also comply with all applicable
requirements of the Exchange Act and the rules and regulations thereunder with
respect to the matters set forth in this Section 2.08. Nothing in this Section
2.08 shall be deemed to affect any rights (i) of stockholders to request
inclusion of proposals in the Corporation's proxy materials with respect to a
meeting of stockholders pursuant
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to Rule 14a-8 under Exchange Act or (ii) of the holders of any series of
Preferred Stock or any other series or class of stock (excluding Common Stock)
as set forth in the Certificate of Incorporation to elect directors under
specified circumstances or to consent to specific actions taken by the
Corporation.
SECTION 2.09. PROCEDURE FOR ELECTION OF DIRECTORS; REQUIRED VOTE.
Subject to the rights of the holders of any series of Preferred Stock or any
other series or class of stock as set forth in the Certificate of Incorporation
to elect directors under specified circumstances, election of directors at all
meetings of the stockholders at which directors are to be elected shall be by a
plurality of the votes cast. Except as otherwise provided by law, the
Certificate of Incorporation, or these By-Laws, in all matters other than the
election of directors, the affirmative vote of a majority of the stock present
in person or represented by proxy at the meeting and entitled to vote on the
matter shall be the act of the stockholders.
SECTION 2.10. NO STOCKHOLDER ACTION BY WRITTEN CONSENT. Subject to the
rights of the holders of any series of Preferred Stock or any other series or
class of stock (excluding Common Stock) set forth in the Certificate of
Incorporation to elect additional directors under specified circumstances or to
consent to specific actions taken by the Corporation, any action required or
permitted to be taken by the stockholders of the Corporation must be taken at an
annual or special meeting of the stockholders and may not be taken by any
consent in writing by stockholders of the Corporation.
SECTION 2.11. VOTING LISTS. The officer who has charge of the stock
ledger of the Corporation shall prepare and make, at least ten days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting. The list shall be arranged in alphabetical order showing the
address of each stockholder and the number of shares registered in the name of
each stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten days prior to the meeting either at a place within the
city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held. The list shall also be produced and kept at the time and place of
the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
SECTION 2.12. INSPECTORS OF ELECTION. All elections of
directors shall be by written ballot, unless otherwise provided in the
Certificate of Incorporation; the vote upon any other matter need not be by
ballot. In advance of any meeting of stockholders, the Board of Directors may
appoint inspectors of election, who need not be stockholders, to act at such
meeting or any adjournment thereof. If inspectors of election are not so
appointed, the chairman of any such meeting shall, appoint inspectors of
election. The number of inspectors shall be either one or three, as determined
by the chairman of the meeting or the Board of Directors, as
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the case may be. No person who is a candidate for office shall act as an
inspector. In case any person appointed as an inspector fails to appear or fails
or refuses to act, the vacancy may be filled by appointment made by the Board of
Directors in advance of the convening of the meeting, or at the meeting by the
chairman of the meeting.
If inspectors of election are appointed as aforesaid, they shall
determine the number of shares outstanding and the voting power of each, the
shares represented at the meeting, the existence of a quorum, and the
authenticity, validity and effect of proxies and ballots, receive votes or
ballots, hear and determine all challenges and questions in any way arising in
connection with the right to vote, count and tabulate all votes, determine the
result, and do such acts as may be proper to conduct the election or vote with
fairness to all stockholders. If there be three inspectors of election, the
decision, act or certificate of a majority shall be effective in all respects as
the decision, act or certificate of all.
On request of the chairman of the meeting or of any stockholder or such
stockholder's proxy, the inspectors shall make a report in writing of any
challenge or question or matter determined by them, and execute a certificate of
any fact found by them.
ARTICLE III
BOARD OF DIRECTORS
SECTION 3.01. POWERS. The business and affairs of the Corporation shall
be managed by or under the direction of the Board of Directors. In addition to
the express powers conferred upon the Board of Directors by these By-laws, the
Board of Directors may exercise all such powers of the Corporation and do all
such lawful acts and things as are not by law or the Certificate of
Incorporation or by these By-laws required to be exercised or done by the
stockholders.
SECTION 3.02. NUMBER AND TERM OF OFFICE. The Board of Directors shall
consist of such number of directors, not less than 6 nor more than 17, as may be
determined from time to time by (i) a resolution adopted by a majority of the
total number of directors which the Corporation at the time would have if there
were no vacancies or (ii) the affirmative vote of at least 66 2/3% of the voting
power of all of the shares of the Corporation entitled to vote generally in the
elections of directors, voting together as a single class. The directors shall
be elected at each annual meeting of stockholders of the Corporation and shall
hold office for a term expiring at the annual meeting of stockholders held in
the year following the year of their election, and until their successors are
elected and qualified. All directors of the Corporation shall be natural
persons, but need not be residents of Delaware or stockholders of the
Corporation.
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SECTION 3.03. VACANCIES. Subject to applicable law and the rights of
the holders of any series of Preferred Stock or any other series or class of
stock (excluding Common Stock) as set forth in the Certificate of Incorporation
to elect directors under specified circumstances, and unless the Board of
Directors otherwise determines, vacancies resulting from death, resignation,
retirement, disqualification, removal from office or other cause, and newly
created directorships resulting from any increase in the authorized number of
directors, may be filled only by the affirmative vote of a majority of the
remaining directors, though less than a quorum of the Board of Directors, or
stockholders of the Corporation at any annual meeting, and directors so chosen
shall hold office for a term expiring at the annual meeting of stockholders at
which the term of office of the class to which they have been elected expires
and until such director's successor shall have been duly elected and qualified.
No decrease in the number of authorized directors shall shorten the term of any
incumbent director.
SECTION 3.04. RESIGNATIONS. Any director of the corporation may resign
at any time by giving written notice to the president or the secretary of the
Corporation. Such resignation shall take effect at the date of the receipt of
such notice or at any later time specified therein and, unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective.
SECTION 3.05. ORGANIZATION. At every meeting of the Board of Directors,
the chairman of the board, if there be one, or, in the case of a vacancy in the
office or absence of the chairman of the board, one of the following officers
present in the order stated: the vice chairman of the board, if there be one,
the president, the vice presidents in their order of rank and seniority, or a
chairman chosen by a majority of the directors present, shall preside, and the
secretary, or, in his or her absence, an assistant secretary, or in the absence
of the secretary and the assistant secretaries, any person appointed by the
chairman of the meeting, shall act as secretary.
SECTION 3.06. PLACE OF MEETING. The Board of Directors may hold its
meetings, both regular and special, at such place or places within or without
the State of Delaware as the Board of Directors may from time to time appoint,
or as may be designated in the notice calling the meeting.
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SECTION 3.07. ORGANIZATION MEETING. Immediately after each annual
election of directors, the Board of Directors shall meet for the purpose of
organization, election of officers, and the transaction of other business, at
the place where such election of directors was held or, if notice of such
meeting is given, at the place specified in such notice. Notice of such meeting
need not be given. In the absence of a quorum at said meeting, the same may be
held at any other time and place which shall be specified in a notice given as
hereinafter provided for special meetings of the Board of Directors, or as shall
be specified in a written waiver signed by the directors, if any, not attending
and participating in the meeting.
SECTION 3.08. REGULAR MEETINGS. Regular meetings of the Board of
Directors may be held without notice at such time and place as shall be
designated from time to time by resolution of the Board of Directors. If the
date fixed for any Such regular meeting be a legal holiday under the laws of the
State where such meeting is to be held, then the same shall be held on the next
succeeding business day, not a Saturday, or at such other time as may be
determined by resolution of the Board of Directors. At such meetings, the
directors shall transact such business as may properly be brought before the
meeting.
SECTION 3.09. SPECIAL MEETINGS. Special meetings of the Board of
Directors shall be held whenever called by the Chairman or by two or more of the
directors. Notice of each such meeting shall be given to each director by
telephone or in writing, including by facsimile message, to such telephone
number or address as a director may designate from time to time at least 24
hours (in the case of notice by telephone or facsimile message) or 48 hours (in
the case of notice by overnight delivery service) or three days (in the case of
notice by mail) before the time at which the meeting is to be held. Each such
notice shall state the time and place of the meeting to be so held. Any notice
by telephone shall be deemed effective if a message regarding the substance of
the notice is given on a director's behalf to the director's secretary or
assistant or to a member of the director's family.
SECTION 3.10. QUORUM, MANNER OF ACTING AND ADJOURNMENT. At all meetings
of the Board of Directors, a majority of the directors shall constitute a quorum
for the transaction of business and the act of a majority of the directors
present at any meeting at which there is a quorum shall be the act of the Board
of Directors, except as may be otherwise specifically provided by statute or by
the Certificate of Incorporation. If a quorum shall not be present at any
meeting of the Board of Directors, the directors present thereat may adjourn the
meeting from time to time, without notice other than announcement at the
meeting, until a quorum shall be present.
Unless otherwise restricted by the Certificate of Incorporation or
these By-laws, any action required or permitted to be taken at any meeting of
the Board of Directors or of any committee thereof may be taken without a
meeting, if all members of the Board of Directors
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consent thereto in writing, and the writing or writings are filed with the
minutes of proceedings of the Board of Directors.
SECTION 3.11. EXECUTIVE AND OTHER COMMITTEES. The Board of Directors
may, by resolution adopted by a majority of the whole board, designate an
executive committee and one or more other committees, each committee to consist
of one or more directors and to have such authority as may be specified by the
Board of Directors, subject to the DGCL. The Board of Directors may designate
one or more directors as alternate members of any committee, who may replace any
absent or disqualified member at any meeting of the committee. In the absence or
disqualification of a member, and the alternate or alternates, if any,
designated for such member, of any committee the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another director to act at the
meeting in the place of any such absent or disqualified member. Any such
committee shall be governed by the procedural provisions of these By-laws that
govern the operation of the full Board of Directors, including with respect to
notice and quorum, except to the extent specified otherwise by the Board of
Directors.
SECTION 3.12. COMPENSATION OF DIRECTORS. Unless otherwise restricted by
the Certificate of Incorporation, the Board of Directors shall have the
authority to fix the compensation of directors. The directors may be paid their
expenses, if any, of attendance at each meeting of the Board of Directors and
may be paid a fixed sum for attendance at each meeting of the Board of Directors
or a stated salary as director. No such payment shall preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor. Members of special or standing committees may be allowed like
compensation for attending committee meetings.
SECTION 3.13. CONFERENCE TELEPHONE MEETINGS. One or more directors may
participate in a meeting of the Board of Directors, or of a committee of the
Board of Directors, by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other. Participation in a meeting pursuant to this section shall constitute
presence in person at such meeting.
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ARTICLE IV
OFFICERS
SECTION 4.01. NUMBER, QUALIFICATIONS AND DESIGNATION. The officers of
the Corporation shall be chosen by the Board of Directors and shall be a
chairman, a president, a secretary, a treasurer, and such other officers as may
be elected in accordance with the provisions of Section 4.03 of this Article.
Any number of offices may be held by the same person. Officers may, but need
not, be directors or stockholders of the Corporation. The chairman of the board
shall be the chief executive officer of the Corporation, except as otherwise
determined by the Board of Directors. All officers elected by the Board of
Directors shall each have such powers and duties as generally pertain to their
respective offices, subject to the specific provisions of this Article IV. Such
officers shall also have such powers and duties as may from time to time be
conferred by the Board of Directors or by any committee thereof.
SECTION 4.02. ELECTION AND TERM OF OFFICE. The officers of the
Corporation, except those elected by delegated authority pursuant to the last
sentence of Section 4.03 of this Article IV, shall be elected annually by the
Board of Directors, but each such officer shall hold office until a successor is
elected and qualified, or until his or her earlier resignation or removal.
SECTION 4.03. OTHER OFFICERS, COMMITTEES AND AGENTS. The Board of
Directors may from time to time elect such other officers and appoint such
committees, employees or other agents as it deems necessary, who shall hold
their offices for such terms and shall exercise such powers and perform such
duties as are provided in these By-laws, or as the Board of Directors may from
time to time determine. The Board of Directors may delegate to any officer or
committee the power to elect subordinate officers and to retain or appoint
employees or other agents, or committees thereof, and to prescribe the authority
and duties of such subordinate officers, committees, employees or other agents.
SECTION 4.04. REMOVAL. Any officer elected, or agent appointed, by the
Board of Directors may be removed by the affirmative vote of a majority of the
whole Board of Directors whenever, in their judgment, the best interests of the
Corporation would be served thereby. Any officer or agent appointed by another
officer by delegated authority pursuant to the last sentence of Section 4.03 may
be removed by such other officer whenever, in such officer's judgment, the best
interests of the Corporation would be served thereby. No elected officer shall
have any contractual rights against the Corporation for compensation by virtue
of such election beyond the date of the election of such officer's successor,
such officer's death, such officer's resignation or such officer's removal,
whichever event shall first occur, except as otherwise provided in a written
agreement or benefit plan.
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SECTION 4.05. VACANCIES. A newly created elected office and a vacancy
in any elected office because of death, resignation, or removal may be filled by
the Board of Directors for the unexpired portion of the term at any meeting of
the Board of Directors. Any vacancy in an office appointed by another officer by
delegated authority pursuant to Section 4.03 because of death, resignation, or
removal may be filled by such other officer.
SECTION 4.06. OFFICERS' BONDS. No officer of the Corporation need
provide a bond to guarantee the faithful discharge of the officer's duties
unless the Board of Directors shall by resolution so require a bond in which
event such officer shall give the Corporation a bond (which shall be renewed if
and as required) in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors for the faithful performance of the
duties of office.
SECTION 4.07. SALARIES. The salaries of the officers of the
Corporation elected by the Board of Directors shall be fixed from time to time
by the Board of Directors, except to the extent the Board of Directors shall
have delegated power to officers of the Corporation to fix, from time to time,
the salaries of such officers' assistant or subordinate officers.
ARTICLE V
NOTICE - WAIVERS
SECTION 5.01. NOTICE, WHAT CONSTITUTES. Whenever, under the provisions
of the statutes of Delaware or the Certificate of Incorporation or of these
By-laws, notice is required to be given to any director or stockholder, it shall
not be construed to mean personal notice, but such notice may be given in
writing, by mail, addressed to such director or stockholder, at such
stockholder's address as it appears on the records of the Corporation, with
postage thereon prepaid, and such notice shall be deemed to be given at the time
when the same shall be deposited in the United States mail. Notice to directors
may also be given in accordance with Section 3.09 of Article III hereof.
SECTION 5.02. WAIVERS OF NOTICE. Whenever any written notice is
required to be given under the provisions of the Certificate of Incorporation,
these By-laws, or by statute, a waiver thereof in writing, signed by the person
or persons entitled to such notice, whether before or after the time stated
therein, shall be deemed equivalent to the giving of such notice. Except in the
case of a special meeting of stockholders, neither the business to be transacted
at, nor the purpose of, any regular or special meeting of the stockholders,
directors, or members of a committee of directors need be specified in any
written waiver of notice of such meeting.
Attendance of a person, either in person or by proxy, at any meeting,
shall constitute a waiver of notice of such meeting, except where a person
attends a meeting for the
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express purpose of objecting to the transaction of any business because the
meeting was not lawfully called or convened.
SECTION 5.03. EXCEPTION TO REQUIREMENTS OF NOTICE. Whenever notice is
required to be given, under any provision of the DGCL or of the Certificate of
Incorporation or these By-laws, to any person with whom communication is
unlawful, the giving of such notice to such person shall not be required and
there shall be no duty to apply to any governmental authority or agency for a
license or permit to give such notice to such person. Any action or meeting
which shall be taken or held without notice to any such person with whom
communication is unlawful shall have the same force and effect as if such notice
had been duly given. In the event that the action taken by the Corporation is
such as to require the filing of a certificate under any section of the DGCL,
the certificate shall state, if such is the fact and if notice is required, that
notice was given to all persons entitled to receive notice except such persons
with whom communication is unlawful.
Whenever notice is required to be given, under any provision of the
DGCL or the Certificate of Incorporation or these By-laws, to any stockholder to
whom (i) notice of two consecutive annual meetings, and all notices of meetings
or of the taking of action by written consent without a meeting to such person
during the period between such two consecutive annual meetings, or (ii) all, and
at least two, payments (if sent by first class mail) of dividends or interest on
securities during a 12 month period, have been mailed addressed to such person
at such stockholder's address as shown on the records of the Corporation and
have been returned undeliverable, the giving of such notice to such person shall
not be required. Any action or meeting which shall be taken or held without
notice to such person shall have the same force and effect as if such notice had
been duly given. If any such person shall deliver to the Corporation a written
notice setting forth such stockholder's then current address, the requirement
that notice be given to such person shall be reinstated. In the event that the
action taken by the Corporation is such as to require the filing of a
certificate under any section of the DGCL, the certificate need not state that
notice was not given to persons to whom notice was not required to be given
pursuant to this section.
ARTICLE VI
CERTIFICATES OF STOCK, TRANSFER, ETC.
SECTION 6.01. ISSUANCE. Each stockholder shall be entitled to a
certificate or certificates for shares of stock of the Corporation owned by such
stockholder upon such stockholder's request therefor. The stock certificates of
the Corporation shall be numbered and registered in the stock ledger and
transfer books of the Corporation as they are issued. They shall be signed by
the chairman of the board, the president or a vice president and by the
secretary or
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an assistant secretary or the treasurer. It shall not be necessary for any such
certificate to bear the corporate seal unless required by law. Any of or all the
signatures upon such certificate may be a facsimile, engraved or printed. In
case any officer, transfer agent or registrar who has signed, or whose facsimile
signature has been placed upon, any share certificate shall have ceased to be
such officer, transfer agent or registrar, before the certificate is issued, it
may be issued with the same effect as if he were such officer, transfer agent or
registrar at the date of its issue.
SECTION 6.02. TRANSFER. Upon surrender to the Corporation or the
transfer agent of the Corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the Corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books. No transfer shall be made which would be
inconsistent with the provisions of Article 8, Title 6 of the Delaware Uniform
Commercial Code-Investment Securities.
SECTION 6.03. STOCK CERTIFICATES. Stock certificates of the Corporation
shall be in such form as provided by statute and approved by the Board of
Directors or by such committee or officer authorized by the Board of Directors
to approve the form of certificate. The stock record books and the blank stock
certificates books shall be kept by the secretary or by any agency designated by
the Board of Directors for that purpose.
SECTION 6.04. LOST, STOLEN, DESTROYED OR MUTILATED CERTIFICATES. The
Board of Directors may direct a new certificate or certificates to be issued in
place of any certificate or certificates theretofore issued by the Corporation
alleged to have been lost, stolen or destroyed, upon the making of an affidavit
of that fact by the person claiming the certificate of stock to be lost, stolen
or destroyed. When authorizing such issue of a new certificate or certificates,
the Board of Directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen or destroyed
certificate or certificates, or such stockholder's legal representative, to
advertise the same in such manner as it shall require and/or to give the
Corporation a bond in such sum as it may direct as indemnity against any claim
that may be made against the Corporation with respect to the certificate alleged
to have been lost, stolen or destroyed.
SECTION 6.05. RECORD HOLDER OF SHARES. The Corporation shall be
entitled to recognize the exclusive right of a person registered on its books as
the owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books as the owner
of shares, and shall not be bound to recognize any equitable or other claim to
or interest in such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise provided
by the laws of Delaware.
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SECTION 6.06. DETERMINATION OF STOCKHOLDERS OF RECORD. In order that
the Corporation may determine the stockholders entitled to notice of or to vote
at any meeting of stockholders or any adjournment thereof, the Board of
Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors, and which record date shall not be more than sixty nor less than ten
days before the date of such meeting. If no record date is fixed by the Board of
Directors, the record date for determining stockholders entitled to notice of or
to vote at a meeting of stockholders shall be at the close of business on the
day next preceding the day on which notice is given, or, if notice is waived, at
the close of business on the day next preceding the day on which the meeting is
held. A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
In order that the Corporation may determine the stockholders entitled
to receive payment of any dividend or other distribution or allotment of any
rights of the stockholders entitled to exercise any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action, the Board of Directors may fix a record date, which record date shall
not precede the date upon which the resolution fixing the record date is
adopted, and which record date shall be not more than sixty days prior to such
action. If no record date is fixed, the record date for determining stockholders
for any such purpose shall be at the close of business on the day on which the
Board of Directors adopts the resolution relating thereto.
ARTICLE VII
INDEMNIFICATION OF DIRECTORS, OFFICERS AND
OTHER AUTHORIZED REPRESENTATIVES
SECTION 7.01. INDEMNIFICATION OF AUTHORIZED REPRESENTATIVES IN THIRD
PARTY PROCEEDINGS. The Corporation shall indemnify any person who was or is an
authorized representative of the Corporation, and who was or is a party, or is
threatened to be made a party to any third party proceeding, by reason of the
fact that such person was or is an authorized representative of the Corporation,
against expenses, judgments, penalties, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such third
party proceeding if such person acted in good faith and in a manner such person
reasonably believed to be in, or not opposed to, the best interests of the
Corporation and, with respect to any criminal third party proceeding, had no
reasonable cause to believe such conduct was unlawful. The termination of any
third party proceeding by judgment, order, settlement, indictment, conviction or
upon a plea of nolo contendere or its equivalent, shall not of itself create a
presumption that the authorized representative did not act in good faith and in
a manner which such person reasonably believed to be in or not opposed to, the
best interests of the Corporation, and, with
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respect to any criminal third party proceeding, had reasonable cause to believe
that such conduct was unlawful.
SECTION 7.02. INDEMNIFICATION OF AUTHORIZED REPRESENTATIVES IN
CORPORATE PROCEEDINGS. The Corporation shall indemnify any person who was or is
an authorized representative of the Corporation and who was or is a party or is
threatened to be made a party to any corporate proceeding, by reason of the fact
that such person was or is an authorized representative of the Corporation,
against expenses actually and reasonably incurred by such person in connection
with the defense or settlement of such corporate action if such person acted in
good faith and in a manner reasonably believed to be in, or not opposed to, the
best interests of the Corporation, except that no indemnification shall be made
in respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the Corporation unless and only to the extent that the
Court of Chancery or the court in which such corporate proceeding was pending
shall determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such authorized representative is
fairly and reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
SECTION 7.03. MANDATORY INDEMNIFICATION OF AUTHORIZED REPRESENTATIVES.
To the extent that an authorized representative of the Corporation has been
successful on the merits or otherwise in defense of any third party or corporate
proceeding or in defense of any claim, issue or matter therein, such person
shall be indemnified against expenses actually and reasonably incurred by such
person in connection therewith.
SECTION 7.04. DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION. Any
indemnification under Section 7.01, 7.02 or 7.03 of this Article (unless ordered
by a court) shall be made by the Corporation only as authorized in the specific
case upon a determination that indemnification of the authorized representative
is proper in the circumstances because such person has either met the applicable
standard of conduct set forth in Section 7.01 or 7.02 or has been successful on
the merits or otherwise as set forth in Section 7.03 and that the amount
requested has been actually and reasonably incurred. Such determination shall be
made:
(1) By the Board of Directors by a majority of a quorum
consisting of directors who were not parties to such third party or
corporate proceeding, or
(2) If such a quorum is not obtainable, or, even if
obtainable, a majority vote of such a quorum so directs, by independent
legal counsel in a written opinion, or
(3) By the stockholders.
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SECTION 7.05. ADVANCING EXPENSES.
(1) Expenses actually and reasonably incurred in defending a
third party or corporate proceeding shall be paid on behalf of a
director or other authorized representative by the Corporation in
advance of the final disposition of such third party or corporate
proceeding upon receipt of an undertaking by or on behalf of the
director or other authorized representative to repay such amount if it
shall ultimately be determined that such person is not entitled to be
indemnified by the Corporation as authorized in this Article.
(2) The financial ability of any director or other authorized
representative to make a repayment contemplated by this Section 7.05
shall not be a prerequisite to the making of an advance.
SECTION 7.06. DEFINITIONS. For purposes of this Article VII:
(1) "authorized representative" shall mean a director or
officer of the Corporation, or a person serving at the request of the
Corporation as a director, officer, or trustee, of another corporation,
partnership, joint venture, trust or other enterprise;
(2) "corporation" shall include, in addition to the resulting
corporation, any constituent corporation (including any constituent of
a constituent) absorbed in a consolidation of merger which, if its
separate existence had continued, would have had power and authority to
indemnify its directors, officers, employees or agents, so that any
person who is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such
constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position under the provisions of
this Article with respect to the resulting or surviving corporation as
such person would have with respect to such constituent corporation if
its separate existence had continued;
(3) "corporate proceeding" shall mean any threatened, pending
or completed action or suit by or in the right of the Corporation to
procure a judgment in its favor or investigative proceeding by the
Corporation;
(4) "criminal third party proceeding" shall include any action
or investigation which could or does lead to a criminal third party
proceeding;
(5) "expenses" shall include attorneys' fees and
disbursements;
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(6) "fines" shall include any excise taxes assessed on a
person with respect to an employee benefit plan;
(7) "not opposed to the best interests of the Corporation"
shall include actions taken in good faith and in a manner the
authorized representative reasonably believed to be in the interest of
the participants and beneficiaries of an employee benefit plan;
(8) "other enterprises" shall include employee benefit plans;
(9) "party" shall include the giving of testimony or similar
involvement;
(10) "serving at the request of the Corporation" shall include
any service as a director, officer or employee of the Corporation which
imposes duties on, or involves services by, such director, officer or
employee with respect to an employee benefit plan, its participants, or
beneficiaries; and
(11) "third party proceeding" shall mean any threatened,
pending or completed action, suit or proceeding, whether civil,
criminal, administrative, or investigative, other than an action by or
in the right of the Corporation.
SECTION 7.07. INSURANCE. The Corporation may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another Corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
such person and incurred by such person in any such capacity, or arising out of
such person's status as such, whether or not the Corporation would have the
power or the obligation to indemnify such person against such liability under
the provisions of this Article.
SECTION 7.08. SCOPE OF ARTICLE. The indemnification of authorized
representatives and advancement of expenses, as authorized by the preceding
provisions of this Article, shall not be deemed exclusive of any other rights to
which those seeking indemnification or advancement of expenses may be entitled
under any statute, agreement, vote of stockholders or disinterested directors or
otherwise, both as to action in an official capacity and as to action in another
capacity. The indemnification and advancement of expenses provided by or granted
pursuant to this Article VII shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be an authorized
representative and shall inure to the benefit of the heirs, executors and
administrators of such a person.
SECTION 7.09. RELIANCE ON PROVISIONS. Each person who shall act as an
authorized representative of the Corporation shall be deemed to be doing so in
reliance upon rights of indemnification provided by this Article, with the same
effect as if such person and the
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Corporation entered into a binding contract under which the Corporation agreed
to provide the indemnification provided by this Article VII.
ARTICLE VIII
AFFILIATED TRANSACTIONS AND INTERESTED DIRECTORS
SECTION 8.01. AFFILIATED TRANSACTIONS. No contract or transaction
between the Corporation and one or more of its directors or officers, or between
the Corporation and any other corporation, partnership, association or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof which
authorizes the contract or transaction or solely because his or their votes are
counted for such purpose, if:
(a) The material facts as to his relationship or interest and
as to the contract or transaction are disclosed or are known to the Board of
Directors or the committee, and the Board of Directors or committee in good
faith authorizes the contract or transaction by the affirmative vote of a
majority of the disinterested directors, even though the disinterested directors
be less than a quorum; or
(b) The material facts as to his relationship or interest and
as to the contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the stockholders; or
(c) The contract or transaction is fair as to the Corporation
as of the time it is authorized, approved or ratified by the Board of Directors,
a committee thereof, or the stockholders.
SECTION 8.01. DETERMINING QUORUM. Common or interested directors may be
counted in determining the presence of a quorum at a meeting of the Board of
Directors or of a committee thereof which authorizes the contract or
transaction.
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ARTICLE IX
GENERAL PROVISIONS
SECTION 9.01. DIVIDENDS. Dividends upon the capital stock of the
Corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property, or in
shares of the capital stock of the Corporation, subject to the provisions of the
Certificate of Incorporation. Before payment of any dividend, there may be set
aside out of any funds of the Corporation available for dividends such sum or
sums as the directors from time to time, in their absolute discretion, think
proper as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the Corporation, or
for such other purpose as the directors shall think conducive to the interest of
the Corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
SECTION 9.02. CONTRACTS. Except as otherwise provided in these By-laws,
the Board of Directors may authorize any officer or officers including the
chairman and vice chairman of the Board of Directors, or any agent or agents, to
enter into any contract or to execute or deliver any instrument on behalf of the
Corporation and such authority may be general or confined to specific instances.
SECTION 9.03. CHECKS. All checks, notes, bills of exchange or other
orders in writing shall be signed by the president, any vice president, the
treasurer and such other person or persons as the Board of Directors may from
time to time designate.
SECTION 9.04. CORPORATE SEAL. The corporate seal shall have inscribed
thereon the name of the Corporation, the year of its organization and the words
"Corporate Seal, Delaware". The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or in any other manner reproduced.
SECTION 9.05. DEPOSITS. All funds of the Corporation shall be deposited
from time to time to the credit of the Corporation in such banks, trust
companies, or other depositories as the Board of Directors may approve or
designate, and all such funds shall be withdrawn only upon checks signed by such
one or more officers or employees as the Board of Directors shall from time to
time determine.
SECTION 9.06. CORPORATE RECORDS. Every stockholder shall, upon written
demand under oath stating the purpose thereof, have a right to examine, in
person or by agent or attorney, during the usual hours for business, for any
proper purpose, the stock ledger, books or records of account, and records of
the proceedings of the stockholders and directors, and make copies or extracts
therefrom. A proper purpose shall mean a purpose reasonably related to such
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person's interest as a stockholder. In every instance where an attorney or other
agent shall be the person who seeks the right to inspection, the demand under
oath shall be accompanied by a power of attorney or such other writing which
authorizes the attorney or other agent to so act on behalf of the stockholder.
The demand under oath shall be directed to the Corporation at its registered
office in Delaware or at its principal place of business. Where the stockholder
seeks to inspect the books and records of the Corporation, other than its stock
ledger or list of stockholders, the stockholder shall first establish (1)
compliance with the provisions of this section respecting the form and manner of
making demand for inspection of such document; and (2) that the inspection
sought is for a proper purpose. Where the stockholder seeks to inspect the stock
ledger or list of stockholders of the Corporation and has complied with the
provisions of this section respecting the form and manner of making demand for
inspection of such documents, the burden of proof shall be upon the Corporation
to establish that the inspection sought is for an improper purpose.
Any director shall have the right to examine the Corporation's stock
ledger, a list of its stockholders and its other books and records for a purpose
reasonably related to his or her position as a director. The court may summarily
order the Corporation to permit the director to inspect any and all books and
records, the stock ledger and the stock list and to make copies or extracts
therefrom. The court may, in its discretion, prescribe any limitations or
conditions with reference to the inspection, or award such other and further
relief as the court may deem just and proper.
SECTION 9.07. AMENDMENT OF BY-LAWS. These By-laws may be amended, added
to, rescinded or repealed at any meeting of the Board of Directors or of the
stockholders, PROVIDED that notice of the proposed change was given in the
notice of the meeting and, in the case of the Board of Directors, in a notice
given no less than twenty-four hours prior to the meeting; PROVIDED, HOWEVER,
that in the case of amendments by stockholders, notwithstanding any other
provisions of these By-laws or any provision of law which might otherwise permit
a lesser vote or no vote, but in addition to any affirmative vote of the holders
of any series of Preferred Stock or any other series or class of stock set forth
in the Certificate of Incorporation which is required by law, the Certificate of
Incorporation or these By-laws, the affirmative vote of the holders of at least
66 2/3% of the voting power of the then outstanding shares of the Corporation
entitled to vote generally in the election of directors, present or represented
by proxy, voting together as a single class, shall be required to alter, amend
or repeal Sections 2.03, 2.08, 2.10, 3.02, 3.03, 3.05, 9.07 and Article VII of
these By-laws.
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Exhibit 10.1
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JEFFERIES GROUP, INC.
1999 INCENTIVE COMPENSATION PLAN
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<PAGE>
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JEFFERIES GROUP, INC.
1999 INCENTIVE COMPENSATION PLAN
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1. PURPOSE OF THE PLAN
The purpose of this 1999 Incentive Compensation Plan (the "Plan") is to
advance the interests of the Company and its stockholders by providing a means
to attract, retain, and reward officers, other employees, and persons who
provide services to the Company and its subsidiaries, to link compensation to
measures of the Company's performance in order to provide additional incentives,
including stock-based incentives and cash-based annual incentives, to such
persons for the creation of stockholder value, and to enable such persons to
acquire or increase a proprietary interest in the Company in order to promote a
closer identity of interests between such persons and the Company's
stockholders. The Plan is intended to qualify certain compensation awarded under
the Plan as "performance-based" compensation under Code Section 162(m) to the
extent deemed appropriate by the Committee which administers the Plan.
2. DEFINITIONS
The definitions of awards under the Plan, including Options,
SARs, Restricted Stock, Deferred Stock, Stock granted as a bonus or in lieu of
other awards, and Other Stock-Based Awards, are set forth in Section 6, and the
definition of Performance Awards, including Annual Incentive Awards, is set
forth in Section 8. Such awards, together with any other right or interest
granted to a Participant under the Plan, are termed "Awards." In addition to
such terms and the terms defined in Section 1, the following terms shall be
defined as set forth below:
2.1 "Annual Incentive Award" means a conditional right granted to a
Participant under Section 8.3 to receive a cash payment, Shares or other Awards
based on performance during all or part of a specified fiscal year.
2.2 "Beneficiary" means the person(s) or trust(s) which have been
designated by a Participant in his or her most recent written beneficiary
designation filed with the Committee to receive the benefits specified under the
Plan upon such Participant's death. If, upon a Participant's death, there is no
designated Beneficiary or surviving designated Beneficiary, then the term
Beneficiary means the person(s) or trust(s) entitled by will or the laws of
descent and distribution to receive such benefits.
2.3 "Board" means the Board of Directors of the Company.
2.4 "Code" means the Internal Revenue Code of 1986, as amended,
including regulations thereunder and successor provisions and regulations
thereto.
2.5 "Committee" means the Compensation Committee of the Board or such
other Board committee or committees as may be designated by the Board to
administer the Plan, and the term "Committee" shall refer to the full Board in
any case in which it is performing any function of the Committee under the Plan.
In appointing members of the Committee, the Board will consider whether each
member will qualify as a "Non-Employee Director" within the meaning of Rule
16b-3(b)(3) and as an
<PAGE>
"outside director" within the meaning of Treasury Regulation 1.162-27(e)(3)
under Code Section 162(m), but the members are not required to so qualify at the
time of appointment or during their term of service on the Committee.
2.6 "Company" means Jefferies Group, Inc., a Delaware corporation,
formerly named JEF Holding Company, Inc., the common stock of which was
distributed in the Spin-off.
2.7 "Covered Employee" has the meaning as defined in Section 8.5 of the
Plan.
2.8 "Effective Date" means the date on which the Plan takes effect, as
set forth in Section 9.13 of the Plan.
2.9 "Eligible Holder" means each employee of the Company who, at the
Spin-off Date, holds an option or other award relating to stock under a
compensatory plan of Predecessor with respect to which the Company has agreed to
grant, or offer to grant, an Award relating to Shares in substitution for such
person's Predecessor award or to offset any lost value due to the early
termination of such award.
2.10 "Exchange Act" means the Securities Exchange Act of 1934, as
amended, including rules thereunder and successor provisions and rules thereto.
2.11 "Fair Market Value," means, with respect to Shares, Awards, or
other property, the fair market value of such Shares, Awards, or other property
determined by such methods or procedures as shall be established from time to
time by the Committee. Unless otherwise determined by the Committee, the Fair
Market Value of a Share as of any given date means the average of the closing
sales prices of a Share as reported in the table entitled "New York Stock
Exchange Composite Transactions" contained in The Wall Street Journal (or an
equivalent successor table) for the day as of which the valuation is to be made
or, if that day is not a trading day, the nearest preceding trading day, and the
four trading days immediately prior thereto; PROVIDED, HOWEVER, that Fair Market
Value at the date of the Spin-off shall be determined based on the first five
trading days for which a closing price is reported following the Spin-off.
2.12 "Participant" means an individual who has been granted an Award
under the Plan, for so long as the Company has any obligation under the Plan
with respect to such Award or such Award remains subject to any restriction
under the Plan.
2.13 "Predecessor" means Jefferies Group, Inc., a Delaware corporation,
as it existed immediately prior to the Spin-off.
2.14 "Qualified Member" means a member of the Committee who is a
"Non-Employee Director" within the meaning of Rule 16b-3(b)(3) under the
Exchange Act and an "outside director" within the meaning of Regulation 1.162-27
under Code Section 162(m).
2.15 "Shares" means shares of common stock, par value $.01 per share,
of the Company and such other securities as may be substituted or resubstituted
for Shares pursuant to Section 5.3.
2.16 "Spin-off" means the distribution of the Common Stock of the
Company by the Predecessor to the Predecessor's stockholders, which was approved
by the Predecessor's stockholders on April 20, 1999.
2.17 "Spin-off Date" means the record date for Predecessor's
distribution of Shares in the Spin- off.
<PAGE>
3. ADMINISTRATION
3.1 AUTHORITY OF THE COMMITTEE. The Plan shall be administered by
the Committee. The Committee shall have full and final authority to take the
following actions, in each case subject to and consistent with the provisions of
the Plan:
(a) to select persons to whom Awards may be granted, including
Eligible Holders to whom Awards may be granted in substitution
for Predecessor awards;
(b) to determine the type or types of Awards to be granted to each
Participant;
(c) to determine the number of Awards to be granted, the number of
Shares to which an Award will relate, the cash amount payable
in settlement of an Annual Incentive Award and the performance
conditions applicable thereto, all other terms and conditions
of any Award granted under the Plan (including, but not
limited to, any exercise price, grant price, or purchase
price, any restriction or condition, any schedule or
performance conditions for the lapse of restrictions or
conditions relating to transferability, forfeiture,
exercisability, or settlement of an Award, and accelerations
or modifications thereof, based in each case on such
considerations as the Committee shall determine), and all
other matters to be determined in connection with an Award;
(d) to determine whether, to what extent, and under what
circumstances an Award may be settled, or the exercise price
of an Award may be paid, in cash, Shares, other Awards, or
other property, or an Award may be cancelled, forfeited, or
surrendered;
(e) to determine whether, to what extent, and under what
circumstances cash, Shares, other Awards, or other property
payable with respect to an Award will be deferred either
automatically, at the election of the Committee, or at the
election of the Participant;
(f) to prescribe the form of each Award agreement, which need not
be identical for each Participant;
(g) to adopt, amend, suspend, and rescind such rules and
regulations and appoint such agents as the Committee may deem
necessary or advisable to administer the Plan;
(h) to correct any defect or supply any omission or reconcile any
inconsistency in the Plan and to construe and interpret the
Plan and any Award, rules and regulations, Award agreement, or
other instrument hereunder; and
(i) to make all other decisions and determinations as may be
required under the terms of the Plan or as the Committee may
deem necessary or advisable for the administration of the
Plan.
3.2 MANNER OF EXERCISE OF COMMITTEE AUTHORITY. Any action of the
Committee with respect to the Plan shall be final, conclusive, and binding on
all persons, including the Company, subsidiaries of the Company, Participants,
any person claiming any rights under the Plan from or through any Participant,
and stockholders. The express grant of any specific power to the Committee, and
the taking of any action by the Committee, shall not be construed as limiting
any power or authority of the Committee. The Committee may delegate to officers
or managers of the Company or any subsidiary of the Company the authority,
subject to such terms as the Committee shall determine, to perform such
functions as the
<PAGE>
Committee may determine, to the extent that such delegation will not result in
the loss of an exemption under Rule 16b-3(d)(1) for Awards granted to
Participants subject to Section 16 of the Exchange Act in respect of the Company
and will not cause Awards intended to qualify as "performance-based"
compensation under Code Section 162(m) to fail to so qualify, and as otherwise
limited by applicable law. Other provisions of the Plan notwithstanding, the
Board may perform any function of the Committee under the Plan, in order to
ensure that transactions under the Plan are exempt under Rule 16b-3 or for any
other reason; PROVIDED, HOWEVER, that authority specifically reserved to the
Board under the terms of the Plan, the Company's Certificate of Incorporation or
By-Laws, or applicable law shall be exercised by the Board and not by the
Committee.
3.3 LIMITATION OF LIABILITY. Each member of the Committee shall be
entitled to, in good faith, rely or act upon any report or other information
furnished to him by any officer or other employee of the Company or any
subsidiary, the Company's independent certified public accountants, or any
executive compensation consultant, legal counsel, or other professional retained
by the Company to assist in the administration of the Plan. No member of the
Committee, nor any officer or employee of the Company acting on behalf of the
Committee, shall be personally liable for any action, determination, or
interpretation taken or made in good faith with respect to the Plan, and all
members of the Committee and any officer or employee of the Company acting on
behalf of the Committee or members thereof shall, to the extent permitted by
law, be fully indemnified and protected by the Company with respect to any such
action, determination, or interpretation.
4. ELIGIBILITY
Persons who are eligible to be granted Awards under the Plan include
(i) any executive officer and other officer or employee of the Company or any
subsidiary, including any such person who may also be a director of the Company,
(ii) any other person who provides substantial personal services to the Company
or any subsidiary not solely in the capacity as a director, and (iii) any person
who has agreed to become an employee of the Company or a subsidiary provided
that no such person may receive any payment or exercise any right relating to an
Award until such person has commenced employment. In addition, Eligible Holders
will be eligible to be granted Awards in substitution for Predecessor awards
outstanding immediately prior to the Spin-Off, in accordance with agreements
entered between the Company and Predecessor and as approved by the Committee.
5. LIMITATION ON SHARES SUBJECT TO OUTSTANDING AWARDS; PER-PERSON
LIMITATIONS; ADJUSTMENTS
5.1 AGGREGATE NUMBER OF SHARES SUBJECT TO OUTSTANDING AWARDS. Awards
relating to Shares may be granted if, at the time of grant of each Award, the
aggregate number of Shares subject to outstanding Awards plus the number of
Shares subject to the Award being granted do not exceed 25% of the number of
Shares issued and outstanding immediately prior to the grant of such Award. For
purposes of this Section 5.1, an Option is "outstanding" until it is exercised
and any other Award is "outstanding" in the calendar year in which it is granted
and for so long thereafter as it remains subject to any vesting condition
requiring continued employment; provided, however, that Awards granted in
substitution for Predecessor awards shall not be considered to be "outstanding"
for purposes of this Section 5.1. The foregoing notwithstanding, the maximum
number of shares that may be subject to ISOs granted under the Plan shall be 1.5
million (subject to adjustment as provided in Section 5.3). The Shares delivered
in connection with Awards may consist, in whole or in part, of authorized and
unissued Shares, treasury Shares or Shares acquired in the market for the
account of a Participant.
5.2 ANNUAL PER-PERSON LIMITATIONS. In each fiscal year during any part
of which the Plan is in effect, a Participant may be granted (i) Options and
SARs under Sections 6.2 and 6.3 relating to no more
<PAGE>
than 800,000 Shares, and (ii) Performance Awards pursuant to Section 8 relating
to no more than 500,000 Shares, subject in each case to adjustment as provided
in Section 5.3. With respect to Annual Incentive Awards pursuant to Section 8,
the maximum amount payable to a Participant in settlement of such Awards
relating to a given fiscal year shall be (i), in the case of the Chief Executive
Officer or any other executive officer principally having Company-wide
responsibilities, 25% of Company profits after taxes but before payment of
bonuses, and (ii), in the case of an executive officer or other person
principally having responsibilities for one or more specific business units, the
greatest of 30% of the net income of such business unit(s), 10% of the revenues
of such business unit(s), or 25% of the EVA of such business unit(s). With
respect to Performance Awards pursuant to Section 8 other than Annual Incentive
Awards which Performance Awards are not valued by reference to Common Stock at
the date of grant, the maximum amount that may be earned by any one Participant
under the Plan upon achievement of performance objectives shall be $5 million
for each full or partial year in the period over which performance is measured;
for this purpose, the term "earned" refers to satisfaction of the performance
conditions, regardless of any additional period of deferral or period in which
the Award may be forfeitable upon termination of service by the Participant.
5.3 ADJUSTMENTS. In the event of any change in the outstanding Shares
after the Effective Date by reason of any Share dividend or split,
reorganization, recapitalization, merger, consolidation, spin-off, combination
or exchange of Shares, repurchase, liquidation, dissolution or other corporate
exchange, any large, special and non-recurring dividend or distribution to
stockholders, or other similar corporate transaction, the Committee may make
such substitution or adjustment, if any, as it deems to be equitable and in
order to preserve, without enlarging, the rights of Participants, as to (i) the
number and kind of Shares which may be delivered in connection with Awards
granted thereafter, (ii) the number and kind of Shares by which annual
per-person Award limitations are measured under Section 5.2, (iii) the number
and kind of Shares subject to or deliverable in respect of outstanding Awards,
and (iv) the exercise price, grant price or purchase price relating to any Award
and/or make provision for payment of cash, other Awards or other property in
respect of any outstanding Award. In addition, the Committee is authorized to
make adjustments in the terms and conditions of, and the criteria included in,
Awards (including Performance Awards, Annual Incentive Awards, and the
performance goals relating thereto) in recognition of unusual or nonrecurring
events (including events described in the preceding sentence, as well as
acquisitions and dispositions of businesses and assets) affecting the Company,
any subsidiary or any business unit, or the financial statements of the Company
or any subsidiary, or in response to changes in applicable laws, regulations,
accounting principles, tax rates and regulations or business conditions or in
view of the Committee's assessment of the business strategy of the Company, any
subsidiary or business unit thereof, performance of comparable organizations,
economic and business conditions, personal performance of a Participant, and any
other circumstances deemed relevant; provided that no such adjustment shall be
authorized or made if and to the extent that such authority or the making of
such adjustment would cause Options, SARs, Performance Awards granted under
Section 8.2 hereof, or Annual Incentive Awards granted under Section 8.3 hereof
to Participants designated by the Committee as Covered Employees and intended to
qualify as "performance-based compensation" under Code Section 162(m) and
regulations thereunder to otherwise fail to qualify as "performance-based
compensation" under Code Section 162(m) and regulations thereunder.
6. SPECIFIC TERMS OF AWARDS
6.1 GENERAL. Awards may be granted on the terms and conditions set
forth in this Section 6. In addition, the Committee may impose on any Award, at
the date of grant or thereafter (subject to Section 9.5), such additional terms
and conditions, not inconsistent with the provisions of the Plan, as the
Committee shall determine, including terms requiring forfeiture of Awards in the
event of termination of employment or service by the Participant or upon the
occurrence of other events. Except as expressly
<PAGE>
provided by the Committee (including for purposes of complying with requirements
of the Delaware General Corporation Law relating to lawful consideration for
issuance of shares), no consideration other than for services will be required
for the grant (but not the exercise) of any Award.
6.2 OPTIONS. The Committee is authorized to grant options to purchase
Shares ("Options") to Participants on the following terms and conditions:
(a) EXERCISE PRICE. The exercise price per Share purchasable under
an Option shall be determined by the Committee; PROVIDED,
HOWEVER, that, except as provided in Section 7.1, such
exercise price shall be not less than the Fair Market Value of
a share on the date of grant of such Option.
(b) TIME AND METHOD OF EXERCISE. The Committee shall determine the
time or times at which an Option may be exercised in whole or
in part, the methods by which such exercise price may be paid
or deemed to be paid, the form of such payment, including
cash, Shares, other Awards or awards granted under other
Company plans, or other property (including notes or other
contractual obligations of Participants to make payment on a
deferred basis, or through broker-assisted "cashless exercise"
arrangements, to the extent permitted by applicable law), and
the methods by which Shares will be delivered or deemed to be
delivered to Participants.
(c) INCENTIVE STOCK OPTIONS. The terms of any incentive stock
option ("ISO") granted under the Plan shall comply in all
respects with the provisions of Section 422 of the Code,
including but not limited to the requirement that no ISO shall
be granted more than ten years after the Effective Date.
Anything in the Plan to the contrary notwithstanding, no term
of the Plan relating to ISOs shall be interpreted, amended, or
altered, nor shall any discretion or authority granted under
the Plan be exercised, so as to disqualify either the Plan or
any ISO under Section 422 of the Code, unless the Participant
has first requested such disqualification.
6.3 STOCK APPRECIATION RIGHTS. The Committee is authorized to
grant stock appreciation rights ("SARs") to Participants on
the following terms and conditions:
(a) RIGHT TO PAYMENT. An SAR shall confer on the Participant to
whom it is granted a right to receive, upon exercise thereof,
the excess of (A) the Fair Market Value of one Share on the
date of exercise (or, if the Committee shall so determine in
the case of any such right other than one related to an ISO,
the Fair Market Value of one share at any time during a
specified period before or after the date of exercise), over
(B) the grant price of the SAR as determined by the Committee
as of the date of grant of the SAR, which, except as provided
in Section 7.1, shall be not less than the Fair Market Value
of one Share on the date of grant.
(b) OTHER TERMS. The Committee shall determine the time or times
at which an SAR may be exercised in whole or in part, the
method of exercise, method of settlement, form of
consideration payable in settlement, method by which Shares
will be delivered or deemed to be delivered to Participants,
whether or not an SAR shall be in tandem with any other Award,
and any other terms and conditions of any SAR.
<PAGE>
6.4 RESTRICTED STOCK. The Committee is authorized to grant Awards, in
the form of shares issued at or shortly after grant of the Award subject to
restrictions ("Restricted Stock"), to Participants on the following terms and
conditions:
(a) GRANT AND RESTRICTIONS. Restricted Stock shall be subject to
such restrictions on transferability and other restrictions,
if any, as the Committee may impose, which restrictions may
lapse separately or in combination at such times, under such
circumstances, in such installments, or otherwise as the
Committee may determine. Except to the extent restricted under
the terms of the Plan and any Award agreement relating to the
Restricted Stock, a Participant granted Restricted Stock shall
have all of the rights of a stockholder including the right to
vote Restricted Stock or the right to receive dividends
thereon.
(b) FORFEITURE. Except as otherwise determined by the Committee,
upon termination of employment or service during the
applicable restriction period, Restricted Stock that is at
that time subject to restrictions shall be forfeited and
reacquired by the Company; PROVIDED, HOWEVER, that the
Committee may provide, by rule or regulation or in any Award
agreement, or may determine in any individual case, that
restrictions or forfeiture conditions relating to Restricted
Stock will lapse in whole or in part in the event of
terminations resulting from specified causes.
(c) CERTIFICATES FOR SHARES. Restricted Stock granted under the
Plan may be evidenced in such manner as the Committee shall
determine. If certificates representing Restricted Stock are
registered in the name of the Participant, such certificates
shall bear an appropriate legend referring to the terms,
conditions, and restrictions applicable to such Restricted
Stock, the Company shall retain physical possession of the
certificate, and the Participant shall have delivered a stock
power to the Company, endorsed in blank, relating to the
Restricted Stock.
(d) DIVIDENDS AND DISTRIBUTIONS. Dividends paid on Restricted
Stock shall be either paid at the dividend payment date in
cash or in Shares of unrestricted Stock having a Fair Market
Value equal to the amount of such dividends, or the payment of
such dividends shall be deferred and/or the amount or value
thereof automatically reinvested in additional Restricted
Stock, other Awards, or other investment vehicles, as the
Committee shall determine or permit the Participant to elect.
Shares distributed in connection with a stock split or Share
dividend, and other property distributed as a dividend, shall
be subject to restrictions and a risk of forfeiture to the
same extent as the Restricted Stock with respect to which such
Shares or other property is distributed.
6.5 DEFERRED STOCK. The Committee is authorized to grant Awards in the
form of Shares to be delivered at a specified future date ("Deferred Stock") to
Participants, subject to the following terms and conditions:
(a) AWARD AND RESTRICTIONS. Issuance of Shares will occur upon
expiration of the deferral period specified for an Award of
Deferred Stock by the Committee (or, if permitted by the
Committee, as elected by the Participant). In addition,
Deferred Stock shall be subject to such restrictions as the
Committee may impose, if any, which restrictions may lapse at
the expiration of the deferral period or at earlier specified
times, separately or in combination, under such circumstances,
in such installments, or otherwise as the Committee may
determine.
<PAGE>
(b) FORFEITURE. Except as otherwise determined by the Committee,
upon termination of employment or service during the
applicable deferral period or portion thereof to which
forfeiture conditions apply (as provided in the Award
agreement evidencing the Deferred Stock), all Deferred Stock
that is at that time subject to such risk of forfeiture shall
be forfeited; PROVIDED, HOWEVER, that the Committee may
provide, by rule or regulation or in any Award agreement, or
may determine in any individual case, that restrictions or
forfeiture conditions relating to Deferred Stock will lapse in
whole or in part in the event of terminations resulting from
specified causes.
(c) DIVIDEND EQUIVALENTS. The Committee may provide that payments
in the form of dividend equivalents will be credited in
respect of Deferred Stock, which amounts may be paid or
distributed when accrued or deemed reinvested in additional
Deferred Stock.
6.6 BONUS SHARES AND AWARDS IN LIEU OF CASH OBLIGATIONS. The Committee
is authorized to grant Shares as a bonus, or to grant Shares or other Awards in
lieu of Company obligations to pay cash under other plans or compensatory
arrangements. Shares or Awards granted hereunder shall be subject to such other
terms as shall be determined by the Committee.
6.7 OTHER STOCK-BASED AWARDS. The Committee is authorized, subject to
limitations under applicable law, to grant to Participants such other Awards
that may be denominated or payable in, valued in whole or in part by reference
to, or otherwise based on, or related to, Shares and factors that may influence
the value of Shares, as deemed by the Committee to be consistent with the
purposes of the Plan, including convertible or exchangeable debt securities,
other rights convertible or exchangeable into Shares, purchase rights for
Shares, Awards with value and payment contingent upon performance of the Company
or any other factors designated by the Committee, and Awards valued by reference
to the book value of Shares or the value of securities of or the performance of
specified subsidiaries. The Committee shall determine the terms and conditions
of such Awards. Shares issued pursuant to an Award in the nature of a purchase
right granted under this Section 6.7 shall be purchased for such consideration,
paid for at such times, by such methods, and in such forms, including cash,
Shares, other Awards, or other property, as the Committee shall determine. Cash
awards, as an element of or supplement to any other Award under the Plan, may be
granted pursuant to this Section 6.7.
7. CERTAIN PROVISIONS APPLICABLE TO AWARDS
7.1 STAND-ALONE, ADDITIONAL, TANDEM, AND SUBSTITUTE AWARDS. Awards
granted under the Plan may, in the discretion of the Committee, be granted
either alone or in addition to, in tandem with, or in substitution or exchange
for, any other Award or any award granted under another plan of the Company, any
subsidiary, or any business entity to be acquired by the Company or a
subsidiary, any other right of a Participant to receive payment from the Company
or any subsidiary, and, in the case of Eligible Holders, in substitution for
awards granted by Predecessor. Such additional, tandem, and substituted or
exchanged Awards may be granted at any time. If an Award is granted in
substitution or exchange for another Award or award, the Committee shall require
the surrender of such other Award or award in consideration for the grant of the
new Award. In addition, Awards may be granted in lieu of cash compensation,
including in lieu of cash amounts payable under other plans of the Company or
any subsidiary, in which the value of Shares subject to the Award is equivalent
in value to the cash compensation, or in which the value of the cash or other
compensation surrendered is applied to the exercise price, grant price, or
purchase price of the Award.
<PAGE>
7.2 TERM OF AWARDS. The term of each Award shall be for such period as
may be determined by the Committee; PROVIDED, HOWEVER, that in no event shall
the term of any ISO or an SAR granted in tandem therewith exceed a period of ten
years from the date of its grant (or such shorter period as may be applicable
under Section 422 of the Code).
7.3 FORM AND TIMING OF PAYMENT UNDER AWARDS; DEFERRALS. Subject to the
terms of the Plan and any applicable Award agreement, payments to be made by the
Company or a subsidiary upon the exercise of an Option or other Award or
settlement of an Award may be made in such forms as the Committee shall
determine, including cash, Shares, other Awards, or other property, and may be
made in a single payment or transfer, in installments, or on a deferred basis.
The settlement of any Award may be accelerated, and cash paid in lieu of Shares
in connection with such settlement, in the discretion of the Committee or upon
occurrence of one or more specified events. The foregoing notwithstanding, no
Award specified as settleable in Shares may be settled otherwise than by
delivery of Shares if the Award agreement does not specify such alternative form
of settlement and the authorization of alternative forms of settlement would
preclude fixed accounting for the compensation expense relating to such Award
under APB 25 prior to the determination or event which causes settlement to be
in a form other than Shares. Installment or deferred payments may be required by
the Committee (subject to Section 9.5 of the Plan, including the consent
provisions thereof in the case of any deferral of an outstanding Award not
provided for in the original Award agreement) or permitted at the election of
the Participant on terms and conditions established by the Committee. Payments
may include provisions for the payment or crediting of reasonable interest on
installment or deferred payments or the grant or crediting of dividend
equivalents or other amounts in respect of installment or deferred payments
denominated in Shares.
7.4 CANCELLATION AND RESCISSION OF AWARDS. Unless the Award agreement
specifies otherwise, the Committee may cancel any unexpired, unpaid, or deferred
Awards at any time, and, unless otherwise determined by the Committee, the
Company shall have the additional rights set forth in subsection (d) below, if
the Participant is not in compliance with all applicable material provisions of
the Award agreement and the Plan, including the following conditions:
(a) A Participant shall not render services for any organization
or engage directly or indirectly in any business which, in the
judgment of the Chief Executive Officer of the Company or
other senior executive officer designated by the Committee, is
or becomes competitive with the Company. For Participants
whose employment has terminated, the judgment of the Chief
Executive Officer or other senior officer designated by the
Committee shall be based on the Participant's post-employment
responsibilities and position with the other organization or
business, the extent of past, current and potential
competition or conflict between the Company and the other
organization or business, the effect on the Company's
stockholders, customers, suppliers and competitors of the
Participant assuming the post- employment responsibilities and
such other considerations as are deemed relevant given the
applicable facts and circumstances. A Participant who has
terminated employment shall be free, however, to purchase as
an investment or otherwise, stock or other securities of such
organization or business so long as they are listed upon a
recognized securities exchange or traded over-the-counter, and
such investment does not represent a greater than five percent
equity interest in the organization or business.
(b) A Participant shall not, without prior written authorization
from the Company, disclose to anyone outside the Company or
use in other than the Company's business any confidential
information or material relating to the business of the
Company which is acquired by the Participant either during or
after employment with the Company.
<PAGE>
(c) A Participant shall disclose promptly and assign to the
Company all right, title, and interest in any invention or
idea, patentable or not, made or conceived by the Participant
during employment by the Company, relating in any manner to
the actual or anticipated business, research, or development
work of the Company and shall do anything reasonably necessary
to enable the Company to secure a patent where appropriate in
the United States and in foreign countries.
(d) Upon exercise, settlement, payment, or delivery pursuant to an
Award, the Participant shall certify on a form acceptable to
the Committee that he or she is in compliance with the terms
and conditions of this Section 7.4. Failure to comply with the
provisions of this Section 7.4 prior to, or during the six
months after, any exercise, payment or delivery pursuant to an
Award shall cause such exercise, payment or delivery to be
rescinded. The Company shall notify the Participant in writing
of any such rescission within two years after such exercise,
payment, or delivery. Within ten days after receiving such a
notice from the Company, the Participant shall pay to the
Company the amount of any gain realized or payment received as
a result of the rescinded exercise, payment, or delivery
pursuant to an Award. Such payment shall be made either in
cash or by returning to the Company the number of Shares that
the Participant received in connection with the rescinded
exercise, payment, or delivery, in which case the Company
shall promptly repay the lesser of the exercise price or the
then-Fair Market Value of the Shares returned.
The Committee may modify the conditions imposed under this Section 7.4 with
respect to any Award.
7.5 LOAN PROVISIONS. With the consent of the Committee, and subject at
all times to, and only to the extent, if any, permitted under and in accordance
with, laws and regulations and other binding obligations or provisions
applicable to the Company, the Company may make, guarantee, or arrange for a
loan or loans to a Participant with respect to the exercise of any Option or
other payment in connection with any Award, including the payment by a
Participant of any or all federal, state, or local income or other taxes due in
connection with any Award. Subject to such limitations, the Committee shall have
full authority to decide whether to make a loan or loans hereunder and to
determine the amount, terms, and provisions of any such loan or loans, including
the interest rate to be charged in respect of any such loan or loans, whether
the loan or loans are to be with or without recourse against the borrower, the
terms on which the loan is to be repaid and conditions, if any, under which the
loan or loans may be forgiven.
8. PERFORMANCE AND ANNUAL INCENTIVE AWARDS
8.1 PERFORMANCE CONDITIONS. The right of a Participant to exercise or
receive a grant or settlement of any Award, and the timing thereof, may be
subject to such performance conditions as may be specified by the Committee. The
Committee may use such business criteria and measures of performance as it may
deem appropriate in establishing performance conditions, and may exercise its
discretion to reduce or increase the amounts payable under any Award subject to
performance conditions, except as limited under Sections 8.2 and 8.3 hereof in
the case of a Performance Award or Annual Incentive Award intended to qualify
under Code Section 162(m).
8.2 PERFORMANCE AWARDS GRANTED TO DESIGNATED COVERED EMPLOYEES. If the
Committee determines that a Performance Award to be granted to an Eligible
Person who is designated by the Committee as likely to be a Covered Employee
should qualify as "performance-based compensation" for purposes of Code Section
162(m), the grant, exercise, and/or settlement of such Performance Award shall
be contingent upon achievement of preestablished performance goals and other
terms set forth in this Section 8.2.
<PAGE>
(a) PERFORMANCE GOALS GENERALLY. The performance goals for such
Performance Awards shall consist of one or more business
criteria and a targeted level or levels of performance with
respect to each such criteria, as specified by the Committee
consistent with this Section 8.2. Performance goals shall be
objective and shall otherwise meet the requirements of Code
Section 162(m) and regulations thereunder (including
Regulation 1.162-27 and successor regulations thereto),
including the requirement that the level or levels of
performance targeted by the Committee result in the
achievement of performance goals being "substantially
uncertain." The Committee may determine that such Performance
Awards shall be granted, exercised, and/or settled upon
achievement of any one performance goal or that two or more of
the performance goals must be achieved as a condition to
grant, exercise, and/or settlement of such Performance Awards.
Performance goals may differ for Performance Awards granted to
any one Participant or to different Participants.
(b) BUSINESS CRITERIA. One or more of the following business
criteria for the Company, on a consolidated basis, and/or for
specified subsidiaries, divisions, or other business units of
the Company (where the criteria are applicable), shall be used
by the Committee in establishing performance goals for such
Performance Awards: (1) earnings per share; (2) revenues; (3)
cash flow; (4) cash flow return on investment; (5) return on
net assets, return on assets, return on investment, return on
capital, return on equity; profitability; (6) economic value
added ("EVA"); (7) operating margins or profit margins; (8)
income or earnings before or after taxes; pretax earnings;
pretax earnings before interest, depreciation and
amortization; operating earnings; pretax operating earnings,
before or after interest expense and before or after
incentives, service fees, and extraordinary or special items;
net income; (9) total stockholder return or stock price; (10)
book value per share; (11) expense management; improvements in
capital structure; working capital; costs; and (12) any of the
above goals as compared to the performance of a published or
special index deemed applicable by the Committee including,
but not limited to, the Standard & Poor's 500 Stock Index or a
group of comparator companies. EVA means the amount by which a
business unit's income exceeds the cost of the capital used by
the business unit during the performance period, as determined
by the Committee. Income of a business unit may be before
payment of bonuses, capital charges, non-recurring or
extraordinary income or expense, and general and
administrative expenses for the performance period, if so
specified by the Committee. One or more of the foregoing
business criteria shall also be exclusively used in
establishing performance goals for Annual Incentive Awards
granted to a Covered Employee under Section 8.3 hereof.
(c) PERFORMANCE PERIOD; TIMING FOR ESTABLISHING PERFORMANCE AWARD
TERMS. Achievement of performance goals in respect of such
Performance Awards shall be measured over a performance period
of up to ten years, as specified by the Committee. Performance
goals, amounts payable upon achievement of such goals, and
other material terms of Performance Awards shall be
established by the Committee (i) while the performance outcome
for that performance period is substantially uncertain and
(ii) no more than 90 days after the commencement of the
performance period to which the performance goal relates or,
if less, the number of days which is equal to 25 percent of
the relevant performance period. In all cases, the maximum
amount payable in respect of a Performance Award to any
Participant shall be subject to the limitation set forth in
Section 5 hereof.
<PAGE>
(d) PERFORMANCE AWARD POOL. The Committee may establish a
Performance Award pool, which shall be an unfunded pool, for
purposes of measuring performance of the Company in connection
with Performance Awards. The amount of such Performance Award
pool shall be based upon the achievement of a performance goal
or goals based on one or more of the business criteria set
forth in Section 8.2(b) hereof during the given performance
period, as specified by the Committee in accordance with
Section 8.2(c) hereof. The Committee may specify the amount of
the Performance Award pool as a percentage of any of such
business criteria, a percentage thereof in excess of a
threshold amount, or as another amount which need not bear a
strictly mathematical relationship to such business criteria.
In such case, Performance Awards may be granted as rights to
payment of a specified portion of the Award pool; such grants
shall be subject to the requirements of Section 8.2(c).
(e) SETTLEMENT OF PERFORMANCE AWARDS; OTHER TERMS. Settlement of
such Performance Awards shall be in cash, Shares, other
Awards, or other property, in the discretion of the Committee.
The Committee may, in its discretion, reduce the amount of a
settlement otherwise to be made in connection with such
Performance Awards, but may not exercise discretion to
increase any such amount payable to a Covered Employee in
respect of a Performance Award subject to this Section 8.2.
The Committee shall specify the circumstances in which such
Performance Awards shall be paid or forfeited in the event of
termination of employment by the Participant prior to the end
of a performance period or settlement of Performance Awards.
8.3 ANNUAL INCENTIVE AWARDS GRANTED TO DESIGNATED COVERED EMPLOYEES. If
the Committee determines that an Annual Incentive Award to be granted to an
Eligible Person who is designated by the Committee as likely to be a Covered
Employee should qualify as "performance-based compensation" for purposes of Code
Section 162(m), the grant, exercise, and/or settlement of such Annual Incentive
Award shall be contingent upon achievement of preestablished performance goals
and other terms set forth in this Section 8.3.
(a) POTENTIAL ANNUAL INCENTIVE AWARDS. Not later than the deadline
specified in Section 8.2(c) above, the Committee shall
determine the Eligible Persons who will potentially receive
Annual Incentive Awards, and the amounts potentially payable
thereunder, for that fiscal year, either out of an Annual
Incentive Award pool established by such date under Section
8.3(b) hereof or as individual Annual Incentive Awards. In the
case of individual Annual Incentive Awards intended to qualify
under Code Section 162(m), the amount potentially payable
shall be based upon the achievement of a performance goal or
goals based on one or more of the business criteria set forth
in Section 8.2(b) hereof in the given performance year, as
specified by the Committee; in other cases, such amount shall
be based on such criteria as shall be established by the
Committee. In all cases, the maximum Annual Incentive Award of
any Participant shall be subject to the limitation set forth
in Section 5 hereof.
(b) ANNUAL INCENTIVE AWARD POOL. The Committee may establish an
Annual Incentive Award pool, which shall be an unfunded pool,
for purposes of measuring performance of the Company in
connection with Annual Incentive Awards. The amount of such
Annual Incentive Award pool shall be based upon the
achievement of a performance goal or goals based on one or
more of the business criteria set forth in Section 8.2(b)
hereof during the given performance period, as specified by
the Committee in accordance with Section 8.2(c) hereof. The
Committee may specify the amount of the Annual Incentive
<PAGE>
Award pool as a percentage of any of such business criteria, a
percentage thereof in excess of a threshold amount, or as
another amount which need not bear a strictly mathematical
relationship to such business criteria.
(c) PAYOUT OF ANNUAL INCENTIVE AWARDS. After the end of each
fiscal year, the Committee shall determine the amount, if any,
of the potential Annual Incentive Award payable to each
Participant eligible therefor and, if applicable, the amount
of any Annual Incentive Award pool. The Committee may, in its
discretion, determine that the amount payable to any
Participant as a final Annual Incentive Award shall be
increased or reduced from the amount of his or her potential
Annual Incentive Award, including a determination to make no
final Award whatsoever, but may not exercise discretion to
increase any such amount in the case of an Annual Incentive
Award intended to qualify under Code Section 162(m). The
Committee shall specify the circumstances in which an Annual
Incentive Award shall be paid or forfeited in the event of
termination of employment by the Participant prior to the end
of a fiscal year or prior to settlement of such Annual
Incentive Award.
8.4 WRITTEN DETERMINATIONS. Determinations by the Committee as to the
establishment of performance goals, the amount potentially payable in respect of
Performance Awards and Annual Incentive Awards, the achievement of performance
goals relating to Performance Awards and Annual Incentive Awards, and the amount
of any final Performance Award and Annual Incentive Award shall be recorded in
writing, except that the Committee may determine that this requirement shall not
apply in the case of Performance Awards not intended to qualify under Section
162(m). Specifically, the Committee shall certify in writing, in a manner
conforming to applicable regulations under Section 162(m), prior to settlement
of each such Award granted to a Covered Employee, that the performance goals and
other material terms of the Award upon which settlement of the Award was
conditioned have been satisfied. The Committee may not delegate any
responsibility relating to such Performance Awards or Annual Incentive Awards,
and the Board shall not perform such functions at any time that the Committee is
composed solely of Qualified Members.
8.5 STATUS OF SECTION 8.2 AND SECTION 8.3 AWARDS UNDER CODE SECTION
162(M). It is the intent of the Company that Performance Awards and Annual
Incentive Awards under Sections 8.2 and 8.3 hereof granted to persons who are
designated by the Committee as likely to be Covered Employees within the meaning
of Code Section 162(m) and regulations thereunder (including Regulation 1.162-27
and successor regulations thereto) shall, if so designated by the Committee,
constitute "performance-based compensation" within the meaning of Code Section
162(m) and regulations thereunder. Accordingly, the terms of Sections 8.2, 8.3,
8.4 and 8.5, including the definitions of Covered Employee and other terms used
therein, shall be interpreted in a manner consistent with Code Section 162(m)
and regulations thereunder. The foregoing notwithstanding, because the Committee
cannot determine with certainty whether a given Participant will be a Covered
Employee with respect to a fiscal year that has not yet been completed, the term
Covered Employee as used herein shall mean only a person designated by the
Committee, at the time of grant of a Performance Award or Annual Incentive
Award, as likely to be a Covered Employee with respect to a specified fiscal
year. If any provision of the Plan as in effect on the date of adoption of any
agreements relating to Performance Awards or Annual Incentive Awards that are
designated as intended to comply with Code Section 162(m) does not comply or is
inconsistent with the requirements of Code Section 162(m) or regulations
thereunder, such provision shall be construed or deemed amended to the extent
necessary to conform to such requirements.
9. GENERAL PROVISIONS.
<PAGE>
9.1 COMPLIANCE WITH LAWS AND OBLIGATIONS. The Company shall not be
obligated to issue or deliver Shares in connection with any Award or take any
other action under the Plan in a transaction subject to the registration
requirements of the Securities Act of 1933, as amended, or any other federal or
state securities law, any requirement under any listing agreement between the
Company and any national securities exchange or automated quotation system, or
any other law, regulation, or contractual obligation of the Company, until the
Company is satisfied that such laws, regulations, and other obligations of the
Company have been complied with in full. Certificates representing Shares issued
under the Plan will be subject to such stop-transfer orders and other
restrictions as may be applicable under such laws, regulations, and other
obligations of the Company, including any requirement that a legend or legends
be placed thereon.
9.2 LIMITATIONS ON TRANSFERABILITY. Awards and other rights under the
Plan will not be transferable by a Participant except by will or the laws of
descent and distribution (or to a designated Beneficiary in the event of the
Participant's death), and, if exercisable, shall be exercisable during the
lifetime of a Participant only by such Participant or his guardian or legal
representative; PROVIDED, HOWEVER, that such Awards and other rights (other than
ISOs and SARs in tandem therewith) may be transferred during the lifetime of the
Participant, for purposes of the Participant's estate planning or other purposes
consistent with the purposes of the Plan (as determined by the Committee), and
may be exercised by such transferees in accordance with the terms of such Award,
but only if and to the extent permitted by the Committee. Awards and other
rights under the Plan may not be pledged, mortgaged, hypothecated, or otherwise
encumbered, and shall not be subject to the claims of creditors. A Beneficiary,
transferee, or other person claiming any rights under the Plan from or through
any Participant shall be subject to all terms and conditions of the Plan and any
Award agreement applicable to such Participant, except as otherwise determined
by the Committee, and to any additional terms and conditions deemed necessary or
appropriate by the Committee.
9.3 NO RIGHT TO CONTINUED EMPLOYMENT; LEAVES OF ABSENCE. Neither the
Plan, the grant of any Award, nor any other action taken hereunder shall be
construed as giving any employee, consultant, director, or other person the
right to be retained in the employ or service of the Company or any of its
subsidiaries, nor shall it interfere in any way with the right of the Company or
any of its subsidiaries to terminate any person's employment or service at any
time. Unless otherwise specified in the applicable Award agreement, an approved
leave of absence shall not be considered a termination of employment or service
for purposes of an Award under the Plan.
9.4 TAXES. The Company and any subsidiary is authorized to withhold
from any Award granted or to be settled, any delivery of Shares in connection
with an Award, any other payment relating to an Award, or any payroll or other
payment to a Participant amounts of withholding and other taxes due or
potentially payable in connection with any transaction involving an Award, and
to take such other action as the Committee may deem advisable to enable the
Company and Participants to satisfy obligations for the payment of withholding
taxes and other tax obligations relating to any Award. This authority shall
include authority to withhold or receive Shares or other property and to make
cash payments in respect thereof in satisfaction of a Participant's tax
obligations.
9.5 CHANGES TO THE PLAN AND AWARDS. The Board may amend, suspend,
discontinue, or terminate the Plan or the Committee's authority to grant Awards
under the Plan without the consent of stockholders or Participants, except that
any amendment shall be subject to the approval of the Company's stockholders at
or before the next annual meeting of stockholders for which the record date is
after the date of such Board action if such stockholder approval is required by
any federal or state law or regulation or the rules of any stock exchange or
automated quotation system on which the Shares may then be listed or quoted, and
the Board may otherwise, in its discretion, determine to submit other such
amendments to
<PAGE>
stockholders for approval; PROVIDED, HOWEVER, that, without the consent of an
affected Participant, no such action may materially impair the rights of such
Participant under any Award theretofore granted. The Committee may amend,
suspend, discontinue, or terminate, any Award theretofore granted and any Award
agreement relating thereto; PROVIDED, HOWEVER, that no such amendment may reduce
the exercise price of an outstanding Option (except as authorized under Section
5.3) or provide for Award terms that the Plan would not then permit for a newly
granted Award; and PROVIDED FURTHER, that, without the consent of an affected
Participant, no such action may materially impair the rights of such Participant
under such Award.
9.6 NO RIGHTS TO AWARDS; NO STOCKHOLDER RIGHTS. No Participant or other
person shall have any claim to be granted any Award under the Plan, and there is
no obligation for uniformity of treatment of Participants, employees,
consultants, or directors. No Award shall confer on any Participant any of the
rights of a stockholder of the Company unless and until Shares are duly issued
or transferred and delivered to the Participant in accordance with the terms of
the Award or, in the case of an Option, the Option is duly exercised.
9.7 INTERNATIONAL PARTICIPANTS. With respect to Participants who reside
or work outside the United States of America, the Committee may, in its sole
discretion, amend the terms of the Plan with respect to such Participants or
grant Awards not conforming to the terms of the Plan to such Participants in
order that such Awards conform to the requirements of local law and customary
employment practices in such locations and in order that such Awards shall serve
the purposes of the Plan in light of such local laws and customary employment
practices.
9.8 UNFUNDED STATUS OF AWARDS; CREATION OF TRUSTS. The Plan is intended
to constitute an "unfunded" plan for incentive and deferred compensation. With
respect to any payments not yet made to a Participant pursuant to an Award,
nothing contained in the Plan or any Award shall give any such Participant any
rights that are greater than those of a general creditor of the Company;
PROVIDED, HOWEVER, that the Committee may authorize the creation of trusts or
make other arrangements to meet the Company's obligations under the Plan to
deliver cash, Shares, other Awards, or other property pursuant to any Award,
which trusts or other arrangements shall be consistent with the "unfunded"
status of the Plan unless the Committee otherwise determines with the consent of
each affected Participant.
9.9 NONEXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan by the
Board nor its submission to the stockholders of Predecessor or, in the case of
any amendment, submission to the stockholders of the Company for approval shall
be construed as creating any limitations on the power of the Board to adopt such
other compensatory arrangements as it may deem desirable, including the granting
of awards otherwise than under the Plan, and such arrangements may be either
applicable generally or only in specific cases.
9.10 PAYMENTS IN THE EVENT OF FORFEITURES; FRACTIONAL SHARES. Unless
otherwise determined by the Committee, in the event of a forfeiture of an Award
with respect to which a Participant paid cash consideration, the Participant
shall be repaid the amount of such cash consideration. No fractional Shares
shall be issued or delivered pursuant to the Plan or any Award (although
fractional share units may be credited in connection with any Award if so
authorized by the Committee). The Committee shall determine whether cash, other
Awards, or other property shall be issued or paid in lieu of such fractional
Shares or whether such fractional Shares or any rights thereto shall be
forfeited or otherwise eliminated.
9.11 SUCCESSORS AND ASSIGNS. The Plan shall be binding on all
successors and assigns of the Company and a Participant, including any permitted
transferee of a Participant, the Beneficiary or estate of
<PAGE>
such Participant and the executor, administrator or trustee of such estate, or
any receiver or trustee in bankruptcy or representative of the Participant's
creditors.
9.12 GOVERNING LAW. The validity, construction, and effect of the Plan,
any rules and regulations under the Plan, and any Award agreement will be
determined in accordance with the Delaware General Corporation Law and other
laws (including those governing contracts) of the State of Delaware, without
giving effect to principles of conflicts of laws, and applicable federal law.
9.13 EFFECTIVE DATE, STOCKHOLDER APPROVAL, AND PLAN TERMINATION. The
Plan shall become effective on the later of its approval by stockholders of the
Predecessor or the effectiveness of the Company's registration under Section 12
of the Exchange Act. Unless earlier terminated by action of the Board, the Plan
will remain in effect until such time as no Shares remain available for delivery
under the Plan and the Company has no further rights or obligations under the
Plan with respect to outstanding Awards under the Plan.
<PAGE>
Exhibit 10.2
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JEFFERIES GROUP, INC.
1999 DIRECTORS' STOCK COMPENSATION PLAN
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<PAGE>
JEFFERIES GROUP, INC.
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1999 DIRECTORS' STOCK COMPENSATION PLAN
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1. PURPOSE. The purpose of this 1999 Directors' Stock Compensation Plan
(the "Plan") is to advance the interests of the Company and its stockholders by
providing a means to attract, retain and compensate non-employee directors and
to enable such persons to increase their proprietary interest in the Company. In
furtherance of this purpose, the Plan provides for periodic grants of options,
Deferred Shares or Restricted Stock (as defined below), the opportunity for a
director to elect deferred and alternative forms of compensation in lieu of cash
fees for service as a director, including Options, Deferred Shares, and deferred
cash, and the opportunity to defer delivery of shares deliverable upon exercise
of options or in settlement of other awards.
2. DEFINITIONS. In addition to the terms defined in Section 1, the
following terms shall be defined as set forth below:
2.1 "Administrator" means the administrative committee specified in
Section 3(b) to whom the Board has delegated the authority to take action under
the Plan.
2.2 "Beneficiary" means the person(s) or trust(s) which have been
designated by a Participant in his or her most recent written beneficiary
designation filed with the Administrator to receive the benefits specified under
the Plan upon such Participant's death. If, upon a Participant's death, there is
no designated Beneficiary or surviving designated Beneficiary, then the term
Beneficiary means the person(s) or trust(s) entitled by will or the laws of
descent and distribution to receive such benefits.
2.3 "Board" means the Board of Directors of the Company.
2.4 "Code" means the Internal Revenue Code of 1986, as amended,
including regulations thereunder and successor provisions and regulations
thereto.
2.5 "Company" means Jefferies Group, Inc., a Delaware corporation,
formerly named JEF Holding Company, Inc., the common stock of which was
distributed in the Spin-off.
2.6 "DDCP" means Predecessor's Non-Employee Directors' Deferred
Compensation Plan.
2.7 "Deferral Account" means the account established and maintained by
the Company for Deferred Shares credited under Sections 7 and 8 and deferred
cash credited under Section 8. A Deferral Account shall include one or more
subaccounts, including a Deferred Share Account for forfeitable Deferred Shares
under Section 7, a Deferred Share Account for Deferred Shares that have become
nonforfeitable under Section 7 or that are at all times nonforfeitable under
Section 8(c), a Deferred Share Account for Deferred Shares resulting from Option
exercises under Section 9(a), and a Deferred Cash Account described in Section
8(d). The Deferral Account and subaccounts, and Deferred Shares and deferred
cash credited thereto, will be maintained solely as bookkeeping entries by the
Company to evidence unfunded obligations of the Company.
2.8 "Deferred Share" means a credit to a Participant's Deferred Share
Account under Sections 7 or 8 which represents the right to receive one Share
upon settlement of such Account.
<PAGE>
2.9 "Disability" means a Participant's termination of service as a
director of the Company due to a physical or mental incapacity of long duration
which renders the Participant unable to perform the duties of a director of the
Company.
2.10 "Eligible Holder" means each person who, at the Spin-off Date,
holds an option or deferred share granted by Predecessor under a plan or program
for Predecessor's non-employee directors with respect to which the Company has
agreed to grant, or offer to grant, an Option or Deferred Share award in
substitution for such Predecessor award or to offset any lost value due to the
early termination of such option or deferred share.
2.11 "Exchange Act" means the Securities Exchange Act of 1934, as
amended, including rules thereunder and successor provisions and rules thereto.
2.12 "Fair Market Value," means, with respect to Shares, the fair
market value of such Shares determined by such methods or procedures as shall be
established from time to time by the Board. Unless otherwise determined by the
Board, the Fair Market Value of a Share as of any given date means the average
of the closing sales prices of a Share as reported in the table entitled "New
York Stock Exchange Composite Transactions" contained in The Wall Street Journal
(or an equivalent successor table) for the day as of which the valuation is to
be made or, if that day is not a trading day, the nearest preceding trading day,
and the four trading days immediately prior thereto; PROVIDED, HOWEVER, that
Fair Market Value at the date of the Spin-off shall be determined based on the
first five trading days for which a closing price is reported following the
Spin-off.
2.13 "Option" means the right, granted to a Participant under Section 6
or 8, to purchase a specified number of Shares at the specified exercise price
for a specified period of time under the Plan. All Options will be non-qualified
stock options.
2.14 "Option Valuation Methodology" means the method for determining
the number of shares to be subject to Options, and the exercise price thereof,
granted in payment of Retainer Fees under Section 8(b).
2.15 "Other Director Compensation" means fees payable to a director in
his or her capacity as such, other than Retainer Fees, for attending meetings
and other service on the Board and Board committees.
2.16 "Participant" means any person who has been granted an Option
which remains outstanding, has Deferred Shares or cash credited to his or her
Deferral Account, or has elected to be granted Options in payment of Retainer
Fees or to defer payment of Retainer Fees and Other Director Compensation in the
form of Deferred Shares or cash under the Plan.
2.17 "Plan Year" means, with respect to a Participant, the period
commencing at the time of election of the director at an annual meeting of
stockholders (or the election of a class of directors if the Company then has a
classified Board of Directors), or the director's initial appointment to the
Board if not at an annual meeting of stockholders, and continuing until the
close of business of the day preceding the next annual meeting of stockholders;
PROVIDED, HOWEVER, that the initial Plan Year shall be deemed to be a
continuation of the plan year in effect under the DDCP at the Spin-Off Date.
2.18 "Predecessor" means Jefferies Group, Inc., a Delaware corporation,
as it existed immediately prior to the Spin-off.
<PAGE>
2.19 "Restricted Stock" means Shares granted under Section 7, subject
to a risk of forfeiture and restrictions on transfer for a specified period.
2.20 "Retainer Fees" means annual retainer fees payable to a director
in his or her capacity as such for service on the Board and service as chairman
of any Board committee.
2.21 "Retirement" means a Participant's termination of service as a
director of the Company at or after age 65.
2.22 "Shares" means shares of common stock, par value $.01 per share,
of the Company and such other securities as may be substituted or resubstituted
for Shares pursuant to Section 5.3.
2.23 "Spin-off" means the distribution of the Common Stock of the
Company by the Predecessor to the Predecessor's stockholders, which was approved
by the Predecessor's stockholders on April 20, 1999.
2.24 "Spin-off Date" means the record date for Predecessor's
distribution of Shares in the Spin- off.
2.25 "Valuation Date" shall mean the close of business on the last
business day of each calendar quarter and, in the case of any final distribution
from a Participant's Deferred Cash Account, the day preceding such distribution.
3. ADMINISTRATION.
3.1 AUTHORITY. Both the Board and the Administrator (subject to the
ability of the Board to restrict the Administrator) shall administer the Plan in
accordance with its terms, and shall have all powers necessary to accomplish
such purpose, including the power and authority to construe and interpret the
Plan, to define the terms used herein, to prescribe, amend and rescind rules and
regulations, agreements, forms, and notices relating to the administration of
the Plan, and to make all other determinations necessary or advisable for the
administration of the Plan. The Administrator may perform any function of the
Board under the Plan, except for grants of awards under Sections 6 and 7,
adoption of material amendments to the Plan under Section 11.5, or other
functions from time to time specifically reserved by the Board to itself. Any
actions of the Board or the Administrator with respect to the Plan shall be
final, conclusive, and binding upon all persons interested in the Plan, except
that any action of the Administrator will not be binding on the Board. The Board
and Administrator may each appoint agents and delegate thereto powers and duties
under the Plan, except as otherwise limited by the Plan.
3.2 ADMINISTRATOR. The Administrator shall be the Director of Human
Resources and the Secretary or such other committee as may designated by the
Board. In any case in which a director is a member of the Administrator, such
director shall be not act on or decide any matter relating solely to himself or
herself or any of his or her rights or benefits under the Plan. No bond or other
security need be required of the Administrator or any member thereof in any
jurisdiction.
3.3 LIMITATION OF LIABILITY. Each member of the Board and the
Administrator shall be entitled to, in good faith, rely or act upon any report
or other information furnished to him or her by any officer or other employee of
the Company or any subsidiary, the Company's independent certified public
accountants, or any executive compensation consultant, legal counsel, or other
professional retained by the Company to assist in the administration of the
Plan. No member of the Board or the Administrator, nor any person to whom
ministerial duties under the Plan have been delegated, shall be personally
liable for
<PAGE>
any action, determination, or interpretation taken or made in good faith with
respect to the Plan, and any such person shall, to the extent permitted by law,
be fully indemnified and protected by the Company with respect to any such
action, determination, or interpretation.
4. SHARES AVAILABLE UNDER THE PLAN. The total number of Shares reserved
and available for delivery under the Plan is 500,000, subject to adjustment as
provided in Section 11.2. Shares that may be delivered under the Plan may
consist, in whole or in part, of authorized and unissued Shares, treasury Shares
or Shares acquired in the market for the account of a Participant. For purposes
of the Plan, shares that may be purchased upon exercise of an Option or
distributed in settlement of Deferred Shares will not be considered to be
available after such Option has been granted or Deferred Share credited, except
for purposes of delivery in connection with such Option or Deferred Share;
provided, however, that, if an Option expires for any reason without having been
exercised in full or Deferred Shares or shares of Restricted Stock are forfeited
or cancelled, the shares subject to the unexercised portion of such Option or to
the forfeited or cancelled Deferred Shares or Restricted Stock will again be
available for delivery under the Plan.
5. ELIGIBILITY. Each non-employee director of the Company who is paid
fees for service on the Board or a Board committee, and each Eligible Holder,
may participate in the Plan, subject to the terms hereof. No person other than
those specified in this Section 5 will be eligible to participate in the Plan.
The Administrator will notify each person of his or her eligibility to
participate in the Plan on an elective basis not later than 15 days (or such
other period as may be determined by the Administrator) prior to any deadline
for filing an election form.
6. INITIAL AND ANNUAL GRANTS OF OPTIONS. Options shall be granted to
non-employee directors in accordance with policies established from time to time
by the Board specifying the classes of directors to be granted Options, the
number of Shares to be subject to each Option, and the time or times at which
such Options shall be granted; provided, however, that the maximum number of
Shares that may be subject to Options granted to a director in a given year
under this Section 6 (i.e., without a corresponding reduction in fees) shall be
10,000, subject to adjustment as provided in Section 11.2. Options granted to an
Eligible Holder under Section 9.6 shall not be counted against the limitation
set forth in the preceding sentence.
6.1 INITIAL POLICY -- OPTION GRANTS. The initial policy with respect to
Options granted under this Section 6, effective as of the Spin-off Date and
continuing until modified or revoked by the Board, shall be as follows:
(a) INITIAL GRANTS. At the date of a person's initial election
or appointment as a member of the Board after the effective date of the
Plan, such person, if he or she is a non-employee director eligible to
participate upon such election or appointment, shall be granted an
Option to purchase during the Option term 5,000 Shares, subject to
adjustment as provided in Section 11.2.
(b) ANNUAL GRANTS. At the date of each annual meeting of
stockholders at which a director is elected or reelected as a member of
the Board (or at which members of another class of directors are
elected or reelected, if the Company then has a classified Board), and
at the time of effectiveness of the Spin-off, a director, if he or she
is a non-employee director eligible to participate at the close of
business on that date and if he or she has not been granted an Option
under this Section 6.1 previously during the same calendar year, shall
be granted an Option to purchase during the Option term 4,000 Shares,
subject to adjustment as provided in Section 11.2.
<PAGE>
(c) PREDECESSOR DIRECTORS. For purposes of this policy, a
director who served on the Predecessor's board of directors and became
a director of the Company at the time of the Spin-off shall be deemed a
continuing director entitled to an annual grant under Section 6.1(b)
rather than Section 6.1(a).
6.2 TERMS OF OPTIONS GRANTED UNDER SECTION 6. Each Option granted under
this Section 6 shall be subject to the following terms and conditions:
(a) EXERCISE PRICE. The exercise price per Share purchasable
under an Option will be equal to 100% of the Fair Market Value of a
Share on the date of grant of the Option.
(b) OPTION TERM. Each Option shall expire at the end of a term
fixed by the Board, not longer than ten years after the date of grant,
or at such earlier date as the Option may no longer be exercised and
cannot, by its terms, thereafter become exercisable. Options granted
under the initial policy set out in Section 6.1 shall expire at the
earlier of (i) a fixed term of five years after the date of grant, (ii)
12 months after the Participant ceases to serve as a Director of the
Company due to death, Disability, or Retirement, or (iii) 60 days after
the Participant ceases to serve as a Director of the Company for any
reason other than death, Disability, or Retirement.
(c) VESTING AND EXERCISABILITY. The Board may establish terms
regarding the times at which Options shall become vested and
exercisable. Options granted under the initial policy set out in
Section 6.1 and not previously forfeited shall vest and become
exercisable by a Participant on the date three months after the date of
grant, and, unless otherwise provided in the Participant's Option
agreement, any portion of a Participant's Option that has not vested
and become exercisable at the time of termination of the Participant's
service as a director shall be forfeited.
(d) PAYMENT. The exercise price of an Option shall be paid to
the Company either in cash or by the surrender of Shares, or any
combination thereof, or in such other form or manner as may be
established by the Administrator; PROVIDED, HOWEVER, that, unless
otherwise determined by the Administrator, shares shall not be
surrendered in payment of the exercise price if such surrender would
result in additional accounting expense to the Company.
7. GRANTS OF DEFERRED SHARES AND RESTRICTED STOCK. Deferred Shares
and/or Restricted Stock shall be granted to non-employee directors in accordance
with policies established from time to time by the Board specifying the classes
of directors to be granted such awards, the number of Deferred Shares or shares
of Restricted Stock to be granted, and the time or times at which such awards
shall be granted; provided, however, that the maximum number of Deferred Shares
and shares of Restricted Stock that may be granted to a director in a given year
under this Section 7, without a corresponding reduction in fees, shall be 50% of
the number of Deferred Shares that could be granted under Section 8.3 in that
year with such a corresponding reduction in fees. Deferred Shares and Restricted
Stock granted to an Eligible Holder under Section 9.6 shall not be counted
against the limitation set forth in the preceding sentence.
7.1 INITIAL POLICY. The initial policy with respect to awards under
this Section 7, effective as of the Effective Date and continuing until modified
or revoked by the Board, shall be to grant no Deferred Shares or Restricted
Stock under this Section 7.
7.2 TERMS OF DEFERRED SHARES AND RESTRICTED STOCK GRANTED UNDER SECTION
7. Deferred Shares granted under this Section 7 shall be subject to the terms
and conditions of Deferred Shares specified in Sections 9.2, 9.3, and 9.4,
unless otherwise determined by the Board. Deferred Shares and Restricted Stock
granted under this Section 7 shall also be subject to the following additional
terms and
<PAGE>
conditions:
(a) VESTING AND FORFEITURE. The Board may establish terms
regarding the times at which Deferred Shares and Restricted Stock shall
become vested and non-forfeitable. Unless otherwise determined by the
Board, an award granted under this Section 7 shall be subject to the
following terms: Such award, if not previously forfeited, shall become
vested and non-forfeitable as to one-third of the number of Deferred
Shares or shares of Restricted Stock at the close of business on the
day preceding each of the three annual meetings of stockholders
following the date of grant of such award, rounded to the nearest
number of whole shares; provided, however, that if such award was not
previously vested or forfeited, it shall vest and become
non-forfeitable on an accelerated basis upon the termination of the
Participant's service as a director due to death, Disability or
Retirement. Unless otherwise determined by the Board, an award of
Deferred Shares or Restricted Stock not previously vested or forfeited
will cease to vest and will be forfeited upon the termination of the
Participant's service as a director for any reason other than death,
Disability or Retirement.
(b) DEFERRED SHARES CREDITED AS A RESULT OF DIVIDEND
EQUIVALENTS. Unless otherwise determined by the Board, Deferred Shares
credited as a result of dividend equivalents under Section 9.2 shall be
subject to the same terms, including risk of forfeiture, as the
Deferred Shares with respect to which the dividend equivalents were
credited.
(c) DIVIDENDS ON RESTRICTED STOCK. Unless otherwise determined
by the Board, dividends on Restricted Stock declared and paid prior to
the lapse of the risk of forfeiture on such Restricted Stock shall be
automatically reinvested in additional shares of Restricted Stock,
which shall be subject to the same terms, including risk of forfeiture,
as the Restricted Stock on which the dividend was paid.
(d) AWARDS NONTRANSFERABLE. Deferred Shares and Restricted
Stock shall be nontransferable by the Participant at any time that the
award remains subject to a risk of forfeiture.
(e) CONSIDERATION FOR RESTRICTED STOCK. If shares to be
granted as Restricted Stock are not treasury shares, the Board or Administrator
may impose additional conditions upon the grant of the Restricted Stock,
possibly including a requirement that cash consideration be paid by the
Participant, if and to the extent necessary to ensure that the Company will
receive lawful consideration equal to the aggregate par value of the Shares
being granted as Restricted Stock.
8. OPTIONS GRANTED IN PAYMENT OF FEES AND DEFERRAL OF FEES IN DEFERRED
SHARES AND DEFERRED CASH. Each director of the Company who is eligible under
Section 5 may elect, in accordance with Section 8.1, to be paid Retainer Fees in
the form of Options under Section 8.2 or to defer receipt of Retainer Fees and
Other Director Compensation in the form of Deferred Shares under Section 8.3 or
deferred cash under Section 8.4.
8.1 ELECTIONS. A director shall elect to participate and the terms of
such participation by filing an election with the Company prior to the beginning
of a Plan Year (the initial Plan Year is the same as that under Predecessor's
DDCP and Plan Years thereafter generally will begin at each annual meeting of
stockholders or, in the case of a new director, upon initial appointment) or at
such other date as may be specified by the Administrator, provided that any date
so specified shall ensure effective deferral of taxation and otherwise comply
with applicable laws.
(a) EFFECT AND IRREVOCABILITY OF ELECTIONS. Elections
shall be deemed continuing, and
<PAGE>
therefore applicable to Plan Years after the initial Plan Year covered
by the election, until the election is modified or superseded by the
Participant. Elections other than those subject to Section 9.4 shall
become irrevocable at the commencement of the Plan Year to which an
election relates, unless the Administrator specifies a different time.
Elections relating to the time of settlement of a Deferral Account
shall become irrevocable at the time specified in Section 9.4.
Elections may be modified or revoked by filing a new election prior to
the time the election to be modified or revoked has become irrevocable.
The latest election filed with the Administrator shall be deemed to
revoke all prior inconsistent elections that remain revocable at the
time of filing of the latest election.
(b) MATTERS TO BE ELECTED. The Administrator will provide a
form of election which will permit a director to make appropriate
elections with respect to all relevant matters under this Section 8.
(c) TIME OF FILING ELECTIONS. An election must be received by
the Administrator prior to the date specified by the Administrator.
Under no circumstances may a Participant defer compensation to which
the Participant has attained, at the time of deferral, a legally
enforceable right to current receipt of such compensation.
8.2 OPTIONS GRANTED IN PAYMENT OF RETAINER FEES. A Participant who has
elected to be paid a specified amount of Retainer Fees in the form of Options
shall be granted, at the close of business on the day the Participant's Plan
Year commences, an Option to purchase the number of whole Shares determined in
accordance with the Option Valuation Methodology specified by the Board. Each
Option granted under this Section 8.2 shall be subject to the following terms
and conditions:
(a) OPTION VALUATION METHODOLOGY. The Board shall determine
the Option Valuation Methodology which will be used to determine the
number of Options granted and the Option exercise price. The Option
Valuation Methodology may be based upon a valuation of the Option (for
example, using the Black-Scholes option valuation model), a discounting
of the aggregate exercise price of the Options by the amount of
Retainer Fees to be paid in the form of Options, or such other
methodology as may be deemed reasonable for purposes of this Section
8.2.
(b) OPTION TERM. Each Option will expire ten years after the
date of grant; PROVIDED, HOWEVER, that, unless otherwise determined by
the Board, any portion of an Option that is not yet exercisable at the
date a Participant ceases to serve as a director for any reason will
expire at the date such service ceases; and, PROVIDED FURTHER, that,
unless otherwise determined by the Board, any portion of an Option that
is not yet exercisable at the date a Participant ceases to serve as
chair or a member of a Board committee will, to the extent specified in
Section 8.2(e), expire at the date such service ceases.
(c) VESTING AND EXERCISABILITY. Each Option will vest and
become exercisable as to 25% of the underlying shares on the June 30,
September 30, December 31, and March 31 following the date of grant;
PROVIDED, HOWEVER, that, in the case of a Plan Year which begins on or
after June 30 and before September 30, the vesting percentage shall be
33%, and in the case of a Plan Year which begins on or after September
30 and before December 31, the vesting percentage shall be 50%; and
PROVIDED FURTHER, that an Option will become fully vested and
exercisable at the close of business on the last day of the Plan Year
in which it was granted. The number of Shares as to which the Option
becomes vested and exercisable will be rounded to the nearest whole
number. The foregoing notwithstanding, upon termination of the
Participant's service as a director due to death, Disability, or
Retirement, that portion of the Option which would become vested and
<PAGE>
exercisable on the last day of the calendar quarter in which such
death, Disability, or Retirement occurred will become immediately
vested and exercisable. Unless otherwise determined by the Board, an
Option will cease to further vest and become exercisable upon the
termination of the Participant's service as a director for any reason,
and the portion that has not vested and become exercisable at the time
of such termination shall be forfeited.
(d) EXERCISE PRICE. The exercise price per Share purchasable
under an Option will be determined in accordance with the Option
Valuation Methodology. The exercise price of an Option shall be paid to
the Company either in cash or by the surrender of Shares, or any
combination thereof, or in such other form or manner as may be
established by the Administrator; PROVIDED, HOWEVER, that, unless
otherwise determined by the Administrator, shares shall not be
surrendered in payment of the exercise price if such surrender would
result in additional accounting expense to the Company.
(e) CHANGES IN FEES; CHANGES IN SERVICE AS A COMMITTEE CHAIR.
If the amount of Retainer Fees is increased during a Plan Year, or if a
Director is appointed chair of a Board committee such that an
additional Retainer Fee is payable during a Plan Year, such increased
or additional fees will not be paid in the form of Options. Unless
otherwise determined by the Board, if a Director has been granted an
Option in respect of a Plan Year in payment of Retainer Fees which
included committee-related fees for service as chair or a member of any
Board committee, and during such Plan Year he or she ceases such
service but remains on the Board, the Option will expire in part at the
time such service ceases, to the extent of that portion of the Option
which is not yet exercisable multiplied by a fraction the numerator of
which is the amount of committee-related fees included in such Retainer
Fees and the denominator of which is the total amount of such Retainer
Fees.
(f) SERVICE DURING PART OF A QUARTER. If a Participant ceases
to serve as a director or on committee at a date other than a vesting
date for the Option and if the Board does not exercise its discretion
to permit vesting of the Participant's Option in consideration for the
Participant's service in that final quarterly period, the Participant
shall be entitled to payment in cash for his or her service in that
final quarterly period if and to the extent then provided in the
Company's regular non-employee director compensation policies.
8.3 DEFERRAL OF RETAINER FEES AND OTHER DIRECTOR COMPENSATION IN THE
FORM OF DEFERRED SHARES. If a Participant has elected to defer receipt of a
specified amount of Retainer Fees or Other Director Compensation in the form of
Deferred Shares, a number of Deferred Shares shall be credited to the
Participant's Deferred Share Account, as of the date such Retainer Fees or Other
Director Compensation otherwise would have been payable to the Participant but
for such election to defer, equal to (i) such amount otherwise payable divided
by (ii) the Fair Market Value of a Share at that date. Deferred Shares credited
under this Section 8.3 shall be subject to the terms and conditions of Deferred
Shares specified in Sections 9.2, 9.3, and 9.4. The right and interest of each
Participant in Deferred Shares credited to the Participant's Deferred Share
Account under this Section 8.3 at all times will be nonforfeitable.
8.4 DEFERRAL OF RETAINER FEES AND OTHER DIRECTOR COMPENSATION IN THE
FORM OF DEFERRED CASH. If a Participant has elected to defer receipt of a
specified amount of Retainer Fees or Other Director Compensation in the form of
deferred cash, an amount equal to such specified amount shall be credited to the
Participant's Deferred Cash Account as of the date such Retainer Fees or Other
Director Compensation otherwise would have been payable to the Participant but
for such election to defer. As of the close of business on each Valuation Date,
interest shall be credited to such Deferred Cash Account in an amount
<PAGE>
equal to the average daily balance in such Deferred Cash Account since the last
Valuation Date multiplied by the interest rate as specified by the Board and
applicable to the period since the last Valuation Date. The initial policy with
respect to the interest rate under this Section 8.4, effective as of the
Spin-off Date and continuing until modified or revoked by the Board, shall be to
credit interest at the prime interest rate of a single large bank as published
in The Wall Street Journal and effective on the date of the latest annual
meeting of stockholders of the Company or the date on which Predecessor's
stockholders approved the Plan. The right and interest of each Participant
relating to his or her Deferred Cash Account at all times will be
nonforfeitable.
8.5 CESSATION OF SERVICE AS A DIRECTOR. If any Retainer Fee or Other
Director Compensation otherwise subject to an election would be paid to a
Participant after he or she has ceased to serve as a director, such payment
shall not be subject to deferral under this Section 8, but shall instead be paid
in accordance with the Company's regular non-employee director compensation
policies.
9. OTHER DEFERRALS AND TERMS OF DEFERRAL ACCOUNTS.
9.1 DEFERRAL OF CERTAIN OPTION SHARES. If and to the extent permitted
by the Administrator, upon any exercise of an Option by a non-employee director,
if the exercise price of such Option is paid by surrender of Shares to the
Company, the director may elect to defer receipt of all or a portion of the
shares deliverable upon exercise of the Option in excess of the number
surrendered in payment of the exercise price. In such case, the number of shares
deferred shall be credited to the Participant's Deferred Share Account.
9.2 DIVIDEND EQUIVALENTS ON DEFERRED SHARES. Dividend equivalents will
be credited on Deferred Shares credited to a Participant's Deferred Share
Account as follows:
(a) CASH AND NON-SHARE DIVIDENDS. If the Company declares and
pays a dividend on Shares in the form of cash or property other than
Shares, then a number of additional Deferred Shares shall be credited
to a Participant's Deferred Share Account as of the payment date for
such dividend equal to (i) the number of Deferred Shares credited to
the Account as of the record date for such dividend, multiplied by (ii)
the amount of cash plus the Fair Market Value of any property other
than shares actually paid as a dividend on each share at such payment
date, divided by (iii) the Fair Market Value of a Share at such payment
date.
(b) SHARE DIVIDENDS AND SPLITS. If the Company declares and
pays a dividend on Shares in the form of additional Shares, or there
occurs a forward split of Share, then a number of additional Deferred
Shares shall be credited to the Participant's Deferred Share Account as
of the payment date for such dividend or forward Share split equal to
(i) the number of Deferred Shares credited to the Account as of the
record date for such dividend or split multiplied by (ii) the number of
additional Shares actually paid as a dividend or issued in such split
in respect of each Share.
9.3 REALLOCATION OF ACCOUNTS. A Participant shall have no right to have
amounts credited as cash to the Participant's Deferred Cash Account reallocated
or switched to his or her Deferred Share Account or amounts credited to the
Participant's Deferred Share Account reallocated or switched to his or her
Deferred Cash Account, unless otherwise determined by the Board.
9.4 ELECTIONS AS TO SETTLEMENT. Each Participant, while still a
director of the Company, shall file an election with the Administrator
specifying the time or times at which the Participant's Deferral Account will be
settled, following the Participant's termination of service as a director of the
Company,
<PAGE>
and whether distribution will be in a single lump sum or in a number of annual
installments not exceeding ten; PROVIDED, HOWEVER, that, if no valid election
has been filed as to the time of settlement of a Participant's Deferral Account
or any portion thereof, such Deferral Account or portion thereof shall be
distributed in a single lump sum on the first business day of the year following
the year in which the Participant ceases to serve as a director. If installments
are elected, such installments must be annual installments commencing not later
than the first year following the year in which the Participant ceases to serve
as a director (on such annual installment date as may be specified by the
Administrator) and extending over a period not to exceed ten years.
(a) MATTERS COVERED BY ELECTION. Subject to the terms of the
Plan, the Administrator shall determine whether all deferrals under the
Plan must be subject to a single election as to the time or times of
settlement, or whether settlement elections may relate to a specified
sub-account (I.E., the Deferred Share Account or the Deferred Cash
Account) and/or a specified Plan Year. If the Administrator permits
elections to relate to a specified Plan Year, such election shall apply
to the amounts originally credited to the specified subaccount in
respect of such Plan Year and to any additional amounts credited as
dividend equivalents or interest in respect of such originally credited
amounts and previously credited additional amounts.
(b) MODIFYING ELECTIONS. A Participant may modify a prior
election as to the time at which a Participant's Deferral Account
(including a specified subaccount) will be settled at any time prior to
the time the Participant ceases to serve as a director of the Company,
subject to such requirements as may be specified by the Administrator.
Such modification shall be made by filing a new election with the
Administrator. The foregoing notwithstanding, elections under this
Section 9.4 shall not be permitted, including elections which would
have the effect of advancing the time of settlement of any portion of
the Deferral Account, if permitting such an election would result in
constructive receipt by the Participant of compensation in respect of
the Participant's Deferral Account prior to the actual settlement of
such Deferral Account.
9.5 ELECTION FORMS. Elections under the Plan shall be made in writing
on such form or forms as may be specified from time to time by the
Administrator.
9.6 TREATMENT OF PREDECESSOR AWARDS AND DEFERRALS. Options may be
granted under the Plan to Eligible Holders in substitution for options granted
by Predecessor, including under the DDCP. The terms of such substitute Options
shall be adjusted to the extent authorized under the applicable Predecessor plan
or agreement, and otherwise as determined to be equitable by the Board. In
addition, the Board may grant Options to Eligible Holders intended to offset any
value lost by the Eligible Holder due to the early termination of a Predecessor
option in connection with the Spin-off. In such case, the Board will determine
such value lost and the replacement value of the Options granted under the Plan
in accordance with Section 8.2(a). Deferred Shares and Deferred Cash shall be
credited to an Eligible Holder in place of like credits under the DDCP, subject
to adjustment to the terms of the Deferred Shares to the extent authorized under
the DDCP and otherwise as determined to be equitable by the Board. The interest
rate applicable to amounts of Deferred Cash so credited and deferrals of cash
under Section 8.4 prior to the Company's first annual meeting of stockholders
shall be based on the applicable interest rate that would apply under the DDCP
assuming the meeting of Predecessor's stockholders at which the Plan was
approved had been an annual meeting.
9.7 STATEMENTS. The Administrator will furnish statements to each
Participant reflecting the amount credited to a Participant's Deferral Account,
transactions therein, and other related information no less frequently than once
each calendar year.
<PAGE>
9.8 FRACTIONAL SHARES. The amount of Deferred Shares credited to a
Deferred Share Account shall include fractional shares calculated to at least
three decimal places.
10. SETTLEMENT OF DEFERRAL ACCOUNTS. The Company will settle a
Participant's Deferral Account by making one or more distributions to the
Participant (or his or her Beneficiary, following Participant's death) at the
time or times, in a lump sum or installments, as specified in the Participant's
election(s) filed in accordance with Section 9.4; PROVIDED, HOWEVER, that a
Deferral Account will be settled at times earlier than those specified in such
election in accordance with Sections 10.2, 10.3, and 10.4.
10.1 FORM OF DISTRIBUTION. Distributions in respect of a Participant's
Deferred Share Account shall be made only in Shares, together with cash in lieu
of any fractional share remaining at a time that less than one whole Deferred
Share is credited to such Deferred Share Account. Shares may be delivered in
certificate form to a Participant (or his or her Beneficiary) or to a nominee
for the account of the Participant (or his or her Beneficiary), or in such other
manner as the Administrator may determine. Distributions in respect of a
Participant's Deferred Cash Account shall be made only in cash.
10.2 DEATH. If a Participant ceases to serve as a director due to death
or dies prior to distribution of all amounts from his or her Deferral Account,
the Company shall make a single lump-sum distribution to the Participant's
Beneficiary. Any such distribution shall be made as soon as practicable
following notification to the Company of the Participant's death.
10.3 FINANCIAL EMERGENCY AND OTHER PAYMENTS. Other provisions of the
Plan notwithstanding, if, upon the written application of a Participant, the
Board determines that the Participant has a financial emergency of such a
substantial nature and beyond the Participant's control that payment of amounts
previously deferred under the Plan is warranted, the Board may direct the
payment to the Participant of all or a portion of the balance of a Deferral
Account and the time and manner of such payment.
11. GENERAL PROVISIONS.
11.1 LIMITS ON TRANSFERABILITY. Options, Deferred Shares, Restricted
Stock and all other rights under the Plan will not be transferable by a
Participant except by will or the laws of descent and distribution, or to a
Beneficiary in the event of a Participant's death, and will not otherwise be
subject to alienation, anticipation, encumbrance, garnishment, attachment, levy,
execution or other legal or equitable process, nor subject to the debts,
contracts, liabilities or engagements, or torts of any Participant or his or her
Beneficiary. Any attempt to alienate, sell, transfer, assign, pledge, garnish,
attach or take any other action subject to legal or equitable process or
encumber or dispose of any interest in the Plan shall be void. The foregoing
notwithstanding, the Administrator may permit a Participant to transfer Options,
Deferred Shares, and related rights to one or more trusts, partnerships, or
family members during the lifetime of the Participant solely for estate planning
purposes, but only if and to the extent then consistent with the registration of
any offer and sale of shares related thereto on Form S-8, Form S-3, or such
other registration form of the Securities and Exchange Commission as may then be
permitted to be filed with respect to the Plan. The Company may rely upon the
beneficiary designation last filed in accordance with this Section 11.1.
11.2 ADJUSTMENTS. In the event that any large, special and
non-recurring dividend or other distribution (whether in the form of cash,
Shares, or other property), recapitalization, forward or reverse split,
reorganization, merger, consolidation, spin-off, combination, repurchase, share
exchange, liquidation, dissolution or other similar corporate transaction or
event affects the Shares such that an adjustment is determined by the Board to
be appropriate in order to prevent dilution or enlargement of a Participant's
rights under the Plan, then the Board shall, in such manner as it may deem
equitable, adjust any or all of (i)
<PAGE>
the number and kind of Shares reserved and available for delivery under the Plan
and to be subject to Options, Deferred Shares, and Restricted Stock thereafter
granted or credited, (ii) the number of Shares subject to Options automatically
granted under any policy under Section 6.1, the number of Deferred Shares and/or
Shares of Restricted Stock automatically granted under any policy under Section
7.1, and the maximum number of Shares that may be subject to Options granted to
a director in a single year under Section 6, (iii) the number and kind of Shares
deliverable upon exercise of outstanding Options, and the exercise price per
share thereof (provided that no fractional shares will be delivered upon
exercise of any Option), (iv) the number and kind of Shares to be delivered upon
settlement of outstanding Deferred Shares (taking into account any Deferred
Shares credited as dividend equivalents under Section 9.2), and (v) the number
and kind of shares outstanding as Restricted Stock.
11.3 RECEIPT AND RELEASE. Payments (in any form) to any Participant or
Beneficiary in accordance with the provisions of the Plan shall, to the extent
thereof, be in full satisfaction of all claims for the compensation deferred and
relating to the Deferral Account to which the payments relate against the
Company, the Board, or the Administrator, and the Administrator may require such
Participant or Beneficiary, as a condition to such payments, to execute a
receipt and release to such effect. In the case of any payment under the Plan of
less than all amounts then credited to a Deferral Account in the form of
Deferred Shares, the amounts paid shall be deemed to relate to the Deferred
Shares credited to the Account at the earliest time.
11.4 COMPLIANCE. The Company shall have no obligation to settle any
Deferral Account of a Participant (in any form) until all legal and contractual
obligations of the Company relating to establishment of the Plan and such
settlement shall have been complied with in full. In addition, the Company shall
impose such restrictions on Shares delivered to a Participant hereunder and any
other interest constituting a security as it may deem advisable in order to
comply with the Securities Act of 1933, as amended, the requirements of the New
York Stock Exchange or any other stock exchange or automated quotation system
upon which the Shares are then listed or quoted, any state securities laws
applicable to such a transfer, any provision of the Company's Certificate of
Incorporation or By-laws, or any other law, regulation, or binding contract to
which the Company is a party.
11.5 CHANGES TO THE PLAN AND AWARDS. The Board may amend, suspend,
discontinue, or terminate the Plan or the authority to grant awards under the
Plan without the consent of stockholders or Participants, except that any
amendment shall be subject to the approval of the Company's stockholders at or
before the next annual meeting of stockholders for which the record date is
after the date of such Board action if such stockholder approval is required by
any federal or state law or regulation or the rules of any stock exchange or
automated quotation system on which the Shares may then be listed or quoted, and
the Board may otherwise, in its discretion, determine to submit other such
amendments to stockholders for approval; PROVIDED, HOWEVER, that, without the
consent of an affected Participant, no such action may materially impair the
rights of such Participant under any award theretofore granted. The Committee
may amend, suspend, discontinue, or terminate any award theretofore granted and
any award agreement relating thereto; PROVIDED, HOWEVER, that no such amendment
may reduce the exercise price of an outstanding Option (except as authorized
under Section 11.2) or provide for award terms that the Plan would not then
permit for a newly granted award; and PROVIDED FURTHER, that, without the
consent of an affected Participant, no such action may materially impair the
rights of such Participant under such award. The foregoing notwithstanding, the
Board may, in its sole discretion, terminate the Plan (in whole or in part) and,
and may distribute to any Participant (in whole or in part, and whether or not
in connection with a termination of the Plan) the amounts credited to the
Participant's Deferral Account.
11.6 UNFUNDED STATUS OF PLAN; CREATION OF TRUSTS. The Plan is intended
to constitute an "unfunded" plan for deferred compensation and Participants
shall rely solely on the unsecured promise of
<PAGE>
the Company for payment hereunder. With respect to any payment not yet made to a
Participant under the Plan, nothing contained in the Plan shall give a
Participant any rights that are greater than those of a general unsecured
creditor of the Company; PROVIDED, HOWEVER, that the Board may authorize the
creation of trusts or make other arrangements to meet the Company's obligations
under the Plan, which trusts or other arrangements shall be consistent with the
"unfunded" status of the Plan unless the Board otherwise determines with the
consent of each affected Participant. The establishment and maintenance of, or
allocations and credits to, the Deferral Account of any Participant shall not
vest in any Participant any right, title or interest in and to any Plan assets
or benefits except at the time or times and upon the terms and conditions and to
the extent expressly set forth in the Plan and in accordance with the terms of
any trust.
11.7 OTHER PARTICIPANT RIGHTS. No Participant shall have any of the
rights or privileges of a stockholder of the Company under the Plan, including
as a result of the grant of an Option or crediting of Deferred Shares or other
amounts to a Deferral Account, or the creation of any Trust and deposit of
Shares therein, except at such time as such Option may have been duly exercised
or Shares may be actually delivered in settlement of a Deferral Account, except
that a Participant granted Restricted Stock shall have rights of a stockholder
except to the extent that those rights are limited by the terms of the Plan and
the agreement relating to the Restricted Stock. No provision of the Plan,
document relating to the Plan, or transaction hereunder shall confer upon any
Participant any right to continue to serve as a director of the Company or in
any other capacity with the Company or a subsidiary or to be nominated for
reelection as a director, or interfere in any way with the right of the Company
to increase or decrease the amount of any compensation payable to such
Participant. Subject to the limitations set forth in Section 11.1, the Plan
shall inure to the benefit of, and be binding upon, the parties hereto and their
successors and assigns.
11.8 CONTINUED SERVICE AS AN EMPLOYEE. If a Participant ceases to serve
as a director and, immediately thereafter, is employed by the Company or any
subsidiary, then such Participant will not be deemed to have ceased to serve as
a director or as chair or as a member of a Board committee at that time, and his
or her continued employment by the Company or any subsidiary will be deemed to
be continued service as a director or chair or a member of a Board committee;
PROVIDED, HOWEVER, that, for purposes of Section 5, such former director will
not be deemed to be a non-employee director eligible for further grants of
awards.
11.9 GOVERNING LAW. The validity, construction, and effect of the Plan,
any rules and regulations under the Plan, and any agreement under the Plan will
be determined in accordance with the Delaware General Corporation Law and other
laws (including those governing contracts) of the State of Delaware, without
giving effect to principles of conflicts of laws, and applicable federal law.
11.10 LIMITATION. A Participant and his or her Beneficiary shall assume
all risk in connection with any decrease in value of Options or a Deferral
Account and neither the Company, the Board nor the Administrator shall be liable
or responsible therefor.
11.11 CONSTRUCTION. The captions and numbers preceding the sections of
the Plan are included solely as a matter of convenience of reference and are not
to be taken as limiting or extending the meaning of any of the terms and
provisions of the Plan. Whenever appropriate, words used in the singular shall
include the plural or the plural may be read as the singular.
11.12 SEVERABILITY. In the event that any provision of the Plan shall
be declared illegal or invalid for any reason, said illegality or invalidity
shall not affect the remaining provisions of the Plan but shall be fully
severable, and the Plan shall be construed and enforced as if said illegal or
invalid provision had never been inserted herein.
<PAGE>
11.13 NONEXCLUSIVITY OF THE PLAN. The adoption of the Plan by the Board
shall not be construed as creating any limitation on the power of the Board to
adopt such other compensatory arrangements for directors as it may deem
desirable.
11.14 EFFECTIVE DATE, STOCKHOLDER APPROVAL, AND PLAN TERMINATION. The
Plan shall become effective on the later of its approval by stockholders of the
Predecessor or the effectiveness of the Company's registration under Section 12
of the Exchange Act. Unless earlier terminated by action of the Board, the Plan
will remain in effect until such time as no Shares remain available for delivery
under the Plan and the Company has no further rights or obligations under the
Plan with respect to outstanding Options or other awards under the Plan.
<PAGE>
APPENDIX B
DISTRIBUTION AGREEMENT
DATED AS OF
MARCH 17, 1999
BETWEEN
JEFFERIES GROUP, INC.
AND
JEF HOLDING COMPANY, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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<S> <C>
ARTICLE I--DEFINITIONS..................................................................................... 2
Section 1.01. Definitions.............................................................................. 2
ARTICLE II--THE DISTRIBUTION............................................................................... 7
Section 2.01. Cooperation Prior to the Distribution.................................................... 7
Section 2.02. JEFG Board Action; Conditions Precedent to the Distribution.............................. 8
Section 2.03. The Distribution......................................................................... 9
ARTICLE III--CONVEYANCE OF ASSETS, OBLIGATIONS AND RIGHTS; ASSUMPTION OF LIABILITIES; CONDUCT OF HOLDING
PENDING DISTRIBUTION..................................................................................... 9
Section 3.01. Conveyance of Assets, Obligations and Rights; Assumption and Release of Liabilities...... 9
Section 3.02. Conduct of Holding and JEFG Pending Distribution......................................... 11
Section 3.03. Further Assurances and Consents.......................................................... 11
ARTICLE IV--INDEMNIFICATION................................................................................ 12
Section 4.01. Holding Indemnification of the ITGI Group................................................ 12
Section 4.02. ITGI Indemnification of the Holding Group................................................ 12
Section 4.03. Insurance and Third Party Obligations.................................................... 12
ARTICLE V--HOLDING REPRESENTATIONS......................................................................... 12
Section 5.01. Holding Representations.................................................................. 12
ARTICLE VI--INDEMNIFICATION PROCEDURES; CONTRIBUTION....................................................... 14
Section 6.01. Notice and Payment of Claims............................................................. 14
Section 6.02. Notice and Defense of Third-Party Claims................................................. 14
Section 6.03. Contribution............................................................................. 15
ARTICLE VII--EMPLOYEE MATTERS.............................................................................. 16
Section 7.01. Benefits Agreement....................................................................... 16
ARTICLE VIII--TAX MATTERS.................................................................................. 16
ARTICLE IX--ACCOUNTING MATTERS............................................................................. 16
Section 9.01. Accounting Treatment of Assets Transferred............................................... 16
ARTICLE X--INFORMATION..................................................................................... 16
Section 10.01. Provision of Corporate Records.......................................................... 17
Section 10.02. Access to Information................................................................... 17
Section 10.03. Litigation Cooperation.................................................................. 17
Section 10.04. Reimbursement........................................................................... 17
Section 10.05. Retention of Records.................................................................... 17
Section 10.06. Confidentiality......................................................................... 17
ARTICLE XI--INTEREST ON PAYMENTS........................................................................... 18
</TABLE>
i
<PAGE>
<TABLE>
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<S> <C>
ARTICLE XII--MISCELLANEOUS................................................................................. 18
Section 12.01. Expenses................................................................................ 18
Section 12.02. Notices................................................................................. 19
Section 12.03. Amendment and Waiver.................................................................... 20
Section 12.04. Entire Agreement........................................................................ 20
Section 12.05. Parties in Interest..................................................................... 20
Section 12.06. Disputes................................................................................ 20
Section 12.07. Survival................................................................................ 21
Section 12.08. Severability............................................................................ 21
Section 12.09. Governing Law........................................................................... 21
Section 12.10. Counterparts............................................................................ 21
</TABLE>
<TABLE>
<S> <C> <C>
Schedule A -- Holding Provided Information Concerning the Merger
Schedule B -- ITGI Provided Information Concerning the Merger
</TABLE>
ii
<PAGE>
DISTRIBUTION AGREEMENT
This Distribution Agreement ("AGREEMENT"), dated as of March 17, 1999, is
hereby entered into by and between Jefferies Group, Inc., a Delaware corporation
("JEFG"), and JEF Holding Company, Inc., a Delaware corporation and wholly-owned
subsidiary of JEFG as of the date of this Agreement ("HOLDING").
RECITALS
WHEREAS, the Board of Directors of JEFG has approved the business
transactions pursuant to which all the assets, businesses and Liabilities (as
defined below) of Investment Technology Group, Inc., a Delaware corporation and
approximately 80.5% owned subsidiary of JEFG ("ITGI"), and ITGI's subsidiaries
will be separated from all other assets, businesses and Liabilities of JEFG, on
the terms and subject to the conditions set forth herein and in the Ancillary
Agreements (as defined below);
WHEREAS, concurrently herewith, JEFG and ITGI are entering into an Agreement
and Plan of Merger (the "MERGER AGREEMENT"), pursuant to which (x) ITGI will
merge (the "MERGER") with and into JEFG and (y) all outstanding shares of common
stock, par value $0.01 per share, of ITGI (the "ITGI COMMON STOCK") will be
canceled or converted into the right to receive shares of common stock, par
value $0.01 per share, of JEFG (the "JEFG COMMON STOCK") in the manner set forth
in the Merger Agreement;
WHEREAS, prior to the Distribution (defined below) and Merger (x) JEFG will
transfer to Holding (or to JEFCO, defined herein, prior to the time JEFCO
becomes a subsidiary of Holding in connection with the Contribution, defined
below), and Holding and JEFCO will accept from JEFG, all of the Assets of JEFG
other than JEFG's ownership interest in capital stock of ITGI (the
"CONTRIBUTION"), and JEFG will assign to Holding (or to JEFCO, as appropriate),
and Holding and JEFCO will assume from JEFG, all of the Holding Liabilities (as
defined herein) (individually, the "ASSUMPTION" and together with the
Contribution, collectively, the "TRANSFERS"), and (y) following the Transfers
and the satisfaction of all conditions set forth in Section 2.02 of this
Agreement, all of the common stock of Holding, par value $0.0001 per share
("HOLDING COMMON STOCK"), will be distributed (the "DISTRIBUTION") to JEFG's
stockholders at the rate of one share of Holding Common Stock for each share of
JEFG Common Stock outstanding as of April 20, 1999, or such other date as is
designated by JEFG's Board of Directors as the record date for determining the
stockholders of JEFG entitled to receive the Distribution (the "RECORD DATE");
WHEREAS, (i) pursuant to the Merger, the name of Jefferies Group, Inc. (as
the surviving corporate entity in the Merger) will be changed to Investment
Technology Group, Inc. and (ii) following the consummation of the Distribution
and the Merger, the name of JEF Holding Company, Inc. will be changed to
Jefferies Group, Inc.;
WHEREAS, it is intended that the Distribution not be taxable to JEFG or its
stockholders pursuant to Section 355 of the Internal Revenue Code of 1986, as
amended (the "CODE");
WHEREAS, as of March 16, 1999, the Board of Directors of ITGI declared,
subject to the approval and adoption of the Merger Agreement by the stockholders
of JEFG and ITGI and the satisfaction or waiver of all other conditions to the
Pre-Closing (as defined in the Merger Agreement) as set forth in the Merger
Agreement, a cash dividend in an amount equal to $4.00 per share to all holders
of ITGI Common Stock, including JEFG (the "SPECIAL ITGI CASH DIVIDEND");
B-1
<PAGE>
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
agreements and covenants contained in this Agreement, the parties hereby agree
as follows:
ARTICLE I
DEFINITIONS
Section 1.01. DEFINITIONS. As used herein, the following terms have the
following meaning:
"Action" means any claim, suit, arbitration, inquiry, proceeding or
investigation by or before any court, governmental or other regulatory or
administrative agency or commission or any other tribunal.
"Analytical" means Jefferies Analytical Trading Group, Inc., a Delaware
corporation.
"Ancillary Agreements" means the Benefits Agreement and the Tax Agreement
and all of the written agreements, instruments, understandings, assignments and
other arrangements entered into in connection with the transactions contemplated
hereby excluding, however, the Merger Agreement and all instruments and
documents related thereto.
"Assets" means all properties, rights, contracts, leases and claims, of
every kind and description, wherever located, whether tangible or intangible,
and whether real, personal or mixed.
"Assumption" is defined in the recitals to this Agreement.
"Benefits Agreement" means the Benefits Agreement entered into in connection
with the Distribution between JEFG and Holding, as amended from time to time.
"Code" is defined in the recitals to this Agreement.
"Commission" means the Securities and Exchange Commission.
"Contribution" is defined in the recitals to this Agreement.
"Distribution" is defined in the recitals to this Agreement.
"Distribution Agent" means EquiServe, in its capacity as agent for JEFG in
connection with the Distribution.
"Distribution Date" means April 27, 1999 or such other business day as of
which the Distribution shall be effective, as determined by the Board of
Directors of JEFG; provided, however, that the Distribution Date shall occur (in
time) prior to the Effective Time.
"Effective Time" means the date and time at which the Merger is consummated.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Form S-4" means the registration statement on Form S-4 filed by JEFG
pursuant to the Securities Act with respect to the JEFG Common Stock issuable in
the Merger pursuant to the Merger Agreement, as such registration statement may
be amended from time to time.
"Form 10" means the registration statement on Form 10 filed by Holding with
the Commission to effect the registration of the class of Holding Common Stock
pursuant to the Exchange Act, as such registration statement may be amended from
time to time.
"Group" means the ITGI Group or the Holding Group, as applicable.
"Holding" is defined in the preamble to this Agreement.
"Holding Assets" means all Assets of JEFG (a) including without limitation
(1) all of the capital stock, and options, warrants or other rights to purchase
capital stock, of Analytical, Investment, Japan, JEFCO, JIL, Licensing, Pacific,
and Switzerland, and all of the preferred stock and options, warrants or
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other rights to purchase capital stock (including all of the common stock) of
W&D, (2) all cash, receivables, marketable securities and real and personal
property of JEFG, (3) all Assets that are (i) owned of record by or held in the
name of a member of the Holding Group, (ii) used exclusively by one or more
members of the Holding Group prior to, on or following the Effective Time and
(4) the names "Jefferies," "Jefferies Group" and "Jefferies Group, Inc." and all
variations thereof and all trademarks, trade names, copyrights or other
intellectual property right related thereto, but (b) excluding the capital stock
of ITGI.
"Holding Business" means the businesses conducted by JEFG prior to or at the
Effective Time or by any member of the Holding Group prior to, on and following
the Effective Time, excluding in each such case the ITGI Business.
"Holding By-laws" means the By-laws of Holding in the form filed as an
exhibit to the Form 10, as last amended, under the Exchange Act.
"Holding Certificate" means the certificate of incorporation of Holding in
the form filed as an exhibit to the Form 10, as last amended, under the Exchange
Act.
"Holding Common Stock" is defined in the recitals to this Agreement.
"Holding Group" shall mean Holding, Analytical, Investment, Japan, JEFCO,
JIL, Licensing, Pacific, Switzerland and W&D and their successors and permitted
assigns.
"Holding Liabilities" means (i) all Liabilities of Holding under this
Agreement, any Intercompany Agreement or any Ancillary Agreement, (ii) except as
otherwise expressly provided in this Agreement, any Intercompany Agreement or
any Ancillary Agreement, all Liabilities, other than ITGI Group Liabilities, (x)
of JEFG, to the extent those Liabilities arise out of or relate to any event,
occurrence, act, omission or state of affairs that occurred or existed prior to
the Effective Time, (y) of any member of the Holding Group or the Holding
Business, whether arising before, on or after the Effective Time or (z) arising
out of the ownership or use of the Holding Assets, whether arising before, on or
after the Effective Time, (iii) all Liabilities arising under or in connection
with the Form 10 unless and except to the extent that such claims are based upon
the ITGI Provided Information, (iv) subject to the provisions of Section 12.01
of this Agreement, all Liabilities comprising the JEFG Debt Obligation, (v) all
Liabilities arising with respect to claims based upon the Holding Provided
Information included or incorporated by reference into the Form S-4 and (vi)
Liabilities of JEFG under options or other rights to purchase or acquire any
JEFG Common Stock, to the extent such options or rights, prior to the Effective
Time, are not exercised for JEFG Common Stock, canceled or exchanged for options
to purchase shares of Holding Common Stock.
"Holding Provided Information" means information included or incorporated by
reference into the Form S-4, Form 10, or Joint Proxy/Information Statement that
relates exclusively to JEFG (excluding ITGI and its subsidiaries) prior to the
Effective Time, the consolidated financial statements and financial and
statistical data of JEFG (excluding the financial statements and statistical and
financial data of ITGI and its subsidiaries), any member of the Holding Group,
the Holding Business, the Ancillary Agreements, the Transfers, the Distribution
or the Holding provided information concerning the Merger as set forth in
Schedule A attached hereto and made a part hereof.
"Intercompany Agreements" means an amended and restated tax sharing
agreement, dated March 17, 1999, between JEFG, Holding and ITGI.
"Investment" means JEF Investment Company, a Delaware corporation.
"ITGI" means Investment Technology Group, Inc., a Delaware corporation,
before and/or after the Merger, as the context requires as set forth herein.
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"ITGI Business" means the businesses conducted exclusively by ITGI and its
subsidiaries prior to, on and following the Effective Time.
"ITGI Common Stock" is defined in the recitals to this Agreement.
"ITGI Group" means ITGI and its subsidiaries prior to, on and following the
Effective Time.
"ITGI Group Liabilities" means (i) all Liabilities of ITGI (in its own right
or as the successor to JEFG following the Merger) under Sections 4.02 and 12.01
of this Agreement, or under any Intercompany Agreement or any Ancillary
Agreement, (ii) except as otherwise expressly provided in this Agreement, any
Intercompany Agreement or any Ancillary Agreement, all Liabilities (other than
Holding Liabilities) of ITGI, any member of the ITGI Group or the ITGI Business
or Liabilities arising out of the ownership or use of the Assets of the ITGI
Group, in each case whether arising before, on or after the Effective Time,
(iii) all Liabilities with respect to claims based upon the ITGI Provided
Information included and incorporated by reference into the Form 10 and Joint
Proxy/ Information Statement, and (iv) all Liabilities arising with respect to
claims based upon ITGI Provided Information included or incorporated by
reference into the Form S-4.
"ITGI Provided Information" means information included or incorporated by
reference into the Form S-4, Form 10 or Joint Proxy/Information Statement that
relates exclusively to ITGI, any member of the ITGI Group, the ITGI Business,
JEFG after the Effective Time, the consolidated historical financial statements
of ITGI, the pro forma consolidated financial statements of ITGI (as the
successor to JEFG following the Merger), the financial and statistical data of
ITGI, the Special ITGI Cash Dividend or the ITGI provided information concerning
the Merger as set forth in Schedule B attached hereto and made a part hereof.
"Japan" means Jefferies (Japan) Limited, a company formed under the laws of
England.
"JEFCO" shall mean Jefferies & Company, Inc., a Delaware corporation.
"JEFG" is defined in the preamble to this Agreement.
"JEFG Common Stock" is defined in the recitals to this Agreement.
"JEFG Contribution" means an amount of money to be contributed by JEFG to
the capital of JEFCO prior to the Distribution Date equal to at least $60
million.
"JEFG Debt Obligation" means the Liabilities of JEFG in respect of its
8 7/8% Senior Notes due 2004 and 7 1/2% Senior Notes due 2007, including,
without limitation, the related indentures (including all supplemental
indentures thereto), consent solicitations and offering materials.
"JIL" means Jefferies International Limited, a company formed under the laws
of England.
"Joint Proxy/Information Statement" means the joint proxy/information
statement, as amended from time to time, filed by JEFG and Holding with the SEC
under the Exchange Act to be sent to each holder of JEFG Common Stock in
connection with the Distribution and the Merger.
"Liabilities" means any and all claims, debts, commitments, liabilities and
obligations, absolute or contingent, matured or not matured, liquidated or
unliquidated, accrued or unaccrued, known or unknown, whenever arising,
including all costs and expenses relating thereto, and including, without
limitation, those debts, commitments, liabilities and obligations arising under
this Agreement, any law, rule, regulation, action, order or consent decree of
any governmental entity or any award of any arbitrator of any kind, and those
arising under any contract, commitment or undertaking.
"Licensing" means Jefferies Licensing Corporation, a Delaware corporation.
"Merger" is defined in the recitals to this Agreement.
"Merger Agreement" is defined in the recitals to this Agreement.
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"Pacific" means Jefferies Pacific Limited, a company formed under the laws
of Hong Kong.
"Record Date" is defined in the recitals to this Agreement.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Special ITGI Cash Dividend" is defined in the recitals to this Agreement.
"Switzerland" means Jefferies (Switzerland) Ltd., a company formed under the
laws of Switzerland.
"Tax" shall have the meaning given to such term in the Tax Agreement.
"Tax Agreement" means the Tax Sharing and Indemnification Agreement entered
into in connection with the Distribution among JEFG, Holding and ITGI, as
amended from time to time.
"Transfers" is defined in the recitals to this Agreement.
"Transactions" shall mean the Transfers, the Distribution and the Merger.
"W&D" means W&D Securities, Inc., a Delaware corporation.
ARTICLE II
THE DISTRIBUTION
Section 2.01. COOPERATION PRIOR TO THE DISTRIBUTION.
(a) JEFG and Holding shall prepare, and JEFG shall mail on or prior to the
Distribution Date to the holders of JEFG Common Stock, the Joint
Proxy/Information Statement, which shall set forth appropriate disclosure
concerning Holding, the Distribution, the Merger and certain other matters
required by the Exchange Act. JEFG and Holding shall also prepare, and Holding
shall file with the Commission, the Form 10, which shall incorporate by
reference portions of the Joint Proxy/Information Statement. JEFG and Holding
shall use all reasonable efforts to cause the Form 10 to be declared, or become,
effective under the Exchange Act as soon as reasonably practicable and on or
before the Distribution Date.
(b) JEFG and Holding shall cooperate in preparing, filing with the
Commission under the Securities Act and causing to become effective any
registration statements or amendments thereto that are appropriate to reflect
the establishment of or amendments to any employee benefit plan contemplated by
the Benefits Agreement.
(c) JEFG and Holding shall, by means of a stock split or stock distribution,
cause the number of outstanding shares of Holding Common Stock held by JEFG as
of the Record Date to be equal to the number of shares of Holding Common Stock
to be distributed in the Distribution.
(d) JEFG and Holding shall take all such action as may be necessary or
appropriate under the securities or blue sky laws of states or other political
subdivisions of the United States in connection with the transactions
contemplated by this Agreement or any Ancillary Agreement.
(e) Holding shall prepare, file and pursue an application to succeed to the
listing of JEFG and thereby effectuate the listing of the Holding Common Stock
on the New York Stock Exchange, and such related matters and other matters as
shall be required by the New York Stock Exchange.
(f) On or prior to the Distribution Date, JEFG and Holding shall cooperate
in carrying out the transactions and events described in Article III hereof.
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Section 2.02. JEFG BOARD ACTION; CONDITIONS PRECEDENT TO THE DISTRIBUTION.
JEFG's Board of Directors shall, in its discretion, establish the Record Date
and the Distribution Date and any appropriate procedures in connection with the
Distribution. In no event shall the Distribution occur unless the following
conditions shall have been satisfied:
(a) any necessary regulatory approvals shall have been received;
(b) the Form 10 shall have been declared, or become, effective under the
Exchange Act;
(c) ITGI shall have declared and paid the Special ITGI Cash Dividend to the
holders of ITGI Common Stock, including JEFG;
(d) the JEFG Contribution and the Transfers shall have been completed;
(e) JEFG and the trustees under the indentures governing the JEFG Debt
Obligation shall have executed supplemental indentures in form and substance
satisfactory to JEFG and such trustees and their respective counsel, pursuant to
which Holding shall assume, and JEFG shall be released from obligations
concerning the JEFG Debt Obligation, effective as of the date the Transfers are
completed;
(f) Holding's Board of Directors, as named in the Form 10, shall have been
elected by JEFG, as sole stockholder of Holding, as directors of Holding
effective as of the Distribution Date, and the Holding Certificate and Holding
By-laws shall be in effect;
(g) the Holding Common Stock shall have been approved for listing on the New
York Stock Exchange, subject to official notice of issuance;
(h) The tax ruling obtained from the Internal Revenue Service ("IRS") on
March 11, 1999 concerning the treatment of the Transfers and the Distribution
and related transactions under Sections 332, 351, 355 and 368(a)(1)(D) of the
Code shall not have been, prior to the Effective Time, withdrawn by the IRS or
modified by the IRS in any material adverse respect;
(i) all conditions to the Pre-Closing (as defined in the Merger Agreement)
of the Merger shall have been satisfied or waived by JEFG or ITGI, as
appropriate, and the Pre-Closing shall have been consummated; and
(j) JEFG shall be reasonably satisfied that, at all relevant times prior to
the Effective Time, JEFG owns at least 80% of the outstanding ITGI Common Stock
and that no capital stock of ITGI (other than ITGI Common Stock) shall have been
issued or outstanding.
Section 2.03. THE DISTRIBUTION. On or before the Distribution Date, subject
to satisfaction or waiver of the conditions set forth in this Agreement, JEFG
shall deliver to the Distribution Agent a certificate or certificates
representing all of the then outstanding shares of Holding Common Stock held by
JEFG, endorsed in blank, and shall instruct the Distribution Agent to distribute
to each holder of record of JEFG Common Stock as of the close of business on the
Record Date a certificate or certificates representing one share of Holding
Common Stock for each share of JEFG Common Stock held of record as of the close
of business on the Record Date. Holding agrees to provide all certificates for
shares of Holding Common Stock that the Distribution Agent shall require in
order to effect the Distribution.
ARTICLE III
CONVEYANCE OF ASSETS, OBLIGATIONS AND RIGHTS;
ASSUMPTION OF LIABILITIES;
CONDUCT OF HOLDING PENDING DISTRIBUTION
Section 3.01. CONVEYANCE OF ASSETS, OBLIGATIONS AND RIGHTS; ASSUMPTION AND
RELEASE OF LIABILITIES.
(a) Prior to the completion of the Transfers, JEFG shall make the JEFG
Contribution.
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(b) Prior to the Distribution Date and effective with the Transfers (i) all
Holding Assets are intended to be and shall become Assets of the Holding Group
and (ii) all Holding Liabilities are intended to be and shall become exclusively
the Liabilities of the Holding Group.
(c) Prior to, or in connection with, the completion of the Transfers, JEFG
shall transfer or cause to be transferred to Holding (or JEFCO, as appropriate),
and JEFG shall disclaim (as appropriate) all right, title and interest of JEFG
in and to any and all of the Holding Assets and the Holding Business. Effective
as of the Transfers, all of JEFG's rights and obligations under the Intercompany
Agreements shall be transferred and assigned, without limitation or alteration
of the rights or responsibilities hereunder or thereunder, to Holding.
(d) Before the Distribution Date, effective as of the date of the Transfers,
Holding shall execute supplemental indentures in form and substance satisfactory
to JEFG, the trustee under the Indentures governing the JEFG Debt Obligation and
their respective counsel pursuant to which, among other things, Holding shall
assume, and JEFG shall be released from, the JEFG Debt Obligation, all of which
shall be effective prior to the Distribution Date.
(e) Set forth on Schedule 3.01(e) hereto is each Holding Asset and each
Holding Liability that requires a third-party consent to transfer such Holding
Asset or Holding Liability from JEFG to Holding (or to JEFCO, as appropriate).
If any such Holding Asset or Holding Liability may not be transferred by reason
of the requirement to obtain the consent of any third party and such consent has
not been obtained by the Distribution Date, then such Holding Asset or Holding
Liability shall not be transferred until such consent has been obtained. In the
event that any conveyance of an Asset constituting a Holding Asset or a
Liability constituting a Holding Liability is not effected on or before the
Distribution Date, the obligation to transfer such Asset or such Liability as
the case may be, shall continue past the Distribution Date and shall be
accomplished as soon thereafter as practicable. JEFG and its successors
(including ITGI) will cooperate with Holding to provide, or cause the owner of
such Holding Asset to use all reasonable efforts to provide, to the appropriate
member of the Holding Group all the rights and benefits under such Holding
Asset, or cause such owner to enforce such Holding Asset for the benefit of such
member. Such parties shall otherwise cooperate and use all reasonable efforts to
provide the economic and operational equivalent of an assignment or transfer of
the Holding Asset or Holding Liability, as the case may be. Holding shall duly
pay, perform or discharge, or cause the appropriate member of the Holding Group
to duly pay, perform or discharge, from and after the date of the Transfers,
each Holding Liability, including without limitation any Holding Liability
referred to in the second sentence of this paragraph; provided, the foregoing
provisions of this paragraph (e) do not affect Holding's obligation to assume
all of the Holding Liabilities at the date of the Transfers and therefore duly
pay, perform or discharge all of the Holding Liabilities from and after such
time.
(f) From and after the Distribution Date, each party shall promptly transfer
or cause the members of its Group promptly to transfer to the other party or the
appropriate member of the other party's Group, from time to time, any property
held by any such party that pursuant to this Agreement is or is intended to be
an Asset of the other party or a member of its Group. Without limiting the
foregoing, funds received by a member of one Group upon the payment of accounts
receivable that pursuant to this Agreement is or is intended to belong to a
member of the other Group shall be transferred to the other Group by wire
transfer not more than five business days after receipt of such payment.
(g) Holding agrees that it will not, without the prior written consent of
ITGI, take any action that attempts or purports to amend or modify any
agreement, including any real property lease or sublease, to which JEFG is a
party at or prior to the Transfers and from which (i) JEFG is not fully and
unconditionally released at or prior to the Transfers and (ii) the Surviving
Corporation (as the successor to JEFG pursuant to the Merger) is not fully and
unconditionally released after the Merger.
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(h) Holding agrees to obtain and deliver to ITGI, for the benefit of ITGI
one or more letters of credit in an aggregate undrawn face amount not less than
the amount by which the aggregate unmitigated Residual Liabilities exceeds the
Applicable Amount, consistent with the definitions and terms provided for under
Section 7(n) of the Merger Agreement. Such letters of credit shall be issued by
one or more nationally recognized financial institutions reasonably satisfactory
to ITGI, be in form and substance reasonably satisfactory to ITGI and expire not
earlier than 135 days after the date on which the related unmitigated Residual
Liabilities terminate.
Section 3.02. CONDUCT OF HOLDING AND JEFG PENDING DISTRIBUTION.
(a) Prior to the Distribution Date, neither Holding nor JEFG shall, without
the prior consent in writing of the other, make any public announcement
concerning the Distribution and each party shall use its respective best efforts
not to take any action which may prejudice or delay the consummation of the
Distribution.
(b) Prior to the Distribution Date, the business of Holding shall be
operated for the sole benefit of JEFG as its sole stockholder.
Section 3.03. FURTHER ASSURANCES AND CONSENTS. In addition to the actions
specifically provided for elsewhere in this Agreement, each of the parties
hereto will use its commercially reasonable efforts to (i) execute and deliver
such further instruments and documents and take such other actions as any other
party may reasonably request in order to effectuate the purposes of this
Agreement and to carry out the terms hereof and (ii) take, or cause to be taken,
all actions, and to do, or cause to be done, all things, reasonably necessary,
proper or advisable under applicable laws, regulations and agreements or
otherwise to consummate and make effective the transactions contemplated by this
Agreement, including, without limitation, using its reasonable efforts to obtain
any consents and approvals and to make any filings and applications necessary or
desirable in order to consummate the transactions contemplated by this
Agreement.
ARTICLE IV
INDEMNIFICATION
Section 4.01. HOLDING INDEMNIFICATION OF THE ITGI GROUP. On and after the
Distribution Date, Holding shall indemnify, defend and hold harmless each member
of the ITGI Group, and each of their respective directors, officers, employees
and agents (the "ITGI Indemnitees") from and against any and all claims, costs,
damages, losses, liabilities and expenses (including, without limitation,
reasonable expenses of investigation and reasonable attorney fees and expenses,
but excluding consequential damages of the indemnified party, in connection with
any and all Actions or threatened Actions) (collectively, "Indemnifiable
Losses") incurred or suffered by any of the ITGI Indemnitees and arising out of,
or due to or otherwise in connection with any of the Holding Liabilities or the
failure of Holding or any member of the Holding Group to assume, pay, perform or
otherwise discharge any of the Holding Liabilities.
Section 4.02. ITGI INDEMNIFICATION OF THE HOLDING GROUP. On and after the
Distribution Date, ITGI (as the successor to JEFG following the Merger) shall
indemnify, defend and hold harmless each member of the Holding Group and each of
their respective directors, officers, employees and agents (the "Holding
Indemnitees") from and against any and all Indemnifiable Losses incurred or
suffered by any of the Holding Indemnitees and arising out of, or due to or
otherwise in connection with any of the ITGI Group Liabilities or the failure of
ITGI or any member of the ITGI Group to pay, perform or otherwise discharge any
of the ITGI Group Liabilities.
Section 4.03. INSURANCE AND THIRD PARTY OBLIGATIONS. No insurer or any other
third party shall be (a) entitled to a benefit it would not be entitled to
receive in the absence of the foregoing
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indemnification provisions, (b) relieved of the responsibility to pay any claims
to which it is obligated or (c) entitled to any subrogation rights with respect
to any obligation hereunder.
ARTICLE V
HOLDING REPRESENTATIONS
Section 5.01. HOLDING REPRESENTATIONS. Holding represents and warrants to
JEFG as follows:
(a) Organization, Etc. Holding is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
all requisite power and authority to own, lease and operate its properties and
to carry on its business as it is now being conducted. Holding is a newly formed
corporation that, since formation and the initial capitalization effected
thereby, has not acquired, assumed or become contractually obligated to acquire
or assume any assets or liabilities, except as set forth on Schedule 5.01(a)
hereof. Since formation, Holding has not conducted any activity other than the
execution and delivery of this Agreement and the Ancillary Agreements and
activities coincident with the Transfers and the Distribution and incidental
hereunder and under the Ancillary Agreements, and other than that which is
contemplated hereby.
(b) Authority of Holding. Holding has full corporate power and authority to
execute, deliver and perform its obligations under this Agreement and each of
the Ancillary Agreements and to effectuate the Transfers and consummate the
Distribution. The execution, delivery and performance of this Agreement and each
of the Ancillary Agreements and the consummation of the Transfers and the
Distribution has been duly and validly authorized by the Board of Directors of
Holding, and no other corporate proceedings on the part of Holding are necessary
to consummate or authorize any of the Ancillary Agreements or to effectuate the
Transfers and consummate the Distribution. Each of this Agreement and the
Ancillary Agreements has been duly and validly executed and delivered by Holding
and constitutes valid and binding agreements of Holding, enforceable against
Holding in accordance with their respective terms.
(c) No Consent. No filing or registration with, or permit, authorization,
consent or approval of, or notification or disclosure (collectively,
"Governmental Consents") to, any United States (federal, state or local) or
foreign government, or governmental, regulatory or administrative authority,
agency or commission, court or other body or any arbitral tribunal (each, a
"Governmental Authority") or any other third party (collectively, "Consents") is
required in connection with the execution, delivery and performance by Holding
of this Agreement or any of the Ancillary Agreements or the consummation by
Holding of the Transfers and the Distribution, except (i) the filing of the Form
10 under the Exchange Act and the effectiveness thereof under the Exchange Act,
(ii) such consents, approvals, orders, permits, authorizations, registrations,
declarations and filings as may be required under the Blue Sky laws of various
states, (iii) the listing on the New York Stock Exchange of the Holding Common
Stock in connection with the Distribution and (iv) as set forth in Schedule
5.01(c) hereof.
(d) No Violation. Assuming that all Consents have been duly made or obtained
as contemplated by Section 5.01(c), the execution, delivery and performance by
Holding of this Agreement and the Ancillary Agreements and the consummation of
the Transfers and the Distribution will not (i) violate any provision of the
certificate of incorporation or bylaws of Holding, (ii) violate any statute,
rule, regulation, order or decree of any Governmental Authority by which Holding
or any of its assets may be bound or affected or (iii) result in a violation or
breach of, or constitute (with or without due notice or lapse of time or both) a
default (or give rise to any right of termination, cancellation, acceleration,
redemption or repurchase) under, any of the terms, conditions or provisions of
(x) any note, bond, mortgage, indenture or deed of trust relating to
indebtedness for borrowed money or (y) any license, lease or other agreement,
instrument or obligation to which Holding is a party or by which it or any of
its assets may be bound or affected.
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(e) Capitalization of Holding. All issued and outstanding shares of capital
stock of Holding are held by JEFG as of the date hereof and are duly authorized
and validly issued, fully paid, nonassessable and free of preemptive rights and
respect thereto. Other than this Agreement and the transactions contemplated
thereby and the awards contemplated by the Benefits Agreement or the Joint
Proxy/Information Statement, there are no options, warrants, calls,
subscriptions, or other rights, agreements or commitments obligating Holding to
issue, transfer or sell any shares of capital stock of Holding or any other
securities convertible into or evidencing the right to subscribe for any such
shares. Prior to the date hereof, there has not been any issuance of capital
stock of Holding other than to JEFG.
ARTICLE VI
INDEMNIFICATION PROCEDURES; CONTRIBUTION
Section 6.01. NOTICE AND PAYMENT OF CLAIMS. If any ITGI or Holding
Indemnitee (the "INDEMNIFIED PARTY") determines that it is or may be entitled to
indemnification by a party (the "INDEMNIFYING PARTY") under Article IV (other
than in connection with any Action or claim subject to Section 6.02), the
Indemnified Party shall deliver to the Indemnifying Party a written notice
specifying, to the extent reasonably practicable, the basis for its claim for
indemnification and the amount for which the Indemnified Party reasonably
believes it is entitled to be indemnified. After the Indemnifying Party shall
have been notified of the amount for which the Indemnified Party seeks
indemnification, the Indemnifying Party shall, within 90 days after receipt of
such notice, pay the Indemnified Party such amount in cash or other immediately
available funds (or reach agreement with the Indemnified Party as to a mutually
agreeable alternative payment schedule) unless the Indemnifying Party objects to
the claim for indemnification or the amount thereof. If the Indemnifying Party
does not give the Indemnified Party written notice objecting to such claim and
setting forth the grounds therefor within the same 90 day period, the
Indemnifying Party shall be deemed to have acknowledged its liability for such
claim and the Indemnified Party may exercise any and all of its rights under
applicable law to collect such amount.
Section 6.02. NOTICE AND DEFENSE OF THIRD-PARTY CLAIMS. Promptly following
the earlier of (a) receipt of notice of the commencement by a third party of any
Action against or otherwise involving any Indemnified Party or (b) receipt of
information from a third party alleging the existence of a claim against an
Indemnified Party, in either case, with respect to which indemnification may be
sought pursuant to this Agreement (a "THIRD-PARTY CLAIM"), the Indemnified Party
shall give the Indemnifying Party written notice thereof. The failure of the
Indemnified Party to give notice as provided in this Section 6.02 shall not
relieve the Indemnifying Party of its obligations under this Agreement, except
to the extent that the Indemnifying Party is materially prejudiced by such
failure to give notice. Within 90 days after receipt of such notice, the
Indemnifying Party may by giving written notice thereof to the Indemnified
Party, (a) acknowledge, as between the parties hereto, responsibility for, and
at its option, elect to assume the defense of such Third-Party Claim at its sole
cost and expense or (b) object to the claim of indemnification set forth in the
notice delivered by the Indemnified Party pursuant to the first sentence of this
Section 6.02; PROVIDED that if the Indemnifying Party does not within the same
90 day period give the Indemnified Party written notice objecting to such claim
and setting forth the grounds therefor or electing to assume the defense, the
Indemnifying Party shall be deemed to have acknowledged, as between the parties
hereto, its responsibility for such Third-Party Claim. Any contest of a Third
Party Claim as to which the Indemnifying Party has elected to assume the defense
shall be conducted by attorneys employed by the Indemnifying Party and
reasonably satisfactory to the Indemnified Party; PROVIDED that the Indemnified
Party shall have the right to participate in such proceedings and to be
represented by attorneys of its own choosing at the Indemnified Party's sole
cost and expense. Notwithstanding the foregoing, (i) the Indemnifying Party
shall not be entitled to assume the defense of any Third-Party Claim (and shall
be liable to the Indemnified Party for the reasonable
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fees and expenses incurred by the Indemnified Party in defending such
Third-Party Claim) if there are one or more legal defenses available only to the
Indemnified Party that conflict, in one or more significant substantive
respects, with those available to the Indemnifying Party with respect to such
Third-Party Claim and (ii) if at any time after assuming the defense of a
Third-Party Claim an Indemnifying Party shall fail to prosecute or shall
withdraw from the defense of such Third-Party Claim, the Indemnified Party shall
be entitled to resume the defense thereof with counsel selected by such
Indemnified Party and the Indemnifying Party shall be liable for the reasonable
fees and expenses of counsel incurred by the Indemnified Party in such defense.
The Indemnifying Party may settle, compromise or discharge a Third-Party Claim,
provided, the Indemnifying Party shall have obtained the prior written consent
of the Indemnified Party, which consent shall not be unreasonably withheld. If,
after receipt of notice of a Third-Party Claim, the Indemnifying Party does not
undertake to defend such Third-Party Claim within 90 days of such notice, the
Indemnified Party may, but shall have no obligation to, contest any lawsuit or
action with respect to such Third-Party Claim and the Indemnifying Party shall
be bound by the results obtained with respect thereto by the Indemnified Party.
Indemnification shall be made by periodic payments of the amount thereof during
the course of the investigation or defense, as and when bills are received or
Indemnifiable Loss is incurred. The parties agree to render to each other such
assistance as may reasonably be requested in order to ensure the proper and
adequate defense of any Third-Party Claim. The remedies provided in this Article
VI shall be cumulative and shall not preclude assertion by any Indemnified Party
of any other rights or the seeking of any and all other remedies against any
Indemnifying Party.
Section 6.03. CONTRIBUTION. To the extent that any indemnification provided
for in Section 4.01 or 4.02 is unavailable to an Indemnified Party or is
insufficient in respect of any of the Indemnifiable Losses of such Indemnified
Party, then the Indemnifying Party, in lieu of, or in addition to, indemnifying
such Indemnified Party hereunder, shall contribute to the amount paid or payable
by such Indemnified Party as a result of such Indemnifiable Losses (i) in such
proportion as is appropriate to reflect the relative benefits received by such
Indemnifying Party on the one hand and the Indemnified Party on the other hand
from the transaction or other matter which resulted in the Indemnifiable Losses
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) but also the relative fault of the
Indemnifying Party on the one hand and of the Indemnified Party on the other
hand in connection with the action, inaction, statements or omissions that
resulted from such Indemnifiable Losses as well as any other relevant equitable
considerations.
ARTICLE VII
EMPLOYEE MATTERS
Section 7.01. BENEFITS AGREEMENT. All matters relating to or arising out of
any employee benefit, compensation or welfare arrangement in respect of any
present and former employee of the ITGI Group or the Holding Group shall be
governed by the Benefits Agreement, except as may be expressly stated herein. In
the event of any inconsistency between the Benefits Agreement and this
Agreement, the Benefits Agreement shall govern.
ARTICLE VIII
TAX MATTERS
All matters relating to Taxes shall be governed exclusively by the Tax
Agreement, except as may be expressly stated herein. In the event of any
inconsistency between the Tax Agreement and this Agreement, the Tax Agreement
shall govern.
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ARTICLE IX
ACCOUNTING MATTERS
Section 9.01. ACCOUNTING TREATMENT OF ASSETS TRANSFERRED. All transfers of
Assets of JEFG to JEFCO or Holding pursuant to this Agreement shall constitute
contributions by JEFG to the capital of JEFCO or Holding, as appropriate.
ARTICLE X
INFORMATION
Section 10.01. PROVISION OF CORPORATE RECORDS. ITGI (as successor to JEFG
pursuant to the Merger) and Holding shall arrange as soon as practicable
following the Effective Time for the provision to the other of copies of any
requested corporate documents (e.g. minute books, stock registers, stock
certificates, documents of title, contracts, etc.) in its possession relating to
the other or its business and affairs; provided, however, this Section 10.01
shall not create any obligation to retain documents beyond that which is
required pursuant to such entity's records retention policies. JEFG and Holding
agree that Holding shall retain control and custody of original copies of all
corporate documents of JEFG relating to matters and events on or prior to the
Effective Time.
Section 10.02. ACCESS TO INFORMATION. From and after the Effective Time,
ITGI (as successor to JEFG pursuant to the Merger) and Holding shall each afford
the other and its accountants, counsel and other designated representatives
reasonable access (including using reasonable efforts to give access to persons
or firms possessing information) and duplicating rights during normal business
hours to all records, books, contacts, instruments, computer data and other data
and information in its possession relating to the business and affairs of the
other, insofar as such access is reasonably required by the other including,
without limitation, for audit, accounting and litigation purposes.
Section 10.03. LITIGATION COOPERATION. ITGI (as successor to JEFG pursuant
to the Merger) and Holding shall each use reasonable efforts to make available
to the other, upon written request, its officers, directors, employees and
agents as witnesses to the extent that such persons may reasonably be required
in connection with any legal, administrative or other proceedings arising out of
the business of the other prior to the Effective Time in which the requesting
party may from time to time be involved.
Section 10.04. REIMBURSEMENT. ITGI (as successor to JEFG pursuant to the
Merger) and Holding, each providing copies of documents, information or
witnesses under Sections 10.01, 10.02 or 10.03 to the other, shall be entitled
to receive from the recipient, upon the presentation of invoices therefor,
payment for all reasonable out-of-pocket costs and expenses as may be reasonably
incurred in providing such information or witnesses.
Section 10.05. RETENTION OF RECORDS. Except as otherwise required by law or
agreed to in writing, each party shall, and shall cause the members of its Group
to, retain all information relating to the other's business in accordance with
the past practice of such party. Notwithstanding the foregoing, except as
otherwise provided in the Tax Agreement, either party may destroy or otherwise
dispose of any information at any time following the first anniversary of the
Merger in accordance with the corporate record retention policy maintained by
such party with respect to its own records.
Section 10.06. CONFIDENTIALITY. Each party shall, and shall cause each
member of its Group to, hold and cause its directors, officers, employees,
agents, consultants and advisors to hold, in strict confidence all information
concerning the other party (except to the extent that such information can be
shown to have been (a) in the public domain through no fault of such party or
(b) later lawfully acquired after the Distribution on a non-confidential basis
from other sources not subject to a confidentiality obligation by the party to
which it was furnished), and neither party shall release or disclose such
information to any other person, except its auditors, attorneys, financial
advisors, bankers and other
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consultants and advisors who shall be advised of and agree in writing to comply
with the provisions of this Section 10.06. In the event that a party (the
"RECEIVING PERSON") is requested pursuant to, or required by, applicable law,
regulation, rule or by legal process to disclose any information regarding the
other party (the "DISCLOSING PERSON"), the Receiving Person agrees that it will
provide the Disclosing Person with prompt notice of such request or requirement
in order to enable the Disclosing Person to seek an appropriate protective order
or other remedy, to consult with the Receiving Person with respect to the
Disclosing Person taking steps to resist or narrow the scope of such request or
requirement, or to waive compliance, in whole or in part, with the terms of this
Section 10.06. In any such event, the Receiving Person will disclose only that
portion of any information regarding the Disclosing Party which the Receiving
Person is advised by counsel is legally required and will use its reasonable
best efforts to ensure that all such information that is so disclosed will be
accorded confidential treatment.
ARTICLE XI
INTEREST ON PAYMENTS
Except as otherwise expressly provided in this Agreement, all payments by
one party to the other under this Agreement, any Intercompany Agreement or any
Ancillary Agreement shall be paid, by wire transfer of immediately available
funds to an account in the United States designated by the recipient, within 30
days after receipt of an invoice or other written request for payment setting
forth the specific amount due and a description of the basis therefor in
reasonable detail. Any amount remaining unpaid beyond its due date, including
disputed amounts that are ultimately determined to be payable, shall bear
interest at a floating rate of interest equal to 2.5% over the higher of the
Federal funds rate or the London Interbank Offered Rate.
ARTICLE XII
MISCELLANEOUS
Section 12.01. EXPENSES. The obligations of JEFG and ITGI under Section 7(d)
("Expenses") of the Merger Agreement shall survive (i) any termination of the
Merger Agreement and (ii) the Effective Time of the Merger, with (x) Holding
succeeding to the obligations of, and being credited for any Expense payments
made prior to the Effective Time by, JEFG thereunder and (y) ITGI (as the
successor to JEFG following the Merger) succeeding to the obligations of, and
being credited for any Expense payments made by, ITGI thereunder.
Section 12.02. NOTICES. All notices and communications under this Agreement
after the Distribution Date shall be in writing and any communication or
delivery hereunder shall be deemed to have been duly given when received
addressed as follows:
If to JEFG or any of its successors, to:
Investment Technology Group, Inc.
380 Madison Avenue, 4th Floor
New York, New York 10017
Attention: Chief Financial Officer
With a copy to:
Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005
Attention: Immanuel Kohn, Esq.
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If to Holding, to:
Jefferies Group, Inc.
JEF Holding Company, Inc.
11100 Santa Monica Boulevard, 11th Floor
Los Angeles, California 90025
Attention: Chief Financial Officer
With a copy to:
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103
Attention: Brian J. Lynch, Esq.
Such notices shall be deemed received (i) as of the date of delivery by hand
delivery, (ii) one business day after such notice is given to a national
overnight delivery service or (iii) five business days after placed in the
United States mail, provided such mail is sent by certified mail with return
receipt requested. Either party may, by written notice so delivered to the other
party, change the address to which delivery of any notice shall thereafter be
made.
Section 12.03. AMENDMENT AND WAIVER. This Agreement may not be altered or
amended, nor may rights hereunder be waived, except by an instrument in writing
executed by the party or parties to be charged with such amendment or waiver. No
waiver of any terms, provision or condition of or failure to exercise or delay
in exercising any rights or remedies under this Agreement, in any one or more
instances, shall be deemed to be, or construed as, a further or continuing
waiver of any such term, provision, condition, right or remedy or as a waiver of
any other term, provision or condition of this Agreement.
Section 12.04. ENTIRE AGREEMENT. This Agreement, together with the Merger
Agreement and the Ancillary Agreements, constitutes the entire understanding of
the parties hereto with respect to the subject matter hereof, superseding all
negotiations, prior discussions and prior agreements and understandings relating
to such subject matter. To the extent that the provisions of this Agreement are
inconsistent with the provisions of any Ancillary Agreement, the provisions of
such Ancillary Agreement shall prevail.
Section 12.05. PARTIES IN INTEREST. Neither of the parties hereto may assign
its rights or delegate any of its duties under this Agreement without the prior
written consent of each other party. This Agreement shall be binding upon, and
shall inure to the benefit of, the parties hereto and their respective
successors and permitted assigns. Nothing contained in this Agreement, express
or implied, is intended to confer any benefits, rights or remedies under
Articles IV, V and VI hereof upon any person or entity other than members of the
ITGI Group and the Holding Group and the ITGI Indemnitees and the Holding
Indemnitees and their respective successors and permitted assigns.
Section 12.06. DISPUTES.
(a) Resolution of any and all disputes arising from or in connection with
this Agreement, whether based on contract, tort, statute or otherwise,
including, but not limited to, disputes in connection with claims by third
parties (collectively, "DISPUTES"), shall be subject to the provisions of this
Section 12.06; provided, however, that nothing contained herein shall preclude
either party from seeking or obtaining (i) injunctive relief or (ii) equitable
or other judicial relief to enforce the provisions hereof or to preserve the
status quo pending resolution of Disputes hereunder.
(b) Either party may give the other party written notice of any Dispute not
resolved in the normal course of business. The parties shall thereupon attempt
in good faith to resolve any Dispute promptly by negotiation between executives
who have authority to settle the controversy and who are at a higher
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level of management than the persons with direct responsibility for
administration of this Agreement. Within 20 days after delivery of the notice,
the receiving party shall submit to the other a written response. The notice and
the response shall include a statement of such party's position and a summary of
arguments supporting that position and the name and title of the executive who
will represent that party and of any other person who will accompany such
executive. Within 45 days after delivery of the first notice, the executives of
both parties shall meet at a mutually acceptable time and place, and thereafter
as often as they reasonably deem necessary, to attempt to resolve the Dispute.
All reasonable requests for information made by one party to the other will be
honored.
(c) If the Dispute has not been resolved by negotiation within 60 days of
the first party's notice, or if the parties failed to meet within 45 days, the
parties shall endeavor to settle the Dispute by mediation under the then current
Commercial Mediation Rules of the American Arbitration Association.
(d) If the Dispute has not been resolved within 180 days after delivery of
the first notice under Section 12.06(b), either party may commence any
litigation or other procedure allowed by law.
Section 12.07. SURVIVAL. The rights and obligations under this Agreement
shall survive the Distribution and Merger and any sale or other transfer by any
member of Holding Group and/or the ITGI Group or any assignment or sale by them
of any Assets or Liabilities.
Section 12.08. SEVERABILITY. The provisions of this Agreement are severable
and should any provision hereof be void, voidable or unenforceable under any
applicable law, such provision shall not affect or invalidate any other
provision of this Agreement, which shall continue to govern the relative rights
and duties of the parties as though such void, voidable or unenforceable
provision were not a part hereof.
Section 12.09. GOVERNING LAW. This Agreement shall be construed in
accordance with, and governed by, the laws of the State of New York, without
regard to the conflicts of law rules of such state.
Section 12.10. COUNTERPARTS. This Agreement may be executed in one or more
counterparts each of which shall be deemed an original instrument, but all of
which together shall constitute but one and the same Agreement.
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IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
<TABLE>
<S> <C> <C>
JEFFERIES GROUP, INC.
By /s/ CLARENCE T. SCHMITZ
-----------------------------------------
Name: Clarence T. Schmitz
Title: Executive Vice President and CFO
JEF HOLDING COMPANY, INC.
By /s/ JERRY M. GLUCK
-----------------------------------------
Name: Jerry M. Gluck
Title: Secretary and General Counsel
</TABLE>
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<PAGE>
TAX SHARING AND INDEMNIFICATION AGREEMENT
THIS AGREEMENT is entered into as of the 17th day of March, 1999, by and
among JEFFERIES GROUP, INC., a Delaware corporation ("JEFG"), JEF HOLDING
COMPANY, INC., a Delaware corporation ("HOLDING"), and INVESTMENT TECHNOLOGY
GROUP, INC., a Delaware corporation ("ITGI").
WITNESSETH:
WHEREAS, the JEFG Board of Directors has determined that it is appropriate
and desirable to distribute all of the shares of HOLDING common stock that it
owns to the holders of JEFG common stock (the "Distribution") in a transaction
intended to qualify as a tax-free distribution for federal income tax purposes
under Section 355 of the Internal Revenue Code of 1986, as amended (the "Code");
and
WHEREAS, JEFG has applied to the Internal Revenue Service for a private
letter ruling (the "Ruling") to the effect that the Distribution will qualify as
a tax-free distribution for federal income tax purposes under Section 355 of the
Code; and
WHEREAS, ITGI will be the principal subsidiary of JEFG immediately after the
Distribution; and
WHEREAS, it is intended that ITGI will merge with and into JEFG following
the Distribution (the "Merger"); and
WHEREAS, it is intended that HOLDING and its subsidiaries will accordingly
cease to be members of the affiliated group (within the meaning of Section
1504(a) of the Code) of which JEFG is the common parent, effective on or about
[ , 1999] (the "Effective Date"); and
WHEREAS, the parties desire to provide for and agree upon the allocation of
liabilities for taxes with respect to the parties for the taxable year that
includes the Effective Date (the "1999 Taxable Year"); and
WHEREAS, the parties hereto also desire to provide for the preparation and
filing of tax returns along with the payment of taxes shown due and payable
thereon with respect to the 1999 Taxable Year, the treatment of carrybacks and
adjustments with respect to the parties for the 1999 Taxable Year, and any other
matters related to taxes with respect to the 1999 Taxable Year, including
indemnification for any taxes imposed as a result of certain actions by the
parties that are inconsistent with the treatment of the Distribution as
tax-free; and
WHEREAS, the Tax Sharing Agreement entered into as of January 1, 1994 by and
between JEFG and ITGI has been terminated in its existing form and the Amended
and Restated Tax Sharing Agreement dated as of March 17, 1999 by and among JEFG,
HOLDING and ITGI (the "Prior Agreement") (attached hereto as Exhibit A) will
apply to all tax years ending before the 1999 Taxable Year,
NOW, THEREFORE, in consideration of the foregoing and of the mutual
promises, covenants and conditions hereinafter contained, the parties hereto
agree as follows:
1. DEFINITIONS
The following terms as used in this Agreement shall have the meanings set
forth below:
(a) "Additional Amount" shall mean the amount determined under Section
3 hereof.
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(b) "Consolidated Return" shall mean a consolidated Federal income tax
return filed pursuant to Section 1501 of the Code.
(c) "Consolidated Taxable Income" shall mean the consolidated Federal
taxable income of the JEFG Group for any taxable year for which the JEFG
Group files a Consolidated Return.
(d) "Consolidated Tax Liability" shall mean the consolidated Federal
income tax liability of the JEFG Group for any taxable year for which the
JEFG Group files a Consolidated Return.
(e) "IRS" shall mean the Internal Revenue Service.
(f) "JEFG Group" shall mean the affiliated group of corporations of
which JEFG is the common parent. In the event that the merger takes place as
contemplated and JEFG changes its name to Investment Technology Group, Inc.
("New ITGI"), the term "JEFG Group" shall include the affiliated group of
corporations of which New ITGI is the common parent.
(g) "Loss Amount" shall mean the amount determined under Section 2
hereof.
(h) "Member" shall mean each includible member of the JEFG Group.
(i) "Regulations" shall mean the Treasury Regulations as in effect from
time to time.
(j) "Separate Return Tax Liability" shall mean the Federal income tax
liability of a Member and its subsidiaries computed as if they had filed a
separate Federal income tax return for the applicable taxable year with the
modifications set forth in Section 1.1552-1(a)(2)(ii) of the Regulations. If
the computation of a Member's Separate Return Tax Liability as provided
herein does not result in a positive amount, such Member's Separate Return
Tax Liability shall be deemed to be zero. For purposes of this definition,
ITGI's Separate Return Tax Liability shall include JEFG's Separate Return
Tax Liability for the period after the Distribution.
(k) "Separate Taxable Income" shall mean an amount determined with
respect to a Member and its subsidiaries in accordance with Section
1.1502-12 of the Regulations with the adjustments contained in Section
1.1552-1(a)(1)(ii) of the Regulations. If the computation of a Member's
Separate Taxable Income as provided herein does not result in a positive
amount, such Member's Separate Taxable Income shall be deemed to be zero.
For purposes of this definition, ITGI's Separate Taxable Income shall
include JEFG's Separate Taxable Income for the period after the
Distribution.
(l) "Separate Tax Liability" shall mean the amount determined under
Section 2 hereof.
2. SEPARATE TAX LIABILITY
(a) The Separate Tax Liability of ITGI shall be the amount set forth in
paragraph (b) hereof as modified by paragraphs (c) and (d) hereof.
(b) The amount referred to in this paragraph (b) shall be an amount
equal to that portion of the Consolidated Tax Liability for such taxable
year that the Separate Taxable Income of ITGI for such taxable year bears to
the sum of the Separate Taxable Incomes of all Members for such taxable
year; PROVIDED, HOWEVER, that such amount shall not exceed the Consolidated
Tax Liability for such taxable year.
(c) The amount computed pursuant to paragraph (b) above shall be
increased by 100% of the excess, if any, of the ITGI Separate Return Tax
Liability for such taxable year over such amount (the "Loss Amount").
(d) Any federal, state or local income tax deduction resulting from (i)
the payment to the JEFG Pension Plan described in Section 3.03(a) of the
Benefits Agreement (or from benefits distributions related thereto), or (ii)
the payment of benefits under the JEFG CAP Plan to JEFG
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employees (each as defined in the Benefits Agreement), shall be for the
benefit of ITGI (and the JEFG Group after the Distribution) and not for the
benefit of HOLDING.
3. ADDITIONAL AMOUNT
The Additional Amount shall be equal to 100% of the amount, if any, by which
the Consolidated Tax Liability for the 1999 Taxable Year has been decreased by
reason of the inclusion of ITGI and its subsidiaries in the JEFG Group for the
1999 Taxable Year.
4. PAYMENTS
For the 1999 Taxable Year, payment of (i) the Separate Tax Liability of ITGI
by ITGI (less any Loss Amount paid to HOLDING) to JEFG (or to the IRS after the
Merger), (ii) the excess of the Consolidated Tax Liability over the amount
described in (i) (the "Holding Liability") by HOLDING to JEFG, (iii) the
Additional Amount, if any, by HOLDING to ITGI and (iv) the Loss Amount, if any,
by ITGI to HOLDING with respect to such taxable year shall be made as follows:
(a) On or before the 15th day of the fourth month of such taxable year,
JEFG shall cause KPMG LLP to estimate the Separate Tax Liability (less any
Loss Amount to be paid to HOLDING), the Holding Liability, the Additional
Amount and the Loss Amount for such taxable year.
(b) ITGI shall pay to JEFG (or to the IRS after the Merger), HOLDING
shall pay to JEFG, HOLDING shall pay to ITGI and ITGI shall pay to HOLDING
on or before each of the due dates for JEFG to make payment of estimates of
JEFG Group's Federal income taxes for such taxable year one-fourth of the
amount estimated pursuant to paragraph (a) above (collectively, the
"Estimated Amounts"). If, after paying any such installment of the Estimated
Amounts, KPMG LLP makes a new estimate, the amount of each remaining
installment (if any) shall be the amount which would have been payable if
the new estimate had been made when the first estimate for the taxable year
was made, increased or decreased, as applicable, by the amount computed by
dividing:
(i) the difference between (A) the amount of the Estimated Amounts
required to be paid before the date on which the new estimate is made,
and (B) the amount of the Estimated Amounts which would have been
required to be paid before such date if the new estimate had been made
when the first estimate was made, by
(ii) the number of installments remaining to be paid on or after the
date on which the new estimate is made.
(c) If, after the end of the 1999 Taxable Year, at the time of the
filing of an application for extension of the time to file the tax return
for the 1999 Taxable Year, if so filed, it is determined that the estimated
Separate Tax Liability of ITGI (less any Loss Amount paid to HOLDING),
Holding Liability, Additional Amount or the Loss Amount for such taxable
period exceeds the aggregate amount paid pursuant to subparagraph (b) above
with respect to such taxable period, then such excess shall be paid on or
before the later of (i) the 15th day of the third month after the end of
such taxable period, and (ii) the date on which such excess is finally
determined, which shall be no later than 30 days after the extension for
such taxable period is filed.
(d) If, after the end of the 1999 Taxable Year, it is determined that
the actual Separate Tax Liability of ITGI (less any Loss Amount paid to
HOLDING), Holding Liability, Additional Amount or Loss Amount for such
taxable period exceeds the aggregate amount paid pursuant to subparagraph
(b) and (c) above with respect to such taxable period, then such excess
shall be paid on or before the later of (i) the 15th day of the third month
after the end of such taxable period, and (ii) the date on which such excess
is finally determined, which shall be no later than 30 days after the
Consolidated Return for such taxable period is filed.
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(e) If, after the end of the 1999 Taxable Year, it is determined that
the amount paid pursuant to subparagraphs (b), (c) or (d) above with respect
to such taxable period exceeds the actual Separate Tax Liability of ITGI
(less any Loss Amount paid to HOLDING), Holding Liability, Additional Amount
or Loss Amount for such taxable period, then such excess shall be paid on or
before the later of (i) the 15th day of the third month after the end of
such taxable period, and (ii) the date on which such excess is finally
determined, which shall be no later than 30 days after the Consolidated
Return for such taxable period is filed.
5. CARRYBACKS
(a) If the JEFG Group has a consolidated unused investment credit, a
consolidated unused foreign tax credit, a consolidated excess charitable
contribution, a consolidated net capital loss or a consolidated net
operating loss, as such terms defined in the Regulations (a "Consolidated
Excess Amount") for any taxable year, the portion of such Consolidated
Excess Amount which is attributable to a Member (the "Separate Excess
Amount") shall be computed in accordance with Section 1.1502-79 of the
Regulations. Any consolidated unused research and experimentation credit of
the JEFG Group shall be treated and calculated in a manner consistent with
the foregoing sentence, and shall be included in the term "Consolidated
Excess Amount."
(b) If such Consolidated Excess Amount originates in the 1999 Taxable
Year, it will be carried back to a prior taxable year of the JEFG Group and
the effect of such carryback will be determined in accordance with the Prior
Agreement.
(c) Payment of any amount due under this Section 5 shall be made on the
date that a credit or refund is allowed with respect to the taxable year to
which such payment relates.
6. SUBSEQUENT ADJUSTMENTS AND PROCEDURAL MATTERS
(a) If any adjustments (other than adjustments made pursuant to Section
5 hereof) are made to the income, gains, losses, deductions or credits of
the JEFG Group for the 1999 Taxable Year, whether by reason of the filing of
an amended return or a claim for refund with respect to such taxable year or
an audit with respect to such taxable year by the IRS, the amounts due under
this Agreement for such taxable year shall be redetermined by taking into
account such adjustments. If, as a result of such redetermination, any
amounts due under this Agreement shall differ from the amounts previously
paid, then payment of such difference shall be made (a) in the case of an
adjustment resulting in a credit or refund, on the date on which such credit
or refund is allowed with respect to such adjustment or (b) in the case of
an adjustment resulting in the assertion of a deficiency, on the date on
which such deficiency is paid. Any amounts due under this paragraph (a)
shall include any interest attributable thereto computed in accordance with
Sections 6601 or 6611 of the Code, as the case may be, and any penalties or
additional amounts which may be imposed.
(b) If any tax audit is undertaken by any tax authority, HOLDING shall
initially have primary control of any dealings with such tax authority. Upon
a determination that such audit could give rise to an increase in either
HOLDING's or ITGI's liability under this Agreement, then HOLDING or ITGI, as
the case may be, shall be given primary control of any dealings with such
tax authority; provided, however, that the other party will be consulted
with respect to any matters which could result in an increase in the other
party's liability under this Agreement.
(c) If any adjustment or deficiency is proposed, asserted or assessed
by any tax authority which would give rise to an increase in either
HOLDING's or ITGI's liability under this Agreement, then HOLDING or ITGI, as
the case may be, shall have the primary right to contest, compromise or
settle any such adjustment or deficiency; provided, however, that the other
party will be consulted with respect to any matters which could result in an
increase in such other party's
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liability under this Agreement. If such adjustment or deficiency would give
rise to an increase in both HOLDING's and ITGI's liability under this
Agreement, then HOLDING and ITGI shall jointly have the right to contest,
compromise or settle any such adjustment or deficiency.
7. CARRYBACKS FROM SEPARATE RETURN YEARS
This Agreement shall have no application to the carryback of a net operating
loss or credit from a separate return year (within the meaning of Section
1.1502-1(e) of the Treasury Regulations) to any taxable year of JEFG Group, and
no recomputation or other payment shall be made in respect of such carryback.
8. FILING OF CALIFORNIA SINGLE RETURNS
HOLDING may file or cause to be filed a single return for California
franchise and income tax purposes ("California Single Return") for those
affiliated corporations that are includible in a California combined report (the
"JEFG Combined Group") for the 1999 Taxable Year if the JEFG Combined Group is
required or permitted to file such a return. To the extent that it qualifies
under California law, JEFG shall be the "key corporation" with respect to any
such California Single Return and, to the extent that it does not so qualify,
shall designate a "key corporation" from among the members of the JEFG Combined
Group that does so qualify. Each party to this Agreement hereby consents to any
such designation on behalf of itself and any direct or indirect subsidiary
thereof. With regard to any income year with respect to which the JEFG Combined
Group files, or it is reasonably anticipated that the JEFG Combined Group will
file, a California Single Return for the 1999 Taxable Year, the estimated and
final California tax liability of each member of the JEFG Combined Group shall
be determined, to the extent permitted by California law, in a manner consistent
with the principles set forth in this Agreement, and payments of the estimated
and final tax liability so determined shall be made to the key corporation at
the time that payments of corresponding Federal payments are due.
9. FILING OF STATE CONSOLIDATED RETURNS
To the extent permitted or required by the applicable laws of any state
other than California, JEFG and its affiliated corporations (the "state
consolidated group"), at the election of HOLDING in its sole discretion, may
join for the 1999 Taxable Year in the filing of a single, combined or
consolidated franchise or income tax return ("state consolidated return") with
any such corporation required to file a franchise or income tax return in such
state for such taxable year. With regard to the 1999 Taxable Year with respect
to which the state consolidated group files, or it is reasonably anticipated
will file, a state consolidated return which includes ITGI, the estimated and
final state tax liability of each member of the state consolidated group shall
be determined, to the extent permitted by law of the state in which the return
is to be filed, in a manner consistent with the principles set forth in this
Agreement, and payments of the estimated and final tax liability so determined
shall be made to the member of the state consolidated group responsible for
payment of the state consolidated group's tax liability at the time that
payments of corresponding Federal payments are due.
10. LIABILITY FOR TAKING CERTAIN ACTIONS INCONSISTENT WITH THE TREATMENT OF
THE DISTRIBUTION AS TAX-FREE.
(a) Notwithstanding any other provision of this Agreement (other than
in this Section 10), (i) in the event that any party, or employee, officer,
or director of such party, takes any action inconsistent with, or fails to
take any action required by, or in accordance with, the treatment of the
Distribution as tax-free, then such party shall be liable for the
inconsistent action or failure to take required action of it or its
employees, officers and directors and shall indemnify and hold the other
parties harmless from any tax liabilities, including the costs thereof,
resulting from such
D-5
<PAGE>
inconsistent action or failure to take required action, and (ii) if any
party engages in any transaction involving its stock or assets or makes any
factual statement or representation to the Internal Revenue Service in or in
connection with the Ruling that is inaccurate or incomplete in any material
respect, and as a result of that transaction or inaccuracy or incompleteness
of such factual statement or representation, the Distribution is treated as
a taxable event notwithstanding the receipt of the Ruling, then the party
engaging in such transaction or making such factual statement or
representation shall hold the other parties harmless from any tax
liabilities, including the costs thereof, that result from the treatment of
the Distribution as a taxable event.
(b) For purposes of this Section 10, (i) any action taken (or failure
to take action) prior to the Distribution by any subsidiary of JEFG (other
than ITGI or a subsidiary of ITGI) or any employee, officer or director of
such subsidiary of JEFG shall be deemed to be an action taken (or failure to
take action) by HOLDING (and not JEFG) or by an employee, officer or
director of HOLDING (and not JEFG); (ii) any action taken (or failure to
take action) prior to the Distribution by JEFG or any employee, officer or
director of JEFG shall be deemed to be an action taken (or failure to take
action) by HOLDING (and not JEFG) or by an employee, officer or director of
HOLDING (and not JEFG); (iii) any action taken (or failure to take action)
prior to the Distribution by any subsidiary of ITGI or any employee, officer
or director of such subsidiary of ITGI shall be deemed an action (or failure
to take action) by ITGI (and not HOLDING) or by an employee, officer or
director of ITGI (and not HOLDING); (iv) any action taken (or failure to
take action) prior to the Distribution by any employee, officer or director
of ITGI shall be deemed to be an action taken (or failure to take action) by
ITGI (and not HOLDING) or by an employee, officer or director of ITGI (and
not HOLDING); (v) any action taken (or failure to take action) after the
Distribution by JEFG, any subsidiary of JEFG (including ITGI and any
subsidiary of ITGI) (other than HOLDING or a subsidiary of HOLDING) or any
employee, officer or director of JEFG or such subsidiary of JEFG (including
ITGI and any subsidiary of ITGI) shall be deemed to be an action taken (or
failure to take action) by ITGI or by an employee, officer or director of
ITGI; and (vi) any action taken (or failure to take action) after the
Distribution by HOLDING, any subsidiary of HOLDING or any employee, officer
or director of HOLDING or such subsidiary of HOLDING shall be deemed to be
an action taken (or failure to take action) by HOLDING or by an employee,
officer or director of HOLDING.
(c) For purposes of this Section 10, any factual statement or
representation made by JEFG in or in connection with the Ruling with respect
to (i) ITGI and any subsidiary of ITGI, or with respect to JEFG following
the Distribution, including, without limitation, the intentions of JEFG
following the Distribution, shall be deemed to be a factual statement or
representation made by ITGI (and not HOLDING) or by an employee, officer or
director of ITGI (and not HOLDING), and (ii) JEFG and any subsidiary of JEFG
(other than ITGI or any subsidiary of ITGI and other than with respect to
JEFG following the Distribution, including, without limitation, the
intentions of JEFG following the Distribution) shall be deemed to be a
factual statement or representation made by HOLDING (and not JEFG) or by an
employee, officer or director of HOLDING (and not JEFG).
(d) ITGI has reviewed the materials submitted to the IRS in and in
connection with the Ruling. All such materials concerning ITGI and all such
materials concerning JEFG following the Distribution, including, without
limitation, any factual statements and representations concerning ITGI, its
business operations, capital structure and organization, are complete and
accurate in all material respects.
(e) HOLDING has reviewed the materials submitted to the IRS in and in
connection with the Ruling. All such materials concerning JEFG and
subsidiaries (other than (i) materials relating to ITGI or any subsidiary of
ITGI and (ii) materials concerning JEFG following the Distribution)
including, without limitation, any factual statements and representations
concerning JEFG or its
D-6
<PAGE>
subsidiaries, their business operations, capital structure and organization,
are complete and accurate in all material respects.
(f) HOLDING and ITGI agree to split equally the costs of defending the
Ruling in a subsequent examination by the IRS if it is reasonably determined
that no party is otherwise responsible for such costs as provided in this
Section 10.
(g) ITGI is considering an internal restructuring involving a transfer
by ITG Inc. ("ITGX") of the assets, liabilities and employees of ITGX's
research and development division to a newly formed subsidiary of ITGX (the
"R&D Subsidiary"), followed by a distribution by ITGX of all of the stock of
the R&D Subsidiary to ITGI (such transfer and distribution referred to
hereinafter as the "Internal Spin"). ITGI hereby represents and warrants
that ITGI and ITGX have not consummated the Internal Spin in its entirety
and have not consummated either of (i) such transfer of assets, liabilities
and employees to the R&D Subsidiary or (ii) such distribution of the stock
of the R&D Subsidiary. ITGI further represents and agrees that it will not
consummate, and will cause ITGX not to consummate, either the Internal Spin
in its entirety or either of (i) such transfer of assets, liabilities and
employees to the R&D Subsidiary or (ii) such distribution of the stock of
the R&D Subsidiary unless and until it has received a ruling from the IRS
that any such consummation will not adversely affect any ruling issued by
the IRS pursuant to the Ruling, and the subsequent supplements to the
Ruling.
11. REPRESENTATIONS OF HOLDING. HOLDING represents and warrants to ITGI
that, to the best of its knowledge, subject to the exceptions provided in
Schedule attached hereto, and subject to other exceptions that are not
material individually or in the aggregate:
(a) JEFG will have prepared and timely filed with the appropriate
taxing authority all tax returns and reports required to be filed through
the date of the Distribution, taking into account any extension of time to
file granted to JEFG;
(b) JEFG will have timely paid all taxes (including interest and
penalties thereon and additions thereto) due and payable by it (including
any federal income tax liability of the JEFG Group and any tax liability of
a combined or consolidated state, local or foreign group which includes JEFG
for any period prior to the Distribution);
(c) any deficiencies or assessments asserted in writing against JEFG by
any taxing authority through the date of the Distribution will have been
paid or fully settled;
(d) JEFG is not presently under examination or audit by any taxing
authority;
(e) no extension of the period for assessment or collection of any tax
is currently in effect with respect to JEFG;
(f) copies of all tax returns and reports filed by JEFG and any other
books and records and other information relating to any liability (or
potential liability) of JEFG for taxes have been made available to ITGI; and
(g) no Member of the JEFG Group has entered into any intercompany
transaction (as that term is defined in Section 1.1502-13 of the Treasury
Regulations) that may result in any material tax or addition to tax such as
interest or penalties.
12. FURTHER ACTIONS
Each of the parties hereto agrees, and agrees to cause any direct or
indirect subsidiary of such party, to file such consents, elections and other
documents and take such other action as may be necessary or appropriate to carry
out the purpose of this Agreement.
D-7
<PAGE>
13. RECORD RETENTION, RETURN PREPARATION AND COSTS
(a) HOLDING will retain all records relating to the determination of
taxes hereunder as agent and custodian for JEFG, and HOLDING will make such
records available to JEFG.
(b) KPMG LLP will prepare all tax returns to be filed pursuant to this
Agreement in a manner consistent with past practice and will make all
computations relating to estimated taxes and carrybacks for purposes of this
Agreement.
(c) HOLDING and ITGI agree to split equally the costs arising from the
preparation and filing of all tax returns filed pursuant to this Agreement
(including any applicable computations relating to carrybacks).
14. DETERMINATIONS
Except as provided in Section 13 of this Agreement, all determinations
required hereunder shall be made by the independent public accountants regularly
employed by the JEFG Group at the time that such determination is required to be
made. Such determinations shall be binding and conclusive upon the parties for
purposes hereof.
15. INTEREST
If any payment required to be made pursuant to Section 4, 5, 8 or 9 of this
Agreement is not made within the time periods specified in those Sections, the
delinquent payment shall bear interest from its due date until the date of
actual payment at the rate (or rates) charged by the Internal Revenue Service on
underpayments of tax for the periods in question.
16. MISCELLANEOUS PROVISIONS
(a) All references and provisions under this Agreement that refer to
ITGI shall be deemed to refer also to JEFG with respect to any period after
the Merger.
(b) This Agreement applies only with respect to the 1999 Taxable Year
and the Prior Agreement remains in full force and effect with respect to all
tax years prior to the 1999 Taxable Year.
(c) This Agreement contains the entire understanding of the parties
hereto with respect to the subject matter contained herein. No alteration,
amendment or modification of any of the terms of this Agreement shall be
valid unless made by an instrument signed in writing by an authorized
officer of each party hereto.
(d) This Agreement has been made in and shall be construed and enforced
in accordance with the laws of the State of New York from time to time
obtaining.
(e) This Agreement shall be binding upon and inure to the benefit of
each party hereto and their respective successors and assigns.
(f) This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(g) All notices and other communications hereunder shall be deemed to
have been duly given if given in writing and delivered by either in person
or by facsimile with receipt
D-8
<PAGE>
acknowledged or confirmed or by certified or registered mail, return receipt
requested, postage prepaid and addressed as follows:
(i)If to JEFG or any of its successors prior to the Distribution at:
Jefferies Group, Inc.
11100 Santa Monica Boulevard, 11th Floor
Los Angeles, California 90025
Attention: Chief Executive Officer
Facsimile: 310-914-1013
With a copy to:
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103
Attention: Brian J. Lynch, Esq.
(ii)If to JEFG or any of its successors after the Distribution at:
Investment Technology Group, Inc.
380 Madison Avenue, 4th Floor
New York, New York 10017
Attention: Chief Financial Officer
Facsimile: 212-444-6490
With a copy to:
Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005
Attention: Immanuel Kohn, Esq.
(iii)If to ITGI or any of its successors at:
Investment Technology Group, Inc.
380 Madison Avenue, 4th Floore
New York, New York 10017
Attention: Chief Financial Officer
Facsimile: 212-444-6490
With a copy to:
Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005
Attention: Immanuel Kohn, Esq.
D-9
<PAGE>
(iv)If to HOLDING at:
Jefferies Group, Inc.
JEF Holding Company, Inc.
11100 Santa Monica Boulevard, 11th Floor
Los Angeles, California 90025
Attention: Chief Financial Officer
With a copy to:
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103
Attention: Brian J. Lynch, Esq.
(h) The headings of the paragraphs of this Agreement are inserted for
convenience only and shall not constitute a part hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed and their respective corporate seals to be affixed hereto, all on the
date and year first above written.
<TABLE>
<S> <C> <C>
"JEFG" JEFFERIES GROUP, INC.,
a Delaware corporation
By: /s/ JERRY M. GLUCK
-----------------------------------------
Jerry M. Gluck, General Counsel
"ITGI"
INVESTMENT TECHNOLOGY GROUP, INC.
a Delaware corporation
By: /s/ RAYMOND KILLIAN
-----------------------------------------
Raymond Killian, President/CEO
"HOLDING"
JEF HOLDING COMPANY, INC.
A Delaware corporation
By: /s/ JERRY M. GLUCK
-----------------------------------------
Jerry M. Gluck, General Counsel
</TABLE>
D-10
<PAGE>
AMENDED AND RESTATED TAX SHARING AGREEMENT
THIS AGREEMENT is entered into as of the 17th day of March, 1999, by and
among JEFFERIES GROUP, INC., a Delaware corporation ("JEFG") , JEF HOLDING
COMPANY, INC., a Delaware corporation ("HOLDING"), and INVESTMENT TECHNOLOGY
GROUP, INC., a Delaware corporation ("ITGI").
WITNESSETH:
WHEREAS, as of January 1, 1994, JEFG and ITGI entered into a tax sharing
agreement to define the method by which Federal, state and local income and
franchise taxes would be allocated between JEFG as the common parent and ITGI as
a subsidiary of JEFG (the "1994 Tax Sharing Agreement"); and
WHEREAS, the JEFG Board of Directors has determined that it is appropriate
and desirable to distribute all of the shares of HOLDING common stock that it
owns to the holders of JEFG common stock (the "Distribution") in a transaction
intended to qualify as a tax-free distribution for federal income tax purposes
under Section 355 of the Internal Revenue Code of 1986, as amended (the "Code");
and
WHEREAS, JEFG has applied to the Internal Revenue Service for a private
letter ruling (the "Ruling") to the effect that the Distribution will qualify as
a tax-free distribution for federal income tax purposes under Section 355 of the
Code; and
WHEREAS, ITGI will be the principal subsidiary of JEFG immediately after
the Distribution; and
<PAGE>
WHEREAS, it is intended that ITGI will merge with and into JEFG
following the Distribution (the "Merger"); and
WHEREAS, it is intended that HOLDING and its subsidiaries will
accordingly cease to be members of the affiliated group (within the meaning of
Section 1504(a) of the Code) of which JEFG is the common parent, effective on or
about [April 27, 1999] (the "Effective Date"); and
WHEREAS, JEFG, HOLDING and ITGI have entered into a tax sharing and
indemnification agreement, dated as of March 17, 1999, which is to apply
only to the 1999 taxable year (the "Tax Sharing and Indemnification Agreement");
and
WHEREAS, the parties desire to amend the 1994 Tax Sharing Agreement in
certain respects, including but not limited to the addition of HOLDING as a
party and the exclusion of the 1999 taxable year (the "1999 Taxable Year") and
all subsequent taxable years from its coverage, and to restate the 1994 Tax
Sharing Agreement in its entirety,
NOW, THEREFORE, in consideration of the foregoing and of the mutual
promises, covenants and conditions hereinafter contained, the parties hereto
agree that the 1994 Tax Sharing Agreement is hereby amended and restated in its
entirety as follows:
1. DEFINITIONS
The following terms as used in this Agreement shall have the meanings
set forth below:
(a) "Additional Amount" shall mean the amount determined under
Section 3 hereof.
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<PAGE>
(b) "Consolidated Return" shall mean a consolidated Federal
income tax return filed pursuant to Section 1501 of the Code.
(c) "Consolidated Taxable Income" shall mean the consolidated
Federal taxable income of the JEFG Group for any taxable year for which the JEFG
Group files a Consolidated Return.
(d) "Consolidated Tax Liability" shall mean the consolidated
Federal income tax liability of the JEFG Group for any taxable year for which
the JEFG Group files a Consolidated Return.
(e) "IRS" shall mean the Internal Revenue Service.
(f) "JEFG Group" shall mean the affiliated group of corporations
of which JEFG is the common parent. In the event that the merger takes place as
contemplated and JEFG changes its name to Investment Technology Group, Inc.
("New ITGI"), the term "JEFG Group" shall include the affiliated group of
corporations of which New ITGI is the common parent.
(g) "Loss Amount" shall mean the amount determined under Section
2 hereof.
(h) "Member" shall mean each includible member of the JEFG Group.
(i) "Regulations" shall mean the Treasury Regulations as in
effect from time to time.
(j) "Separate Return Tax Liability" shall mean the Federal income
tax liability of a Member and its subsidiaries computed as if they had filed a
separate Federal income
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<PAGE>
tax return for the applicable taxable year with the modifications set forth in
Section 1.1552-1(a)(2)(ii) of the Regulations. If the computation of a Member's
Separate Return Tax Liability as provided herein does not result in a positive
amount, such Member's Separate Return Tax Liability shall be deemed to be zero.
(k) "Separate Taxable Income" shall mean an amount determined
with respect to a Member and its subsidiaries in accordance with Section
1.1502-12 of the Regulations with the adjustments contained in Section
1.1552-1(a)(1)(ii) of the Regulations. If the computation of a Member's Separate
Taxable Income as provided herein does not result in a positive amount, such
Member's Separate Taxable Income shall be deemed to be zero.
(l) "Separate Tax Liability" shall mean the amount determined
under Section 2 hereof.
2. SEPARATE TAX LIABILITY
(a) The Separate Tax Liability of ITGI for each taxable year
shall be the amount set forth in paragraph (b) hereof as modified by paragraphs
(c) and (d) hereof.
(b) The amount referred to in this paragraph (b) shall be an
amount equal to that portion of the Consolidated Tax Liability for such taxable
year that the Separate Taxable Income of ITGI for such taxable year bears to the
sum of the Separate Taxable Incomes of all Members for such taxable year;
PROVIDED, HOWEVER, that such amount shall not exceed the Consolidated Tax
Liability for such taxable year.
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<PAGE>
(c) The amount computed pursuant to paragraph (b) above shall be
increased by 100% of the excess, if any, of the ITGI Separate Return Tax
Liability for such taxable year over such amount (the "Loss Amount").
(d) Any federal, state or local income tax deduction resulting
from (i) the payment to the JEFG Pension Plan described in Section 3.03(a) of
the Benefits Agreement (or from benefits distributions related thereto), or (ii)
the payment of benefits under the JEFG CAP Plan to JEFG employees (each as
defined in the Benefits Agreement), shall be for the benefit of ITGI (and the
JEFG Group after the Distribution) and not for the benefit of HOLDING.
3. ADDITIONAL AMOUNT
The Additional Amount for each taxable year shall be equal to
100% of the amount, if any, by which the Consolidated Tax Liability has been
decreased by reason of the inclusion of ITGI and its subsidiaries in the JEFG
Group for such taxable year.
4. FILING AND PAYMENTS
(a) HOLDING shall file or cause to be filed the Consolidated
Return for the JEFG Group for the 1998 taxable year.
(b) JEFG shall file or cause to be filed the Consolidated Return
for the JEFG Group for all taxable periods covered under this Agreement other
than the 1998 taxable year.
(c) For any taxable year, payment of (i) the Separate Tax
Liability of ITGI by ITGI (less any Loss Amount paid to HOLDING) to JEFG (or to
the IRS after the
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<PAGE>
Merger), (ii) the excess of the Consolidated Liability over the amount described
in (i) (the "Holding Liability") by HOLDING to JEFG (or to ITGI after the
Merger), (iii) the Additional Amount, if any, by HOLDING to ITGI and (iv) the
Loss Amount, if any, by ITGI to HOLDING with respect to such taxable year shall
be made as follows:
(A) For each taxable year, HOLDING has estimated the
Separate Tax Liability (less any Loss Amount to be paid to HOLDING), the
Holding Liability, the Additional Amount and the Loss Amount for such
taxable year.
(B) ITGI and HOLDING have each paid on or before each of the
due dates for HOLDING to make payment of estimates of JEFG Group's Federal
income taxes for each taxable year one-fourth of the amount estimated
pursuant to paragraph (i) above (collectively, the "Estimated Amounts").
If, after paying any such installment of the Estimated Amounts, HOLDING
made a new estimate, the amount of each remaining installment (if any) was
equal to the amount which would have been payable if the new estimate had
been made when the first estimate for the taxable year was made, increased
or decreased, as applicable, by the amount computed by dividing:
(1) the difference between (1) the amount of the
Estimated Amounts required to be paid before the date on which the new
estimate is made, and (2) the amount of the Estimated Amounts which
would have been required to be paid before such date if the new
estimate had been made when the first estimate was made, by
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<PAGE>
(2) the number of installments remaining to be paid on
or after the date on which the new estimate is made.
(d) If, after the end of any taxable year, at the time of the
filing of an application for extension of the time to file the tax return for
such taxable year, if so filed, it is determined that the estimated Separate Tax
Liability of ITGI (less any Loss Amount paid to HOLDING), Holding Liability,
Additional Amount or Loss Amount for such taxable period exceeds the aggregate
amount paid pursuant to subparagraph (c), with respect to such taxable period,
then such excess shall be paid on or before the later of (i) the 15th day of the
third month after the end of such taxable period, and (ii) the date on which
such excess is finally determined, which shall be no later than 30 days after
the extension for such taxable period is filed.
(e) If, after the end of each taxable year with respect to which
HOLDING or JEFG filed a Consolidated Return pursuant to this Agreement, it is
determined that the actual Separate Tax Liability of ITGI (less any Loss Amount
paid to HOLDING), Holding Liability, Additional Amount or Loss Amount for such
taxable period exceeds the aggregate amount paid pursuant to subparagraph (c)
and (d), with respect to such taxable period, then such excess shall be paid on
or before the later of (i) the 15th day of the third month after the end of such
taxable period, and (ii) the date on which such excess is finally determined,
which shall be no later than 30 days after the Consolidated Return for such
taxable period is filed.
(f) If it is determined that the amount paid pursuant to
subparagraphs (c), (d), or (e) above with respect to any taxable period exceeds
the actual Separate Tax Liability of ITGI (less any Loss Amount paid to
HOLDING), Holding Liability, Additional Amount or
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<PAGE>
Loss Amount for such taxable period, then such excess shall be repaid on or
before the later of (i) the 15th day of the third month after the end of such
taxable period, and (ii) the date on which such excess is finally determined,
which shall be no later than 30 days after the Consolidated Return for such
taxable period is filed.
5. CARRYBACKS
(a) If the JEFG Group has a consolidated unused investment
credit, a consolidated unused foreign tax credit, a consolidated excess
charitable contribution, a consolidated net capital loss or a consolidated net
operating loss, as such terms are defined in the Regulations (a "Consolidated
Excess Amount") for any taxable year, the portion of such Consolidated Excess
Amount which is attributable to a Member (the "Separate Excess Amount") shall be
computed in accordance with Section 1.1502-79 of the Regulations. Any
consolidated unused research and experimentation credit of the JEFG Group shall
be treated and calculated in a manner consistent with the foregoing sentence,
and shall be included in the term "Consolidated Excess Amount."
(b) If such Consolidated Excess Amount is carried back to a prior
taxable year of the JEFG Group during which ITGI or one of its subsidiaries was
a Member, then the amounts due under this Agreement for such prior taxable year
shall be redetermined by taking into account such Consolidated Excess Amount and
any Separate Excess Amounts allocable to such taxable year.
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<PAGE>
(c) Payment of any amount due under this Section 5 shall be made
on the date that a credit or refund is allowed with respect to the taxable year
to which such payment relates.
6. SUBSEQUENT ADJUSTMENTS AND PROCEDURAL MATTERS
(a) If any adjustments (other than adjustments made pursuant to
Section 5 hereof) are made to the income, gains, losses, deductions or credits
of the JEFG Group for a taxable year during which ITGI or one of its
subsidiaries was a member, whether by reason of the filing of an amended return
or a claim for refund with respect to such taxable year or an audit with respect
to such taxable year by the IRS, the amounts due under this Agreement for such
taxable year shall be redetermined by taking into account such adjustments. If,
as a result of such redetermination, any amounts due under this Agreement shall
differ from the amounts previously paid, then payment of such difference shall
be made (a) in the case of an adjustment resulting in a credit or refund, on the
date on which such credit or refund is allowed with respect to such adjustment
or (b) in the case of an adjustment resulting in the assertion of a deficiency,
on the date such deficiency is paid. Any amounts due under this paragraph (a)
shall include any interest attributable thereto computed in accordance with
Sections 6601 or 6611 of the Code, as the case may be, and any penalties or
additional amounts which may be imposed.
(b) If any tax audit is undertaken by any tax authority, HOLDING
shall initially have primary control of any dealings with such tax authority.
Upon a determination that such audit could give rise to an increase in either
HOLDING's or ITGI's liability under this Agreement, then HOLDING or ITGI, as the
case may be shall be given
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<PAGE>
primary control of any dealings with such tax authority; provided, however, that
the other party will be consulted with respect to any matters which could result
in an increase in the other party's liability under this Agreement.
(c) If any adjustment or deficiency is proposed, asserted or
assessed by any tax authority which would give rise to an increase in either
HOLDING's or ITGI's liability under this Agreement, then HOLDING or ITGI, as the
case may be, shall have the primary right to contest, compromise or settle any
such adjustment or deficiency; provided, however, that the other party will be
consulted with respect to any matters which could result in an increase in such
other party's liability under this Agreement. If such adjustment or deficiency
would give rise to an increase in both HOLDING's and ITGI's liability under this
Agreement, then HOLDING and ITGI shall jointly have the right to contest,
compromise or settle any such adjustment or deficiency.
7. CARRYBACKS FROM SEPARATE RETURN YEARS
This Agreement shall have no application to the carryback of a
net operating loss or credit from a separate return year (within the meaning of
Section 1.1502-1(e) of the Treasury Regulations) to any taxable year of JEFG
Group, and no recomputation or other payment shall be made in respect of such
carryback.
8. FILING OF CALIFORNIA SINGLE RETURNS
HOLDING may file or cause to be filed a single return for
California franchise and income tax purposes ("California Single Return") for
those affiliated corporations that are includible in a California combined
report (the "JEFG Combined Group") for each of the
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<PAGE>
taxable years for which the JEFG Combined Group is required or permitted to file
such a return. To the extent that it qualifies under California law, JEFG shall
be the "key corporation" with respect to any such California Single Return and,
to the extent that it does not so qualify, shall designate a "key corporation"
from among the members of the JEFG Combined Group that does so qualify. Each
party to this Agreement hereby consents to any such designation on behalf of
itself and any direct or indirect subsidiary thereof. With regard to any income
year with respect to which the JEFG Combined Group files, or it is reasonably
anticipated that the JEFG Combined Group will file, a California Single Return
which includes ITGI, the estimated and final California tax liability of each
member of the JEFG Combined Group shall be determined, to the extent permitted
by California law, in a manner consistent with the principles set forth in this
Agreement, and payments of the estimated and final tax liability so determined
shall be made to the key corporation at the time that payments of corresponding
Federal payments are due.
9. FILING OF STATE CONSOLIDATED RETURNS
To the extent permitted or required by the applicable laws of any
state other than California, JEFG and its affiliated corporations (the "state
consolidated group"), at the election of HOLDING in its sole discretion, may
join for any taxable year in the filing of a single, combined or consolidated
franchise or income tax return ("state consolidated return") with any such
corporation required to file a franchise or income tax return in such state for
such taxable year. With regard to any taxable year with respect to which the
state consolidated group files, or it is reasonably anticipated will file, a
state consolidated return which includes ITGI, the
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estimated and final state tax liability of each member of the state consolidated
group shall be determined, to the extent permitted by law of the state in which
the return is to be filed, in a manner consistent with the principles set forth
in this Agreement, and payments of the estimated and final tax liability so
determined shall be made to the member of the state consolidated group
responsible for payment of the state consolidated group's tax liability at the
time that payments of corresponding Federal payments are due.
10. FURTHER ACTIONS
Each of the parties hereto agrees, and agrees to cause any direct
or indirect subsidiary of such party, to file such consents, elections and other
documents and take such other action as may be necessary or appropriate to carry
out the purpose of this Agreement.
11. RECORD RETENTION AND COSTS
(a) HOLDING will retain all records relating to the determination
of taxes hereunder as agent and custodian for JEFG, and HOLDING will make such
records available to JEFG.
(b) HOLDING and ITGI agree to split equally the third-party costs
arising from the preparation and filing of all tax returns filed pursuant to
this Agreement (including any applicable computations relating to carrybacks).
12. DETERMINATIONS
All determinations required hereunder shall be made by KPMG LLP.
Such determinations shall be binding and conclusive upon the parties for
purposes hereof.
13. INTEREST
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If any payment required to be made pursuant to Section 4, 5, 8 or
9 of this Agreement is not made within the time periods specified in those
Sections, the delinquent payment shall bear interest from its due date until the
date of actual payment at the rate (or rates) charged by the Internal Revenue
Service on underpayments of tax for the periods in question.
14. MISCELLANEOUS PROVISIONS
(a) All references and provisions under this Agreement that refer
to ITGI shall be deemed to refer also to JEFG with respect to any period after
the Merger.
(b) This Agreement applies only to all taxable periods prior to
the 1999 taxable year (which is covered by the Tax Sharing and Indemnification
Agreement) in which ITGI is included in the JEFG Group.
(c) This Agreement contains the entire understanding of the
parties hereto with respect to the subject matter contained herein. No
alteration, amendment or modification of any of the terms of this Agreement
shall be valid unless made by an instrument signed in writing by an authorized
officer of each party hereto.
(d) This Agreement has been made in and shall be construed and
enforced in accordance with the laws of the State of New York from time to time
obtaining.
(e) This Agreement shall be binding upon and inure to the benefit
of each party hereto and their respective successors and assigns.
(f) This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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(g) All notices and other communications hereunder shall be
deemed to have been duly given if given in writing and delivered by either in
person or by facsimile with receipt acknowledged or confirmed or by certified or
registered mail, return receipt requested, postage prepaid and addressed as
follows:
(i) If to JEFG or any of its successors prior to the Distribution
at:
Jefferies Group, Inc.
11100 Santa Monica Boulevard, 11th Floor
Los Angeles, California 90025
Attention: Chief Executive Officer
Facsimile: 310-914-1013
With a copy to:
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103
Attention: Brian J. Lynch, Esq.
(ii) If to JEFG or any of its successors after the Distribution
at:
Investment Technology Group, Inc.
380 Madison Avenue, 4th Floor
New York, New York 10017
Attention: Chief Financial Officer
Facsimile: 212-444-6490
With a copy to:
Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005
Attention: Immanuel Kohn, Esq.
(iii) If to ITGI or any of its successors at:
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Investment Technology Group, Inc.
380 Madison Avenue, 4th Floor
New York, New York 10017
Attention: Chief Financial Officer
Facsimile: 212-444-6490
With a copy to:
Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005
Attention: Immanuel Kohn, Esq.
(iv) If to HOLDING at:
Jefferies Group, Inc.
JEF Holding Company, Inc.
11100 Santa Monica Boulevard, 11th Floor
Los Angeles, California 90025
Attention: Chief Financial Officer
With a copy to:
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103
Attention: Brian J. Lynch, Esq.
(h) The headings of the paragraphs of this Agreement are inserted
for convenience only and shall not constitute a part hereof.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed and their respective corporate seals to be affixed hereto,
all on the date and year first above written.
"JEFG" JEFFERIES GROUP, INC.,
a Delaware corporation
By: /s/ CLARENCE T. SCHMITZ
-----------------------------------
Clarence T. Schmitz,
Executive Vice President and CFO
"ITGI" INVESTMENT TECHNOLOGY GROUP, INC.
a Delaware corporation
By: /s/ RAYMOND KILLIAN
-----------------------------------
Raymond Killian, President/CEO
"HOLDING" JEF HOLDING COMPANY, INC.
A Delaware corporation
By: /s/ JERRY M. GLUCK
-----------------------------------
Jerry M. Gluck, General Counsel
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BENEFITS AGREEMENT
DATED AS OF
MARCH 17, 1999
BETWEEN
JEFFERIES GROUP, INC.
AND
JEF HOLDING COMPANY, INC.
<PAGE>
BENEFITS AGREEMENT
BENEFITS AGREEMENT ("Agreement") dated as of March 17, 1999 by and between
Jefferies Group, Inc., a Delaware corporation ("JEFG"), and JEF Holding Company,
Inc. a Delaware corporation and a wholly owned subsidiary of JEFG ("Holding").
RECITALS
WHEREAS, the Board of Directors of JEFG has approved the business
transactions pursuant to which all the assets, businesses and Liabilities (as
defined below) of Investment Technology Group, Inc., a Delaware corporation and
approximately 80.5% owned subsidiary of JEFG ("ITGI"), and ITGI's subsidiaries
will be separated from all other assets, businesses and Liabilities of JEFG, on
the terms and subject to the conditions set forth herein and in the Ancillary
Agreements (as defined below);
WHEREAS, concurrently herewith, JEFG and ITGI are entering into an Agreement
and Plan of Merger (the "MERGER AGREEMENT"), pursuant to which (x) ITGI will
merge (the "MERGER") with and into JEFG and (y) all outstanding shares of common
stock, par value $0.01 per share, of ITGI (the "ITGI COMMON STOCK") will be
canceled or converted into the right to receive shares of common stock, par
value $0.01 per share, of JEFG (the "JEFG COMMON STOCK") in the manner set forth
in the Merger Agreement;
WHEREAS, prior to the Distribution (defined below) and Merger (x) JEFG will
transfer to Holding (or to JEFCO, defined herein, prior to the time JEFCO
becomes a subsidiary of Holding in connection with the Contribution, defined
below), and Holding and JEFCO will accept from JEFG, all of the Assets of JEFG
other than JEFG's ownership interest in capital stock of ITGI (the
"CONTRIBUTION"), and JEFG will assign to Holding (or to JEFCO, as appropriate),
and Holding and JEFCO will assume from JEFG, all of the Holding Liabilities (as
defined herein) (individually, the "ASSUMPTION" and together with the
Contribution, collectively, the "TRANSFERS"), and (y) following the Transfers
and the satisfaction of all conditions set forth in Section 2.02 of this
Agreement, all of the common stock of Holding, par value $0.0001 per share
("HOLDING COMMON STOCK"), will be distributed (the "DISTRIBUTION") to JEFG's
stockholders at the rate of one share of Holding Common Stock for each share of
JEFG Common Stock outstanding as of April 20, 1999, or such other date as is
designated by JEFG's Board of Directors as the record date for determining the
stockholders of JEFG entitled to receive the Distribution (the "Record Date");
WHEREAS, (i) pursuant to the Merger, the name of Jefferies Group, Inc. (as
the surviving corporate entity in the Merger) will be changed to Investment
Technology Group, Inc. and (ii) following the consummation of the Distribution
and the Merger, the name of JEF Holding Company, Inc. will be changed to
Jefferies Group, Inc.;
WHEREAS, it is intended that the Distribution not be taxable to JEFG or its
stockholders pursuant to Section 355 of the Internal Revenue Code of 1986, as
amended (the "Code");
WHEREAS, prior to the Distribution, ITGI will declare and, subject to the
approval and adoption of the Merger Agreement and the Merger by the stockholders
of JEFG and ITGI and the satisfaction or waiver of all other conditions to the
Merger as set forth in the Merger Agreement, pay a cash dividend in an amount
equal to $4.00 per share to all holders of ITGI Common Stock, including JEFG
(the "SPECIAL ITGI CASH DIVIDEND");
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NOW, THEREFORE, in consideration of the foregoing premises and the mutual
agreements and covenants contained in this Agreement, the parties hereby agree
as follows:
ARTICLE I
DEFINITIONS
Section 1.01. DEFINITIONS. Capitalized terms used herein without
definition have the meanings given to them in the Distribution Agreement. As
used herein, the following terms have the following meanings:
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"HOLDING EMPLOYEE" means (i) any person who was an employee immediately
prior to the Effective Time of any member of the JEFG Group (other than any
member of the ITGI Group), including any such employee who is absent from work
at the Effective Time on account of sick leave, short-term or long-term
disability or leave of absence, but excluding any such employee designated by
Holding and ITGI as remaining an employee of a member of the JEFG Group
following the Effective Time; (ii) any employee of any member of the Holding
Group (whether before or after the Effective Time); and (iii) any former
employee of any member of the JEFG Group (other than any member of the ITGI
Group).
"HOLDING GROUP" means Holding and its subsidiaries.
"ITGI GROUP" means ITGI and its subsidiaries.
"JEFG EMPLOYEE" means (i) any employee of any member of the ITGI Group,
including any such employee who is absent from work on account of sick leave,
short-term or long-term disability or leave of absence; (ii) any person who was
an employee immediately prior to the Effective Time of any other member of the
JEFG Group and who is designated by Holding and ITGI as remaining an employee of
a member of the JEFG Group following the Effective Time; and (iii) any former
employee of any member of the ITGI Group.
"JEFG GROUP" means JEFG and its subsidiaries, excluding any member of the
Holding Group.
ARTICLE II
EMPLOYEES AND ALLOCATION OF LIABILITIES
Section 2.01. ALLOCATION OF EMPLOYEE LIABILITIES.
(a) As of the Effective Time, Holding shall assume, retain and be liable for
all wages, salaries, welfare, pension, incentive compensation and other
employee-related liabilities and obligations ("Employee Liabilities") with
respect to Holding Employees, except as specifically provided otherwise in this
Agreement. JEFG shall assume, retain and be liable for Employee Liabilities with
respect to JEFG Employees, except as specifically provided otherwise in this
Agreement.
Section 2.02. OFFER OF EMPLOYMENT; BENEFIT PLAN COVERAGE.
(a) Holding shall offer all Holding Employees (other than those described in
clause (iii) of the definition thereof) employment with the Holding Group as of
the Effective Time. As of the Effective Time, all such Holding Employees shall
cease to be employees of the JEFG Group.
(b) Holding Employees shall not continue to be participants in benefit plans
maintained by the JEFG Group on or after the Effective Time and, instead, shall
be eligible to participate in applicable Holding plans, as determined by
Holding, as of the Effective Time. Holding shall treat service of each Holding
Employee with the JEFG Group before the Effective Time as if such service had
been with
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Holding for purposes of determining eligibility to participate, eligibility for
benefits, benefit forms and vesting under plans maintained by Holding.
Section 2.03. ADMINISTRATION. Holding and JEFG shall each make its
appropriate employees and data regarding employee benefit coverage available to
the other at such reasonable times as may be necessary for the proper
administration by the other of any and all matters relating to employee benefits
and worker's compensation claims affecting its employees. Prior to the Effective
Time and for any period of time during which Holding is administering any
employee benefit plans for the benefit of JEFG Employees, ITGI shall continue to
pay to Holding such amounts for administrative services as it was paying for
such purpose as of the date of execution of this Agreement.
ARTICLE III
PROFIT SHARING, EMPLOYEE STOCK OWNERSHIP
AND PENSION PLANS
Section 3.01. PROFIT SHARING PLAN.
(a) As of the Effective Time, the Jefferies Group, Inc. Employees' Profit
Sharing Plan (the "JEFG PSP") shall be transferred to and maintained by, and all
liability relating thereto shall be assumed by, Holding. Prior to the Effective
Time, JEFG will amend the JEFG PSP to fully vest the accounts of all
participants who are active employees on December 31, 1998 as of that date and
to provide for the cessation of further benefit accruals in the plan by JEFG
Employees as of December 31, 1998. JEFG shall reimburse Holding for any
contribution made subsequent to the end of the plan year of the JEFG PSP ending
November 30, 1998 to the extent that such contribution is allocated to JEFG
Employees, including any such contribution allocated to JEFG Employees for the
month of December of 1998. Such reimbursement by JEFG shall be made to Holding
no later than 30 days following the date on which Holding makes the contribution
to the JEFG PSP for the year ending November 30, 1998. Contributions to the JEFG
PSP for the plan year ending November 30, 1998 shall be based on calendar year
1998 combined profits of Holdings and ITGI.
(b) As soon as practical following the date the final contribution for the
plan year ending November 30, 1998 is made to the JEFG PSP, and except as
provided below, assets of the JEFG PSP equal to the aggregate account balances
of the JEFG Employees under the JEFG PSP (including contributions accrued
through December 31, 1998) shall be transferred to, at ITGI's election, (x) a
defined contribution plan and trust (the "ITG PSP") maintained by a member of
the JEFG Group intended to be qualified under Sections 401 and 501 of the Code
and providing for salary reduction contributions pursuant to Section 401(k) of
the Code or (y) the ITGI ESOP (as defined below). The transfer to the ITGI PSP
shall be made in cash or notes evidencing plan loans to JEFG Employees and the
transfer to the ITGI ESOP shall be made in JEFG common stock or Holdings common
stock. Any outstanding balances of plan loans to JEFG Employees shall be
transferred with the underlying accounts. The account balances of the JEFG
Employees shall be valued as of the date immediately preceding the date on which
the transfer is made, which value shall include the earnings, gains and losses,
appreciation and depreciation of the investment funds in which the accounts are
invested through the date immediately preceding the date on which the transfer
is made. Notwithstanding any provision of this Agreement to the contrary,
Holding and the JEFG PSP shall remain responsible for providing any unpaid
benefits accrued under the JEFG PSP for former JEFG Employees who have
outstanding plan loans from the JEFG PSP as of the date of transfer of the
account balances, and neither JEFG nor ITGI shall be responsible for any
administrative expenses relating thereto.
(c) Pending the transfer of assets to the ITG PSP, Holding will administer
the JEFG PSP in accordance with the terms of the plan, ERISA and the Code, and
will make distributions to JEFG Employees on the basis of their employment
status with the JEFG Group. In addition, pending the transfer of assets to the
ITG PSP, JEFG Employees shall have the ability to direct the investment of
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their accounts under the JEFG PSP in the same manner as they had immediately
prior to the Effective Time. Loans from the JEFG PSP to JEFG Employees which are
outstanding during the period from January 1, 1999 through the date of transfer
of assets to the ITG PSP shall be serviced by having ITGI make applicable
payroll deductions which shall be forwarded to Holding, as plan administrator,
for payment to the JEFG PSP. As soon as practicable after the date hereof,
Holding will provide to ITGI a list of such plan loans to JEFG Employees
outstanding as of December 15, 1998, including the outstanding loan balances as
of December 31, 1998 and a list of the remaining scheduled loan repayments for
each such JEFG Employee. Holding and ITGI shall jointly administer the loan
provisions of the JEFG PSP as applied to the JEFG Employees for the period from
January 1, 1999 through the date of transfer of assets to the ITG PSP.
Section 3.02. EMPLOYEE STOCK OWNERSHIP PLAN.
(a) As of the Effective Time, the Jefferies Group, Inc. Employee Stock
Ownership Plan (the "JEFG ESOP") shall be transferred to and maintained by, and
all liability relating thereto shall be assumed by, Holding. Prior to the
Effective Time, JEFG will amend the JEFG ESOP to provide that all participants
who are active employees on December 31, 1998 shall be fully vested in their
accounts as of the Effective Time. Participation in the JEFG ESOP by JEFG
Employees shall continue until the Effective Time.
(b) Following the date of consummation of the Transactions, the parties
hereto currently expect that the Holding Common Stock held by the JEFG ESOP for
the account of JEFG Employees will be exchanged to the extent possible for JEFG
Common Stock held for the account of Holding Employees and that the exchange
will occur within approximately ninety days after the Effective Time. Unless the
parties hereto mutually agree otherwise, the price at which any such exchange
shall occur shall be based upon the average respective closing prices of JEFG
Common Stock and Holding Common Stock for the ten trading days ending on the
date before the day on which the exchange occurs. Any remaining JEFG Common
Stock held in the accounts of Holding Employees shall be sold at such time or
times as is deemed prudent under ERISA and the cash proceeds received from such
sale shall be credited to such accounts.
(c) As soon as practical following the Effective Time, an employee stock
ownership plan and trust (the "ITG ESOP") shall be established by a member of
the JEFG Group intended to be qualified under Sections 401 and 501 of the Code
and assets of the JEFG ESOP equal to the aggregate account balances of the JEFG
Employees under the JEFG ESOP shall be transferred to the ITG ESOP. The transfer
shall be made in cash, Holding Common Stock and JEFG Common Stock according to
the investment of each JEFG Employee's account as of the date on which the
transfer is made. The account balances of the JEFG Employees shall be valued as
of the date on which the transfer is made, which value shall include the
earnings, gains and losses, appreciation and depreciation of the investments in
which the accounts are invested through the date on which the transfer is made.
Pending the transfer of the assets to the ITGI ESOP, Holding will administer the
JEFG ESOP in accordance with the terms of the plan, ERISA and the Code, and will
make distributions to JEFG Employees at such time as their employment might
terminate with the JEFG Group.
Section 3.03. PENSION PLAN. As of the Effective Time, the Jefferies Group,
Inc. Employees Pension Plan (the "JEFG Pension Plan") shall be transferred to
and maintained by, and all liability relating thereto shall be assumed by,
Holding. JEFG Employees shall participate in the JEFG Pension Plan and accrue
benefits under the plan through February 15, 1999. Prior to the Effective Time,
JEFG will amend the JEFG Pension Plan in the manner set forth in Exhibit A.
Holding shall submit the JEFG Pension Plan, as amended as set forth in Exhibit
A, to the Internal Revenue Service for a determination as to its qualification
under Section 401(a) of the Code as soon as possible following the date hereof,
but in no event later than March 15, 1999. As soon as practicable following
receipt by Holding of a favorable determination letter from the Internal Revenue
Service with respect to the
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JEFG Pension Plan, as amended in the manner set forth in Exhibit A and including
the provision for lump sum distributions to JEFG Employees, JEFG Employees shall
be allowed to receive distributions, including lump sum distributions, of their
entire benefit under the JEFG Pension Plan in accordance with the terms of the
JEFG Pension Plan, as amended as set forth in Exhibit A. Following the Effective
Time and the receipt by Holdings of the favorable Internal Revenue Service
determination letter referred to above and approximately two weeks prior the
date benefits are expected to be payable to all JEFG Employees from the JEFG
Pension Plan, JEFG will pay to the JEFG Pension Plan an amount, computed as set
forth below, in order to pay for the underfunding of the JEFG Pension Plan
allocable to JEFG Employees for benefits accrued through December 31, 1998.
First, the lump sum equivalent of all benefits accrued as of January 1, 1999
under the JEFG Pension Plan, as amended as set forth in Exhibit A, will be
calculated for all participants using a discount rate equal to 5.25%, compounded
annually (the GATT interest rate for November, 1998) and the mortality table
described in Rev. Rul. 95-6. The "JEFG Liability Percentage" will then be
determined by dividing the aggregate lump sum value of the accrued benefits, as
so computed as of January 1, 1999, of the JEFG Employees by the total of the
aggregate lump sum value of all such accrued benefits as so computed for all
participants. The amount of the payment which JEFG is required to make to the
JEFG Pension Plan pursuant to this Section 3.03(a) will be the total of the
following: (i) the total benefit due the JEFG Employees, calculated as of the
date of actual distribution (using the GATT interest rate in effect for November
of the plan year immediately prior to the year benefits are actually distributed
and the mortality table described in Rev. Rul. 95-6), less (ii) the actual value
of the assets of the JEFG Pension Plan as of the last day of the month in which
the determination letter referred to above is received from the Internal Revenue
Service (as such value is reported by the trustee of the JEFG Pension Plan)
multiplied by the JEFG Liability Percentage, less (iii) the amount of the
benefits accrued by JEFG Employees between January 1, 1999 and February 15,
1999, determined as set forth in clause (i) above, plus (iv) interest for 30
days on such resulting amount (the clause (i) amount less the amounts of clauses
(ii) and (iii)) at the GATT interest rate in effect at the time of such
calculation. Holding shall administer the payment of such distributions in
accordance with the terms of the JEFG Pension Plan, ERISA and the Code. The
entire accrued benefit under the JEFG Pension Plan of each JEFG Employee who is
actively employed on December 31, 1998 shall be fully vested as of December 31,
1998. In the event the Internal Revenue Service, as a condition to issuing a
favorable determination letter, requires Holding to revise the amendment set
forth in Exhibit A so as to modify the distribution provisions to JEFG
Employees, including any modification that would eliminate the payment of lump
sum distributions to JEFG Employees prior to the time they separate from service
with JEFG, distributions shall be made to JEFG Employees only in accordance with
the JEFG Pension Plan as it may be amended to secure the favorable determination
letter.
Section 3.04. ASSUMPTION OF LIABILITIES UPON TRANSFER OF PLAN ASSETS;
FILINGS.
(a) Effective on the date of the transfer of assets of the JEFG PSP and the
JEFG ESOP to the ITG PSP and/or the ITG ESOP, (i) JEFG and its applicable
benefit plan shall assume all liabilities to pay benefits in connection with the
transferred assets, and (ii) Holding shall have no further liability to pay
benefits with respect to the assets and liabilities that are transferred. On and
after the date of such transfer, the JEFG Group shall have no liability with
respect to Holding's pension, employee stock ownership and profit sharing plans,
and Holding shall have no liability with respect to JEFG's employee stock
ownership and profit sharing plans.
(b) Holding and JEFG shall make the appropriate filings required under the
Code or ERISA in connection with the transfers described in this Article III in
a timely manner. The parties agree that the transfers described in Sections 3.01
and 3.02 shall be made in accordance with Section 414(l) of the Code.
(c) JEFG shall submit to the Internal Revenue Service requests for favorable
determination letters with respect to the tax-qualified status of the ITG PSP,
if adopted, and the ITG ESOP as soon as
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practicable after the Effective Time, and JEFG shall make such amendments to the
plans as may be required by the Internal Revenue Service in order for JEFG to
receive favorable determination letters with respect to the plans.
ARTICLE IV
STOCK OPTION AND OTHER EQUITY-BASED COMPENSATION PLANS
Section 4.01. EMPLOYEE STOCK OPTION PLANS. Holding shall be responsible
for all liabilities relating to stock options granted by JEFG prior to the
Effective Time.
Section 4.02. CAP AND EMPLOYEE STOCK PURCHASE PLANS.
(a) JEFG shall accelerate vesting in the matching contributions to its
Employee Stock Purchase Plan and distribute the JEFG Common Stock in this plan
to participants prior to the Effective Time. Holding shall be responsible for
all liability under the JEFG Employee Stock Purchase Plan.
(b) The disposition of the nonqualified deferred compensation plan of JEFG
(the "Capital Accumulation Plan for Key Employees") shall be as described in the
Unanimous Written Consent of the Board of Directors of JEFG adopted as of
January 13, 1999 (a copy of which is attached as Exhibit B).
ARTICLE V
OTHER EMPLOYEE PLANS
Section 5.01. WELFARE BENEFIT PLANS.
(a) As of the Effective Time, Holding shall assume all liability under
and with respect to all welfare benefit plans maintained by JEFG, including,
without limitation, medical, health, disability, accident, life insurance,
death, dental and other benefit plans or arrangements and such plans shall
be transferred to, and maintained by, Holding. Effective January 1, 1999,
ITGI established welfare benefit plans for eligible JEFG Employees, which
provide medical, health, disability, accident, life insurance, death, dental
or other benefits.
(b) (i) JEFG shall be liable for all employee health (including,
without limitation, medical and dental), life insurance (including, without
limitation, disability waiver of premium claims and any other life insurance
disability claims) and long-term disability claims, and any other welfare
benefit claims, and any expenses related thereto, ("Welfare Claims") that
are incurred on or after January 1, 1999 with respect to JEFG Employees and
their beneficiaries and dependents.
(ii) Holding shall be liable for all Welfare Claims that are incurred
on, after or before the Effective Time with respect to Holding
Employees and their beneficiaries and dependents.
(iii) If either party pays any welfare benefit claims that are a
liability of the other party, the responsible party shall reimburse
the paying party for all such payments.
(c) For purposes of this Section 5.01, a health benefit claim is
incurred when the medical services are rendered, and a life insurance claim
is incurred when the covered person dies. A claim for a hospital admission
shall be deemed to have been incurred on the date of admission to the
hospital and shall continue for the duration of that period of hospital
confinement; costs for all services provided during that period of hospital
confinement shall be included in the claim. A long-term disability claim
shall be deemed to have been incurred on the date the condition causing the
disability rendered the employee disabled, as determined by the committee or
plan administrator making the determination; costs for all long-term
disability benefits relating to the claim shall be included in the claim.
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(d) Holding shall be liable for any health care continuation
obligations under Section 4980B of the Code and Section 601 through 608 of
ERISA with respect to Holding Employees and former Holding Employees and
persons who are "qualified beneficiaries" (as that term is used in Section
4980B of the Code) of such employees.
(e) The Distribution shall not be considered an event entitling any
employee to salary continuation or other severance benefits.
Section 5.02. VACATION PAY AND SIMILAR ITEMS. Holding shall assume or
retain liability for all unpaid vacation pay, sick pay and personal leave
accrued by Holding Employees as of the Effective Time. JEFG shall assume or
retain liability for all unpaid vacation pay, sick pay and personal leave
accrued by JEFG Employees as of the Effective Time.
ARTICLE VI
HOLDING REPRESENTATIONS
Holding represents to JEFG as follows:
Section 6.01. ANNEX A hereto contains a true and complete list of "all
employee benefit plans" as defined in Section 3(3) of ERlSA, and each other
plan, arrangement or policy relating to stock options, stock purchases,
compensation, deferred compensation, severance, fringe benefits and other
employee benefits which are maintained or contributed to by any member of the
JEFG Group or as to which any member of the JEFG Group has any direct or
indirect, actual or contingent liability, other than plans, arrangements or
policies maintained by the ITGI Group (such JEFG Group plans, arrangements and
policies, the "Benefit Plans"), and copies of such plans, arrangements, policies
and related relevant materials have been made available to ITGI.
Section 6.02. No member of the Holding Group or JEFG Group has incurred,
or is reasonably likely to incur, any material liability under Title IV of ERISA
(other than for PBGC insurance premiums, all of which have been paid when due).
All contributions to any "employee benefit plan" (as defined in Section 3(3) of
ERISA) required to be made by any member of the JEFG Group or the Holding Group
in accordance with the terms of such plan and, when applicable, Section 302 of
ERISA or Section 412 if the Code, have been timely made.
Section 6.03. Each member of the JEFG Group and each Benefit Plan are in
compliance in all material respects with the applicable provisions of ERISA and
the Code. Each Benefit Plan intended to qualify under Section 401 of the Code is
so qualified. With respect to all Benefit Plans, there are no audits,
investigations or claims pending or, to the knowledge of Holding, threatened
(other than routine claims for benefits). There have been no nonexempt
prohibited transactions under the Code or ERISA with respect to any Benefit
Plans. With respect to all Benefit Plans that are welfare plans (as defined in
ERISA Section 3(1)), such plans have complied in all material respects with the
COBRA continuation coverage requirements of Code Section 4980B. No member of the
JEFG Group has any liability with respect to any plans providing benefits with
respect to employees employed outside the United States.
Section 6.04. The consummation of the transactions contemplated by the
Distribution Agreement and this Agreement will not result in JEFG being liable
to any individual for severance pay.
ARTICLE VII
INDEMNIFICATION
Section 7.01. HOLDING INDEMNIFICATION OF THE JEFG GROUP. On or after the
Effective Time, Holding shall indemnify, defend and hold harmless each member of
the JEFG Group, and each of their respective directors, officers, employees and
agents (the "JEFG Indemnitees") from and against any and all claims, costs,
damages, losses, liabilities and expenses (including, without limitation,
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reasonable expenses of investigation and reasonable attorneys fees and expenses
in connection with any and all Actions or threatened Actions) (collectively,
"Indemnifiable Losses") incurred or suffered by any of the JEFG Indemnitees and
arising out of, or due to or otherwise in connection with (x) any of the
employee benefit liabilities and obligations assumed or retained by Holding
pursuant to this Agreement or (y) the failure of Holding or any member of the
Holding Group to pay, perform or otherwise discharge, any of the employee
benefit liabilities and obligations assumed or retained, and representations and
agreements made, by Holding pursuant to this Agreement.
Section 7.02. JEFG INDEMNIFICATION OF HOLDING. On and after the Effective
Time, JEFG shall indemnify, defend and hold harmless Holding, and each of its
respective directors, officers, employees and agents (the "Holding Indemnitees")
from and against any and all Indemnifiable Losses incurred or suffered by any of
the Holding Indemnitees and arising out of, or due to or otherwise in connection
with (x) any of the employee benefit liabilities and obligations assumed or
retained by JEFG pursuant to the Agreement or (y) the failure of JEFG or any
member of the JEFG Group to pay, perform or otherwise discharge, any of the
employee benefit liabilities and obligations assumed or retained, and agreements
made, by JEFG pursuant to this Agreement.
Section 7.03. INSURANCE AND THIRD PARTY OBLIGATIONS. No insurer or any
other third party shall be (a) entitled to a benefit it would not be entitled to
receive in the absence of the foregoing indemnification provisions, (b) relieved
of the responsibility to pay any claims to which it is obligated or (c) entitled
to any subrogation rights with respect to any obligation hereunder.
ARTICLE VIII
INDEMNIFICATION PROCEDURES
Section 8.01. NOTICE AND PAYMENT OF CLAIMS. If any JEFG or Holding
Indemnitee (the Indemnified Party") determines that it is or may be entitled to
indemnification by a party (the "Indemnifying Party") under Article VII (other
than in connection with any Action or claim subject to Section 8.02), the
Indemnified Party shall deliver to the Indemnifying Party a written notice
specifying, to the extent reasonably practicable, the basis for its claim for
indemnification and the amount for which the Indemnified Party reasonably
believes it is entitled to be indemnified. After the Indemnifying Party shall
been notified of the amount for which the Indemnified Party seeks
indemnification, the Indemnifying Party shall, within 90 days after receipt of
such notice, pay the Indemnified Party such amount in cash or other immediately
available funds (or reach agreement with the Indemnified Party as to a mutually
agreeable alternative payment schedule) unless the Indemnifying Party objects to
the claim for indemnification or the amount thereof. If the Indemnifying Party
does not give the Indemnified Party written notice objecting to such claim and
setting forth the grounds therefor within the same 90 day period, the
Indemnifying Party shall be deemed to have acknowledged its liability for such
claim and the Indemnified Party may exercise any and all of its rights under
applicable law to collect such amount.
Section 8.02. NOTICE AND DEFENSE OF THIRD-PARTY CLAIMS. Promptly following
the earlier of (a) receipt of notice of the commencement by a third party of any
Action against or otherwise involving any Indemnified Party or (b) receipt of
information from a third party alleging the existence of a claim against an
Indemnified Party, in either case, with respect to which indemnification may be
sought pursuant to this Agreement (a "Third-Party Claim"), the Indemnified Party
shall give the Indemnifying Party written notice thereof. The failure of the
Indemnified Party to give notice as provided in this Section 8.02 shall not
relieve the Indemnifying Party of its obligations under this Agreement, except
to the extent that the Indemnifying Party is prejudiced by such failure to give
notice. Within 90 days after receipt of such notice, the Indemnifying Party may
(a) by giving written notice thereof to the Indemnified Party, acknowledge
liability for and at its option elect to assume the defense of such Third-Party
Claim at its sole cost and expense or (b) object to the claim of indemnification
set forth in
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the notice delivered by the Indemnified Party pursuant to the first sentence of
this Section 8.02; provided that if the Indemnifying Party does not within the
same 90 day period give the Indemnified Party written notice objecting to such
claim and setting forth the grounds therefor or electing to assume the defense,
the Indemnifying Party shall be deemed to have acknowledged, as between the
parties hereto, its liability for such Third-Party Claim. Any contest of a Third
Party Claim as to which the Indemnifying Party has elected to assume the defense
shall be conducted by attorneys employed by the Indemnifying Party and
reasonably satisfactory to the Indemnified Party; provided that the Indemnified
Party shall have the right to participate in such proceedings and to be
represented by attorneys of its own choosing at the Indemnified Party's sole
cost and expense. Notwithstanding the foregoing, (i) the Indemnifying Party
shall not be entitled to assume the defense of any Third-Party Claim (and shall
be liable to the Indemnified Party for the reasonable fees and expenses incurred
by the Indemnified Party in defending such Third-Party Claim) if there are one
or more legal defenses available only to the Indemnified Party that conflict, in
one or more significant substantive respects, with those available to the
Indemnifying Party with respect to such Third-Party Claim and (ii) if at any
time after assuming the defense of a Third-Party Claim an Indemnifying Party
shall fail to prosecute or shall withdraw from the defense of such Third-Party
Claim, the Indemnified Party shall be entitled to resume the defense thereof
with counsel selected by such Indemnified Party and the Indemnifying Party shall
be liable for the reasonable fees and expenses of counsel incurred by the
Indemnified Party in such defense. The Indemnifying Party may settle, compromise
or discharge a Third-Party Claim, provided, the Indemnifying Party shall have
obtained the prior written consent of the Indemnified Party, which consent shall
not be unreasonably withheld. If, after receipt of notice of a Third-Party
Claim, the Indemnifying Party does not undertake to defend such Third-Party
Claim within 90 days of such notice, the Indemnified Party may, but shall have
no obligation to, contest any lawsuit or action with respect to such Third-Party
Claim and the Indemnifying Party shall be bound by the results obtained with
respect thereto by the Indemnified Party. Indemnification shall be made by
periodic payments of the amount thereof during the course of the investigation
or defense, as and when bills are received or Indemnifiable Loss is incurred.
The parties agree to render to each other such assistance as may reasonably be
requested in order to ensure the proper and adequate defense of any Third-Party
Claim. The remedies provided in this Article VIII shall be cumulative and shall
not preclude assertion by any Indemnified Party of any other rights or the
seeking of any and all other remedies against any Indemnifying Party.
Section 8.03. CONTRIBUTION. To the extent that any indemnification
provided for in Section 7.01 or 7.02 is unavailable to an Indemnified Party or
is insufficient in respect of any of the Indemnifiable Losses of such
Indemnified Party, then the Indemnifying Party, in lieu of, or in addition to,
indemnifying such Indemnified Party hereunder, shall contribute to the amount
paid or payable by such Indemnified Party as a result of such Indemnifiable
Losses (i) in such proportion as is appropriate to reflect the relative benefits
received by such Indemnifying Party on the one hand and the Indemnified Party on
the other hand from the transaction or other matter which resulted in the
Indemnifiable Losses or (ii) if the allocation provided by clause (i) above is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) but also the relative
fault of the Indemnifying Party on the one hand and of the Indemnified Party on
the other hand in connection with the action, inaction, statements or omissions
that resulted from such Indemnifiable Losses as well as any other relevant
equitable considerations.
ARTICLE IX
MISCELLANEOUS
Section 9.01. NOTICES. All notices and communications under this Agreement
shall be in writing and any communication or delivery hereunder shall be deemed
to have been duly given when received
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addressed as follows:If to JEFG, to:
Investment Technology Group, Inc.
380 Madison Avenue, 4th Floor
New York, New York 10017
Attention: Chief Financial Officer
With a copy to:
Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005
Attention: Immanuel Kohn, Esq.
If to Holding, to:
Jefferies Group, Inc.
JEF Holding Company, Inc.
11100 Santa Monica Boulevard, 11th Floor
Los Angeles, California 90025
Attention: Chief Financial Officer
With a copy to:
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103
Attention: Brian J. Lynch, Esq.
Such notices shall be deemed received (i) as of the date of delivery by hand
delivery, (ii) one business day after such notice is given to a national
overnight delivery service or (iii) five business days after placed in the
United States mail, provided such mail is sent by certified mail with return
receipt requested. Either party may, by written notice so delivered to the other
party, change the address to which delivery of any notice shall thereafter be
made.
Section 9.02. AMENDMENT AND WAIVER. This Agreement may not be altered or
amended, nor may rights hereunder be waived, except by an instrument in writing
executed by the party or parties to be charged with such amendment or waiver and
by ITGI. No waiver of any terms, provision or condition of or failure to
exercise or delay in exercising any rights or remedies under this Agreement, in
any one or more instances, shall be deemed to be, or construed as, a further or
continuing waiver of any such term, provision, condition, right or remedy or as
a waiver of any other term, provision or condition of this Agreement.
Section 9.03. ENTIRE AGREEMENT. This Agreement, together with the
Distribution Agreement, constitutes the entire understanding of the parties
hereto with respect to the subject matter hereof, superseding all negotiations,
prior discussions and prior agreements and understandings relating to such
subject matter. To the extent that the provisions of this Agreement are
inconsistent with the provisions of the Distribution Agreement, the provisions
of this Agreement shall prevail.
Section 9.04. PARTIES IN INTEREST. Neither of the parties hereto may
assign its rights or delegate any of its duties under this Agreement without the
prior written consent of each other party and of ITGI. This Agreement shall be
binding upon, and shall inure to the benefit of, the parties hereto and
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their respective successors and permitted assigns. Nothing contained in this
Agreement, express or implied, is intended to confer any benefits, rights or
remedies upon any person or entity other than members of the JEFG Group and
Holding, and the JEFG Indemnitees and Holding Indemnitees and their respective
successors and assigns under Articles VII and VIII hereof.
Section 9.05. FURTHER ASSURANCES AND CONSENTS. In addition to the actions
specifically provided for elsewhere in this Agreement, each of the parties
hereto will use its reasonable efforts to (i) execute and deliver such further
instruments and documents and take such other actions as any other party may
reasonably request in order to effectuate the purposes of this Agreement and to
carry out the terms hereof and (ii) take, or cause to be taken, all actions, and
to do, or cause to be done, all things, reasonably necessary, proper or
advisable under applicable laws, regulations and agreements or otherwise to
consummate and make effective the transactions contemplated by this Agreement,
including, without limitation, using its reasonable efforts to obtain any
consents and approvals and to make any filings and applications necessary or
desirable in order to consummate the transactions contemplated by this
Agreement.
Section 9.06. SEVERABILITY. The provisions of this Agreement are severable
and should any provision hereof be void, voidable or unenforceable under any
applicable law, such provision shall not affect or invalidate any other
provision of this Agreement, which shall continue to govern the relative rights
and duties of the parties as though such void, voidable or unenforceable
provision were not part hereof.
Section 9.07. EXPRESS THIRD-PARTY BENEFICIARY. Prior to the Merger, ITGI
is an express third party beneficiary of this Agreement and shall be entitled to
enforce the provisions hereof as if a party hereto.
Section 9.08. GOVERNING LAW. This Agreement shall be construed in
accordance with, and governed by, the laws of the State of New York, without
regard to the conflicts of law rules of such state.
Section 9.09. COUNTERPARTS. This Agreement may be executed in one or more
counterparts each of which shall be deemed an original instrument, but all of
which together shall constitute but one and the same Agreement.
Section 9.10. DISPUTES. Resolution of any and all disputes arising from or
in connection with this Agreement, whether based on contract, tort, statute or
otherwise, including, but not limited to, disputes in connection with claims by
third parties shall be exclusively governed by and settled in accordance with
provisions identical to those set forth in Section 11.10 of the Distribution
Agreement, which Section is hereby incorporated by this reference.
Section 9.11. Holding will provide to ITGI, as soon as practicable
following its request, any information reasonably needed by ITGI relating to any
of the employee benefit plans referred to in this Agreement. In addition, as
soon as practicable following the Effective Time Holding will provide to ITGI
copies of all domestic relations orders received with respect to JEFG Employees
in connection with the JEFG ESOP, the JEFG PSP and the JEFG Pension Plan.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
JEFFERIES GROUP, INC.
BY /s/ Clarence T. Schmitz
--------------------------------------
Clarence T. Schmitz, Executive
Vice President and CFO
JEF HOLDING COMPANY, INC.
BY /s/ Jerry M. Gluck
--------------------------------------
Jerry M. Gluck, Secretary and
General Counsel
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FULLY DISCLOSED CLEARING AGREEMENT
This Agreement, made this 1st day of January, 1999, between JEFFERIES & COMPANY,
INC. (the "Clearing Broker") and ITG INC. (the "Introducing Broker"), sets forth
the terms and conditions under which the Clearing Broker will provide execution
and clearing services, on a fully disclosed basis, for certain customer and
proprietary accounts of the Introducing Broker.
I. SERVICES TO BE PROVIDED BY THE CLEARING BROKER
A. Subject to the terms and conditions of this Agreement and to the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended (the "1934 Act"), the Investment Advisers Act of 1940, as amended, the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
Government Securities Act of 1986, as amended, or any rules or regulations
thereunder, and to any other applicable law, rule or regulation, federal, state
or local, including the rules of the Board of Governors of the Federal Reserve
System, and to any applicable constitution, by-law, rule, regulation, or stated
policy or practice of any securities exchange or nation or other regulatory or
self-regulatory body or agency (collectively, the "Laws and Regulations"), the
Clearing Broker will provide the following services to the Introducing Broker:
1. The Clearing Broker will provide trade clearance of executions
for such customers or proprietary accounts of the Introducing Broker as have
been accepted by the Clearing Broker, but only insofar as such executions are
transmitted by the Introducing Broker or its authorized agents to the Clearing
Broker. Authorized modes of transmission shall include electronic host-to-host,
facsimile, e-mail and authorized telephonic instructions, but only as such modes
of transmission are mutually agreed upon by Clearing Broker and Introducing
Broker with respect to particular Customers (as defined herein). These accounts,
including any syndicate account for any underwriting of which the Introducing
Broker is manager, are hereinafter referred to as the "Introduced Accounts" and
the beneficial owners thereof (except for Introduced Accounts that are
proprietary accounts of the Introducing Broker) are hereinafter referred to as
the "Customers."
2. The Clearing Broker will prepare and mail, telex or fax, as
requested, confirmations and notices, and will prepare and mail monthly
statements (or quarterly statements if no activity in any Introduced Account
occurs during any quarter covered by such statement) directly to every
Introduced Account on the Clearing Broker's forms for such purposes.
3. Unless otherwise agreed, the Clearing Broker will supply the
Introducing Broker on each business day with copies of Customer confirmations,
money lines, and daily commission detail reports and such other reports that the
Clearing Broker has been providing Introducing Broker in the ordinary course of
business. In addition to the foregoing, Clearing Broker will provide Introducing
Broker with and Reference Data (as defined herein) which Clearing Broker has
been providing Introducing Broker, PROVIDED, HOWEVER, that Clearing Broker may
cease providing the Reference Data or make changes to the types of reference
data it provides in the event that Clearing Broker is not allowed by a
third-party provider of information to provide the information to a
non-affiliate or changes the types of reference data which it receives. For
purposes of this Section, the term "Reference Data"
<PAGE>
means the name and address of the Customer and Institution, and security master
data. Unless the Introducing Broker notifies the Clearing Broker within a
reasonable time (and for the purposes hereof, a period of one (1) business day
after receipt of such information shall be a reasonable time) of mistakes or
discrepancies in the above-described reports and information, the Clearing
Broker shall be entitled to consider all such information supplied to the
Introducing Broker to be correct.
4. The Clearing Broker will settle contracts and transactions in
securities (including options to buy or sell securities) (i) between the
Introducing Broker and other brokers and dealers, (ii) between the Introducing
Broker and the Introduced Accounts of Customers, and (iii) between the
Introducing Broker and persons other than Customers or other brokers and
dealers.
5. The Clearing Broker will collect and pay SEC fees on behalf of
the Introducing Broker.
6. The Clearing Broker will engage in all cashiering functions for
the Introduced Accounts, including the receipt, delivery, borrowing, lending and
transfer of securities, the making and receipt of payments therefor, the custody
and safeguarding of securities and payments so received, the handling of margin
accounts, the receipt and distribution of dividends and other distributions, the
processing of exchange offers, rights offerings, warrants, tender offers, and
redemptions, and such other functions as may be agreed upon by the parties;
provided, however, that if mutually agreed to by the Introducing Broker and the
Clearing Broker, cashiering functions with respect to receipt of cash and
securities may be performed directly by the Introducing Broker.
7. The Clearing Broker will establish and maintain all prescribed
books and records of transactions executed or cleared through it that are not
specifically assigned to the Introducing Broker pursuant to the terms of this
Agreement, including a stock record, and a daily record of required margin, or
by the constitution, by-laws, rules, regulations, or stated policies or
practices of the National Association of Securities Dealers, Inc. ("NASD") or
any other securities exchange of which the Clearing Broker is a member (the
"Standards").
B. The Clearing Broker shall not provide to the Introducing Broker any
services that are not specifically set forth in this Agreement, including, but
not limited to, the following:
1. Clearing, execution, accounting, bookkeeping or cashiering, or
any other services with respect to commodities transactions, including contracts
for future delivery of commodities and options on such contracts or on
commodities, or any other transactions not involving securities;
2. Preparation of the Introducing Broker's payroll records,
financial statements or any analysis or review thereof or any recommendations
relating thereto:
3. Preparation or issuance of checks in payment of the
Introducing Broker's expenses, other than expenses incurred by the Clearing
Broker on behalf of the Introducing Broker pursuant to this Agreement;
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4. Payment of commission, salaries, or other remuneration to the
Introducing Broker's employees;
5. Preparation and filing of reports with the Securities and
Exchange Commission (the "SEC"), any state securities commission, any National
Securities Exchange, or other securities exchange, the NASD or any other
securities association or other regulatory or self-regulatory body or agency
with which the Introducing Broker or any Introduced Account is associated or by
which it is regulated, including compliance with any applicable reporting,
disclosure or requirements of ERISA in respect of transactions for Introduced
Accounts; provided, however, that (a) the Clearing Broker shall at the request
of the Introducing Broker, promptly cooperate in providing the Introducing
Broker with any necessary information and data contained in records kept by the
Clearing Broker and not otherwise available to the Introducing Broker for use in
Introducing Broker's preparation of such reports, and (b) the Introducing Broker
shall be responsible for all costs incurred by the Clearing Broker in connection
with the preparation and provision of such information.
6. Making and maintaining reports and records required to be kept by
the Introducing Broker by the Currency and Foreign Transactions Reporting Act of
1970 and the regulations promulgated pursuant thereto, or any similar law or
regulations enacted or adopted hereafter;
7. Verification of the address changes of any Introduced Account;
8. Obtaining, verifying, and interpreting account information, and
insuring that such information meets the requirements of any "know your customer
rule" of the Rules, the Standards and any other Laws and Regulations;
9. Maintaining records of personal and financial information
concerning any Introduced Account and orders received therefor, and maintaining
all documents and agreements executed by any Introduced Account (other than
those ordinarily maintained by the Clearing Broker);
10. Holding for safekeeping the securities of any Introduced
Account registered in the name of the Customer;
11. Accepting deposits from the Introducing Broker in the form of
cash; or
12. Verification of changes in the identity or address of any person
holding any power of attorney over any Introduced Account.
C. The Clearing Broker shall limit its services pursuant to the terms
of this Agreement to that of clearing functions and the related services
expressly set forth herein. Neither this Agreement nor any operation hereunder
shall create a general or limited partnership, association, joint venture,
branch, or agency relationship between the Introducing Broker and the Clearing
Broker.
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D. The Clearing Broker will not be bound to make any investigation into
the facts surrounding any transaction that it may have with the Introducing
Broker on a principal or agency basis or that the Introducing Broker may have
with its Customers or other persons, nor will the Clearing Broker be under any
responsibility for compliance by the Introducing Broker with any Rules,
Standards or laws and Regulations that may be applicable to the Introducing
Broker or any Introduced Account.
E. The Clearing Broker shall use reasonable efforts to implement a plan
of contingency recovery and testing by June 30, 2000.
II. CLEARING FEES, INTEREST CHARGES, AND COMMISSIONS
A. The Introducing Broker agrees to pay the Clearing Broker for its
services pursuant to this Agreement such amounts as are set forth in Schedule A.
Said compensation schedules may be changed from time to time as may be agreed to
in writing by the Introducing Broker and the Clearing Broker. The Clearing
Broker will remit to the Introducing Broker 88% of the Introducing Broker's
weekly gross commission revenue based on trade date sent on the second business
day of the following week. Within twelve (12) business days after the trade
month end, the Clearing Broker will remit to the Introducing Broker the net
trade month commission balance (gross commissions, less weekly remittances,
service and clearing amounts, and other charges, including amounts due the
Clearing Broker by the Introducing Broker arising from any losses, liabilities,
or damages in accordance with the terms of this Agreement). All remittances
shall be made by the Clearing Broker to the Introducing Broker by wire transfer
of immediately available funds.
In the event that the Introducing Broker defaults (as defined in
Article X below), the Clearing Broker shall have the right to offset any and all
liabilities, costs, or expenses due it from the Introducing Broker that remain
unpaid as of the date of such Event of Default against commission revenue due
the Introducing Broker, the Clearing Deposit, or any other assets of the
Introducing Broker then in the possession of the Clearing Broker.
B. In the event that the monthly compensation otherwise payable to the
Clearing Broker for its services hereunder is not greater than $10,000 in any
calendar month, the Clearing Broker may deduct from the commission revenue due
the Introducing Broker and/or from the Collateral Account, an amount equal to
the difference between (i) $10,000, and (ii) the amount of fees mutually agreed
upon by the Clearing Broker and the Introducing Broker.
C. Interest income earned through charges on debit balances in any
Introduced Account shall be proprietary to and fully retained by the Clearing
Broker. Interest paid or credit given for any credit balances which from time to
time may be left on deposit with the Clearing Broker shall be at the discretion
of the Clearing Broker unless otherwise specified by Schedule A attached hereto.
D. It is expressly understood and agreed that the Clearing Broker may
not and will not exercise any control whatsoever over or influence in any way,
the commissions, mark-ups, or other charges or expenses between the Introducing
Broker and the Introduced Accounts. The Clearing Broker
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shall charge each of the Introduced Accounts such commissions, mark-ups,
charges, and expenses as the Introducing Broker directs, in writing; provided,
however, that such commissions, mark-ups, charges, and expenses shall be
implemented (i) only to the extent they are within the usual and normal
capabilities of the Clearing Broker's data processing and operations systems,
and (ii) only after such reasonable time as the Clearing Broker may deem
necessary to avoid disruption of its normal operating capabilities. Further, the
Introducing Broker shall be responsible for all costs, if any, associated with
any modifications to the Clearing Broker's systems and procedures which may be
necessary to accommodate the Introducing Broker.
III. PROCEDURES FOR INTRODUCED ACCOUNTS
A. At the time of the opening of each Introduced Account, the
Introducing Broker shall supply to the Clearing Broker a new account form on
such forms as the Clearing Broker will supply to the Introducing Broker (unless
otherwise mutually agreed by the parties) and shall supply any other additional
orsupplementary documentation or information that the Clearing Broker may in its
sole discretion request the Introducing Broker to obtain from the Customer,
including, but not limited to, a cash account agreement on a form approved by
the Clearing Broker ("Cash Account Agreement"), and all other documents that the
Clearing Broker initially supplied to the Customer. If applicable, the
Introducing Broker shall furnish the Clearing Broker with appropriate Alert
and/or SID references for the Customer and the Clearing Broker will update such
information when updates are received from Alert and/or SID. At the time of the
opening of Introduced Accounts that are margin accounts, the Introducing Broker
shall furnish the Clearing Broker with executed customer agreements,
hypothecation and rehypothecation agreements, and consents to loans of
securities on forms to be provided by the clearing broker (collectively, the
"Margin Agreement"). If any Introduced Account has been opened without the
Clearing Broker having previously received the foregoing information or
documents, failure of the Clearing Broker to receive such information or
documents shall not be deemed to be a waiver of the information or documentation
requirements set forth herein. With respect to each Introduced Account that is a
proprietary account, an executed Margin Agreement shall be furnished to the
Clearing Broker. In addition, the terms of such Cash Account Agreement or Margin
Agreement, as amended from time to time, are incorporated by reference herein.
Upon the request of the Clearing Broker, the Introducing Broker shall furnish
the Clearing Broker with any other additional or supplementary documents and
agreements executed by the Introduced Account on forms supplied by the Clearing
Broker that the Clearing Broker may require in connection with the opening,
operating or maintaining of Introduced Accounts. The Clearing Broker may, at its
option, mail Cash Account Agreements, Margin Agreements or other documentation
directly to the Introduced Accounts upon notification by the Introducing Broker.
The Introducing Broker shall promptly provide the Clearing Broker with basic
data and copies of documents relating to each of the Introduced Accounts,
including, but not limited to, copies of records of any receipts of the
Introduced Accounts' funds or securities received directly by the Introducing
Broker, as shall be necessary for the Clearing Broker to discharge its service
obligations hereunder. The Clearing Broker shall provide, upon request, any
documentation and agreements related to the opening and maintenance of any
Introduced Accounts.
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B. If the documents necessary to comply with the account documentation
requirements of the Rules, Standards and Laws and Regulations have not been
received by the Clearing Broker after request has been made therefor, the
Clearing Broker shall give the Introducing Broker notification that no orders
will be accepted (other than liquidating orders) for the Introduced Account
involved. If orders are placed for such account after this notice is given, no
commission credit will be granted on such orders. On receipt of the necessary
documents, this restriction will be lifted with respect to future commissions,
but any commissions withheld will not be credited or paid. This Agreement is not
in any way intended to limit the responsibility of the Clearing Broker under the
Rules, Standards, Laws and Regulations with respect to Introduced Accounts.
Further, acceptance of an order after notification has been given shall not
constitute a waiver of the Clearing Broker's right to reject any trade.
C. All transactions in any Introduced Account are to be considered cash
transactions until such time as the Clearing Broker has received and accepted
Margin Agreements, duly and validly executed in respect of such Introduced
Account.
D. At the time of the opening of any agency Introduced Account, the
Introducing Broker shall furnish the Clearing Broker with the name of any
principal for whom the agent is acting and written evidence of the agent's
authority.
E. The Introducing Broker shall be solely and exclusively responsible
for approval of all accounts and transactions therein and all similar applicable
Rules, Standards, Laws and Regulations and shall specifically approve the
opening of any new account before forwarding such account to the Clearing Broker
as a potential Introduced Account.
F. The Clearing Broker reserves the right to reject any account that
the Introducing Broker may tender to the Clearing Broker as a potential
Introduced Account. The Clearing Broker also reserves the right to terminate any
account previously accepted by it as an Introduced Account.
G. The Introducing Broker shall be solely and exclusively responsible
for ensuring that its Customers shall not be minors or subject to those
prohibitions existing under the Rules, Standards, Laws and Regulations generally
relating to the incapacity of any Introduced Account or any conflict of interest
relating to such Introduced Account.
H. With respect to Introduced Accounts that are margin accounts, the
Clearing Broker is responsible for compliance with Regulation T, 12 C.F.R. Part
220, promulgated by the Board of Governors of the Federal Reserve System (the
"Board"), and any interpretive ruling issued by the Board, and the letter
rulings of the Federal Reserve Bank of New York, Rules and interpretations of
the NASD and any other applicable margin and margin maintenance requirements of
the Rules, Standards, Laws and Regulations. The Introducing Broker is
responsible to the Clearing Broker for the collection of the margin required to
support each transaction for, and to maintain margin in, each Introduced
Account, in conformity with the above margin and margin maintenance
requirements. After such initial margin on each transaction has been received,
maintenance margin calls shall be generated by the Clearing Broker and made by
the Clearing Broker or by the Introducing Broker at the instructions of
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the Clearing Broker. The Clearing Broker shall have the absolute right to
modify, in its sole discretion, the margin requirements for any Introduced
Account or any security position from time to time so that the Clearing Broker
may call for additional margin and shall have sole discretion as to the amount
of margin to be required of and maintained by Introduced Accounts.
I. The Introducing Broker shall be solely and exclusively responsible
for the payment and delivery of all "when issued" or "when distributed"
transactions that the Clearing Broker may accept, forward, or execute for
Introduced Accounts.
J. The Introducing Broker agrees that all Customers of the Introducing
Broker who engage in DVP transactions (and their agents) will utilize the
facilities of a securities depository for the confirmation, acknowledgment, and
book entry settlement of all depository eligible transactions, subject to the
exceptions to Rules or Standards pertaining to "COD" or "DVP" transactions.
K. To facilitate the keeping of records by the Clearing Broker, the
Introducing Broker shall turn over promptly to the Clearing Broker any and all
payments and securities that the Introducing Broker receives from Customers.
Concurrently with the delivery of such payments or securities to the Introducing
Broker, it shall furnish the Clearing Broker with such information as may be
relevant or necessary to enable the Clearing Broker to record promptly and
properly such payments and securities in the respective Introduced Accounts.
L. On all Over-the-Counter transactions for Introduced Accounts, the
Introducing Broker shall furnish the Clearing Broker with the names of the
respective purchasing and selling broker-dealers (except as otherwise provided
below), the names of the purchasing and selling Customers, and the wholesale and
retail purchase and sale prices. When the selection of the contra broker in an
Over-the-Counter transaction is left to the Clearing Broker's discretion, the
Clearing Broker will assume responsibility for any failure to pay by the contra
broker. When the Introducing Broker executes its own Over-the-Counter order or
designates the contra broker, in the event that the Over-the-Counter contra
broker fails to perform its part of the transaction, the Introducing Broker will
reimburse the Clearing Broker for any loss sustained thereby. The Clearing
Broker reserves the right at any time to limit the size of transactions that the
Clearing Broker will accept for clearance in these circumstances. The Clearing
Broker will give the Introducing Broker reasonable notice (i.e., at least 10
days' notice in most circumstances, 30 days' notice for Credit Committee
limitations and whatever notice is possible in the event of regulatory or
self-regulatory limitations) of such limitations. If, after the Introducing
Broker has received notice of such limitation (whether notice was reasonable or
not), the Introducing Broker executes an order in excess of the limit
established by the Clearing Broker, the Clearing Broker shall have the right to
notify the other party and other dealer that it will not accept the transaction
for clearance and settlement.
M. The Introducing Broker shall be solely and exclusively responsible
for approving all orders for the Introduced Accounts and for establishing
procedures to ensure that such approved orders are transmitted properly to the
Clearing Broker for execution. The Clearing Broker reserves the right
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to reject any order that the Introducing Broker may transmit to the Clearing
Broker for execution or clearance.
N. The Introducing Broker shall be solely and exclusively responsible
for the supervisory review of all orders for the Introduced Accounts and shall
ensure that any orders and instructions given by it or any of its employees to
the Clearing Broker pursuant to the terms of this Agreement shall have been
properly authorized in advance.
O. The Introducing Broker shall be solely and exclusively responsible
for making every reasonable effort to ascertain the essential facts relative to
any Introduced Account and any order therefor, in compliance with "know your
customer" provisions of the Rules or the Standards, including but not otherwise
limited to ascertaining the authority of all orders for Introduced Accounts, and
the genuineness of all certificates, papers, and signatures provided by each
Introduced Account. Any investment advice furnished to an Introduced Account
shall be the sole and exclusive responsibility of the Introducing Broker.
P. The Introducing Broker shall be solely and exclusively responsible
for review of all Introduced Accounts and for compliance with any supervisory
responsibility with respect to the accounts introduced under this Agreement,
including but not otherwise limited to matters involving the investment
objectives of the Introduced Accounts, the suitability of the investments made
by the Introduced Accounts, the reasonable basis for recommendations made to
Introduced Accounts, and the frequency of trading in the Introduced Accounts,
whether or not such transactions are instituted by the Introducing Broker, its
partners, officers, employees or any registered investment adviser.
Q. The Introducing Broker shall be solely and exclusively responsible
for the handling and supervisory review of any Introduced Accounts over which
the Introducing Broker's partners, officers or employees have discretionary
authority, and any interpretations thereof and any other applicable Rules,
Standards, Laws and Regulations. The Introducing Broker shall furnish the
Clearing Broker with such documentation with respect thereto as may be requested
by the Clearing Broker. The Introducing Broker hereby warrants that with regard
to any orders or instructions given by the Introducing Broker with respect to
such discretionary accounts, its partners, officers or employees shall have been
fully and properly authorized relative thereto and that the execution of such
orders shall not be in violation of the Rules, Standards, Laws and Regulations.
R. The Introducing Broker shall be solely and exclusively responsible
for the handling and supervisory review of any Introduced Account for an
employee or officer of any member organization, self-regulatory organization,
bank, trust company, insurance company, or other organization engaged in the
securities business, and any other applicable Rules, Standards, Laws and
Regulations. The Introducing Broker shall furnish the Clearing Broker with such
documentation with respect thereto as may be requested by the Clearing Broker.
S. The Introducing Broker shall be solely and exclusively responsible
for ensuring that it is authorized to do business in any jurisdiction in which
any Introduced Account resides or is domiciled.
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T. The Introducing Broker shall be solely and exclusively responsible
for compliance with any and all disclosure documents and prospectus delivery
requirements in connection with Introduced Accounts that are option accounts and
with any principal training or registration requirements relating to options
trading in Introduced Accounts.
U. The Introducing Broker and the Clearing Broker shall each be
responsible for the respective compliance of each with any supervisory
procedures under Rule 3010 of the NASD Manual, Conduct Rules and, to the extent
applicable, any other related provisions of the Rules, Standards, Laws and
Regulations including but not otherwise limited to supervising the activities
and training of their respective registered representatives, as well as all of
their other respective employees in the performance of functions specifically
allocated to them pursuant to the terms of this Agreement.
V. The Introducing Broker shall be solely and exclusively responsible
for sales and purchases for the Introduced Accounts that may create or result in
a violation of any of the Rules, Standards, Laws and Regulations.
W. The Introducing Broker shall be solely and exclusively responsible
for compliance with the Rules, Standards, Laws and Regulations in the same
manner and to the same degree as if the Introducing Broker were performing the
services for the Introduced Accounts that have been assumed by the Clearing
Broker pursuant to this Agreement.
X. The Introducing Broker shall be solely and exclusively responsible
for compliance with any Rules, Standards, Laws and Regulations concerning
transfers of restricted or control securities in Introduced Accounts. Securities
delivered to the Clearing Broker on behalf of an Introduced Account for delivery
in respect of a sale shall not be in legended form.
Y. The Introducing Broker shall be solely and exclusively responsible
for compliance with Rule 10b-16 under the 1934 Act; provided, however, that any
document provided to Customers in connection therewith shall be approved in
writing by the Clearing Broker in advance.
Z. In connection with all transactions for Introduced Accounts, the
Introducing Broker shall be solely responsible for compliance with all rules
relating to the Small Order Execution System ("SOES") of the NASD including,
without limitation, prohibitions on proprietary trading and volume restrictions.
AA. All transactions heretofore had between the Introducing Broker and
the Clearing Broker with respect to orders given by or for the Introduced
Accounts and cleared through the Clearing Broker shall be subject to the
provisions of this Agreement.
BB. For purposes of the Securities and Exchange Commission's financial
responsibility rules and the Securities Investor Protection Act, Introducing
Broker's customers will be considered customers of Clearing Broker and not
customers of Introducing Broker. Nothing herein shall cause Introducing Broker's
customers to be construed or interpreted as customers of Clearing Broker for any
other
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purpose, or to negate the intent of any other section of the Fully Disclosed
Clearing Agreement, including, but not limited to, the delineation of
responsibilities as set forth elsewhere in the Fully Disclosed Clearing
Agreement.
IV. INFORMATION TO BE PROVIDED BY THE INTRODUCING BROKER
A. The Introducing Broker shall provide the Clearing Broker with copies
of the Introducing Broker's annual audited financial statements as well as
copies of all financial information and reports filed by the Introducing Broker
with the NASD, the SEC, and any other National Securities Exchange (where a
member) (including but not otherwise limited to monthly and quarterly Financial
and Operational Combined Uniform Single Reports, i.e., "FOCUS" Reports)
simultaneously with the filing therewith.
B. The Introducing Broker shall submit to the Clearing Broker on a
monthly basis, or at more frequent intervals if so requested by the Clearing
Broker, information and reports relating to the Introducing Broker's financial
integrity, including but not otherwise limited to information regarding the
Introducing Broker's aggregate indebtedness ratio and net capital.
C. The Introducing Broker shall provide the Clearing Broker with all
appropriate data in its possession pertinent to the proper performance and
supervision of any function or responsibility specifically allocated to the
Clearing Broker pursuant to the terms of this Agreement.
D. The Introducing Broker shall provide the Clearing Broker with any
amendment or supplement to the Form BD of the Introducing Broker.
E. Upon the execution of this Agreement, the Introducing Broker shall
provide to the Clearing Broker a written list of all securities with respect to
which the Introducing Broker is a market-maker. The Introducing Broker shall
give the Clearing Broker prior written notice of any proposed changes in its
market-making activities, including changes in the identity of the securities
for which it makes a market. The Introducing Broker shall provide the Clearing
Broker on a timely basis with information sufficient to ensure that any
confirmation sent to Customers by the Clearing Broker on the Introducing
Broker's behalf contain correct information on the Introducing Brokers' role in
the transaction. The Clearing Broker shall have the right to limit or prohibit
the Introducing Broker's market-making activities with respect to any security.
V. INFORMATION TO BE PROVIDED BY THE CLEARING BROKER
A. The Clearing Broker shall provide the Introducing Broker with all
appropriate data in its possession pertinent to the proper performance and
supervision of any function specifically allocated to the Introducing Broker
pursuant to the terms of this Agreement. The Introducing Broker shall be
responsible for all costs incurred by the Clearing Broker in connection with the
preparation and provision of such information.
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B. The Clearing Broker shall provide the Introducing Broker with copies
of the Clearing Broker's annual audited financial statements as well as copies
of all financial information and reports filed by the Clearing Broker with the
NASD, the SEC, and any other National Securities Exchange (where a member)
(including but not otherwise limited to monthly and quarterly Financial and
Operational Combined Uniform Single Reports, i.e., "FOCUS" Reports)
simultaneously with the filing therewith.
VI. COMMUNICATIONS WITH CUSTOMERS AND OTHERS
A. Any new Customers of the Introducing Broker shall be provided by the
Clearing Broker with a Welcome Letter, notifying the new Customer as to the
general nature of the services to be provided by the Clearing Broker pursuant to
this Agreement, the respective obligations of the parties hereto, and any other
Customer-related responsibilities of the parties to this Agreement prior to such
Customers becoming Introduced Accounts.
B. The Customers shall be informed pursuant to such Welcome Letter that
all inquiries and correspondence should be directed to the Introducing Broker.
In the event such correspondence is not directed to the party who is responsible
under the terms of this Agreement for the area to which the correspondence
relates, the Introducing Broker or the Clearing Broker shall expeditiously
forward such correspondence to the appropriate party which shall respond to it.
C. The Clearing Broker shall carry all Introduced Accounts in the name
of the Customer, with a notation on its books and records that such Introduced
Accounts were introduced by the Introducing Broker, and all monthly or quarterly
statements, confirmations, and notices of funds or securities due relating to
such Introduced Accounts shall also indicate that the Introduced Accounts were
introduced by the Introducing Broker, that the role of the Clearing Broker is
that of a clearing broker only, and that the Introducing Broker will continue as
broker for the Introduced Accounts. Inadvertent omission of such notations shall
not be deemed to constitute a breach of this Agreement. Copies of the forms
covering all of the foregoing shall be furnished by the Clearing Broker to the
Introducing Broker.
D. The Introducing Broker shall not, without the prior written approval
of the Clearing Broker, place any advertisement in any newspaper, publication,
periodical or any other media or communicate with any customer or the public in
any manner whatsoever if such advertisement or communication in any manner makes
reference to the Clearing Broker or any affiliate of the Clearing Broker or to
the clearing arrangements and the services embodied in this Agreement. This
paragraph does not limit the Introducing Broker from informing prospective
clients or Customers that it has a clearing arrangement with the Clearing
Broker; provided, however, that such information was specifically requested by
the prospective client or Customer.
E. Should the Introducing Broker in any way hold itself out as,
advertise or represent that it is the agent of, affiliated with, or a branch of
the Clearing Broker, the Clearing Broker shall have the power, at its option, to
terminate this Agreement and the Introducing Broker shall be liable for any
loss,
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liability, damage, cost or expense (including but not otherwise limited to fees
and expenses of legal counsel) sustained or incurred by the Clearing Broker as a
result of such advertisement or representation. Notwithstanding the provisions
of paragraph C of Article X below that any dispute or controversy between the
parties relating to or arising out of this Agreement shall be referred to and
settled by arbitration, in connection with any breach by the Introducing Broker
of this paragraph, the Clearing Broker may, at any time prior to the initial
arbitration hearing pertaining to such dispute or controversy, by application to
the United States District Court for the Southern District of New York or the
Supreme Court of the State of New York for the County of New York seek any such
temporary or provisional relief or remedy ("provisional remedy") provided for by
the laws of the United States of America or the laws of the State of New York as
would be available in an action based upon such dispute or controversy in the
absence of an agreement to arbitrate. The parties acknowledge and agree that it
is their intention to have any such application for a provisional remedy decided
by the court to which it is made and that such application shall not be referred
to or settled by arbitration. No such application to either said court for a
provisional remedy, nor any act or conduct by either party in furtherance of or
in opposition to such application, shall constitute a relinquishment or waiver
of any right to have the underlying dispute or controversy with respect to which
such application is made settled by arbitration in accordance with paragraph C
of Article XI below.
VII. ERRORS, CONTROVERSIES AND INDEMNITIES
A. The Clearing Broker hereby agrees to indemnify, defend and hold
harmless the Introducing Broker and each person, if any, who controls the
Introducing Broker within the meaning of Section 20 of the 1934 Act, from and
against any and all losses, claims, damages, liabilities and expenses, including
attorneys' fees and costs, arising out of the bad faith, gross negligence or
criminal acts or omissions on the part of any of the Clearing Broker's
directors, officers, or employees with respect to the services provided by the
Clearing Broker under this Agreement.
B. The Introducing Broker hereby agrees to indemnify, defend and hold
harmless the Clearing Broker and each person, if any, who controls the Clearing
Broker within the meaning of Section 20 of the 1934 Act from and against any and
all losses, claims, damages, liabilities and expenses, including attorneys' fees
and costs, arising out of one or more of the following:
1. Failure of any Introduced Account to make timely payment
for the securities purchased by it or timely and good delivery of securities
sold for it, the existence in any Introduced Account of any unsecured debit or
unsecured short position, or the failure of any Introduced Account timely to
comply with margin or margin maintenance calls (if such calls are timely made by
the Clearing Broker), whether or not any margin extensions have been granted by
the Clearing Broker and whether or not such extensions have been requested by
the Introducing Broker;
2. Any check or draft given to the Clearing Broker by any
Introduced Account being returned to the Clearing Broker unpaid or any delivery
versus payment or receipt versus payment transaction being rejected by any
Customer (or its agent);
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3. Failure of the Introducing Broker to properly perform its
duties, obligations and responsibilities as set forth in this Agreement;
provided, however, that the participation of any employee of the Clearing Broker
in any transactions referred to herein shall not affect the Introducing Broker's
Indemnification obligations hereunder unless such participation by such employee
of the Clearing Broker was in bad faith or grossly negligent;
4. Any dishonest, fraudulent, negligent or criminal act or
omission on the part of any of the Introducing Broker's officers, partners,
employees, registered representatives, agents or Customers;
5. All claims or disputes between the Introducing Broker and
its customers with respect to the matters set forth in this Agreement, it being
understood and agreed: (A) that the Introducing Broker guarantees the validity
of Customer orders in the form such orders are transmitted to the Clearing
Broker by the Introducing Broker and guarantees to the Clearing Broker that each
Customer will promptly and fully perform its commitments and obligations with
respect to all transactions in its accounts carried by the Clearing Broker and
(B) that checks received by the Clearing Broker from the Introducing Broker's
Customers shall not constitute payment until the proceeds have actually been
received and credited to the Clearing Broker by its bank;
6. Any adverse claims with respect to any Customer securities
delivered to or cleared by the Clearing Broker, it being understood and agreed
that the clearing Broker shall be deemed to be an intermediary between the
Introducing Broker and its Customers, and the Clearing Broker shall be deemed to
make no representations or warranties other than as provided in Section 8-306(3)
of the Uniform Commercial Code;
7. The default by any over-the-counter contra broker with whom
the Introducing Broker deals on a principal basis, giving the Clearing Broker
for clearance;
8. The default by any third-party contra broker with whom the
Introducing Broker rather than the Clearing Broker executes a transaction for
itself or a Customer;
9. A claim by any third-party or contra broker arising out of
the Clearing Broker's rejection of any transaction pursuant to Article III of
this Agreement;
10. The breach by the Introducing Broker of any representation
or warranty made by it under this Agreement;
11. The Clearing Broker's guarantee of any signatures with
respect to transactions in the accounts of any customers; and
12. The failure of any Customers to fulfill their obligations
to the Introducing Broker or to the Clearing Broker, whether or not such failure
is within the Introducing Broker's control.
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C. In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to this Article VII, such person (hereinafter called the
indemnified party) shall promptly notify the person against whom such indemnity
may be sought (hereinafter called the indemnifying party) in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
satisfactory to the indemnified party to represent the indemnified party. It is
understood that the indemnifying party shall not, in connection with any
proceeding or related proceedings in the same jurisdiction, be liable for the
reasonable fees and expenses of more than one separate firm (in addition to any
local counsel) for all such indemnified parties, and that all such fees and
expenses shall be reimbursed as they are incurred. The indemnifying party shall
not be liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
from and against any loss or liability by reason of such settlement or judgment.
Notwithstanding the foregoing sentence, if at any time an indemnified party
shall have requested an indemnifying party to reimburse the indemnified party
for fees and expenses of counsel as contemplated in this Section, the
indemnifying party agrees that it shall be liable for any settlement of any
proceeding effected without its written consent if (1) such settlement is
entered into more than thirty (30) days after receipt by such indemnifying party
of the aforesaid request and (ii) such indemnifying party shall not have
reimbursed the indemnified party in accordance with such request prior to the
date of such settlement. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement of any pending or
threatened proceeding in respect of which any indemnified party is or could have
been a party and indemnity could have been sought hereunder by such indemnified
party, unless such settlement includes an unconditional release of such
indemnified party from all liability on claims that are the subject matter of
such proceeding.
D. The indemnification provisions in this Article VII, and the
indemnification provisions embodied within Article III hereof, shall remain
operative and in full force and effect, regardless of the termination of this
Agreement, and shall survive any such termination.
E. In no event shall the Clearing Broker be responsible to the
Introducing Broker, to any of its Customers or to any other person for indirect
or consequential damages arising out of any actual or alleged failure by the
Clearing Broker to perform the functions or provide the services to the
Introducing Broker required by this Agreement, even if notified of the
possibility thereof. The Clearing Broker's sole responsibility and liability for
any such actual or alleged failure will be to the Introducing Broker and only to
the extent expressly provided by this Agreement.
VIII. ADDITIONAL REPRESENTATIONS AND WARRANTIES
A. The Introducing Broker represents, warrants, and covenants as
follows:
1. The Introducing Broker shall (a) maintain at all times a
net capital computed in accordance with Rule 15c3-1 of the 1934 Act of at least
$100,000 except during periods when it is in an underwriting syndicate, when it
shall have not less than $1,000,000 of net capital and (b) immediately notify
the Clearing Broker when (i) its net capital is less than the amount set forth
in (a)
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above, (ii) its Aggregate Indebtedness Ratio reaches or exceeds 10 to 1, or
(iii) if the Introducing Broker has elected to operate under paragraph (f) of
Rule 15c3-1, when its net capital is less than 5% of aggregate debit items
computed in accordance with Rule 15c3-3.
2. The Introducing Broker is a member in good standing of the
NASD. The Introducing Broker agrees to promptly notify the Clearing Broker of
any additional exchange memberships or affiliations. The Introducing Broker
shall also comply with whatever non-member access rules have been promulgated by
any National Securities Exchange or any other securities exchange of which it is
not a member.
3. The Introducing Broker is and during the term of this
Agreement will remain duly registered or licensed and in good standing as a
broker-dealer under all applicable laws and Regulations.
4. The Introducing Broker has all the requisite authority in
conformity with all applicable Rules to enter into this Agreement and to retain
the services of the Clearing Broker in accordance with the terms hereof and has
taken all necessary action to authorize the execution of this Agreement and the
performance of the obligations hereunder.
5. The Introducing Broker is in compliance, and during the
term of this Agreement will remain in compliance with (i) the capital and
financial reporting requirements of every National Securities Exchange or other
securities exchange and/or securities association of which it is a member, (ii)
the capital requirements of the SEC, and (iii) the capital requirements of every
state in which it is licensed as a broker-dealer.
6. The Introducing Broker shall keep confidential any
confidential information the Introducing Broker may acquire as a result of this
Agreement regarding the business and affairs of the Clearing Broker, which
requirement shall survive the life of this Agreement.
7. The Introducing Broker warrants and represents that all
transactions introduced to the Clearing Broker on behalf of an Introduced
Account are authorized by the Introduced Account.
8. All orders or transactions for Introduced Accounts shall
comply in all respects with the Laws, Regulations, Rules and Standards.
9. The Introducing Broker shall not generate and/or prepare
any statements, bills, or confirmations respecting any Introduced Account unless
expressly authorized to do so in writing by the Clearing Broker.
10. The Introducing Broker shall maintain a $250,000 blanket
brokers bond insurance policy covering any and all acts of its employees,
agents, and partners to protect and indemnify the Clearing Broker against any
loss, liability, damage, cost or expense (including but not
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otherwise limited to fees and expenses of legal counsel) that the Clearing
Broker may suffer or incur, directly or indirectly, as a result of any act of
the Introducing Broker's employees, agents, or partners.
11. The Introducing Broker agrees that the Clearing Broker
shall be its only clearing agent and that all transactions, in any customer or
proprietary account serviced by the Introducing Broker, shall be cleared
exclusively through the Clearing Broker.
B. The Clearing Broker represents, warrants, and covenants as follows:
1. The Clearing Broker is a member in good standing of the
NASD.
2. The Clearing Broker is and during the term of this
Agreement will remain duly licensed and in good standing as a broker-dealer
under all applicable laws and Regulations.
3. The Clearing Broker has all the requisite authority, in
conformity with all applicable Rules, Standards, Laws and Regulations to enter
into and perform this Agreement and has taken all necessary action to authorize
the execution of this Agreement and the performance of the obligations
hereunder.
4. The Clearing Broker is in compliance, and during the term
of this Agreement will remain in compliance with (i) the capital and financial
report reporting requirements of every National Securities Exchange and/or other
securities exchange or association of which it is a member, (ii) the capital
requirements of the SEC, and (iii) the capital requirements of every state in
which it is licensed as a broker-dealer.
5. The Clearing Broker represents and warrants that the names
and addresses of the customers of the Introducing Broker that have or may come
to its attention in connection with the clearing and related functions it has
assumed under this Agreement are confidential and shall not be utilized by the
Clearing Broker except in connection with the functions performed by the
Clearing Broker pursuant to this Agreement. Notwithstanding the foregoing,
should an Introduced Account request, on an unsolicited basis, that the Clearing
Broker become its broker, acceptance of such Introduced Account by the Clearing
Broker shall in no way violate this representation and warranty, nor result in a
breach of this Agreement.
6. The Clearing Broker shall keep confidential any
confidential information it may acquire as a result of this Agreement regarding
business and affairs of the Introducing Broker, which requirement shall survive
the life of this Agreement.
IX. TERM
Subject to the provisions of Article X hereof, the term of this
Agreement shall be a period of eighteen months from the date hereof, and shall
renew automatically for successive one (1) year terms unless terminated in
accordance with Article X hereof.
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X. TERMINATION
A. Notwithstanding any provision of this Agreement, the following
events or occurrences shall constitute an Event of Default under this Agreement:
1. Either party hereto shall fail to perform or observe any
term, covenant, or condition to be performed hereunder (including, but not
limited to, any representation, warranty, or covenant relating to net capital
requirements) and such failure shall continue to be unremedied for a period of
ten (10) days after receipt of written notice from the nondefaulting party to
the defaulting party specifying the failure and demanding that the same be
remedied; or
2. Any representation or warranty made by either party hereto
shall prove to be incorrect at any time in any material respect; or
3. A receiver, liquidator, or trustee of either party hereto
or of any property held by either party, is appointed by court order and such
order remains in effect for more than 30 days; or either party is adjudicated
bankrupt or insolvent; or a substantial amount of property of either party is
sequestered by court order and such order remains in effect for more than 30
days; or a petition is filed against either party under any bankruptcy,
reorganization, arrangement, insolvency, readjustment of debt, dissolution or
liquidation law of any jurisdiction, whether now or hereafter in effect, and is
not dismissed within 30 days after such filings; or
4. Either party hereto files a petition in voluntary
bankruptcy or seeks relief under any provision of any bankruptcy,
reorganization, arrangement, insolvency, readjustment of debt, dissolution or
liquidation law of any jurisdiction, whether now or hereafter in effect, or
consents to the filing of any petition against it under any such law; or
5. Either party hereto makes an assignment for the benefit of
its creditors, or admits in writing its inability to pay its debts generally as
they become due, or consents to the appointment of a receiver, trustee or
liquidator of either party, or of any property held by either party; or
6. Either party hereto is enjoined, disabled, suspended,
prohibited, or otherwise unable to engage in the securities business as a result
of any administrative or judicial proceeding or action by the SEC, any state
securities law administrator, any National Securities Exchange, or any
self-regulatory organization having jurisdiction over that party.
B. Upon the occurrence of any such Event of Default, the nondefaulting
party may, at its option, by notice to the defaulting party declare that this
Agreement shall be thereby terminated and such termination shall be effective as
of the date such notice has been communicated to the defaulting party, If the
Introducing Broker defaults, the Clearing Broker shall have sole discretion to
determine what orders, if any, it shall accept for any Introduced Account, and
shall in addition to all rights it has under this Agreement, have all rights
granted to it under the Cash Account Agreement and Margin
- 17 -
<PAGE>
Agreement incorporated by reference herein. In such event, the Clearing Broker
shall be entitled, upon the consent of the Customer, to accept instructions
directly from the Customer.
C. This Agreement may be canceled by either of the parties hereto upon
180 days' written notice to the other, provided, however, that the first date
such written notice may be given is January 1, 2000.
D. This Agreement shall terminate automatically on the effective date
of termination of the Execution Agreement between the Introducing Broker and W &
D, Inc. without any further action by either party hereto.
E. Upon any termination of this Agreement for any reason whatsoever,
the Supplemental Account Agreement between the Clearing Broker and the
Introducing Broker relating to the Introducing Broker's use of Optimark services
shall terminate automatically without any further action by either party hereto.
XI. MISCELLANEOUS
A. This Agreement supersedes any previous agreement and may be modified
only by a writing signed by both parties to this Agreement. Such modification
shall not be deemed to be a cancellation of this Agreement.
B. This Agreement shall be submitted to and/or approved by any National
Securities Exchange, or other regulatory and self-regulatory bodies vested with
the authority to review and/or approve this Agreement or any amendment or
modifications hereof. In the event of any such disapproval, the parties hereto
agree to bargain in good faith to achieve the requisite approval.
C. Any dispute or controversy between the Introducing Broker and the
Clearing Broker relating to or arising out of their relationship or this
Agreement shall be settled by arbitration before and under the Code of
Arbitration Procedures of the NASD, unless the transaction which gave rise to
such dispute or controversy was effected in another exchange or market which
provides arbitration facilities, in which case it shall be settled by
arbitration under such facilities.
D. This Agreement shall be binding upon all successors, assigns or
transferees of both parties hereto, irrespective of any change with regard to
the name of or the personnel of the Introducing Broker or the Clearing Broker.
Any assignment of this Agreement shall be subject to the requisite review and/or
approval of any regulatory or self-regulatory agency or body whose review and/or
approval must be obtained prior to the effectiveness and validity of such
assignment. No assignment of this Agreement by the Introducing Broker shall be
valid unless the Clearing Broker consents to such an assignment in writing. Any
assignment by the Clearing Broker to any subsidiary that it may create or
acquire or controlled directly or indirectly by the Clearing Broker will be
deemed valid and enforceable in the absence of any consent from the Introducing
Broker. Neither this Agreement nor any operation hereunder is intended to be,
shall not be deemed to be, and shall not be treated as a general
- 18 -
<PAGE>
or limited partnership, association or joint venture or agency relationship
between the Introducing Broker and the Clearing Broker.
E. The construction and effect of every provision of this Agreement,
the rights of the parties hereunder and any questions arising out of the
Agreement, shall be subject to the statutory and common law of the State of New
York without reference to the conflict of law provisions thereof.
F. The headings preceding the text, articles, and sections hereof have
been inserted for convenience and reference only and shall not be construed to
affect the meaning, construction, or effect of this Agreement.
G. This Agreement shall cover only the types of services set forth
herein and is in no way intended nor shall it be construed to bestow upon the
Introducing Broker any special treatment regarding any other arrangements,
agreements or understandings that presently exist or which may hereafter exist
between the Introducing Broker and the Clearing Broker and any affiliate or the
Clearing Broker. The Introducing Broker shall be under no obligation whatsoever
to deal with the Clearing Broker or any of its subsidiaries or any companies
controlled directly or indirectly by or affiliated with the Clearing Broker, in
any capacity other than as set forth in this Agreement. Similarly, the Clearing
Broker shall be under no obligation whatsoever to deal with the Introducing
Broker or any of its affiliates in any capacity other than as set forth in this
Agreement.
H. If any provision or condition of this Agreement shall be held to be
invalid or unenforceable by any court, or regulatory or self-regulatory agency
or body, such invalidity or unenforceability shall attach only to such provision
or condition. The validity of the remaining provisions and conditions shall not
be affected thereby and this Agreement shall be carried out as if any such
invalid or unenforceable provision or condition were not contained herein.
I. The enumeration herein of specific remedies shall not be exclusive
of any other remedies. Any delay or failure by any party to this Agreement to
exercise any right, power, remedy or privilege herein contained, or now or
hereafter existing under any applicable statute or law, shall not be construed
to be a waiver of such right, power, remedy or privilege or to limit the
exercise of such right, power, remedy or privilege. No single, partial or other
exercise of any such right, power, remedy or privilege shall preclude the
further exercise thereof or the exercise of any other right, power, remedy or
privilege.
J. All notices, consents, directions, approvals, restrictions,
requests, or other communications required or permitted to be delivered
hereunder shall be given to the parties hereto, effective upon delivery, as
follows:
If to the Clearing Broker: Jefferies & Company, Inc.
11100 Santa Monica Boulevard
11th Floor
Los Angeles, CA 90025
- 19 -
<PAGE>
Attention: Jerry M. Gluck, Esq.
If to the Introducing Broker: ITG Inc.
380 Madison Avenue
4th Floor
New York, NY 10017
Attention: Timothy H. Hosking
Either party may change its address for notice purposes by giving written notice
pursuant to registered mail of the new address to the other party. Termination
shall not affect any of the rights and liabilities of the parties hereof
incurred before the date of receipt of such notice of termination.
K. The Clearing Broker shall not be liable for any loss caused,
directly or indirectly, by government restrictions, exchange or market rulings,
suspension of trading, war, strikes or other conditions beyond the control of
the Clearing Broker. In the event that any communications network, data
processing system, or computer system used by the Clearing Broker or by the
Introducing Broker, whether or not owned by the Clearing Broker, is rendered
inoperable, the Clearing Broker shall not be liable to the Introducing Broker
for any loss, liability, claim, damage or expense resulting, either directly or
indirectly, therefrom.
L. The Clearing Broker shall have the right to investigate, or arrange
for an appropriate party to investigate, the Introducing Broker's credit.
Nothing in this paragraph shall be construed to relieve the Introducing Broker
of its obligation to oversee its financial integrity.
M. Without the prior written consent of the Clearing Broker, the
Introducing Broker will not during the period of this Agreement and for one year
following its termination, hire or attempt to hire any person who is employed by
the Clearing Broker or whose employment with the Clearing Broker terminated
within the one-year period prior to the termination of this Agreement.
Made and executed at New York, New York, on the date first hereinabove set
forth.
ITG INC. JEFFERIES & COMPANY, INC.
By: /S/ JOHN R. MACDONALD By: /S/ CLARENCE T. SCHMITZ
------------------------------ ------------------------------
John R. MacDonald . Clarence T. Schmitz
Senior Vice President Executive Vice President
- 20 -
<PAGE>
AMENDMENT NO. 1 TO
SERVICE AGREEMENT DATED MARCH 15, 1994 BETWEEN
JEFFERIES & COMPANY, INC. AND ITG INC.
Jefferies & Company, Inc. ("Jefferies") and ITG Inc. ("ITG") hereby
enter into this Amendment, dated as of January 1, 1999, to that certain Service
Agreement dated March 15, 1994, by and between Jefferies and ITG (the "Service
Agreement").
1. Sections 1.a(ii), 1.b, 1.d, 1.e, 1.f(ii), 1.f(iii) and 1.g are
hereby deleted from the Service Agreement.
2. Exhibits 1 through 6 are hereby deleted from the Service Agreement
and replaced with Exhibits 1 through 2 hereof.
3. Sections 1.c(i), 1.c(ii) and 1.c(iii) are hereby deleted and
replaced with the following:
c. Jefferies shall administer the qualified and
non-qualified benefit plans that ITG provides its
employees through Jefferies or Jefferies Group, Inc.
4. Section 6 is hereby deleted and replaced with the following:
6. TERM AND TERMINATION
a. Services provided under this Agreement shall
terminate automatically, without any further
action by either of the parties hereto, as
follows:
(i) With respect to the Accounting
Services set forth in Section 1.a,
on June 30, 1999; and
(ii) With respect to the Personnel
Services set forth in Section 1.c,
on the later to occur of (A) such
date as the plan assets for ITG's
employees have been transferred by
the Jefferies Group, Inc.
Employees' Profit Sharing Plan to a
defined contribution plan and trust
maintained by Investment Technology
Group, Inc. or an employee stock
ownership plan and trust maintained
by Investment Technology Group,
Inc. (the "ITG ESOP") and (B) such
date as the plan assets for ITG's
employees have been transferred by
the Jefferies Group, Inc. Employee
Stock Ownership Plan to the ITG
ESOP.
b. Upon termination of either of the services
described in Section 6.a above, the related
charges applicable thereto shall also
terminate.
c. This Agreement shall terminate
automatically, without any further action by
either of the parties hereto, upon the
termination of each of the Accounting
Services and Personnel Services as provided
in Section 6.a above.
d. Upon termination of this Agreement, the
obligations of each party under Sections 2
and 3 of this Agreement shall survive such
termination.
e. Jefferies agrees to provide ITG reasonable
opportunity to copy, or remove from
Jefferies' premises, any accounting records
relating to
<PAGE>
Investment Technology Group, Inc. and its
subsidiaries prior to destroying them.
Except as specifically amended hereby, the terms and conditions of the
Service Agreement shall remain in full force and effect.
ITG INC. JEFFERIES & COMPANY, INC.
By: /s/ Raymond L. Killian, Jr. By: /s/ Clarence T. Schmitz
------------------------------ ------------------------------
Name: Raymond L. Killian, Jr. Name: Clarence T. Schmitz
Title: President Title Executive Vice President
<PAGE>
EXECUTION AGREEMENT
This Agreement is made this 1st day of January, 1999, by and between W & D
Securities, Inc. ("W & D"), a California corporation, and ITG Inc. ("ITG"), a
Delaware corporation.
WHEREAS, ITG has entered into an agreement with W & D (the "Omnibus
Clearing Agreement") to clear and settle transactions which are executed by
W & D on the New York Stock Exchange ("NYSE") on behalf of customers of ITG; and
WHEREAS, ITG desires to avail itself of certain services offered by W & D
with respect to executions effected on the NYSE and other regional exchanges;
and
WHEREAS, W & D desires to provide to ITG the services described below
subject to the terms and conditions of this Agreement;
NOW, THEREFORE, for and in consideration of the promises and mutual
agreements set forth herein, W & D and ITG agree as follows:
1. SERVICES PROVIDED BY W & D WITH RESPECT TO ITG'S TRADE ENTRY AND EXECUTION
a. W & D's Operations Department shall be responsible for trade execution
and trade entry on the books and records of Jefferies & Company, Inc. for all
trades executed by W & D as agent for ITG on the NYSE, on any other regional
stock exchange, and in the over-the-counter market. W & D's Operations
Department will also be responsible pursuant to the Omnibus Clearing Agreement
for the clearance and settlement of all trades executed by W & D as agent for
ITG on the NYSE. W & D will provide daily reconciliation of orders sent by ITG
not later than 12:00 pm on T+1.
b. W & D's Operations Department shall be available for trade entry and
clearance and settlement of trades executed on the NYSE pursuant to the Omnibus
Clearing Agreement, so long as the Omnibus Clearing Agreement remains in effect.
c. W & D shall provide to ITG the full benefit of any operating systems
changes, whether automated or manual, implemented by W & D. W & D will continue
to provide the support for order handling, systems and account set-up that it
currently provides to ITG.
d. W & D shall negotiate, pay and account within 15 days of month end all
specialist and $2 broker bills.
2. CONFIDENTIALITY
a. W & D will exercise reasonable care to prevent access to information
regarding ITG or ITG's customers by unauthorized persons and will keep
confidential any information it has concerning the business of ITG.
Notwithstanding the foregoing, W & D shall be held harmless
<PAGE>
for complying with any request for information or documents by the Securities
and Exchange Commission or other regulatory or self-regulatory authority or
any court order or other legal process which W & D believes to be valid and
effective.
b. ITG will keep confidential any information it may acquire regarding
W & D and its business. Notwithstanding the foregoing, ITG shall be held
harmless for complying with any request for information or documents by the
Securities and Exchange Commission or other regulatory authority or any court
order or other legal process which ITG believes to be valid and effective.
3. INDEMNIFICATION
ITG will indemnify, protect and hold harmless W & D, its officers and
employees, and each person, if any, controlling W & D, from and against all
manner of claims, demands, proceedings, suits or actions (whether in law or in
equity) and liabilities, losses, expenses and costs (including attorneys' fees)
in the event (i) ITG fails to properly exercise its obligations as set forth
herein, or (ii) any customer of or regulator for ITG institutes a claim, suit,
action, arbitration or other proceeding against W & D for any reason, PROVIDED,
HOWEVER, that W & D shall not be entitled to indemnification in any such manner
if W & D is found to have acted with gross negligence in the performance of its
services under this Agreement.
4. REPRESENTATIONS AND WARRANTIES
a. ITG represents and warrants as follows:
(1) ITG is and during the term of this Agreement will remain a member
in good standing of the National Association of Securities Dealers, Inc.;
(2) ITG is and during the term of this Agreement will remain duly
registered or licensed and in good standing as a broker-dealer under all
applicable federal and state securities laws;
(3) ITG has all requisite authority, whether arising under applicable
federal or state laws and rules and regulations of any securities exchange or
securities association to which it is subject, to enter into this Agreement and
to retain the services of W & D in accordance with the terms hereof; and
(4) ITG is now and during the term of this Agreement will remain in
compliance with the capital and financial reporting requirements of every
securities exchange and/or securities association of which it is a member, the
Securities and Exchange Commission, and every state in which it is licensed as a
broker-dealer.
b. W & D represents and warrants as follows:
(1) W & D is and during the term of this Agreement will remain a
member in good standing of the National Association of Securities Dealers, Inc.
and the NYSE;
<PAGE>
(2) W & D is and during the term of this Agreement will remain duly
registered or licensed and in good standing as a broker-dealer under all
applicable federal and state securities laws;
(3) W & D has all requisite authority, whether arising under
applicable federal or state laws and rules and regulations of any securities
exchange or securities association to which it is subject, to enter into this
Agreement and to retain the services of W & D in accordance with the terms
hereof; and
(4) W & D is now and during the term of this Agreement will remain in
compliance with the capital and financial reporting requirements of every
securities exchange and/or securities association of which it is a member, the
Securities and Exchange Commission, and every state in which it is licensed as a
broker-dealer.
5. COMPENSATION
During the term of this Agreement, W & D shall be compensated by ITG based
on the schedule that appears on Exhibit A hereto. The parties may amend said
schedule from time to time in writing and such amendment shall not affect any
other term of this Agreement.
6. TERM AND TERMINATION
a. The term of this Agreement shall be a period of eighteen months from
the date hereof, and shall renew automatically for successive one (1) year terms
unless terminated earlier in accordance with Section 6(b), 6(c), or 6(d).
b. This Agreement may be terminated by either party without cause upon
written notice delivered in person or by registered mail to the other party at
least 180 days prior to the effective date of termination, PROVIDED, HOWEVER,
that the first date on which such notice of termination may be given by either
party hereto is January 1, 2000.
c. This Agreement may be terminated immediately by either party if any
representations or warranties cease to be true or if any duties,
responsibilities or obligations are not duly performed during the term of this
Agreement. Notwithstanding the foregoing, should any party choose not to
exercise its right to terminate this Agreement when such a right is first
available, such action shall not be deemed a waiver of such right if available
on a subsequent occasion and the non-terminating party's legal and/or equitable
remedies for any breach(es) of this Agreement will remain in full force and
effect.
d. This Agreement shall terminate automatically on the effective date of
termination of the Fully-Disclosed Clearing Agreement between ITG and Jefferies
& Company, Inc. without any further action by either party hereto.
e. The Core Glue System Software License Agreement between ITG and W & D
shall terminate automatically on the effective date of termination of this
Agreement.
<PAGE>
f. Upon any termination of this Agreement for any reason whatsoever, the
Supplemental Account Agreement between ITG and Jefferies & Company, Inc.
relating to ITG's use of Optimark services shall terminate automatically without
any further action by either party hereto.
7. NOTICE
For the purpose of delivery of any notice hereunder, W & D's address shall
be:
W & D Securities, Inc.
Harborside Financial Center
Plaza III, Suite 704
Jersey City, NJ 07311
Attention: President
and ITG's address shall be:
ITG Inc.
380 Madison Avenue, 4th Floor
New York, NY 10017
Attention: President
8. MISCELLANEOUS
a. W & D agrees that it will use ITG Glue for the routing of orders
placed by ITG; however, W & D shall have the right to adopt or use new or
different routing technology for orders, including those placed by ITG, if W & D
determines that the new technology is superior to ITG Glue.
b. This Agreement shall be governed by the State of New York, without
giving effect to principles of conflicts of laws.
c. W & D shall provide to ITG on within 45 days of the end of W & D's
first three fiscal quarters and 90 days of the end of W & D's fiscal year, W &
D's balance sheet and a consolidating income statement. Such financial
information shall be prepared in accordance with Exhibit B hereto.
d. This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors, assigns, and transferees. No
assignment or amendment shall be valid unless the other party consents to such
assignment or amendment in writing. Neither this Agreement nor the performance
of services by W & D hereunder shall be construed to create a joint venture,
partnership or agency relationship of any type between ITG and W & D.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have each caused this Agreement to
be executed by their duly authorized officers as of the day and year set forth
above.
W & D SECURITIES, INC. ITG INC.
By: /s/ Donald Wiese By: /s/ Raymond L. Killian, Jr.
---------------------------- --------------------------------
Donald Wiese Raymond L. Killian, Jr.
President President
<PAGE>
EXHIBIT 21
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY STATE/COUNTRY OF INCORPORATION/ORGANIZATION
- ------------------ --------------------------------------------
<S> <C>
Jefferies & Company, Inc. Delaware
Jefferies International Limited England
Jefferies Pacific Limited Hong Kong
Jefferies Analytical Trading Group Inc. Delaware
JEF Investment Company Delaware
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AND THE CONSOLIDATED STATEMENTS
OF EARNINGS AS OF DECEMBER 31, 1998 AND FOR THE YEAR THEN ENDED AND THE NOTES
THERETO, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS FILED IN THE 1998 JEF HOLDING COMPANY, INC. FORM 10 FILING.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 55,581
<RECEIVABLES> 183,859
<SECURITIES-RESALE> 5,066
<SECURITIES-BORROWED> 1,922,691
<INSTRUMENTS-OWNED> 100,797
<PP&E> 20,524
<TOTAL-ASSETS> 2,617,864
<SHORT-TERM> 21,000
<PAYABLES> 243,808
<REPOS-SOLD> 5,061
<SECURITIES-LOANED> 1,580,811
<INSTRUMENTS-SOLD> 39,365
<LONG-TERM> 149,387
0
0
<COMMON> 234
<OTHER-SE> 334,541
<TOTAL-LIABILITY-AND-EQUITY> 2,617,864
<TRADING-REVENUE> 177,189
<INTEREST-DIVIDENDS> 91,024
<COMMISSIONS> 190,870
<INVESTMENT-BANKING-REVENUES> 126,651
<FEE-REVENUE> 0
<INTEREST-EXPENSE> 75,153
<COMPENSATION> 321,943
<INCOME-PRETAX> 59,193
<INCOME-PRE-EXTRAORDINARY> 59,193
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 69,682
<EPS-PRIMARY> 3.12
<EPS-DILUTED> 2.96
</TABLE>
