<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF
THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/ / Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-11(c) or
Section240.14a-12
JEFFERIES GROUP, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
JEFFERIES GROUP, INC.
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
-----------------------------------------------------------------------
-----------------------------------------------------------------------
2) Aggregate number of securities to which transaction applies:
-----------------------------------------------------------------------
3) Per unit price or other underlying value of transaction computed pursu-
ant to Exchange Act Rule 0-11 (Set forth the amount on which the filing
fee is calculated and state how it was determined):.
-----------------------------------------------------------------------
4) Proposed maximum aggregate value of transaction:
-----------------------------------------------------------------------
5) Total fee paid:
-----------------------------------------------------------------------
/X/ Fee paid previously with filing of preliminary confidential materials by
registrant.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
-----------------------------------------------------------------------
2) Form, Schedule or Registration Statement No.:
-----------------------------------------------------------------------
3) Filing Party:
-----------------------------------------------------------------------
4) Date filed:
-----------------------------------------------------------------------
<PAGE>
[LOGO]
March 18, 1999
Dear Jefferies Group, Inc. Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders (the
"Special Meeting") of Jefferies Group, Inc. ("Group") to be held at The New York
Helmsley Hotel, 212 East 42nd Street, New York, New York 10017, on April 20,
1999 at 9:00 a.m., local time. At the Special Meeting, you will be asked to
approve and adopt the Agreement and Plan of Merger (the "Merger Agreement"),
between Group and Group's approximately 80.5% owned subsidiary, Investment
Technology Group, Inc. ("ITGI") and to approve and adopt the issuance of the
Merger Shares (defined below). The Merger Agreement provides for the merger (the
"Merger") of ITGI with and into Group (with the surviving corporation being "New
ITGI") and for the issuance of shares of common stock of Group (the "Group
Common Stock") to stockholders of ITGI other than Group pursuant to the Merger
Agreement (the "Merger Shares").
The Merger will occur only after we distribute to you in a spin-off
transaction (the "Spin-Off") all of the outstanding common stock of JEF Holding
Company, Inc. ("New JEF"), a newly created wholly-owned subsidiary of Group.
Prior to the Spin-Off, Group will transfer to New JEF all of the assets of Group
(including the brokerage and investment banking businesses conducted by Group's
non-ITGI subsidiaries) except for the capital stock of ITGI, and all of Group's
liabilities, other than liabilities related to ITGI (the "Transfers"). The
Spin-Off is subject to numerous conditions, including Group Stockholder approval
of the Merger Agreement. As a result, your vote is important. Group owns, and
has the right to vote at the ITGI stockholders' meeting, sufficient shares to
approve the Merger Agreement without the vote of any other ITGI stockholder and
intends to vote its ITGI shares to approve the Merger Agreement.
The completion of the Merger and the Spin-Off will result in a complete
separation of ITGI from the other Group businesses. The Spin-Off and the Merger
will be tax-free to Group Stockholders. As a result of the Merger, you will own
a direct interest in the ITGI business through shares of New ITGI, rather than
an indirect interest in the ITGI business through ownership of Group shares. You
will own the same number of shares of New ITGI that you owned of Group prior to
the Merger. ITGI has applied for the listing of the New ITGI common stock on the
New York Stock Exchange (the "NYSE") under the symbol "ITG." As a result of the
Spin-Off, you will continue to own the non-ITGI businesses of Group through
ownership of New JEF common stock. You will own the same number of shares of New
JEF that you owned of Group as of the record date for the Spin-Off. New JEF
common stock will be publicly traded on the NYSE under the symbol "JEF."
Coincident with the Merger, Jefferies Group, Inc., as the surviving corporation
in the Merger, will change its name to Investment Technology Group, Inc. and JEF
Holding Company, Inc. will change its name to Jefferies Group, Inc.
At the Special Meeting, you will also be asked to consider and act upon
proposals to approve two incentive compensation plans of New JEF. These
proposals are being presented to you because Group Stockholders will become New
JEF stockholders as a result of the Spin-Off.
Your vote is important. Whether or not you plan to attend the Special
Meeting in person, I urge you to either complete, date, sign and return the
accompanying proxy card in the provided prepaid envelope or attend the Special
Meeting and vote in person.
Sincerely,
[LOGO]
Frank E. Baxter
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
<PAGE>
<TABLE>
<S> <C> <C>
[LOGO]
</TABLE>
JEFFERIES GROUP, INC.
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 20, 1999
To the Stockholders of Jefferies Group, Inc.:
NOTICE IS HEREBY GIVEN that Jefferies Group, Inc., a Delaware corporation
("Group"), will hold a special meeting of Stockholders (including any
postponement or adjournment, the "Special Meeting") at The New York Helmsley
Hotel, 212 East 42nd Street, New York, New York 10017, on April 20, 1999 at 9:00
a.m., local time, for the following purposes:
(1) To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger to be dated as of the mailing date of this
notice (the "Merger Agreement"), between Group and Investment Technology
Group, Inc., a Delaware corporation ("ITGI"), providing for the merger (the
"Merger") of ITGI with and into Group and to also approve the issuance of
Group Common Stock pursuant to the Merger Agreement. The Merger is subject
to numerous conditions as set forth in the Merger Agreement, including the
condition that the Merger would occur only after Group distributes (the
"Spin-Off") to you all of the outstanding common stock of JEF Holding
Company, Inc. ("New JEF"), a wholly-owned subsidiary of Group, following the
transfer of all of Group's assets, except for Group's approximately 80.5%
interest in the capital stock of ITGI, and all of Group's liabilities (other
than liabilities related to ITGI), to New JEF or its subsidiaries and the
satisfaction of all other terms and conditions related to the Spin-Off;
(2) To consider and vote upon a proposal to approve the 1999 Incentive
Compensation Plan of New JEF (the "Incentive Plan");
(3) To consider and vote upon a proposal to approve the 1999 Directors'
Stock Compensation Plan of New JEF (the "Directors' Plan");
(4) To consider and vote upon a proposal to grant the Group Board of
Directors discretionary authority to postpone or adjourn the Special Meeting
in order to solicit additional votes to approve any matter set forth in
paragraph (1), (2) or (3) above if the Secretary of Group determines that
there are not sufficient votes to approve any such matter ("Grant of
Discretionary Authority"); and
(5) To transact any other business that may properly come before the
Special Meeting or any one or more adjournments thereof.
The Board of Directors of Group has fixed the close of business on March 1,
1999 as the record date for determination of Group Stockholders entitled to
notice of and to vote at the Special Meeting (the "Special Meeting Record
Date"). A complete list of stockholders entitled to vote will be available for
inspection at the offices of Group at 11100 Santa Monica Boulevard, 11th Floor,
Los Angeles, CA 90025 for a period of ten days prior to the Special Meeting.
By Order of the Board of Directors
[LOGO]
Jerry M. Gluck
SECRETARY
Los Angeles, California
March 18, 1999
WHETHER OR NOT YOU PLAN TO ATTEND THIS MEETING, PLEASE FILL IN, SIGN, DATE, AND
RETURN THE ACCOMPANYING PROXY IN THE ENCLOSED POSTAGE-PAID ENVELOPE. PLEASE DO
NOT SEND STOCK CERTIFICATES WITH YOUR PROXY CARD.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
SUMMARY.................................................................................................... 1
QUESTIONS AND ANSWERS ABOUT THE SPIN-OFF............................................................... 1
QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE STOCKHOLDER VOTE........................................ 5
The Transactions....................................................................................... 9
The Special ITGI Cash Dividend......................................................................... 11
Effect of Transactions on Stockholder Rights and Stock Ownership....................................... 12
Structural and Ownership Changes Arising from the Transactions......................................... 13
RISK FACTORS............................................................................................... 15
THE SPECIAL MEETING........................................................................................ 19
THE TRANSACTIONS........................................................................................... 20
The Transfers and Spin-Off............................................................................. 20
Agreements Between Group and New JEF Relating to the Spin-Off.......................................... 24
Background of and Reasons for the Transactions......................................................... 28
The Merger............................................................................................. 30
Opinion of Group's Financial Advisor Concerning the Merger............................................. 34
The Merger Agreement................................................................................... 35
The Special Committee of ITGI's Board of Directors..................................................... 42
Opinion of ITGI's Financial Advisor.................................................................... 46
Special ITGI Cash Dividend............................................................................. 46
No Dissenters' Rights.................................................................................. 46
APPROVAL OF THE 1999 INCENTIVE COMPENSATION PLAN........................................................... 47
Reasons for Approval by Group Stockholders............................................................. 47
Description of the Incentive Plan...................................................................... 48
Federal Income Tax Implications of the Incentive Plan.................................................. 52
Vote Required for Approval............................................................................. 54
Recommendation of the Board of Directors of Group...................................................... 54
APPROVAL OF THE 1999 DIRECTORS' STOCK COMPENSATION PLAN.................................................... 55
Reasons for Approval by Group Stockholders............................................................. 55
Current Director Compensation Under the Existing Plans................................................. 55
Description of the Directors' Plan..................................................................... 56
Federal Income Tax Implications of the Directors' Plan................................................. 59
Vote Required for Approval............................................................................. 60
Recommendation of the Board of Directors of Group...................................................... 60
DESCRIPTION OF NEW JEF CAPITAL STOCK....................................................................... 61
Introduction........................................................................................... 61
Authorized and Outstanding Capital Stock............................................................... 61
New JEF Common Stock; Delaware Antitakeover Provisions................................................. 61
Preferred Stock........................................................................................ 62
Certain Antitakeover Provisions--New JEF Certificate and Bylaws........................................ 62
Other Delaware Corporate Law Provisions Affecting New JEF Stockholders................................. 63
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
MARKET PRICE OF AND DIVIDENDS ON COMMON STOCK AND RELATED STOCKHOLDER MATTERS.............................. 66
Group.................................................................................................. 66
ITGI................................................................................................... 67
SELECTED HISTORICAL FINANCIAL DATA OF GROUP................................................................ 68
UNAUDITED SUPPLEMENTAL SELECTED HISTORICAL FINANCIAL DATA
OF NEW JEF............................................................................................... 69
MANAGEMENT'S DISCUSSION AND ANALYSIS OF SUPPLEMENTAL FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF NEW
JEF...................................................................................................... 70
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION OF NEW JEF (EXCLUDING
DISCONTINUED OPERATIONS)................................................................................. 80
SELECTED HISTORICAL FINANCIAL DATA OF ITGI................................................................. 82
UNAUDITED PRO FORMA FINANCIAL DATA OF ITGI................................................................. 83
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF ITGI.............. 87
COMPARATIVE PER SHARE DATA OF GROUP AND ITGI............................................................... 95
BUSINESS OF NEW JEF........................................................................................ 96
JEFCO.................................................................................................. 96
JIL.................................................................................................... 96
JPL.................................................................................................... 96
W & D Securities, Inc.................................................................................. 96
Corporate Finance...................................................................................... 97
Commission Business.................................................................................... 97
Principal Transactions................................................................................. 98
Interest............................................................................................... 99
Risk Management........................................................................................ 101
Properties............................................................................................. 101
Employees.............................................................................................. 101
BUSINESS OF ITGI AND NEW ITGI.............................................................................. 102
POSIT.................................................................................................. 102
QuantEX................................................................................................ 104
SmartServers........................................................................................... 104
Electronic Trading Desk................................................................................ 105
ITG Platform........................................................................................... 105
"ISIS" Pre- and Post-trade Analysis.................................................................... 106
ITG/Opt................................................................................................ 106
ITG Research........................................................................................... 107
ITG Europe............................................................................................. 107
Australian POSIT....................................................................................... 107
Canadian QuantEX....................................................................................... 107
Arizona Stock Exchange................................................................................. 108
Regulation............................................................................................. 108
Credit Risk............................................................................................ 109
License and Relationship with BARRA.................................................................... 109
Competition............................................................................................ 110
Research and Product Development....................................................................... 110
Employees.............................................................................................. 112
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
MANAGEMENT OF GROUP AND NEW JEF............................................................................ 113
Directors.............................................................................................. 113
Other Executive Officers............................................................................... 114
Director Compensation.................................................................................. 114
Executive Compensation................................................................................. 116
Employment Contracts and Termination of Employment and Change-in-Control Arrangements.................. 119
Pension Plan........................................................................................... 119
Impact of the Spin-Off and Merger on Group's Employee Benefit Plans.................................... 120
Compliance with Section 16(a) of the Exchange Act...................................................... 122
MANAGEMENT OF ITGI AND NEW ITGI............................................................................ 124
Directors.............................................................................................. 124
Other Executive Officers............................................................................... 125
BENEFICIAL OWNERSHIP OF GROUP COMMON STOCK BY DIRECTORS, OFFICERS AND PRINCIPAL STOCKHOLDERS OF GROUP...... 126
EXPERTS.................................................................................................... 129
OTHER MATTERS; STOCKHOLDER PROPOSALS FOR THE 2000 ANNUAL MEETINGS OF NEW JEF AND NEW ITGI.................. 129
WHERE YOU CAN FIND MORE INFORMATION........................................................................ 129
INDEX TO UNAUDITED PROFORMA FINANCIAL STATEMENTS........................................................... F-1
</TABLE>
<TABLE>
<S> <C>
APPENDIX A MERGER AGREEMENT
APPENDIX B DISTRIBUTION AGREEMENT
APPENDIX C BENEFITS AGREEMENT
APPENDIX D TAX SHARING AND INDEMNIFICATION AGREEMENT
APPENDIX E OPINION OF J.P. MORGAN SECURITIES INC.
APPENDIX F SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
</TABLE>
QuantEX-Registered Trademark- ("QuantEX") is a registered trademark of ITGI.
POSIT-Registered Trademark- ("POSIT") is a registered service mark of the
POSIT Joint Venture. SmartServer is a service mark of ITGI.
This Proxy/Information Statement and the accompanying form of proxies are
first being mailed to the Stockholders on or about March 19, 1999.
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN (OR, TO THE EXTENT NOT
SUPERSEDED BY INFORMATION PRESENTED HEREIN, INCORPORATED BY REFERENCE INTO) THIS
PROXY/INFORMATION STATEMENT. WE HAVE NOT AUTHORIZED ANYONE TO GIVE ANY
INFORMATION DIFFERENT FROM THE INFORMATION CONTAINED IN (OR INCORPORATED BY
REFERENCE INTO) THIS PROXY/INFORMATION STATEMENT. YOU SHOULD NOT ASSUME THAT THE
INFORMATION CONTAINED IN THIS PROXY/INFORMATION STATEMENT IS ACCURATE AS OF ANY
LATER DATE, AND THE MAILING OF THIS PROXY/INFORMATION STATEMENT TO STOCKHOLDERS
SHALL NOT MEAN OTHERWISE.
iv
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND MAY NOT
CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND THE
TRANSFERS, THE SPIN-OFF AND THE MERGER (COLLECTIVELY, THE "TRANSACTIONS"), AND
FOR A MORE COMPLETE DESCRIPTION OF THE LEGAL TERMS OF THE MERGER, YOU SHOULD
READ CAREFULLY THIS ENTIRE DOCUMENT AND THE OTHER DOCUMENTS TO WHICH WE HAVE
REFERRED YOU. SEE "WHERE YOU CAN FIND ADDITIONAL INFORMATION" ON PAGE 129 OF
THIS PROXY/INFORMATION STATEMENT. THE ACTUAL TERMS OF THE MERGER ARE CONTAINED
IN THE MERGER AGREEMENT, WHICH IS INCLUDED IN THIS PROXY/ INFORMATION STATEMENT
AS APPENDIX A. EXCEPT WHERE THE CONTEXT SUGGESTS OTHERWISE, (1) REFERENCES TO
"WE," "OUR," "US" OR WORDS OF SIMILAR IMPORT MEAN JEFFERIES GROUP, INC., A
DELAWARE CORPORATION, BEFORE THE MERGER AND (2) REFERENCES TO "NEW JEF" MEAN JEF
HOLDING COMPANY, INC. AND ITS SUBSIDIARIES, BEFORE ITS NAME CHANGE, WHICH WILL
OCCUR FOLLOWING THE MERGER, AND JEFFERIES GROUP, INC. (FOLLOWING THE MERGER AND
THE AFOREMENTIONED NAME CHANGE) AND ITS SUBSIDIARIES.
QUESTIONS AND ANSWERS ABOUT THE SPIN-OFF
<TABLE>
<S> <C>
WHAT ARE THE PRACTICAL PRACTICAL EFFECTS OF THE TRANSFERS AND SPIN-OFF. New JEF
EFFECTS OF THE will own the Brokerage and Investment Banking Business
TRANSACTIONS? (defined below) following completion of the Transfers. After
the Spin-Off is completed, Group Stockholders will own New
JEF shares and, therefore, a direct interest in the
Brokerage and Investment Banking Business (defined below).
You will own the same number of shares of New JEF that you
owned of Group as of the close of business on April 20, 1999
(the "Spin-Off Record Date").
PRACTICAL EFFECTS OF THE MERGER. You will own shares of New
ITGI, and therefore own a direct interest in the
Technology-Based Trading and Research Business (defined
below), as a result of the Merger. You will own the same
number of shares of New ITGI that you owned of Group prior
to the Merger.
PLEASE PROVIDE SOME For many years, Group has been engaged, through its
BACKGROUND INFORMATION subsidiaries, in the active conduct of two principal lines
REGARDING THE TRANSACTIONS. of business:
- a full-service brokerage and investment banking business
(the "Brokerage and Investment Banking Business") serving
institutions and small to medium-sized corporations that
is primarily conducted through Group's subsidiary,
Jefferies & Company, Inc. ("JEFCO"); and
- a technology-based equity trading services and transaction
research business (the "Technology-Based Trading and
Research Business") serving institutional investors and
brokers that is conducted by ITGI through its subsidiary
ITG Inc. ("ITG").
The Transactions are being pursued in order to separate the
Brokerage and Investment Banking Business from the
Technology-Based Trading and Research Business.
WHY ARE WE SEPARATING NEW JEF FOCUSED PERFORMANCE. We believe that, after completing the
FROM GROUP THROUGH THE Spin- Off, New JEF will have an enhanced ability to focus
SPIN-OFF? more directly on the Brokerage and Investment Banking
Business. New JEF will be in a better position to obtain,
retain and motivate employees through equity-based
incentives (including incentives offered through the
Incentive Plan, and the New JEF employee stock ownership
plan ("ESOP")) that can more directly link the results of
</TABLE>
1
<PAGE>
<TABLE>
<S> <C>
the Brokerage and Investment Banking Business and New JEF
stock performance. Since employee performance is one of the
most critical determinants affecting New JEF's results and
stock price, enhanced incentive opportunities that are
directly linked to stock performance create powerful new
incentives for improved performance.
DIRECT INVESTMENT. The Spin-Off will give you a direct
investment in New JEF and New ITGI. We believe that,
following the Spin-Off, the financial markets will be able
to focus on the individual strengths of New JEF and New ITGI
and more accurately evaluate the performance of each
distinct business compared to companies in the same or
similar businesses.
WHAT DO I HAVE TO DO TO NOTHING. No proxy or vote is necessary for the Spin-Off.
PARTICIPATE IN THE However, since Group Stockholder approval of the Merger
SPIN-OFF? Agreement is one of the conditions of the Spin-Off, your
vote is important for the Merger and we urge you to review
this document and complete and return the enclosed proxy
card as soon as possible.
If you own Group Common Stock as of the Spin-Off Record
Date, common stock of New JEF (the "New JEF Common Stock")
will be mailed to you or credited to your account without
any further action. You should not mail in Group Common
Stock certificates to receive New JEF Common Stock
certificates, particularly since your certificates of Group
Common Stock will evidence your ownership of New ITGI Common
Stock unless and until they are exchanged for New ITGI
Common Stock certificates.
PLEASE EXPLAIN THE ONE-FOR-ONE. One share of New JEF Common Stock will be
DISTRIBUTION RATIO. distributed in the Spin-Off for every share of Group Common
Stock owned as of the Spin-Off Record Date (the
"Distribution Ratio"). The Distribution Ratio will not alter
the number of Shares of Group Common Stock that you own
before the Merger or the number of shares of New ITGI Common
Stock that you will own after the Merger. See, however
"--Questions and Answers About the Merger and the
Stockholder Vote -- Will the Merger affect the value of the
ITGI Common Stock".
EXAMPLE: If you own 100 shares of Group Common Stock as of
the close of business on the Spin-Off Record Date, you will
receive 100 shares of New JEF Common Stock through the
Spin-Off. Assuming you do not alter your ownership of those
100 shares of Group Common Stock before the Merger, you will
own 100 shares of New ITGI Common Stock after the Merger.
WILL MY DIVIDENDS CHANGE? NO CHANGE IN DIVIDEND POLICY IS EXPECTED. Before the
Spin-Off, Group paid a $.05 per share quarterly dividend.
After the Spin-Off, New JEF expects to continue the policy
of paying a $.05 per share quarterly dividend subject, as is
currently the case with Group, to the continuation of
acceptable earnings levels, as determined by the Board in
its sole judgment.
EXAMPLE: If you owned 100 shares of Group Common Stock, your
last quarterly dividend would have been $5.00 (or 100 shares
X $.05). Assuming you maintain a constant number of shares
of New JEF Common Stock after the Spin-Off and New JEF
experiences acceptable earnings levels, it is expected that
you will continue to
</TABLE>
2
<PAGE>
<TABLE>
<S> <C>
receive the same $5.00 quarterly dividend from New JEF after
the Spin-Off.
WILL SHARES TRADE ANY YES. Because there is no public market for the New JEF
DIFFERENTLY AS A RESULT OF Common Stock, a temporary form of interim trading called
THE SPIN-OFF? "when-issued trading" will occur for New JEF Common Stock on
the New York Stock Exchange beginning about one week before
the Spin-Off. When-issued listings can be identified by the
"wi" letters next to New JEF Common Stock on the New York
Stock Exchange. During this time, Group Common Stock will
continue to trade on a regular way basis, and will trade on
a "when-distributed" basis, which is the regular way trading
price less an approximate amount per share constituting the
anticipated value of the Spin-Off, based primarily on
when-issued trading prices for New JEF Common Stock. This
process occurs in order to develop an orderly market and
trading price for New JEF Common Stock after the Spin-Off.
ARE THE TRANSFERS OR THE NO. We believe, based on the advice of our counsel, Morgan,
SPIN-OFF TAXABLE FOR U.S. Lewis & Bockius LLP, that we have structured the Transfers
TAX PURPOSES? and the Spin-Off to qualify as tax-free transactions for
U.S. federal income tax purposes. We have 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 our
Stockholders, respectively, (the "Tax Ruling").
DO THE TRANSACTIONS GIVE RISE YES. Within a reasonable time after the Spin-Off, Group will
TO TAX BASIS ALLOCATION send a letter to stockholders that will explain the way to
ISSUES FOR MY SHARES? allocate tax basis between New ITGI Common Stock you will
hold after the Merger and the New JEF Common Stock
distributed in the Spin-Off. The allocation will be based
upon average trading values for New ITGI Common Stock and
New JEF Common Stock coincident with the Spin-Off.
WILL NEW JEF AND NEW ITGI BE NO. New JEF and New ITGI will not be under common ownership
RELATED IN ANY WAY AFTER or control following the Spin-Off. Group (and therefore New
THE SPIN-OFF? ITGI as the successor to Group in the Merger) will be party
to agreements with New JEF to define their ongoing
relationship, to cooperate regarding past matters and to
allocate responsibility for past obligations and certain
obligations that might arise in the future.
ARE THERE ANY NEW RISKS YES. New JEF's separation from Group presents certain
INVOLVED IN OWNING NEW JEF additional risks because New JEF's revenues and earnings
COMMON STOCK? will be less, in absolute terms, and less diversified, and
may be less stable, than Group's consolidated revenues and
earnings, including the revenue and earnings of ITGI. In
addition to these new risks, the Brokerage and Investment
Banking Business, whether owned by Group or New JEF, is
subject to risks related to the volatile nature of the
securities business, competition, the extensive federal,
state and foreign regulation of the securities business, its
high-yield securities underwriting activities, its
underwriting and trading activities generally, potential
securities law liability, the effect of antitakeover
provisions, its dependence on the availability of capital
and funding, and its dependence on personnel.
For further discussion of the risks related to New JEF
Common Stock see "Risk Factors" beginning at page 15.
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
ARE THERE ANY DIFFERENCES YES. As a result of the termination of various incentive
BETWEEN THE CAPITALIZATION compensation plans and arrangements in connection with the
OF NEW JEF AND GROUP? completion of the Transactions, it is anticipated that the
total capitalization of New JEF will be greater than the
current total consolidated capitalization of Group,
including ITGI.
For further details on the post-Spin-Off capitalization of
New JEF see the pro forma financial information beginning at
page 80.
WHAT ARE THE ACCOUNTING After the Spin-Off, New JEF will report historical ITGI
RAMIFICATIONS OF THE results as a discontinued operation in its consolidated
SPIN-OFF? financial statements. The results of the ITGI and New JEF
businesses will no longer be consolidated.
PLEASE EXPLAIN THE SEQUENCE THE TRANSFERS. In order for us to separate the Brokerage and
OF THE TRANSACTIONS Investment Banking Business and the Technology-Based Trading
and Research Business, we will first transfer to New JEF or
its subsidiaries all of our assets (except for our
approximately 80.5% interest in the capital stock of ITGI)
and liabilities (except for liabilities of or related to
ITGI) including the outstanding publicly traded debt
obligations of Group of approximately $150 million. After
the Transfers have been completed, New JEF will own the
Brokerage and Investment Banking Business.
THE SPIN-OFF. Next, after all conditions to the Spin-Off
have been satisfied, we will distribute all of the
outstanding New JEF Common Stock to our Stockholders of
record as of the close of business on the Spin-Off Record
Date.
THE MERGER. Finally, ITGI will merge with and into Group,
resulting in the issuance of Merger Shares to the existing
public (i.e., non-Group) ITGI stockholders. The end result
of these actions will be that ownership of each of the
Brokerage and Investment Banking Business and the
Technology-Based Trading and Research Business will be
completely separated (without any common ownership by Group)
and you will hold shares of each of New JEF and New ITGI
directly.
HAS THE BOARD OF DIRECTORS YES. On March 17, 1999, our Board of Directors unanimously
APPROVED THE TRANSFERS AND approved the Transfers and the Spin-Off.
SPIN-OFF?
ARE ANY FURTHER APPROVALS NO. Delaware law does not require our Stockholders' approval
NECESSARY UNDER STATE LAW? to effect the Transfers or consummate the Spin-Off.
</TABLE>
4
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE STOCKHOLDER VOTE
<TABLE>
<S> <C>
WHY IS GROUP PROPOSING THAT TO ELIMINATE PUBLIC OWNERSHIP REDUNDANCIES THAT WOULD
ITGI MERGE WITH GROUP? OTHERWISE ARISE AFTER THE SPIN-OFF. ITGI and Group will
combine through the Merger in order to:
- enhance investor understanding and establish one
publicly-traded vehicle concerning the Technology-Based
Trading and Research Business;
- eliminate the publicly traded middle-tier holding company
that will result from, and become unnecessary as a result
of, the Transfers and the Spin-Off; and
- minimize investor confusion concerning the
Technology-Based Trading and Research Business.
The Merger will result in the stockholders of Group becoming
direct stockholders of New ITGI and Group ceasing to be
ITGI's parent company.
As an independent company, ITGI will have greater
flexibility to determine its capital structure and will have
the opportunity to use New ITGI Common Stock to raise
capital and make acquisitions.
DOES THE BOARD OF DIRECTORS YES. The Group Board of Directors unanimously recommends
RECOMMEND VOTING IN FAVOR that you approve the Merger Agreement and the issuance of
OF THE MERGER AND THE Group Common Stock pursuant to the Merger Agreement.
ISSUANCE OF MERGER SHARES?
WHAT WILL GROUP AND ITGI GROUP STOCKHOLDERS. After the Merger, each Group Stockholder
STOCKHOLDERS OWN AS A will continue to own the same number of shares of Common
RESULT OF THE MERGER? Stock of New ITGI as the number of shares of Group Common
Stock that such stockholder owned before the Merger.
ITGI STOCKHOLDERS. In the Merger, each issued and
outstanding share of ITGI Common Stock (other than the
shares held by Group) will be converted into the right to
receive such number of shares of New ITGI Common Stock in
accordance with an exchange ratio formula. This exchange
ratio will be equal to the result obtained by dividing the
total number of shares of Group Common Stock outstanding
immediately prior to the Merger by the total number of
shares of ITGI Common Stock held by Group immediately prior
to the Merger (the "Exchange Ratio").
WHAT DOES THE EXCHANGE RATIO The Exchange Ratio formula has been established to provide:
ACCOMPLISH?
- the non-Group ITGI stockholders (the "ITGI Public
Stockholders") with the same proportionate common stock
ownership of New ITGI that they held of ITGI prior to the
Merger; and
- the Stockholders of Group, as an entirety, with the same
collective percentage ownership of New ITGI that Group
held of ITGI prior to the Merger.
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
EXCHANGE RATIO CALCULATION. For example, based upon an
anticipated number of outstanding shares of Group Common
Stock before the Merger of approximately 23.9 million and
the number of shares of ITGI Common Stock held by Group
(15.0 million), the Exchange Ratio would have been 1.59
(23.9 million divided by 15.0 million).
EXCHANGE RATIO ILLUSTRATION. Assuming Group's 15.0 million
shares of ITGI Common Stock will represent, consistent with
the foregoing assumptions, 80.5% of the outstanding ITGI
Common Stock (or 18.6 million shares), the 3.6 million
shares of ITGI Common Stock owned by the ITGI Public
Stockholders would become approximately 5.8 million shares
of New ITGI Common Stock immediately following the Merger
(3.6 million times the 1.59 Exchange Ratio).
EFFECTS OF THE EXCHANGE RATIO. As a result of the foregoing,
the ITGI Public Stockholders would collectively own
approximately 19.5% of the New ITGI Common Stock (5.8
million shares divided by 29.7 million shares) and Group
Stockholders would collectively own approximately 80.5% of
New ITGI Common Stock (23.9 million divided by 29.7
million). See "--Structural and Ownership Changes Arising
from the Transactions" and "Transactions--The Merger."
IS THE EXCHANGE RATIO FAIR? YES. J.P. Morgan Securities Inc. ("J.P. Morgan") has
rendered an opinion that the Exchange Ratio is fair to Group
from a financial point of view.
HOW DOES THE MERGER IMPACT NO ULTIMATE OVERALL CHANGE. The ITGI Public Stockholders and
OVERALL STOCK OWNERSHIP? the existing stockholders of Group will directly own all of
the equity interest in New ITGI, with the former ITGI Public
Stockholders having the same collective percentage ownership
of New ITGI that they held of ITGI prior to the Merger and
the former stockholders of Group having the same collective
percentage ownership of New ITGI that Group held of ITGI
prior to the Merger.
WILL THE MERGER AFFECT THE PERHAPS. The aggregate value of ITGI Common Stock may or may
VALUE OF THE ITGI COMMON not change as a result of the Merger, because we cannot
STOCK? predict the overall stock market impact of the Merger and
the related transactions on the trading price of ITGI Common
Stock. However, New ITGI Common Stock is likely to trade
immediately following the Merger at a per share price lower
than the per share price at which ITGI Common Stock trades
immediately prior to the Merger, because the number of
shares of New ITGI Common Stock outstanding immediately
after the Merger will be greater than the number of shares
of ITGI Common Stock outstanding immediately before the
Merger.
WILL I OWE ANY U.S. FEDERAL NO. You should not owe any U.S. Federal income tax as a
INCOME TAX AS A RESULT OF result of the Merger because you will not be receiving any
THE MERGER? consideration pursuant to the Merger.
WHAT ARE THE OTHER MATERIAL Group has received rulings from the Internal Revenue Service
TAX CONSEQUENCES ASSOCIATED that the Merger will qualify as a tax-free transaction for
WITH THE MERGER? ITGI and Group for U.S. Federal income tax purposes.
Further, ITGI and Group have conditioned the Merger on the
receipt of legal opinions stating that the Merger will
qualify as a tax-free transaction for the ITGI Public
Stockholders for U.S. federal income tax purposes (except
with respect to cash received by the ITGI Public
Stockholders in lieu of fractional shares). See "The
Transactions--The Merger; U.S. Federal Income Tax
Consequences of the Merger."
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
WHAT ARE THE SIGNIFICANT THE MERGER WILL BE ACCOUNTED FOR AS A MERGER OF "ENTITIES
ACCOUNTING CONSEQUENCES OF UNDER COMMON CONTROL" in accordance with generally accepted
THE MERGER? accounting principles. Accordingly, the accounting will
reflect the historical cost basis of each party's assets and
liabilities.
WHEN DO YOU EXPECT THE MERGER WE EXPECT THAT THE MERGER WILL OCCUR IN THE SECOND QUARTER
TO BE COMPLETED? OF 1999. Group and ITGI are working towards completing the
Merger as quickly as possible.
SHOULD I SEND IN MY STOCK NO. The number of shares of Group Common Stock that you own
CERTIFICATES NOW? will not be affected by the Merger.
HOW MANY VOTES ARE REQUIRED The Merger Agreement and the issuance of the Merger Shares
TO APPROVE THE MERGER must be approved and adopted by the affirmative vote of the
AGREEMENT? holders of a majority of the outstanding shares of our
Common Stock. We will not effect the Spin-Off if the Merger
Agreement and the issuance of Merger Shares are not approved
and adopted by the requisite stockholder vote.
Holders of record of Group Common Stock as of the Special
Meeting Record Date are entitled to cast one vote for each
share of Group Common Stock held as of such date. At the
Special Meeting Record Date, there were approximately 23.2
million shares of our Common Stock outstanding and entitled
to vote. As of the Special Meeting Record Date, our
directors and executive officers beneficially owned
approximately 15% of our Common Stock entitled to vote at
the Special Meeting.
WHAT OTHER MATTERS WILL BE IN ADDITION TO THE MERGER, YOU WILL BE ASKED TO APPROVE THE
VOTED ON AT THE SPECIAL INCENTIVE PLAN AND THE DIRECTORS' PLAN FOR NEW JEF. To carry
MEETING? out one of the purposes of the Spin-Off, the creation of
incentive compensation opportunities for directors and
employees of New JEF that are directly linked to
performance, the Boards of Directors of Group and New JEF
have each approved the Incentive Plan and the Directors'
Plan and seek stockholder approval and adoption of these
plans from you, the future holders of New JEF Common Stock.
Our Board and the New JEF Board unanimously recommend that
you approve and adopt the Incentive Plan and the Directors'
Plan. See "The Special Meetings--Special Meeting." Approval
of each of the Incentive Plan and the Directors' Plan
requires the affirmative vote of a majority of the votes
held by holders of our Common Stock present and entitled to
vote at the Special Meeting in person or represented by
proxy. We are also seeking Stockholders' express authority
to postpone or adjourn the Special Meeting in case we need
to solicit additional votes to approve any of the foregoing
matters being presented to Stockholders, as described herein
generally and in the Notice to Stockholders, in particular.
WHAT SHOULD I DO NOW? JUST MAIL YOUR SIGNED PROXY CARD NO LATER THAN APRIL 12,
1999. The Special Meeting will be held at 9:00 a.m., local
time on April 20, 1999 at The New York Helmsley Hotel, 212
East 42nd Street, New York, New York 10017.
CAN I CHANGE MY VOTES AFTER I YES. You can change your vote at any time before the vote is
HAVE MAILED IN A SIGNED taken at the Special Meeting. You can do this in one of
PROXY CARD? three ways. First, you can send a written notice dated later
than your proxy card stating that you would like to revoke
your prior, current proxy. Second, you can complete and
submit a new proxy card dated later than your original proxy
card. If you choose either of these two
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
methods, you must submit your notice of revocation or your
new proxy card to Jefferies Group, Inc., 11100 Santa Monica
Boulevard, 11th Floor, Los Angeles, California 90025,
Attention: Secretary. Group must receive the notice or new
proxy card before the vote is taken at the Special Meeting.
Third, you can attend the Special Meeting and vote in
person. Simply attending the Special Meeting, however will
not revoke your proxy. If you have instructed a broker to
vote your shares, follow the directions received from your
broker as to how to change your vote.
IF MY SHARES ARE HELD IN ONLY IF YOU GIVE YOUR BROKER PROMPT INSTRUCTIONS ON HOW TO
"STREET NAME" BY MY BROKER, VOTE. You should instruct your broker to vote your shares.
WILL MY BROKER VOTE MY Without instructions, your shares will not be voted by that
SHARES FOR ME? broker and the failure to vote will have the same effect as
a vote against the approval and adoption of the Merger
Agreement and the issuance of the Merger Shares. A failure
to properly instruct your broker will have no negative
effect on the vote with respect to the Incentive Plan or the
Directors' Plan.
</TABLE>
8
<PAGE>
THE TRANSACTIONS
BACKGROUND
The success of both the Brokerage and Investment Banking Business and the
Technology-Based Trading and Research Business depends on each having separate
management teams and highly skilled employees that are focused on their
respective businesses. The management and employees of the Brokerage and
Investment Banking Business are primarily focused on investment banking,
brokerage, capital raising, research, mergers and acquisition activities,
business restructuring advisory services and a traditional, broker-dealer
business. The management and employees of the Technology-Based Trading and
Research Business's are primarily focused on the use of technology for trading
securities and the development of securities research and analysis products.
Although Group and ITGI are each publicly-traded and have separate
management teams, we have concluded that further separation of the two
organizations is in the best interests of Group and our Stockholders. This
separation would be achieved through the combined effect of the Transfers and
the Spin-Off.
THE TRANSFERS AND THE SPIN-OFF
The Transfers will be completed in order for New JEF to own the Brokerage
and Investment Banking Business and in order to transfer Group liabilities that
are not related to ITGI. After completion of the Transfers and satisfaction of
all other conditions to the Spin-Off, we will distribute all of the outstanding
New JEF Common Stock pro rata to our Stockholders of record as of the Spin-Off
Record Date. The Spin-Off would occur immediately prior to the Merger.
Our management believes that, after completing the Transfers and the
Spin-Off, New JEF management will have an enhanced ability to focus more
directly on the Brokerage and Investment Banking Business. New JEF will have a
better opportunity to obtain, retain and motivate employees through equity-based
incentives (including incentives offered through the Incentive Plan and a New
JEF ESOP) that can more directly link the results of the Brokerage and
Investment Banking Business and New JEF stock performance.
In order for us to ensure that the Transfers and the Spin-Off are tax-free,
it was necessary for us to structure the Transactions as a spin-off of New JEF
Common Stock, rather than a direct spin-off of ITGI Common Stock, to Group
Stockholders.
THE MERGER
Immediately after the Transfers and the Spin-Off, New JEF will be a publicly
traded corporation that will own the Brokerage and Investment Banking Business.
ITGI will be a publicly traded corporation that will own directly the
Technology-Based Trading and Research Business, and Group will be a publicly
traded corporation that will control (through its approximately 80.5% ownership
interest in ITGI), the Technology-Based Trading and Research Business. The
Merger will be completed to establish one publicly traded company that owns and
controls the Technology-Based Trading and Research Business.
After the satisfaction or waiver of all conditions set forth in the Merger
Agreement, including receipt of all required stockholder approvals, the Merger
will become effective (the "Effective Time") upon the filing of a Certificate of
Merger with the Secretary of State of the State of Delaware. At the Effective
Time, ITGI will be merged with and into Group and Group will continue as the
surviving corporation under a new name, Investment Technology Group, Inc.
Following the Merger, New JEF will change its name to Jefferies Group, Inc.
Prior to the Spin-Off, the New JEF board of directors and Jefferies Group, Inc.,
in its capacity as sole stockholder of New JEF, approved and authorized the name
change to be filed and become effective as soon as is practicable following the
Merger. Subject to the terms and conditions of the Merger Agreement, each issued
and outstanding share of ITGI
9
<PAGE>
Common Stock (other than any shares held by Group) will be converted into the
right to receive the number of Merger Shares based on the Exchange Ratio.
Group and ITGI are each obligated to effect the Merger only if various
conditions set forth in the Merger Agreement, including the completion of the
Transfers and the Spin-Off, are waived or satisfied. Either Group or ITGI may
terminate the Merger Agreement at any time prior to the Effective Time, whether
before or after approval by the stockholders of Group or ITGI of the matters
presented in connection with the Merger, upon the occurrence of certain events
set forth in the Merger Agreement. See "The Transactions--The Merger."
INTERESTS OF CERTAIN PERSONS IN THE TRANSACTIONS.
Stockholders should be aware that certain directors and executive officers,
including some officers who are also directors, have certain interests in the
Transactions that are different from, or in addition to, the interests of
Stockholders generally.
The Compensation Committee of the Board of Directors of Group has terminated
and settled on an accelerated basis phantom incentive compensation shares and
related earnings for the following executive officers of Group in the following
amounts: Frank Baxter, $2,601,795; Michael Klowden, $336,705; and Clarence
Schmitz, $224,388. The Compensation Committee also has accelerated the vesting
of all unvested stock options granted before January 1, 1998 to facilitate the
exercise of these options before the Spin-Off Record Date and the Merger. As a
result, the options held by the following executive officers of Group will have
been accelerated for the following number of shares: Jerry Gluck, 5,000 shares;
Gary Burnison, 5,000 shares; and Maxine Syrjamaki, 5,000 shares. Optionees
holding Group options granted after January 1, 1998, and directors holding
options, regardless of grant date, may exchange such options for options of New
JEF with such terms that are designed to preserve the inherent value and
contractual rights of such Group options (the "Replacement Option Exchange"). In
lieu of participating in the Replacement Option Exchange, directors may elect to
exercise Group options in advance of the option's scheduled contractual
expiration date and receive a make-whole grant of New JEF options with a fair
market value determined after subtracting gain realized on any exercise effected
in advance of scheduled contractual expiration from the Black-Scholes fair
market value of the option before exercise ("Make-Whole Grants"). Options
subject to Make Whole Grants would have an exercise price determined by
reference to volume weighted average trading prices for New JEF Common Stock
during the five trading days after the Spin-Off.
The following executive officers of Group will be entitled to receive an
accelerated vesting of matching contributions made under the terms of Group's
Employee Stock Purchase Plan (the "ESPP") with respect to the following number
of shares of Group Common Stock: Frank Baxter, 258 shares; Michael Klowden, 899
shares; Jerry Gluck, 258 shares; and Gary Burnison, 87 shares. Aside from such
provisions, the Compensation Committee of the Board of Directors of Group has
not altered the economic terms of outstanding compensation awards held by
executive officers or directors in connection with the Transactions. The
aggregate value of the foregoing interests, exclusive of values associated with
the Replacement Option Exchange and the Make-Whole Grants (each of which are
intended to preserve the intrinsic value of outstanding contractual rights), is
$3,489,824, taking into account the price per share of Group Common Stock on
March 15, 1999 ($45.19 per share). See "Management of Group and New JEF--Impact
of the Spin-Off and Merger on Group's Employee Benefit Plans."
THE PARTIES TO THE MERGER
JEFFERIES GROUP, INC. We are a publicly-traded holding company that trades
under the New York Stock Exchange symbol "JEF." Group's four current primary
subsidiaries, JEFCO, ITGI, described separately below, Jefferies International
Limited ("JIL"), and Jefferies Pacific Limited ("JPL"), provide investment
banking, securities brokerage and trading, and other financial services.
10
<PAGE>
Group's current principal subsidiary in the investment banking and brokerage
business, JEFCO, was founded in 1962. JEFCO's international investment banking
operations focus on capital raising, research, mergers and acquisitions and
advisory and restructuring services for small- to medium-sized companies.
JEFCO's brokerage operations conduct equity, convertible debt and taxable fixed
income securities brokerage and trading. JEFCO is one of the leading national
brokerage firms engaged in the distribution and trading of blocks of equity
securities and often conducts such activities in the "third market." The term
"third market" refers to transactions in listed equity securities that occur
outside of national securities exchanges.
JIL, a broker-dealer subsidiary of Group, was incorporated in 1986 in
England. JIL is a member of The International Stock Exchange and The Securities
and Futures Authority. JIL introduces customers trading in U.S. securities to
JEFCO and also trades as a broker-dealer in international equity and convertible
securities and American Depositary Receipts ("ADRs"). In 1995, JIL formed a
wholly-owned subsidiary, Jefferies (Switzerland) Ltd. In 1996, JIL formed a
wholly-owned subsidiary, Jefferies (Japan) Limited, which maintains a branch
office in Tokyo. JPL, also a broker-dealer subsidiary of Group, was incorporated
in 1992 in Hong Kong. JPL presently introduces foreign customers trading in U.S.
securities to JEFCO.
Group and its various subsidiaries maintain offices in Los Angeles, New
York, Short Hills, Jersey City, Chicago, Dallas, Boston, Atlanta, New Orleans,
Houston, San Francisco, Stamford, London, Hong Kong, Zurich and Tokyo. Group's
executive offices are located at 11100 Santa Monica Boulevard, Los Angeles,
California 90025, and its telephone number is (310) 445-1199.
INVESTMENT TECHNOLOGY GROUP, INC. ITGI is a holding company that conducts
its operations through subsidiaries that provide automated equity trading
services and transaction research to institutional investors and brokers. Prior
to the initial public offering of its common stock in 1994, ITGI was a
wholly-owned subsidiary of Group. ITGI Common Stock has, since such time, been
publicly traded on the Nasdaq National Market under the symbol "ITGI." As of the
date of this Proxy/ Information Statement, Group owns approximately 80.5% of the
outstanding ITGI common stock. ITG, one of ITGI's principal subsidiaries, is a
full service execution firm and broker-dealer that utilizes transaction
processing technology to increase the effectiveness and lower the cost of
institutional and other trading.
ITGI's executive offices are located at 380 Madison Avenue, New York, New
York 10017, and its telephone number is (212) 588-4000.
THE SPECIAL MEETING.
This document is being furnished to you in order for our Board of Directors
to solicit your vote by proxy at the Special Meeting. The Special Meeting will
be held at 9:00 a.m., local time on April 20, 1999, at The New York Helmsley
Hotel, 212 East 42nd Street, New York, New York 10017.
THE SPECIAL ITGI CASH DIVIDEND
ITGI has, as of March 16, 1999, declared a cash dividend of $4.00 per share
to all ITGI stockholders, including Group (the "Special ITGI Cash Dividend"). As
a result, $60.0 million of the Special ITGI Cash Dividend will be payable to
Group. The Special ITGI Cash Dividend will be payable to all of ITGI's
stockholders of record as of April 20, 1999 (the "Special ITGI Cash Dividend
Record Date"). Payment of the Special ITGI Cash Dividend is conditioned upon the
satisfaction or waiver of other conditions to the Merger pursuant to the Merger
Agreement. The Special ITGI Cash Dividend is expected to be paid on April 21,
1999. We believe, based on the advice of counsel, Morgan, Lewis & Bockius LLP,
that the Special ITGI Cash Dividend paid to Group will not result in taxable
income to Group. The Special ITGI Cash Dividend paid to the ITGI Public
Stockholders will be a taxable dividend.
As part of the Transfers, Group will contribute the $60 million it is
expected to receive in respect of the Special ITGI Cash Dividend to JEFCO
immediately prior to the transfer of the capital stock of
11
<PAGE>
JEFCO (and Group's non-ITGI subsidiaries) to New JEF, and New JEF will assume
Group's existing liabilities that are unrelated to ITGI, including the
outstanding publicly traded debt obligations of Group of approximately $150
million. The transfer by Group to JEFCO of amounts received in respect of the
Special ITGI Cash Dividend will be made to increase the consolidated capital of
New JEF, to offset in part the leverage arising from the publicly-traded notes
of Group to be assumed by New JEF in connection with the Transfers, and to
satisfy working capital demands and requirements associated with the Brokerage
and Investment Banking Businesses.
EFFECT OF TRANSACTIONS ON STOCKHOLDER RIGHTS AND STOCK OWNERSHIP
You will not have dissenters' rights of appraisal in connection with the
Merger or the Transfers. See "The Transactions--No Dissenters' Rights."
Provisions in the New JEF Amended and Restated Certificate of Incorporation
and Bylaws, as compared to the Group Certificate of Incorporation and Bylaws,
and in the New ITGI Certificate of Incorporation and Bylaws, as compared to the
ITGI Certificate of Incorporation and Bylaws, may make more difficult or more
expensive or discourage a tender offer, change in control or takeover attempt
that is opposed by the Board of Directors of New JEF or New ITGI, respectively.
As a result, stockholders may have a reduced likelihood of receiving a takeover
premium, a potential takeover may not occur, and such provisions may adversely
affect the market price of New JEF Common Stock or New ITGI Common Stock,
respectively. These anti-takeover provisions include:
- a prohibition on stockholders' calling a special meeting of stockholders;
- the imposition of procedural requirements concerning stockholder proposals
at stockholder meetings;
- a prohibition on stockholder action by written consent; and
- the requirement that any anti-takeover provisions (such as those described
above) may be repealed or altered only upon the affirmative vote of at
least 66 2/3% of the stockholders.
See "The Transactions--The Spin-Off--Comparison of Rights of Current Group
Stockholders and New JEF Stockholders Following the Spin-Off" and "The
Merger--Comparison of Rights of Current Group Stockholders and New ITGI
Stockholders Following the Merger" and "Description of New JEF Capital
Stock--New JEF Common Stock; Delaware Antitakeover Provisions," "--Preferred
Stock," and "-- Certain Antitakeover Provisions--New JEF Certificate and
Bylaws."
The charts on the following pages illustrate the structure of Group, ITGI and
their principal subsidiaries before the Transactions are effected and the
structural and ownership changes brought about following the Transfers, the
Spin-Off and the Merger.
12
<PAGE>
STRUCTURAL AND OWNERSHIP CHANGES ARISING FROM THE TRANSACTIONS
[LOGO]
13
<PAGE>
[LOGO]
14
<PAGE>
RISK FACTORS
YOU SHOULD CONSIDER THE FOLLOWING RISK FACTORS, AS WELL AS THE OTHER
INFORMATION SET FORTH IN THE PROXY/ INFORMATION STATEMENT, THAT ARE RELEVANT TO
THE TRANSACTIONS.
WE ALSO CAUTION YOU THAT THIS PROXY/INFORMATION STATEMENT INCLUDES
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT"). ALL STATEMENTS
REGARDING THE REASONS FOR AND INTENDED EFFECTS OF THE TRANSACTIONS AND OUR AND
NEW JEF'S EXPECTED FUTURE FINANCIAL POSITION, RESULTS OF OPERATIONS, CASH FLOWS,
DIVIDENDS, FINANCING PLANS, BUSINESS STRATEGIES, COMPETITIVE POSITIONS, PLANS
AND OBJECTIVES OF MANAGEMENT FOR FUTURE OPERATIONS, AND CONCERNING SECURITIES
MARKETS AND ECONOMIC TRENDS ARE FORWARD-LOOKING STATEMENTS. ALTHOUGH WE AND NEW
JEF BELIEVE OUR EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE
BASED ON REASONABLE ASSUMPTIONS, NO ASSURANCE CAN BE GIVEN THAT SUCH
EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT. IMPORTANT FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE EXPECTATIONS REFLECTED IN THE
FORWARD-LOOKING STATEMENTS HEREIN INCLUDE, AMONG OTHERS, THOSE SET FORTH BELOW
AS WELL AS GENERAL ECONOMIC AND BUSINESS CONDITIONS; CHANGES IN SECURITIES,
CREDIT AND FINANCIAL MARKET CONDITIONS; ADVERSE CHANGES OR VOLATILITY IN
INTEREST RATES; EFFICACY OF TECHNOLOGY; COSTS OR DIFFICULTIES RELATING TO THE
ESTABLISHMENT OF NEW JEF AND ITGI AS INDEPENDENT ENTITIES; AND INCREASED
COMPETITIVE PRESSURES.
RISK THAT THE TRANSFERS, THE SPIN-OFF AND THE MERGER MAY NOT BE TAX-FREE AND
THAT THE TRANSACTIONS WILL NOT OCCUR
We have received rulings from the IRS through the Tax Ruling to the effect,
among other things, that the Transfers, the Spin-Off and the Merger will qualify
as tax-free transactions with respect to New JEF, ITGI, Group and Group
Stockholders under Sections 332, 351, 355 and 368 of the Internal Revenue Code
of 1986, as amended (the "Code"). Such rulings, while generally binding upon the
IRS, are subject to certain factual representations and assumptions. If these
factual representations and assumptions were incorrect in a material respect,
the rulings would be jeopardized. We are not aware of any facts or circumstances
which would cause such representations and assumptions to be untrue in any
material respect. In addition, each of New JEF, ITGI and Group (and therefore
New ITGI following the Merger) has agreed to certain restrictions on its future
actions to provide further assurances that the Transfers, the Spin-Off and the
Merger will qualify as tax free. If any of New JEF, ITGI, Group or New ITGI
fails to abide by such restrictions and, as a result, the Spin-Off and the
Merger fail to qualify as tax-free transactions, then such breaching party will
be obligated to indemnify the non-breaching party or parties for any resulting
tax liability. However, such tax liability could be substantial, and there is no
assurance that such breaching party would be able to satisfy its indemnification
obligation. Further, the Merger is conditioned on our receipt of legal opinions
stating that the Merger will be tax-free to ITGI Public Stockholders (except
with respect to cash received by ITGI Public Stockholders in lieu of fractional
shares). Such legal opinions neither bind nor preclude the IRS from adopting a
contrary position. If the Tax Ruling is withdrawn or modified by the IRS in any
material adverse respect, or if we do not receive the legal opinions regarding
tax consequences to the ITGI Public Stockholders, the Transfers, the Spin-Off
and the Merger will not occur.
NEW JEF REVENUES AND EARNINGS WILL BE LESS DIVERSIFIED AND MAY BE LESS STABLE
AFTER THE SPIN-OFF
After the separation of New JEF through the Spin-Off, New JEF's revenues and
earnings will be less diversified, and may be less stable, than our consolidated
revenues and earnings (including ITGI) in the periods prior to the Spin-Off.
When the Spin-Off is complete, New JEF will derive virtually all of its revenues
and earnings from its Brokerage and Investment Banking Business and, unlike our
historical results, will not include the revenues and earnings of ITGI, which
have experienced significant growth in recent years. While New JEF believes that
revenues from its Brokerage and Investment Banking Business will remain
moderately stable in the future, New JEF, in general, and New JEF's Brokerage
and Investment Banking Business, in particular, may be vulnerable to revenue
15
<PAGE>
and earnings erosion and significant fluctuations resulting from adverse equity,
debt and interest rate market conditions, increased competition or adverse
competitive developments, economic downturns and New JEF's strategic focus on
small to mid-sized companies in select industries.
NEW ITGI OR NEW JEF MAY BE UNABLE TO SATISFY INDEMNIFICATION OBLIGATIONS
New JEF and Group have entered into a Distribution Agreement dated as of
March 17, 1999 (the "Distribution Agreement"), which, among other things, will
allocate responsibility between Group (and therefore New ITGI following the
Merger) and New JEF for various liabilities and obligations. The Distribution
Agreement provides, among other things, that New JEF will indemnify Group and
its successors (and therefore New ITGI after the Merger) for the liabilities
assumed by New JEF pursuant to the Distribution Agreement, and Group and its
successors, including New ITGI after the Merger, will indemnify New JEF for
liabilities related to ITGI. See "The Transactions--Arrangements between Group
and ITGI Relating to the Spin-Off--Distribution Agreement." However, the
availability of such indemnities will depend upon the future financial strength
of New JEF and Group and its successors, such as New ITGI. No assurance can be
given that the relevant company will be in a position to fund such indemnities.
THE NEW JEF COMMON STOCK TRADING PRICES CANNOT BE PREDICTED AND MAY FLUCTUATE
SIGNIFICANTLY UNTIL AN ORDERLY MARKET DEVELOPS
For many years, there has been a trading market for Group Common Stock;
however, this market reflected investor perceptions concerning the results and
prospects of both the Brokerage and Investment Banking Business and the
Technology-Based Trading and Research Business. Following the Spin-Off, New JEF
will only conduct the Brokerage and Investment Banking Business, and the
Technology-Based Trading and Research Business will not impact investor
perceptions, or the market price, of New JEF Common Stock. There has been no
prior trading market for New JEF Common Stock and we cannot predict, estimate or
give assurances about the trading prices for New JEF Common Stock before or
after the date of the Spin-Off. On the date of the Spin-Off, the New JEF Common
Stock is likely to trade at a price lower than the price at which the Group
Common Stock traded regular way prior to the Spin-Off in light of the
Distribution Ratio and the separation of New JEF from Group and ITGI following
the completion of the Transfers and the Spin-Off. Until the New JEF Common Stock
is fully distributed and an orderly market develops, the trading prices for New
JEF Common Stock may fluctuate significantly. Prices for the New JEF Common
Stock will be determined in the trading markets and may be influenced by many
factors, including the depth and liquidity of the market for New JEF Common
Stock, investor perceptions of New JEF and its business, changes in debt and
equity market conditions, changes in interest rates and results, and general
economic and market conditions.
SUBSTANTIAL SALES OF GROUP COMMON STOCK, NEW JEF COMMON STOCK OR NEW ITGI COMMON
STOCK COULD ADVERSELY AFFECT MARKET PRICES
In the approximately three-month period prior to the Spin-Off, it is
expected that approximately 2.7 million shares of Group Common Stock will be
issued pursuant to the termination of Group benefit plans, the exercise of
outstanding Group options and the issuance of restricted stock. See "Management
of Group and New JEF--Impact of the Spin-Off and Merger on Group's Employee
Benefit Plans." Recipients of such shares, in the aggregate, will incur
significant tax liabilities in connection with the receipt, exercise or purchase
of such shares and in most cases the funding of such liabilities will only be
possible through the sale of Group Common Stock (prior to completion of the
Transactions) or the sale of New ITGI or New JEF Common Stock after the
completion of the Transactions. The New JEF Common Stock distributed to Group
stockholders in the Spin-Off will be freely transferable under the Securities
Act, except for securities received by persons who may be deemed affiliates of
New JEF. The sale of a substantial number of shares of Group Common Stock,
16
<PAGE>
New JEF Common Stock or New ITGI Common Stock could adversely affect the market
price of such securities.
NEW CERTIFICATE AND BYLAW PROVISIONS MAY HAVE THE EFFECT OF IMPEDING A TAKEOVER
Provisions in the New JEF Certificate of Incorporation and Bylaws, as
compared to the Group Certificate of Incorporation and Bylaws, and in the New
ITGI Certificate of Incorporation and Bylaws, as compared to the ITGI
Certificate of Incorporation and Bylaws, and in the General Corporation Law of
the State of Delaware may make more difficult or more expensive or discourage a
tender offer, change in control or takeover attempt that is opposed by the Board
of Directors of New JEF or New ITGI, respectively. As a result, stockholders may
have a reduced likelihood of receiving a takeover premium, a potential takeover
may not occur, and such provisions may adversely affect the market price of New
JEF Common Stock or New ITGI Common Stock, respectively. These anti-takeover
provisions include:
- a prohibition on stockholders' calling a special meeting of stockholders;
- the imposition of procedural requirements concerning stockholder proposals
at stockholder meetings;
- a prohibition on stockholder action by written consent; and
- the requirement that any anti-takeover provisions may be repealed or
altered only upon the affirmative vote of at least 66 2/3% of the
stockholders.
See "The Transactions--The Spin-Off--Comparison of Rights of Current Group
Stockholders and New JEF Stockholders Following the Spin-Off," "--The
Merger--Comparison of Rights of Current Group Stockholders and New ITGI
Stockholders Following the Merger," "Description of New JEF Capital Stock--New
JEF Common Stock; Delaware Antitakeover Provisions," "--Preferred Stock," and
"--Antitakeover Provisions--New JEF Certificate and Bylaws." In addition,
provisions in the Tax Sharing Agreement (as defined herein) that are intended to
preserve the tax-free status of the Spin-Off for Federal income tax purposes
could discourage certain takeover proposals or make them more expensive. See
"The Transactions--Arrangements Between Group and New JEF Relating to the
Spin-Off--Tax Sharing Agreement."
SHARES ELIGIBLE FOR FUTURE SALE--THERE MAY BE SUBSTANTIAL SALES OF NEW ITGI
COMMON STOCK FOLLOWING THE MERGER, WHICH MAY ADVERSELY AFFECT THE PRICE OF THE
NEW ITGI COMMON STOCK.
Following the Merger, there will be approximately 29.7 million shares of New
ITGI Common Stock outstanding, of which approximately 28 million shares will be
tradeable without restriction by persons other than "affiliates" of New ITGI.
The remaining shares of New ITGI Common Stock may be deemed "restricted"
securities within the meaning of the Securities Act, and, as such, may be sold
only pursuant to registration under the Securities Act or an exemption
therefrom, including the exemptions contained in Rule 144 under the Securities
Act. No assurance can be given that holders of "restricted" shares of New ITGI
Common Stock will not decide, based upon the prevailing market and other
conditions, to dispose of all or a portion of such stock pursuant to the
provisions of Rule 144 under the Securities Act.
Following the Merger, there will be approximately 5.5 million outstanding
options to purchase shares of New ITGI Common Stock at varying exercise prices.
New ITGI expects to enter into registration rights agreements with holders of
certain options, pursuant to which New ITGI will be required to file, within 90
days following the consummation of the Merger, a registration statement with
respect to an underwritten public offering of the shares issuable upon exercise
of such options.
Following the Merger, the Group ESOP as assumed by New JEF (the "New JEF
ESOP") will own approximately 1.9 million shares of New ITGI Common Stock and
the ESOP to be created by New ITGI (the "New ITGI ESOP"), will own approximately
117,000 shares of New JEF Common Stock for
17
<PAGE>
the benefit of New ITGI employees. New JEF and ITGI anticipate that the
approximately 117,000 shares of the New JEF Common Stock held by the New ITGI
ESOP will be exchanged for New ITGI Common Stock held by the New JEF ESOP, based
upon fair market values for the respective shares. New JEF has advised ITGI that
any New ITGI Common Stock remaining in the New JEF ESOP after such exchange must
be disposed of by the New JEF ESOP in an orderly fashion over a reasonable
period of time after consummation of the Merger, and it is expected that such
shares will be sold in the public market.
No predictions can be made about the effect, if any, that market sales of
shares of New ITGI Common Stock or the availability of such shares for sale
would have on the market price prevailing from time to time. Nevertheless, sales
of substantial amounts of New ITGI Common Stock in the public market, or the
perception that such sale could occur, may have an adverse impact on the market
price for the shares of New ITGI Common Stock or New ITGI's ability to raise
capital through a public offering of New ITGI's equity securities. Additionally,
New ITGI may also determine to issue its Common Stock to fund acquisitions,
which may have such an effect, as well as be financially dilutive to its
stockholders.
18
<PAGE>
THE SPECIAL MEETING
THE SPECIAL MEETING
DATE, TIME AND PLACE OF THE SPECIAL MEETING
The Special Meeting will be held at 9:00 a.m., local time, on April 20,
1999, at The New York Helmsley Hotel, 212 East 42nd Street, New York, New York
10017.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, our Stockholders will consider and vote upon
proposals to approve and adopt the Merger Agreement and the issuance of the
Merger Shares, the Incentive Plan, the Directors' Plan and the Grant of
Discretionary Authority. See "The Transactions" and the Appendices attached
hereto for more information related to the Transactions.
VOTING AT THE SPECIAL MEETING; RECORD DATE; QUORUM
On the Special Meeting Record Date, there were 23.2 million shares of our
Common Stock outstanding and entitled to vote at the Special Meeting. These
shares were held by approximately 294 holders of record. Each Stockholder of
record on the Special Meeting Record Date is entitled to cast one vote per share
on each proposal. This vote may be cast at the Special Meeting either in person
or by properly executed proxy. The presence, in person or by proxy, of the
holders of a majority of our outstanding Common Stock entitled to vote at the
Special Meeting is necessary to constitute a quorum at the Special Meeting. The
Merger Agreement and the issuance of the Merger Shares must be approved and
adopted by the affirmative vote of the holders of a majority of the shares of
our Common Stock that are outstanding as of the Special Meeting Record Date.
Approval of each of the Incentive Plan, the Directors' Plan and the Grant of
Discretionary Authority requires the affirmative vote of a majority of the votes
held by holders of our Common Stock present and entitled to vote at the Special
Meeting assuming the presence of a proper quorum. As of the Special Meeting
Record Date, our directors and executive officers beneficially owned
approximately 15% of our Common Stock entitled to vote at the Special Meeting.
Our Board unanimously recommends that you approve and adopt the Merger Agreement
and the issuance of the Merger Shares, the Incentive Plan, the Directors' Plan
and the Grant of Discretionary Authority.
PROXIES
We are furnishing you with this Proxy/Information Statement in connection
with the solicitations of proxies by and on behalf of our Board for use at the
Special Meeting. Proxies in the form enclosed, which are properly executed and
returned and not subsequently revoked, will be voted at the Special Meeting.
These proxies will be voted in accordance with the directions specified thereon,
and otherwise in accordance with the judgment of the persons designated as
proxies. If no directions are indicated on a properly executed proxy, such proxy
will be voted in favor of the Merger Agreement and the issuance of the Merger
Shares, and each other proposal. You may revoke a proxy at any time before it is
exercised. This may be accomplished by:
(1) notifying us in writing at 11100 Santa Monica Boulevard, Los Angeles,
California 90025, Attention: Secretary, Jefferies Group, Inc.;
(2) executing and delivering a proxy bearing a later date; or
(3) by attending the Special Meeting and voting by ballot.
TREATMENT OF BROKER NON-VOTES AND ABSTENTIONS AT THE SPECIAL MEETING
All shares of Group Common Stock represented by properly executed proxies
received prior to or at the Special Meeting, as the case may be, and not
revoked, will be voted in accordance with the
19
<PAGE>
instructions indicated in such proxies. If no instructions are indicated on a
properly executed returned proxy, such proxies will be voted FOR the approval of
each of the matters set forth on the proxy card. A properly executed proxy
marked "ABSTAIN," although counted for purposes of determining whether there is
a quorum and for purposes of determining the aggregate voting power and number
of shares represented and entitled to vote at the Special Meeting, will not be
voted. Accordingly, since an affirmative majority approval is required at the
Special Meeting for the Merger Agreement and the issuance of Merger Shares, a
proxy marked "ABSTAIN" will have the effect of a negative vote. Since a majority
of the votes present and entitled to vote at the Special Meeting is required to
approve the Incentive Plan, the Directors' Plan and the Grant of Discretionary
Authority, a proxy marked "ABSTAIN" will also have the effect of a vote against
such proposals.
Shares represented by "broker non-votes" (i.e., shares held by brokers or
nominees which are represented at a meeting but with respect to which the broker
or nominee is not empowered to vote on a particular proposal) will be counted
for purposes of determining whether there is a quorum at the Special Meeting. In
accordance with New York Stock Exchange rules, brokers and nominees are
precluded from exercising their voting discretion with respect to the approval
and adoption of the proposals at the Special Meeting and thus, absent specific
instructions from the beneficial owner of such shares, are not empowered to vote
such shares with respect to such matters. Therefore, a "broker non-vote" will
have the effect of a negative vote with respect to the Merger Agreement and the
issuance of the Merger Shares pursuant to the Merger Agreement. Since a majority
of the votes present and entitled to vote at the Special Meeting is required to
approve the Incentive Plan and the Directors' Plan, shares represented by a
broker non-vote will not have any effect on the votes concerning the Incentive
Plan, the Directors' Plan and the Grant of Discretionary Authority.
The cost of solicitation of Group proxies for the Special Meeting will be
shared equally between Group and ITGI will be paid by Group. In addition to
solicitation by mail, arrangements will be made with brokerage houses and other
custodians, nominees and fiduciaries to send proxy material to beneficial
owners; and Group will, upon request, reimburse them for their reasonable
expense in so doing. Group has retained Georgeson & Company Inc. to aid in the
solicitation of proxies for the Special Meeting and to verify certain records
related to the solicitation at a fee of approximately $20,000 plus expenses.
THE TRANSACTIONS
The following is a brief summary of material aspects of the Transactions.
This summary does not purport to be complete and is qualified in its entirety by
reference to the Merger Agreement and the Distribution Agreement, which are
attached to this Proxy/Information Statement as Appendix A and Appendix B,
respectively, and are incorporated herein by reference. We urge you to read each
agreement carefully.
THE TRANSFERS AND SPIN-OFF
POTENTIAL BENEFITS ASSOCIATED WITH THE TRANSFERS AND THE SPIN-OFF
Our Board of Directors has determined that the Transfers and the Spin-Off
will be beneficial to our business and our Stockholders. The New JEF and ITGI
businesses have distinct financial, investment and operating characteristics.
After the completion of the Transfers and Spin-Off, New JEF's management will
have greater equity-based incentive performance opportunities and greater
freedom to adopt strategies and pursue objectives that they believe are more
appropriate to New JEF than are possible under the present Group ownership
structure. Management also believes that New JEF will be better able to
concentrate its attention and financial resources on New JEF's core business
opportunities and respond to industry conditions and competitive developments.
20
<PAGE>
Following the Transfers and the Spin-Off, New JEF will have a better
opportunity to obtain, retain and motivate its employees through equity-based
incentives, including the Incentive Plan and a New JEF ESOP, that can more
directly link New JEF business results and New JEF stock performance. We believe
that Group's current compensation plans provide inadequate incentives for
employees of the Brokerage and Investment Banking Business because such
compensation is tied to the performance of Group (including ITGI) rather than
the performance of New JEF's Brokerage and Investment Banking Business.
Moreover, Group currently is not able to offer an ESOP funded with equity
securities related only to the Brokerage and Investment Banking Business and
therefore cannot provide its Brokerage and Investment Banking Business employees
with a direct link between their performance and the market value of the equity
interests they receive as compensation under the Group ESOP. The completion of
the Spin-Off, the continuation of the Group ESOP as the New JEF ESOP, the
redenomination of New JEF employee balances in the New JEF ESOP to New JEF
Common Stock only, future allocations of New JEF Common Stock under the New JEF
ESOP and the grant of awards under the Incentive Plan will provide a beneficial
direct link between employee performance and stock performance and therefore
provide enhanced stock-based incentive opportunities that are competitive with
arrangements offered by other investment banking and brokerage firms.
Consequently, we are hopeful that the more direct link between incentive
compensation arrangements for key employees of New JEF and the performance of
the New JEF Common Stock will prove beneficial for New JEF stockholders.
We also believe that, following the Merger and the Spin-Off, the financial
markets will be able to focus on the individual strengths of New JEF's Brokerage
and Investment Banking Business and more accurately evaluate its performance
compared to competitive and peer companies. The elimination of the consolidation
of ITGI's financial results with the Brokerage and Investment Banking Business
should provide stockholders with a clearer view of the financial performance and
condition of the Brokerage and Investment Banking Business.
MANNER OF EFFECTING THE SPIN-OFF
The general terms and conditions relating to the Transfers and the Spin-Off
are set forth in the Distribution Agreement between Group and New JEF attached
hereto as Appendix B. See "--Arrangements Between New JEF and Group Relating to
the Spin-Off--Distribution Agreement." We will effect the Spin-Off by delivering
all of the outstanding shares of New JEF Common Stock to EquiServe, (the
"Distribution Agent") for distribution to our Stockholders as of the Spin-Off
Record Date. It is expected that certificates representing shares of New JEF
Common Stock will be mailed to Stockholders as soon as practicable after April
27, 1999.
NO ISSUANCE OF NEW JEF FRACTIONAL SHARES THROUGH THE SPIN-OFF
No certificates or scrip representing fractional interests in shares of New
JEF Common Stock ("Fractional Shares") will be issued to our Stockholders as
part of the Spin-Off. The Distribution Agent, acting as agent for the
Stockholders otherwise entitled to receive in the Spin-Off certificates
representing Fractional Shares, will aggregate and sell in the open market all
Fractional Shares at then prevailing prices and distribute the net proceeds to
our Stockholders who are entitled to payment.
RESULTS OF THE TRANSFERS AND THE SPIN-OFF
After the Transfers and the Spin-Off, New JEF will be a separate public
company and New JEF Common Stock will be traded on the NYSE. The number and
identity of stockholders of New JEF immediately after the Spin-Off will be the
same as the number and identity of stockholders of Group on the Spin-Off Record
Date. Immediately after the Spin-Off, New JEF expects to have approximately 294
holders of record of New JEF Common Stock and approximately 23.9 million shares
of New JEF Common Stock outstanding, based on the anticipated number of record
stockholders and issued and
21
<PAGE>
outstanding shares of Group Common Stock as of the close of business on the
Spin-Off Record Date and the Distribution Ratio of one share of New JEF Common
Stock for each outstanding share of Group Common Stock.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE SPIN-OFF
Group has received rulings from the IRS, through the Tax Ruling, that the
Spin-Off will qualify as a tax-free spin-off to Group and its Stockholders under
Sections 355 and 368 of the Code and, therefore, that the material U.S. federal
income tax consequences to holders of Group Common Stock as a result of the
Spin-Off will be as follows:
(1) except as described below with respect to Fractional Shares, the
Stockholders will not recognize income, gain or loss upon the receipt of
New JEF Common Stock in the Spin-Off;
(2) the aggregate tax basis of a Stockholder's Group Common Stock and New
JEF Common Stock (including any Fractional Share interests to which a
Group stockholder is entitled) held by a Stockholder after the Spin-Off
will be the same as the tax basis of the Group Common Stock held by such
Stockholder immediately before the Spin-Off, and will be allocated
between the shares of New JEF Common Stock and Group Common Stock in
proportion to their relative fair market values at the time of the
Spin-Off;
(3) the holding period for tax purposes of the shares of New JEF Common
Stock received by a Group Stockholder (including any Fractional Share
interests to which a Group Stockholder is entitled) will include the
period during which the Stockholder held Group Common Stock, provided
that the shares of Group Common Stock are held as a capital asset by
such Stockholder at the time of the Spin-Off; and
(4) cash received in lieu of Fractional Share interests in New JEF Common
Stock will give rise to gain or loss equal to the difference between the
amount of cash received and the tax basis allocable to such Fractional
Share interests. Such gain or loss will be capital gain or loss if the
shares of Group Common Stock are held as a capital asset at the time of
the Spin-Off.
A condition to the Spin-Off is that the Tax Ruling shall not have been withdrawn
or modified by the IRS in any material adverse respect.
U.S. Treasury regulations require each Group Stockholder that receives New
JEF Common Stock in the Spin-Off to attach to the Stockholder's federal income
tax return for the year in which such stock is received a detailed statement
setting forth such data as may be appropriate in order to show the applicability
of Section 355 of the Code to the Spin-Off. Within a reasonable time after the
Spin-Off, Stockholders of record as of the Spin-Off Record Date will be provided
with the information necessary to comply with that requirement, and will provide
information regarding the allocation of basis described in clause (2) in the
preceding paragraph.
The foregoing is only a summary of the material U.S. Federal income tax
consequences of the Spin-Off under the law in effect as of the date hereof. IT
DOES NOT PURPORT TO COVER ALL INCOME TAX CONSEQUENCES AND MAY NOT APPLY TO
STOCKHOLDERS WHO ACQUIRED THEIR GROUP COMMON STOCK IN CONNECTION WITH A GRANT OF
SHARES AS COMPENSATION, WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED STATES,
OR WHO ARE OTHERWISE SUBJECT TO SPECIAL TREATMENT UNDER THE CODE.
All Stockholders should consult their own tax advisors regarding the
appropriate income tax treatment of their receipt of New JEF Common Stock
pursuant to the Spin-Off, including the application of Federal, state, local and
foreign tax laws, and the effect of possible changes in tax law that may affect
the tax consequences described above.
22
<PAGE>
LISTING AND TRADING OF NEW JEF COMMON STOCK
There is not currently a public market for the New JEF Common Stock. An
application has been made to list the New JEF Common Stock on the NYSE and
listing under the symbol "JEF" is anticipated. A "when-issued" trading market
for New JEF Common Stock is expected to develop approximately one week before
the Spin-Off Record Date. The term "when-issued" means that shares can be traded
prior to the time certificates are actually available or issued. The prices at
which the New JEF Common Stock may trade on a "when-issued" basis before the
Spin-Off, on a regular way basis after the Spin-Off or after such time
certificates are actually available or issued cannot be predicted. Until the New
JEF Common Stock is fully distributed and an orderly market develops, trading
prices for New JEF Common Stock may fluctuate significantly. The prices at which
the New JEF Common Stock trades will be determined by the marketplace and may be
influenced by many factors including, among others, the depth and liquidity of
the market for New JEF Common Stock, investor perception of New JEF and its
business, market conditions for interest rates and fixed income and equity
securities, New JEF's results and general economic and market conditions.
New JEF and Group understand that the NYSE will require that shares of Group
Common Stock that are sold or purchased from the period beginning on April 16,
1999, and ending on April 27, 1999, be accompanied by due-bills representing the
New JEF Common Stock distributable with respect to such shares and that during
such period the Group Common Stock may not be purchased or sold separately from
the due bills. The Transfer Agent and Registrar for the New JEF Common Stock
will be First Chicago Trust Company of New York, a division of EquiServe.
New JEF Common Stock distributed to Stockholders in the Spin-Off will be
freely transferable under the Securities Act, except for securities received by
persons who may be deemed to be affiliates of New JEF pursuant to Rule 405 under
the Securities Act. Persons who may be deemed to be affiliates of New JEF after
the Spin-Off generally include individuals or entities that control, are
controlled by, or are under common control with New JEF, and such persons
include directors of New JEF. Persons who are affiliates of New JEF will be
permitted to sell their shares of New JEF Common Stock received in the Spin-Off
pursuant to Rule 144 under the Securities Act except for the holding period
requirements of Rule 144 which are not applicable in this instance. As a result,
New JEF Common Stock received by New JEF affiliates pursuant to the Spin-Off may
be sold if certain provisions of Rule 144 under the Securities Act are complied
with (e.g., the amount sold within a three-month period does not exceed the
greater of one percent of the outstanding New JEF Common Stock or the average
weekly trading volume for New JEF Common Stock during the preceding four week
period and the securities are sold in "brokers' transactions" and in compliance
with certain notice provisions under Rule 144).
ACCOUNTING TREATMENT OF THE SPIN-OFF
The Spin-Off will result in New JEF reporting historical results and balance
sheet amounts relating to ITGI prior to the Spin-Off as a discontinued operation
of New JEF.
COMPARISON OF RIGHTS OF CURRENT GROUP STOCKHOLDERS AND NEW JEF STOCKHOLDERS
FOLLOWING THE SPIN-OFF
Upon the consummation of the Spin-Off, you will become stockholders of New
JEF. Since Group and New JEF are each organized under the laws of the State of
Delaware, any differences in your rights as a holder of common stock of these
two corporations will arise solely from differences in certificates of
incorporation and bylaws of these two corporations. The following are summaries
of material differences between your rights as stockholders of Group and New
JEF. The following discussions are not intended to be complete and are qualified
in their entirety by reference to the Delaware General Corporation Law ("DGCL"),
the certificate of incorporation and bylaws of Group
23
<PAGE>
and the New JEF amended and restated certificate of incorporation (the "New JEF
Certificate") and the New JEF bylaws (the "New JEF Bylaws").
SPECIAL MEETINGS. The Group Bylaws state that the special meetings of the
stockholders for any purpose may be called by the Board of Directors, President
or the Secretary. A special meeting of the stockholders of Group shall be called
by the President or the Secretary whenever stockholders owning a majority of the
shares of Group entitled to vote on matters to be submitted to the stockholders
shall make application therefor in writing. The New JEF Certificate and Bylaws
provide that special meetings may be called by the Board of Directors or any
person authorized by the Board of Directors to call a special meeting. The New
JEF Certificate and Bylaws preclude stockholders from having the ability to call
special meetings of stockholders.
ACTION BY STOCKHOLDERS WITHOUT A MEETING. The Group Bylaws expressly
include a provision permitting the Group Stockholders to consent in writing to
any action without a meeting, provided such consent is signed by stockholders
having at least the minimum number of votes required to authorize such action at
a meeting of stockholders at which all shares entitled to vote thereon were
present and voted. The New JEF Certificate and Bylaws do not permit stockholders
to take action by any written consent in lieu of a meeting.
STOCKHOLDERS PROPOSALS. The Group Bylaws do not include a provision
restricting the manner in which nominations for directors may be made by
stockholders or the other business which may be brought before a meeting. The
New JEF Bylaws provide that nominations by stockholders of persons for election
to the Board of Directors at a stockholder's meeting and for the proposal of
other business to be considered at a stockholder's meeting generally must be
received not less than 60 days, nor more than 90 days, prior to the meeting and
such proposals must supply adequate information concerning the proponent and the
proposal, as specified in the New JEF Bylaws.
CHARTER AMENDMENTS. Under the Group Certificate and New JEF Certificate, an
amendment or change to the certificate of incorporation requires the approval of
the Board of Directors, followed by a vote of the owners of a majority of the
shares entitled to vote thereon. However, the New JEF Certificate also requires
the approval of the holders of at least 66 2/3% of the voting power of all of
the shares entitled to vote to alter, amend, repeal or adopt any provision
inconsistent with or limiting the effect of provisions of certain enumerated
antitakeover provisions in the New JEF Certificate, whereas the Group
Certificate contains no comparable provision.
AMENDMENTS TO BYLAWS. Each of the Group Bylaws and New JEF Bylaws provide
that the bylaws may be amended or repealed, and new bylaws may be made, by an
affirmative majority of the votes cast at any annual or special meeting of
stockholders, or by an affirmative vote of a majority of the directors present
at a meeting of the Board of Directors. However, the New JEF Bylaws also
require, in connection with stockholder proposed changes to the New JEF Bylaws,
the approval of the holders of at least 66 2/3% of the voting power of all of
the shares entitled to vote to alter, amend, repeal or adopt any bylaw provision
inconsistent with or limiting the effect of provisions of certain enumerated
antitakeover provisions in the New JEF Bylaws, whereas the Group Bylaws contain
no comparable provision.
AGREEMENTS BETWEEN GROUP AND NEW JEF RELATING TO THE SPIN-OFF
To facilitate the orderly transition into two independent companies, Group
and New JEF have entered into certain agreements described in this section.
DISTRIBUTION AGREEMENT
New JEF is party to the Distribution Agreement, which provides for, among
other things, the principal corporate transactions required to effect the
Spin-Off, the conditions precedent to the
24
<PAGE>
Spin-Off, the allocation between Group (and therefore New ITGI following the
Merger) and New JEF of certain assets and liabilities and certain other
transition arrangements.
CONDITIONS TO THE SPIN-OFF. The Spin-Off will occur only in the event all
of the following conditions, among others, are satisfied or waived by Group:
(1) the Registration Statement on Form 10 (the "Exchange Act Registration
Statement") under the Exchange Act filed by New JEF with the SEC shall
have been declared, or become, effective;
(2) ITGI shall have paid the Special ITGI Cash Dividend;
(3) the Transfers shall have been consummated, including that Group shall
have transferred the Group obligations under separate indentures
governing its 8 7/8% Senior Notes due 2004 and 7 1/2% Senior Notes due
2007 to New JEF (the "Senior Notes") and Group shall have executed
supplemental indentures pursuant to which New JEF shall assume and Group
shall be released from the obligations concerning the Senior Notes;
(4) the New JEF Common Stock shall have been approved for listing on the
NYSE;
(5) the Tax Ruling shall not have been withdrawn or modified by the IRS in
any material adverse respect;
(6) the pre-closing conditions under the Merger Agreement shall have been
satisfied or waived by Group and the pre-closing of the Merger shall
have been completed (see "--The Merger; the Merger Agreement"); and
(7) Group being satisfied at all relevant times before the Spin-Off that it
owned at least 80% of the outstanding ITGI capital stock.
ALLOCATION OF ASSETS AND LIABILITIES. The Distribution Agreement provides
generally that all assets of Group (other than Group's ownership of ITGI capital
stock) and all liabilities of Group (other than liabilities of or related to
ITGI) will be transferred to and assumed by New JEF or JEFCO. New JEF has agreed
to obtain and maintain any necessary letters of credit obtained by Group for New
JEF's benefit prior to the Effective Time. See clause 12 under "--The Merger;
The Merger Agreement; Group Covenants." If Group cannot transfer any non-ITGI
liabilities to New JEF, Group (and New JEF following the Spin-Off) will obtain
letters of credit for certain non transferred liabilities that have not been
mitigated, as provided for in the Merger Agreement.
CROSS-INDEMNIFICATION. On and after the date of the Spin-Off, New JEF has
agreed to indemnify, defend and hold harmless Group and its successors
(including New ITGI following the Merger) and their subsidiaries, 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
claims, suits, arbitrations, inquiries, proceedings or investigations by or
before any court, governmental or other regulatory or administrative agency or
commission or any other tribunal ("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 (as defined in the Distribution Agreement) or the
failure of New JEF or any of its subsidiaries to assume, pay, perform or
otherwise discharge, any of the Holding Liabilities.
On and after the date of the Spin-Off, Group and its successors (including
New ITGI following the Merger, collectively, the "ITGI Group") have agreed to
indemnify, defend and hold harmless New JEF and its subsidiaries and each of
their respective directors, officers, employees and agents (the "New JEF
Indemnitees") from and against any and all Indemnifiable Losses incurred or
suffered by any of
25
<PAGE>
the New JEF Indemnitees and arising out of, or due to or otherwise in connection
with any of the ITGI Liabilities (as defined in the Distribution Agreement) or
the failure of the ITGI Group to pay, perform or otherwise discharge, any of the
ITGI Liabilities. The Distribution Agreement includes procedures for notice and
payment of indemnification claims and provides that the indemnifying party may
assume the defense of the claim or suit brought by a third party.
BENEFITS AGREEMENT
New JEF and Group have entered into the benefits agreement attached hereto
as Appendix C (the "Benefits Agreement"). The Benefits Agreement provides, among
other things, that as of the Effective Time, New JEF shall assume, retain and be
liable for all wages, salaries, welfare, retirement, incentive compensation and
other employee related liabilities and obligations with respect to employees of
Group (excluding ITGI and its subsidiaries) and New ITGI shall assume, retain
and be liable for such liabilities and obligations with respect to employees of
ITGI and its subsidiaries.
Prior to the Effective Time, Group amended the profit sharing and employee
stock ownership plans to provide that all active participants in such plans
shall be fully vested in their accounts. Generally, New JEF will assume and
become a successor employer with respect to the profit sharing and employee
stock ownership plans currently maintained by Group and will continue such plans
for the benefit of eligible employees of Group (excluding ITGI and its
subsidiaries). New ITGI will establish a profit sharing plan and an employee
stock ownership plan for the benefit of its eligible employees as soon as
practicable following the Effective Time. Assets equal to the aggregate account
balances of employees of ITGI and its subsidiaries in the profit sharing and
employee stock ownership plans assumed by New JEF shall be transferred to the
New ITGI plans to be maintained for the benefit of such employees.
New JEF will also assume and become the successor employer for the defined
benefit pension plan currently maintained by Group. The accrued benefits of all
active participants in the pension plan shall be vested as of December 31, 1998.
As soon as is practicable following the Effective Time, and if such action is
approved by the IRS, participants in the pension plan who will continue to be
employees of New ITGI and its subsidiaries will be given the opportunity to
receive actuarially equivalent lump sum distributions of the benefits they have
accrued under the pension plan. In order to reflect certain modifications to the
pension plan affecting the amount of benefits to be provided to the employees of
New ITGI and its subsidiaries in connection with their termination of
participation in the plan and in order to reflect New ITGI's share of the
funding obligations under the plan, New ITGI will pay to the pension plan an
actuarially computed amount in order to discharge the costs associated with such
benefits and its share of such funding obligations.
Prior to the Effective Time, optionees under the Group stock incentive plan
shall have the opportunity to exercise stock options previously granted under
the plan. New JEF shall be responsible for all liabilities relating to stock
options granted by Group prior to the Effective Time. In contemplation of the
Spin-Off, the Capital Accumulation Plan for Key Employees (the "Group CAP
Plan"), a nonqualified deferred compensation plan maintained by Group, was
terminated and all balances of cash and Group common stock held under the plan
were distributed except with respect to the accounts of five participants in the
plan. The liability associated with the accounts of the four participants who
will be New JEF employees will be assumed by New JEF and the liability
associated with the account of the participant who is an ITGI employee has been
assumed by ITGI. In exchange for ITGI's assumption of such liability, Group has
paid approximately $1.1 million to ITGI. In addition, prior to the Effective
Time, Group Common Stock under the Employee Stock Purchase Plan shall be
distributed to participants.
New ITGI will assume the ITGI 1994 Stock Option and Long-Term Incentive
Plan, the ITGI Employee Stock Purchase Plan, the ITGI Pay-For-Performance
Incentive Plan and the ITGI Non-
26
<PAGE>
Employee Directors' Stock Option Plan. Awards authorized under those plans may
be made to employees and directors of New ITGI following the Effective Time.
TAX SHARING AND INDEMNIFICATION AGREEMENT
New JEF, ITGI and Group have entered into a Tax Sharing and Indemnification
Agreement as attached hereto as Appendix D and an Amended and Restated Tax
Sharing Agreement as attached thereto as Exhibit A (collectively, the "Tax
Sharing Agreement"). The Tax Sharing Agreement will allocate pre-Spin-Off tax
liabilities between New JEF, ITGI and Group and their respective subsidiaries
for the year of the New JEF Spin-Off and prior tax years. The term "Ancillary
Agreements" is sometimes referred to in this document as the Distribution
Agreement, the Benefits Agreement and the Tax Sharing Agreement, collectively.
Under the Tax Sharing Agreement, for all Group tax years ending before or
including the Distribution Date, New JEF will bear any excess over ITGI's share
(computed as if ITGI and its subsidiaries were a separate consolidated or
combined group) of Group's:
(1) Federal consolidated income tax liability,
(2) any unitary or combined state or local income or franchise tax
liability, and
(3) any foreign income tax liability.
Each of ITGI and New JEF is also responsible for paying all tax liabilities
arising from any tax returns which it files separately. Each of ITGI and New JEF
will be responsible for that portion of the Federal consolidated income tax
liability of Group attributable to it. In addition, each of ITGI and New JEF
will pay to the other the amount by which the Federal consolidated income tax
liability of Group has been reduced as a result of the inclusion of ITGI and New
JEF, and their respective subsidiaries, in Group. If Group's tax liability for
any tax year ending before or including the date of the Spin-Off is changed or
adjusted as a result of a tax examination or otherwise, then each of ITGI's and
New JEF's share of Group's adjusted tax liability or benefit shall be recomputed
and agreed to by the parties. Any payments due between New JEF and ITGI as a
result of the recomputation will include interest for the periods in question at
the rates charged by the applicable tax authority with respect to underpayments
of income tax or paid by the applicable tax authority on overpayments of income
tax.
The Tax Sharing Agreement generally provides that in the event that either
New ITGI or New JEF takes any action inconsistent with, or fails to take any
action required by, or in accordance with, the qualification of the Spin-Off as
tax-free, then New ITGI or New JEF, as the case may be, will be liable for and
indemnify and hold the other party harmless from any tax liability resulting
from such action or inaction. If either party engages in any transaction
involving its stock or assets, and as a result, the Spin-Off is treated as a
taxable event, then the party engaging in such transaction shall hold the other
party harmless from any tax liabilities that result from the treatment of the
Spin-Off as a taxable event.
CLEARING AGREEMENT
Pursuant to a Fully Disclosed Clearing Agreement dated as of March 15, 1994
(the "Clearing Agreement"), JEFCO, as clearing broker, provides certain
execution and clearing services for customer and proprietary accounts of ITG
(the "Introduced Accounts"). These services include, among others, (1) execution
of orders, (2) mailing of confirmations, notices and monthly statements, (3)
providing reports to ITGI, (4) settling certain contracts and transactions, (5)
engaging in all cashiering functions and (6) record keeping. JEFCO is required
to remit fees to ITG on a weekly basis after deduction of amounts due.
Introduced Accounts may only be charged such fees or other charges as JEFCO may
direct. The Clearing Agreement establishes procedures applicable to Introduced
Accounts and the processing of transactions for such accounts and establishes
the various responsibilities of the parties. With certain exceptions, JEFCO is
responsible for all Introduced Accounts and transactions in such accounts. JEFCO
reserves the right to reject any proposed account and to terminate any
Introduced Account. The Clearing Agreement also requires ITG to indemnify
against certain liabilities arising
27
<PAGE>
from, among other things, failed settlements, failure of Introduced Accounts to
satisfy any applicable margin requirements, ITG's failure to perform its duties
and obligations and claims between ITG and its customers. In 1998, ITG paid
approximately $11.9 million to JEFCO for services performed under the clearing
agreement.
Effective as of January 1, 1999, JEFCO and ITG entered into a new clearing
agreement on substantially similar terms as the Clearing Agreement except that:
(a) the new agreement has an initial term of January 1, 1999 to June 30, 2000,
(b) with 180 days' prior notice, either party can cancel the agreement at any
time for any reason, effective on or after June 30, 2000, (c) neither party can
terminate the agreement prior to June 30, 2000 except for a material breach by
the other party and (d) rates for services provided through June 30, 2000 are
the same as in 1998. JEFCO believes that the terms of this agreement are
generally as favorable as those that could be negotiated with unaffiliated third
parties.
BACKGROUND OF AND REASONS FOR THE TRANSACTIONS
For many years, Group has been engaged, through its subsidiaries, in the
active conduct of two principal lines of business:
- the Brokerage and Investment Banking Business, which consists of a
full-service international investment banking and brokerage business
serving institutions and small- to medium-sized corporations and is
conducted primarily through its wholly-owned subsidiary, JEFCO; and
- the Technology-based Trading and Research Business, which serves
institutional investors and brokers and is conducted through ITGI and its
subsidiaries.
Each of the Brokerage and Investment Banking Business and the
Technology-Based Trading and Research Business has separate management teams and
highly skilled employees on which the success of the business is dependent. The
Brokerage and Investment Banking Business's management and employees are
primarily focused on investment banking, brokerage, capital raising, research,
mergers and acquisition activities, business restructuring advisory services and
a traditional, broker-dealer business. The Technology-Based Trading and Research
Business's management and employees are primarily focused on the use of
technology to create a seamless infrastructure for trading securities and
developing high-content, leading-edge securities research and analysis products.
In April 1996, Group had a meeting with the IRS to explore the tax treatment
which would flow from a possible spin-off by Group of ITGI. At this meeting,
Group management discussed a proposed spin-off of ITGI, several related
transactions and the business purposes for those proposed transactions
including:
- the need to obtain and retain the services of key employees by offering
direct equity interests in ITGI,
- the need to improve the fit and focus of incentive compensation
arrangements for each of Group's two principal lines of business (the "fit
and focus" business purpose),
- the ability to enhance ITGI's stock as acquisition currency, and
- the formation of a leveraged ESOP to acquire shares of ITGI in the open
market.
At a second meeting with the IRS in August 1996, Group discussed whether a
ruling position announced by the IRS was applicable to compensatory employee
stock options and whether outstanding employee stock options in ITGI's stock
would be treated by the IRS as outstanding stock for purposes of determining
whether Group had the requisite control of ITGI prior to the possible ITGI
spin-off.
28
<PAGE>
In August 1996, Group deferred its decision to proceed with the spin-off of
ITGI, largely due to the fact that the key employee who sought a direct interest
in ITGI stock before taking the position as successor to the Chief Executive
Officer of ITGI advised Group that an ITGI spin-off would not be necessary as a
condition to his acceptance of the position. In addition, from a business
perspective, the decision to defer further consideration of an ITGI spin-off was
due to concern that, at that time, a spin-off of ITGI could lead to two
undercapitalized businesses.
More than a year later, Group renewed discussion with the IRS regarding the
proposed ITGI spin-off and requested an additional pre-submission conference,
which was held in December 1997. At this conference, management of Group
discussed the business purposes for the transactions, including:
- the need to obtain and retain the services of key employees by offering
them direct equity interests in ITGI, including through an ESOP,
- the need to improve the fit and focus of incentive compensation
arrangements for each of Group's two principal lines of business, and
- the ability to enhance ITGI's stock as acquisition currency.
At this conference, management of Group also discussed the effect of a more
than 5% shareholder on the fit and focus business purpose and the effect of
outstanding ITGI stock options in analyzing whether Group had the requisite
control of ITGI prior to the proposed ITGI spin-off.
During January and February, 1998, after consideration of the issues
discussed in the conferences and based on advice from its employee compensation
advisor and other factors, management of Group and ITGI concluded that a
separation of the Investment Banking Brokerage Business from the
Technology-Based Trading and Research Business would benefit both businesses by
enhancing their ability to obtain, retain and motivate employees through
equity-based compensation incentives that can more directly be linked to the
results of their respective businesses. In order to effect the Spin-Off business
purpose, and solely in contemplation of the Spin-Off, New JEF will adopt a
program of equity-based compensation, including the Incentive Plan, the
Directors' Plan, the New JEF ESOP, a Section 401(k)/After-Tax Thrift Plan and an
Employee Stock Purchase Plan designed to tie employee compensation specifically
to the results of New JEF's operations, with incentives appropriate to the
Brokerage and Investment Banking Business. The management of Group concluded
that the current intermingling of the two businesses' results seriously dilutes
the effectiveness of these programs as they currently exist at Group. It is
expected that, following the Spin-Off, this separation of equity-based
compensation, including in particular the Incentive Plan and a New JEF ESOP,
will represent a significant long-term commitment to grant stock to employees
and significantly improve the ability of New JEF to compete for employees in a
tight labor market.
On March 17, 1999 the Group Board unanimously approved the Transactions and
believes that the terms of the Transactions are fair to, and in the best
interests of, the stockholders of Group. The Transfers and Spin-Off will result
in the separation of the Brokerage and Investment Banking Business from the
Technology-Based Trading and Research Business of ITGI. In addition, the Merger
will be effected following the Spin-Off in order to combine public trading in
one stock (i.e., New ITGI related to the Technology-Based Trading and Research
Business), rather than the two corporate entities (Group and ITGI) following the
separation of New JEF from Group as a result of the Spin-Off.
In the course of its deliberations with respect to considering approval of
the Transactions, the Group Board received the advice of management regarding
the Brokerage and Investment Banking Business and the Technology-Based Trading
and Research Business and the advice of management and legal counsel regarding
the terms and provisions of the Merger Agreement, the Distribution
29
<PAGE>
Agreement, the Benefits Agreement and the Tax Sharing Agreement. The Group Board
considered a number of other factors in approving the Transactions, including
without limitation:
- that the continuation of the Group ESOP as the New JEF ESOP and the
redenomination of Group Common Stock balances from the Group ESOP to only
New JEF Common Stock balances and the allocation of additional shares of
New JEF in the future will provide a valuable incentive to New JEF's
employees,
- that the Transactions would improve the fit and focus of incentive
compensation arrangements for each of Group's two principal lines of
business, and
- that the Transactions would provide Group Stockholders with a clearer
picture of the separate financial results of each business.
The foregoing discussion of the information and factors considered and given
weight by the Group Board is not intended to be exhaustive. In view of the
variety of factors considered in connection with its evaluation of the
Transactions, the Group Board did not find it practicable to, and did not,
quantify or otherwise assign relative weights to the specific factors considered
in reaching its determination.
THE MERGER
As soon as practicable following the satisfaction or waiver of all
conditions to the Merger, including the consummation of the Transfers and the
Spin-Off, the Merger will be consummated upon the filing of a Certificate of
Merger with the Secretary of State of the State of Delaware. The time that the
Certificate of Merger is filed is referred to herein as the "Effective Time" and
the date of filing is referred to as the "Effective Date."
IMPACT OF MERGER ON GROUP AND ITGI STOCKHOLDERS
The Merger will effectively result in the transfer of Group's ownership of
ITGI to Group Stockholders. As a Stockholder of Group, the Merger will enable
you to directly own shares of New ITGI. After the Merger, each former Group
Stockholder will own the same number of shares of Common Stock in New ITGI as
the number of shares of Group Common Stock that such Group Stockholder owned
before the Merger.
Pursuant to the Merger Agreement, as of the Effective Time, each issued and
outstanding share of ITGI Common Stock (other than any shares held by Group)
will be converted into the right to receive such number of shares of Group
Common Stock pursuant to the Exchange Ratio. The Exchange Ratio is equal to the
result obtained by dividing
- the total number of shares of Group Common Stock outstanding immediately
prior to the Effective Time by
- the total number of shares of ITGI Common Stock held by Group immediately
prior to the Effective Time.
The Exchange Ratio is a formula that has been established to provide
- the ITGI Public Stockholders with the same proportionate ownership of New
ITGI that they owned of ITGI prior to the Effective Time and
- the Stockholders of Group with collectively the same percentage ownership
of New ITGI that Group owned of ITGI prior to the Merger.
30
<PAGE>
For example, based upon the anticipated outstanding shares of Group Common
Stock as of the Effective Date (23.9 million), the Exchange Ratio would have
been 1.59 (23.9 million divided by 15.0 million) and the ITGI Public
Stockholders would have collectively owned 19.5% of the New ITGI Common Stock
and our Stockholders would have collectively owned 80.5% of New ITGI Common
Stock. Additionally, pursuant to the Merger Agreement,
- each vested ITGI Option will be converted into a vested New ITGI Option;
and
- each unvested ITGI Option will be converted into an unvested New ITGI
Option, with vesting established in accordance with the vesting schedule
of the replaced option;
provided, however, such ITGI options will be adjusted so as to preserve the
inherent value of the options prior to the Special ITGI Cash Dividend and the
Merger, respectively, and therefore appropriate adjustments (a) will be made to
reduce the exercise price to take into account the effects of the Special ITGI
Cash Dividend and (b) may be made to increase the number of shares subject to
the option and decrease the option exercise price to reflect the Exchange Ratio.
U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The following discussion is a summary of the material U.S. federal income
tax consequences of the Merger to ITGI, Group and the ITGI Public Stockholders.
The discussion which follows is based on the Code, Treasury regulations
promulgated thereunder, administrative rulings and pronouncements and judicial
decisions as of the date hereof, all of which are subject to change, possibly
with retroactive effect.
Group has received rulings from the IRS through the Tax Ruling that, among
other things, the Merger will qualify as a tax-free liquidation with respect to
Group and ITGI under Section 332 of the Code. Consummation of the Merger is
conditioned upon the Tax Ruling not being withdrawn by the IRS or modified by
the IRS in any material adverse respect. Further, it is a condition to the
obligations of ITGI and Group under the Merger Agreement that Group receive an
opinion from Morgan, Lewis & Bockius LLP regarding certain federal income tax
consequences of the Merger and ITGI receive an opinion from Cahill Gordon &
Reindel regarding certain federal income tax consequences of the Merger, each
dated as of the date of this Proxy/Information Statement, to the effect that:
(1) with respect to the ITGI Public Stockholders, the Merger will qualify as a
"reorganization" under Section 368(a) of the Code and (2) ITGI and Group each
will be a party to that reorganization within the meaning of Section 368(b) (the
"Tax Opinions"). Morgan, Lewis & Bockius LLP and Cahill Gordon & Reindel will
confirm their respective opinions as of the Effective Time, provided that there
shall have been no change in law between the date of this Proxy/Information
Statement and the Effective Time and the Merger is consummated in accordance
with the provisions of the Merger Agreement.
TAX OPINIONS. The Tax Opinions will assume consummation of the Merger in
accordance with the provisions of the Merger Agreement and the absence of
changes in existing law, and may rely on assumptions and representations of ITGI
and Group relating to the requirements of a reorganization. The Tax Opinions
neither bind nor preclude the Internal Revenue Service from adopting a contrary
position. An opinion of counsel sets forth such counsel's legal judgment and has
no binding effect or official status of any kind, and no assurance can be given
that contrary positions will not be successfully asserted by the Internal
Revenue Service or adopted by a court if the issues are litigated. We believe,
based upon the Tax Ruling and the Tax Opinions, that the Merger will have the
U.S. federal income tax consequences discussed below.
TAX IMPLICATIONS TO GROUP AND ITGI. No income, gain or loss will be
recognized by Group or ITGI for federal income tax purposes as a result of the
Merger.
31
<PAGE>
TAX IMPLICATIONS TO ITGI PUBLIC STOCKHOLDERS. With respect to the ITGI
Public Stockholders, the Merger will be treated for U.S. federal income tax
purposes as a reorganization within the meaning of Section 368(a) of the Code,
and Group and ITGI will each be a party to such reorganization within the
meaning of Section 368(b) of the Code. Except to the extent that ITGI Public
Stockholders receive cash in lieu of fractional shares of Group Common Stock,
ITGI Public Stockholders who exchange ITGI Common Stock in the Merger solely for
Group Common Stock will not recognize gain or loss for federal income tax
purposes upon the receipt of Group Common Stock in exchange for their ITGI
Common Stock. An ITGI Public Stockholder's aggregate tax basis for the Group
Common Stock received pursuant to the Merger will equal such ITGI Public
Stockholder's aggregate tax basis in the ITGI Common Stock exchanged therefor,
reduced by the portion of the stockholder's tax basis properly allocated to the
fractional share interest, if any, for which the stockholder receives cash. An
ITGI Public Stockholder's holding period for the Group Common Stock received
pursuant to the Merger will include the holding period of the ITGI Common Stock
surrendered in exchange therefor, provided that the ITGI Common Stock was held
as a capital asset on the Effective Date. An ITGI Public Stockholder who
receives cash in lieu of a fractional share interest in Group Common Stock
pursuant to the Merger will be treated as having received such cash in exchange
for such fractional share interest and generally will recognize gain or loss on
such deemed exchange in an amount equal to the difference between the amount of
cash received and the basis of the ITGI Common Stock held by such ITGI Public
Stockholder that is allocable to such fractional share. In general, such gain or
loss will constitute capital gain or loss if the ITGI Common Stock was held as a
capital asset on the Effective Date, and will be long-term capital gain or loss
if such ITGI Common Stock has been held for more than one year as of the
Effective Date of the Merger.
ITGI Public Stockholders should consult their own tax advisors regarding the
appropriate income tax treatment of their receipt of Group Common Stock,
including the application of Federal, state, local and foreign tax laws, and the
effect of possible changes in tax law that may affect the tax consequences
described above.
The foregoing is only a summary of the material U.S. Federal income tax
consequences of the Merger under the law in effect as of the date hereof. IT
DOES NOT PURPORT TO COVER ALL INCOME TAX CONSEQUENCES AND MAY NOT APPLY TO
STOCKHOLDERS WHO ACQUIRED THEIR ITGI COMMON STOCK IN CONNECTION WITH A GRANT OF
SHARES AS COMPENSATION, WHO ARE NOT CITIZENS OR RESIDENTS OF THE UNITED STATES,
OR WHO ARE OTHERWISE SUBJECT TO SPECIAL TREATMENT UNDER THE CODE.
COMPARISON OF RIGHTS OF CURRENT GROUP STOCKHOLDERS AND NEW ITGI STOCKHOLDERS
FOLLOWING THE MERGER
Although Group will be the surviving corporation in the Merger, the Group
Certificate and Group Bylaws will not be the charter and bylaws of New ITGI. In
connection with the consummation of the Merger, the certificate of incorporation
of ITGI and the bylaws of ITGI will be amended and restated and become the
charter and bylaws of New ITGI. Since Group and New ITGI are each organized
under the laws of the State of Delaware, any differences in your rights as a
holder of common stock of these two corporations will arise solely from the
aforementioned charter and bylaw amendments. The following are summaries of
material differences between your rights as stockholders of Group and New ITGI.
The following discussions are not intended to be complete and are qualified in
their entirety by reference to the DGCL, the existing certificate of
incorporation and bylaws of the Group and the certificate of incorporation and
bylaws of New ITGI after giving affect to the aforementioned charter and bylaw
amendments (the "New ITGI Certificate" and the "New ITGI Bylaws," respectively).
SPECIAL MEETINGS. The Group Bylaws state that the special meetings of the
stockholders for any purpose may be called by the Board of Directors, President
or the Secretary. A special meeting of the stockholders of Group shall be called
by the President or the Secretary whenever stockholders owning a
32
<PAGE>
majority of the shares of Group entitled to vote on matters to be submitted to
the stockholders shall make application therefor in writing. The New ITGI
Certificate and Bylaws provide that special meetings may be called only by the
Secretary of the Corporation at the request of a majority of the directors or
any person authorized by the majority vote of the directors. The New ITGI
Certificate and Bylaws, therefore, preclude stockholders from having the ability
to call special meetings of stockholders.
ACTION BY STOCKHOLDERS WITHOUT A MEETING. The Group Bylaws expressly
include a provision permitting the Group Stockholders to consent in writing to
any action without a meeting, provided such consent is signed by stockholders
having at least the minimum number of votes required to authorize such action at
a meeting of stockholders at which all shares entitled to vote thereon were
present and voted. The New ITGI Certificate and Bylaws do not permit
stockholders to take action by any written consent in lieu of a meeting.
STOCKHOLDER'S PROPOSALS. The Group Certificate and Bylaws do not include a
provision restricting the manner in which nominations for directors may be made
by stockholders or the manner in which business may be brought before a meeting.
The New ITGI Bylaws provide that nominations by stockholders of persons for
election to the Board of Directors at the annual meeting and for the proposal of
other business to be considered at an annual meeting generally must be received
not less than 60 days, nor more than 90 days, prior to the meeting.
CHARTER AMENDMENTS. Under the Group Certificate and New ITGI Certificate,
an amendment to the certificate of incorporation requires the approval of the
Board of Directors, followed by a vote of the owners of a majority of the shares
entitled to vote thereon. However, the New ITGI Certificate also requires the
approval of the holders of at least 66 2/3% of the voting power of all the
shares entitled to vote to alter, amend, repeal or adopt any provision
inconsistent with or limiting the effect of provisions of certain enumerated
antitakeover provisions in the New ITGI Certificate, whereas the Group
Certificate has no comparable provision.
AMENDMENTS TO BYLAWS. Each of the Group Bylaws and New ITGI Bylaws provide
that the bylaws may be amended or repealed, and new bylaws may be made, by an
affirmative majority of the votes cast at any annual or special meeting of
stockholders, or by an affirmative vote of a majority of the directors present
at a meeting of the Board of Directors. However, the New ITGI Bylaws also
require the approval of the holders of at least 66 2/3% of the voting power of
all of the shares entitled to vote to alter, amend, repeal or adopt any bylaw
provision inconsistent with or limiting the effect of provisions of certain
enumerated antitakeover provisions in the New ITGI Bylaws, whereas the Group
Bylaws contain no comparable provision.
EXCHANGE AGENT
First Chicago Trust Company of New York, a division of EquiServe, has been
selected as exchange agent (the "Exchange Agent") under the Merger Agreement. As
soon as practicable after the Effective Time, Group shall deposit with the
Exchange Agent, for the benefit of the ITGI Public Stockholders, certificates
representing the Merger Shares The Exchange Agent will deliver the certificates
representing the Merger Shares upon surrender for exchange of the ITGI Common
Stock.
ACCOUNTING TREATMENT OF THE MERGER
The Merger will be accounted for as a merger of "entities under common
control" in accordance with generally accepted accounting principles.
Accordingly, the accounting will reflect the historical cost basis of each
party's assets and liabilities.
33
<PAGE>
RECOMMENDATION OF THE BOARD OF DIRECTORS OF GROUP CONCERNING THE MERGER
THE GROUP BOARD BELIEVES THAT THE TERMS OF THE TRANSACTIONS ARE FAIR TO, AND
IN THE BEST INTERESTS OF, GROUP AND ITS STOCKHOLDERS AND HAS UNANIMOUSLY
APPROVED AND ADOPTED THE TRANSACTIONS CONTEMPLATED HEREIN.
THE GROUP BOARD UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS OF GROUP VOTE "FOR"
THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE ISSUANCE OF THE MERGER
SHARES.
OPINION OF GROUP'S FINANCIAL ADVISOR CONCERNING THE MERGER
Beginning in late 1997, Group held discussions with J.P. Morgan concerning
the proposed Merger. On June 18, 1998, Group officially retained J.P. Morgan as
its financial advisor and to deliver a fairness opinion in connection with the
proposed Merger.
At the meeting of Group's Board of Directors on January 27, 1999, J.P.
Morgan rendered its oral opinion that the Exchange Ratio is fair from a
financial point of view to Group. No limitations were imposed by Group's Board
of Directors upon J.P. Morgan with respect to the investigations made or such
procedures followed by it in rendering its opinion.
J.P. Morgan subsequently confirmed its oral opinion by delivering a written
opinion on March 17, 1999 to the Group Board and the full text of such written
opinion, which sets forth the assumptions made, matters considered and limits on
the review undertaken, is attached as Appendix E to this Proxy/ Information
Statement and incorporated herein by reference. Group's stockholders are urged
to read the opinion in its entirety. J.P. Morgan's written opinion is addressed
to the Board of Directors of Group, is directed only to the Exchange Ratio in
the Merger and does not constitute a recommendation to any stockholder of Group
as to how such stockholder should vote at the Special Meeting. The summary of
the opinion of J.P. Morgan set forth in this Proxy/Information Statement is
qualified in its entirety by reference to the full text of such opinion.
In arriving at its opinion, J.P. Morgan reviewed, among other things, the
Merger Agreement, drafts of this Proxy/Information Statement, the audited
financial statements of Group and ITGI for the fiscal year ended December 31,
1997 and drafts of the audited financial statements at Group and ITGI for the
fiscal year ended December 31, 1998. J.P. Morgan also held discussions with
certain members of the management of Group and ITGI with respect to certain
aspects of the Merger and considered such other information as it deemed
appropriate for the purposes of its opinion.
J.P. Morgan relied upon and assumed, without independent verification, the
accuracy and completeness of all information that was publicly available or that
was furnished to it by Group and ITGI or otherwise reviewed by J.P. Morgan, and
J.P. Morgan has not assumed any responsibility or liability therefor. J.P.
Morgan has not conducted any valuation or appraisal of any assets or
liabilities, nor have any valuations or appraisals been provided to J.P. Morgan.
J.P. Morgan has assumed that the Merger will have the tax and accounting
consequences described in this Proxy/Information Statement, and in discussions
with, and materials furnished to J.P. Morgan by, representatives of Group, and
that the other transactions contemplated by the Merger Agreement will be
consummated as described in the Merger Agreement and Proxy/Information
Statement.
J.P. Morgan's opinion is based on economic, market and other conditions as
in effect on, and the information made available to J.P. Morgan as of, the date
of such opinion. Subsequent developments may affect this opinion, and J.P.
Morgan does not have any obligation to update, revise, or reaffirm such opinion.
J.P. Morgan expressed no opinion as to the price at which Group's Common Stock
or New ITGI's Common Stock will trade at any future time.
34
<PAGE>
In accordance with customary investment banking practice, J.P. Morgan
employed generally accepted methods in reaching its opinion. The following is a
summary of the material financial analysis utilized by J.P. Morgan in connection
with providing its opinion.
In reviewing the Exchange Ratio, J.P. Morgan based its analysis on the
premise that Group Stockholders and ITGI Public Stockholders should own New ITGI
in the same proportion as their economic ownership of ITGI prior to the Merger.
Group's Stockholders' current ownership of ITGI through Group is 15.0 million
shares, representing an 80.5% economic and voting interest in ITGI. This
interest is divided among the approximately 23.9 million shares of proforma
outstanding Group Common Stock as of the Effective Date. In order to maintain
the current ownership relationship existing as between the two classes of
stockholders, the shares of ITGI Common Stock held by ITGI Public Stockholders
would have to be exchanged for Group shares at the same ratio as that in which
Group's stockholders' ownership of ITGI is expressed, namely 23.9 million
divided by 15.0 million, or 1.59. The Exchange Ratio of 1.59 multiplied by the
3.6 million ITGI Public Stockholders' shares of ITGI Common Stock equals 5.7
million shares of New ITGI to be held by ITGI Public Stockholders. After giving
effect to the Exchange Ratio under the foregoing assumption, the total
outstanding shares in New ITGI following the Merger would be 29.7 million. The
ownership interest of the ITGI Public Stockholders of 5.7 million would
represent 19.5% of the total shares outstanding of New ITGI, and the ownership
interest of Group of 23.9 million would represent 80.5% of the total outstanding
shares of New ITGI, consistent with the premise outlined above.
The summary set forth above does not purport to be a complete description of
the analyses or data presented by J.P. Morgan. The preparation of a fairness
opinion is a complex process and is not necessarily susceptible to partial
analysis or summary description. J.P. Morgan based its analyses on assumptions
that it deemed reasonable. The other principal assumptions upon which J.P.
Morgan based its analyses are set forth above.
As a part of its investment banking business, J.P. Morgan and its affiliates
are continually engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, investments for passive and control
purposes, negotiated underwritings, secondary distributions of listed and
unlisted securities, private placements, and valuations for estate, corporate
and other purposes. J.P. Morgan was selected to advise Group with respect to the
Merger on the basis of such experience and its familiarity with Group.
For services rendered in connection with the Spin-off and Merger, Group has
agreed to pay J.P. Morgan a fee of $2 million. In addition, Group has agreed to
reimburse J.P. Morgan for its expenses incurred in connection with its services,
including the fees and disbursements of counsel, and will indemnify J.P. Morgan
against certain liabilities.
J.P. Morgan and its affiliates maintain banking and other business
relationships with Group and its affiliates, for which it receives customary
fees. In the ordinary course of their businesses, affiliates of J.P. Morgan may
actively trade the debt and equity securities of Group or ITGI for their own
accounts or for the accounts of customers and, accordingly, they may at any time
hold long or short positions in such securities.
THE MERGER AGREEMENT
The Merger Agreement is the agreement pursuant to which Group and ITGI agree
to merge. The Merger Agreement sets forth the rights, responsibilities and
obligations of ITGI and Group and establishes the Exchange Ratio. The Exchange
Ratio establishes the relative stock ownership of Group Stockholders and ITGI
Stockholders in New ITGI. See "--Impact of the Merger on Group and ITGI
Stockholders." A summary of material provisions of the Merger Agreement is set
forth herein. You should review carefully the full text of the Merger Agreement,
which is attached hereto as Appendix A and incorporated herein by reference.
35
<PAGE>
REPRESENTATIONS AND WARRANTIES.
ITGI REPRESENTATIONS AND WARRANTIES. The Merger Agreement contains
representations and warranties by ITGI relating to a number of matters,
including:
(1) the due organization, valid existence and good standing of ITGI;
(2) the authorization, execution and delivery of the Merger Agreement by
ITGI, enforceability of the Merger Agreement against ITGI and related
matters;
(3) the absence of conflicts under ITGI's charter and bylaws or under any
governmental order or law and the absence of breaches of any material
agreement binding upon ITGI;
(4) the capital structure of ITGI;
(5) broker and finder fees; and
(6) the supplemental indentures and related documentation concerning New
JEF's assumption of certain of the Senior Notes.
GROUP REPRESENTATIONS AND WARRANTIES. The Merger Agreement contains
representations and warranties by Group relating to a number of matters,
including:
(1) the due organization, valid existence and good standing of Group;
(2) the authorization, execution and delivery of the Merger Agreement and
the Ancillary Agreements by Group, enforceability of the Merger Agreement
and the Ancillary Agreements against Group and related matters;
(3) the absence of conflicts under Group's charter and bylaws or under any
governmental order or law and the absence of breaches of any material
agreement binding upon Group;
(4) the capital structure of Group;
(5) broker and finders fees; and
(6) the supplemental indentures and related documentation concerning New
JEF's assumption of certain of the Senior Notes.
CERTAIN COVENANTS AND AGREEMENTS.
ITGI COVENANTS. Among other covenants and agreements, ITGI has agreed, for
itself and its subsidiaries, that, during the period from the date of the Merger
Agreement to the Closing Date, without the prior written consent of Group, it
will and will cause each of its subsidiaries to:
(1) conduct its affairs in the ordinary course of business consistent with
past and then current practice;
(2) not adopt, amend or modify any employment or personnel contract or plan,
or increase the level of compensation payable to any officer or employee
other than in accordance with past practice or as otherwise required by
law or the terms of any such contract or plan;
(3) (a) not issue any capital stock or security convertible into capital
stock, except pursuant to certain outstanding stock options and equity
compensation awards that are not covered by agreements preventing the
purchase or acquisition of ITGI Common Stock until after the later of the
Effective Time and April 30, 1999 ("Lock-Up Agreements"); (b) grant any
option to purchase or acquire ITGI Common Stock outside of the ordinary
course, inconsistent with past practice or exercisable prior to April 30,
1999; or (c) otherwise alter its capital structure;
36
<PAGE>
(4) not pay any dividend (except as contemplated by the Merger Agreement) or
make any distribution (including any stock split or stock dividend) with
respect to its securities;
(5) not enter into any contract or arrangement other than in the ordinary
course of business;
(6) not amend its Certificate of Incorporation or Bylaws;
(7) promptly advise Group if it has more than 18,750,000 shares of ITGI
Common Stock outstanding at any time prior to the closing date or any
person holding, or exercising rights under, ITGI Common Stock Equivalents
shall have validly tendered any exercise form related thereto and
demanded the issuance and delivery of ITGI Common Stock in respect of any
such ITGI Common Stock Equivalent prior to the Effective Time;
(8) not amend any Lock-Up Agreement without Group's prior written consent;
(9) take responsibility for information in the Proxy Statement/Prospectus
being distributed to ITGI's stockholders, except that ITGI will not be
responsible for information relating solely to Group and its non-ITGI
subsidiaries, the Transfers, the Ancillary Agreements, the Spin-Off or
the Group-provided information concerning the Merger. ITGI agrees to
consult with Group before filing any amendment or supplement to the Proxy
Statement/Prospectus or submitting any information to the SEC in
connection therewith;
(10) be responsible for one half of all Transaction Expenses (as defined in
the Merger Agreement) of Group and ITGI, subject to certain conditions,
limitations and exclusions set forth therein;
(11) use its reasonable best efforts to obtain all governmental consents and
other consents referenced in the Merger Agreement;
(12) refrain from purchasing, or entering into options or contracts that
would allow or obligate ITGI to purchase, Group Common Stock prior to the
Effective Time; use its commercially reasonable efforts to obtain
agreement from the holders of ITGI common stock equivalents not to
exercise such options prior to the earlier of the Effective Time or April
30, 1999; and
(13) not at any time after the Pre-Closing and prior to the Merger knowingly
take any action that would result in ITGI's ceasing to be a member of the
affiliated group (within the meaning of Section 1504 (a) of the Code) of
which Group is the parent.
GROUP COVENANTS. Among other covenants and agreements, Group has agreed, for
itself and its non-ITGI subsidiaries, that, during the period from the date of
the Merger Agreement to the Closing Date, without the prior written consent of
ITGI, it will and will cause each of its non-ITGI subsidiaries to:
(1) conduct its affairs in the ordinary course of business consistent with
past and then current practice;
(2) not adopt, amend or modify any employment or personnel contract or plan,
or increase the level of compensation payable to any officer or employee
other than in accordance with past practice or as otherwise required by
law or the terms of any such contract or plan;
(3) not issue any capital stock or security convertible into capital stock,
except any stock options or equity compensation award that becomes, upon
consummation of the Merger, an option to purchase JEF Holding Common
Stock or an amount in equity of JEF Holding, or otherwise alter its
capital structure;
(4) not pay any dividend (except as contemplated by the Merger Agreement or
the Ancillary Agreements) or make any distribution with respect to its
securities;
(5) not enter into any contract or arrangement other than in the ordinary
course of business;
37
<PAGE>
(6) not amend its Certificate of Incorporation or Bylaws;
(7) take responsibility for information in this Proxy/Information Statement,
except that Group will not be responsible for information relating solely
to ITGI and its subsidiaries, the Special Cash Dividend or the
ITGI-provided information concerning the Merger. Group agrees to consult
with ITGI before filing any amendment or supplement to the
Proxy/Information Statement or submitting any information to the SEC in
connection therewith;
(8) be responsible for one half of all Transaction Expenses (as defined in
the Merger Agreement) of Group and ITGI, subject to certain conditions,
limitations and exclusions set forth therein;
(9) use its reasonable best efforts to obtain all required governmental
consents and other consents listed in the disclosure schedules to the
Merger Agreement;
(10) not amend, modify or waive any provision of the Distribution Agreement
without ITGI's consent not to be unreasonably withheld;
(11) in the event that at any time prior to the Pre-Closing, Group receives
a third party offer to purchase its entire equity interest in ITGI, use
its commercially reasonable best efforts to obtain, but shall not be
obligated to obtain, the same economic terms and benefits of such offer
for the benefit of the ITGI Public Stockholders;
(12) take all necessary action to effect the transfer to New JEF, prior to
the Effective Time, of all Group liabilities that are not related to
ITGI; if Group cannot transfer any non-ITGI liabilities to New JEF by the
time the Merger is effected, and therefore Group has non-ITGI liabilities
immediately prior to the Merger, Group will take action satisfactory to
ITGI to mitigate these liabilities, such as in the form of prepayments,
insurance, reserves and the like, and Group is obligated to obtain one or
more letters of credit for the benefit of ITGI to the extent any such
unmitigated liabilities exceed the following amounts:
- $5.0 million from the Effective Time until its first anniversary;
- $3.33 million from the first anniversary of the Effective Time to its
second anniversary;
- $1.67 million from the second anniversary of the Effective Time until
its third anniversary; and
- $0 after the third anniversary of the Effective Time; and
(13) not, any time from and after Pre-Closing and prior to the Merger,
knowingly take any action that would result in ITGI's ceasing to be a
member of the affiliated group (within the meaning of Section 1504(a) of
the Code) of which Group is the parent.
The parties have agreed to proceed to closing the Merger only if certain
conditions are satisfied not later than the day of the meetings of Group and
ITGI stockholders unless extended in writing by Group and ITGI (the "Pre-Closing
Date").
MUTUAL PRE-CLOSING CONDITIONS. The mutual Pre-Closing conditions to the
obligation of Group or ITGI to complete the Merger include the following:
(1) the Merger Agreement (including the Charter Amendments) and the issuance
of the Merger Shares shall have been approved and adopted by the
requisite votes of the Group stockholders in accordance with the DGCL,
New York Stock Exchange requirements and the Certificate of Incorporation
and Bylaws of Group. The Merger Agreement shall have been approved and
adopted by the requisite votes of ITGI's stockholders in accordance with
the DGCL and the Certificate of Incorporation and Bylaws of ITGI.
38
<PAGE>
(2) no temporary restraining order, preliminary or permanent injunction,
sanction or other order issued by any court of competent jurisdiction,
self-regulatory organization or body, or stock exchange or other legal or
regulatory restraint or prohibition shall have been issued and be in
effect
(a) restraining or prohibiting the consummation of the Merger, the
Spin-Off or the transactions contemplated by the Ancillary Agreements
or the Merger Agreement or
(b) prohibiting or limiting the ownership, operation or control by New
ITGI or Group or any of their respective Subsidiaries of any portion
of the business or assets of ITGI or any of their respective
subsidiaries as of the Effective Time, or compelling New ITGI or
Group or ITGI or any of their respective Subsidiaries to dispose of,
grant rights in respect of, or hold separate any portion of the
business or assets of Group, ITGI or any of their respective
Subsidiaries as of the Effective Time; nor shall any action have been
taken by a governmental regulatory authority, agency or
instrumentality, self-regulatory organization or body, stock exchange
or any federal, state or foreign statute, rule, regulation, executive
order, decree or injunction shall have been enacted, entered,
promulgated or enforced by any governmental regulatory authority,
agency or instrumentality, self-regulatory organization or body,
stock exchange or arbitrator, which is in effect and has the effect
of making the Spin-Off or Merger, or the transactions contemplated
thereby, illegal or otherwise prohibiting the consummation of the
Spin-Off or Merger;
(3) the registration statement with respect to the ITGI Proxy/Prospectus of
Group shall have been declared effective under the Securities Act and no
stop orders with respect thereto shall have been issued, and the
Proxy/Information Statement shall have been furnished to the stockholders
of Group, the definitive Proxy/Prospectus shall have been furnished to
the stockholders of ITGI, and Group shall have received all requisite
authorizations under all applicable state securities or blue sky laws
necessary to consummate the issuance of the Merger Shares;
(4) approval for listing by the NYSE, upon official notice of issuance of
the Merger Shares, shall have been received by Group;
(5) the Tax Ruling shall not have been withdrawn or modified by the IRS in
any material adverse respect prior to the Pre-Closing;
(6) receipt of the accounting advisory letter from KPMG LLP, dated as of the
Pre-Closing Date;
(7) execution and delivery of the Escrow Agreement by and among Group, ITGI
and the Bank of New York (the "Escrow Agent") pursuant to which:
(a) ITGI shall deposit into escrow cash in an amount equal to the Special
ITGI Cash Dividend, to be released without condition or limitation by
the Escrow Agent on the business day following the completion of the
Pre-Closing Date to all of ITGI's stockholders of record as of the
close of business on the date of the stockholders' meetings;
(b) Documents shall be executed and placed into escrow concerning any
remaining Transfers following the contribution by Group to New JEF of
Group's pro rata share of the Special ITGI Cash Dividend which will
be effected throughout the Escrow Agent in accordance with the Escrow
Agreement) so that all remaining Transfers can be effected pursuant
to the Distribution Agreement immediately following payment of the
Special ITGI Cash Dividend;
39
<PAGE>
(c) Group shall deposit into escrow an agreement between Group and the
Distribution Agent for the New JEF Common Stock, pursuant to which
Group shall irrevocably direct the Distribution Agent to, and the
Distribution Agent shall agree to, distribute all New JEF Common
Stock to Group's stockholders immediately after being instructed to
do so by the Escrow Agent, who shall issue such instructions unless
the Escrow Agent shall have received a certificate from ITGI and
Group prior to 9:00 am E.T. on the Closing Date to the effect that
either the 80% condition (in paragraph 8 below) or the Tax Ruling
condition (in paragraph 5 above) have not been satisfied; and
(d) ITGI and Group shall deposit into escrow the executed Certificate of
Merger, to be filed without condition or limitation by the Escrow
Agent with the Secretary of State of the State of Delaware on the
fifth business day following the Stockholders' Meetings after the
issuance of the instructions to the Distribution Agent described
above and immediately after the Distribution Agent shall have
confirmed in writing its book-entry distribution of all New JEF
Common Stock to Group's stockholders.
(8) Group and ITGI shall be reasonably satisfied that, at all relevant times
prior to the Pre-Closing Date, Group 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; and
(9) satisfaction or waiver of the Distribution Agreement conditions.
If any of the above Pre-Closing conditions are waived to the detriment of
Group Stockholders in any material respect, Group will resolicit proxies to all
Group Stockholders prior to the Merger occurring.
PRE-CLOSING CONDITIONS TO GROUP'S OBLIGATION. The obligations of Group to
effect the Merger are subject to the satisfaction or waiver of each of the
following additional conditions as of the Pre-Closing, any of which may be
waived, in writing, exclusively by Group:
(1) the representations and warranties of ITGI contained in the Merger
Agreement shall be true and correct at the Effective Time in all material
respects with the same effect as though made at such time, except to the
extent waived thereunder or affected by the transactions contemplated
therein;
(2) ITGI shall have performed in all material respects all obligations and
complied in all material respects with all agreements, undertakings,
covenants and conditions required by the Merger Agreement and the
Ancillary Agreements to be performed or complied with by it at or prior
to the Effective Time;
(3) ITGI shall have delivered to Group a certificate in form and substance
satisfactory to Group dated the date of the Effective Time and signed by
the chief executive officer and the chief financial officer of ITGI;
(4) ITGI shall have delivered to Group an opinion of Cahill Gordon &
Reindel, counsel to ITGI, dated the Pre-Closing Date and which is
satisfactory to counsel for Group, to the effect set forth in the Merger
Agreement;
(5) Group shall have received an opinion of Morgan, Lewis & Bockius LLP
dated the Pre-Closing Date to the effect that the Merger will be treated
for U.S. federal income tax purposes as a reorganization qualifying under
the provisions of Section 368(a) of the Code with respect to ITGI
stockholders other than Group and that each of ITGI and Group will be a
party to the reorganization within the meaning of Section 368(b) of the
Code; and
40
<PAGE>
(6) ITGI shall have obtained all consents to the Merger required in the
Merger Agreement disclosure schedules.
If any of the above Pre-Closing conditions are waived to the detriment of
Group Stockholders in any material respect, Group will resolicit proxies to all
Group Stockholders prior to the Merger occurring.
PRE-CLOSING CONDITIONS TO ITGI'S OBLIGATION. The obligations of ITGI to
effect the Merger is subject to the satisfaction of each of the following
additional conditions as of the Pre-Closing, any of which may be waived, in
writing, exclusively by ITGI:
(1) the representations and warranties of Group contained in the Merger
Agreement shall be true and correct at the Effective Time in all material
respects with the same effect as though made at such time, except to the
extent waived thereunder or affected by the transactions contemplated
therein;
(2) Group shall have performed in all material respects all obligations and
complied in all material respects with all agreements, undertakings,
covenants and conditions required by the Merger Agreement and the
Ancillary Agreements to be performed or complied with by it at or prior
to the Effective Time;
(3) Group shall have delivered to ITGI a certificate in form and substance
satisfactory to ITGI dated the date of the Effective Time and signed by
the chief executive officer and the chief financial officer of Group;
(4) Group shall have delivered to ITGI a copy of duly adopted resolutions of
the Board of Directors of Group accelerating the vesting and
exercisability of all options to purchase or acquire Group Common Stock;
(5) all outstanding Group Common Stock Equivalents shall have been exercised
or canceled or exchanged (conditioned upon completion of the Spin-Off)
for options, shares or common stock equivalents of New JEF as of or
within two business days following the Pre-Closing Date, or reserved
against without New ITGI's responsibility after the Closing Date;
(6) Supplemental indentures and related documents concerning New JEF's
assumption of certain of the Senior Notes shall have been executed and
delivered and Group shall have taken all necessary action to effect the
transfer of all Group liabilities and mitigate any excess liabilities not
transferred as provided for pursuant to the Distribution Agreement and
delivered any letters of credit required by paragraph (12) under "Group
Covenants";
(7) Group shall have delivered to ITGI an opinion, dated the Pre-Closing
Date, satisfactory to counsel for ITGI, of Morgan, Lewis & Bockius LLP,
counsel for Group, to the effect set forth in the Merger Agreement.
(8) ITGI shall have received an opinion of Cahill Gordon & Reindel dated the
Pre-Closing Date to the effect that the Merger will be treated for U.S.
federal income tax purposes as a reorganization qualifying under the
provisions of Section 368(a) of the Code with respect to ITGI
stockholders other than Group and that each of ITGI and Group will be a
party to the reorganization within the meaning of Section 368(b) of the
Code;
(9) The Distribution Agreement shall not have been amended without the
consent of ITGI; and
(10) Group shall have obtained all consents to the Merger required in the
Merger Agreement disclosure schedules and all certificates, consents and
opinions, including any provision therein permitting ITGI to rely
thereon, delivered in connection with the Supplemental Indentures shall
not have been withdrawn.
41
<PAGE>
CONDITIONS TO CLOSING.
In addition to the Pre-Closing conditions described above, Group and ITGI
have agreed to certain conditions to be satisfied as of the Effective Date, any
of which may be waived, in writing, by Group or ITGI, as appropriate:
(1) the Pre-Closing shall have been consummated and the Escrow Agreement
shall have been fully complied with;
(2) at all relevant times prior to the Spin-Off and the Effective Time,
Group shall have owned at least 80% of the outstanding ITGI Common Stock
and no other ITGI capital stock (other than Common Stock) shall have been
issued or outstanding; and
(3) The favorable Tax Ruling shall not have been, prior to the Effective
Time, withdrawn or modified by the IRS in any material adverse respect.
If any of the above conditions are waived to the detriment of Group
Stockholders in any material respect, Group will resolicit proxies to all Group
Stockholders prior to the Merger occurring.
TERMINATION.
The Merger Agreement may be terminated at any time prior to the Pre-Closing
Date,
(1) by mutual written consent of Group and ITGI,
(2) by either party upon:
(a) the failure of the other party to satisfy any material covenant or
agreement set forth in the Merger Agreement or the Ancillary
Agreements;
(b) upon the discovery of any representation of the other party which is
false in any material respect or for which there is a material
omission to disclose information which makes any representation of
the other party materially misleading; or
(c) the failure to satisfy any mutual condition to the obligation of
either party to consummate the Pre-Closing or the failure of the
other party to satisfy a condition to such party's obligation to
consummate the Pre-Closing.
The Merger Agreement may be terminated at any time after the Pre-Closing
Date and before the Closing Date,
(1) by mutual written consent of Group and ITGI,
(2) by either party upon:
(a) the failure of the condition that Group shall have owned at least 80%
of the outstanding ITGI Common Stock and not other ITGI capital stock
(other than Common Stock) shall have been issued or outstanding,
unless and to the extent such failure occurred as a result of such
party's breach of any representation, warranty or covenant set forth
in the Merger Agreement; or
(b) the IRS has withdrawn or modified the Tax Ruling in any material
adverse manner.
BACKGROUND OF AND NEGOTIATIONS INVOLVING THE SPECIAL COMMITTEE OF ITGI'S BOARD
OF DIRECTORS
At a meeting of ITGI's board of directors on March 17, 1998, the ITGI board
determined that the terms of the Transactions should be reviewed and negotiated
by members of the ITGI board who were independent with respect to Group.
Accordingly, the ITGI board unanimously approved the appointment of a special
committee, consisting of William I Jacobs and Robert L. King (the "ITGI
42
<PAGE>
Special Committee"), to review the terms of and make recommendations to the ITGI
board concerning the Transactions. Neither Mr. Jacobs nor Mr. King is a
director, officer or employee of Group nor an officer or employee of ITGI. At a
meeting on May 12, 1998, the ITGI board authorized the ITGI Special Committee to
retain advisors and take all other actions that it deemed necessary to the
proper and complete conduct of any such review and recommendation.
After its formation, the ITGI Special Committee retained independent legal
advisors. Prior to commencing negotiations with Group regarding the Spin-Off,
the members of the ITGI Special Committee and ITGI entered into separate
indemnification agreements that, among other things, specified or clarified the
directors' entitlement to indemnification and certain procedures and
presumptions that would apply to claims for indemnification in connection with
the proposed Spin-Off or any other transaction arising out of the negotiations.
The ITGI Special Committee thereafter discussed with its legal advisors the
procedures to be followed in evaluating the proposed Spin-Off, including the
retention of a financial advisor. In April 1998, the ITGI Special Committee held
discussions with the investment banking firm of Donaldson, Lufkin & Jenrette
Securities Corporation ("DLJ") regarding DLJ's engagement as its financial
advisor. At a meeting on April 23, 1998, the ITGI Special Committee discussed
with DLJ in general terms the evaluation process and analysis that DLJ would
undertake pursuant to its engagement.
From April 23, 1998 through May 12, 1998, the ITGI Special Committee and its
advisors reviewed certain public and non-public information with respect to ITGI
and the proposed Transactions. Representatives of the Special Committee's
advisors met on several occasions among themselves, with members of ITGI's
management and with ITGI's legal counsel. The focus of the discussions was the
proposed structure of the Spin-Off and the potential additional complications
such a structure might engender compared to a spin-off of ITGI effected as a
special dividend by Group to its stockholders of the shares of ITGI owned by
Group (the ITGI Special Committee in its deliberations sometimes referred to
this alternative Spin-Off structure used by it for comparative purposes as a
"ITGI Stock Dividend Spin-Off"). At a meeting of the ITGI Special Committee on
May 12, 1998, the ITGI Special Committee received a report from their advisors
on their activities to date and discussed, among other things, the issues
associated with the large number of ITGI stock options scheduled to expire early
in 1999, the appropriate size of the special cash dividend proposed to be paid
by ITGI in connection with the Spin-Off, the allocation of transaction costs
between ITGI and Group, the terms of the execution, clearing and other
agreements to be entered into between ITGI and Group, the desirability of
obtaining noteholder consents to New JEF's assumption of Group's obligations
under two outstanding issues of publicly-traded notes (the "Notes") and the
likelihood that Group would be able to fulfill its indemnity and other
obligations to ITGI following the Transactions. The ITGI Special Committee
determined that a principal objective of the negotiations with Group would be to
ensure that, as nearly as practicable, ITGI following the Spin-Off would be in
the same position as if the transaction were structured as the ITGI Stock
Dividend Spin-Off. In particular, to the greatest extent possible, ITGI
following its merger with Group should be substantially free from liabilities
(including contingent liabilities) related to the activities of Group (excluding
ITGI and its subsidiaries) prior to the Spin-Off. The ITGI Special Committee
instructed its advisors to continue their analyses of the issues discussed at
the meeting.
During the summer and early fall of 1998, the ITGI Special Committee's
advisors continued their "due diligence" investigation of ITGI and Group and met
with ITGI's legal counsel and commented on preliminary drafts of the Transaction
documents. The ITGI Special Committee held meetings at which it was briefed on
the status of negotiations, issues that might arise and the probable accounting
treatment of the Spin-Off. The ITGI Special Committee was advised that, in
general, the surviving corporation in the Merger should not be required to
record goodwill as an asset on its balance sheet provided that, at the time of
the Merger, Group could fairly be viewed as substantially free of liabilities
43
<PAGE>
unrelated to ITGI's business. DLJ advised the ITGI Special Committee that, if a
substantial amount of goodwill were to be recorded because of the Merger, the
reduction in earnings that would result from the amortization of that goodwill
potentially could have an adverse effect on the prices at which the surviving
corporation's common stock would trade after the Merger. To that time, Group had
taken the position that the Merger Agreement should not contain a condition to
closing based on accounting treatment in light of the Group Contingency Concerns
discussed below. The ITGI Special Committee also was advised that, in order to
avoid goodwill accounting treatment, the relative levels of equity ownership of
ITGI's various stockholders could not change--in other words, it would not be
possible to avoid goodwill accounting and at the same time seek an exchange
ratio in the Merger that would increase the percentage ownership of the ITGI
Public Stockholders. In considering the implications of these accounting issues,
the ITGI Special Committee noted that if in fact Group was substantially free
from liabilities at the time of the Merger, it would be fair to leave the
relative ownership levels of the ITGI Public Stockholders unchanged. The ITGI
Special Committee instructed its advisors that the transaction must be
structured in a way that avoided the need to record goodwill and that it should
be a condition to the consummation of the transaction that satisfactory
accounting treatment be available following the Merger.
Throughout the course of negotiations between Group and ITGI before
mid-December of 1998, Group communicated to ITGI's management and counsel that
it was reluctant to agree to a closing condition based on the absence of
goodwill recognition in connection with the Merger and to the related covenant
request to cause Group to be free of all liabilities prior to the Merger due to
the associated need for third party consents, and other matters, that were
outside of Group's control and the related risks that the Spin-Off (which by
necessity must occur before the Merger) could be declared and paid prior to the
occurrence of subsequent events that could prevent the closing of the Merger and
the realization of the benefits associated with the Merger (the "Group
Contingency Concerns").
On December 10, 1998 the ITGI Special Committee and its advisors met with
representatives of ITGI's management and counsel to receive a report on the
progress of the transaction and identify the significant issues remaining for
negotiation with Group. The ITGI Special Committee was advised that Group
continued to maintain that the accounting consequences of the Merger should not
affect ITGI's obligation to complete the transaction in light of the Group
Contingency Concerns. The ITGI Special Committee directed its representatives to
respond that ITGI would not complete the transaction unless it was satisfied
that no goodwill would be required to be recorded for accounting purposes. The
ITGI Special Committee then reviewed the status of discussions with Group
regarding ITGI's payment of a special cash dividend and ITGI's contribution
toward the expenses of the Spin-Off. The ITGI Special Committee had previously
determined that, since the dividend would be paid pro rata to all stockholders,
the principal concern with respect to the dividend was not unfair treatment of
the ITGI Public Stockholders but rather the prudence of the dividend--whether it
would leave ITGI with sufficient resources and liquidity to operate after the
Merger without any adverse effect on its business. The ITGI Special Committee
concluded, after reviewing and discussing operating budgets and cash flow
forecasts presented by ITGI's management, that a $75 million dividend should not
adversely affect the business. The ITGI Special Committee instructed that the
response to Group should be to limit the dividend to no more than $75 million.
The ITGI Special Committee emphasized that this determination was based, among
other things, on estimates of the amount of transaction costs payable by ITGI in
connection with the Spin-Off. ITGI's management provisionally had agreed with
Group's management that the transaction costs to be incurred by each company
should be shared equally by the two companies. The ITGI Special Committee asked
ITGI's management to prepare a detailed estimate of these expenses and to advise
as to the possibility that the expenses would exceed the estimate. At its
December 10 meeting, the ITGI Special Committee received a presentation from
ITGI's management regarding the terms of the clearing and execution agreements
that had been provisionally agreed with Group. The ITGI Special Committee was
advised that the economic terms of the proposed agreements were consistent with
prevailing industry terms and that ITGI would be entitled to terminate the
44
<PAGE>
agreements if it so desired within a relatively short time period (after June
30, 2000, in the case of the Clearing Agreement).
On December 14, 1998 the ITGI Special Committee met with its advisors and
with members of ITGI's management and its counsel. At the meeting, the ITGI
Special Committee told ITGI's management that, on the basis of information
furnished at and subsequent to the December 10 meeting, the following positions
should be taken in seeking to finalize the terms of the Spin-Off: (1) an
important overall objective should continue to be that the effect and
consequences of the Spin-Off be as similar as possible to those of a ITGI Stock
Dividend Spin-Off; (2) it should be a condition to the closing of the Spin-Off
that ITGI would be satisfied concerning the accounting treatment of the Merger;
(3) proper actions should be taken prior to the closing of the Merger to ensure
that when the Merger becomes effective the surviving corporation will be
substantially free of liabilities not related to ITGI's business; (4) ITGI's
obligation to share transaction costs should be capped; (5) the Special ITGI
Cash Dividend should be not greater than $75 million; and (6) the terms of the
proposed clearing and execution agreements negotiated by ITGI's management were
satisfactory.
In subsequent negotiations, Group, ITGI and representatives of the ITGI
Special Committee agreed in principle to the execution of a preclosing and
escrow agreement in order to eliminate substantially all risks associated with
the Group Contingency Concerns and substantially eliminate the risk that the
Special ITGI Cash Dividend or the Spin-Off might be paid or distributed,
respectively, only to have the Merger then fail to occur. Group further agreed
that satisfactory accounting treatment should be a mutual condition to the
consummation of the Transactions and also agreed that the ITGI Special Cash
Dividend would be $4.00 per share, amounting to no more than $75 million in the
aggregate. Group refused to agree to a cap on ITGI's share of expenses, but it
proposed to cap the amount of expenses related to the Notes that ITGI would be
required to pay. Group proposed to use its best efforts to seek all third-party
consents required for ITGI to be released effective as of the closing from all
non-ITGI liabilities of Group (such as office leases and guarantees), but
insisted that if the third party consents could not be obtained on commercially
acceptable terms, ITGI should be required to close the transaction but with the
benefit of a full indemnity from New JEF in respect of all such liabilities.
Group further advised, in response to an inquiry from ITGI's representatives,
that Group intended to vote its shares in ITGI in favor of the Merger, but that
it would not contractually commit to such a vote due to fiduciary duty and
business judgment considerations.
At a meeting of ITGI's board of directors on January 20, 1999, the ITGI
Special Committee reported to the ITGI Board that it was prepared to recommend
approval in principle of the terms negotiated to date, as reflected in draft
documents provided to and reviewed by the ITGI Special Committee, subject
however to several conditions. First, at the closing, all or substantially all
of Group's non-ITGI liabilities must be fully and unconditionally released and
ITGI's obligation to share transaction costs must be capped. Secondly, since
Group would not be making a contractual commitment to vote its shares of ITGI
Common Stock in favor of the Merger, Group should commit to allow ITGI's
minority stockholders to participate in any sale or similar transaction that
might occur pursuant to a third party proposal (should one emerge) on the same
terms as Group. Third, final approval of the transaction terms should be given
only when all documentation was complete and satisfactory to the ITGI Special
Committee and after the Tax Ruling was received and deemed satisfactory.
Negotiations involving Group and the ITGI Special Committee were subsequently
completed after Group agreed to provide protection in the Merger Agreement for
the ITGI Public Stockholders in the event of a third-party purchase, agreed to
the requested expense cap and agreed that to the extent that at the closing
Group had unreleased liabilities in excess of a level agreed by the parties to
be immaterial, New JEF would secure its indemnity obligation in respect of the
excess amount with an irrevocable standby letter of credit issued by a financial
institution. The ITGI Special Committee subsequently agreed that for this
purpose liabilities of up to $5 million could be deemed immaterial, provided the
amount was reduced ratably to zero over no more than three years.
45
<PAGE>
SPECIAL ITGI CASH DIVIDEND
ITGI has, as of March 16, 1999, declared the Special ITGI Cash Dividend, of
which approximately $60.0 million will be payable to Group. The Special ITGI
Cash Dividend will be payable to all of ITGI's stockholders of record as of the
Special ITGI Cash Dividend Record Date. Payment of the Special ITGI Cash
Dividend is conditioned upon approval of the Merger Agreement by stockholders of
Group and ITGI, the approval of the issuance of the Merger Shares by
stockholders of Group and the satisfaction of all other conditions to the Merger
pursuant to the Merger Agreement. The Special ITGI Cash Dividend is expected to
be paid on April 21, 1999. Group believes, based on the advice of counsel,
Morgan, Lewis & Bockius LLP, that the Special ITGI Cash Dividend paid to Group
will not result in taxable income to Group. The Special ITGI Cash Dividend paid
to the ITGI Public Stockholders will be a taxable dividend for ITGI Public
Stockholders.
As part of the Transfers, Group will contribute the $60 million it is
expected to receive in respect of the Special ITGI Cash Dividend to JEFCO
immediately prior to the transfer of the capital stock of JEFCO and Group's
non-ITGI subsidiaries to New JEF, and New JEF will assume Group's existing
liabilities that are unrelated to ITGI, including the outstanding publicly
traded debt obligations of Group of approximately $150 million. The transfer by
Group to JEFCO of amounts received in respect of the Special ITGI Cash Dividend
will be made to increase the consolidated capital of New JEF, to Offset in part
the leverage arising from the publicly-traded debt of Group to be assumed by New
JEF in connection with the Transfers, and to satisfy working capital demands and
requirements associated with the Brokerage and Investment Banking Businesses.
NO DISSENTERS' RIGHTS
Under the DGCL, the Group Stockholders will not have dissenters' rights of
appraisal in connection with the Transfers or the Merger.
46
<PAGE>
APPROVAL OF THE 1999 INCENTIVE COMPENSATION PLAN
REASONS FOR APPROVAL BY GROUP STOCKHOLDERS
At the Special Meeting, Group Stockholders will be asked to approve the
Incentive Plan of New JEF. If approved, the Incentive Plan will serve the
function for New JEF that Group's 1993 Stock Ownership and Long-Term Incentive
Plan (the "1993 Plan") and Pay-For-Performance Incentive Plan (the "Performance
Plan") have served for Group. Group has relied on stock option and
cash-denominated annual incentive awards under the 1993 Plan and Performance
Plan as the principal means by which executive officers' compensation is tied to
the performance of Group.
The Group Board of Directors and Compensation Committee believe that
attracting and retaining executives and other key employees of high quality has
been essential to Group's growth and success. A comprehensive compensation
program which includes different types of incentives for motivating employees
and rewards for outstanding service likewise will be important to New JEF's
future success. In particular, stock options and stock-related-awards will
continue to be an important element of compensation for executives and other
employees, because such awards enable them to acquire or increase their
proprietary interest in the firm, thereby promoting a closer identity of
interests between them and the firm's stockholders. Annual incentive awards and
other performance-based awards will provide rewards for achieving specific
performance objectives (such as profitability). Such awards will help New JEF to
remain competitive with firms engaged in diversified financial and brokerage
services, and will provide an increased incentive for the recipient to expend
his or her maximum efforts for the success of the firm's business. The Group
Board and Compensation Committee therefore view the Incentive Plan as a key part
of the New JEF compensation program.
The Group Board and Compensation Committee also intend that New JEF's
ability to claim tax deductions for compensation paid should be preserved to the
greatest extent practicable. Section 162(m) of the Code limits the deductions a
publicly held company can claim for compensation in excess of $1 million in a
given year paid to certain executive officers (generally, the officers who are
"named executive officers" in the summary compensation table in Group's
Proxy/Information Statement). "Performance-based" compensation that meets
certain requirements is not counted against the $1 million deductibility cap.
Therefore, Group is seeking stockholder approval of the material terms of
certain awards, including annual incentive awards, to named executives under the
Incentive Plan, in order to meet a key requirement for such awards to qualify as
"performance-based" compensation under Section 162(m) of the Code. If the
Incentive Plan is approved by stockholders, annual incentive awards granted
under the Incentive Plan to named executives generally will be payable only upon
achievement of pre-established performance goals relating to the firm as a whole
or specific business units for which the individual executive has principal
responsibility. The Group Board and Compensation Committee believe that such
annual incentive awards have and will continue to provide strong motivation to
executives to achieve performance objectives set by the New JEF Compensation
Committee, and thereby place strong emphasis on the building of value for all
stockholders.
For purposes of Section 162(m) of the Code, approval of the Incentive Plan
will be deemed also to include approval of the eligibility of executive officers
and other employees and service providers to participate in the Incentive Plan,
the annual per-person limitations described below under the caption "SHARES
AVAILABLE AND AWARD LIMITATIONS," the general business criteria upon which
performance objectives for performance awards, including annual incentive
awards, are based, described below under the caption "PERFORMANCE-BASED AWARDS"
and "ANNUAL INCENTIVE AWARDS," and the stock-price appreciation performance goal
inherent in stock options and stock appreciation rights ("SARs"). Because
stockholder approval of general business criteria, without specific targeted
levels of performance, qualifies annual incentive awards for a period of
approximately five years, stockholder approval of such business criteria will
meet the requirements under Section 162(m) until 2004.
47
<PAGE>
Stockholder approval of the performance goal inherent in stock options and SARs
(increases in the market price of stock) is not subject to a time limit under
Section 162(m).
Stockholder approval of the Incentive Plan is also intended to meet
requirements of the NYSE.
DESCRIPTION OF THE INCENTIVE PLAN
The following is a brief description of the material features of the
Incentive Plan.
SHARES AVAILABLE AND AWARD LIMITATIONS
The Incentive Plan imposes a limit on the number of shares of New JEF Common
Stock that may be subject to awards. An award relating to shares may be granted
if the aggregate number of shares subject to then-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. For this
purpose, 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. Options and other awards granted in substitution for Group options
and awards will not count against this aggregate share limitation, however. The
number of shares subject to these substituted New JEF options and the exercise
price per share will be adjusted, based on the market prices of Group Common
Stock prior to the Spin-Off and New JEF Common Stock after the Spin-Off, in a
manner intended to preserve but not enlarge the aggregate in-the-money value of
the options. Although the terms of this adjustment cannot be determined at this
time, the adjustment is expected to substantially increase the number of shares
subject to each option and substantially reduce the per share exercise price.
New JEF estimates that Group options relating to not more than 370,000 shares
will be adjusted and reissued as substitute New JEF options. Regardless of this
aggregate share limitation, the maximum number of shares that may be subject to
tax-favored incentive stock options will be 1.5 million (subject to adjustment
for extraordinary corporate events). Shares delivered under the Incentive Plan
may be either newly issued or treasury shares of New JEF Common Stock.
Currently, there is no market for New JEF Common Stock. See "Market Price of and
Dividends on Common Stock and Related Stockholder Matters."
In addition, the Incentive Plan includes a limitation on the amount of
awards that may be granted to any one participant in a given calendar year in
order to qualify awards as "performance-based" compensation not subject to the
limitation on deductibility under Section 162(m) of the Code. Under this
per-person limitation, no participant may in any fiscal year be granted (1)
options and SARs relating to more than 800,000 shares of New JEF Common Stock,
and (2) stock-based performance awards relating to more than 500,000 shares,
subject in each case to adjustment for extraordinary corporate events. With
respect to annual incentive awards, the maximum amount payable to a participant
in settlement of such awards relating to a given fiscal year will be
(1) in the case of the Chief Executive Officer or any other executive
officer principally having firm-wide responsibilities, 25% of profits
after taxes (but before payment of bonuses), and
(2) in the case of an executive officer or other person principally having
responsibilities for one or more 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 economic value added of such business
unit(s).
With respect to other performance awards (other than annual incentive awards)
not valued by reference to common stock at the date of grant, the maximum amount
that may be earned by any one participant 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 risk of
48
<PAGE>
forfeiture upon termination of employment or service. These limits apply only to
awards under the Incentive Plan, and do not limit New JEFs' ability to enter
into compensation arrangements outside of the Incentive Plan.
Adjustments to the number and kind of shares subject to the share
limitations and annual per-person limitations relating to stock-denominated
awards under the Incentive Plan and to the number and kind of shares subject to
outstanding awards, as well as adjustments to exercise prices and other terms of
awards (including supplemental payments), are authorized in the event that a
dividend or other distribution (whether in cash, shares, or other property),
recapitalization, reclassification, stock split, reorganization, business
combination, or other similar corporate transaction or event affects the New JEF
Common Stock. The New JEF Compensation Committee is also authorized to adjust
performance conditions and other terms of awards in response to these kinds of
events or to changes in applicable laws, regulations, or accounting principles,
except that any adjustments to awards intended to qualify as "performance-based"
must conform to requirements under Section 162(m).
New JEF will have other plans relating to common stock, possibly including
an employee stock purchase plan, an employee stock ownership plan, and, if
approved by stockholders, the proposed 1999 Directors' Stock Compensation Plan.
See "Approval of the 1999 Directors' Stock Compensation Plan."
ELIGIBILITY
Executive officers and other officers and employees of New JEF and its
subsidiaries, including any such person who may also be a director, and any
other person who provides substantial personal services (other than solely as a
director) will be eligible to be granted awards under the Incentive Plan. A
prospective employee may be granted an award, but no value may be realized
thereunder if such person does not become an employee. Upon completion of the
Spin-Off, an estimated 900 persons would be eligible for awards under the
Incentive Plan. Under the 1993 Plan and Performance Plan, approximately 84
persons held outstanding awards at December 31, 1998; no determination has been
made whether awards will be granted more broadly under the Incentive Plan than
has been Group's practice under the 1993 Plan and Performance Plan.
ADMINISTRATION
The Incentive Plan will be administered by the Compensation Committee of the
Board of Directors of New JEF (the "Committee"), except that the New JEF Board
may appoint any other committee to administer the Incentive Plan and may itself
act to administer the Incentive Plan. (References to "Committee" herein include
the Board in any case in which it exercises authority with respect to an award.)
Subject to the terms and conditions of the Incentive Plan, the Committee is
authorized to select participants, determine the type and number of awards to be
granted and the number of shares to which awards will relate or the amount of an
annual incentive award, specify times at which awards will be exercisable or
settled, including performance conditions that may be required as a condition
thereof, set other terms and conditions of such awards, prescribe forms of award
agreements, interpret and specify rules and regulations relating to the
Incentive Plan, and make all other determinations which may be necessary or
advisable for the administration of the Incentive Plan. Nothing in the Incentive
Plan precludes the Committee from authorizing payment of other compensation,
including bonuses based upon performance, to officers and employees, including
executive officers. The Incentive Plan provides that Committee members shall not
be personally liable, and shall be fully indemnified, in connection with any
action, determination, or interpretation taken or made in good faith under the
Incentive Plan.
49
<PAGE>
STOCK OPTIONS AND SARS
The Committee is authorized to grant stock options, including both incentive
stock options ("ISOs"), which can result in potentially favorable tax treatment
to the participant, and non-qualified stock options, and SARs entitling the
participant to receive the excess of the fair market value of a share on the
date of exercise or other specified date over the grant price of the SAR. The
exercise price of an option and the grant price of an SAR is determined by the
Committee, but generally may not be less than the fair market value of the stock
on the date of grant (except as described below). The maximum term of each
option or SAR, the times at which each option or SAR will be exercisable, and
provisions requiring forfeiture of unexercised options at or following
termination of employment generally are fixed by the Committee, subject to a
restriction that no ISO, or SAR in tandem therewith, may have a term exceeding
ten years. Options may be exercised by payment of the exercise price in cash,
stock or other property (possibly including notes or obligations to make payment
on a deferred basis, or through broker-assisted cashless exercise procedures) or
by surrender of other outstanding awards having a fair market value equal to the
exercise price. Methods of exercise and settlement and other terms of SARs will
be determined by the Committee.
RESTRICTED AND DEFERRED STOCK
The Committee is authorized to make awards of restricted stock and deferred
stock. Prior to the end of the restricted period, shares received as restricted
stock may not be sold or disposed of by participants, and may be forfeited in
the event of termination of employment. The restricted period generally is
established by the Committee. An award of restricted stock entitles the
participant to all of the rights of a stockholder of New JEF, including the
right to vote the shares and the right to receive any dividends thereon, unless
otherwise determined by the Committee. Deferred stock gives participants the
right to receive shares at the end of a specified deferral period, subject to
forfeiture of the award in the event of termination of employment under certain
circumstances prior to the end of a specified restricted period (which need not
be the same as the deferral period). Prior to settlement, deferred stock awards
carry no voting or dividend rights or other rights associated with stock
ownership, but dividend equivalents may be paid on such deferred stock.
OTHER STOCK-BASED AWARDS, BONUS STOCK, AND AWARDS IN LIEU OF OTHER
OBLIGATIONS
The Incentive Plan authorizes the Committee to grant awards that are
denominated or payable in, valued in whole or in part by reference to, or
otherwise based on or related to New JEF Common Stock. The Committee will
determine the terms and conditions of such awards, including the consideration
to be paid to exercise awards in the nature of purchase rights, the periods
during which awards will be outstanding, and any forfeiture conditions and
restrictions on awards. In addition, the Committee is authorized to grant shares
as a bonus free of restrictions, or to grant shares or other awards in lieu of
obligations under other plans or compensatory arrangements, subject to such
terms as the Committee may specify.
PERFORMANCE-BASED AWARDS
The Committee may require satisfaction of pre-established performance goals,
consisting of one or more business criteria and a targeted performance level
with respect to such criteria, as a condition of awards being granted or
becoming exercisable or settleable under the Incentive Plan, or as a condition
to accelerating the timing of such events. If so determined by the Committee, in
order to avoid the limitations on deductibility under Section 162(m) of the
Code, the business criteria used by the Committee in establishing performance
goals applicable to performance awards to the named
50
<PAGE>
executives, applicable to New JEF on a consolidated basis or to specified
subsidiaries, divisions, or other business units, will be selected from among
the following:
- earnings per share;
- revenues;
- cash flow;
- cash flow return on investment;
- return on net assets, return on assets, return on investment, return on
capital, return on equity, or profitability;
- economic value added ("EVA");
- operating margins or profit margins;
- 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;
- total stockholder return or stock price;
- book value per share;
- expense management; improvements in capital structure; working capital;
costs; and
- 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
comparative 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. Earnings 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.
ANNUAL INCENTIVE AWARDS
The Committee is authorized to grant annual incentive awards, settleable in
cash or in stock upon achievement of preestablished performance objectives
achieved during a specified one-year period. The performance objectives will be
one or more of the performance objectives available for other performance awards
under the Incentive Plan, as described in the preceding paragraph. As stated
above, annual incentive awards granted to named executives are intended to
constitute "performance-based compensation" not subject to the limitation on
deductibility under Code Section 162(m). The Committee generally must establish
the performance objectives, the corresponding amounts payable (subject to
per-person limits), other terms of settlement, and all other terms of such
awards not later than 90 days after the beginning of the fiscal year.
OTHER TERMS OF AWARDS
Awards may be settled in cash, New JEF Common Stock, other awards or other
property, in the discretion of the Committee. The Committee may require or
permit participants to defer the settlement of all or part of an award in
accordance with such terms and conditions as the Committee may establish,
including payment or crediting of interest or dividend equivalents on any
deferred amounts. The Committee is authorized to place cash, shares or other
property in trusts or make other arrangements to provide for payment of
obligations under the Incentive Plan. The Committee may
51
<PAGE>
condition awards on the payment of taxes such as by withholding a portion of the
stock or other property to be distributed (or previously acquired stock or other
property surrendered by the participant) in order to satisfy tax obligations.
Awards granted under the Incentive Plan generally may not be pledged or
otherwise encumbered and are not transferable except by will or by the laws of
descent and distribution, or to a designated beneficiary upon the participant's
death, except that the Committee may permit transfers in individual cases,
including for estate-planning purposes.
Awards under the Incentive Plan are generally granted without a requirement
that the participant pay consideration in the form of cash or property for the
grant (as distinguished from the exercise), except to the extent required by
law. The Committee may, however, grant awards in substitution for other awards
under the Incentive Plan, awards under other compensatory plans, or other rights
to payment from New JEF, and may grant awards in addition to and in tandem with
such other awards or rights as well.
VESTING, FORFEITURES, AND ACCELERATION THEREOF
The Committee may, in its discretion determine the vesting schedule of
options and other awards, the circumstances that will result in forfeiture of
awards, the post-termination exercise periods of options and similar awards, and
the events that will result in acceleration of the ability to exercise and the
lapse of restrictions, or the expiration of any deferral period, on any award.
AMENDMENT AND TERMINATION OF THE INCENTIVE PLAN
The New JEF Board will be able to amend, suspend, discontinue, or terminate
the Incentive Plan or the Committee's authority to grant awards thereunder
without stockholder approval unless required by law, regulation, or stock
exchange rules, or deemed advisable. Thus, stockholder approval will not
necessarily be required for amendments which might increase the cost of the
Incentive Plan or broaden eligibility. Unless earlier terminated, the Incentive
Plan will terminate at such time that no shares reserved under the Incentive
Plan remain available and New JEF has no further obligation with respect to any
outstanding award.
EFFECT OF STOCKHOLDER APPROVAL ON AWARDS
Awards to be granted under the Incentive Plan will be within the discretion
of the Committee, and cannot be ascertained at this time. The terms of awards to
be granted under the Incentive Plan to replace awards granted under Group plans
and outstanding at the time of the Spin-Off are described above under the
caption "Management of Group and New JEF--Impact of the Spin-Off and Merger on
Group's Employee Benefit Plans; Jefferies Group, Inc. Stock Ownership and
Long-Term Incentive Plan; New JEF Incentive Plan;" the amount and terms of such
replacement awards will not be determinable until the spin-off becomes
effective. Annual incentive awards and stock options granted in the 1996-1998
period to Group's named executives as of December 31, 1998 are shown in
"Management of Group and New JEF--Summary Compensation Table," and other
information relating to such awards is set forth under the caption "Stock
Options" above. If stockholders decline to approve the Incentive Plan, awards
will not be granted under the Incentive Plan to the extent necessary to meet the
requirements of Treasury Regulation 1.162-27(e)(4).
FEDERAL INCOME TAX IMPLICATIONS OF THE INCENTIVE PLAN
The following is a brief description of the federal income tax consequences
generally arising with respect to awards that may be granted under the Incentive
Plan. The grant of an option or SAR (including a stock-based award in the nature
of a purchase right) will create no federal income tax consequences for the
participant or New JEF. A participant will not have taxable income upon
exercising an ISO (except that the alternative minimum tax may apply). Upon
exercising an option
52
<PAGE>
other than an ISO (including a stock-based award in the nature of a purchase
right), the participant must generally recognize ordinary income equal to the
difference between the exercise price and the fair market value of the freely
transferable and nonforfeitable stock acquired on the date of exercise. Upon
exercising an SAR, the participant must generally recognize ordinary income
equal to the cash or to the fair market value of the freely transferable and
nonforfeitable stock received.
Upon a disposition of shares acquired upon exercise of an ISO before the end
of the applicable ISO holding periods, the participant must generally recognize
ordinary income equal to the lesser of
(1) the fair market value of the shares at the date of exercise of the ISO
minus the exercise price or
(2) the amount realized upon the disposition of the ISO shares minus the
exercise price. Otherwise, a participant's disposition of shares acquired
upon the exercise of an option or SAR generally will result in short-term
or long-term capital gain or loss measured by the difference between the
sale price and the participant's tax basis in such shares (generally, the
exercise price plus any amount previously recognized as ordinary income
in connection with the exercise of the option or SAR).
New JEF generally will be entitled to a tax deduction equal to the amount
recognized as ordinary income by the participant in connection with options and
SARs, but will not be entitled to a tax deduction relating to amounts that
represent a capital gain to a participant. Accordingly, New JEF will not be
entitled to any tax deduction with respect to an ISO if the participant holds
the shares for the applicable ISO holding periods prior to disposition of the
shares.
With respect to other awards granted under the Incentive Plan that may be
settled either in cash or in stock or other property that is either not
restricted as to transferability or not subject to a substantial risk of
forfeiture, the participant must generally recognize ordinary income equal to
the cash or the fair market value of stock or other property actually received.
Except as discussed below, New JEF generally will be entitled to a deduction for
the same amount. With respect to awards involving stock or other property that
is restricted as to transferability and subject to a substantial risk of
forfeiture, the participant must generally recognize ordinary income equal to
the fair market value of the shares or other property received at the first time
the shares or other property become transferable or not subject to a substantial
risk of forfeiture, whichever occurs earlier. Except as discussed below, New JEF
generally will be entitled to a deduction in an amount equal to the ordinary
income recognized by the participant. A participant may elect to be taxed at the
time of receipt of shares or other property rather than upon lapse of
restrictions on transferability or the substantial risk of forfeiture, but if
the participant subsequently forfeits such shares or property he would not be
entitled to any tax deduction, including as a capital loss, for the value of the
shares or property on which he previously paid tax.
As discussed above, compensation that qualifies as "performance-based"
compensation is excluded from the $1,000,000 deductibility cap of Code Section
162(m), and therefore remains fully deductible by the company that pays it.
Under the Incentive Plan, options and SARs granted with an exercise price or
grant price at least equal to 100% of fair market value of the underlying stock
at the date of grant, annual incentive awards to employees the Committee expects
to be named executives at the time compensation is received, and certain other
awards which are conditioned upon achievement of performance goals are intended
to qualify as such "performance-based" compensation. A number of requirements
must be met in order for particular compensation to so qualify, however, so
there can be no assurance that such compensation under the Incentive Plan will
be fully deductible under all circumstances. In addition, other awards under the
Incentive Plan generally will not so qualify, so that compensation paid to
certain executives in connection with such awards may, to the extent it and
other compensation subject to Section 162(m)'s deductibility cap exceed
$1,000,000 in a given year, be subject to the limitation of Section 162(m).
53
<PAGE>
The foregoing provides only a general description of the application of
federal income tax laws to certain types of awards under the Incentive Plan.
This discussion is intended for the information of Group Stockholders
considering how to vote at the Special Meeting and not as tax guidance to
participants in the Incentive Plan, as the consequences may vary with the types
of awards made, the identity of the recipients and the method of payment or
settlement. Different tax rules may apply, including in the case of variations
in transactions that are permitted under the Incentive Plan (such as payment of
the exercise price of an option by surrender of previously acquired shares). The
summary does not address the effects of other federal taxes (including possible
"golden parachute" excise taxes) or taxes imposed under state, local, or foreign
tax laws.
VOTE REQUIRED FOR APPROVAL
Approval of the Incentive Plan will require the affirmative vote of holders
of a majority of the shares of Group Common Stock present in person or
represented by proxy and entitled to vote on the matter.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF GROUP
THE GROUP BOARD OF DIRECTORS CONSIDERS APPROVAL OF THE INCENTIVE PLAN TO BE
IN THE BEST INTERESTS OF GROUP AND NEW JEF AND THEIR PRESENT AND FUTURE
STOCKHOLDERS, AND HAS UNANIMOUSLY APPROVED THE ADOPTION OF THE INCENTIVE PLAN.
THE GROUP BOARD UNANIMOUSLY RECOMMENDS THAT GROUP STOCKHOLDERS VOTE "FOR"
APPROVAL AND ADOPTION OF THE INCENTIVE PLAN.
54
<PAGE>
APPROVAL OF THE 1999 DIRECTORS' STOCK COMPENSATION PLAN
REASONS FOR APPROVAL BY GROUP STOCKHOLDERS
At the Special Meeting, Group Stockholders will be asked to approve the
Directors' Plan of New JEF. If approved, the Directors' Plan will serve the
function for New JEF currently served by two Group plans, the Non-Employee
Directors' Stock Option Plan originally approved by stockholders in 1994 (the
"1994 Option Plan") and the Non-Employee Directors' Deferred Compensation Plan
originally approved by stockholders in 1996 (the "1996 Deferral Plan" and, with
the 1994 Option Plan, the "Existing Plans"). Stockholder approval of the
Directors' Plan is being sought in part to meet certain requirements of the
NYSE.
While initially continuing the compensation policies similar to those under
the Existing Plans, the Directors' Plan will provide the Board with greater
flexibility to modify the amount and type of awards granted to non-employee
directors and the terms on which such awards are granted than is permitted under
the Existing Plans. In addition, adoption of the Directors' Plan will reserve a
total of 500,000 shares as compared to 301,051 remaining available under the
Existing Plans as of March 15, 1999. Greater flexibility is intended to help
Group to remain competitive in its compensation package for directors, in order
to help attract and retain highly qualified persons to serve in that capacity.
Director plans designed and implemented in 1996 and earlier generally were
required by Rule 16b-3 under the Exchange Act to contain more rigid and
inflexible terms. Amendments to Rule 16b-3 adopted in 1996 permit much greater
flexibility, and a growing number of companies have taken advantage of this
flexibility. For example, a number of companies have sought to increase the
portion of director compensation paid in shares rather than in cash, on an
elective or mandatory basis. While Group, through the 1996 Deferral Plan, has
participated in this trend, the proposed Directors' Plan will allow New JEF to
continue to offer innovative forms of stock-based compensation that increase
directors' proprietary interest in NEW JEF and more closely align their
interests with those of stockholders.
INITIAL NEW JEF DIRECTOR COMPENSATION POLICY AND CURRENT DIRECTOR COMPENSATION
UNDER THE EXISTING PLANS
Initially under the Directors' Plan, New JEF's policies with respect to
automatic option grants to non-employee directors and grants of options or
deferred shares in lieu of cash fees at the election of non-employee directors
will be similar to the current program under the Existing Plans. Under the 1994
Option Plan, each non-employee Director is automatically granted each year an
option to purchase 2,000 shares of Group's Common Stock after the annual
stockholders' meeting at which he is elected a director, and a newly elected
Director is automatically granted an option to purchase 5,000 shares. Such
options have an exercise price equal to 100% of the fair market value of a share
at the date of grant, become exercisable three months after the date of grant,
and expire at the earliest of five years after the date of grant, 12 months
after the optionee ceases to serve as a Director due to death, disability or
retirement or 60 days after the optionee ceases to serve as a Director for any
other reason.
The initial policy under the Directors' Plan will provide for an automatic
grant of an option to purchase 4,000 shares of New JEF Common Stock after each
annual stockholders' meeting and upon the effectiveness of the Spin-Off, and an
automatic grant of an option to purchase 5,000 shares upon the initial election
or appointment of a new Director. Certain additional awards through the
Replacement Option Exchange or through Make-Whole Grants will be made upon the
effectiveness of the Spin-Off, as described herein.
Under the 1996 Deferral Plan, each non-employee Director may elect to
receive annual retainer and Chairman's fees in the form of stock options and/or
to defer receipt of any Director fees in a deferred cash account or as deferred
shares. If a Director elects to be paid fees in the form of options, the number
of options granted is that number having an aggregate value, determined under a
modified "Black-Scholes" option valuation model, equal to the amount of such
fees. Such options have a term of
55
<PAGE>
ten years, and an exercise price per share equal to 100% of the fair market
value of a share at the date of grant. If fees are deferred in cash, interest is
credited at the prime rate. If fees are deferred in the form of deferred shares,
Group credits the Director's deferral account with a number of deferred shares
equal to the number of shares having an aggregate fair market value at the date
the fees otherwise would be payable equal to the amount of fees deferred.
Dividend equivalents are credited on such deferred shares, which amounts are
deemed to be reinvested in additional deferred shares. Deferrals are settled at
such time as the Director has elected in a deferral election form, by delivery
of one share of Common Stock in settlement of each deferred share and delivery
of cash in settlement of the deferred cash account. The initial policy under the
Directors' Plan will not materially change the terms of deferrals by directors.
Certain adjustments to deferred shares will be made in connection with the
Spin-Off, as described below.
DESCRIPTION OF THE DIRECTORS' PLAN
The following is a brief description of the material features of the
Directors' Plan.
SHARES AVAILABLE AND AWARD LIMITATIONS
The Directors' Plan reserves 500,000 shares of New JEF Common Stock for
future options and awards. This includes the number of shares to be delivered
under awards replacing awards granted under the Existing Plans and replacing
other options granted to Group's current and former non-employee directors. If
an award expires for any reason without having been exercised in full or is
forfeited or canceled, the shares subject thereto will again be available for
delivery under the Directors' Plan. There is currently no trading market for
shares of New JEF Common Stock. See "Market Price of and Dividends on Common
Stock and Related Stockholder Matters."
The Directors' Plan also imposes limits on individual awards. Options may be
granted outright-- that is, granted without a corresponding reduction in cash
fees payable--for up to 10,000 shares to a director in a single year. Deferred
shares or restricted stock may be granted outright to a Director in a single
year in a number equal to 50% of the number that could be granted with a
corresponding reduction in cash fees. Options, deferred shares, and restricted
stock granted with a corresponding reduction in cash fees are, of course,
limited by the level of cash fees. As is the case for most publicly held
corporations, the level of cash fees is established from time to time by the
Board. These limitations do not apply to awards through the Replacement Option
Exchange or through Make-Whole Grants.
Adjustments to the number and kind of shares subject to the aggregate share
limitation, the annual per-person limitation on the amount of options that may
be granted outright, the number and kind of shares subject to outstanding awards
and to be granted under any Board policy providing automatic grants under the
Directors' Plan then in effect, as well as adjustments to exercise prices and
other terms of awards, are authorized in the event that an extraordinary
dividend or other distribution (whether in cash, shares, or other property),
recapitalization, reclassification, stock split, reorganization, business
combination, or other similar corporate transaction or event affects the New JEF
Common Stock.
New JEF may adopt other plans and arrangements providing compensation to
non-employee Directors in the form of common stock, although no such additional
arrangements are currently planned.
ELIGIBILITY
Only non-employee Directors of New JEF will be eligible to participate in
the Directors' Plan, except a former director of Group may be granted awards in
substitution for Group options or
56
<PAGE>
deferred shares outstanding at the time of the Spin-Off. Upon completion of the
Spin-Off, an estimated three persons would be eligible for awards under the
Directors' Plan.
ADMINISTRATION
The Directors' Plan generally will be administered by the Board of Directors
of New JEF. Officers of New JEF and employees of the New JEF businesses will
perform administrative functions as well, but will not determine the amount or
timing of discretionary awards. The Board can amend, suspend, or terminate the
Directors' Plan without further stockholder approval, unless such approval is
required by law or regulation or under the rules of the NYSE. Thus, stockholder
approval will not necessarily be required for amendments which might increase
the cost of the Directors' Plan or broaden eligibility. Stockholder approval
will not be deemed to be required under laws or regulations that condition
favorable treatment of participants on such approval, although the Board may, in
its discretion, seek stockholder approval in any circumstance in which it deems
such approval advisable.
OUTRIGHT GRANTS OF OPTIONS, DEFERRED SHARES, AND RESTRICTED STOCK
As stated above, the Directors' Plan authorizes the Board to determine the
amount and timing of outright grants of stock options, deferred shares, and
restricted stock to non-employee Directors, as well as the times at which such
options will become exercisable, the terms under which any such awards will be
forfeited upon termination of a Director's service, and other terms of awards.
For purposes of this discussion, an "outright" grant is a grant as to which
there is no corresponding reduction in cash fees payable to the Director. The
Board's initial policy with respect to such outright grants of options,
including vesting and forfeiture terms, is described above; such policy does not
include an authorization of outright grants of deferred shares or restricted
stock under the initial compensation plan for non-employee directors.
Options granted outright under the Directors' Plan will have an exercise
price equal to 100% of the fair market value of the underlying common stock at
the date of grant, and a maximum term of ten years. Directors will not be
required to pay any cash consideration at the time of grant of such options.
A deferred share represents a contractual right to receive one share of
common stock at a specified future date. Deferred shares granted outright may be
subject to a risk of forfeiture and nontransferable for a period determined by
the Board, but delivery of shares in settlement of the award may be deferred to
a date after the lapse of the forfeiture/nontransferability restriction.
Restricted stock is an award of shares, issued in the name of the Director,
which are subject to a risk of forfeiture and nontransferable for a specified
vesting period. Such stock may be held in escrow on behalf of the Director until
it becomes vested. Dividend equivalents are credited on outstanding deferred
shares, and dividends are payable on outstanding restricted stock, with such
dividend equivalents or dividends in each case deemed reinvested in additional
like awards (unless otherwise determined by the Board). Directors generally will
pay no cash consideration at the time of grant of deferred shares or restricted
stock (except as may be required by law). Directors have voting rights with
respect to outstanding restricted stock, but not with respect to deferred
shares.
OPTIONS GRANTED IN PAYMENT OF FEES AND DEFERRAL OF FEES IN DEFERRED SHARES
AND DEFERRED CASH
The Directors' Plan will permit each non-employee director to elect to
receive annual retainer fees and Chairman's fees in the form of stock options
and to defer receipt of any Director fees in a deferred cash account or as
deferred shares. To participate, a non-employee Director must file an election
to participate prior to the beginning of a plan year, specifying the amount of
fees and compensation to be received in the form of options or deferred in the
form of deferred cash or deferred shares. A plan year generally begins at the
time of the Director's election at an annual meeting of shareholders and
continues through the next annual meeting (a plan year will begin for a
57
<PAGE>
Director initially elected other than at an annual meeting at the time of such
initial election), except that, upon completion of the Spin-Off, the plan year
will be deemed to be a continuation of the plan year under the 1996 Deferral
Plan (with elections under that plan applying equally under the Directors'
Plan).
If and to the extent elected by a non-employee Director, retainer fees will
be paid in the form of a stock option. Initially, New JEF will authorize payment
to each non-employee Director of annual retainer fees of $20,000 and Chairman's
fees for service as chairman of a Board committee of $3,000 (the same rates as
currently in effect for Group). Such options will be valued and have related
terms, and fees reduced, based on an option valuation methodology adopted by the
Board. Under the 1996 Deferral Plan, the Board has valued options using a
modified "Black-Scholes" valuation model, reducing fees by the aggregate value
of the options determined under such model. Under this approach, the exercise
price per share equals 100% of the fair market value of the underlying shares at
the date of grant. During the 1998 plan year, no directors elected to receive
options in lieu of their annual retainer fees.
The Directors' Plan will allow the Board to use other valuation
methodologies. An example of an alternative methodology used by some companies
is to grant options with a discounted exercise price per share, for example 25%
of then-current fair market value, with the amount of fees reduced equal to 75%
of the then-current fair market value of the shares underlying options.
Options granted in payment of fees generally will become exercisable as to
25% of the underlying shares on the June 30, September 30, December 31, and
March 31 following the grant (or at a faster rate if options are granted at
times other than the customary annual meeting date), except that an option will
become fully exercisable at the end of the plan year if the Director serves
through such date. Options will expire ten years after the date of grant, except
that any part of the option not exercisable at the time a Director ceases to
serve as a Director will expire at that time, regardless of the reason for the
Director's termination and the part of an unexercisable option attributable to
fees for service as Chairman or a member of a committee will expire at the time
committee service terminates.
A non-employee Director may elect to defer receipt of annual retainer fees
(other than fees paid in the form of options), fees for service as chairman of a
Board committee, and Board and committee meeting fees by filing an election
prior to the beginning of a plan year. If such fees are deferred in the form of
cash, New JEF will credit a cash account established for the Director with the
amount of fees deferred, at the date such fees otherwise would be payable to the
Director. Interest will be credited to such account for a plan year at a rate
specified by the Board. Under the Board's initial policy, that rate will be the
prime interest rate in effect at the date of the preceding annual meeting of
stockholders. The Directors' Plan will permit deferred cash to be carried
forward from the 1996 Deferral Plan.
If Directors' fees are deferred in the form of deferred shares, New JEF will
credit a deferral account established for the Director with a number of deferred
shares equal to the number of shares (including fractional shares) having an
aggregate fair market value at the date fees otherwise would be payable equal to
the amount of fees deferred in such form. Dividend equivalents equal to
dividends declared and paid on New JEF Common Stock will be credited on deferred
shares then credited to a Director's account, which amounts will be deemed to be
reinvested in additional deferred shares.
A Director's deferred cash account and deferred share account generally will
be settled at such times, and in a lump sum or installments, as may have been
elected by the Director in his or her deferral election form, by distribution of
(1) cash equal to the balance in the deferred cash account and (2) a number of
shares equal to the number of deferred shares credited to the deferred share
account. Distributions will be accelerated in certain circumstances, including
upon the participant's death and certain transactions terminating the corporate
existence of Group. Rights relating to deferred cash and deferred shares not
resulting from an outright grant under the Directors' Plan are non-forfeitable.
58
<PAGE>
OTHER INFORMATION REGARDING THE DIRECTORS' PLAN
All options granted under the Directors' Plan will be non-qualified stock
options. A Director may pay the exercise price of an option in cash or by
surrendering previously acquired shares of common stock. Options generally will
not be transferable other than by will or by the laws of descent and
distribution or to a designated beneficiary in the event of death, and are
exercisable during the Director's lifetime only by the Director, except that
transfers for estate planning purposes may be permitted.
Unless earlier terminated by the Board, the Directors' Plan will terminate
when no shares remain available under the Plan and New JEF has no further rights
and obligations under the Plan, or upon certain transactions terminating the
corporate existence of New JEF. It is not possible at present to predict the
number of options that will be granted or the number of shares that will be
issuable in settlement of deferred shares under the Directors' Plan.
GRANTS UPON EFFECTIVENESS OF THE SPIN-OFF
Options will be granted under the Directors' Plan in connection with the
Spin-Off. If a Group Director who will become a New JEF Director holds an
outstanding Group option at the time of the Spin-Off, he will have such Group
option cancelled and receive instead an option to purchase New JEF shares. The
number of shares subject to the New JEF option and the exercise price will be
adjusted, based on the market prices of Group Common Stock prior to the Spin-Off
and New JEF Common Stock after the Spin-Off, in a manner intended to preserve
but not enlarge the aggregate in-the-money value of the option. This adjustment
is expected to increase the number of shares subject to the option and reduce
the per share exercise price. If a Group Director who will become a director of
New JEF elects to exercise his options prior to the Spin-Off, a Make-Whole Grant
of New JEF options will be granted under the Directors' Plan upon the
effectiveness of the Spin-Off. Deferred shares credited to the director's
deferral account will be adjusted into a number of New JEF deferred shares
having an equal aggregate value following the Spin-Off, and will continue to be
deferred under the Directors' Plan.
In addition, the automatic annual grant of an option to purchase 4,000
shares of New JEF Common Stock to each non-employee Director will become
effective at the time of the Spin-Off.
FEDERAL INCOME TAX IMPLICATIONS OF THE DIRECTORS' PLAN
The federal income tax consequences of non-qualified stock options and
outright grants of deferred shares and restricted stock are described above
under the caption "Approval of the 1999 Incentive Compensation Plan--Federal
Income Tax Implications of the Incentive Plan." Other deferrals permitted under
the Directors' Plan generally will have the following federal income tax
consequences. If a Director defers fees in the form of deferred cash or deferred
shares, he or she will not recognize ordinary income at the date the fees would
otherwise have been paid or as a result of the crediting of deferred cash or
deferred shares to his or her account (including interest credited to the cash
account or upon the deemed reinvestment of dividend equivalents in the deferred
share account). The Director will, however, at the date of settlement of such
accounts by payment of cash or issuance of common stock to the Director,
recognize ordinary income equal to the amount of cash and the fair market value
of the common stock received at that date.
The foregoing provides only a general description of the application of
federal income tax laws to the Directors' Plan. This discussion is intended for
the information of Group Stockholders considering how to vote at the Special
Meeting and not as tax guidance to participants in the Directors' Plan. The
summary does not address the effects of other federal taxes or taxes imposed
under state, local, or foreign tax laws.
59
<PAGE>
VOTE REQUIRED FOR APPROVAL
Approval of the Directors' Plan will require the affirmative vote of holders
of a majority of the shares of Group Common Stock present in person or
represented by proxy and entitled to vote on the matter.
RECOMMENDATION OF THE BOARD OF DIRECTORS OF GROUP
THE GROUP BOARD OF DIRECTORS CONSIDERS APPROVAL OF THE DIRECTORS' PLAN TO BE
IN THE BEST INTERESTS OF GROUP AND NEW JEF AND THEIR PRESENT AND FUTURE
STOCKHOLDERS, AND HAS UNANIMOUSLY APPROVED THE ADOPTION OF THE DIRECTORS' PLAN
THE GROUP BOARD UNANIMOUSLY RECOMMENDS THAT GROUP STOCKHOLDERS VOTE "FOR"
APPROVAL AND ADOPTION OF THE DIRECTORS' PLAN.
60
<PAGE>
DESCRIPTION OF NEW JEF CAPITAL STOCK
INTRODUCTION
We presently expect that New JEF will have the following capital stock
authorization and terms.
AUTHORIZED AND OUTSTANDING CAPITAL STOCK
The authorized capital stock of New JEF will consist of 100 million shares
of New JEF Common Stock, $.0001 par value per share, and 10 million shares of
Preferred Stock $.001 par value per share (the "Preferred Stock").
Following the completion of the Spin-Off, approximately 23.9 million shares
of New JEF Common Stock outstanding will be held of record by approximately 294
persons, excluding shares of New JEF Common Stock issuable upon the exercise of
New JEF stock options. See "The Transactions--The Spin-Off and the Transfers;
Results of the Spin-Off and the Transfers" and "Approval of the 1999 Incentive
Compensation Plan." No shares of Preferred Stock have been issued by New JEF,
and there is no present intention to issue any shares of Preferred Stock.
NEW JEF COMMON STOCK; DELAWARE ANTITAKEOVER PROVISIONS
Holders of shares of New JEF Common Stock are entitled to one vote per share
on all matters to be voted upon by the stockholders and are not entitled to
cumulate votes for the election of directors. Subject to preferences that may be
applicable to any outstanding Preferred Stock, holders of shares of New JEF
Common Stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the New JEF Board of Directors out of funds
legally available therefor. In the event of liquidation, dissolution or winding
up of New JEF, the holders of shares of New JEF Common Stock are entitled to
share ratably in all assets remaining after payment of liabilities, subject to
prior distribution rights of Preferred Stock, if any, then outstanding. Holders
of New JEF Common Stock have no preemptive, conversion or other subscription
rights and there are no redemption or sinking fund provisions applicable to the
New JEF Common Stock.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
New JEF is subject to the provisions of Section 203 of the Delaware General
Corporation Law ("DGCL"). Subject to certain exceptions, Section 203 of the DGCL
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder. Subject to certain exceptions, an "interested stockholder" is a
person who, together with affiliates and associates, owns, or within three years
did own, 15% or more of the corporation's voting stock. A "business combination"
includes
(1) mergers, consolidations and sales or other dispositions of 10% or more
of the assets of a corporation to or with an interested stockholder,
(2) certain transactions resulting in the issuance or transfer to an
interested stockholder of any stock of such corporation or its
subsidiaries, and
(3) other transactions resulting in a disproportionate financial benefit to
an interested stockholder.
The restrictions of Section 203 of the Delaware General Corporation Law do
not apply where:
(1) the business combination or the transaction in which the stockholder
becomes interested is approved by the corporation's Board of Directors
prior to the date the interested stockholder acquired its shares;
61
<PAGE>
(2) the interested stockholder acquired at least 85% of the outstanding
voting stock of the corporation in the transaction in which the
stockholder became an interested stockholder excluding, for determining
the number of shares outstanding, shares owned by persons who are
directors as well as officers and by employee stock plans in which
participants do not have the right to determine confidentially whether
shares held subject to the plan will be tendered in a tender or exchange
offer; or
(3) the business combination is approved by the Board of Directors and the
affirmative vote of two-thirds of the outstanding voting stock not owned
by the interested stockholder at an annual or special meeting.
The business combinations provisions of Section 203 of the DGCL may have the
effect of deterring merger proposals, tender offers or other attempts to effect
changes in control of New JEF that are not negotiated with and approved by the
Board of Directors.
PREFERRED STOCK
The New JEF Certificate provides that New JEF may issue up to 10 million
shares of Preferred Stock. The New JEF Board has the authority to issue
Preferred Stock in one or more series and to fix the rights, preferences,
privileges and restrictions, including the dividend, conversion, voting,
redemption (including sinking fund provisions), and other rights, liquidation
preferences, and the number of shares constituting any series and the
designations of such series, without any further vote or action by the
stockholders of New JEF. Because the terms of the Preferred Stock may be fixed
by the New JEF Board without stockholder action, the Preferred Stock could be
issued quickly with terms calculated to defeat a proposed takeover of New JEF to
make the removal of management of New JEF more difficult. Under certain
circumstances this could have the effect of decreasing the market price of the
New JEF Common Stock.
CERTAIN ANTITAKEOVER PROVISIONS--NEW JEF CERTIFICATE AND BYLAWS
Certain provisions of the New JEF Certificate and Bylaws may have the
effect, either alone or in combination with each other, of making more difficult
or discouraging a tender offer, takeover attempt or change in control that is
opposed by New JEF's Board of Directors but that a stockholder might consider to
be in its best interest. New JEF believes that such provisions are necessary to
enable New JEF to develop its business in a manner that will foster its
long-term growth without disruption caused by the threat of a takeover not
deemed by the Board of Directors to be in the best interests of New JEF and its
stockholders. These provisions are summarized in the following paragraphs.
BUSINESS CONDUCTED AT MEETINGS; DIRECTOR NOMINATION
The JEF Bylaws provide that in order to bring matters before the annual
meetings of stockholders, stockholders must give notice to New JEF containing
certain information within 60 to 90 days prior to the anniversary date of the
previous year's annual meeting or, if the date of the annual meeting is not
within 30 days of the anniversary date of the previous year's annual meeting, no
earlier than 90 days prior to such annual meeting and no later than the close of
business on the tenth day following the day on which notice of the date of such
meeting was mailed or the tenth day following the day on which public disclosure
of the date of the meeting of stockholders was made, whichever first occurs. In
order to nominate candidates for directors of New JEF, stockholders must give
notice to New JEF containing certain information within 60 to 90 days prior to
the anniversary date of the previous year's annual meeting or, if the date of an
annual meeting is not within 30 days of the anniversary of the previous year's
annual meeting, not later than the close of business on the tenth day following
the day on which notice of the date of such meeting was mailed or public
disclosure of the date of the meeting of stockholders was made, whichever first
occurs.
62
<PAGE>
SPECIAL MEETING OF STOCKHOLDERS
The DGCL provides that special meetings of stockholders may be called by the
Board of Directors of New JEF or any person authorized by the New JEF
Certificate or JEF Bylaws to call a special meeting. The New JEF Certificate and
Bylaws provide that special meetings may be called by the Board of Directors or
any person authorized by the Board of Directors to call a special meeting.
Nominations of persons for election to the Board of Directors may be made at a
special meeting by or at the direction of the Board of Directors. In order to
nominate candidates for directors of New JEF at a special meeting in such
circumstances, stockholders must give notice to New JEF containing certain
information 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 tenth 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.
NO STOCKHOLDER ACTION BY WRITTEN CONSENT; STOCKHOLDER ACTION AT MEETINGS
The New JEF Certificate and New JEF Bylaws provide that stockholder action
can be taken only at an annual or special meeting of stockholders, and prohibit
stockholder action by written consent in lieu of a meeting.
SUPERMAJORITY VOTING
The New JEF Certificate and New JEF Bylaws require the approval of the
holders of at least 66 2/3% of the voting power of all of the shares entitled to
vote to alter, amend, repeal or adopt any provision inconsistent with or
limiting the effect of provisions of certain enumerated antitakeover provisions
in the New JEF Certificate and JEF Bylaws, including the anti-takeover
provisions listed above. The Board of Directors may amend, supplement or repeal
the JEF Bylaws at any time, except as limited by law.
OTHER DELAWARE CORPORATE LAW PROVISIONS AFFECTING NEW JEF STOCKHOLDERS
DIVIDEND RIGHTS
Under the DGCL, a corporation may pay dividends either
(1) out of "surplus" (as defined below) or,
(2) if no such surplus exists, out of net profits for the fiscal year in
which such dividends are declared and/or for its preceding fiscal year;
except that no dividends may be paid out of such net profits if the
"capital" (as defined below) of the corporation is diminished by
depreciation in the value of its property or by losses, or otherwise to
an amount less than the aggregate amount of capital represented by the
issued and outstanding stock having a preference upon the distribution of
assets.
"Surplus" is defined in the DGCL as the amount by which net assets
(total assets less total liabilities) exceeds the capital of the
corporation. In accordance with the DGCL, "capital" is determined by the
Board of Directors and will not be less than the aggregate par value of
the outstanding capital stock of the corporation having par value. In
addition, the DGCL generally provides that a corporation may redeem or
repurchase its own shares only if such redemption or repurchase would not
"impair the capital" of the corporation. The ability of a Delaware
corporation to pay dividends on, or redeem or to make repurchases or
redemptions of, its shares is dependent on the financial status of the
corporation standing alone and not on a consolidated basis.
63
<PAGE>
FIDUCIARY DUTIES OF DIRECTORS
Under the DGCL, the business and affairs of a corporation are managed by or
under the direction of its boards of directors. In exercising their powers,
directors are charged with a fiduciary duty to protect the interests of the
corporation and to act in the best interests of its stockholders. Delaware
courts have held that the duty of care requires the directors to exercise an
informed business judgment, known as the "business judgment rule." A party
challenging the propriety of a decision of a Board of Directors bears the burden
of rebutting the applicability of the presumption of the business judgment rule
by demonstrating that, in reaching their decision, the directors breached one or
more of their fiduciary duties--good faith, loyalty and due care. If the
presumption is not rebutted, the business judgment rule attaches to protect the
directors and their decisions, and their business judgments will not be second
guessed. Where, however, the presumption is rebutted, the directors bear the
burden of demonstrating the entire fairness of the relevant transaction.
Notwithstanding the foregoing, Delaware courts subject directors' conduct to
enhanced scrutiny in respect of defensive actions taken in response to a threat
to corporate control and approval of a transaction resulting in a sale of such
control.
LIABILITY OF DIRECTORS
The DGCL permits a corporation to include in its certificate of
incorporation a provision limiting or eliminating the liability of its directors
to such corporation or its stockholders for monetary damages arising from a
breach of fiduciary duty, except for:
(1) a breach of the duty of loyalty to the corporation or its stockholders,
(2) acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
(3) a declaration of a dividend or the authorization of the repurchase or
redemption of stock in violation of the DGCL or
(4) any transaction from which the director derived an improper personal
benefit.
The certificates of incorporation of each of Group and New JEF limits the
liability of directors to those set forth above.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the DGCL, a corporation may indemnify any person involved in a third
party action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of being a director or officer of the corporation,
against expenses (including attorneys' fees), judgments, fines and settlement
amounts actually and reasonably incurred in connection with such action, suit or
proceeding (and against expenses incurred in a derivative action on behalf of
such corporation) or incurred by reason of such person's being or having been a
representative of such corporation, if such person acted in good faith and
reasonably believed that his actions were in or not opposed to the best
interests of such corporation and, with respect to any criminal proceeding, had
no reasonable cause to believe that his conduct was unlawful. The DGCL also
provides that a corporation may advance to such director or officer expenses
incurred by him in defending any action, upon receipt of an undertaking by the
person to repay the amount advanced if it is ultimately determined that he is
not entitled to indemnification. A determination as to the amount of the
indemnification to be made by the corporation shall be made by a majority vote
of the directors who are not parties to such action, even though less than a
quorum, or, if such directors so direct, by independent legal counsel. No
indemnification for expenses in derivative actions is permitted under the DGCL
where the person is adjudged liable to the corporation, unless a court finds him
entitled to such indemnification. If, however, the person is successful in
defending a third party or derivative action, indemnification for expenses
incurred is mandatory. The DGCL provides further that the provisions for
indemnification contained therein are nonexclusive of
64
<PAGE>
any other rights to which the party may be entitled under any bylaw, agreement
or vote of stockholders or disinterested directors. The bylaws of each of Group
and New JEF provide for indemnification of any person to the fullest extent
permitted by law.
ANNUAL MEETINGS
Under the DGCL, if the annual meeting for the election of directors is not
held on the designated date, the directors are required to cause such a meeting
to be held as soon thereafter as convenient. If they fail to do so for a period
of 30 days after the designated date, or if no date has been designated for a
period of 13 months after the organization of the corporation or after its last
annual meeting, the Court of Chancery may summarily order a meeting to be held
upon the application of any stockholder or director.
MERGERS AND MAJOR TRANSACTIONS
Under the DGCL, whenever the approval of the stockholders of a corporation
is required for an agreement of merger or consolidation or for a sale, lease or
exchange of all or substantially all of its assets, such agreement, sale, lease
or exchange must be approved by the affirmative vote of the owners of a majority
of outstanding shares entitled to vote thereon. Notwithstanding the foregoing,
unless required by its certificate of incorporation, no vote of the stockholders
of a constituent corporation surviving a merger is necessary to authorize such
merger if:
(1) the agreement of merger does not amend the certificate of incorporation
of such constituent corporation,
(2) each share of stock of such constituent corporation outstanding prior to
such merger is to be an identical outstanding or treasury share of the
surviving corporation after such merger,
(3) either no shares of Common Stock of the surviving corporation and no
shares, securities or obligations convertible into such Common Stock are
to be issued under such agreement of merger, or the number of shares of
Common Stock issued or so issuable does not exceed 20% of the number
thereof outstanding immediately prior to such merger, and
(4) certain other conditions are satisfied.
In addition, the DGCL provides that a parent corporation that is the record
holder of at least 90% of the outstanding shares of each class of stock of a
subsidiary may merge such subsidiary into such parent corporation without the
approval of such subsidiary's stockholders or Board of Directors. Furthermore,
the DGCL provides that no stockholder vote is required to approve a merger of a
constituent corporation with a single direct or indirect wholly owned subsidiary
of such corporation, subject to certain qualifications.
65
<PAGE>
MARKET PRICE OF AND DIVIDENDS ON COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
GROUP
Group's Common Stock began trading on the NYSE on March 15, 1996, under the
symbol JEF. Previously, Group's Common Stock traded in the Nasdaq National
Market System under the symbol Group. The following table sets forth for the
periods indicated, the range of high and low prices per share for the Group
Common Stock as reported by the NYSE. All price range and dividends per share
information has been restated to retroactively reflect the effect of the
two-for-one stock splits declared by the Group Board of Directors on November
19, 1997 and March 2, 1996.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1999
- -----------------------------------------------------------------
First Quarter (through March 15, 1999)........................... $ 55.25 $ 36.94
1998
- -----------------------------------------------------------------
First Quarter.................................................... $ 56.88 $ 32.50
Second Quarter................................................... 59.50 40.00
Third Quarter.................................................... 51.25 24.38
Fourth Quarter................................................... 50.88 16.56
1997
- -----------------------------------------------------------------
First Quarter.................................................... $ 24.13 $ 19.38
Second Quarter................................................... 30.38 20.00
Third Quarter.................................................... 38.16 26.63
Fourth Quarter................................................... 48.00 31.88
</TABLE>
On March 15, 1999, the closing sales price per share for Group Common Stock
as reported on the NYSE was $45.19. On March 17, 1998, the last full trading day
prior to the public announcement of the Transactions, the last reported sale
price was $51.31 per share for Group Common Stock. There were approximately 294
holders of record of Group's Common Stock at March 1, 1999.
In 1988, Group instituted a policy of paying regular quarterly cash
dividends. There are no restrictions on Group's present ability to pay dividends
on Common Stock, other than the applicable provisions of the DGCL.
Dividends per Group Common Share (declared and paid):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
1998............................................... $ .0500 $ .0500 $ .0500 $ .0500
1997............................................... $ .0250 $ .0250 $ .0250 $ .0500
</TABLE>
66
<PAGE>
ITGI
ITGI's Common Stock is quoted on the Nasdaq National Market under the symbol
"ITGI." ITGI has applied for listing of New ITGI Common Stock on the New York
Stock Exchange under the symbol "ITG."
The following table sets forth for the periods indicated, the range of the
high and low closing sales prices per share for ITGI's Common Stock as
reportedis on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1999
- -----------------------------------------------------------------
First Quarter (through March 15, 1999)........................... $ 67.00 $ 35.50
1998
- -----------------------------------------------------------------
First Quarter.................................................... $ 37.50 $ 24.38
Second Quarter................................................... 35.50 25.50
Third Quarter.................................................... 34.00 27.25
Fourth Quarter................................................... 62.06 18.50
1997
- -----------------------------------------------------------------
First Quarter.................................................... $ 23.75 $ 18.38
Second Quarter................................................... 26.88 17.88
Third Quarter.................................................... 32.00 26.31
Fourth Quarter................................................... 31.25 26.25
</TABLE>
On March 15, 1999, the closing sales price per share for ITGI Common Stock
as reported on the Nasdaq National Market was $46.50. On March 17, 1998, the
last full trading day prior to the public announcement of the Transactions, the
last reported sale price was $31.25 per share for ITGI Common Stock. On December
31, 1998, ITGI Common Stock was held by approximately 1,500 holders of record or
through nominees in street name accounts with brokers.
ITGI has not paid a dividend since May 4, 1994. Prior to and subject to the
consummation of the Merger, ITGI will pay the Special ITGI Cash Dividend of
$4.00 per share to each stockholder of record as of April 20, 1999. See "The
Transactions--Special ITGI Cash Dividend." ITGI's revolving credit facility
restricts ITGI's ability to pay dividends. See "Management's Discussion of
Financial Condition and Result of Operations of ITGI--Liquidity and Capital
Resources." ITGI's dividend policy following the Merger will be to retain
earnings to finance the operations and expansion of ITGI's businesses. Other
than the Special ITGI Cash Dividend, ITGI does not anticipate paying any cash
dividends on ITGI Common Stock in the foreseeable future.
67
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF GROUP
The following selected historical financial information has been derived from
the Group's consolidated financial statements and should be read in conjunction
with such consolidated financial statements and the notes thereto, which are
incorporated by reference into this Proxy/Information Statement. The selected
data as of and for each of the years in the five-year period ended December 31,
1998 have been derived from Group's consolidated financial statements, which
financial statements have been audited by KPMG LLP, independent auditors.
All share and per share information has been restated to retroactively
reflect the effect of the two-for-one stock splits declared by the Board of
Directors on November 19, 1997 and March 2, 1996. Earnings per share information
has been restated to retroactively reflect the adoption of Statement of
Financial Accounting Standards No. 128. Certain reclassifications have been made
to the prior period amounts to conform to the current periods presentation.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues:
Commissions........................................... $ 395,211 $ 282,317 $ 222,048 $ 165,610 $ 144,208
Principal transactions................................ 174,240 177,214 143,912 97,954 67,013
Corporate finance..................................... 126,651 228,640 97,870 72,003 39,818
Interest.............................................. 90,799 70,740 47,803 65,792 51,223
Other................................................. 11,809 5,593 4,993 4,228 1,902
--------- --------- --------- --------- ---------
Total revenues.................................. 798,710 764,504 516,626 405,587 304,164
Interest expense...................................... 75,178 61,466 37,852 54,365 41,626
--------- --------- --------- --------- ---------
Revenues, net of interest expense..................... 723,532 703,038 478,774 351,222 262,538
Non-interest expenses:
Compensation and benefits............................. 380,737 409,979 264,041 195,278 145,372
Floor brokerage and clearing fees..................... 42,063 35,028 27,323 20,273 18,660
Communications........................................ 67,851 55,959 35,177 24,960 20,997
Occupancy and equipment rental........................ 19,931 21,238 17,207 15,993 14,271
Travel and promotional................................ 21,662 19,207 13,541 10,296 8,909
Software royalties.................................... 15,252 9,853 8,805 5,987 5,028
Other................................................. 37,844 35,824 29,493 25,197 18,522
--------- --------- --------- --------- ---------
Total non-interest expenses..................... 585,340 587,088 395,587 297,984 231,759
--------- --------- --------- --------- ---------
Operating income...................................... 138,192 115,950 83,187 53,238 30,779
Other income--Gain on initial public offering of
Investment Technology Group, Inc.................... -- -- -- -- 8,257
--------- --------- --------- --------- ---------
Earnings before income taxes and minority interest.... 138,192 115,950 83,187 53,238 39,036
Income taxes.......................................... 60,533 47,677 35,438 21,911 17,568
--------- --------- --------- --------- ---------
Earnings before minority interest..................... 77,659 68,273 47,749 31,327 21,468
Minority interest..................................... 7,977 4,706 4,189 2,798 1,244
--------- --------- --------- --------- ---------
Net earnings.......................................... $ 69,682 $ 63,567 $ 43,560 $ 28,529 $ 20,224
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Earnings per share of Common Stock:
Basic earnings per share.......................... $ 3.12 $ 2.95 $ 1.90 $ 1.23 $ 0.84
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted earnings per share........................ $ 2.96 $ 2.80 $ 1.84 $ 1.19 $ 0.81
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average shares of Common Stock:
Basic............................................. 22,346 21,552 22,980 23,270 23,956
Diluted........................................... 22,954 22,349 23,410 23,922 24,756
Cash dividends per common share....................... $ 0.200 $ 0.125 $ 0.087 $ 0.050 $ 0.050
SELECTED BALANCE SHEET DATA (AT PERIOD END):
Total assets.......................................... $2,683,640 $2,099,542 $1,568,087 $1,536,969 $1,557,348
Long-term debt........................................ $ 149,387 $ 149,290 $ 52,987 $ 56,322 $ 59,570
Total stockholders' equity............................ $ 334,775 $ 242,756 $ 195,445 $ 186,261 $ 163,235
Book value per share of Common Stock.................. $ 15.77 $ 11.97 $ 9.43 $ 8.28 $ 7.28
Shares outstanding.................................... 21,230 20,286 20,726 22,514 22,420
</TABLE>
68
<PAGE>
UNAUDITED SUPPLEMENTAL SELECTED HISTORICAL FINANCIAL DATA OF NEW JEF
The unaudited supplemental selected historical financial data of New JEF
presented below as of and for each of the years in the five-year period ended
December 31, 1998, reflects the historical financial statements of New JEF, as
successor to Group, as reclassified to show the effects on reported results of
operations and financial position of New JEF assuming the proposed Spin-Off was
consummated and, as a result, ITGI is reported as a discontinued operation.
All share and per share information has been restated to retroactively
reflect the effect of the two-for-one stock splits declared by Group's Board of
Directors on November 19, 1997 and March 2, 1996. Earnings per share information
has been restated to retroactively reflect the adoption of Statement of
Financial Accounting Standards No. 128. Such data should be read in connection
with the consolidated financial statements incorporated by reference herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL EARNINGS STATEMENT DATA
Revenues:
Commissions........................................... $ 190,870 $ 148,940 $ 113,512 $ 95,892 $ 89,459
Principal transactions................................ 177,189 179,081 145,207 98,629 67,412
Corporate finance..................................... 126,651 228,640 97,870 72,003 39,818
Interest.............................................. 91,024 70,656 47,443 65,784 50,918
Other................................................. 4,881 3,525 2,991 1,974 948
--------- --------- --------- --------- ---------
Total revenues.................................. 590,615 630,842 407,023 334,282 248,555
Interest expense...................................... 75,153 61,314 37,840 54,343 41,587
--------- --------- --------- --------- ---------
Revenues, net of interest expense..................... 515,462 569,528 369,183 279,939 206,968
--------- --------- --------- --------- ---------
Non-interest expenses:
Compensation and benefits............................. 321,943 373,619 234,446 175,101 127,826
Floor brokerage and clearing fees..................... 32,425 26,754 21,606 15,874 15,999
Communications........................................ 47,210 40,305 24,474 18,762 16,014
Occupancy and equipment rental........................ 14,036 15,701 13,003 13,047 11,657
Travel and promotional................................ 17,710 15,300 10,703 7,770 7,538
Other................................................. 22,945 29,159 22,765 21,035 14,927
--------- --------- --------- --------- ---------
Total non-interest expenses..................... 456,269 500,838 326,997 251,589 193,961
--------- --------- --------- --------- ---------
Earnings before income taxes.......................... 59,193 68,690 42,186 28,350 13,007
Income taxes.......................................... 22,992 27,334 17,772 11,928 6,375
--------- --------- --------- --------- ---------
Earnings from continuing operations................... 36,201 41,356 24,414 16,422 6,632
Discontinued operations of ITGI, net of tax........... 33,481 22,211 19,146 12,107 13,592
--------- --------- --------- --------- ---------
Net earnings.......................................... $ 69,682 $ 63,567 $ 43,560 $ 28,529 $ 20,224
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Earnings per share of Common Stock:
Basic:
Continuing operations........................... $ 1.62 $ 1.92 $ 1.06 $ 0.71 $ 0.28
Discontinued operations of ITGI, net of tax..... 1.50 1.03 0.84 0.52 0.56
--------- --------- --------- --------- ---------
Net earnings.................................... $ 3.12 $ 2.95 $ 1.90 $ 1.23 $ 0.84
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Diluted:
Continuing operations........................... $ 1.58 $ 1.85 $ 1.04 $ 0.69 $ 0.27
--------- --------- --------- --------- ---------
Discontinued operations of ITGI, net of tax..... 1.38 0.95 0.80 0.50 0.54
--------- --------- --------- --------- ---------
Diluted earnings per share...................... $ 2.96 $ 2.80 $ 1.84 $ 1.19 $ 0.81
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Weighted average shares of Common Stock:
Basic............................................. 22,346 21,552 22,980 23,270 23,956
Diluted........................................... 22,954 22,349 23,410 23,922 24,756
Cash dividends per common share....................... $ 0.200 $ 0.125 $ 0.087 $ 0.050 $ 0.050
SELECTED BALANCE SHEET DATA (AT PERIOD END):
Total assets.......................................... $2,617,864 $2,058,106 $1,533,906 $1,519,949 $1,538,126
Long-term debt........................................ $ 149,387 $ 149,290 $ 52,987 $ 56,322 $ 59,570
Total stockholders' equity............................ $ 334,775 $ 242,756 $ 195,445 $ 186,261 $ 163,235
Book value per share of Common Stock.................. $ 15.77 $ 11.97 $ 9.43 $ 8.28 $ 7.28
Shares outstanding.................................... 21,230 20,286 20,726 22,514 22,420
</TABLE>
69
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF SUPPLEMENTAL FINANCIAL
CONDITION AND RESULTS OF OPERATIONS OF NEW JEF
The following Management's Discussion and Analysis of Supplemental Financial
Condition and Results of Operations assumes the proposed Spin-Off is consummated
and reflects the historical financial statements of Group restated to reflect
ITGI as a discontinued operation.
ANALYSIS OF FINANCIAL CONDITION
Total assets increased $559.8 million from $2,058.1 million at December 31,
1997 to $2,617.9 million at December 31, 1998. The increase is mostly due to a
$748.4 million increase in receivable from brokers and dealers related to
securities borrowed. The increase in securities borrowed is mostly related to an
increase in payables to brokers and dealers (related to securities loaned)
payables to brokers and dealers (related to securities loaned). Securities owned
and securities sold, not yet purchased decreased $144.3 million and $149.3
million, respectively, from December 31, 1997 to December 31, 1998, largely due
to the discontinuance of statistical arbitrage trading.
Total liabilities increased $467.7 million from $1,815.4 million at December
31, 1997 to $2,283.1 million at December 31, 1998. The increase is largely due
to the before-mentioned increases in payable to brokers and dealers and
partially offset by the before-mentioned decrease in securities sold, not yet
purchased.
SUMMARY OF REVENUES BY SOURCE
The earnings of New JEF are subject to wide fluctuations since many factors
over which New JEF has little or no control, particularly the overall volume of
trading and the volatility and general level of market prices, may significantly
affect its operations. The following provides a summary of revenues by source
for the past three years.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1996
------------------------- ------------------------- ----------
<CAPTION>
% OF % OF
TOTAL TOTAL
AMOUNT REVENUES AMOUNT REVENUES AMOUNT
---------- ------------- ---------- ------------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Commissions and principal transactions:
Equities Division.................................. $ 261,664 44% $ 206,430 33% $ 164,077
International Division............................. 50,889 9 56,525 9 43,288
Taxable Fixed Income Division...................... 40,071 7 34,714 6 28,839
Convertible Division............................... 13,011 2 9,336 1 8,132
Other Proprietary Trading.......................... 2,424 -- 21,016 3 14,383
---------- --- ---------- --- ----------
Total.......................................... 368,059 62 328,021 52 258,719
---------- --- ---------- --- ----------
Corporate Finance.................................... 126,651 22 228,640 36 97,870
Interest............................................. 91,024 15 70,656 11 47,443
Other................................................ 4,881 1 3,525 1 2,991
---------- --- ---------- --- ----------
Total revenues................................. $ 590,615 100% $ 630,842 100% $ 407,023
---------- --- ---------- --- ----------
---------- --- ---------- --- ----------
<CAPTION>
<S> <C>
% OF
TOTAL
REVENUES
-------------
<S> <C>
Commissions and principal transactions:
Equities Division.................................. 40%
International Division............................. 11
Taxable Fixed Income Division...................... 7
Convertible Division............................... 2
Other Proprietary Trading.......................... 3
---
Total.......................................... 63
---
Corporate Finance.................................... 24
Interest............................................. 12
Other................................................ 1
---
Total revenues................................. 100%
---
---
</TABLE>
1998 COMPARED TO 1997
Revenues, net of interest expense, decreased $54.1 million, or 9%, in 1998
as compared to 1997. The decrease was due to a $102.0 million, or 45%, decrease
in corporate finance, partially offset by a $41.9 million, or 28%, increase in
commissions. Commission revenues increased mostly due to the Equities Division.
Revenues from principal transactions decreased $1.9 million, or 1%, primarily
due to reduced trading gains in other investments. Corporate finance revenues
declined due to the difficult
70
<PAGE>
environment for underwritings during 1998. Net interest income increased by $6.5
million mostly due to an excess of securities borrowed interest income over
securities loaned interest expense.
Total non-interest expenses decreased $44.6 million, or 9%, in 1998 as
compared to 1997. Compensation and benefits decreased $51.7 million, or 14%
primarily due to a $65.6 million decrease in performance-based compensation,
partially offset by an $8.1 increase in salaries, a $4.1 increase in payroll
taxes and employee benefits and a $2.0 million increase in sales commissions.
Other expense decreased $6.2 million, or 21%, largely due to lower litigation
expenses and provisions. Communications increased $6.9 million, or 17%,
primarily due to increased Y2K costs. Floor brokerage and clearing fees
increased $5.7 million, or 21%, mostly due to increased volume of business
executed on the various exchanges. Travel and promotional expense increased $2.4
million, or 16%, mostly due to increased business travel. Occupancy and
equipment rental decreased $1.7 million, or 11%, mostly due to a reduction in
office move related expenses.
As a result of the above, earnings from continuing operations before income
taxes were down $5.2 million, or 12%.
The discontinued operations of ITGI increased $11.3 million, or 51%, in 1998
as compared to 1997.
Net earnings were up 10% to $69.7 million, as compared to $63.6 million in
1997. The effective tax rate on earnings from continuing operations was
approximately 38.8% in 1998 compared to approximately 39.8% in 1997. The
reduction in the effective tax rate was due largely to a reduction in the
effective state tax rate.
Basic earnings per share from continuing operations were $3.12 in 1998 on
22.3 million shares compared to $2.95 in 1997 on 21.6 million shares. Diluted
earnings per share from continuing operations were $2.96 in 1998 on 23.0 million
shares compared to $2.80 in 1997 on 22.3 million shares.
1997 COMPARED TO 1996
Revenues, net of interest expense, increased $200.3 million, or 54%, in 1997
as compared to 1996. The increase was due to a $130.8 million, or 134%, increase
in corporate finance, a $35.4 million, or 31%, increase in commissions and a
$33.9 million, or 23%, increase in principal transactions. Commission revenues
increased mostly due to the Equities Division and the International Division.
Revenues from principal transactions increased primarily due to increased
trading gains in the Equities Division, the International Division, and the
Taxable Fixed Income Division. Corporate finance revenues benefited from
increased debt financing deals. Net interest income decreased only slightly from
the prior year.
Total non-interest expenses increased $173.8 million, or 53%, in 1997 as
compared to 1996. Compensation and benefits increased $139.2 million, or 59%
primarily due to a $101.8 million increase in performance-based compensation, a
$24.7 million increase in sales commissions and an $8.8 million increase in
salaries. Salaries increased due largely to expansion in the Corporate Finance
Division, the Equity Research Division and the Equities Division. Other expense
increased $6.4 million, or 28%, largely due to higher litigation expenses and
provisions. Communications increased $15.8 million, or 65%, primarily due to
increased trade volume and personnel. Floor brokerage and clearing fees
increased $5.1 million, or 24%, mostly due to increased volume of business
executed on the various exchanges. Travel and promotional expense increased $4.6
million, or 43%, mostly due to increased business travel. Occupancy and
equipment rental increased $2.7 million, or 21%, mostly due to the relocation
and addition of office space.
As a result of the above, earnings from continuing operations before income
taxes were up $26.5 million, or 63%.
The discontinued operations of ITGI increased $3.1 million, or 16%, in 1997
as compared to 1996.
71
<PAGE>
Net earnings were up 46% to $63.6 million, as compared to $43.6 million in
1996. The effective tax rate on earnings from continuing operations was
approximately 39.8% in 1997 compared to approximately 42.1% in 1996. The
reduction in the effective tax rate was due largely to a reversal of taxes
related to ITGI shares that were repurchased during 1997.
Basic earnings per share from continuing operations were $2.95 in 1997 on
21.6 million shares compared to $1.90 in 1996 on 23.0 million shares. Diluted
earnings per share from continuing operations were $2.80 in 1997 on 22.3 million
shares compared to $1.84 in 1996 on 23.4 million shares.
LIQUIDITY AND CAPITAL RESOURCES
In connection with the Transfers and the Spin-Off, it is anticipated that
certain events will take place that will increase New JEF's liquidity and
capital. For more details as to the nature of the expected infusion and the
anticipated amounts, refer to the "Unaudited Pro Forma Condensed Consolidated
Statement of Financial Condition of New JEF (Excluding Discontinued
Operations)." It is expected that these additional liquidity and capital amounts
will be invested into New JEF's core Brokerage and Investment Banking Business.
Management believes that the expected levels of liquidity and capital in New JEF
will be adequate to satisfy the short-term and long-term operating requirements
of New JEF.
Also, as part of the Transfers and the Spin-Off, New JEF will assume the
outstanding Senior Notes of Group in the amount of $150 million. Through the
above described capital and liquidity infusions and future earnings, it is
expected that the Senior Notes will either be paid off when due or refinanced in
the ordinary course of business.
A substantial portion of New JEF's assets are liquid, consisting of cash or
assets readily convertible into cash. The majority of securities positions (both
long and short) in New JEF's trading accounts are readily marketable and
actively traded. Receivables from brokers and dealers are primarily current open
transactions or securities borrowed transactions which can be settled or closed
out within a few days. Receivables from customers, officers and directors
include margin balances and amounts due on uncompleted transactions. Most of New
JEF's receivables are secured by marketable securities.
New JEF's assets are funded by equity capital, senior debt, subordinated
debt, securities loaned, customer free credit balances, bank loans and other
payables. Bank loans represent secured and unsecured short-term borrowings
(usually overnight) which are generally payable on demand. Secured bank loans
are collateralized by a combination of customer, noncustomer and firm
securities. JEFCO has always been able to obtain necessary short-term borrowings
in the past and believes that it will continue to be able to do so in the
future. Additionally, JEFCO has letters of credit outstanding which are used in
the normal course of business to satisfy various collateral requirements in lieu
of depositing cash or securities.
JEFCO and W & D are subject to the net capital requirements of the
Commission and other regulators, which are designed to measure the general
financial soundness and liquidity of broker-dealers. JEFCO and W & D have
consistently operated in excess of the minimum requirements. As of December 31,
1998, JEFCO's and W & D's net capital was $217.4 million and $2.0 million,
respectively, which exceeded minimum net capital requirements by $213.4 million
and $1.8 million, respectively. JEFCO and W & D use the alternative method of
calculating their regulatory net capital.
In 1998, Jefferies Group, Inc. repurchased 334,234 shares (including 275,400
shares purchased in connection with the Company's Capital Accumulation Plan) of
its Common Stock at prices ranging from $17.25 to $52.81.
During 1997, JEFCO obtained a NASDR approved $200 million revolving credit
facility to be used in connection with underwriting activities.
The repurchased shares of Common Stock, excluding the shares repurchased in
connection with the Group CAP Plan, were mostly retired.
72
<PAGE>
On January 25, 1999, in anticipation of the Transactions, the Group CAP Plan
was liquidated. Liquidation of this plan is part of the capital infusion to New
JEF contemplated as part of the Transactions, and resulted in employees
receiving approximately 1.5 million shares of Group Common Stock. These shares
payable under the Group CAP Plan are included in the basic and diluted weighted
average shares of New JEF.
MARKET RISK
New JEF adopted SEC Release No. 33-7386, issued in 1997, which requires
qualitative disclosures of market risk exposure and quantitative disclosures of
the magnitude of market risk.
New JEF maintains equity securities inventories in exchange-listed, Nasdaq
and private securities on both a long and short basis. The fair value of these
securities at December 31, 1998, was $43 million in long positions and $26
million in short positions. The potential loss in fair value, using a
hypothetical 10% decline in prices, is estimated to be approximately $2 million
due to the offset of losses in long positions with gains in short positions. In
addition, New JEF generally enters into exchange-traded option and index futures
contracts to hedge against potential losses in inventory positions, thus
reducing this potential loss exposure. This hypothetical 10% decline in prices
would not be material to New JEF's financial position, results of operations or
cash flows.
New JEF also invests in money market funds; high-yield, corporate and U.S.
Government agency debt and mutual bond funds. Money market funds do not have
maturity dates and do not present a material market risk. The fair value of high
yield, corporate and U.S. Government agency debt at December 31, 1998 was $57
million in long positions and $12 million in short positions. Mutual bond funds
also do not have maturity dates and total $33 million at December 31, 1998. The
potential loss in fair value of the high-yield, corporate and U.S. Government
agency debt and the mutual bond funds, using a hypothetical 5% decline in value,
is estimated to be approximately $4 million due to the offset of losses in long
positions with gains in short positions. This hypothetical 5% decline in value
would not be material to New JEF's financial position, results of operations or
cash flows.
At December 31, 1998, New JEF had $150 million aggregate principal amount of
Senior Notes, with fixed interest rates. New JEF has no cash flow exposure
regarding these Notes due to the fixed rate of interest.
The table below provides information about New JEF's derivative financial
instruments and other financial instruments that are sensitive to changes in
interest rates, exchange rates and stock price movements (in thousands of
dollars.) For debt obligations and reverse repurchase agreements, the table
presents principal cash flows with expected maturity dates. For foreign exchange
forward contracts,
73
<PAGE>
index futures contracts and option contracts the table presents notional amounts
with expected maturity dates.
<TABLE>
<CAPTION>
EXPECTED MATURITY DATE
--------------------------------
AFTER FAIR
1999 2000 2003 TOTAL VALUE
--------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
INTEREST RATE SENSITIVITY
8.875% Senior Notes..................................... $ 50,000 $ 50,000 $ 51,625
7.5% Senior Notes....................................... $ 100,000 $ 100,000 $ 100,000
Reverse repurchase agreements (1), weighted average
interest rate of 4.95%................................ $ 28,000 $ 28,000 $ 28,000
EXCHANGE RATE SENSITIVITY
Foreign exchange forward contracts--Sale................ $ 8,759 $ 8,759 $ 8,759
STOCK PRICE SENSITIVITY
Index futures contracts--Sale........................... $ 3,559 $ 3,559 $ (178)
Option contracts........................................
Purchase.............................................. $ 1,825 $ 1,125 $ 2,950 $ 666
Sale.................................................. $ 1,577 $ 1,350 $ 2,927 $ 574
</TABLE>
- ------------------------
(1) Includes reverse repurchase agreements of $28,000 included in cash and
securities segregated and on deposit for regulatory purposes or deposited
with clearing and depository organizations.
EFFECTS OF CHANGES IN FOREIGN CURRENCY RATES
New JEF maintains a foreign securities business in its foreign offices
(London, Hong Kong, Zurich and Tokyo) as well as in some of its domestic
offices. Most of these activities are hedged by related foreign currency
liabilities or by forward exchange contracts. However, New JEF is still subject
to some foreign currency risk. A change in the foreign currency rates could
create either a foreign currency transaction gain/loss (recorded in New JEF's
Consolidated Statements of Earnings) or a foreign currency translation
adjustment to the stockholders' equity section of New JEF's Consolidated
Statements of Financial Condition.
NEW ACCOUNTING STANDARD ON EARNINGS PER SHARE
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share," establishes standards for computing and presenting earnings per share
("EPS"). SFAS No. 128 replaced the presentation of primary EPS with a
presentation of basic EPS. SFAS No. 128 also requires dual presentation of basic
and diluted EPS 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 EPS computation to the numerator and denominator of the
diluted EPS computation. 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. EPS information has been restated to
retroactively reflect the adoption of SFAS No. 128.
NEW ACCOUNTING STANDARD ON COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income," 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
74
<PAGE>
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.
New JEF implemented SFAS No. 130 in 1997. The adoption of SFAS No. 130 did
not have any impact on New JEF.
NEW ACCOUNTING STANDARD ON SEGMENT REPORTING
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
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.
New JEF implemented SFAS No. 131 in 1998. The adoption of SFAS No. 131 did
not have any impact on New JEF.
NEW ACCOUNTING STANDARD ON EMPLOYERS' DISCLOSURE ABOUT PENSIONS AND OTHER
POSTRETIREMENT BENEFITS
SFAS No. 132, "Employers' Disclosure About Pensions and Other
Post-retirement Benefits," revises employers' disclosures about pension and
other postretirement benefit plans. It does not change the measurement or
recognition of those plans. It standardizes the disclosure requirements for
pensions and other postretirement 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.
New JEF implemented SFAS No. 132 in 1998. The adoption of SFAS No. 132 did
not have any impact on New JEF.
NEW ACCOUNTING STANDARD ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," 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 New JEF.
75
<PAGE>
THE YEAR 2000 PROJECT
The Year 2000 ("Y2K") preparedness effort by Group (the "Y2K Project") began
in late 1997 and early 1998 with an initial assessment of Group's systems, its
risk of exposure, the steps necessary to achieve Y2K compliance, and the
resources necessary to implement those steps. As a result, Group engaged Keane,
Inc. as independent Y2K consultants, and Ernst & Young, LLP ("E&Y") to provide
quarterly reviews of the Y2K Project as an internal audit outsourcer and to
provide the independent accountant's report required by Release No. 34-40608.
Together with the advice of these professionals, Group formulated and adopted a
Y2K Master Plan.
The first phase of the Y2K Project, the Inventory, Assessment and Planning
phase, involved a complete assessment of Group's systems, both information
technology ("IT") related and non-IT related, and a survey of all vendors and
key clients. Systems were categorized into one of three "Triage" Levels--Mission
Critical, Business Important, or Other, with "Mission Critical" defined as those
systems, the failure of which would result in Group being unable to conduct
business. Group also created the framework for the Remediation and Testing phase
that would follow, and set schedules for reaching the Operational Sustainability
and Fully Compliant phases. This planning process provided a guide for each of
Group's divisions in its preparation of more detailed project plans that outline
specific areas of work on each system. The Y2K Project called for the devotion
of resources primarily to Mission Critical systems during 1998, and Business
Important and Other systems primarily in the first quarter of 1999.
CURRENT STATE OF READINESS
Group has now completed the first phase of the Y2K Project (Inventory,
Assessment and Planning), and is working toward completion of the second phase:
Remediation and Testing. As of March 1, 1999, phase two was approximately 90%
complete. The remediation portion of this phase has been completed, and the
testing portion has been under way since mid-1998. Although we originally
planned to complete phase two by December 31, 1998, and participate in extended
point to point testing in early 1999, we received notice during the fourth
quarter that certification and extended point to point testing would commence in
November. Resources were redirected during the fourth quarter to prepare Group
for participation in these tests, causing a delay in testing previously
scheduled for the fourth quarter 1998. In addition, complaint versions of
certain key applications did not arrive until late December 1998 or early
January 1999, which prevented their testing until that time.
Group has polled each of its vendors about their Y2K compliance. Of the 668
vendors contacted, 539 (80.1%) have responded and all who responded have
indicated that they are or intend to become Y2K compliant by mid-1999. Group is
actively attempting to obtain assurances from the remaining vendors, though none
of the remaining vendors provides Mission Critical services. Notwithstanding
these representations from our vendors, Group is not relying on vendor
statements of readiness but is independently testing each system and connection
as part of the Y2K Project. Group has obtained assurances from all its vendors
of Mission Critical systems that each vendor will be Y2K compliant and Group has
no reason to believe any of those vendors will be unable to attain compliance.
However, because Group may be forced to rely on contingency plans which may have
a material adverse effect on Group's business and operations, as discussed
below, Group is independently testing each system and connection for Y2K
compliance.
Group representatives have also contacted key clients and have begun testing
with certain of those clients. Due to the nature of Group's business, the
clients that comprise the vast majority of Group's revenues are institutional
and are regulated by various governmental and self-regulatory bodies. Group has
therefore determined to review the filings made by those clients during the
second quarter of 1999 before conducting a broad based survey of client Y2K
readiness. Depending on the result of this review, Group may find it necessary
to survey its clients or to request written certification of their Y2K
compliance.
76
<PAGE>
Group has completed testing on systems needed to participate in the
Securities Industry Association's ("SIA") street-wide testing and is now
participating in the SIA test. As of March 15, 1999, Group had successfully
completed two testing cycles, which resulted in no external errors and only
minor internal errors. The remainder of testing to be performed involves testing
each system using either compliant environment regression testing or unit
regression and forward date testing in the existing environment. All IT systems
are then subjected to system regression testing, followed by user group testing
before they are placed into production. Each system, (IT and non-IT) will then
be subjected to forward date testing in a simulated production environment.
Group has begun testing with certain key clients and Group has now obtained
compliant versions of key systems and is in the process of testing those systems
and any connections with third party vendors. Group is working with its
landlords and lessors to assure the continued functionality of the Mission
Critical non-IT systems upon which it is dependent, and is in the process of
preparing contingency plans for non-IT failures as described below. Other than
its internal audits and periodic reporting requirements to the Commission and
the NASD, Group has not been reviewed or audited by any state or federal
regulators.
COSTS TO ADDRESS Y2K ISSUES
Group's consolidated budget for the Y2K Project is $19.8 million with $16.8
million attributable to Group and its subsidiaries, other than ITGI, and $3.0
million attributable to ITGI. Current spending rates and projected expenses
indicate that Group will stay within that budget. As of December 1998,
approximately $12.4 million of costs in the consolidated budget had already been
incurred. This budget includes new software and hardware, consultants to assist
with project administration, quarterly internal audit outsourcing by E&Y, and a
large number of the present IT staff devoting a substantial portion of their
time to the Y2K Project. Until we achieve Operational Sustainability, the vast
majority of IT resources will continue to be redirected into the Y2K Project and
new development unrelated to Y2K has been limited to only the most essential
projects. The budget for 1999 is approximately $6.3 million, which will be
reassessed in the second half of 1999 to account for the possible implementation
of contingency plans if any vendors will not achieve Y2K compliance.
RISKS
Though Group expects to achieve Operational Sustainability by mid-1999, and
to be fully compliant by the end of the third quarter of 1999, a number of
material risks remain which could have a materially adverse impact on Group or
New JEF. These risks generally arise as a result of either: (1) failures of
internal systems or (2) failures of third party systems.
Despite the considerable testing and remediation efforts Group has
undertaken, latent errors in Group's internal systems that remain undetected
could cause failures in those systems. Failures in one or more key systems would
almost certainly result in substantial impairment of JEFCO's ability to
efficiently process orders and trades or to perform its clearing functions.
Although Group expects that the contingency plans discussed below will allow it
to continue operations, those contingency plans may not support the volume of
trading JEFCO is accustomed to and could therefore cause substantial losses in
revenue while they are relied upon. In the event failures occur, lost data may
result in failed trades and related violations of NASD and SEC rules and
regulations. To minimize the time during which it must rely on any contingency
plan, Group and New JEF after the Spin-Off plan to devote all available
resources to restoring normal system operations in the event any failures occur.
There is also a substantial risk that failures by third parties could
compromise the major order-processing systems upon which Group is heavily
dependent. Vendors such as Automatic Data Processing, Inc. and the Securities
Industry Automation Corporation have represented to Group that they either are
or intend to become Y2K compliant and Group stands ready to test with each of
these parties as soon as they are prepared to do so, but the failure of any one
of these systems could result in a significant interruption of normal business
for Group. Due to the interdependence of Group's systems on those third party
systems, Group does not believe any effective replacement products could
77
<PAGE>
be adopted if those systems are not remediated and is therefore focusing its
attention on assisting with the remediation and testing process and on
developing contingency plans.
In addition, there is also a risk that JEFCO's ability to conduct
transactions will be materially impaired by the failure of any significant
component of the national clearing and settlement system, of major
counterparties, exchanges or financial institutions in the marketplace. Failures
by one or more of the New York Stock Exchange, Inc., the Nasdaq Stock Market,
the Depository Trust Company, the National Securities Clearing Corporation or
any of the largest banks or brokerage firms could prevent the entire market from
effectively transmitting and receiving data after the Year 2000, despite the Y2K
compliance of Group's systems. Although it is expected that each of these
parties will conduct extensive testing to ensure that each is Y2K compliant,
there can be no assurance that an unforeseen problem will not create a market
disruption that in turn affects Group's Brokerage and Investment Banking
Business.
CONTINGENCY PLANS
Group is in the final drafting stages of its Y2K Contingency Plan (the
"Contingency Plan"), a detailed mediation and recovery plan that covers each of
the six most significant risks that may arise from a Y2K failure:
1) loss of data,
2) software failures,
3) telecommunications failures,
4) loss of key hardware,
5) loss of key personnel, and
6) loss of facilities.
The Contingency Plan addresses each of these risks with respect to each of
Group's nine key business areas (Equities, International, Taxable Fixed Income,
Convertibles, Corporate Finance, Operations, Accounting, Facilities and
Technology), and addresses both internal systems and failures by key third party
information providers and other vendors. The Contingency Plan also sets forth an
approach to maintaining business continuity for each of Group's key business
areas. The specific workarounds for failures of various systems are set forth in
the Contingency Plan, and range from the use of cellular phones or relocation of
personnel in the event of a communications failure to the installation of backup
software or hardware.
The completed portion of the Contingency Plan provides an analysis of each
reasonably possible failure scenario for a given Mission Critical system or
process. Specifically, the Contingency Plan sets forth (1) the likelihood of
failure of the system or process, (2) the circumstances under which such a
failure would occur, (3) the impact the failure would have on the competitive
environment of Group, and (4) a detailed mitigation strategy for each type of
failure. Mitigation strategies typically list specific products or vendors that
can be used to replace failed systems, manual workarounds for ordinarily
automated processes and alternative sources for data or datastreams that are
interrupted or become unreliable. Additional mitigation strategies are offered
where appropriate. The Contingency Plan also includes a specific description of
start up procedures to reactivate systems that go down, itemizes the staffing
and equipment requirements that will be associated with repairing or re-starting
a given system and a contact list of key individuals familiar with the system or
process that should be contacted to assist with remediation or business
restoration procedures. Finally, the Contingency Plan includes a matrix showing
the way each system or process would be impacted by each of the six primary risk
areas discussed above, and the testing, remediation, business recovery,
responsible persons and timetable involved in the restoration of each.
78
<PAGE>
As of the date of hereof, the Y2K Contingency Plan was complete with respect
to Mission Critical systems, except for finalization of the business continuity
section, which should be completed by the second quarter of 1999. Funds to begin
actual implementation of Contingency Plans will be allocated in the second
quarter of 1999 based upon perceived risk of failure of each system.
FORWARD LOOKING STATEMENTS
Group's projections in this section are based upon assumptions, which it
believes to be correct, but which are not guaranteed. Any change in those
assumptions could result in material variations in those projections, including
the projected costs for remediation and testing, the feasibility of using
contingency plans, and the impact of third party failures. Any such change could
have a material adverse impact on New JEF and its results of operations.
79
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL
CONDITION OF NEW JEF (EXCLUDING DISCONTINUED OPERATIONS)
Assuming the proposed Spin-Off was consummated at the beginning of 1998, we
believe that the pro forma consolidated statement of continuing operations for
this period would not differ materially from the results of New JEF presented in
"Unaudited Supplemental Selected Historical Financial Data of New JEF" excluding
discontinued operations, except for any earnings realized on the new
stockholders' equity infused in conjunction with the proposed Spin-Off. For
specific details of the expected infused stockholders' equity, refer to the
following Unaudited Pro Forma Condensed Consolidated Statement of Financial
Condition of New JEF.
The following unaudited pro forma condensed consolidated Statement of
Financial Condition of New JEF as of December 31, 1998 has been derived from
unaudited financial statements prepared by New JEF. These financial statements
reflect the financial condition of New JEF assuming the Transfers and Spin-Off
are consummated. The historical data excludes the net assets of ITGI, which,
upon consummation of the Spin-Off, will be reported as net assets of
discontinued operations. In the opinion of management, the unaudited pro forma
statement of financial condition, which gives effect to the Spin-Off as if it
had occurred on December 31, 1998, includes all significant, normal and
recurring adjustments necessary for the fair presentation of the financial
position. The unaudited pro forma information is presented for illustrative
purposes only and is not necessarily indicative of the financial position that
will actually occur when the transaction is consummated.
In connection with the Spin-Off, it is anticipated that certain events will
take place that will increase both New JEF's stockholders' equity and the number
of shares outstanding. The following is summary of such events:
1. Prior to the Spin-Off, ITGI will declare and pay the Special ITGI Cash
Dividend to all of its shareholders, including Group. For purposes of this
pro forma statement of financial condition, the Special ITGI Cash Dividend
is assumed to be $4 per share. Group owns 15 million shares of ITGI and
would receive approximately $60 million. Prior to the Spin-Off, Group will
contribute its entire share of the Special ITGI Cash Dividend to JEFCO.
2. In January 1999, Group liquidated the Group CAP Plan which resulted in the
issuance of approximately 1.5 million shares of Group Common Stock and a
cash payment of approximately $40 million (the "Group CAP Plan
Termination"). In connection with the Group CAP Plan Termination, Group
expects to realize a tax benefit of approximately $23 million. The
obligation under the Group CAP Plan, which had been fully accrued on Group's
statement of financial condition, was eliminated upon the issuance of shares
and payment of cash pursuant to, and coincident with, the termination of the
Group CAP Plan.
3. In the first quarter of 1999, Group accelerated the vesting of all
outstanding options issued prior to January 1, 1998 and issued restricted
stock to certain employees. Group will not adjust the terms of the
outstanding stock options that were issued prior to January 1, 1998 to
reflect the economic impact of the Spin-Off. As such, it is anticipated that
all options issued prior to January 1, 1998, will be exercised before the
Spin-Off and will result in exercise proceeds of approximately $9 million
and a related tax benefit of approximately $13 million for purposes of this
pro forma statement of financial condition (based upon the closing price of
Group Common Stock on the NYSE on March 15, 1999 of $45.19 per share). The
exact amount of the tax benefit will be dependent upon the fair market value
of Group Common Stock on or about the date of issuance of the shares.
Assuming a Group Common Stock price range of $35 to $55, the expected tax
benefit will range from approximately $11 million to approximately $14
million. The exercise of options and issuance of restricted shares is
expected to result in an increase of Group's Common Stock outstanding of 1.2
million.
4. New JEF's share of the transaction costs for 1999 are expected to be
approximately $6.3 million.
80
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998 (UNAUDITED)
--------------------------------------------------
HISTORICAL
CONTINUING PRO FORMA
OPERATIONS ADJUSTMENTS REF PRO FORMA
------------ ----------- --- ------------
<S> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
Cash and cash equivalents......................................... $ 55,581 $ 22,401 (a) $ 77,982
Receivables from brokers and dealers.............................. 2,018,090 2,018,090
Other assets...................................................... 435,860 35,704 (b) 471,564
------------ ----------- ------------
Total assets.................................................... $ 2,509,531 $ 58,105 $ 2,567,636
------------ ----------- ------------
------------ ----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Payable to brokers and dealers.................................... $ 1,602,906 $ 1,602,906
Securities sold, not yet purchased, payable to customers, accrued
expenses and other liabilities.................................. 530,796 (61,789) (c) 469,007
Long-term debt.................................................... 149,387 149,387
------------ ----------- ------------
Total liabilities............................................... 2,283,089 (61,789) 2,221,300
Stockholders' equity.............................................. 226,442 119,894 (d) 346,336
------------ ----------- ------------
Total liabilities and stockholders' equity...................... $ 2,509,531 $ 58,105 $ 2,567,636
------------ ----------- ------------
------------ ----------- ------------
Outstanding shares................................................ 21,230 23,900
------------ ------------
------------ ------------
Book value per share.............................................. $ 10.67 $ 14.49
------------ ------------
------------ ------------
</TABLE>
- ------------------------
FOOTNOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<S> <C> <C>
(a) Pro Forma Cash Adjustment includes the following:
Dividend from ITGI................................. $ 60,000
Stock option exercise proceeds..................... 8,752
Group CAP Plan cash payment........................ (40,101)
Transaction costs.................................. (6,250)
---------
Total.............................................. $ 22,401
---------
---------
(b) Pro Forma Other Asset Adjustment includes the
following:
Stock option exercise tax benefit.................. $ 12,565
Group CAP Plan distribution tax benefit............ 23,139
---------
Total.............................................. $ 35,704
---------
---------
(c) Pro Forma Accrued Expenses adjustment includes the
following:
Elimination of Group CAP Plan liability............ $ (61,789)
---------
---------
(d) Pro Forma Stockholders' Equity adjustment includes
the following:
Dividend from ITGI................................. $ 60,000
Stock option net exercise proceeds................. 8,752
Transaction costs.................................. (6,250)
Other asset adjustments (see (b) above)............ 35,704
Stock-based portion of Group CAP Plan
distribution..................................... 21,688
---------
Total.............................................. $ 119,894
---------
---------
(e) Outstanding share rollforward (in millions):
Shares outstanding at December 31, 1998............ 21.2
Group CAP Plan termination......................... 1.5
Stock option exercises and restricted stock
grants........................................... 1.2
---------
Pro forma outstanding shares at December 31,
1998............................................. 23.9
---------
---------
</TABLE>
81
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF ITGI
The following selected historical financial information has been derived
from the ITGI consolidated financial statements and should be read in connection
with the consolidated financial statements in ITGI's Annual Report on Form 10-K
filed with the SEC and incorporated herein by reference.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 1997 1996 1995 1994(1)
--------- --------- --------- --------- -----------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Total revenues.................................................. $ 212,205 $ 137,042 $ 111,556 $ 72,381 $ 56,716
Total expenses.................................................. 131,270 89,782 70,555 47,493 69,106
--------- --------- --------- --------- -----------
Income (loss) before income taxes............................... 80,935 47,260 41,001 24,888 (12,390)
Income tax expense (benefit).................................... 37,541 20,343 17,666 9,983 (4,529)
--------- --------- --------- --------- -----------
Net income (loss)............................................... $ 43,394 $ 26,917 $ 23,335 $ 14,905 $ (7,861)
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
Basic net earnings (loss) per share of common stock............. $ 2.36 $ 1.48 $ 1.28 $ 0.81 $ (0.45)
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
Diluted net earnings (loss) per share of common stock........... $ 2.25 $ 1.42 $ 1.26 $ 0.81 $ (0.45)
--------- --------- --------- --------- -----------
--------- --------- --------- --------- -----------
Basic weighted average shares outstanding (in millions)......... 18.4 18.2 18.3 18.5 17.5
Diluted weighted average shares and common stock
equivalents (in millions)..................................... 19.3 18.9 18.6 18.5 17.5
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION DATA:
Total assets..................................................... $ 180,512 $ 113,641 $ 82,798 $ 55,318 $ 38,354
Total stockholders' equity....................................... $ 143,709 $ 93,763 $ 67,093 $ 45,479 $ 31,893
</TABLE>
- ------------------------------
(1) In connection with ITGI's initial public offering (the "Offering") in May
1994, certain management employment agreements, the performance share plans
(consisting of a 12.7% phantom equity interest in ITG and an annual profits
bonus component, the "ITGI Performance Share Plans") and non-compensatory
ITG stock options (on 10% of the outstanding shares of ITG common stock)
were terminated as of May 1, 1994 in exchange for $31.1 million in cash, a
portion of which was used to purchase Group Common Stock. ITGI, prior to
December 31, 1993, had expenses and paid to Group an additional $9.4 million
related to ITGI Performance Share Plans. Immediately prior to the
consummation of the Offering, Group transferred its $9.4 million liability
and an equivalent amount of cash to ITGI to be applied by ITGI as part of
the termination of the ITGI Performance Share Plans. The total liability in
connection with the above-mentioned plans was $40.5 million. Of the
non-recurring expense of $31.1 million, approximately $900,000 was recorded
in ITGI Performance Share Plans expense in the first two quarters of 1994
under the terms of the prior agreement. The total ITGI Performance Share
Plans expense recorded for the first two quarters of 1994 was $1.5 million.
The remaining $600,000 of such expense was for the annual profits bonus
component of the ITGI Performance Share Plans for January 1, 1994 through
May 1, 1994 (the termination date of the above-mentioned plans). Only the
future annual profits bonus component (post-Offering) of the above-mentioned
plans was determined to be a component of the $40.5 million liability. The
annual profits bonus component was earned during the period January 1, 1994
through May 1, 1994 by the payees regardless of the Offering. The remaining
liability of $30.2 million was recorded as termination of plans expense in
the second quarter of 1994.
82
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA OF ITGI
ITGI prepared the following unaudited pro forma statement of financial
condition data for ITGI as of December 31, 1998, assuming the Transactions had
been consummated on that date. ITGI prepared the following unaudited pro forma
statement of income data for ITGI for the year ended December 31, 1998, assuming
the Transactions had been consummated at the beginning of the period. The pro
forma adjustments are based upon available information and certain assumptions
that ITGI believes are reasonable under the circumstances. The unaudited pro
forma financial data are not necessarily indicative of the operating results or
financial position that ITGI would have achieved if the Transactions had been
consummated on the data indicated and should not be construed as representative
of future operating results or financial position. The unaudited pro forma
financial data should be read in conjunction with "The Transactions" and the
consolidated financial statements and the notes thereto of ITGI incorporated by
reference herein.
UNAUDITED PRO FORMA STATEMENT OF FINANCIAL CONDITION DATA
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998 (UNAUDITED)
------------------------------------------------
<S> <C> <C> <C> <C>
PROFORMA
HISTORICAL ADJUSTMENTS REF. PROFORMA
---------- ----------- --- ----------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
ASSETS:
Cash and cash equivalents............................................ $ 116,924 $ (64,820) A $ 52,104
Premises and equipment............................................... 19,662 19,662
Other................................................................ 43,926 (12,940) A 30,986
---------- ----------
$ 180,512 $ (77,760) $ 102,752
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY:
Accounts payable and accrued expenses................................ $ 26,036 $ 26,036
Other liabilities.................................................... 10,767 10,767
Subordinated note payable............................................ -- 1,353 A 1,353
STOCKHOLDERS' EQUITY:
Preferred stock, par value $.01 per share; 5,000 shares authorized,
no shares issued and outstanding, actual; 1,000 shares authorized,
no shares issued and outstanding, pro forma........................ -- --
Common stock, par value $.01 per share; 30,000 shares authorized,
19,195 shares issued and outstanding, actual; 100,000 shares
authorized, 29,669 shares issued and outstanding, pro forma........ 194 103 B 297
Additional paid-in capital........................................... 51,511 1,395 B 52,906
Retained earnings.................................................... 104,925 (80,611) A 24,314
Common stock held in treasury........................................ (12,760) (12,760)
Accumulated other comprehensive loss: currency translation
adjustment......................................................... (161) -- (161)
---------- ----------
Total stockholders' equity........................................... 143,709 (79,113) 64,596
---------- ----------
$ 180,512 $ (77,760) $ 102,752
---------- ----------
---------- ----------
</TABLE>
- ------------------------
PRO FORMA STATEMENT OF FINANCIAL CONDITION DATA REFERENCE NOTES:
A. Reflects payment of the Special ITGI Cash Dividend (assumed to be $74.4
million in the aggregate) and certain transaction expenses of
approximately $6.3 million. The Special ITGI
83
<PAGE>
Cash Dividend is assumed to be paid with a cash dividend from ITG Inc. of
approximately $73.0 million and proceeds of a $1.4 million subordinated
loan. The loan allows ITG Inc. to have sufficient regulatory capital. See
"Business--Regulation." Since the Special ITGI Cash Dividend will be paid
in April 1999 (instead of on December 31, 1998 as assumed in the
Unaudited Pro Forma Statement of Financial Condition Data), ITGI will not
borrow funds, but will have sufficient cash balances generated from its
operations, to fund the entire Special ITGI Cash Dividend.
Also reflects a refund from Group of $2.9 million for tax credit taken by
Group with respect to the pay-out of the ITG employees who participated
in the Group Cap Plan. The offset would have been reflected as a
reduction in deferred taxes of $1.4 million and an increase in additional
paid-in capital of $1.5 million.
B. Reflects reduction in par value of the outstanding common stock, which
was reclassified to additional paid-in-capital.
UNAUDITED PRO FORMA STATEMENT OF INCOME DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
------------------------------------------------
<S> <C> <C> <C> <C>
PROFORMA
HISTORICAL ADJUSTMENTS REF. PROFORMA
---------- ----------- --- ----------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Total revenues............................................... $ 212,205 $ (2,101) C $ 210,104
Total expenses............................................... 131,270 2,405 C 133,675
---------- ----------
Income before income taxes................................... 80,935 (4,506) 76,429
Income tax expense........................................... 37,541 (2,090) D 35,451
---------- ----------
Net income................................................... $ 43,394 $ (2,416) $ 40,978
---------- ----------
Basic net earnings per share of common stock................. $ 2.36 E $ 1.40
---------- ----------
---------- ----------
Diluted net earnings per share of common stock............... $ 2.25 E $ 1.28
---------- ----------
---------- ----------
Basic weighted average shares outstanding (in millions)...... 18.4 E 29.3
Diluted weighted average shares and common stock equivalents
(in millions).............................................. 19.3 E 31.9
</TABLE>
- ------------------------
UNAUDITED PRO FORMA STATEMENT OF INCOME DATA REFERENCE NOTES:
C. Cash and cash equivalents of $35.7 million, were used as a partial
payment of the $72.9 million Special ITGI Cash Dividend. The remaining
balance of the Special ITGI Cash Dividend was funded with proceeds of a
$37.2 million subordinated loan. The note was repaid in full over the
year. Based on an assumed rate of interest of prime plus 2%, ITGI
incurred approximately $2.4 million of interest expense. The repayment of
principal and interest reduced cash and cash equivalents thus decreasing
the average balance of cash and cash equivalents. As a result, interest
income declined by approximately $2.1 million. Since the Special ITGI
Cash Dividend will be paid in April 1999 (instead of on December 31, 1998
as assumed in the Unaudited Pro Forma Statement of Financial Condition
Data), ITGI will not borrow funds, but will have sufficient cash balances
generated from its operations, to fund the entire Special ITGI Cash
Dividend.
D. The reduction in interest income of approximately $2.1 million and the
increase in interest expense of approximately $2.4 million resulted in a
reduction in income taxes of approximately $2.1 million.
84
<PAGE>
E. In order to determine the number of shares issued and outstanding for
calculating both basic and diluted earnings per share, the historical
shares issued and outstanding must be adjusted for the Special ITGI Cash
Dividend and the Exchange Ratio.
SPECIAL ITGI CASH DIVIDEND:
Options and shares reserved under a deferred compensation plan were
adjusted in the following manner as a result of the assumed $72.9 million
Special ITGI Cash Dividend.
ITGI adjusted the exercise price of each option and, to compensate
for the resulting loss in intrinsic value for such adjusted options, ITGI
increased the number of shares issuable upon exercise of each option as
follows:
The exercise price of each option was assumed to be reduced so that
(1) the ratio of the old exercise price over the volume weighted average
market price of the ITGI common stock on the first trading day after the
pre-closing for the Merger (the "Pre-Dividend Price") was equal to (2)
the ratio of the new exercise price over the greater of (x) the volume
weighted average market price of the ITGI common stock on the second
trading day after the pre-closing (the "Post-Dividend Price") or (y) the
Pre-Dividend Price less the per share amount of the Special ITGI Cash
Dividend. In addition, if the Post-Dividend Price exceeds the Pre-
Dividend Price, there will be no adjustment to the old exercise price.
The number of shares of ITGI Common Stock subject to each option will
be increased in an aggregate amount such that the aggregate intrinsic
value of the options equals the aggregate intrinsic value of the original
options of such holder.
All other terms and conditions relating to stock options will remain
unchanged.
For pro forma adjustment purposes, a Pre-Dividend Price of $62.06 per
share and a Post-Dividend Price of $58.06 per share is assumed. Pursuant
to the adjustment described above, the number of shares issuable upon
exercise of stock options increased from 3.2 million to 3.4 million.
After applying the Exchange Ratio, there were outstanding options to
purchase 5.5 million shares at revised strike prices.
ITGI also assumed adjustments in the number of shares reserved for
issuance to participants under a deferred compensation plan to account
for the Special ITGI Cash Dividend, which such participants will not
receive. For each share reserved for issuance, ITGI will reserve an
additional fractional share equal to $4.00 divided by the post-dividend
price which ITGI assumed to be $58.06. Pursuant to this adjustment, ITGI
assumed that the number of shares reserved under this plan increased from
approximately 111,000 to approximately 119,000. After applying the
exchange ratio, there were approximately 190,000 shares reserved under
such plan.
EXCHANGE RATIO:
Shares of ITGI common stock (other than those held by Group) are
assumed to be exchanged for shares of New ITGI common stock pursuant to
the Exchange Ratio. Options to purchase ITGI common stock are assumed to
be exchanged for options to purchase New ITGI common stock pursuant to
the Exchange Ratio.
The exchange ratio is the ratio of the number of shares of Group
Common Stock outstanding over the number of shares of ITGI common stock
held by Group. For pro forma purposes, ITGI used the number of Group
shares issued and outstanding at December 31, 1998, net of treasury
shares (21.2 million), plus the number of shares issuable upon exercise
of outstanding options (1.2 million) and the number of shares reserved
under a deferred compensation plan (1.5 million) for an Exchange Ratio of
approximately 1.59 (23.9 million
85
<PAGE>
divided 15.0 million). ITGI had 18.6 million shares, net of treasury
shares, issued and outstanding of which Group owned 15.0 million and
other stockholders held 3.6 million. Therefore, ITGI's minority
stockholders received 5.7 million shares for the 3.6 million they
previously held.
ITGI'S BASIC AND DILUTED SHARES OUTSTANDING:
The number of basic shares issued and outstanding is equal to Group's
shares outstanding before the Merger of 23.9 million plus the minority
interest shares now issued and outstanding of 5.7 million. The number of
diluted shares equals basic shares issued and outstanding plus dilution
calculated under the treasury method for the options outstanding of 5.5
million.
86
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF ITGI
You should read the following discussion and analysis along with ITGI's
financial statements, including the notes in ITGI's annual report on Form 10-K
incoporated by reference herein.
GENERAL
ITGI is a leading provider of automated securities trade execution and
analysis services to institutional equity investors. ITGI is a full-service
execution firm that utilizes transaction processing technology to increase the
effectiveness and lower the cost of institutional and other trading. ITGI
generates substantially all of ITGI's revenues from a single line of business
consisting of the following four services:
- POSIT, an electronic stock crossing system;
- QuantEX, a decision-support, trade management and routing system;
- ITG Platform, a PC-based routing and trade management system; and
- Electronic Trading Desk, an agency-only trading desk offering clients
efficient trading services with multiple sources of liquidity.
REVENUES primarily consist of commissions and fees from customers' use of
ITGI's transaction processing and analysis services. Because these commissions
and fees are paid on a per-transaction basis, revenues fluctuate from period to
period depending on the volume of securities traded through ITGI's services.
EXPENSES consist of compensation and employee benefits, transaction
processing, software royalties, occupancy and equipment, consulting,
telecommunications and data processing services, net loss on long-term
investments, spin-off costs and other general and administrative expenses.
Compensation and employee benefits expenses include base salaries, bonuses,
employment agency fees, part-time employee compensation, commissions paid to
employees of Group, fringe benefits, including employer contributions for
medical insurance, life insurance, retirement plans and payroll taxes, reduced
by the employee portion of capitalized software. Transaction processing expenses
consist of floor brokerage and clearing fees. Software royalties are payments to
ITGI's POSIT joint venture partner, BARRA. Occupancy and equipment expenses
include rent, depreciation, amortization of leasehold improvements, maintenance,
utilities, occupancy taxes and property insurance. Consulting expenses are fees
and commissions paid to non-employee consultants for equity research, product
development and other activities. Telecommunications and data processing
services include costs for computer hardware, office automation and
workstations, data center equipment, market data services and voice, data, telex
and network communications. Net loss on long-term investments includes gains on
the sale of equity investments, as offset by amortization of goodwill, equity
loss pickup and initial start-up costs. Spin-off costs including legal,
accounting, consulting and various other expenses in connection with the
Transactions. Other general and administrative expenses include amortization of
goodwill, legal, audit, tax and promotional expenses.
ITGI has entered into a Merger Agreement with Group, under which ITGI will
merge with and into Group, with Group as the surviving entity in the Merger.
Following the Merger, Group will be renamed Investment Technology Group, Inc. On
March 16, 1999, ITGI declared the Special Cash Dividend conditioned upon
approval of the Merger by stockholders of Group and ITGI and the satisfaction of
other conditions to the Merger. The following is a discussion of ITGI's
historical results of operations and may not reflect the impact of the
Transactions and the Special Cash Dividend on ITGI, although ITGI believes that
they should not materially affect ITGI's future results of operations.
87
<PAGE>
RESULTS OF OPERATIONS
The table below sets forth certain items in the statement of income
expressed as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
Revenues................................................................................. 100.0% 100.0% 100.0%
Expenses
Compensation and employee benefits..................................................... 24.3 22.5 22.5
Transaction processing................................................................. 12.7 15.6 14.1
Software royalties..................................................................... 7.2 7.2 7.9
Occupancy and equipment................................................................ 5.6 6.7 5.5
Consulting............................................................................. 1.1 1.5 2.2
Telecommunications and data processing services........................................ 3.8 4.8 4.3
Net loss on long-term investments...................................................... 0.1 0.2 0.0
Spin-off costs......................................................................... 0.9 0.0 0.0
Other general and administrative....................................................... 6.2 7.3 6.8
--------- --------- ---------
Total expenses....................................................................... 61.9 65.5 63.2
Operating income......................................................................... 38.1 34.5 36.8
Income tax expense....................................................................... 17.7 14.8 15.8
--------- --------- ---------
Net income............................................................................... 20.4 19.6 20.9
--------- --------- ---------
--------- --------- ---------
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES
Total revenues increased $75.2 million, or 54.9%, from $137.0 million to
$212.2 million. The number of trading days were 252 in 1998 compared to 253 in
1997. Revenues per trading day increased by $300,000, or 55.5%, from $542,000 to
$842,000. Revenues per employee increased $182,000, or 28.8%, from $631,000 to
$813,000. The increases were attributable to increases in the number of ITGI's
customers and increases in trading volume by ITGI's existing customers. Revenues
from the Electronic Trading Desk increased $19.5 million, or 64.9%, from $30.1
million to $49.6 million. Number of shares crossed on the POSIT system increased
2.1 billion, or 56.8%, from 3.7 billion to 5.8 billion. POSIT revenues in turn
increased $41.6 million, or 55.2%, from $75.4 million to $117.0 million. QuantEX
revenues increased $12.0 million, or 39.9%, from $30.1 million to $42.1 million.
EXPENSES
Total expenses increased $41.5 million, or 46.2%, from $89.8 million to
$131.3 million.
88
<PAGE>
The following table itemizes expenses by category (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
<S> <C> <C> <C> <C>
%
1998 1997 CHANGE CHANGE
------------------ ------------- --------- ---------
Compensation and employee benefits....................... $ 51,462 $ 30,479 $ 20,983 68.8%
Transaction processing................................... 26,920 21,413 5,507 25.7
Software royalties....................................... 15,247 9,848 5,399 54.8
Occupancy and equipment.................................. 11,886 9,204 2,682 29.1
Consulting............................................... 2,338 2,017 321 15.9
Telecommunications and data processing services.......... 8,138 6,605 1,533 23.2
Net gain on long-term investments........................ 204 297 (93) (31.3)
Spin-Off costs........................................... 1,936 -- 1,936 N/A
Other general and administrative......................... 13,139 9,919 3,220 32.5
Income taxes............................................. 37,541 20,343 17,198 84.5
</TABLE>
COMPENSATION AND EMPLOYEE BENEFITS. Salaries, bonuses and related employee
benefits increased approximately $21.0 million over the prior year. Such
increases were primarily due to ITGI's profitability-based compensation, growth
in its employee base of 44 or 20.3%, from 217 to 261 and additional compensation
necessary to attract and retain quality personnel, which accounted for 69% of
this increase. Over 50% of the increase in new employees were staffed in
technology, product development and production infrastructure. In addition,
ITGI's board of directors voted to accelerate the vesting of the options of its
recently deceased President and Chief Executive Officer, Scott P. Mason,
resulting in a $2.8 million charge to compensation expense, representing 13% of
the increase.
TRANSACTION PROCESSING. The increase in transaction processing is primarily
due to an increase in ticket charges associated with a higher volume of
transactions in 1998. The increase in ticket charges of 28% was not
proportionate with the increase in revenues of 55% due to volume discounts
associated with clearing and execution services. A decrease in specialist fees
of 26% and floor broker fees of 3%, was offset by the volume increases in shares
executed by specialists of 49% and floor brokers of 51%, resulting in a net
increase in transaction processing expenses. Transaction processing as a
percentage of revenues decreased 18.6% from 15.6% in 1997 to 12.7% in 1998.
SOFTWARE ROYALTIES. As software royalties are contractually fixed at 13% of
POSIT revenues, the increase is wholly attributable to the increase in POSIT
revenues.
OCCUPANCY AND EQUIPMENT. The increase in occupancy and equipment is
primarily attributable to additional depreciation and amortization of leasehold
improvements (representing 65% of the increase) and rent expense (representing
33% of the increase) related to the relocation and expansion of ITGI's corporate
headquarters (occupied in June 1997), combined with increases in headcount and
purchases of additional technologically advanced software.
CONSULTING. The increase in consulting expense is primarily due to costs
incurred for accounting and financial research of international joint venture
opportunities and a major telecommunication system conversion.
TELECOMMUNICATIONS AND DATA PROCESSING SERVICES. The increase in
technological and data communications processing expenses stems primarily from
the data feed upgrades for clients, primarily market data line connections, and
expenses relating to a telecommunication network conversion and contingency
planning.
NET LOSS ON LONG-TERM INVESTMENTS. The decrease on the net loss on
long-term investments is due to income of $3.8 million recognized from the sale
of ITGI's 37.4% equity ownership interest in the
89
<PAGE>
LongView Group, Inc., offset by initial start-up costs for ITG Europe of $1.3
million and the combined costs of equity loss pick-up and amortization of
goodwill on ITG Australia of $0.2 million and the LongView Group, Inc, of $0.8
million.
SPIN-OFF COSTS. The spin-off expenses are attributable to ITGI's legal,
accounting, consulting and other expenses incurred for the spin-off
transactions.
OTHER GENERAL AND ADMINISTRATIVE. The increase in other general and
administrative expenses was the result of a write-off of a net receivable from
the former Global POSIT joint venture of approximately $1 million, accelerated
software amortization for specific products, increases in business development
costs, such as advertising and active sales efforts, and additional
administrative costs, associated with ITG Europe.
INCOME TAX EXPENSE
The increase in income tax expense is the result of an increase in pretax
income and an increase in the effective tax rate from 43.0% in 1997 to 46.4% in
1998. The increase in the effective rate was due to certain non-deductible
expenses, such as goodwill amortization and spin-off costs and the inability to
offset international losses with United States profits in calculating income tax
expense, that were not present in 1997.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES
Total revenues increased $25.4 million, or 22.9%, from $111.6 million to
$137.0 million. Increased revenues were attributed to a growing use of POSIT,
QuantEX and Electronic Trading Desk services. POSIT revenues increased $8.2
million, or 12.2%, from $67.2 million to $75.4 million while QuantEX revenues
increased $5.2 million, or 21.2%, from $24.9 million to $30.1 million.
Electronic Trading Desk services increased $12.3 million, or 69.2%, from $17.8
million to $30.1 million. Revenues per trading day increased by $103,000, or
23.5%, from $439,000 to $542,000. Revenues per employee decreased $80,000, or
11.3%, from $711,000 to $631,000.
EXPENSES
Total expenses increased $19.2 million, or 27.3%, from $70.6 million to
$89.8 million.
The following table itemizes expenses by category (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
<S> <C> <C> <C> <C>
1997 1996 CHANGE % CHANGE
--------- --------- --------- -----------
Compensation and employee benefits..................................... $ 30,479 $ 25,047 $ 5,432 21.7%
Transaction processing................................................. 21,413 15,737 5,676 36.1
Software royalties..................................................... 9,848 8,798 1,050 11.9
Occupancy and equipment................................................ 9,204 6,111 3,093 50.6
Consulting............................................................. 2,017 2,492 (475) (19.1)
Telecommunications and data processing services........................ 6,605 4,789 1,816 37.9
Net loss on long-term investments...................................... 297 -- 297 N/A
Spin-off costs......................................................... -- -- -- N/A
Other general and administrative....................................... 9,919 7,581 2,338 30.8
Income taxes........................................................... 20,343 17,666 2,677 15.2
</TABLE>
COMPENSATION AND EMPLOYEE BENEFITS. The increase in compensation and
employee benefits expenses is due to an increase in the number of employees
offset by an increase in capitalized software.
90
<PAGE>
Capitalized software development costs increased approximately $4.4 million,
primarily due to additional projects and an increase in staff engaged in
software development. Compensation and employee benefits expenses per person
decreased $18,000, or 11.3%, from $159,000 to $141,000.
TRANSACTION PROCESSING. The increase in transactions processing expenses is
primarily due to the expense associated with a higher volume of transactions and
shares. Transaction processing expenses as a percentage of revenues increased
from 14.1% to 15.6%, primarily from a shift in the business mix towards QuantEX
and Electronic Trading Desk services. Those products have slightly lower margins
than POSIT due to charges for floor brokerage fees which are not incurred with
the POSIT business.
SOFTWARE ROYALTIES. As software royalties are contractually fixed at 13% of
POSIT revenues, the increase is wholly attributable to an increase in POSIT
revenues.
OCCUPANCY AND EQUIPMENT. The increase in occupancy and equipment expense is
due primarily to relocation of ITGI's corporate headquarters from 900 Third
Avenue to 380 Madison Avenue in mid-June 1997. Rent expense increased
accordingly as the rental square footage increased by more than 100%. ITGI also
had to accelerate the write-off of the unamortized leasehold improvements from
the 900 Third Avenue location. In addition, depreciation expense increased
approximately $1.7 million as a result of purchases of additional equipment
associated with both the move and increased headcount.
CONSULTING. Consulting is primarily for functions, which ITGI currently
believes, are advantageous to out-source. The decrease is due primarily to
ITGI's undertaking in 1996 nonrecurring special projects related to contingency
planning and systems' security.
TELECOMMUNICATIONS AND DATA PROCESSING SERVICE. The increase is due
primarily to communications costs incurred in 1995 and 1996 relating to the
POSIT Joint Venture, which were presented for payment in the second quarter of
1997. In addition, duplicate services were required for the 900 Third Avenue and
380 Madison Avenue locations in connection with the move of ITGI's headquarters.
NET LOSS ON LONG-TERM INVESTMENTS. The increase in the net loss on
long-term investments is due to the combined costs of equity loss pick-up and
amortization of goodwill on ITG Australia and the LongView Group, Inc, of
$79,000 and $218,000, respectively.
OTHER GENERAL AND ADMINISTRATIVE EXPENSE. The increase is largely
attributable to the increase in headcount of 60 employees. Related costs,
primarily services provided by Jefco, increased by approximately $374,000.
Travel and entertainment costs increased by approximately $1.1 million primarily
from an increased effort to promote ITGI's products. Legal fees increased by
approximately $510,000 as a result of exploring several strategic initiatives
and the costs associated with outsourcing legal services pending the hiring of a
new in-house general counsel.
INCOME TAX EXPENSE
Income tax expense increased by $2.6 million, or 14.7% from $17,700 to
$20,300. The increase is primarily due to an increase in pretax income. The
effective tax rate in 1997 and 1996 was 43.0% and 43.1%, respectively.
DEPENDENCE ON MAJOR CUSTOMERS
During 1998, revenue from ITGI's 10 largest customers accounted for
approximately 30.7% of its total revenue while revenue from each of ITGI's three
largest customers accounted for 7.9%, 4.5% and 3.2%, respectively, of total
revenue. During 1997, revenue from ITGI's 10 largest customers accounted for
approximately 34.5% of its total revenue while revenue from each of ITGI's three
largest customers accounted for 8.8%, 5.9%, and 3.4%, respectively, of total
revenue. Customers may discontinue use of ITGI's services at any time. The loss
of any significant customers could have a material adverse effect
91
<PAGE>
on ITGI's results of operations. In addition, the loss of significant POSIT
customers could result in lower share volumes of securities offered through
POSIT, which may adversely affect the liquidity of the system.
LIQUIDITY AND CAPITAL RESOURCES
ITGI's liquidity and capital resource requirements are the result of the
funding of working capital needs, primarily consisting of compensation, benefits
and transaction processing fees and software royalty fees. Historically, all
working capital requirements have been met by cash from operations. A
substantial portion of ITGI's assets are liquid, consisting of cash and cash
equivalents or assets readily convertible into cash.
ITGI believes that its cash flow from operations and existing cash balances
will be sufficient to meet its cash requirements. ITGI generally invests its
excess cash in money market funds and other short-term investments that
generally mature within 90 days or less. Additionally, securities owned, at fair
value, include highly liquid, variable rate municipal securities, auction rate
preferred stock and common stock. At December 31, 1998, such cash equivalents
amounted to $77.3 million and receivables from brokers, dealers and other of
$24.1 million were due within 30 days.
ITGI also invests a portion of its excess cash balances in cash enhanced
strategies, which ITGI believes should yield higher returns without any
significant effect on risk. As of December 31, 1998, ITGI had an investment in
an arbitrage fund. The fund's strategy is to invest in a hedge portfolio of
convertible securities. This strategy seeks an enhanced level of capital
appreciation by focusing on current income and capital appreciation. At December
31, 1998, the amount of these investments was $1.0 million.
Historically, all regulatory capital needs of ITG Inc. have been provided by
cash from operations. See "Business--Regulation." ITGI believes that cash flows
from operations and the payment of the exercise price upon the exercise of
expiring options will provide ITG Inc. with sufficient regulatory capital. On
March 16, 1999, ITGI entered into an agreement with a bank to borrow, effective
upon the closing of the merger, up to $20 million on a revolving basis to enable
ITG Inc. to satisfy its regulatory net capital requirements. This commitment
will expire on March 14, 2000. Any amounts drawn may be prepaid at any time, but
no later than March 15, 2001. ITGI has agreed to pay an up-front fee totaling
1.5% of this commitment and will incur a fee at a rate per annum equal to 0.35%
on the daily amount of the unused commitment to March 13, 2000. The interest
rate on any amounts drawn will be prime; if such amounts are not repaid within
two weeks, the interest rate will increase to prime plus 2%. The credit facility
is secured by a pledge of the stock of ITG Inc., ITG Ventures, Inc. and ITG
Global Trading Incorporated. This agreement limits ITGI's ability to pay cash
dividends or incur indebtedness and requires ITGI to comply with certain
financial covenants. Assuming that the merger and related transactions will
close on March 31, 1999, following payment of the special cash dividend ITGI
estimates that ITG Inc. will have excess net regulatory capital of approximately
$20 million (not including the $20 million available under the new revolving
credit facility). Although ITGI believes that the combination of its existing
net regulatory capital, operating cash flows and the revolving credit facility
will be sufficient to meet regulatory capital requirements, a shortfall in net
regulatory capital would have a material adverse effect on ITGI's business and
results of operations.
In 1998, ITGI established a $2 million credit line with a bank to fund
temporary regulatory capital shortfalls encountered periodically by ITG
Australia. The lender charges ITGI interest at the Federal Funds rate plus 1%.
ITGI lends amounts borrowed to ITG Australia and charges interest at the Federal
Funds rate plus 2%. At December 31, 1998, no amounts were outstanding under this
bank credit line and no amounts were owed to ITGI by ITG Australia. Borrowings
from the bank and loans to ITG Australia will not be permitted during the period
that the revolving credit agreement discussed above is effective.
92
<PAGE>
ITGI also invests a portion of its excess cash balances in cash enhanced
strategies, which it believes should yield higher returns without any
significant effect on risk. As of December 31, 1998, ITGI had an investment in
an arbitrage fund. The fund's strategy is to invest in a hedged portfolio of
convertible securities. This strategy seeks an enhanced level of capital
appreciation by focusing on current income and capital appreciation. At December
31, 1998, the amount of these investments was $1.0 million.
EFFECTS OF INFLATION
ITGI does not believe that the relatively moderate levels of inflation which
have been experienced in North America in recent years have had a significant
effect on its revenue or profitability. However, high inflation may lead to
higher interest rates which might cause investment funds to move from equity
securities to debt securities or cash equivalents.
THE YEAR 2000 ISSUE
Some computer systems and software products were originally designed to
accept only two digit entries in the data code field. As a result, certain
computer systems and software packages will not be able to interpret dates
beyond December 31, 1999 and thus will interpret dates beginning January 1, 2000
incorrectly. This could potentially result in computer failure or
miscalculations, causing operating disruptions, including an inability to
process transactions, send invoices or engage in normal business operations.
Therefore, companies may have to upgrade or replace computer and software
systems in order to comply with the "Year 2000" requirements.
STRATEGY
ITGI is well aware of and is actively addressing the Year 2000 issue and the
potential problems that can arise in any computer and software system. Planning
and evaluation work began in 1997 including the identification of those systems
affected. ITGI established a "Year 2000 working group" to address the Year 2000
issue. ITGI has targeted its efforts into three major areas: (1) vendors; (2)
company proprietary products; and (3) clients.
VENDORS. ITGI's ability to successfully meet the Year 2000 challenge is in
part dependent on its vendors. ITGI has contacted its vendors to determine the
status of their Year 2000 programs and has created a database recording each
vendor's readiness status. Over 95% of ITGI's vendors have responded that their
systems are currently Year 2000 compliant, and substantially all of ITGI's
vendors have indicated that they expect their systems to be Year 2000 compliant
by September 30, 1999. Based upon the results of testing to date, ITGI is
satisfied with the representations it has received from its vendors. ITGI is in
the process of integrating Year 2000 compliant versions of its vendors' software
and hardware with its proprietary products.
COMPANY PROPRIETARY PRODUCTS. ITGI has evaluated its trading systems and
has endeavored to examine all code contained in its internally produced
software. ITGI has completed regression testing of all mission critical systems
and released Year 2000 compliant versions of all such systems other than
QuantEX. ITGI plans to complete date-forward testing of all mission critical
systems and release a Year 2000 compliant version of QuantEX by the end of June
1999. ITGI also intends to participate in the Securities Industry Association's
industry-wide testing program in 1999.
CLIENTS. ITGI sent a letter explaining its Year 2000 strategy to all
clients in July 1998. In addition, it contacted clients on a project-by-project
basis to ascertain compatibility between ITGI's systems and changes made to the
clients' systems. ITGI plans to provide point-to-point testing opportunities for
its clients starting in April 1999.
93
<PAGE>
YEAR 2000 CONTINGENCY PLANNING
ITGI is in the early stages of establishing a Year 2000 contingency plan to
deal with both internal and external failures of critical systems. The Year 2000
issue can affect all businesses that rely heavily on automated systems. ITGI's
Year 2000 contingency plan is therefore intended to address failures of internal
systems, client connections and connections to trading destinations, as well as
failures of major infrastructure components. ITGI intends to have its
contingency plan in place by July 1999 and to update and refine such plan as
needed on a continuing basis. ITGI believes, however, that such contingency plan
will not provide satisfactory solutions for its worst-case scenario--the general
failure of computer and communication systems relied upon by the securities
industry, such as the systems provided by long distance telephone companies, the
stock exchanges, Nasdaq, The Depository Trust Company and ADP Brokerage
Services, and the failure of Jefco and W&D to provide services under their
clearing and execution agreement with ITGI. Such failure would prevent ITGI from
operating in whole or in part until such systems or services have been restored
and could have a material adverse effect on ITGI.
In the event any of ITGI's internally developed systems fails, ITGI will
undertake to remediate such system on an emergency basis at the time of such
failure. To ensure that adequate staff will be available to handle any such
emergencies in January of 2000, ITGI has imposed a moratorium on employee
vacations during the first two weeks of January 2000, and has made arrangements
to have a number of software development personnel (normally based in ITGI's
Culver City office) at ITGI's New York headquarters during the final week of
December 1999 and the first week of January 2000. ITGI's inability to remediate
a failure of any of its internally developed mission critical systems would
prevent it from operating in whole or in part until such systems have been
restored and could have a material adverse effect on ITGI.
COSTS
ITGI does not believe that the costs incurred to ready its systems for the
Year 2000 will have a material effect on its financial condition. Total costs
for the whole project are estimated to be between $2.5 and $3.0 million, which
includes the cost of personnel, consultants and software and hardware costs.
Through December 31, 1998, ITGI had spent approximately $1.5 million on the Year
2000 project.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information". SFAS 131 requires that public business
enterprises report certain information about operating segments in complete sets
of financial statements of the enterprise and in condensed financial statements
of interim periods issued to shareholders. It also requires that these
enterprises report certain information about their products and services, the
geographical areas in which they operate, and their major customers. SFAS 131 is
effective for fiscal years beginning after December 15, 1997, although earlier
application was permitted. The disclosure requirements of this standard were not
applicable since ITGI manages its operations through a single line of business
(institutional agency trade executions).
In March 1998, the Accounting Standards Executive Committee issued Statement
of Position 98-1 "ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR
OBTAINED FOR INTERNAL USE". SOP 98-1 provides guidance on accounting for the
costs of computer software developed or obtained for internal use. It identifies
the characteristics of internal-use software and provides examples to assist in
determining when the computer software is for internal use. SOP 98-1 is
effective for financial statements for fiscal years beginning after December 15,
1998, although earlier application is encouraged, and should be applied to
internal-use computer software costs incurred in those fiscal years for all
projects, including those in progress upon initial application of this SOP. ITGI
does not anticipate that the implementation of this statement will have a
material impact on its consolidated financial statements.
94
<PAGE>
COMPARATIVE PER SHARE DATA OF GROUP AND ITGI
The following table sets forth selected per share data for Group and ITGI on
a historical and unaudited pro forma combined basis. The unaudited pro forma
financial data assume that the Transactions were consummated at the beginning of
the earliest period presented. Book value data for all pro forma presentations
are based upon the number of outstanding shares of Group Common Stock adjusted
to include the maximum number of Merger Shares issued. The information set forth
below should be read in conjunction with the selected historical consolidated
financial data of Group and ITGI, including the notes thereto, incorporated
herein by reference. See "--Selected Consolidated Financial Data of Group" and
"Selected Consolidated Financial Data of ITGI."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
GROUP HISTORICAL:
Cash dividends declared per share.................................................... $ .20 $ .125 $ .0875
Book value per share at period ending................................................ $ 15.77
Basic earnings per share from continuing operations.................................. $ 1.62 $ 1.92 $ 1.06
Diluted earnings per share from continuing operations................................ $ 1.58 $ 1.85 $ 1.04
ITGI HISTORICAL:
Cash dividends declared per share.................................................... -- -- --
Book value per share at period ending................................................ $ 7.73
Basic earnings per share from continuing operations.................................. $ 2.36 $ 1.48 $ 1.28
Diluted earnings per share from continuing operations................................ $ 2.25 $ 1.42 $ 1.26
NEW ITGI UNAUDITED PRO FORMA COMBINED:(1)
Cash dividends declared per share.................................................... -- -- --
Book value per share at period ending................................................ $ 2.18
Basic earnings per share from continuing operations.................................. $ 1.40
Diluted earnings per share from continuing operations................................ $ 1.28
NEW ITGI EQUIVALENT PRO FORMA:(2)
Cash dividends declared per share.................................................... -- -- --
Book value per share................................................................. $ 3.47
Basic earnings per share from continuing operations.................................. $ 2.23
Diluted earnings per share from continuing operations................................ $ 2.04
</TABLE>
- ------------------------
(1) The unaudited pro forma income from continuing operations per share data for
the year ended December 31, 1998 illustrates the results as if the
Transactions had occurred on January 1, 1998. The pro forma per share data
do not purport to represent what New ITGI's results of operations or
financial position would have actually been or to project New ITGI's results
of operations for any future period or financial position at any future
date.
(2) The New ITGI equivalent pro forma per share data equals the New ITGI
unaudited pro forma combined times the Exchange Ratio.
95
<PAGE>
BUSINESS OF NEW JEF
The following is a description of the New JEF business after giving effect
to the Transfers and the Spin-Off. Following the Spin-Off, New JEF will operate
as a holding company through three primary subsidiaries, JEFCO, JIL and JPL, as
an international investment bank that focuses on capital raising, research,
mergers and acquisitions, advisory and restructuring services for small- to
medium-sized companies and trading in equity and taxable fixed-income
securities, convertible bonds, options, futures and international securities for
institutional clients. Unless the context otherwise requires, New JEF will also
include the operations of New JEF's other subsidiaries and W&D Securities, Inc.
JEFCO
JEFCO was founded in 1962 and is engaged in equity, convertible debt and
taxable fixed income securities brokerage and trading and corporate finance.
JEFCO is one of the leading national firms engaged in the distribution and
trading of blocks of equity securities both on the national securities exchanges
and in the "third market." The term "third market" refers to transactions in
listed equity securities effected away from national securities exchanges.
JEFCO's revenues are derived primarily from commission revenues and market
making or trading as principal in equity, taxable fixed income, convertible
securities options, futures and international securities with or on behalf of
institutional investors, with the balance generated by corporate finance and
other activities. JEFCO currently provides equity research in the areas of
energy, telecommunications, consumer, real estate (including real estate
investment trusts (REITS)), gaming and entertainment, business services, and
financial services.
JIL
JIL, a broker-dealer subsidiary, was incorporated in 1986 in England. JIL is
a member of The International Stock Exchange and The Securities and Futures
Authority. JIL introduces customers trading in U.S. securities to JEFCO and also
trades as a broker-dealer in international equity and convertible securities and
American Depositary Receipts ("ADRs"). In 1995, JIL formed a wholly owned Swiss
subsidiary, Jefferies (Switzerland) Ltd. In 1996, JIL formed a wholly-owned
English subsidiary, Jefferies (Japan) Limited, which maintains a branch office
in Tokyo.
JPL
JPL, a broker subsidiary, was incorporated in 1992 in Hong Kong. JPL
presently introduces foreign customers trading in U.S. securities to JEFCO.
W & D SECURITIES, INC.
W & D Securities, Inc. ("W & D") primarily provides execution services on
the NYSE and other exchanges to JEFCO and ITG. In order to comply with
regulatory requirements of the NYSE that generally prohibit NYSE members and
their affiliates from executing, as principal and, in certain cases, as agent,
transactions in NYSE-listed securities off the NYSE, Group gave up its formal
legal control of W & D, effective January 1, 1983, by exchanging all of the W &
D common stock owned by it for non-voting preferred stock of W & D. The common
stock of W & D is presently held by an officer of W & D who has agreed with
Group that, at the option of Group, he will sell such stock to Group for nominal
consideration. In the event that Group were to regain ownership of such common
stock, Group believes that the NYSE would assert that W & D would be in
violation of the NYSE's rules unless similar arrangements satisfactory to the
NYSE were made with respect to the ownership of the common stock.
While the NYSE has generally approved the above arrangements, there can be
no assurance that it will not raise objections in the future. In light of these
arrangements and the high proportion of the
96
<PAGE>
equity of W & D represented by the non-voting preferred stock held by Group, W &
D is consolidated as a subsidiary of Group for financial statement purposes.
JEFCO believes that it can make satisfactory alternative arrangements for
executing transactions in listed securities on the NYSE if it were precluded
from doing so through W & D. In connection with the Transfers, all obligations
and rights of Group with respect to W&D will be assumed by and transferred to
New JEF.
CORPORATE FINANCE
JEFCO's Corporate Finance Division offers corporations (primarily middle
market growth companies) a full range of financial advisory services as well as
debt, equity, and convertible financing service. Products include acquisition
financing, bridge and senior loan financing, private placements and public
offerings of debt and equity securities, debt refinancings, restructuring,
merger and acquisition and exclusive sales advice, structured financings and
securitizations, consent and waiver solicitations, and company and bondholder
representations in corporate restructurings. JEFCO's research department covers
223 companies in 12 industries. Investment banking activity involves both
economic and regulatory risks. An underwriter may incur losses if it is unable
to sell the securities it is committed to purchase or if it is forced to
liquidate its commitments at less than the agreed upon purchase price. In
addition, under the Securities Act and other laws and court decisions with
respect to underwriters' liability and limitations on indemnification of
underwriters by issuers, an underwriter is subject to substantial potential
liability for material misstatements or omissions in prospectuses and other
communications with respect to underwritten offerings. Further, underwriting
commitments constitute a charge against net capital, and JEFCO's underwriting
commitments may be limited by the requirement that it must, at all times, be in
compliance with the Uniform Net Capital Rule 15c3-1 of the Commission.
The New JEF businesses intend to continue to pursue opportunities for their
corporate customers which may require them to finance and/or underwrite the
issuance of securities. Under circumstances where JEFCO is required to act as an
underwriter or to trade on a proprietary basis with its customers, the New JEF
businesses may assume greater risk than would normally be assumed in certain
other principal transactions.
COMMISSION BUSINESS
A substantial portion of the New JEF businesses' revenues is derived from
customer commissions on brokerage transactions in equity (primarily listed) and
debt securities for domestic and international investors such as investment
advisors, banks, mutual funds, insurance companies and pension and profit
sharing plans. Such investors normally purchase and sell securities in block
transactions, the execution of which requires special marketing and trading
expertise. JEFCO, for example, is one of the leading national firms in the
execution of equity block transactions, and believes that its institutional
customers are attracted by the quality of its execution (with respect to
considerations of quantity, timing and price) and its competitive commission
rates, which are negotiated on the basis of market conditions, the size of the
particular transaction and other factors. In addition to domestic equity
securities, JEFCO executes transactions in taxable fixed income securities,
domestic and international convertible securities, international equity
securities, ADRs, options, preferred stocks, financial futures and other similar
products.
All of the New JEF businesses' equity account executives are electronically
interconnected through a system permitting simultaneous verbal and graphic
communication of trading and order information by all participants. The New JEF
businesses believe that their execution capability is significantly enhanced by
this system, which permits their account executives to respond to each other and
to negotiate order indications directly with customers rather than through a
separate trading department.
97
<PAGE>
PRINCIPAL TRANSACTIONS
In the regular course of its business, JEFCO take securities positions as a
market-maker to facilitate customer transactions and for investment purposes. In
making markets and when trading for their own accounts, the New JEF businesses
expose their own capital to the risk of fluctuations in market value. Trading
profits (or losses) depend primarily upon the skills of the employees engaged in
market making and position taking, the amount of capital allocated to positions
in securities and the general trend of prices in the securities markets.
The New JEF businesses monitor their risk by maintaining their securities
positions at or below certain pre-established levels. These levels reduce
certain opportunities to realize profits in the event that the value of such
securities increases. However, they also reduce the risk of loss in the event of
a decrease in such value and result in controlled interest costs incurred on
funds provided to maintain such positions.
EQUITIES
The Equities Division of JEFCO makes markets in over 600 over-the-counter
equity and ADR securities, and trades securities for its own account, as well as
to accommodate customer transactions. The Equities and International Divisions
engage in hedged trading involving securities listed or traded in both domestic
and foreign markets.
TAXABLE FIXED INCOME
The Taxable Fixed Income Division of JEFCO trades high grade and
non-investment grade public and private debt securities. The Division
specializes in trading and making markets in over 300 unrated or less than
investment grade corporate debt securities and accounts for these positions at
market value. At December 31, 1998, the aggregate long and short market value of
these positions was $28.7 million and $8.3 million, respectively. Risk of loss
upon default by the borrower is significantly greater with respect to unrated or
less than investment grade corporate debt securities than with other corporate
debt securities. These securities are generally unsecured and are often
subordinated to other creditors of the issuer. These issuers usually have high
levels of indebtedness and are more sensitive to adverse economic conditions,
such as recession or increasing interest rates, than are investment grade
issuers. There is a limited market for some of these securities, and market
quotes are generally available from a small number of dealers.
CONVERTIBLE SECURITIES AND WARRANTS
The New JEF businesses also trade domestic and international convertible
securities and warrants and assists corporate and institutional clients in
identifying attractive investments in these securities and warrants.
OTHER PROPRIETARY TRADING
The New JEF businesses invest in statistically-defined market-neutral
strategies in the equities markets and in merger-related arbitrage activities.
The New JEF businesses conduct these activities through relationships with
independent management firms pursuant to which the New JEF businesses delegate
investment decisions to the managers. In addition, the New JEF businesses have
investments in partnerships and mutual funds as well as other relationships with
independent management firms which contribute to revenues from principal
transactions.
98
<PAGE>
INTEREST
The New JEF businesses derive a substantial portion of their interest
revenues, and incurs a substantial portion of their interest expenses, in
connection with their securities borrowed/securities loaned activity. The New
JEF businesses also earn interest on their securities portfolio, on their
operating and segregated balances, on their margin lending activity and on
certain of their investments.
SECURITIES BORROWED/SECURITIES LOANED
In connection with both its trading and brokerage activities, The New JEF
businesses borrow securities to cover short sales and to complete transactions
in which customers have failed to deliver securities by the required settlement
date and lends securities to other brokers and dealers for similar purposes. The
New JEF businesses have an active securities borrowed and lending matched book
business ("Matched Book"), in which the New JEF businesses borrow securities
from one party and lend them to another party. When a New JEF business borrows
securities, the New JEF business provides cash to the lender as collateral,
which is reflected in New JEF's financial statements as receivable from brokers
and dealers. The New JEF businesses earn interest revenues on this cash
collateral. Similarly, when a New JEF business lends securities to another
party, that party provides cash to the New JEF business as collateral, which is
reflected in New JEF's financial statements as payable to brokers and dealers.
The New JEF businesses pay interest expense on the cash collateral received from
the party borrowing the securities. A substantial portion of the New JEF
businesses' interest revenues and interest expense results from the Matched Book
activity.
MARGIN LENDING
Customers' transactions are executed on either a cash or margin basis. In a
margin transaction, a New JEF business extends credit to the customer,
collateralized by securities and cash in the customer's account, for a portion
of the purchase price, and receives income from interest charged on such
extensions of credit.
In permitting a customer to purchase securities on margin, a New JEF
business is subject to the risk that a market decline could reduce the value of
its collateral below the amount of the customer's indebtedness and that the
customer might otherwise be unable to repay the indebtedness.
In addition to monitoring the creditworthiness of its customers, the New JEF
businesses also consider the trading liquidity and volatility of the securities
it accepts as collateral for its margin loans. Trading liquidity and volatility
may be dependent, in part, upon the market on which the security is traded, the
number of outstanding shares of the issuer, events affecting the issuer and/or
securities markets in general, and whether or not there are any legal
restrictions on the sale of the securities. Certain types of securities have
historical trading patterns which may assist the New JEF businesses in making
their evaluation. Historical trading patterns, however, may not be good
indicators over relatively short time periods or in markets which are affected
by unusual or unexpected developments. The New JEF businesses consider all of
these factors at the time they agree to extend credit to customers and continue
to review their extensions of credit on an ongoing basis.
The majority of the New JEF businesses' margin loans are made to United
States citizens or to corporations which are domiciled in the United States. A
New JEF business may extend credit to investors or corporations who are citizens
of foreign countries or who may reside outside the United States. The New JEF
businesses believe that should such foreign investors default upon their loans
and should the collateral for those loans be insufficient to satisfy the
investors' obligations, it may be more difficult to collect such investors'
outstanding indebtedness than would be the case if investors were citizens or
residents of the United States.
99
<PAGE>
Although the New JEF businesses attempt to minimize the risk associated with
the extension of credit in margin accounts, there is no assurance that the
assumptions on which the New JEF businesses base their decisions will be correct
or that they are in a position to predict factors or events which will have an
adverse impact on any individual customer or issuer, or the securities markets
in general.
COMPETITION
All aspects of the businesses of New JEF are intensely competitive. The New
JEF businesses compete directly with numerous other brokers and dealers,
investment banking firms and banks. In addition to competition from firms
currently in the securities business, there has been increasing competition from
others offering financial services. These developments and others have resulted,
and may continue to result, in significant additional competition for the New
JEF businesses.
Member firms of the NYSE generally are prohibited from effecting
transactions when acting as principal and, in certain cases, as agents, in
listed equity securities off the NYSE, and therefore, unlike JEFCO, are
precluded from effecting such transactions in the third market. Such firms may
execute certain transactions in listed equity securities in the third market for
customers, although typically they do not do so. Since firms which the New JEF
businesses regard as its major competitors in the execution of transactions in
equity securities for institutional investors are members of the NYSE, any
removal of these prohibitions could adversely affect the New JEF businesses.
REGULATION
The securities industry in the United States is subject to extensive
regulation under both federal and state laws. The Commission is the federal
agency responsible for the administration of federal securities laws. In
addition, self-regulatory organizations, principally the NASDR and the
securities exchanges, are actively involved in the regulation of broker-dealers.
These self-regulatory organizations conduct periodic examinations of member
broker-dealers in accordance with rules they have adopted and amended from time
to time, subject to approval by the Commission. Securities firms are also
subject to regulation by state securities commissions in those states in which
they do business. JEFCO is registered as a broker-dealer in 50 states, the
District of Columbia and Puerto Rico. W & D is registered as a broker-dealer in
3 states.
Broker-dealers are subject to regulations which cover all aspects of the
securities business, including sales methods, trade practices among broker-
dealers, use and safekeeping of customers' funds and securities, capital
structure of securities firms, record-keeping and the conduct of directors,
officers and employees. Additional legislation, changes in rules promulgated by
the Commission and self-regulatory organizations, or changes in the
interpretation or enforcement of existing laws and rules, may directly affect
the mode of operation and profitability of broker-dealers. The Commission,
self-regulatory organizations and state securities commissions may conduct
administrative proceedings which can result in censure, fine, suspension,
expulsion of a broker-dealer, its officers or employees, or revocation of
broker-dealer licenses. The principal purpose of regulation and discipline of
broker-dealers is the protection of customers and the securities markets, rather
than protection of creditors and stockholders of broker-dealers.
As registered broker-dealers, JEFCO and W & D are required by law to belong
to the Securities Investor Protection Corporation ("SIPC"). In the event of a
member's insolvency, the SIPC fund provides protection for customer accounts up
to $500,000 per customer, with a limitation of $100,000 on claims for cash
balances.
NET CAPITAL REQUIREMENTS. Every U.S. registered broker-dealer doing
business with the public is subject to the Commission's Uniform Net Capital Rule
(the "Rule"), which specifies minimum net capital requirements. Jefferies Group,
Inc. is not a registered broker-dealer and is therefore not subject to the Rule;
however, its United States broker-dealer subsidiaries are subject thereto.
100
<PAGE>
The Rule provides that a broker-dealer doing business with the public shall
not permit its aggregate indebtedness to exceed 15 times its adjusted net
capital (the "basic method") or, alternatively, that it not permit its adjusted
net capital to be less than 2% of its aggregate debit balances (primarily
receivables from customers and broker-dealers) computed in accordance with such
Rule (the "alternative method"). JEFCO and W & D use the alternative method of
calculation.
Compliance with applicable net capital rules could limit operations of New
JEF such as underwriting and trading activities, that require use of significant
amounts of capital, and may also restrict loans, advances, dividends and other
payments by JEFCO or W & D to the New JEF businesses. As of December 31, 1998,
JEFCO's and W & D's net capital was $217.4 million and $2.0 million,
respectively, which exceeded minimum net capital requirements by $213.4 million
and $1.8 million, respectively.
RISK MANAGEMENT
As an international investment bank, risk is an inherent part of the New JEF
businesses. Global markets, by their nature, are prone to uncertainty and
subject participants to a variety of risks. The New JEF businesses have
developed policies and procedures to identify, measure and monitor each of the
risks involved in their trading, brokerage and corporate finance activities on
an international basis. Risk management is considered to be of paramount
importance. The New JEF businesses devote significant resources across all of
their worldwide trading operations to the measurement, management and analysis
of risk, including investments in personnel, information technology
infrastructure and systems.
LEGAL PROCEEDINGS
INCOME TAXES. Group 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 ITGI and include (i) the disallowance of deductions taken
in connection with the termination of certain compensation plans at the time of
ITGI's initial public offering in 1994 and (ii) the disallowance of tax credits
taken in connection with certain research and development expenditures. New JEF
intends to vigorously contest the proposed adjustments and believes that
resolution of this matter will not have a material adverse effect on New JEF.
ITGI is handling the response to this matter and, under the Tax Sharing
Agreement, is obligated to indemnify JEF Holding for any tax deficiency related
to ITGI.
OTHER. Many aspects of New JEF's business involve substantial risks of
liability. In the normal course of business, New JEF and its subsidiaries have
been named as defendants or co-defendants in lawsuits involving primarily claims
for damages. New JEF's management believes that pending litigation will not have
a material adverse effect on New JEF.
PROPERTIES
New JEF's Brokerage and Investment Banking Business maintain sales offices
in Los Angeles, New York, Short Hills, Chicago, Dallas, Boston, Atlanta, New
Orleans, Houston, San Francisco, Stamford, London, Hong Kong, Zurich and Tokyo.
In addition, New JEF maintains operations offices in Los Angeles and Jersey
City. New JEF leases all of its office space which management believes is
adequate for its business.
EMPLOYEES
Assuming the Spin-Off occurred on December 31, 1998, New JEF would have had
895 employees, of which 885 were full-time and 10 were part-time.
101
<PAGE>
BUSINESS OF ITGI AND NEW ITGI
Following the Merger, New ITGI will be called Investment Technology Group,
Inc., and its principal subsidiaries will continue to include: (1) ITG Inc., a
broker-dealer in securities registered under the Exchange Act, (2) Investment
Technology Group International Limited ("ITG International"), which is a 50%
partner in the ITG Europe joint venture, and (3) ITG Australia Holdings Pty
Limited, which is a 50% partner in ITG Pacific Holdings Pty Limited. ITG
provides equity trading services and transaction research to institutional
investors and brokers.
ITG is a full service trade execution firm that uses technology to increase
the effectiveness and lower the cost of trading. With an emphasis on ongoing
research, ITG offers the following services:
- POSIT: an electronic stock crossing system.
- QuantEX: a decision-support, trade management and routing system.
- SmartServers: offers server based implementation of trading strategies.
- Electronic Trading Desk: an agency-only trading desk offering clients
efficient trading services accessing multiple sources of liquidity.
- ITG Platform: a PC-based routing and trade management system.
- ISIS: a set of pre- and post-trade tools for systematically analyzing and
lowering transaction costs.
- ITG/Opt: a computer-based equity portfolio selection system.
- Research: research, development, sales and consulting services to ITG's
clients.
ITG generates revenues on a "per transaction" basis for all orders executed.
Orders are delivered to ITG from ITG's "front-end" software products, QuantEX
and ITG Platform, as well as vendors' front-ends and direct computer-to-computer
links to customers. Orders may be executed on (1) POSIT, (2) the New York Stock
Exchange, (3) certain regional exchanges, (4) market makers, (5) electronic
communications networks and (6) alternative trading systems.
POSIT
POSIT was introduced in 1987 as a technology-based solution to the trade
execution needs of quantitative and passive investment managers. It has since
grown to serve the active trading and broker-dealer community. There are
approximately 490 clients currently using POSIT, including corporate and
government pension plans, insurance companies, bank trust departments,
investment advisors and mutual funds.
POSIT is an electronic stock crossing system through which clients enter buy
and sell orders to trade single stocks and portfolios of equity securities among
themselves in a confidential environment. Orders may be placed in the system
directly via QuantEX and ITG Platform and computer to computer links or
indirectly via the Electronic Trading Desk, which then enters the orders in the
central computer. ITG also works in partnership with vendors of other popular
trading systems, allowing users the flexibility to route orders directly to
POSIT from trading products distributed by Bridge Information Systems, BRASS,
Bloomberg and others.
POSIT currently accepts orders for approximately 18,000 different equity
securities, but may be modified, as the need arises, to include additional
equity securities registered pursuant to Section 12 of the Exchange Act. An
algorithm is run at scheduled times to find the maximum possible number of buy
and sell orders that match or "cross." Typically, there is an imbalance between
the number of shares available to be bought or sold in the system. When this
occurs, shares are allocated pro rata across participants, resulting in partial
execution. POSIT has been designed to allow clients trade execution flexibility.
Clients may specify constraints on the portion of a portfolio that trades, such
as the
102
<PAGE>
requirement that net cash resulting from buys and sells remain within specified
constraints. A client may also specify a minimum number of shares to be executed
for a given order. POSIT prices trades at the midpoint of the best bid and offer
on the primary market for each security at the time of the cross, based on
information provided directly to the system by a third-party data vendor. There
are seven scheduled crosses every business day: six regular crosses scheduled
hourly, on the hour, between 10:00 a.m. and 3:00 p.m. (Eastern time) and an
American Depositary Receipts cross at 8:45 a.m. (Eastern time). Each scheduled
cross is normally executed within a five minute window selected randomly by the
system.
POSIT provides the following significant benefits to clients:
- Confidential matching of buy and sell orders eliminates market impact. In
contrast, participants in traditional or other open markets constantly
face the risk that disclosure of an order will unfavorably affect price
conditions.
- Access to the substantial pool of liquidity represented by POSIT orders.
- Clients pay a low transaction fee on completed transactions, relative to
the industry average of 5 to 6 cents per share. POSIT generates revenue
from transaction fees charged on each share crossed through the system.
- Immediately after each cross, the system electronically provides clients
with reports of matched and unmatched (residual) orders. Clients can then
execute residual orders by traditional means or take advantage of the
Electronic Trading Desk services (described below).
Since December 1997, ITG has offered POSIT 4. POSIT 4 gives POSIT users the
option of customizing their trading objective and specifying additional
constraints (referred to collectively as a POSIT 4 "strategy"), while preserving
the functionality of the existing POSIT system. This capability allows orders
that might otherwise be ineligible for POSIT to participate in the match. POSIT
4 strategies include ResRisk, which allows users to control the risk of the
unexecuted "residual" portfolio, and Pairs, which makes execution of one trade
contingent on the execution of another, at or better than a given relative
valuation. Portfolio funding, liquidation, restructuring and rebalancing are
some of the types of transactions that are appropriate for execution using
ResRisk. Risk arbitrage, statistical arbitrage and portfolio substitution trades
are examples of transactions that can be implemented using the Pairs strategy.
ITG also implements custom applications upon request. Total volume attributable
to POSIT 4 in 1998 is 66 million shares. ITG has obtained a patent on the
technology underlying POSIT 4.
The following graph illustrates the average daily volume of shares crossed
on POSIT:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
SHARES PER DAY
<S> <C>
1989 642,857
1990 1,703,557
1991 2,320,158
1992 4,330,709
1993 6,142,405
1994 7,737,742
1995 9,040,978
1996 13,067,553
1997 14,527,878
1998 23,151,105
</TABLE>
103
<PAGE>
QUANTEX
QuantEX is ITG's trade management system, an advanced tool for
technologically sophisticated clients transacting large volumes of orders.
QuantEX helps clients manage efficiently every step in the trading process: from
decision-making to execution to tracking of trade list status. From a dedicated
workstation at their desks, users can access fully-integrated real-time and
historical data and analytics, execute electronic order routing and perform
trade management functions. To date, trading systems have generally addressed
just one or two of these functions--a situation that has left many users with
the inefficiency of multiple unrelated systems.
QuantEX is a rule-based decision support system that allows traders to
quantify their trading processes. It is designed to implement each client's
trading styles and strategies and to apply them to hundreds of stocks,
portfolios or industry groups at once. With QuantEX, clients can flag precisely
the same kinds of moment-to-moment opportunities they would ordinarily want to
pursue but do it much more efficiently and rapidly.
QuantEX analyzes lists of securities based on the individual user's trading
strategy. QuantEX enables clients to have access to proprietary ITG research,
including pre-trade, post-trade and intra-day analytical tools. QuantEX has
access to the ITG Data Center, which is a comprehensive historical database that
provides a variety of derived analytics based upon raw historical data. ITG's
support specialists translate the trading criteria developed by the client into
a set of trading rules for trading securities, which are then loaded into
QuantEX. QuantEX applies the client's proprietary trading rules to a continuous
flow of current market information on the list of securities selected by the
user to generate real-time decision support. A user's rules can be based on a
wide range of quantitative models or strategies, such as liquidity measures,
technical indicators, price benchmarks, tracking to specific industries and
sectors, pairs or other long or short strategies, index arbitrage, risk
measurements and liquidity parameters for trade urgency, size or timing. These
rules typically serve as a guide in support of a client's trading decisions.
Additionally, QuantEX supports the ability to implement these trading decisions
automatically via an auto-trading strategy.
As such, QuantEX can automate the complex trade management requirements
typical of investment strategies that trade large volumes of securities through
multiple sources of liquidity. Orders can be electronically routed to multiple
markets, including the New York, American and certain regional stock exchanges
and the Nasdaq National Market, POSIT, the Electronic Trading Desk,
over-the-counter market-makers, Bloomberg's Tradebook and selected
broker-dealers. ITG intends to create links to additional electronic
communications networks and other liquidity sources where appropriate. Trades
routed through QuantEX are automatically tracked and summarized. Each order can
be monitored by source of execution, by trade list, by portfolio or globally
with all other orders placed. QuantEX's built-in trade allocation features
provides a facility for automated back-office clearance and settlement.
ITG's support specialists install the system, train users and provide
ongoing support for the use of QuantEX's order routing and analysis
capabilities. Specialists are knowledgeable about portfolio management and
trading as well as the system's hardware and software. ITG's support team works
closely with each client to develop trading strategies and rules, explore new
trading approaches, provide system integration services and implement system
upgrades and enhancements.
Revenues are generated through commissions and transaction fees attached to
each trade electronically routed through QuantEX to the many destinations
available from the application. ITG does not derive royalties from the sale or
licensing of the QuantEX software.
SMARTSERVERS
SmartServers allow clients to send orders to a computer for execution using
a designated trading strategy. Clients may send orders via the Platform and
QuantEX, via direct connections and via the
104
<PAGE>
ITG Electronic Trading Desk. SmartServers implement a trading strategy in an
automated fashion and thereby serve as an additional trading resource, allowing
clients to focus their time and attention on other trading issues.
ITG has introduced its first server-based trading strategy with the VWAP
SmartServer. The VWAP SmartServer is designed to allow clients to direct their
orders to ITG to be executed in a manner designed to closely track a security's
volume-weighted average price or VWAP throughout the trading day. The VWAP
SmartServer analyzes trade size and liquidity and determines the appropriate
order size and order price to approximate the VWAP. Clients may choose to
execute relative to the VWAP price for the entire trading day, or for some
subset of that trading day.
ELECTRONIC TRADING DESK
The Electronic Trading Desk is a full-service agency execution group that
specializes in the use of ITG's proprietary products, including extensive use of
POSIT for trade execution. For clients that do not send orders electronically to
POSIT, ITG account executives receive orders for POSIT matches by telephone,
fax, or email. The desk accepts orders until a POSIT match begins and after
completion of the match execution reports are given verbally to clients who have
placed verbal or fax orders with the desk.
In addition to order management services for POSIT, the Electronic Trading
Desk provides agency execution services. QuantEX and Platform clients deliver
lists of orders electronically to the ITG's desk and, as orders are executed by
the desk, reports are automatically delivered electronically to the client's
terminal. Trading desk personnel are thereby able to assist customers with
decision support analyses generated by ITG Platform or QuantEX and with the
execution of trades. Clients give traders single stock orders or lists of orders
to work throughout the day as well as unfilled orders that remain due to order
imbalances in POSIT matches.
For order completion outside of POSIT match windows, the Electronic Trading
Desk utilizes numerous sources of liquidity to complete the trade. The trading
desk will actively seek the contra side of client orders by soliciting interest
among other clients, use QuantEX to route the orders to multiple markets,
including primary exchanges, regional exchanges, over-the-counter market makers
and electronic communications networks, or use ITG's active order traders to
execute the trade with floor brokers or over-the-counter brokers.
The Portfolio Trading Group of the ITG desk focuses on agency-only list and
program trading. By employing a step-by-step process that leverages technology
and access to multiple sources of liquidity, the Portfolio Trading Group seeks
to systematically achieve high quality execution for the client. A client
program is evaluated with a pre-trade analysis to determine aggregate portfolio
characteristics, liquidity ranking and market impact, and to quantify risk. The
group implements a number of sophisticated trading strategies using QuantEX to
meet execution objectives on an agency or agency incentive basis. After the
execution is completed, ITG provides the client with comprehensive reports
analyzing execution results utilizing ITG Research products.
ITG PLATFORM
ITG Platform, introduced in the first quarter of 1996, provides clients with
seamless connectivity from their desktop to a variety of execution destinations,
such as POSIT, the Electronic Trading Desk, ITG SmartServers, New York Stock
Exchange and American Stock Exchange via SuperDOT, and the Nasdaq National
Market and other over-the-counter market makers. ITG intends to create links to
additional electronic communications networks and other liquidity sources where
appropriate. Orders may be corrected or canceled electronically, and all reports
are delivered electronically back to the ITG Platform. The ITG Platform also
supports special trading interfaces as needed by POSIT 4 applications.
Allocation information can be associated with executions in the ITG Platform and
delivered to ITG
105
<PAGE>
electronically. ITG Platform has access to historical data through the ITG Data
Center, including a wide array of analytics, such as average historical share
volumes, dollar volumes, volatility and historical spread statistics.
The ITG Platform was intended for broad distribution to institutional
clients, so it was designed to run in conventional PC environments alongside
other applications, and be inexpensive to install, maintain and support.
Many technical features support these goals:
- Other PC applications can interact with the ITG Platform using the
Financial Information eXchange FIX data messaging protocol or using "drag
and drop".
- ITG Platform incorporates a spreadsheet package, so users can extend their
trade blotter with custom calculations.
- Custom execution reports can be created to fit each user's requirements.
- ITG Platform can access Bridge and ILX quote data if those systems are
used by the client.
- New versions of ITG Platform are distributed automatically to client sites
and installed without user or ITG intervention.
As of December 31, 1998, there were 507 installations of ITG Platform at 266
client sites.
"ISIS" PRE- AND POST-TRADE ANALYSIS
Accessed through QuantEX, ISIS is an equity pre- and post-trade analysis
system. Via the ISIS facility, QuantEX users can request both aggregate and
stock-by-stock liquidity reports for a trade portfolio prior to and during
execution. Clients can generate standard reports or use a report writer to
design custom reports. Reports can be viewed, printed or saved to a file.
Certain elements of these reports can also be displayed directly on the QuantEX
execution page and referenced in QuantEX strategies. These pre-trade analyses
help QuantEX users make decisions about how best to trade a portfolio, for
example by helping identify the most difficult trades for special handling and
by providing a reference point for evaluating principal trade pricing.
The ISIS post-trade reporting facility allows QuantEX users to compare
actual executed prices to user-selected benchmark prices in order to help assess
trade execution quality. Available benchmarks include the volume-weighted
average price, closing price and opening price. Post-trade reports generated by
ISIS have the same output options as the pre-trade facility, namely on screen,
to a printer or to a file.
ITG/OPT
ITG/Opt is a computer-based equity portfolio selection system that employs
advanced optimization techniques to help investors construct portfolios that
meet their investment objectives. Special features of the system make it
particularly useful to "long/short" and taxable investors, as well as any
investor seeking to control transaction costs. ITG/Opt is usually delivered as a
"turnkey" system that includes software and, in some cases, hardware and data.
Included in the service is telephone and on-site support to assist in training
and integration of the system with the user's other investment systems and
databases. In addition to its core portfolio construction capabilities, ITG/Opt
has powerful backtesting and batch scheduling features that permit efficient
researching of new or refined investment strategies. The system, which is
targeted at highly sophisticated investment applications, is offered primarily
on a value-added basis to ITG's largest clients. Typically, portfolios that are
constructed using ITG/Opt are executed via ITG, using one or more execution
services, such as QuantEX, the Electronic Trading Desk and POSIT 4.
106
<PAGE>
ITG RESEARCH
In addition to its role in the firm's overall research and development
effort, Research provides both sales and consulting services to ITG clients and
prospects. Taken together, these activities are a key component of ITG's overall
relationship development and maintenance activities.
In its sales capacity, Research introduces ITG's clients and prospects to
the full range of products and services offered by the firm and provides
information about features, pricing and technical/ functional specifications.
The sales process includes development of an in-depth understanding of client
practices and requirements and the design and presentation of integrated
solutions based on ITG products.
Consulting encompasses a set of value-added services for the benefit of
ITG's clients. These services break down into two main categories: support for
ITG products, and provision of quantitative analysis. The products supported by
Research are QuantEX, ISIS, Platform, POSIT 4 and ITG/Opt. Support activities
include trading strategy design and implementation, system integration, training
and coordination of technical support. Quantitative analysis covers a broad
range of activities such as transaction cost analysis, investment strategy
simulations and provision of historical time series of proprietary analytics. As
part of its analysis activities, Research publishes and distributes studies on
topics of interest to its clients. In the same way users of fundamental research
compensate the traditional brokerages that provide such research (i.e.,
directing commissions to such brokerage house), ITG clients reward the firm for
these value-added research services.
ITG EUROPE
ITGI is pursuing the international market in a variety of ways, through
joint-ventures with strategic partners and the development of specially-tailored
versions of ITG services. In the fourth quarter of 1998, ITGI and Societe
Generale finalized a 50/50 joint venture through the creation of Investment
Technology Group (Europe) Limited ("ITG Europe"). On November 18, 1998, ITG
Europe launched a new agency brokerage operation that includes the operation of
a European version of the POSIT system ("EuroPOSIT") which currently matches
buyers and sellers of U.K.-listed equities twice daily, at 11:00 a.m. and 3:00
p.m., London time.
AUSTRALIAN POSIT
In 1997, ITG and Burdett, Buckeridge & Young, finalized a 50/50 joint
venture through the creation of ITG Australia Limited, a new international
brokerage firm that applies ITG's cost-saving execution and transaction research
technologies to Australian equity trading. ITG Australia is the culmination of
efforts commenced in 1995 when a license to POSIT was granted to Burdett, one of
Australia's leading brokerage firms. Through this joint venture ITG is pursuing
U.S. business from Australian investors and providing U.S. clients with access
to the Australian marketplace.
CANADIAN QUANTEX
ITG has developed a version of QuantEX for the Canadian markets. This
software is licensed on a perpetual, exclusive, royalty-free basis to VERSUS
Technologies, Inc., a Canadian technology-focused trade automation firm based in
Toronto. The period of exclusivity for the Canadian QuantEX license expires on
December 31, 1999. Pursuant to this license and a series of transactions with
RBC Dominion Securities, the predecessor owner of the VERSUS assets, ITG
received a minority interest in VERSUS. ITG and VERSUS have also entered into
three agreements for trade execution by ITG in POSIT and other United States
markets: (a) a routing agreement pursuant to which VERSUS routes orders of
Canadian registered brokers to ITG, (b) an introducing broker agreement pursuant
to which VERSUS's registered broker affiliate sends institutional orders to ITG,
and (c) an introducing broker agreement pursuant to which VERSUS's registered
broker affiliate sends retail orders to ITG.
107
<PAGE>
ARIZONA STOCK EXCHANGE
ITG is the executing broker for all transactions executed on the Arizona
Stock Exchange ("AZX"). ITG performs this function as a courtesy to its clients.
ITG shares revenues generated from these transactions with Arizona Stock
Exchange.
REGULATION
The securities industry in the United States is subject to extensive
regulation under both federal and state laws. The SEC is the federal agency
responsible for the administration of the federal securities laws. Regulation of
broker-dealers has been primarily delegated to self-regulatory organizations,
principally the National Association of Securities Dealers, Inc. and national
securities exchanges. The National Association of Securities Dealers has been
designated by the SEC as ITG's self-regulatory organization. The self-regulatory
organizations conduct periodic examinations of member broker-dealers in
accordance with rules they have adopted and amended from time to time, subject
to approval by the SEC. Securities firms are also subject to regulation by state
securities administrators in those states in which they conduct business. ITG
Inc. is a registered broker-dealer in 49 states and the District of Columbia.
Broker-dealers are subject to regulations covering all aspects of the
securities business, including sales methods, trade practices among
broker-dealers, use and safekeeping of clients' funds and securities, capital
structure of securities firms, record-keeping and conduct of directors, officers
and employees. Additional legislation, changes in the interpretation or
enforcement of existing laws and rules may directly affect the mode of operation
and profitability of broker-dealers. The SEC, self-regulatory organizations and
state securities commissions may conduct administrative proceedings, which can
result in censure, fine, the issuance of cease-and-desist orders or the
suspension or expulsion of a broker-dealer, its officers or employees. The
principal purpose of regulation and discipline of broker-dealers is the
protection of clients and the securities markets, rather than the protection of
creditors and stockholders of broker-dealers.
ITG Inc. is required by law to belong to the Securities Investor Protection
Corporation. In the event of a broker-dealer's insolvency, the Securities
Investor Protection Corporation fund provides protection for client accounts up
to $500,000 per customer, with a limitation of $100,000 on claims for cash
balances.
REGULATION ATS
Since the formation of the POSIT joint venture, POSIT has operated under a
no-action letter from the SEC staff that it would take no enforcement action if
POSIT were operated without registering as an exchange. As a result, POSIT has
not been registered with the SEC as an exchange, although ITG Inc. is registered
as a broker-dealer and is subject to regulation as such. Material changes to
POSIT currently require prior notice to the SEC pursuant to the conditions of
the no-action letter and under Rule 17a-23 under the Exchange Act. On December
2, 1998, the SEC adopted Regulation ATS, which repeals Rule 17a-23 and
establishes a new regulatory framework for alternative trading systems such as
POSIT. Regulation ATS will allow alternative trading systems to choose to
register as exchanges or as broker-dealers and will require compliance with
informational requirements that are similar to Rule 17a-23. However, POSIT will
no longer be subject to the restrictions of the no-action letter. Upon
effectiveness of Regulation ATS on April 21, 1999, ITG anticipates that it will
continue to operate POSIT as part of its broker-dealer operations and will not
register POSIT as an exchange. There can be no assurance that the SEC will not
in the future seek to impose more stringent regulatory requirements on the
operation of alternative trading systems such as POSIT. In addition, certain of
the securities exchanges have actively sought to have more stringent regulatory
requirements imposed upon automated trade execution systems. There can be no
assurance that Congress will not enact legislation applicable to alternative
trading systems.
108
<PAGE>
NET CAPITAL REQUIREMENT
As a registered broker-dealer, ITG Inc. is subject to the SEC's Uniform Net
Capital Rule (the "Net Capital Rule"). The Net Capital Rule is designed to
measure the general integrity and liquidity of a broker-dealer and requires that
at least a minimum part of its assets be kept in a relatively liquid form.
The Net Capital Rule prohibits a broker-dealer doing business with the
public from allowing the aggregate amount of its indebtedness to exceed 15 times
its adjusted net capital or, alternatively, its adjusted net capital to be less
than 2% of its aggregate debit balances (primarily receivables from clients and
broker-dealers) computed in accordance with the Net Capital Rule. ITG uses the
latter method of calculation.
A change in the Net Capital Rule, imposition of new rules or any unusually
large charge against capital could limit certain operations of ITG Inc. such as
trading activities that require the use of significant amounts of capital.
As of December 31, 1998, ITG Inc. had net capital of $72.0 million, which
exceeded minimum net capital requirements by $71.7 million. If the Transactions
had been completed on December 31, 1998, on a pro forma basis ITG Inc. would
have had regulatory net capital of $10 million, which includes pro forma
borrowing of approximately $1.4 million. See Unaudited Pro Forma Financial Data
including the notes thereto. Based on a closing date of March 31, 1999, ITGI
estimates that ITG Inc. will have excess net regulatory capital of approximately
$20 million. In addition, ITGI has arranged a $20 million revolving credit
facility that it will be entitled to draw on to increase net regulatory capital.
See "Management's Discussion and Analysis of Financial Conditions and Results of
Operations--Liquidity and Capital Resources." Although ITGI believes that the
combination of the existing net regulatory capital, operating cash flows and the
revolving credit facility will be sufficient to meet regulatory capital
requirements, a shortfall in net regulatory capital would have a material
adverse effect on ITGI's business and results of operations.
CREDIT RISK
Although ITG is registered as a broker-dealer, it generally does not perform
traditional broker-dealer services. ITG does not act as a market-maker with
respect to any securities or otherwise as a principal in any securities
transaction; it acts only on an agency basis. Therefore, ITG does not have
exposure to credit risks in the way that traditional broker-dealers have such
exposure. The relatively low credit risk of its business is reflected in the
minimal net capital requirements imposed on ITG as a broker-dealer.
LICENSE AND RELATIONSHIP WITH BARRA
In 1987, JEFCO and BARRA Inc. ("BARRA") formed a joint venture for the
purpose of developing and marketing POSIT. In 1993, JEFCO assigned all of its
rights relating to the joint venture and the license agreement (discussed below)
to ITG.
The technology used to operate POSIT is licensed to ITG pursuant to a
perpetual license agreement between ITG and the joint venture. The license
agreement grants ITG the exclusive right to use certain proprietary software
necessary to the continued operation of POSIT and a non-exclusive license to use
proprietary software that operates in conjunction with POSIT. ITG pays quarterly
royalties to the joint venture to use other proprietary software that operates
in conjunction with POSIT equal to specified percentages of the transaction fees
charged by ITG on each share crossed through POSIT. For the years ended December
31, 1998, 1997 and 1996, BARRA received aggregate royalty payments from the
joint venture of $15.2 million, $9.8 million and $8.8 million, respectively,
under the
109
<PAGE>
license agreement. Under the terms of the joint venture, ITG and BARRA are
prohibited from competing directly or indirectly with POSIT.
The license agreement permits BARRA on behalf of the joint venture to
terminate the agreement upon certain events of bankruptcy or insolvency or upon
an uncured breach by ITG of certain covenants, the performance of which are all
within the control of ITG. Although ITG does not believe that it will experience
difficulty in complying with its obligations under the license agreement, any
termination of the license agreement resulting from an uncured default would
have a material adverse effect on ITG.
Under the license agreement and the terms of the joint venture, BARRA
continues to provide certain support services to ITG in connection with the
operation of POSIT, including computer time, software updates and the
availability of experienced personnel. BARRA also provides support for the
development and maintenance of POSIT.
Under the terms of the joint venture, BARRA generally has the right to
approve any sale, transfer, assignment or encumbrance of ITG's interest in the
joint venture. The POSIT joint venture may earn a royalty from licensing the
POSIT technology to other businesses. The joint venture licensed to ITG and BBY
the right to use the POSIT technology for crossing equity securities in
Australia.
In the third quarter of 1997, BARRA finalized a joint venture with Prebon
Yamane to market POSIT-FRA, the first computer-based system for crossing forward
rate agreements (FRAs). The POSIT joint venture licensed the POSIT software to
Prebon. POSIT-FRA provides a confidential electronic environment where major
financial institutions can match specific sets of FRA contracts to offset
interest rate risk, a condition that is pervasive in interest rate swap
portfolios.
In the fourth quarter of 1998, ITG finalized the formation of ITG Europe
with Societe Generale. The POSIT joint venture has licensed to ITG Europe the
POSIT software.
COMPETITION
The automated trade execution and analysis services offered by ITG compete
with services offered by leading brokerage firms and transaction processing
firms, and with providers of electronic trading and trade order management
systems and financial information services. POSIT also competes with various
national and regional securities exchanges and execution facilities, Nasdaq and
ECNs (such as Instinet) for trade execution services. Many of ITG's competitors
have substantially greater financial, research and development and other
resources. ITG believes that its services compete on the basis of access to
liquidity, transaction costs, market impact cost, timeliness of execution and
probability of trade completion. Although ITG believes that POSIT, QuantEX, ITG
Platform and the Electronic Trading Desk and Research services have established
certain competitive advantages, ITG's ability to maintain these advantages will
require continued investment in the development of its services, additional
marketing activities and customer support services. There can be no assurance
that ITG will have sufficient resources to continue to make this investment,
that its competitors will not devote significantly more resources to competing
services or that ITG will otherwise be successful in maintaining its current
competitive advantages. In addition, ITG cannot predict the effect that changes
in regulation may have on the competitive environment. In particular, the
adoption of Regulation ATS may make it easier for securities exchanges, Nasdaq
or others to establish competing trading systems.
RESEARCH AND PRODUCT DEVELOPMENT
ITG believes that fundamental changes in the securities industry have
increased the demand for technology-based services. ITG devotes a significant
portion of its resources to the development and improvement of these services.
Important aspects of ITG's research and development effort include enhancements
of existing software, the ongoing development of new software and services and
110
<PAGE>
investment in technology to enhance ITG's efficiency. The software programs,
which are incorporated into ITG's services, are subject, in most cases, to
copyright protection. Research and development costs were $11.0 million, $8.4
million, and $6.8 million for 1998, 1997 and 1996, respectively.
In connection with such research and product development and capital
expenditures to improve other aspects of its business, ITG incurs substantial
expenses that do not vary directly, at least in the short term, with
fluctuations in securities transaction volumes and revenues. In the event of a
material reduction in revenues, ITG may not reduce such expenses quickly and, as
a result, ITG could experience reduced profitability or losses. Conversely,
sudden surges in transaction volumes can result in increased profit and profit
margin. To ensure that it has the capacity to process projected increases in
transaction volumes, ITG has historically made substantial capital and operating
expenditures in advance of such projected increases, including during periods of
low transaction volumes. In the event that such growth in transaction volumes
does not occur, the expenses related to such investments could, as they have in
the past, cause reduced profitability or losses. Additionally, during recent
periods of high transaction volumes and increased revenues, ITG has also made
substantial capital and operating expenditures to enhance future growth
prospects.
ITG works closely with BARRA on the development of POSIT enhancements. ITG
expects to continue this level of investment to improve existing services and
continue the development of new services.
DEPENDENCE ON PROPRIETARY INTELLECTUAL PROPERTY; RISKS OF INFRINGEMENT
ITGI's success is dependent, in part, upon its proprietary intellectual
property. ITGI generally relies upon patents, copyrights and trademarks to
establish and protect its rights in its proprietary technology, methods and
products. A third party may still try to challenge, invalidate or circumvent the
protective mechanisms that ITGI selects. ITGI cannot assure that any of the
rights granted under any patent, copyright or trademark ITGI may obtain will
protect its competitive advantages. In addition, the laws of some foreign
countries may not protect ITGI's proprietary rights to the same extent as the
laws of the United States.
There are numerous patents in the computer and financial industries and new
patents are being issued at a rapid rate. Therefore, it is not economically
practicable for ITGI to determine in advance whether any of its products or any
of its components or a service or method infringes the patent rights of others.
It is likely that from time to time, ITGI will receive notices from others of
claims or potential claims of intellectual property infringement or ITGI may be
called upon to defend a joint venture partner, customer, vendee or licensee
against such third party claims. Responding to these kinds of claims, regardless
of merit, could consume valuable time, result in costly litigation or cause
delays, all of which could have a material adverse effect on ITGI. Responding to
these claims could also require ITGI to enter into royalty or licensing
agreements with the third parties claiming infringement. Such royalty or
licensing agreements, if available, may not be available on terms acceptable to
ITGI.
In February 1999, ITGI became aware of patents purportedly owned by Belzberg
Financial Markets & News International Inc. and Sydney Belzberg, an officer of
that company (the "Belzberg Patents"). One or more of the Belzberg Patents may
relate to the devices, means and/or methods that ITGI and/or its customers,
licenses or joint venture partners use in the conduct of business. On March 5,
1999, a Canadian licensee of some of ITGI's technology, received a letter
asserting that the licensee was infringing one of the Belzberg Patents. The
licensee has denied the claims of infringement and has asserted that the
Belzberg Patent at issue is invalid or unenforceable. Under certain conditions,
ITGI may have a duty to defend or indemnify the licensee for any costs or
damages arising out of an infringing use of the technology ITGI has licensed to
them. ITGI is monitoring the matter and may participate in any challenge to the
Belzberg Patent the licensee may make.
111
<PAGE>
ITGI is unaware of any actual claims of patent infringement leveled against
it or any of its customers or joint venture partners by any of the title owners
of the Belzberg Patents. Based upon our review to date ITGI believes that any
such claims arising out of the Belzberg Patents would be without merit and it
would vigorously defend any such claim, including, if warranted, initiating
legal proceedings. However, intellectual property disputes are subject to
inherent uncertainties and there can be no assurance that any potential claim
could be resolved favorably to ITGI or that it would not have a material adverse
affect on ITGI. ITGI will monitor the Belzberg Patent situation and take action
accordingly.
EMPLOYEES
As of December 31, 1998, ITG employed 261 personnel.
112
<PAGE>
MANAGEMENT OF GROUP AND NEW JEF
THE BIOGRAPHICAL DATA OF THE MEMBERS OF MANAGEMENT OF GROUP, BEFORE GIVING
EFFECT TO THE TRANSACTIONS, AND OF NEW JEF, AFTER GIVING EFFECT TO THE
TRANSACTIONS, IS SET FORTH BELOW.
DIRECTORS
Set forth below is information concerning the directors of Group, all of
whom, with the exception of Mr. Herrick, will serve as directors of New JEF
following the completion of the Spin-Off.
FRANK E. BAXTER, 62, has been Chairman of the Board since September 26,
1990, Chief Executive Officer since March 19, 1987, and a Director of Group and
of JEFCO since 1975. Mr. Baxter has previously served as President of Group and
of JEFCO from January 1986 until December 1996, Executive Vice President,
National Sales Manager and New York Branch Manager of JEFCO, and Managing
Director of Group's U.K. subsidiary. Mr. Baxter has been a Director of ITGI
since March 1994, and was a Director of ITG, ITGI's wholly owned broker-dealer
subsidiary, from January 1994 through January 1997. Mr. Baxter has also been a
member of the Board of Governors of the National Association of Securities
Dealers, Inc. since January 1998, and a member of the Board of Directors of the
Securities Industry Association since November 1995.
RICHARD G. DOOLEY, 69, has been a Director of Group since November 1993.
From 1978 until his retirement in June 1993, Mr. Dooley was Executive Vice
President and Chief Investment Officer of Massachusetts Mutual Life Insurance
Company ("Mass Mutual"); Mr. Dooley is currently a consultant to Mass Mutual.
Mr. Dooley has also been a director of Advest Group, Inc. since 1983, HSB Group,
Inc. since 1984, Kimco Realty Corporation since 1990, ITGI from 1996 to January
1999 and various Mass Mutual sponsored investment companies. Mr. Dooley is also
a trustee of Saint Anselm College and Chairman of the Board of The Nellie Mae
Foundation and Corporation. Mr. Dooley is Chairman of Group's Compensation
Committee and a member of the Audit Committee.
RICHARD B. HANDLER, 37, has been a Director of Group since May 1998, an
Executive Vice President of JEFCO since April 1990 and a Director of JEFCO since
May 1993. Mr. Handler is the Manager of the Taxable Fixed Income Division of
JEFCO.
TRACY G. HERRICK, 65, has been a Director of Group since 1983 and of JEFCO
since 1981. He is also President of Tracy G. Herrick, Inc., an economic
consulting firm, a Director of Anderson Capital Management, a registered
investment adviser, a Director of The Committee for Monetary Research and
Education and is a member of the advisory Board of the San Xavier Foundation of
Monterey, California.
MICHAEL L. KLOWDEN, 53, has been a Director of Group since May 1987 and the
President and Chief Operating Officer of Group and of JEFCO since December 1996.
From May 1995 until December 1996, he was Vice Chairman of Group and of JEFCO.
Mr. Klowden has been a Director of JEFCO since May 1995, and has been a trustee
of the University of Chicago since 1986. From 1978 until May 1995, Mr. Klowden
was a senior partner of Morgan, Lewis & Bockius LLP, a law firm that renders
legal services to Group. Mr. Klowden was a Director of ITGI from January 1997 to
January 1999.
SHELDON B. LUBAR, 69, has been a Director of Group since January 1998. He
has been Chairman of the Board of Lubar & Co. Incorporated, an investment
banking firm, since 1977. From 1986 to the present, he has also been Chairman of
the Board of Christiana Companies, Inc., a New York Stock Exchange listed
company that supplies refrigerated warehousing and logistics. Mr. Lubar has also
been a Director of EVI, Inc. since 1995, Ameritech Corporation since 1993, MGIC
Investment Corporation since 1991, Firstar Corporation since 1986, Weatherford
International, Inc. since 1995 and of Massachusetts Mutual since 1977.
113
<PAGE>
FRANK J. MACCHIAROLA, 57, has been a Director of Group since August 1991. He
is currently the President of St. Francis College, where he has served in that
capacity since July 1996. He also serves as special counsel to the law firm of
Newman, Tannenbaum, Halpern, Syracuse & Hirschtritt LLP. Previously. Mr.
Macchiarola was a Professor of Law and Political Science and the Dean of the
Benjamin N. Cardozo School of Law at Yeshiva University in New York City from
1991 to 1996, Professor of Business in the Graduate School of Business at
Columbia University from 1987 to 1991, and President and Chief Executive Officer
of the New York City Partnership, Inc. from 1983 to 1987 and prior to 1985, he
was a faculty member at the City University of New York and Chancellor of the
New York City Public School System. Mr. Macchiarola has been a Trustee of the
Manville Personal Injury Trust since 1991. Mr. Macchiarola is Chairman of
Group's Audit Committee and a member of the Compensation Committee.
OTHER EXECUTIVE OFFICERS
The executive officers of Group and New JEF are appointed by the Group and
New JEF Boards, respectively, and serve at the discretion of the Group and New
JEF Boards, respectively. Other than Messrs. Baxter, Handler and Klowden, for
whom information is provided above, the following sets forth information as to
the other executive officers of Group and New JEF:
GARY BURNISON, 37, has been the Senior Vice President--Corporate Development
since July 1998, the Treasurer of Group since January 1997 and a Director of
JEFCO since November 1995. Mr. Burnison has also been responsible for strategic
planning and analysis for Jefferies. Prior to November, 1995, Mr. Burnison was a
Partner with KPMG Peat Marwick ("KPMG") responsible for its Investment Banking
and Advisory practice in the Southwestern U.S.
JERRY M. GLUCK, 51, has been Secretary and General Counsel of Group and
JEFCO since May 1985 and a Director of JEFCO since November 1984. From March
1994 until September 1995, Mr. Gluck was the Secretary of ITGI.
CLARENCE T. SCHMITZ, 50, has been an Executive Vice President and the Chief
Financial Officer of Group and an Executive Vice President and a Director of
JEFCO since February 1995. Prior to 1990, Mr. Schmitz founded and chaired KPMG
International Mergers and Acquisitions Group. From 1990 until May 1993, Mr.
Schmitz was the Managing Partner of KPMG's Los Angeles Business Unit and a
member of KPMG's Board of Directors. From June 1993 until January 1995, Mr.
Schmitz was the National Managing Partner for KPMG's Manufacturing, Retailing
and Distribution line of business, and was a member of KPMG's Management
Committee.
MAXINE SYRJAMAKI, 54, has been Controller of Group since May 1987, an
Executive Vice President of JEFCO since November 1986 and the Chief Financial
Officer and a director of JEFCO since September 1984.
RAYMOND L. KILLIAN, JR., as Chairman, President and Chief Executive officer
of Group's subsidiary, ITGI, is an executive officer of Group, but will not
serve as an executive officer of New JEF. Biographical information concerning
Mr. Killian can be found under "Management of ITGI and New ITGI."
DIRECTOR COMPENSATION
NEW JEF
Each non-employee Director of New JEF (Messrs. Dooley, Lubar, and
Macchiarola) will receive an annual retainer of $20,000, paid quarterly, $1,000
for attendance at each of six regular meetings of the Board, and $2,000 for
attendance at each special meeting of the Board. In addition, the Chairmen of
the Audit and Compensation Committees will be paid an annual fee of $3,000, and
Directors will receive $750 for each Committee meeting attended.
114
<PAGE>
Under the Directors' Plan, if approved by stockholders, each non-employee
Director may elect to receive annual retainer and Chairman's fees in the form of
stock options and/or to defer receipt of any Director fees in a deferred cash
account or as deferred shares. If a Director elects to be paid fees in the form
of options, the number of options granted will be that number having an
aggregate value, determined under a modified "Black-Scholes" option valuation
model or another valuation methodology, equal to the amount of such fees. Such
options will have a term of ten years, and an exercise price per share equal to
100% of the fair market value of a share at the date of grant. If fees are
deferred in cash, interest will be credited at a rate specified by the Board. If
fees are deferred in the form of deferred shares, New JEF will credit the
Director's deferral account with a number of deferred shares equal to the number
of shares having an aggregate fair market value at the date the fees otherwise
would be payable equal to the amount of fees deferred. Dividend equivalents will
be credited on such deferred shares, which amounts will be deemed to be
reinvested in additional deferred shares. Deferrals will be settled at such time
as the Director has elected in a deferral election form.
In addition, under the Directors' Plan, each non-employee Director will be
automatically granted, each year, an option to purchase 4,000 shares of New JEF
Common Stock upon effectiveness of the Spin-Off and after each annual
stockholder's meeting at which he is elected a Director. A newly elected
Director is also automatically granted an option to purchase 5,000 shares under
the plan. Options which are automatically granted under the plan will have an
exercise price equal to 100% of the fair market value of a share at the date of
grant, become exercisable three months after the date of grant, and expire at
the earliest of five years after the date of grant, 12 months after the optionee
ceases to serve as a Director due to death, disability or retirement or sixty
days after the optionee ceases to serve as a Director for any other reason.
Directors who are also employees of New JEF will not be paid Directors' fees
and will not be granted options for serving as Directors.
During fiscal year 1998, Tracy G. Herrick, a Director of Group, who will not
serve on the New JEF Board, provided the Brokerage and Investment Banking
Business with certain financial and other consulting services. Mr. Herrick was
paid $126,000 for his services.
Each Director may participate in New JEF's Charitable Gifts Matching Program
pursuant to which New JEF will match 50% of charitable contributions made by a
Director, up to a maximum dollar amount of $1,500 per person per year.
The children of Directors may also participate (along with the children of
all employees of New JEF) in the Stephen A. Jefferies Educational Grant Program
which provides scholarship awards for secondary and post-secondary education
based on factors such as financial need, academic merit and personal statements.
The grants are made by an independent scholarship committee, none of whose
members is affiliated with New JEF.
115
<PAGE>
EXECUTIVE COMPENSATION
Shown below is information concerning the annual and long-term compensation
for services in all capacities to Group or ITGI (as appropriate) for the fiscal
years ended December 31, 1998, 1997 and 1996 for the Chief Executive Officer and
four most highly compensated executive officers of Group as of December 31,
1998, all of whom will serve as executive officers of New JEF in connection with
the Spin-Off, and for the two individuals who served during fiscal 1998 as Chief
Executive Officer of ITGI (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
AWARDS
ANNUAL COMPENSATION(1) ------------
------------------------------------
(E)
OTHER (F)
(A) ANNUAL RESTRICTED
NAME AND PRINCIPAL (B) (C) (D) COMPEN- STOCK
POSITION YEAR SALARY BONUS SATION(2) AWARD(S)
- -------------------------------- --------- --------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Frank E. Baxter................. 1998 400,000 818,918 15,848 1,638,082(4)
Chairman and Chief Executive 1997 400,000 818,918 16,228 2,088,082
Officer of Group 1996 400,000 601,240 12,289 150,000
Jerry M. Gluck.................. 1998 214,000 166,000 4,299 79,448(6)
Secretary and General Counsel 1997 214,000 161,000 3,842 --
of Group 1996 214,000 131,000 2,802 --
Richard B. Handler.............. 1998 250,000 8,135,197 15,963 3,320,061(6)
Executive Vice President of 1997 500,000 17,105,403 14,971 --
Group and Manager of the 1996 500,000 7,897,172 14,005 --
Taxable Fixed Income Division
of Jefferies
Michael L. Klowden.............. 1998 300,000 1,023,000 15,664 826,411(7)
President and Chief Operating 1997 300,000 1,050,750 13,405 650,250
Officer of Group 1996 275,000 825,000 11,394 275,000
Clarence T. Schmitz............. 1998 275,000 756,750 14,596 294,969(7)
Executive Vice President 1997 275,000 703,500 13,538 234,500
and Chief Financial Officer of 1996 275,000 693,750 8,767 231,250
Group
Raymond L. Killian, Jr.(8)...... 1998 300,000 1,672,477 53,624 --
Chairman, President and Chief 1997 300,000 475,957 5,483 --
Executive Officer of ITGI 1996 295,184 725,957 11,477 --
Scott P. Mason(9)............... 1998 219,423 11) 956,250 26,708 --
Former President and 1997 296,538 549,557 11,600 --
Chief Executive Officer of 1996 240,580 -- -- --
ITGI
<CAPTION>
(G) PAYOUTS
SECURITIES ------------
UNDER- (I)
(A) LYING (H) ALL OTHER
NAME AND PRINCIPAL OPTIONS/ LTIP COMPEN-
POSITION SARS PAYOUTS SATION(3)
- ---------------------------------- ------------ -----------
<S> <C> <C>
Frank E. Baxter.................-- 1,487,660 81,004
Chairman and Chief Executive 72,000 2,628,322 90,940
Officer of Group -- 1,465,857 77,504
Jerry M. Gluck..................-- -- 33,172
Secretary and General Counsel 10,000 -- 30,527
of Group -- -- 26,853
Richard B. Handler..............-- -- 78,485
Executive Vice President of -- -- 82,826
Group and Manager of the -- -- 84,561
Taxable Fixed Income Division
of Jefferies
Michael L. Klowden..............-- -- 62,662
President and Chief Operating 40,000 -- 54,239
Officer of Group 126,000 -- 33,759
Clarence T. Schmitz.............-- -- 36,740
Executive Vice President 10,000 -- 31,273
and Chief Financial Officer of106,000 -- 22,305
Group
Raymond L. Killian, Jr.(8)......-- -- 54,632
Chairman, President and Chief -- -- 68,294
Executive Officer of ITGI -- -- 59,981
Scott P. Mason(9)...............-- 6,988
Former President and 1,000,000(10) 8,216
Chief Executive Officer of -- --
ITGI
</TABLE>
116
<PAGE>
- ------------------------
1 The amounts shown include cash and non-cash compensation earned by the Named
Executive Officers as well as amounts earned but deferred at the election of
those Named Executive Officers.
2 Each Named Executive Officer participating in the Group CAP Plan was
credited with units representing shares of Group's Common Stock ("CSUs") at
a price equal to eighty-five percent (85%) of Group's average cost per share
of the shares available for distribution in the Group CAP Plan. Group's
average cost per share is based upon the average cost of shares repurchased
specifically for purposes of the Group CAP Plan and held as treasury shares
pending distribution upon settlement of CSUs. During each calendar quarter,
each Group CAP Plan participant defers receipt of compensation, part of
which is credited to his or her cash account. At the end of the quarter, the
cash account is debited by an amount equal to the number of CSUs multiplied
by 85% of the average cost per share. During 1998, the amount of the 15%
discount on the CSUs with respect to each Named Executive Officer was as
follows: Mr. Baxter: $15,848; Mr. Gluck: $4,299; Mr. Handler: $15,963; Mr.
Klowden: $15,664; and Mr. Schmitz: $14,596.
3 The total amounts for 1998 shown in the "All Other Compensation" column
include the following:
a. Group's matching contributions under Group's Section 401(k) plan. During
the plan year ended November 30, 1998, Mr. Baxter received $12,650 as
Group's matching contribution. Messers. Gluck, Handler, Klowden, Schmitz
and Killian each received $13,800 as Group's matching contributions. Mr.
Mason received $2,500 as Group's matching contribution.
b. Allocations resulting from forfeitures under Group's ESOP. During the
plan year ended November 30, 1998 Messrs. Baxter, Gluck, Handler, Klowden
and Schmitz's accounts were each credited with 3.095 shares at an
original cost of $10.875 per share, for a total of $34.00 each, as a
result of such forfeitures.
c. Group's matching contributions to Group's Employee Stock Purchase Plan
("ESPP"). During the year ended December 31, 1998, the Named Executive
Officers received the following total matching contributions: Mr. Baxter
and Mr. Gluck: $5,400; and Mr. Klowden: $18,900.
d. Contributions of $2,683 and forfeiture allocations of $1,410 for each of
Messrs. Baxter, Gluck, Handler, Klowden, Schmitz, Killian and Mason under
Group's Profit Sharing Plan.
e. Dividend equivalents and interest payments to the cash accounts of the
Named Executive Officers under the Group CAP Plan paid at a rate equal to
the average percentage rate JEFCO paid on its margin accounts carrying
credit balances, as follows: Mr. Baxter: $11,731; Mr. Gluck: $1,751; Mr.
Handler: $12,357; Mr. Klowden: $4,342; Mr. Schmitz: $3,068; Mr. Killian:
$6,918; and Mr. Mason: $395.
f. An amount of "deemed interest" credited to each participant's Group CAP
account. The Group CAP Plan participants defer a portion of their cash
compensation to Profit-Based Deferred Compensation Accounts. The amount
of "deemed interest" is determined by multiplying (1) the daily weighted
average amount in the Group CAP Plan participant's Profit-Based Deferred
Compensation Account by (2) an interest rate equal to 100% of the fully-
diluted earnings per share (if any) of Common Stock for that fiscal year
divided by the fair market value of a share at the end of the preceding
year. In 1998, the Named Executive Officers received the following
amounts of such "deemed interest" under the Group CAP Plan: Mr. Baxter:
$47,096; Mr. Gluck: $8,094; Mr. Handler: $48,201; Mr. Klowden: $21,493;
Mr. Schmitz: $15,745; and Mr. Killian: $29,821.
4. In prior years, incentive compensation which was deferred was considered
Long-Term Compensation and reported as "phantom shares" in a "Long-Term
Incentive Plan Awards Table" in the year awarded, and as "LTIP Payouts" in
the year it became payable. As a result of amendments to Mr. Baxter's
Incentive Compensation Plan under Group's Pay-for-Performance
117
<PAGE>
Plan, compensation earned in 1998 is being reported as a grant of Restricted
Stock in this Proxy/ Information Statement. However, compensation previously
reported as grants of long-term incentive compensation in 1996 continues to
be treated as such; the settlement of phantom shares which constitute such
long-term incentive compensation and as to which the risk of forfeiture
lapsed in 1998 is reported in the "LTIP Payouts" column for 1998. Under Mr.
Baxter's Incentive Compensation Plan for 1998, two-thirds of Mr. Baxter's
annual bonus was deferred, one-half of which generally was to become payable
on each of December 31, 1999 and December 31, 2000 (the "deferred incentive
compensation"). The amount of deferred incentive compensation was calculated
by dividing that portion of the 1998 incentive compensation which was
deferred ($1,638,082) by the closing price of Group's Common Stock on
December 31, 1998 ($49.625), and designating the result (33,009) as "phantom
shares" of Group's Common Stock. The amount of the deferred incentive
compensation to be actually paid to Mr. Baxter is determinable as of the
time it is to be paid, generally by multiplying (a) the number of phantom
shares by (b) the sum of (1) the closing price of Group's Common Stock on
the first trading day coincident with or following the close of Group's
fiscal year and (2) the amount of dividends, if any, declared on shares of
Group's Common Stock during the years of deferral. The total number of
phantom shares and shares of restricted stock held by Mr. Baxter on December
31, 1998 (including phantom shares credited in respect of 1998 but excluding
phantom shares settled as of that date) was 65,737, with an aggregate value
of $3,262,199. In 1999, in connection with the Spin-Off and Merger, the
Compensation Committee terminated and settled on an accelerated basis 53,016
phantom shares (including the phantom shares credited for 1998) and dividend
equivalents relating thereto, with the amount paid for each phantom share
equal to the fair market value of a share of Common Stock on the date of
settlement.
5. Pursuant to Mr. Baxter's Incentive Compensation Plan, a portion of Mr.
Baxter's 1996 incentive compensation was converted as of December 31, 1996
into 29,783 phantom shares which became payable on December 31, 1998, at a
closing price of $49.625, together with dividend equivalents totaling $9,679
for a long-term compensation payout of $1,487,660.
6. Mr. Gluck's 1998 Restricted Stock Award represents 1,585 shares of
restricted stock granted as of January 27, 1999 at a price of $50.125 per
share, as a portion of his bonus for 1998. Mr. Handler's 1998 Restricted
Stock Award represents 66,903 shares of restricted stock granted as of
December 31, 1998 at a price of $49.625 per share, as a portion of his bonus
for 1998. These awards entitle the executive to receive dividends on the
shares of restricted stock. Mr. Gluck held no shares of restricted stock at
December 31, 1998, and Mr. Handler held no shares of restricted stock at
that date other than the Restricted Stock Award he received on that date,
the aggregate value of which is shown in the table.
7. Under Mr. Klowden's and Mr. Schmitz's Incentive Compensation Plans, adopted
pursuant to Group's Pay-for-Performance Plan, one fourth of each of Mr.
Klowden's and Mr. Schmitz's annual bonus was deferred generally to become
payable on December 31, 1999 (the "deferred incentive compensation"). For
Mr. Klowden, the portion of the 1998 incentive compensation which was
deferred ($341,000) was converted into 6,872 "phantom shares" based on the
closing price of Group's Common Stock on December 31, 1998 ($49.625). For
Mr. Schmitz, the portion of the 1998 incentive compensation which was
deferred ($227,250) was converted into 4,579 "phantom shares" based on the
closing price of Group's Common Stock on December 31, 1998 ($49.625). The
amount of the incentive compensation to be actually paid to Mr. Klowden and
Mr. Schmitz is determinable as of the time it is to be paid, generally by
multiplying (a) the number of phantom shares by (b) the sum of (1) the
closing price of Group's Common Stock on the first trading day coincident
with or following the close of Group's fiscal year and (2) the amount of
dividends, if any, declared on shares of Group's Common Stock during the
years of deferral. Mr. Klowden's and Mr. Schmitz's 1998 Restricted Stock
Awards also includes 9,684 and 1,351 shares of restricted stock,
respectively, granted to Mr. Klowden and Mr. Schmitz on January 27, 1999 at
a price of
118
<PAGE>
$50.125 per share for an aggregate of $485,411 and $67,719, respectively, as
a portion of their bonuses for 1998. These Restricted Stock Awards vest one
year after the date of grant, and entitle the executive to receive dividends
on the shares of restricted stock. The total number of phantom shares and
shares of restricted stock held by Mr. Klowden and Mr. Schmitz at December
31, 1998 (including phantom shares credited in respect of 1998 but excluding
phantom shares settled as of that date and excluding Restricted Stock Awards
granted in 1999 in respect of 1998 performance) were 15,353 and 4,579,
respectively, with an aggregate value of $761,893 and $227,233,
respectively. In 1999, in connection with the Spin-Off and Merger, the
Compensation Committee terminated and settled on an accelerated basis the
phantom shares credited for 1998 to Mr. Klowden and Mr. Schmitz by
converting each phantom share to a cash obligation equal to the fair market
value of a share of Common Stock on the date of settlement.
8. Mr. Killian served as President and Chief Executive Officer of ITGI from
1994 to 1997 and has served as President and Chief Executive Officer since
September 1998.
9. Mr. Mason died on September 7, 1998.
10. Represents grant of ITGI stock options by ITGI.
11. Represents amounts paid by ITGI to Mr. Mason in his capacity as ITGI's
consultant during 1996.
No stock options were granted by Group to the Named Executive Officers
during 1998.
The following chart reflects year-end values of Group Options held by the
Named Executive Officers:
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
(A) (B) (C) (D) (E)
<S> <C> <C> <C> <C>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-
UNDERLYING UNEXERCISED THE-MONEY OPTIONS/SARS
SHARES VALUE OPTIONS/SARS AT FY-END AT FY-END ($)
ACQUIRED ON REALIZED (#) EXERCISABLE (E)/ EXERCISABLE/
NAME EXERCISE (#) ($) UNEXERCISABLE (U) UNEXERCISABLE(1)
- -------------------------------------- ----------------- ----------------- -------------------------- ------------------------
Frank E. Baxter....................... -- -- 72,000 (E) $ 1,953,000
Jerry M. Gluck........................ -- -- 10,000 (U) $ 260,000
Richard B. Handler.................... -- -- -- --
Michael L. Klowden.................... -- -- 254,000 (E) $ 7,367,000
Clarence T. Schmitz................... -- -- 186,000 (E) $ 6,921,125
Raymond L. Killian, Jr................ -- -- -- --
Scott P. Mason........................ -- -- -- --
</TABLE>
- ------------------------
1. At December 31, 1998, the closing price of Group's Common Stock was $49.625,
which was the price used to determine the year-end value tables in Column
(e).
PENSION PLAN
All employees of Group prior to April 1, 1997, who are citizens or residents
of the United States, who are 21 years of age, and who have completed one year
of service with Group are covered by the Jefferies Group, Inc. Employees'
Pension Plan (the "Pension Plan"), a defined benefit plan, which was originally
adopted in 1964 and amended in January 1987. The Pension Plan is funded through
contributions by Group and earnings on existing assets in conformance with
annual actuarial evaluations. The Pension Plan provides for annual benefits
following normal retirement at age 65 equal to 1% of the employee's covered
remuneration from January 1, 1987, until termination of employment plus 20% of
the first $4,800 and 50% of amounts exceeding $4,800 of annual average covered
remuneration for 1985 and 1986, reduced proportionately for service of less than
fifteen years (as of
119
<PAGE>
December 31, 1986). Benefits are payable under the Pension Plan for the lifetime
of the participant, and are not subject to deduction for Social Security
benefits or other offsets.
Covered remuneration for purposes of the Pension Plan includes the
employee's total annual compensation (salaries, bonuses and commissions) not to
exceed $100,000 for 1985 and 1986, and $200,000 for 1987. From 1988 through
1993, this latter dollar limitation was adjusted automatically for each plan
year to the amount prescribed by the Secretary of the Treasury, or his delegate,
for such plan year. From 1994 until 1996, the maximum covered remuneration was
$150,000. The maximum covered remuneration for 1997 is $160,000. An employee who
retires upon normal retirement at age 65 with at least four years of service
will receive a full vested benefit. An employee who retires at age 55 with at
least four years of service will receive the normal retirement benefit reduced
by 1/2% for each month benefit payments commence before age 65. Employees who
terminate employment with Group for reasons other than death or retirement will
be entitled to the vested portion of their benefits at their normal or early
retirement age. Benefits vest at the rate of 0% for the first year of service,
33% for each of the next two years of service, and 34% for the fourth year of
service. The retirement benefits payable at age 65 for those employees with
service prior to January 1, 1987, will be composed of two items: (1) a benefit
for service up to December 31, 1986, in accordance with the original Pension
Plan formula recognizing pay as the average of 1985 and 1986 remuneration up to
$100,000, and (2) a benefit for service commencing on January 1, 1987, equal to
1% of covered remuneration through the date of termination. Total years of
credited service apply to both the original and amended Pension Plans for
purposes of determining vesting and eligibilities.
As of December 31, 1998, the estimated annual benefits payable upon
retirement at normal retirement age for each of the Named Executive Officers of
Group are: Mr. Baxter: $52,494; Mr. Gluck: $50,739; Mr. Handler: $61,461; Mr.
Klowden: $25,400; and Mr. Schmitz: $30,200.
IMPACT OF THE SPIN-OFF AND MERGER ON GROUP'S EMPLOYEE BENEFIT PLANS
The Spin-Off will cause Group to transfer to New JEF or terminate its
employee benefit plans. Termination of any such plans may result in the
acceleration of benefits, vesting or payouts under certain of these plans. Set
forth below is a description of the impact by the Spin-Off on the employee
benefit plans.
In considering the recommendation of our Board with respect to the Merger,
Stockholders should be aware that certain executive officers, including some
officers who are also directors, have certain interests in the Merger and the
Spin-Off that are different from, or in addition to, the interests of
Stockholders generally. See "Summary--The Transactions; Interest of Certain
Persons in the Transactions."
JEFFERIES GROUP, INC. STOCK OWNERSHIP AND LONG-TERM INCENTIVE PLAN; NEW JEF
INCENTIVE PLAN
The Compensation Committee of the Board of Directors of Group has
accelerated the vesting of all stock options issued before January 1, 1998 in
order to facilitate the exercise of these options before the Spin-Off and the
Merger. The following table sets forth the number of shares of Group Common
Stock subject to accelerated vesting for the benefit of all Group directors and
executive officers in connection with the Transactions:
<TABLE>
<CAPTION>
NUMBER OF OPTIONS WHICH
BECOME VESTED
NAME PRIOR TO THE MERGER
- --------------------------------------------------------------------- -------------------------
<S> <C>
Jerry M. Gluck....................................................... 5,000
Gary D. Burnison..................................................... 5,000
Maxine Syrjamaki..................................................... 5,000
</TABLE>
Optionees holding Group options granted after January 1, 1998 may
participate in the Replacement Option Exchange and exchange such Group options
for options of New JEF that have
120
<PAGE>
terms that are designed to preserve the inherent value and contractual rights of
the Group options surrendered in the Replacement Option Exchange.
The directors and executive officers of Group who will serve as directors
and executive officers of New JEF, will be entitled to participate in
compensation plans and programs adopted from time to time by New JEF. It is
anticipated that directors will receive stock option awards under the Directors'
Plan and that executive officers and employees of New JEF will receive an award
of options of New JEF pursuant to the Incentive Plan, in connection with the
consummation of the Spin-Off. For information concerning director awards and
information generally regarding compensation plans and programs that have been
adopted by New JEF, see "--Approval of the 1999 Incentive Compensation Plan" and
"--Approval of the 1999 Directors' Stock Compensation Plan." Awards have not
been formally approved under the Incentive Plan, but it is anticipated that
option grants covering approximately 800,000 shares of New JEF Common Stock
(which includes Make-Whole Grants) will be granted to executive officers of New
JEF, as a group, with an exercise price determined by reference to volume
weighted average trading prices for New JEF Common Stock during the five trading
days after the Spin-Off.
JEFFERIES GROUP, INC, CAPITAL ACCUMULATION PLAN FOR KEY EMPLOYEES
Under the Group CAP Plan, participants defer receipt of a portion of their
compensation (for a period of three to five years, at the participant's
election), and participants have the deferred amounts credited equally to two
accounts under the Group CAP Plan: under one account, participants receive
credits of interest equal to Group's latest fiscal year's earnings per share
divided by the preceding fiscal year's closing price per share for Group Common
Stock; and under the other account, participants are credited with "Group Common
Stock Units" in their accounts. The Group Common Stock Units are credited to a
participant's account at a price equal to 85% of (i.e., at a 15% discount to)
Group's average cost per share of shares purchased by Group under the Group CAP
Plan. Participants receive distributions of cash and Group Common Stock in
settlement of these two accounts upon the expiration of the deferral period
which they have elected.
In order to prepare for the Spin-Off, Group terminated the Group CAP Plan in
January of 1999. In connection with the termination of the Group CAP Plan, Group
distributed CAP Plan balances without accelerating the vesting of benefits or
earnings not already credited to participants' accounts. Participants (except
for Messrs. Baxter, Handler, Killian, Klowden and Schmitz, who will have CAP
Plan balances transferred in cash to a deferred compensation plan) will be
responsible for the accelerated payment of the accrued tax liabilities in
connection with the Group CAP Plan Termination.
JEFFERIES GROUP, INC. EMPLOYEE STOCK PURCHASE PLAN
Under the ESPP, employees of Group's subsidiaries (other than ITGI) may
authorize monthly payroll deductions for the purpose of purchasing Group Common
Stock on the open market through unaffiliated broker-dealers. Group contributes
an amount equal to 15% of each employee's individual monthly payroll deduction
for the purpose of purchasing additional shares of Group Common Stock and, if
Group's net profits meet performance criteria set by its Board, an additional
15% contribution is made (contributions by Group are referred to as the "ESPP
Matching Contribution"). The ESPP Matching Contribution vests two years after it
is made. In connection with the Spin-Off, Group terminated the ESPP, and
participants immediately vested with respect to previously non-vested Matching
Contributions. Group Executive Officers who are also participants in the ESPP
will receive the following number of shares of Group Common Stock as a result of
the accelerated vesting of the ESPP Matching Contribution: Mr. Baxter, 258
shares; Mr. Klowden, 899 shares; Mr. Burnison, 87 shares; and Mr. Gluck 258
shares.
121
<PAGE>
JEFFERIES GROUP, INC. 401(K)/EMPLOYEES' PROFIT SHARING PLAN ("PSP")
All employees of Group who have completed at least 1,000 hours of service
are covered by the PSP. The PSP provides for discretionary employer
contributions as determined annually by Group's Board of Directors. Subject to
limitations imposed by the Code, Group's contribution is allocated among
eligible participants in the ratio that compensation of each participant for the
year bears to compensation of all participants for the PSP year. The PSP also
has a salary reduction feature designed to qualify under Code Section 401(k) of
the Code. A participant may elect to have a portion of his or her compensation
(subject to certain limitations and restrictions) contributed by Group to the
PSP. Group matches a participant's voluntary contributions at a rate of 25%,
although matching contributions may be higher if Group meets performance
criteria set by its Board. The discretionary and matching contributions by Group
to the PSP are immediately vested for participants who have four years or more
service with Group and contributions for all other participants vest at the rate
of 0% for the first year of service, 33% in each of the next two years of
service, and 34% in the fourth year of service. All executive officers of Group
have completed sufficient service with Group so as to be eligible for immediate
vesting on discretionary and matching contributions or will, in the ordinary
course, be fully eligible for immediate vesting within sixty days of the
proposed Merger.
JEFFERIES GROUP, INC. EMPLOYEE STOCK OWNERSHIP PLAN; NEW JEF EMPLOYEE STOCK
OWNERSHIP PLAN
Between 1988 and 1992, in lieu of contributions to the PSP by Group, Group
contributed to the Group ESOP, Group Common Stock on behalf of eligible
participants who, over time, had such Group Common Stock allocated to their
individual ESOP accounts. As of November 30, 1992, all shares available under
the ESOP had been allocated to the accounts of ESOP participants; however, to
the extent shares were (or are) forfeited as a result of termination of
employment by ESOP participants who had not fully vested in their ESOP
allocations, shares were allocated (and continue to be allocated) to eligible
participants.
In connection with the Spin-Off, all active participants will immediately
vest in Group's contributions to their accounts by the ESOP. However, all of
Group's executive officers were fully vested in Group's contributions to the
ESOP prior to the Spin-Off and without regard to any acceleration.
In connection with the Spin-Off, New JEF will assume the Group ESOP (to be
redesignated as the New JEF ESOP) and Group participants who are New JEF
employees will have their Group ESOP account balances maintained under the New
JEF ESOP and Group ESOP participants who are New ITGI employees will have their
Group ESOP account balances transferred to the New ITGI ESOP. Immediately after
the Spin-Off, participants will have New JEF ESOP account balances that consist
of New JEF Common Stock distributed through the Spin-Off and New ITGI Common
Stock following the Merger, in lieu of the Group Common Stock balances allocated
under the Group ESOP prior to the Transactions. In accordance with Code and
ERISA requirements, shares of New ITGI Common Stock held by the New JEF ESOP
will be sold in an orderly fashion over a reasonable period of time following
the Spin-Off, and all proceeds from such sales will be used to purchase
additional New JEF Common Stock for allocation to participants' accounts. For a
period of five years after the Spin-Off, it is anticipated that, in addition to
the allocations described above, allocations to participants' accounts of New
JEF Common Stock equal to approximately 100,000 shares per year will be made.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Exchange Act requires Group's Directors and Executive
Officers, and persons who beneficially own more than 10% of Group's outstanding
Common Stock, to file with the SEC, by a specified date, initial reports of
beneficial ownership and reports of changes in beneficial ownership of Group
Common Stock and other equity securities of Group on Forms 3, 4 and 5.
Directors, Executive
122
<PAGE>
Officers, and greater-than-10% shareholders are required by SEC regulations to
furnish Group with copies of all Section 16(a) forms they file.
On November 21, 1998, Mr. Baxter sold 100,000 shares of Group Common Stock,
which was not reported on a Form 4. Mr. Baxter reported these sales on a Form 5
pertaining to the 1998 calendar year. Other than these transactions, to Group's
knowledge, based solely on its review of the copies of such reports furnished to
Group and written representations that no other reports were required, Group
believes that all of its officers and directors and greater-than-10% beneficial
owners complied with all Section 16(a) filing requirements applicable to them
with respect to those transactions during 1998.
123
<PAGE>
MANAGEMENT OF ITGI AND NEW ITGI
THE BIOGRAPHICAL DATA OF THE MEMBERS OF MANAGEMENT OF ITGI AND NEW ITGI,
AFTER GIVING EFFECT TO THE MERGER, IS SET FORTH BELOW.
DIRECTORS
Set forth below is information concerning the directors of ITGI, all of whom
will serve as directors of New ITGI.
RAYMOND L. KILLIAN, JR., 61, has been the Chairman of the Board of ITGI
since January 1997 and a director of ITGI since March 1994. Mr. Killian served
as the President and Chief Executive Officer of ITGI from March 1994 through
January 1997 and has resumed his service in such capacity since Mr. Mason's
death in September 1998. He has directed the activities of ITG since 1987 and
has been Chairman of the Board of ITG since 1997. Mr. Killian was a director of
Group from January 1997 to January 1999, was an Executive Vice President of
Group from 1985 to 1995, a director and an Executive Vice President of JEFCO
from 1985 to 1991 and served as National Sales Manager of JEFCO from 1985 to
1990.
FRANK E. BAXTER, 62, has been a director of ITGI since March 1994. Mr.
Baxter has been Chairman of the Board of Group since 1990, Chief Executive
Officer of Group since 1987, and a director of Group and JEFCO since 1975. Mr.
Baxter has previously served as President of Group and JEFCO from January 1986
until December 1996. Prior to 1986, Mr. Baxter served as Executive Vice
President, National Sales Manager and New York Branch Manager of JEFCO and as
the Managing Director of Group's U.K. subsidiary.
NEAL S. GARONZIK, 52, has been a director of ITGI since February 1999. From
1980 until 1989 and 1993 until 1997 Mr. Garonzik was with Morgan Stanley, most
recently as a member of that firm's management committee and head of its equity
division. During his tenure with Morgan Stanley, he served in various
capacities, among them head of global equity capital markets, head of the
financial institutions group in the merger and acquisition department, head of
firm-wide marketing and managing director in the merchant banking (private
equity) department. From 1989 to 1993, Mr. Garonzik was with SGK Partners, LP,
of which he was a founding general partner. From 1972 until 1980, he was a
securities salesman for Goldman, Sachs & Co., in Boston and London.
WILLIAM I JACOBS, 57, has been Executive Vice President-Global Resources of
MasterCard International, Inc. since January 1995. From 1993 to 1994, Mr. Jacobs
served as a financial consultant to several firms and universities. Mr. Jacobs
was founder, Executive Vice President, Chief Operating Officer and a director of
Financial Security Assurance, a monoline bond insurer, from 1985 to 1993 and,
prior to 1985, the President and Managing General Partner of S&B Insurance
Services Company. Mr. Jacobs has been a director of ITGI since June 1994.
ROBERT L. KING, 48, has been the President, Chief Operating Officer and a
director of Corporate Express, Inc., a distributor of office and computer
supplies, since 1993. Prior to 1993, Mr. King was employed by FoxMeyer
Corporation, a distributor of health and pharmaceutical products, where he was
Chief Executive Officer from 1989 to 1993, President from 1988 to 1993 and Chief
Operating Officer from 1988 to 1989. Mr. King has been a director of ITGI since
June 1994.
MARK A. WOLFSON, 46, was a director of Group from July 1991 to January 1999,
a managing partner at Oak Hill Capital Management Inc., a private investment
company since 1998, a principal of Arbor Investors, LLC, a private investment
company, since 1995, and Vice President of Keystone, Inc., the primary
investment vehicle of Robert M. Bass, since 1995. He is also a professor at the
Graduate School of Business, Stanford University, where he has been a faculty
member since 1977, including a term as Associate Dean from 1990 through 1993. He
has also taught at the University of Chicago and Harvard University. Mr. Wolfson
has been a director of Integrated Orthopaedics Inc. since 1997. Mr. Wolfson has
been a director of ITGI since June 1994.
124
<PAGE>
OTHER EXECUTIVE OFFICERS
The executive officers of ITGI are appointed by, and serve at the discretion
of, the ITGI Board. Other than Mr. Killian, for whom information is provided
above, the following sets forth information as to the other executive officers
of ITGI.
YOSSEF A. BEINART, 42, joined ITG in 1992. As Executive Vice President, he
is responsible for research and development and technology matters, and is the
Chief Information Officer of ITG. From 1988 to 1991, Mr. Beinart was Vice
President of Development of Integrated Analytics Corporation.
ANGELO BULONE, 33, has been Vice President and Controller of ITGI since
November 1998. Mr. Bulone joined ITG as the manager of ITG's internal and
external financial and regulatory accounting in April 1997. Prior to joining
ITG, Mr. Bulone held the position of Vice President and Controller at I/B/E/S
International, Inc. from 1993 to 1997.
DAVID C. CUSHING, 37, is Executive Vice President and Director of Research
for ITG. He joined ITG in 1991 as a Vice President of Sales and Trading and
formed the research department in 1992. From 1986 to 1991, Mr. Cushing was a
Vice President in the Equity Derivatives and Program Trading Department at
Lehman Brothers, Inc.
CHRISTOPHER J. HECKMAN, 38, has been a Senior Vice President and Head of
Sales of ITG since March 1998. He joined ITG in January 1991 as a sales trader
and became manager of institutional sales and trading in January 1997.
TIMOTHY H. HOSKING, 39, is Senior Vice President, General Counsel and
Secretary of ITGI. Prior to joining ITGI, Mr. Hosking worked for The Fremont
Group from August 1991 until June 1997, maintaining a variety of positions,
including General Counsel of Fremont Partners, L.P., a private equity
partnership.
JOHN R. MacDONALD, 43, is Senior Vice President and Chief Financial Officer
of ITGI. Mr. MacDonald joined ITGI as Vice President and CFO in March 1994.
Prior to joining ITGI, from November 1989 through March 1994, Mr. MacDonald was
a Vice President and Group Manager of the Financial Division of Salomon Brothers
Inc.
NANCY M. PAULIKAS, 38, has been a Senior Vice President and Director of
Software Development since April 1998. She joined ITG in March 1993 as a Senior
Software Engineer, and became manager of Unix trading systems development in
September of 1996. Prior to joining ITG, Ms. Paulikas was with TRW where she
held a variety of positions in software development and technical management.
ROBERT J. RUSSEL, 44, is Executive Vice President of ITG and is leading
ITG's Strategic Planning and Business Development efforts. Mr. Russel joined ITG
as Senior Vice President in November 1996. Prior to joining ITG, Mr. Russel
spent nine years with Reuters in a variety of senior roles including General
Management, Business Development, Technology, and Marketing and Sales.
STEVEN J. SORICE, 38, has been a Senior Vice President and Head of Trading
of ITG since March 1998. He joined ITG in September 1994 as the manager of
broker-dealer trading. Prior to joining ITG, Mr. Sorice was with ESI Securities,
L.P. ("ESI") from 1988 to 1994. During his tenure with ESI, Mr. Sorice was Head
of the International Desk and a Vice President of Sales and Trading and was a
partner of the firm from 1993 until 1994.
JAMES MARK WRIGHT, 39, has been a Senior Vice President of ITG since
December 1994. From 1992 through November 1994, Mr. Wright was a Vice President
of ITG. From 1990 through 1991, Mr. Wright was a Vice President of Integrated
Analytics Corporation. From 1984 through 1990, Mr. Wright was the Director of
Development of Inference Corporation, a company engaged in the development of
artificial intelligence systems.
125
<PAGE>
BENEFICIAL OWNERSHIP OF GROUP COMMON STOCK BY DIRECTORS, OFFICERS AND
PRINCIPAL STOCKHOLDERS OF GROUP
The following table sets forth certain information regarding beneficial
ownership of Group Common Stock by (1) each person known by Group to
beneficially own more than 5% of Group's Common Stock, (2) each Director, (3)
each Executive Officer named in the Summary Compensation Table and (4) all
Directors and Executive Officers as a group. The information set forth below is
as of March 1, 1999. Information regarding stockholders other than Directors,
Executive Officers and employee benefit plans is based upon information
contained in Schedules 13D or 13G filed with the SEC and furnished to Group by
such stockholders. The number of shares beneficially owned by each stockholder
and the percentage of the outstanding Common Stock those shares represent
include shares that may be acquired by that stockholder within 60 days through
the exercise of any option, warrant or right. Unless otherwise indicated in a
footnote and subject to applicable community property and similar statutes, each
person listed as the beneficial owner of the shares possesses sole voting and
dispositive power with respect to such shares. The mailing address of the
parties listed below is Group's principal business address unless otherwise
indicated.
<TABLE>
<CAPTION>
SHARES OF PERCENTAGE OF
COMMON STOCK COMMON STOCK
BENEFICIALLY BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNER OWNED OWNED
- ------------------------------------------------------------------------------- -------------- ---------------
<S> <C> <C>
Jefferies Group, Inc. Employee Stock Ownership Plan............................ 2,074,165(1) 8.9%
Tweedy, Browne Company L.P. and Affiliates..................................... 1,689,744(2) 7.3%
52 Vanderbilt Ave., 8th Floor
New York, New York 10017
Frank E. Baxter................................................................ 1,562,863(3) 6.7%
The Guardian Life Insurance Company Of America and Affiliates.................. 1,182,308(4) 5.1%
201 Park Avenue South
New York, New York 10003
Richard B. Handler............................................................. 572,263(5) 2.5%
Raymond L. Killian, Jr......................................................... 332,256(6) 1.4%
Michael L. Klowden............................................................. 259,542(7) 1.1%
Clarence T. Schmitz............................................................ 150,130(8) *
Tracy G. Herrick............................................................... 53,503(9) *
Richard G. Dooley.............................................................. 64,436(10) *
Frank J. Macchiarola........................................................... 53,586(11) *
Jerry M. Gluck................................................................. 43,449(12) *
Sheldon B. Lubar............................................................... 10,472(13) *
All Directors and Executive Officers........................................... 3,162,681(14) 13.6%
</TABLE>
126
<PAGE>
- ------------------------
* The percentage of shares beneficially owned does not exceed one percent of
the class.
(1) Amounts reported above are based upon information supplied by the ESOP as of
December 31, 1998. The terms of the ESOP provide for the voting rights
associated with the shares held by the ESOP to be passed through and
exercised exclusively by the participants in the ESOP to the extent that
such securities are allocated to a participant's account. See "Management of
Group and New JEF--Impact of the Spin-Off on Group's Employee Benefit
Plans." Shares held by the ESOP and allocated to the accounts of Directors
and Executive Officers are indicated in the ESOP figure referenced above and
are also included elsewhere in the table and in the succeeding notes to the
table, where appropriate. The ESOP and the Trustee of the ESOP (Wells Fargo
Bank) may be deemed to have shared dispositive power over the shares held by
the ESOP. The Board of Directors of Group appoints the members of the
committee which serves as the Plan Administrator of the ESOP. Messrs. Frank
E. Baxter, a Director of Group, Alan D. Browning, an Executive Vice
President of JEFCO, and Melvin W. Locke, Jr., Director of Human Resources of
Group, presently serve on the committee. These individuals each disclaim
beneficial ownership of the shares held by the ESOP except those shares
allocated to his ESOP account.
(2) Tweedy, Browne Company L.P., a Delaware limited partnership ("TBC"),
together with TBK Partners, L.P., a Delaware limited partnership ("TBK"),
and Vanderbilt Partners L.P., a Delaware limited partnership ("Vanderbilt"),
filed a combined statement on Schedule 13D dated and reporting beneficial
ownership at February 6, 1997, and as of the date hereof, had not filed an
amended Schedule 13D. The holdings for TBC and related entities are
therefore based on the 1997 Schedule 13D, as adjusted for the December 1997
Stock Split. As adjusted, TBC reported beneficial ownership of 1,405,860
shares (6.8% of the outstanding class), with sole voting power over
1,211,000 shares and shared dispositive power over all 1,405,860 shares. TBK
reported having sole voting and dispositive power over 226,040 shares.
Vanderbilt reported having sole voting and dispositive power over 57,844
shares. The aggregate number of shares with respect to which TBC, TBK and
Vanderbilt could be deemed to be the beneficial owner is 1,689,744 shares
(8.2% of the outstanding class). As of February 6, 1997, the three general
partners in Vanderbilt (Christopher H Browne, William H. Browne, and John D.
Spears) were the three general partners of TBC and are also three of the
four general partners of TBK (Thomas P. Knapp was also a general partner of
TBK, but is not a general partner of TBC or Vanderbilt). The general
partners in each of TBC, TBK, and Vanderbilt, as the case may be, solely by
reason of their positions as such, may be deemed to have shared power to
vote and dispose of the shares held by TBC, TBK, and Vanderbilt,
respectively.
(3) Includes 9,026 shares Mr. Baxter holds as custodian for his children's
accounts; 34,900 shares held under the ESOP; and 298,008 shares held under
the PSP. Participants in the ESOP have sole voting power and no dispositive
power over shares allocated to their ESOP accounts. Participants in the PSP
have sole voting power and limited dispositive power over shares allocated
to their PSP accounts. Mr. Baxter also owns 4,122 shares (less than 1% of
the outstanding class) of the common stock of ITGI.
(4) The Guardian Life Insurance Company of America ("Guardian"), Guardian
Investor Services Corporation ("GISC"), The Guardian Park Ave. Fund
("GPAF"), The Guardian Stock Fund, Inc. ("GSF"), The Guardian Park Avenue
Small Cap Fund ("GPASCF"), The Guardian Small Cap Stock Fund, Inc.
("GSCSF"), The Guardian Life Insurance Company of America Master Pension
Trust ("Guardian MPT"), and The Guardian Employees' Incentive Savings Plan
("GEISP") filed a group Schedule 13G dated February 11, 1998, reporting
beneficial ownership at December 31, 1997. The members of the group reported
having voting and dispositive power as follows: Guardian reported sole
voting and dispositive power over 497,736 shares and shared voting and
dispositive power over 132,172 shares; GISC reported shared voting and
dispositive power over
127
<PAGE>
552,400 shares; GPAF reported shared voting and dispositive power over
200,000 shares; GSF reported shared voting and dispositive power over
338,000 shares; GPASCF reported shared voting and dispositive power over
8,300 shares; GSCSF reported shared voting and dispositive power over 6,100
shares; Guardian MPT reported shared voting and dispositive power over
52,172 shares; and GEISP reported shared voting and dispositive power over
80,000 shares.
(5) Includes 10,544 shares held under the ESOP.
(6) Includes 26,176 shares held under the ESOP, 30,325 shares held under the PSP
and 4,920 shares held by members of his immediate family, as to which he
disclaims beneficial ownership. Mr. Killian also owns 564,836 shares (2.9%
of the outstanding class) of ITGI Common Stock, 548,978 of which are subject
to immediately exercisable options.
(7) Includes 40,000 shares subject to immediately exercisable options and 87
shares held under the ESOP. Mr. Klowden also owns 1,000 shares (less than 1%
of the outstanding class) of ITGI common stock.
(8) Includes 87 shares held under the ESOP and 3,065 shares under the PSP.
(9) Includes 18,000 shares subject to immediately exercisable options and 13,048
held by the Tracy G. Herrick, Inc. D.B.P.P. for the benefit of Mr. Herrick
as to which Mr. Herrick has shared investment power.
(10) Includes 25,612 shares subject to immediately exercisable options. Mr.
Dooley also beneficially owns 22,000 shares (less than 1% of the outstanding
class) of ITGI Common Stock, 15,000 of which are subject to immediately
exercisable options.
(11) Includes 21,612 shares subject to immediately exercisable options. Mr.
Macchiarola also beneficially owns 6,600 shares (less than 1% of the
outstanding class) of ITGI Common Stock.
(12) Includes 10,000 shares subject to immediately exercisable options, 20,633
shares held by the Trustee of the ESOP, and 661 shares held by the Trustee
of the PSP.
(13) Includes 2,134 shares held by Mr. Lubar's spouse and 5,353 shares subject
to immediately exercisable options.
(14) Includes 313,577 shares subject to options, all of which are immediately
exercisable, 113,720 shares held under the ESOP for Executive Officers as a
group and 334,004 shares held under the PSP for Executive Officers as a
group. In addition, all Directors and current Executive Officers as a group
beneficially own 598,558 shares of ITGI (3.2% of the outstanding class) of
which 563,978 shares are subject to immediately exercisable options.
128
<PAGE>
EXPERTS
The consolidated financial statements of ITGI and Group as of December 31,
1998, 1997, 1996, 1995 and 1994 and for each of the years in the five-year
period ended December 31, 1998 have been incorporated by reference herein in
reliance upon the reports of KPMG LLP, independent certified public accountants,
upon authority of said firm as experts in accounting and auditing.
OTHER MATTERS; STOCKHOLDER PROPOSALS FOR THE 2000 ANNUAL MEETINGS
OF NEW JEF AND NEW ITGI
As of the date of this Proxy/Information Statement, the Group Board knows of
no matters that will be presented for consideration at the Group Special
Meeting, other than as described in this Proxy Statement. If any other matters
shall properly come before the Group Special Meeting or any adjournments or
postponements thereof and shall be voted upon, the enclosed proxies will be
deemed to confer discretionary authority on the individuals named as proxies
therein to vote the shares represented by such proxies as to any such matters.
The persons named as proxies intend to vote or not vote in accordance with the
recommendation of the Group Board and management of Group.
New JEF will hold the annual meeting of its stockholders in March of 1999
and will convene its next annual meeting of stockholders in May of 2000.
Stockholders who intend to present proposals for consideration at the 2000
annual meeting of stockholders of New JEF are hereby advised that any such
proposals must be received by the Secretary of New JEF no later than the close
of business on November 30, 1999, if such proposal is to be considered for
inclusion in the 2000 annual meeting proxy materials of New JEF.
The deadline for submitting stockholder proposals for inclusion in New
ITGI's 1999 annual meeting proxy materials was November 30, 1999 and, since no
such proposals were timely submitted, no stockholder proposals will be included
in New ITGI's 1999 annual meeting proxy materials. Stockholders of New ITGI who
intend to present proposals for consideration at the 2000 annual meeting of
stockholders are hereby advised that any such proposals must be received by the
Secretary of New ITGI no later than the close of business on November 30, 1999,
if such proposal is to be considered for inclusion in the 2000 annual meeting
proxy materials of New ITGI.
WHERE YOU CAN FIND MORE INFORMATION
As required by law, we file reports, proxy statements and other information
with the SEC. These reports, proxy statements and other information contain
additional information about Group. You can inspect and copy these materials at
the SEC's Public Reference Room at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549, and at the following Regional Offices of the SEC: 500
West Madison Street, Suite 1400, Chicago, Illinois 60661; and 7 World Trade
Center, Suite 1300, New York, New York 10048. For further information concerning
the SEC's Public Reference Rooms, you may call the SEC at 1-800-SEC-0330. Some
of this information may also be accessed on the World Wide Web through the SEC's
Internet address at HTTP://WWW.SEC.GOV. You can also inspect these materials at
the offices of the New York Stock Exchange, 20 Broad Street, New York, New York
10005.
The SEC allows us to "incorporate by reference" information into this
Proxy/Information Statement, which means that we can disclose important
information by referring you to another document filed separately with the SEC.
Information incorporated by reference is considered part of this
Proxy/Information Statement, except to the extent that the information is
superseded by information in this Proxy/Information Statement. This
Proxy/Information Statement incorporates by reference the information contained
in Group's Annual Report on Form 10-K for the year ended December 31, 1998
previously filed by us with the SEC (SEC file number 1-11665):
129
<PAGE>
We also incorporate by reference the information contained in all other
documents we file with the SEC after the date of this Proxy/Information
Statement and before the Special Meeting. The information contained in any such
document will be considered part of this Proxy/Information Statement from the
date the document is filed.
If you are a stockholder of Group and would like to receive a copy of any
document incorporated by reference into this Proxy/Information Statement (which
will not include any of the exhibits to the document other than those exhibits
that are themselves specifically incorporated by reference into this
Proxy/Information Statement), you should call or write to Jefferies Group, Inc.,
11100 Santa Monica Boulevard, 11th Floor, Los Angeles, California 90025,
Attention: Jerry Gluck (telephone: (310) 914-1300). In order to ensure timely
delivery of the documents prior to the Special Meeting, any request should be
made not later than April 2, 1999.
Certain information about ITGI is incorporated by reference into this
Proxy/Information Statement. Information incorporated by reference is considered
part of this Proxy/Information Statement, except to the extent that the
information is superseded by information in this Proxy/ Information Statement.
This Proxy/Information Statement incorporates by reference the information
contained in ITGI's Annual Report on Form 10-K for the year ended December 31,
1998 previously filed by ITGI with the SEC (SEC file No. 0-23644):
130
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
INDEX TO UNAUDITED PROFORMA FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Introduction............................................................................................... F-2
Unaudited Proforma Consolidated Statements of Financial Condition as of December 31, 1998 and 1997......... F-3
Unaudited Proforma Consolidated Statements of Earnings for the Three Years Ended
December 31, 1998........................................................................................ F-4
Unaudited Proforma Consolidated Statements of Changes in Stockholders' Equity for the
Three Years Ended December 31, 1998...................................................................... F-5
Unaudited Proforma Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1998....... F-6
Unaudited Proforma Notes to Consolidated Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
INTRODUCTION
The accompanying unaudited pro forma consolidated statements of financial
condition of JEF Holding Company, Inc. and subsidiaries as of December 31, 1998
and 1997 and the related unaudited pro forma 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, assumes the proposed Spin-Off
was consummated and reflects the historical unaudited pro forma consolidated
financial statements of JEF Holding Company, Inc., as successor to Group. The
proposed Spin-Off is contingent upon the necessary approvals by both Group and
ITGI stockholders. Upon the receipt of the necessary approvals, ITGI will be
reported as a discontinued operation. As a result, for purposes of these
unaudited pro forma consolidated financial statements, ITGI is reported as a
discontinued operation. In connection with the Spin-Off, it is anticipated that
certain events will take place that will increase both JEF Holding, Inc.'s
stockholders' equity and the number of shares outstanding. The accompanying
unaudited pro forma consolidated statement of financial condition does not
reflect these events. To see the pro forma effect of these events, see Unaudited
Pro Forma Condensed Consolidated Statement of Financial Condition of New JEF at
pages 80.
F-2
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
UNAUDITED PROFORMA 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 unaudited proforma consolidated financial statements.
F-3
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
UNAUDITED PROFORMA 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 unaudited proforma consolidated financial statements.
F-4
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
UNAUDITED PROFORMA 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
COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE
STOCK CAPITAL EARNINGS STOCK INCOME (LOSS)
------------- ----------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1995.................................. $ 93 $ 58,117 $ 192,234 $ (63,075) $ (1,108)
Exercise of stock options, including tax benefits (352,460
shares)................................................... 1 2,555 -- 97 --
Purchase of 2,320,352 shares of treasury stock.............. -- -- -- (36,766) --
Issuance of common stock (71,388 shares).................... -- 770 -- -- --
Issuance of restricted stock, including tax benefits and
additional vesting (68,864 shares)........................ -- 1,083 -- -- --
Capital Accumulation Plan distributions, including tax
benefits (39,186 shares).................................. -- 138 -- 340 --
Net increase in proportionate share of subsidiary's
equity.................................................... -- -- (1,115) -- --
Comprehensive income:
Net earnings.............................................. -- -- 43,560 -- --
Other comprehensive income (loss), net of tax:
Currency translation adjustment........................... -- -- -- -- 426
Additional minimum pension liability adjustment........... -- -- -- -- 33
-------
Other comprehensive income (loss)......................... 459
Comprehensive income........................................ -- -- -- -- --
Dividends paid ($.0875 per share)........................... -- -- (1,883) -- --
Redemption of rights ($.0025 per right)..................... -- -- (55) -- --
Two-for-one stock split..................................... 94 (94) -- --
----- ----------- ----------- ----------- -------
Balance, December 31, 1996.................................. 188 62,569 232,741 (99,404) (649)
Exercise of stock options, including tax benefits (240,028
shares)................................................... 2 3,431 -- -- --
Purchase of 1,063,026 shares of treasury stock.............. -- -- -- (23,584) --
Issuance of common stock (41,052 shares).................... -- 879 -- 3 --
Issuance of restricted stock, including tax benefits and
additional vesting (198,888 shares)....................... -- 3,666 -- -- --
Capital Accumulation Plan distributions, including tax
benefits (143,228 shares)................................. -- 508 -- 1,289 --
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 -- --
Comprehensive income:
Net earnings.............................................. -- -- 63,567 -- --
Other comprehensive income (loss), net of tax:
Currency translation adjustment........................... -- -- -- -- (526)
Additional minimum pension liability adjustment........... -- -- -- -- (967)
-------
Other comprehensive income (loss)......................... (1,493)
Comprehensive income........................................
Dividends paid ($.125 per share)............................ -- -- (2,515) -- --
Two-for-one stock split..................................... 112 (112) -- -- --
----- ----------- ----------- ----------- -------
Balance, December 31, 1997.................................. 224 39 271,589 (26,954) (2,142)
Exercise of stock options, including tax benefits (737,125
shares)................................................... 7 15,144 -- -- --
Purchase of 334,234 shares of treasury stock................ -- -- -- (13,815) --
Issuance of common stock (53,286 shares).................... 1 2,180 -- -- --
Issuance of restricted stock, including tax benefits and
additional vesting (182,095 shares)....................... 2 8,170 -- (22) --
Capital Accumulation Plan distributions, including tax
benefits (305,690 shares)................................. -- 3,410 -- 3,666 --
Net decrease in proportionate share of subsidiary's
equity.................................................... -- -- 7,337 -- --
Comprehensive income:
Net earnings.............................................. -- -- 69,682 -- --
Other comprehensive income (loss), net of tax:
Currency translation adjustment........................... -- -- -- -- 573
Additional minimum pension liability adjustment........... -- -- -- -- (149)
-------
Other comprehensive income (loss)......................... 424
Comprehensive income........................................
Dividends paid ($.20 per share)............................. -- -- (4,167) -- --
----- ----------- ----------- ----------- -------
Balance, December 31, 1998.................................. $ 234 $ 28,943 $ 344,441 $ (37,125) $ (1,718)
----- ----------- ----------- ----------- -------
----- ----------- ----------- ----------- -------
<CAPTION>
NET
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balance, December 31, 1995.................................. $ 186,261
Exercise of stock options, including tax benefits (352,460
shares)................................................... 2,653
Purchase of 2,320,352 shares of treasury stock.............. (36,766)
Issuance of common stock (71,388 shares).................... 770
Issuance of restricted stock, including tax benefits and
additional vesting (68,864 shares)........................ 1,083
Capital Accumulation Plan distributions, including tax
benefits (39,186 shares).................................. 478
Net increase in proportionate share of subsidiary's
equity.................................................... (1,115)
Comprehensive income:
Net earnings.............................................. 43,560
Other comprehensive income (loss), net of tax:
Currency translation adjustment........................... 426
Additional minimum pension liability adjustment........... 33
-------------
Other comprehensive income (loss)......................... 459
-------------
Comprehensive income........................................ 44,019
Dividends paid ($.0875 per share)........................... (1,883)
Redemption of rights ($.0025 per right)..................... (55)
Two-for-one stock split..................................... --
-------------
Balance, December 31, 1996.................................. 195,445
Exercise of stock options, including tax benefits (240,028
shares)................................................... 3,433
Purchase of 1,063,026 shares of treasury stock.............. (23,584)
Issuance of common stock (41,052 shares).................... 882
Issuance of restricted stock, including tax benefits and
additional vesting (198,888 shares)....................... 3,666
Capital Accumulation Plan distributions, including tax
benefits (143,228 shares)................................. 1,797
Retirement of treasury shares (15,600,000 shares)........... --
Net decrease in proportionate share of subsidiary's
equity.................................................... 1,558
Comprehensive income:
Net earnings.............................................. 63,567
Other comprehensive income (loss), net of tax:
Currency translation adjustment........................... (526)
Additional minimum pension liability adjustment........... (967)
-------------
Other comprehensive income (loss)......................... (1,493)
-------------
Comprehensive income........................................ 62,074
Dividends paid ($.125 per share)............................ (2,515)
Two-for-one stock split..................................... --
-------------
Balance, December 31, 1997.................................. 242,756
Exercise of stock options, including tax benefits (737,125
shares)................................................... 15,151
Purchase of 334,234 shares of treasury stock................ (13,815)
Issuance of common stock (53,286 shares).................... 2,181
Issuance of restricted stock, including tax benefits and
additional vesting (182,095 shares)....................... 8,150
Capital Accumulation Plan distributions, including tax
benefits (305,690 shares)................................. 7,076
Net decrease in proportionate share of subsidiary's
equity.................................................... 7,337
Comprehensive income:
Net earnings.............................................. 69,682
Other comprehensive income (loss), net of tax:
Currency translation adjustment........................... 573
Additional minimum pension liability adjustment........... (149)
-------------
Other comprehensive income (loss)......................... 424
-------------
Comprehensive income........................................ 70,106
Dividends paid ($.20 per share)............................. (4,167)
-------------
Balance, December 31, 1998.................................. $ 334,775
-------------
-------------
</TABLE>
See accompanying notes to unaudited proforma consolidated financial statements.
F-5
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
UNAUDITED PROFORMA 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 unaudited proforma consolidated financial statements.
F-6
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PROFORMA CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying unaudited proforma 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 unaudited proforma
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
unaudited proforma 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.
F-7
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PROFORMA 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
unaudited proforma consolidated statements of financial condition (see note 13
of the notes to unaudited proforma 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.
F-8
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PROFORMA 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).
F-9
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PROFORMA 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 unaudited
proforma 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
F-10
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PROFORMA 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
F-11
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PROFORMA CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
are excluded from the unaudited proforma 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.
F-12
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PROFORMA 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>
F-13
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PROFORMA 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.
F-14
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PROFORMA 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>
F-15
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PROFORMA 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 and liabilities 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.
F-16
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PROFORMA 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 unaudited proforma consolidated
statements of financial condition and unaudited proforma 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>
F-17
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PROFORMA 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
F-18
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PROFORMA 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
F-19
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PROFORMA 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>
F-20
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PROFORMA 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,
F-21
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PROFORMA 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.
F-22
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PROFORMA 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.
F-23
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PROFORMA 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 $ 12,619
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
unaudited proforma 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 unaudited proforma 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
F-24
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PROFORMA 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.
F-25
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PROFORMA 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>
F-26
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PROFORMA 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
F-27
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PROFORMA 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
F-28
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PROFORMA 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.
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>
F-29
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PROFORMA 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.
F-30
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PROFORMA 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 -- --
------------ ------------
7.5$0--32.10........ 2,888,106 2.2 $ 16.21 2,722,282 $ 15.77
------------ ------------
------------ ------------
</TABLE>
F-31
<PAGE>
JEF HOLDING COMPANY, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PROFORMA 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 Unaudited
Proforma 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>
F-32
<PAGE>
Appendix A
AGREEMENT AND PLAN OF MERGER
Agreement and Plan of Merger (this "AGREEMENT"), dated as of the 17th day of
March, 1999, by and between JEFFERIES GROUP, INC., a Delaware corporation
("JEFG"), and INVESTMENT TECHNOLOGY GROUP, INC., a Delaware corporation ("ITGI",
and, together with JEFG, the "CONSTITUENT CORPORATIONS").
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 ITGI and its subsidiaries will be separated from all other
assets, businesses and Liabilities of JEFG;
WHEREAS, JEFG and JEF Holding Company, Inc., a Delaware corporation and
wholly-owned subsidiary of JEFG ("HOLDING"), concurrently herewith are entering
into a Distribution Agreement (the "DISTRIBUTION AGREEMENT"), which provides
that (x) JEFG will transfer to Jefferies & Company, Inc., a Delaware corporation
and wholly-owned subsidiary of JEFG ("JEFCO"), prior to the time that JEFCO
becomes a subsidiary of Holding in connection with the Contribution (defined
below), and to Holding, and JEFCO and Holding will accept from JEFG, all of
JEFG's assets other than JEFG's capital stock in ITGI (collectively, the
"CONTRIBUTION"), and JEFG will assign to Holding (or to JEFCO, as appropriate),
and Holding and JEFCO (as appropriate) will assume from JEFG, all JEFG
liabilities excluding all liabilities of, or related to, ITGI (the "ASSUMPTION")
(such transfer and acceptance pursuant to the Contribution and such assignment
and assumption pursuant to the Assumption being collectively referred to herein
as the "TRANSFERS"), and (y) all of the outstanding common stock of Holding (the
"Holding Common Stock") will be distributed in a pro rata dividend (the
"DISTRIBUTION") to JEFG's stockholders;
WHEREAS, as of March 16, 1999, ITGI declared a dividend in an amount equal
to $4.00 per share in cash payable on the business day immediately succeeding
the consummation of the pre-closing to the Merger referred to in Sections 2, 8,
9 and 10 hereof (the "PRE-CLOSING") to all its stockholders of record as of
April 20, 1999, including JEFG (the "SPECIAL ITGI CASH DIVIDEND");
WHEREAS, following the Special ITGI Cash Dividend, the Transfers, and the
Distribution, (x) ITGI will merge (the "MERGER," and together with the Transfers
and the Distribution, collectively the "JEFG TRANSACTIONS") with and into JEFG
and (y) outstanding shares of Common Stock, par value $0.01 per share (the "ITGI
COMMON STOCK"), of ITGI will be canceled or converted into the right to receive
shares of Common Stock, par value $0.01 per share (the "JEFG COMMON STOCK"), of
JEFG in the manner set forth herein;
WHEREAS, JEFG, Holding and ITGI concurrently herewith are entering into a
Tax Sharing and Indemnification Agreement (the "TAX AGREEMENT"), which sets
forth the rights and obligations of JEFG and Holding following the Merger with
respect to certain tax matters, and JEFG and Holding concurrently herewith are
entering into a Benefits Agreement (the "BENEFITS AGREEMENT," and together with
the Distribution Agreement and the Tax Agreement, the "ANCILLARY AGREEMENTS"),
which sets forth the rights and obligations of JEFG and Holding following the
Merger with respect to certain employee benefit matters;
WHEREAS, the Boards of Directors of JEFG and ITGI have each determined that
the combination of JEFG and ITGI into one publicly traded corporation after the
Transfers and the Distribution is in the best interest of JEFG and ITGI and have
each approved this Merger Agreement and the Merger upon the terms and conditions
set forth herein;
WHEREAS, for federal income tax purposes, it is intended that the Merger
qualify as a tax-free liquidation of ITGI into JEFG under Section 332 of the
Internal Revenue Code of 1986, as amended
A-1
<PAGE>
(the "CODE"), and a reorganization for ITGI's stockholders, excluding JEFG (the
"ITGI PUBLIC STOCKHOLDERS") under Section 368(a)(1)(A) of the Code;
NOW THEREFORE, in consideration of the agreements and conditions set forth
below, the parties hereto, intending to be legally bound, hereby agree as
follows:
1. THE MERGER
Subject to the terms and conditions hereof and in accordance with the
General Corporation Law of the State of Delaware, as amended (the "DGCL"), at
the Effective Time (as hereinafter defined): (a) ITGI shall be merged with and
into JEFG and the separate existence of ITGI shall cease; (b) JEFG, as the
surviving corporation in the Merger (the "SURVIVING CORPORATION"), (i) shall
continue its corporate existence under the laws of the State of Delaware, (ii)
shall change its name to "INVESTMENT TECHNOLOGY GROUP, INC.", and (iii) shall
succeed to all rights, assets, liabilities and obligations of ITGI in accordance
with the DGCL; (c) the Certificate of Incorporation of JEFG, as in effect
immediately prior to the Effective Time, shall continue as the Certificate of
Incorporation of the Surviving Corporation, as amended and restated as set forth
on Appendix A hereto (with the amendments referred to therein being referred to
herein as the "CHARTER AMENDMENT"); (d) the By-laws of JEFG, as in effect
immediately prior to the Effective Time, shall continue as the By-laws of the
Surviving Corporation, as amended and restated as set forth on Appendix B
hereto; (e) the directors of ITGI immediately prior to the Effective Time shall
be the directors of the Surviving Corporation; and (f) the officers of ITGI
immediately prior to the Effective Time shall continue as the officers of the
Surviving Corporation. From and after the Effective Time, the Merger will have
all the effects provided by applicable law.
2. STOCKHOLDERS' MEETINGS; PRE-CLOSING, CLOSING AND EFFECTIVE TIME OF THE
MERGER; SEC FILINGS
(a) Prior to the date hereof, JEFG and Holding have jointly prepared and
filed with the Securities and Exchange Commission (the "SEC") under the
Securities Exchange Act of 1934, as amended and the rules and regulations
thereunder (the "EXCHANGE ACT"), a proxy statement/information statement (as
amended from time to time, the "PROXY/INFORMATION STATEMENT") and JEFG and ITGI
have jointly prepared and filed with the SEC a proxy statement/prospectus (as
amended from time to time, the "PROXY/PROSPECTUS"). The Proxy/Information
Statement comprises and will comprise (i) proxy material of JEFG with respect to
the approval and adoption of this Agreement (including the Charter Amendment)
and the issuance of JEFG Common Stock pursuant to this Agreement and the
approval of certain employee benefit plans of Holding (the "PLAN PROPOSALS") and
(ii) an information statement with respect to the Distribution and Holding,
which will be filed with the SEC as part of a Form 10 registration statement of
Holding under the Exchange Act. The Proxy/Prospectus comprises and will comprise
proxy material of ITGI with respect to the approval and adoption of this
Agreement, the election of ITGI directors and the ratification of ITGI's auditor
appointment and a registration statement (as amended from time to time, the
"REGISTRATION STATEMENT"), including a prospectus, of JEFG under the Securities
Act of 1933, as amended and the rules and regulations thereunder (the
"SECURITIES ACT"), with respect to JEFG Common Stock to be issued to the ITGI
Public Stockholders pursuant to this Agreement in connection with the Merger.
JEFG will use its best efforts to respond to any comments of the SEC and take
such other actions as may be necessary or appropriate with respect to the
Proxy/Information Statement to enable the Proxy/Information Statement in
definitive form to be mailed to JEFG's stockholders as promptly as practicable.
Each of JEFG and ITGI will use their respective best efforts to respond to any
comments of the SEC and take such other actions as may be necessary or
appropriate to enable the SEC to declare the Registration Statement effective
under the Securities Act and to cause a Proxy/Prospectus in definitive form to
be mailed to ITGI's stockholders as promptly as practicable.
A-2
<PAGE>
(b) JEFG shall submit this Agreement and the issuance of JEFG Common Stock
pursuant to this Agreement and the Plan Proposals to the holders of JEFG Common
Stock and ITGI shall submit this Agreement, the election of ITGI directors and
the ratification of ITGI's auditor appointment and to the holders of ITGI Common
Stock, respectively, for approval and adoption at stockholders' meetings to be
held April 20, 1999 (the "STOCKHOLDERS' MEETINGS").
(c) Subject to the satisfaction of the conditions contained in Sections 8,
9 and 10 hereof, the Pre-Closing shall occur on the day of the Stockholders'
Meetings, unless extended in writing by JEFG and ITGI (the "PRE-CLOSING DATE").
Immediately following completion of the Pre-Closing, JEFG, ITGI, Holding and The
Bank of New York, as escrow agent (the "ESCROW AGENT"), shall enter into a
pre-closing and escrow agreement dated as of the Pre-Closing Date, substantially
in the form of Appendix C hereto (the "ESCROW AGREEMENT"), pursuant to which:
(1) ITGI shall deposit into escrow, cash in an amount equal to the
aggregate Special ITGI Cash Dividend, to be released without
condition or limitation by the Escrow Agent on the business day
following the completion of the Pre-Closing to all of ITGI's
stockholders of record as of the close of business on the date of the
Stockholders' Meetings;
(2) Documents shall be executed and placed into escrow to effectuate, in
accordance with the Distribution Agreement, any remaining Transfers
immediately following the Escrow Agent's payment to JEFCO of $60
million, consistent with the direction of JEFG delivered on the
Pre-Closing Date instructing the Escrow Agent to make such payment to
JEFCO in respect of JEFG's pro rata share of the Special ITGI Cash
Dividend, which remaining Transfers will be effected through the
Escrow Agent in accordance with the Escrow Agreement immediately
following payment of the Special ITGI Cash Dividend;
(3) JEFG shall deposit into escrow an agreement between JEFG and
EquiServe, as distribution agent for the Holding Common Stock (the
"DISTRIBUTION AGENT"), pursuant to which JEFG shall irrevocably
direct the Distribution Agent to, and the Distribution Agent shall
agree to, distribute all Holding Common Stock to JEFG's stockholders
immediately after being instructed to do so by the Escrow Agent, who
shall issue such instructions unless the Escrow Agent receives a
certificate from ITGI or JEFG on or prior to 9:00 a.m. E.T. on the
Closing Date that either or both of the conditions referred to in
Section 11(b) or (c) shall not have been satisfied; and
(4) ITGI and JEFG shall deposit into escrow the executed Certificate of
Merger (as defined below), to be filed without condition or
limitation by the Escrow Agent with the Secretary of State of the
State of Delaware after the Escrow Agent's (i) issuance of the
instructions to the Distribution Agent described in clause (3) above
and (ii) receipt of confirmation from the Distribution Agent
confirming in writing its book-entry distribution of all Holding
Common Stock to JEFG's stockholders.
Subject to completion of the Pre-Closing and upon the satisfaction of the
conditions contained in Section 11(b) and (c) herein, the Constituent
Corporations shall hold a closing (the "CLOSING") at the offices of Morgan,
Lewis & Bockius LLP, New York, New York on the fifth business day following the
date of the Stockholders' Meetings unless extended in writing by JEFG and ITGI
(the "CLOSING DATE"). On the Closing Date, the Escrow Agent, on behalf of the
Constituent Corporations, shall cause the Merger to be consummated by filing a
certificate of merger (the "CERTIFICATE OF MERGER") with the Secretary of State
of the State of Delaware in accordance with clause (4) above and the provisions
of the Escrow Agreement (the date and time of such filing, or such later date or
time agreed upon by JEFG and ITGI in accordance with the DGCL and set forth
therein, the "EFFECTIVE TIME").
A-3
<PAGE>
3. CONVERSION AND CANCELLATION OF SECURITIES
(a) At the Effective Time, each share of ITGI Common Stock issued and
outstanding immediately prior to the Effective Time (other than shares of ITGI
Common Stock described in Section (b) of this Section) shall, by virtue of the
Merger and without any action on the part of the holder thereof, be converted
into the right to receive such number of shares of JEFG Common Stock equal to
the result obtained by dividing (x) the total number of shares of JEFG Common
Stock outstanding immediately prior to the Effective Time by (y) the total
number of shares of ITGI Common Stock held by JEFG immediately prior to the
Effective Time (the "EXCHANGE RATIO"); provided that no fractional shares of
JEFG Common Stock shall be issued and, in lieu thereof, a cash payment shall be
made as provided in Section 4(i) herein.
(b) At the Effective Time, each share of ITGI Common Stock held in the
treasury of ITGI or held by JEFG immediately prior to the Effective Time, shall
by virtue of the Merger and without any action on the part of the holder
thereof, be automatically canceled and retired and cease to exist, and no cash,
securities or other property shall be payable in respect thereof.
(c) The holders of shares of ITGI Common Stock or JEFG Common Stock shall
not be entitled to appraisal rights as a result of either of the Transfers or
the Merger.
4. EXCHANGE OF CERTIFICATES
(a) Prior to the Pre-Closing Date, JEFG shall select a bank or trust
company to act as exchange agent (the "EXCHANGE AGENT") in connection with the
surrender of certificates evidencing shares of ITGI Common Stock converted into
shares of JEFG Common Stock pursuant to the Merger. On the Pre-Closing Date,
JEFG shall deposit with the Escrow Agent one or more certificates representing
the shares of JEFG Common Stock issuable pursuant to Section 3(a) (the "MERGER
STOCK"), which shares of Merger Stock shall be issued in accordance with this
Agreement at the Effective Time. At and following the Effective Time, JEFG shall
deliver to the Exchange Agent such cash as may be required from time to time to
make payment of cash in lieu of fractional shares in accordance with Section
4(i) hereof.
(b) As soon as practicable after the Effective Time, JEFG shall cause the
Exchange Agent to mail to each person who was, at the Effective Time, a holder
of record of a certificate or certificates that immediately prior to the
Effective Time evidenced outstanding shares of ITGI Common Stock (the
"CERTIFICATES") (i) a letter of transmittal specifying that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only upon
delivery of the Certificates to the Exchange Agent, which shall be in a form and
contain any other provisions as JEFG and the Surviving Corporation may
reasonably agree and (ii) instructions for use in effecting the surrender of the
Certificates in exchange for certificates representing the Merger Stock. Upon
the proper surrender of Certificates to the Exchange Agent, together with a
properly completed and duly executed letter of transmittal and such other
documents as may be required by the Exchange Agent, the holder of such
Certificate shall be entitled to receive in exchange therefor certificates
representing the shares of Merger Stock that such holder has the right to
receive pursuant to the terms hereof (together with any dividend or distribution
with respect thereto made after the Effective Time and any cash paid in lieu of
fractional shares pursuant to Section 4(i)), and the Certificate so surrendered
shall be canceled. In the event of a transfer of ownership of ITGI Common Stock
that is not registered in the transfer records of ITGI, a certificate
representing the proper number of shares of Merger Stock may be issued to a
transferee if the Certificate representing such ITGI Common Stock is presented
to the Exchange Agent, accompanied by all documents required to evidence and
effect such transfer and by evidence reasonably satisfactory to JEFG that any
applicable stock transfer tax has been paid.
(c) After the Effective Time, each outstanding Certificate which
theretofore represented shares of ITGI Common Stock shall, until surrendered for
exchange in accordance with this Section 4, be
A-4
<PAGE>
deemed for all purposes to evidence ownership of full shares of JEFG Common
Stock into which the shares of ITGI Common Stock (which, prior to the Effective
Time, were represented thereby) shall have been so converted.
(d) Any Merger Stock deposited with the Exchange Agent pursuant to Section
4(a) hereof, and not exchanged pursuant to Section 4(b) hereof for ITGI Common
Stock within six months after the Effective Time, and any cash deposited with
the Exchange Agent pursuant to Section 4(a) hereof, and not exchanged for
fractional interests pursuant to Section 4(i) hereof within six months after the
Effective Time, shall be returned by the Exchange Agent to the Surviving
Corporation which shall thereafter act as exchange agent subject to the rights
of holders of ITGI Common Stock hereunder.
(e) At the Effective Time, the stock transfer books of ITGI shall be closed
and no transfer of shares of ITGI Common Stock shall thereafter be made.
(f) None of JEFG, ITGI, the Surviving Corporation or the Exchange Agent
will be liable to any holder of shares of ITGI Common Stock for any shares of
Merger Stock, dividends or distributions with respect thereto or cash payable in
lieu of fractional shares pursuant to Section 4(i) hereof delivered to a state
abandoned property administrator or other public official pursuant to any
applicable abandoned property, escheat or similar law.
(g) If any Certificates shall have been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the person claiming such Certificates to
be lost, stolen or destroyed, the Exchange Agent will deliver in exchange for
such lost, stolen or destroyed Certificates the Merger Stock for the shares
represented thereby, deliverable in respect thereof, as determined in accordance
with the terms hereof. When authorizing such payment in exchange for any lost,
stolen or destroyed Certificates, the person to whom the Merger Stock is to be
issued, as a condition precedent to such delivery, shall give JEFG a bond
satisfactory to JEFG against any claim that may be made against JEFG with
respect to the Certificates alleged to have been lost, stolen or destroyed.
(h) No dividend or other distribution declared or made after the Effective
Time with respect to common stock of the Surviving Corporation with a record
date after the Effective Time shall be paid to the holder of any unsurrendered
Certificate with respect to the shares of Merger Stock issuable upon surrender
thereof until the holder of such Certificate shall surrender such Certificate in
accordance with Section 4(b). Subject to the effect of applicable law, following
surrender of any such Certificate there shall be paid, without interest, to the
record holder of certificates representing whole shares of Merger Stock issued
in exchange therefor: (i) at the time of such surrender, the amount of dividends
or other distributions with a record date after the Effective Time theretofore
paid with respect to common stock of the Surviving Corporation; and (ii) the
amount of dividends or other distributions with respect to common stock of the
Surviving Corporation that are properly payable with respect to such Merger
Stock arising out of the fact that the Surviving Corporation shall have
established for a dividend or distribution concerning common stock of the
Surviving Corporation with (A) a record date subsequent to the Effective Time
but prior to surrender of such Certificate for such Merger Stock and (B) a
payment date subsequent to the surrender of such Certificate.
(i) No certificates or scrip evidencing fractional shares of Merger Stock
shall be issued upon the surrender for exchange of Certificates, and such
fractional share interests shall not entitle the owner thereof to any rights of
a stockholder of JEFG or the Surviving Corporation. In lieu of any such
fractional shares, each holder of a Certificate previously evidencing ITGI
Common Stock, upon surrender of such Certificate for exchange pursuant to this
Section 4, shall be paid an amount in cash (without interest), rounded to the
nearest cent, determined by multiplying (a) the closing regular way price for a
share of the Surviving Corporation's common stock on the NYSE Composite
Transaction Tape on the first business day immediately following the Effective
Time, by (b) the fractional interest to which such holder would otherwise be
entitled; PROVIDED, HOWEVER, no holder of ITGI Common Stock will receive cash
for any fractional share interest in an amount equal to or greater than such
closing
A-5
<PAGE>
regular way price of one full share of the Surviving Corporation's common stock.
The Surviving Corporation shall be obligated to fund all amounts required to be
paid in accordance with the preceding sentence. The fractional share interests
of each holder of a Certificate previously evidencing ITGI Common Stock will be
aggregated.
5. OPTIONS
(a) Prior to the Effective Time, each outstanding option to purchase or
acquire ITGI Common Stock shall have been adjusted for the effects of the
Special ITGI Cash Dividend in the following fashion: the exercise price of each
such ITGI option will be reduced so that (1) the ratio of the unadjusted
exercise price over the volume weighted average regular way market price of the
ITGI Common Stock on the trading day that the Special ITGI Cash Dividend is paid
(the "PRE-DIVIDEND PRICE") is equal to (2) the ratio of the adjusted exercise
price over the greater of (x) the volume weighted average regular way market
price of the ITGI Common Stock on the trading day following the trading day that
the Special ITGI Cash Dividend is paid or (y) the Pre-Dividend Price minus the
per share amount of the Special ITGI Cash Dividend (with the greater of (x) or
(y) constituting the "POST-DIVIDEND PRICE"); PROVIDED, HOWEVER, that the
adjusted exercise price shall not be higher than the unadjusted exercise price.
In the event, and only in the event, there is an adjustment to the exercise
price pursuant to the preceding sentence, to compensate for the loss in the
intrinsic value of each option (the spread of the market price above the
exercise price), the number of shares issuable upon exercise of the options of
each holder will be adjusted to such greater number that is equal to the
aggregate number of shares issuable pursuant to the unadjusted options
multiplied by the ratio of the Pre-Dividend Price divided by the Post-Dividend
Price.
(b) Following the adjustments set forth in paragraph (a) of this Section 5,
at the Effective Time, each option granted by ITGI to purchase shares of ITGI
Common Stock, which is outstanding and unexercised immediately prior thereto,
shall be assumed by the Surviving Corporation and converted into an option to
purchase such number of shares of the Surviving Corporation's Common Stock and
at such exercise price as are determined as provided below (and otherwise having
the same vesting, duration and other terms as the original option):
(i) the number of shares of the Surviving Corporation's Common Stock to
be subject to the new option shall be equal to the product of (1)
the number of shares of ITGI Common Stock subject to the original
option and (2) the Exchange Ratio, the product being rounded, if
necessary, up or down, to the nearest whole share; and
(ii) the exercise price per share of the Surviving Corporation's Common
Stock under the new option shall be equal to (1) the exercise price
per share of the ITGI Common Stock under the original option
divided by (2) the Exchange Ratio, rounded, if necessary, up or
down, to the nearest cent.
The adjustments provided herein with respect to any options which are "incentive
stock options" (as defined in Section 422 of the Code) shall be effected in a
manner consistent with Section 424(a) of the Code. Prior to the Effective Time,
the Board of Directors of ITGI shall take such action as may be required under
the governing option plans and agreements to effectuate the foregoing.
At the Effective Time, the Surviving Corporation will assume the ITGI 1994 Stock
Option and Long-Term Incentive Plan (as amended and restated January 29, 1997),
the ITGI Employee Stock Purchase Plan and the ITGI Non-Employee Directors' Stock
Option Plan as the successor to ITGI under such plans. Awards authorized under
such plans may be made to employees of the Surviving Corporation and its
subsidiaries following the Effective Time.
A-6
<PAGE>
6. REPRESENTATIONS AND WARRANTIES
6A. REPRESENTATIONS AND WARRANTIES OF JEFG. JEFG represents and warrants
to, and agrees with, ITGI as follows:
(a) Organization, Etc. JEFG 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 is now being conducted as described in the JEFG SEC
Reports (defined below). Except as set forth on Section 6A(a) of the disclosure
schedule attached to this Agreement (the "DISCLOSURE SCHEDULE"), JEFG is duly
qualified as a foreign corporation to do business, and is in good standing, in
each jurisdiction where the character of its properties owned or leased or the
nature of its activities makes such qualification necessary, except where such
failure to so qualify would not have any material adverse effect on JEFG and its
subsidiaries taken as a whole (a "JEFG MATERIAL ADVERSE EFFECT"). JEFG has
provided to ITGI complete and correct copies of its certificate of incorporation
and bylaws (the "ORGANIZATIONAL DOCUMENTS"), as currently in effect.
(b) Authority of JEFG. JEFG has full corporate power and authority to (i)
execute, deliver and perform its obligations under this Agreement and the
Ancillary Agreements and (ii) to consummate the JEFG Transactions. The
execution, delivery and performance of this Agreement and the Ancillary
Agreements and the consummation of the JEFG Transactions have been duly and
validly authorized by the Board of Directors of JEFG, and no other corporate
proceedings on the part of JEFG are necessary to authorize this Agreement or any
of the Ancillary Agreements or to consummate the JEFG Transactions, other than
the approval of the adoption by the JEFG stockholders of this Agreement and the
issuance of JEFG Common Stock pursuant to this Agreement. Each of this Agreement
and the Ancillary Agreements has been duly and validly executed and delivered by
JEFG and constitutes valid and binding agreements of JEFG, enforceable against
JEFG 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 JEFG of
this Agreement or any of the Ancillary Agreements or the consummation by JEFG of
the JEFG Transactions, except (i) the filing and effectiveness of the
Proxy/Information Statement under the Exchange Act, the filing of the
Proxy/Prospectus under the Exchange Act and the Securities Act and the
effectiveness of the Proxy/Prospectus under the Securities Act, (ii) the
applicable approval of this Agreement (including the Charter Amendment) and the
issuance of JEFG Common Stock pursuant to this Agreement by the holders of JEFG
Common Stock, (iii) the filing of the Certificate of Merger with the Secretary
of State of the State of Delaware, (iv) such consents, approvals, orders,
permits, authorizations, registrations, declarations and filings as may be
required under the Blue Sky laws of various states, (v) the listing on the New
York Stock Exchange of the common stock of the Surviving Corporation, in
connection with the Merger, and of Holding, in connection with the Distribution,
and (vi) as set forth in Section 6A(c) of the Disclosure Schedule.
(d) No Violation. Assuming that all Consents have been duly made or
obtained as contemplated by Section 6A(c), the execution, delivery and
performance by JEFG of this Agreement and the Ancillary Agreements and the
consummation by JEFG of the JEFG Transactions will not (i) violate any provision
of the Organizational Documents of JEFG, (ii) to the best of JEFG's knowledge,
violate any statute, rule, regulation, order or decree of any Governmental
Authority by which JEFG or any of its subsidiaries other than ITGI and its
subsidiaries (the "NON-ITGI SUBSIDIARIES"), or their respective assets, may be
bound or affected or (iii) result in a material violation or breach of, or
constitute a material 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,
A-7
<PAGE>
indenture or deed of trust relating to indebtedness for borrowed money or (y)
any material license, lease or other agreement, instrument or obligation to
which JEFG or any of the Non-ITGI Subsidiaries is a party or by which any of
their respective assets may be bound or affected.
(e) Capitalization of JEFG. The authorized capital stock of JEFG consists
of 100,000,000 shares of Common Stock and 1,000,000 shares of Preferred Stock,
$.01 par value per share ("JEFG PREFERRED STOCK"). As of December 31, 1998,
there were 21,230,030 JEFG Common Stock and no shares of JEFG Preferred Stock
outstanding. All issued and outstanding shares of capital stock of JEFG are duly
authorized and validly issued, fully paid, nonassessable and free of preemptive
rights with respect thereto. As of the date hereof, 695,499 shares of JEFG
Common Stock are issuable upon exercise of outstanding options or other rights
to purchase or acquire JEFG Common Stock ("JEFG COMMON STOCK EQUIVALENTS") and
301,682 shares of JEFG Common Stock are reserved under employee stock ownership,
stock purchase, equity compensation and incentive plans of JEFG and the Non-ITGI
Subsidiaries. Prior to the Effective Time, JEFG will use its best efforts to
cause all JEFG Common Stock that is the subject of JEFG Common Stock Equivalents
to be issued and all JEFG Common Stock Equivalents to be exercised or canceled
or exchanged for options, shares, awards or common stock equivalents of Holding.
Except for the JEFG Common Stock Equivalents, there are no options, warrants,
calls, subscriptions, or other rights, agreements or commitments obligating JEFG
to issue, transfer or sell any shares of capital stock of JEFG or any other
securities convertible into or evidencing the right to subscribe for any such
shares.
(f) SEC Filings.
(i) JEFG has timely filed with the SEC all required forms, reports,
registration statements and documents required to be filed by it with the
SEC since January 1, 1999 (collectively, the "JEFG SEC REPORTS"), all of
which complied as to form in all material respects with the applicable
provisions of the Securities Act or the Exchange Act, as the case may be.
The JEFG SEC Reports (including all exhibits and schedules thereto and
documents incorporated by reference therein) did not, as of their
respective dates, and do not contain any untrue statement of a material
fact concerning JEFG and the Non-ITGI Subsidiaries or omit to state a
material fact required to be stated therein concerning JEFG and the
Non-ITGI Subsidiaries or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading
concerning JEFG and the Non-ITGI Subsidiaries.
(ii) JEFG will deliver to ITGI as soon as they become available true
and complete copies of any report or other document mailed by JEFG to its
securityholders generally or filed by it with the SEC, in each case
subsequent to the date hereof and prior to the Effective Time (the
"SUBSEQUENT JEFG REPORTS"). As of their respective dates, the Subsequent
JEFG Reports will not contain any untrue statement of a material fact
concerning JEFG and the Non-ITGI Subsidiaries or omit to state a material
fact required to be stated therein concerning JEFG and the Non-ITGI
Subsidiaries or necessary to make the statements therein, in the light of
the circumstances under which they are made, not misleading concerning
JEFG and the Non-ITGI Subsidiaries and will comply in all material
respects with all applicable requirements of law. The audited
consolidated financial statements and unaudited consolidated interim
financial statements of JEFG and the Non-ITGI Subsidiaries included or
incorporated by reference in the JEFG SEC Reports or to be included or
incorporated by reference in the Subsequent JEFG Reports have been
prepared or will be prepared, as the case may be, in accordance with GAAP
and fairly present or will fairly present the consolidated financial
position of JEFG and the Non-ITGI Subsidiaries, as of the dates thereof
and the consolidated results of operations and consolidated cash flow for
the periods to which they relate (subject, in the case of any unaudited
interim financial statements, to normal year-end adjustments and to the
extent they may not include footnotes or may be condensed or summary
statements).
A-8
<PAGE>
(g) Liabilities. To the best knowledge of JEFG, JEFG has no Liabilities
(as defined herein) other than (i) those arising under this Agreement or
described in Section 6A(g)(i) of the Disclosure Schedule, and (ii) any
Liabilities of or related to ITGI and its subsidiaries. For purposes hereof,
the term "LIABILITIES" means any and all known claims, debts, commitments,
liabilities and obligations, absolute or contingent, matured or not matured,
liquidated or unliquidated, accrued or unaccrued, 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.
Immediately following the Transfers, JEFG will have no Liabilities other
than those described in clause (ii) above and those set forth in Section
6A(g)(ii) of the Disclosure Schedule.
(h) No JEFG Assets Used in ITGI Business. No "ASSETS" (as defined
below) of JEFG or any of its subsidiaries (other than ITGI and its
subsidiaries) are used by ITGI or any of its subsidiaries or reflected on
the consolidated balance sheet of ITGI. For purposes hereof, the term
"ASSETS" means properties, rights, contracts, leases and claims, of every
kind and description, wherever located, whether tangible or intangible, and
whether real, personal or mixed.
(i) Absence of Changes or Events. Since December 31, 1998, JEFG has
not, directly or indirectly, except as described in Section 6A(i) of the
Disclosure Schedule:
(i) except in the ordinary course of business, purchased or otherwise
acquired, or agreed to purchase or otherwise acquire, any share of
capital stock of JEFG, or any options, warrants or other equity security,
debt security or other indebtedness of JEFG or declared, set aside or
paid any dividend or otherwise made a distribution (whether in cash,
stock or property or any combination thereof) in respect of its capital
stock;
(ii) except in the ordinary course of business (A) created or
incurred any indebtedness for borrowed money; (B) assumed, guaranteed,
endorsed or otherwise become responsible for the obligations of any other
individual, firm or corporation, or made any loans or advances to any
other individual, firm or corporation; or (C) entered into any commitment
or incurred any Liabilities;
(iii) except in the ordinary course of business, suffered any damage,
destruction or loss that is material to JEFG, whether covered by
insurance or not; or
(iv) agreed to do any of the things described in the preceding
clauses (i) through (iii).
(j) Litigation. Except as described in Section 6A(j) of the Disclosure
Schedule, there is no (1) claim, action, suit or proceeding pending or, to
the best of JEFG's knowledge, threatened against JEFG or any of the Non-ITGI
Subsidiaries by or before any Governmental Authority or (2) outstanding
judgment, order, writ, injunction or decree of any court, governmental
agency or arbitration tribunal in a proceeding to which JEFG was or is a
party or by which any of them or any of their respective assets may be bound
or affected.
(k) Compliance with Laws.
(i) Except as described in Section 6A(k)(i) of the Disclosure
Schedule, neither JEFG nor any of the Non-ITGI Subsidiaries has violated
or failed to comply with any statute, law, ordinance, regulation, rule or
order of any Governmental Authority, or any judgment, decree or order of
any court, applicable to its business or operations, except where such
violation or failure to comply would not give rise to a JEFG Material
Adverse Effect.
(ii) Except as described in Section 6A(k)(ii) of the Disclosure
Schedule, (1) JEFG has such certificates, permits, licenses, franchises,
consents, approvals, orders, authorizations and clearances from
appropriate governmental agencies and bodies as are necessary to own,
lease
A-9
<PAGE>
or operate the properties and to conduct the business of Non-ITGI
Subsidiaries in the manner described in the JEFG SEC Reports ("JEFG
LICENSES"), except where the failure to have such will not give rise to a
JEFG Material Adverse Effect; (2) JEFG is, and within the period of all
applicable statutes of limitation has been, in compliance with its
obligations under such JEFG Licenses and no event has occurred that
allows, or after notice or lapse of time would allow, revocation or
termination of such JEFG Licenses and (3) JEFG has no knowledge of any
facts or circumstances that could reasonably be expected to result in an
inability of JEFG to renew any JEFG License. Neither the execution and
delivery by JEFG of this Agreement nor the Ancillary Agreements nor the
consummation of the JEFG Transactions will result in any revocation or
termination of any JEFG License. Set forth in Section 6A(k)(ii) of the
Disclosure Schedule is a true and complete list of all JEFG Licenses
which are necessary for the conduct of the business described in clause
(1) above.
(l) Labor and Employment Matters. Except as described in Section 6A(l)
of the Disclosure Schedule:
(i) Neither JEFG nor any of the Non-ITGI Subsidiaries is party to any
union contract or other collective bargaining agreement. JEFG and the
Non-ITGI Subsidiaries are in compliance with all applicable laws
respecting employment and employment practices, terms and conditions of
employment, safety, wages and hours, except where the failure to comply
will not give rise to a JEFG Material Adverse Effect, and are not engaged
in any unfair labor practice. There is no labor strike, slowdown or
stoppage pending (or any labor strike or stoppage threatened) against or
affecting JEFG or any of the Non-ITGI Subsidiaries, and no union
organizing activities with respect to any of its employees are occurring
or threatened.
(ii) Neither JEFG nor any of the Non-ITGI Subsidiaries is a party to
any employment, management services, consultation or other contract or
agreement with any past or present officer, director or employee or any
entity affiliated with any past or present officer, director or employee,
other than the agreements executed by employees generally, the forms of
which have been provided to ITGI.
(m) No Puts. Except as set forth in Section 6(A)(m) of the Disclosure
Schedule, neither the execution and delivery by JEFG of this Agreement or
the Ancillary Agreements nor the consummation of the JEFG Transactions gives
rise to any obligation of JEFG or any of the Non-ITGI Subsidiaries, or any
right of any holder of any security of JEFG or any of the Non-ITGI
Subsidiaries to require JEFG to purchase, offer to purchase, redeem or
otherwise prepay or repay any such security, or deposit any funds to effect
the same.
(n) Leases. There have been made available to ITGI true and complete
copies of each lease pursuant to which real property is held under lease by
JEFG, or, to JEFG's knowledge, under a lease to which JEFG is guarantor, and
true and complete copies of each lease pursuant to which JEFG leases real
property to others. Section 6A(n) of the Disclosure Schedule sets forth a
true and complete list of all such leases. Such leased real properties are
in good operating order and condition.
(o) Contracts and Commitments. Section 6A(o) of the Disclosure Schedule
sets forth each existing contract, obligation, commitment, agreement or
understanding of any type in any of the following categories:
(i) contracts that provide for payments by JEFG in any year
aggregating in excess of $100,000;
(ii) any contract under which JEFG has become absolutely or
contingently or otherwise liable for (1) the performance under a contract
of any other person, firm or corporation or
A-10
<PAGE>
(2) the whole or any part of the indebtedness or liabilities of any other
person, firm or corporation;
(iii) any contract under which any amount payable by JEFG is
dependent upon the revenues or profits of JEFG or its subsidiaries;
(iv) any contract with any director, officer or five percent or
greater stockholder of JEFG or any contract with any entity in which, to
the best of JEFG's knowledge, any director, officer or stockholder or any
family member of any director, officer or stockholder has a material
economic interest; and
(v) any contract that limits or restricts where JEFG may conduct its
business or the type or line of business that JEFG may engage in.
JEFG is not in breach of or default under any such contract, obligation,
commitment, agreement or understanding.
(p) Environmental Matters. To the best knowledge of JEFG, without any
special inquiry, (i) JEFG and the Non-ITGI Subsidiaries are, and within
applicable statutes of limitation, have been, in material compliance with
all applicable Environmental Laws (as defined below), (ii) JEFG and the
Non-ITGI Subsidiaries have all material permits, authorizations and
approvals required under any applicable Environmental Laws and are in
compliance with their requirements, and the consummation by JEFG of the
transactions contemplated hereby will not require any notification,
disclosure, registration, reporting, filing, investigation, or remediation
under any Environmental Law, (iii) there are no pending or threatened
Environmental Claims (as defined below) against JEFG or any of the Non-ITGI
Subsidiaries, (iv) JEFG has no knowledge of any circumstances that could
reasonably be anticipated to form the basis of an Environmental Claim
against JEFG or any of the Non-ITGI Subsidiaries or any of their respective
properties or operations and the business operations relating thereto and
(v) there has been no disposal, spill, discharge or release of any hazardous
or toxic substance or material, as defined or regulated by any Environmental
Law, on, at or under any property that could reasonably be expected to
result in material liability of, or material costs to, JEFG under any
Environmental Law. For purposes of this Agreement, the following terms shall
have the following meanings: "ENVIRONMENTAL LAW" means any foreign, federal,
state, local or municipal statute, law, rule, regulation, ordinance, code
and any published judicial or administrative interpretation thereof
including, without limitation, any judicial or administrative order,
consent, decree or judgment relating to, regulating or imposing liability or
standards of conduct concerning the environment, health, pollution or any
pollutant, contaminant or hazardous or toxic substance or waste, and any
other chemical or material exposure to which is prohibited or limited or
which is otherwise regulated by any governmental authority. "ENVIRONMENTAL
CLAIMS" means any and all civil or criminal administrative, regulatory or
judicial actions, suits, demands, notice or demand letters, potentially
responsible party letters, claims, liens, notices of noncompliance or
violation, investigations or proceedings relating in any way to any
Environmental Law.
(q) Finders or Brokers. Other than J.P. Morgan & Co. Incorporated,
neither JEFG nor any of the Non-ITGI Subsidiaries has employed any
investment banker broker, finder or intermediary in connection with the
transactions contemplated hereby who might be entitled to any fee, discount
or commission.
(r) Fairness Opinion. JEFG has received the opinion of J.P. Morgan
Securities Inc. attached as Appendix E hereto.
(s) Board Recommendation. The Board of Directors of JEFG has, by a
unanimous vote at a meeting of such Board duly held on March 17, 1999,
approved and adopted, and declared advisable, this Agreement (including the
issuance of JEFG Common Stock pursuant to this
A-11
<PAGE>
Agreement and the Charter Amendment), the Ancillary Agreements, the JEFG
Transactions and the Plan Proposals and determined that the JEFG
Transactions are in the best interest of the stockholders of JEFG, and prior
to the date hereof has resolved to recommend that the holders of JEFG Common
Stock approve and adopt this Agreement (including the issuance of JEFG
Common Stock pursuant to this Agreement and the Charter Amendment) and the
Plan Proposals.
(t) Holding Debt Assumption. Supplemental indentures have been duly
executed in respect of JEFG's 7 1/2% Senior Notes Due 2007 (the "7 1/2%
NOTES") which (i) amend in certain respects the indenture relating to the
7 1/2% Notes and (ii) effective as of the date the Transfers are completed,
provide that Holding shall assume, and JEFG shall be released from, JEFG's
obligations under the 7 1/2% Notes and the related indenture. Complete
copies of such supplemental indentures, along with the officers'
certificates, opinions of JEFG's counsel and consents of holders of the
7 1/2% Notes provided to the trustee for the 7 1/2% Notes in connection
therewith have been provided to ITGI and its counsel.
6B. REPRESENTATIONS AND WARRANTIES OF ITGI. ITGI represents and warrants
to, and agrees with, JEFG as follows:
(a) Organization, Etc. ITGI 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 is
properties and to carry on its business as it is now being conducted as
described in the ITGI SEC Reports (defined below). Except as set forth on
Section 6B(a) of the Disclosure Schedule, ITGI is duly qualified as a
foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or leased or the
nature of its activities makes such qualification necessary, except where
such failure to so qualify would not have any material adverse effect on
ITGI and its subsidiaries taken as a whole (an "ITGI MATERIAL ADVERSE
EFFECT"). ITGI has provided to JEFG complete and correct copies of the
Organizational Documents, as currently in effect, of ITGI.
(b) Authority of ITGI. ITGI has full corporate power and authority to
(i) execute, deliver and perform its obligations under this Agreement and
(ii) to declare and pay the Special ITGI Cash Dividend and to consummate the
Merger. The execution, delivery and performance of this Agreement, the
payment of the Special ITGI Cash Dividend (subject to approval and adoption
of this Agreement and the Merger by the JEFG and ITGI stockholders and the
satisfaction or waiver of all other conditions to the Merger) and the
consummation of the Merger have been duly and validly authorized by the
Board of Directors of ITGI, and no other corporate proceedings on the part
of ITGI are necessary to authorize this Agreement or to consummate the
Merger, other than the approval and adoption of this Agreement by ITGI
stockholders as required by the DGCL. This Agreement has been duly and
validly executed and delivered by ITGI and constitutes a valid and binding
agreement of ITGI, enforceable against ITGI in accordance with its terms.
(c) No Governmental Consent. No Governmental Consent or other Consent
is required in connection with the execution, delivery and performance by
ITGI of this Agreement, the declaration and payment of the Special ITGI Cash
Dividend or the consummation by ITGI of the Merger, except (i) the filing of
the Proxy/Prospectus under the Exchange Act and the Securities Act and the
effectiveness thereof under the Securities Act, (ii) the applicable approval
of this Agreement and the Merger by the holders of ITGI Common Stock as
required by the DGCL, (iii) the filing of the Certificate of Merger with the
Secretary of State of the State of Delaware, (iv) such consents, approvals,
orders, permits, authorizations, registrations, declarations and filings as
may be required under the Blue Sky laws of various states, (v) the listing
on the New York Stock Exchange of the common stock of the Surviving
Corporation and (vi) as set forth in Section 6B(c) of the Disclosure
Schedule.
A-12
<PAGE>
(d) No Violation. Assuming that all Consents have been duly made or
obtained as contemplated by Section 6B(c), the execution, delivery and
performance by ITGI of this Agreement and the consummation by ITGI of the
Merger and the declaration and payment of the Special ITGI Cash Dividend
will not (i) violate any provision of the Organizational Documents of ITGI,
(ii) to the best of ITGI's knowledge, violate the DGCL or any other statute,
rule, regulation, order or decree of any Governmental Authority by which
ITGI or its subsidiaries, or their properties, may be bound or affected or
(iii) result in a material violation or breach of, or constitute any
material 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 material license,
lease or other agreement, instrument or obligation to which ITGI or its
subsidiaries is a party.
(e) Capitalization of ITGI.
(i) The authorized capital stock of ITGI consists of 30,000,000
shares of Common Stock and 5,000,000 shares of Preferred Stock, $.01 par
value per share ("ITGI PREFERRED STOCK"). As of December 31, 1998, there
were 18,590,360 shares of ITGI Common Stock and no shares of ITGI
Preferred Stock outstanding. All issued and outstanding shares of capital
stock of ITGI are duly authorized and validly issued, fully paid,
nonassessable and free of preemptive rights with respect thereto.
(ii) At no time prior to the date hereof did ITGI have more than
18,750,000 shares of ITGI Common Stock issued and outstanding.
(iii) As of the date hereof, 2,869,967 shares of ITGI Common Stock
are issuable upon exercise of outstanding options or other rights to
purchase or acquire ITGI Common Stock ("ITGI COMMON STOCK EQUIVALENTS")
and zero shares of ITGI Common Stock are reserved for issuance prior to
the Effective Time under employee stock ownership, stock purchase, equity
compensation and incentive plans of ITGI and its subsidiaries. Except for
the ITGI Common Stock Equivalents, there are no options, warrants, calls,
subscriptions, or other rights, agreements or commitments obligating ITGI
to issue, transfer or sell any shares of capital stock of ITGI or any
other securities convertible into or evidencing the right to subscribe
for any such shares. Section 6B(e)(i) of the Disclosure Schedule
accurately reflects the total outstanding ITGI Common Stock Equivalents
that, at the date hereof or any time prior to or through the Effective
Time, could be exercised for ITGI Common Stock by contract, arrangement
or otherwise (the "EXERCISABLE ITGI RIGHTS") and Section 6B(e)(ii) of the
Disclosure Schedule accurately reflects the total outstanding ITGI Common
Stock Equivalents that are the subject to any agreement that prevents the
exercise of Exercisable ITGI Rights and the purchase or acquisition of
ITGI Common Stock pursuant to Exercisable ITGI Rights until after the
earlier of the Effective Time or April 29, 1999 (the "LOCK-UP
AGREEMENTS"). Section 6B(e)(ii) of the Disclosure Schedule sets forth the
aggregate number of shares subject to each form of Lock-Up Agreement, and
Section 6B(e)(iii) of the Disclosure Schedule contains each form of
Lock-Up Agreement.
(iv) ITGI agrees to promptly advise JEFG (and provide executed copies
of any agreement) concerning any Lock-Up Agreement executed after the
date of this Agreement, including any amendment to any Lock-Up Agreement.
ITGI will, prior to the earlier of the Effective Date or April 30, 1999,
only permit the exercise of such Exercisable ITGI Rights that are not
subject to Lock-Up Agreements (regardless of whether such Agreements have
been executed on or prior to the date hereof or after the date hereof and
prior to the Effective Time).
A-13
<PAGE>
(f) SEC Filings.
(i) ITGI has timely filed with the SEC all required forms, reports,
registration statements and documents required to be filed by it with the
SEC since January 1, 1999 (collectively, the "ITGI SEC REPORTS"), all of
which complied as to form in all material respects with the applicable
provisions of the Securities Act or the Exchange Act, as the case may be.
As of their respective dates, the ITGI SEC Reports (including all
exhibits and schedules thereto and documents incorporated by reference
therein) did not, as of their respective dates, and do not contain any
untrue statement of a material fact concerning ITGI and its subsidiaries
or omit to state a material fact required to be stated therein concerning
ITGI and its subsidiaries or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading
concerning ITGI and its subsidiaries.
(ii) ITGI will deliver to JEFG as soon as they become available true
and complete copies of any report or other document mailed by ITGI to its
securityholders generally or filed by it with the SEC, in each case
subsequent to the date hereof and prior to the Effective Time (the
"SUBSEQUENT ITGI REPORTS"). As of their respective dates, the Subsequent
ITGI Reports will not contain any untrue statement of a material fact or
omit to state a material fact concerning ITGI and its subsidiaries or
omit to state a material fact required to be stated therein concerning
ITGI and its subsidiaries or necessary to make the statements therein, in
the light of the circumstances under which they are made, not misleading
concerning ITGI and its subsidiaries and will comply in all material
respects with all applicable requirements of law. The audited
consolidated financial statements and unaudited consolidated interim
financial statements of ITGI and its subsidiaries included or
incorporated by reference in the ITGI SEC Reports or to be included or
incorporated by reference in the Subsequent ITGI Reports have been
prepared or will be prepared in accordance with GAAP and fairly present
or will fairly present the consolidated financial position of ITGI and
its subsidiaries, as of the dates thereof and the consolidated results of
operations and consolidated cash flow for the periods to which they
relate (subject, in the case of any unaudited interim financial
statements, to normal year-end adjustments and to the extent they may not
include footnotes or may be condensed or summary statements).
(g) Liabilities. Except for the Liabilities arising under this
Agreement or set forth or referred to in ITGI SEC Reports or the
Proxy/Prospectus, ITGI and its subsidiaries have no material Liabilities,
other than those described in Section 6B(g) of the Disclosure Schedule.
(h) Absence of Changes or Events. Since December 31, 1998, ITGI has
not, directly or indirectly, except as described in Section 6B(h) of the
Disclosure Schedule:
(i) except in the ordinary course of business, purchased or otherwise
acquired, or agreed to purchase or otherwise acquire, any share of
capital stock of ITGI, or any options, warrants or other equity security,
debt security or other indebtedness of ITGI or declared, set aside or
paid any dividend or otherwise made a distribution (whether in cash,
stock or property or any combination thereof) in respect of its capital
stock;
(ii) except in the ordinary course of business (A) created or
incurred any indebtedness for borrowed money; (B) assumed, guaranteed,
endorsed or otherwise become responsible for the obligations of any other
individual, firm or corporation, or made any loans or advances to any
other individual, firm or corporation; or (C) entered into any commitment
or incurred any liabilities;
(iii) except in the ordinary course of business, suffered any damage,
destruction or loss that is material to ITGI, whether covered by
insurance or not; or
(iv) agreed to do any of the things described in the preceding
clauses (i) through (iii).
A-14
<PAGE>
(i) Compliance with Laws.
(i) Except as described in Section 6B(i)(i) of the Disclosure
Schedule, neither ITGI nor any of its subsidiaries has violated or failed
to comply with any statute, law, ordinance, regulation, rule or order of
any Governmental Authority, or any judgment, decree or order of any
court, applicable to their respective business or operations, except
where such violation or failure to comply would not give rise to an ITGI
Material Adverse Effect.
(ii) Except as described in Section 6B(i)(ii) of the Disclosure
Schedule, (1) ITGI has such certificates, permits, licenses, franchises,
consents, approvals, orders, authorizations and clearances from
appropriate governmental agencies and bodies as are necessary to own,
lease or operate the properties and to conduct the business in the manner
described in the ITGI SEC Reports ("ITGI LICENSES"), except where the
failure to have such will not give rise to an ITGI Material Adverse
Effect; (2) ITGI is, and within the period of all applicable statutes of
limitation has been, in compliance with its obligations under such ITGI
Licenses and no event has occurred that allows, or after notice or lapse
of time would allow, revocation or termination of such ITGI Licenses and
(3) ITGI has no knowledge of any facts or circumstances that could
reasonably be expected to result in an inability of ITGI to renew any
ITGI License. Neither the execution and delivery by ITGI of this
Agreement or any Ancillary Agreement or the payment of the Special ITGI
Cash Dividend or the consummation of the Merger will result in any
revocation or termination of any ITGI License. Set forth in Section
6B(i)(ii) of the Disclosure Schedule is a true and complete list of all
ITGI Licenses which are necessary for the conduct of the business
described in clause (1) above.
(j) Labor and Employment Matters. Except as described in Section 6B(j)
of the Disclosure Schedule:
(i) Neither ITGI nor any of its subsidiaries is a party to any union
contract or other collective bargaining agreement. ITGI and its
subsidiaries are in compliance with all applicable laws respecting
employment and employment practices, terms and conditions of employment,
safety, wages and hours, except where the failure to comply will not give
rise to a ITGI Material Adverse Effect, and are not engaged in any unfair
labor practice. There is no labor strike, slowdown or stoppage pending
(or any labor strike or stoppage threatened) against or affecting ITGI or
any of its subsidiaries, and no union organizing activities with respect
to any of its employees are occurring or threatened.
(ii) Neither ITGI nor any of its subsidiaries is a party to any
employment, management services, consultation or other contract or
agreement with any past or present officer, director or employee or any
entity affiliated with any past or present officer, director or employee,
other than the agreements executed by employees generally, the forms of
which have been provided to JEFG.
(k) No Puts. Except as set forth in Section 6B(k) of the Disclosure
Schedule, neither the execution and delivery by ITGI of this Agreement or
any Ancillary Agreement nor payment of the Special ITGI Cash Dividend or the
consummation of the Merger gives rise to any obligation of ITGI or any of
its subsidiaries, or any right of any holder of any security of ITGI or any
of its subsidiaries to require ITGI to purchase, offer to purchase, redeem
or otherwise prepay or repay any such security, or deposit any funds to
effect the same.
(l) Leases. There have been made available to JEFG true and complete
copies of each lease pursuant to which real property is held under lease by
ITGI and under which JEFG is a guarantor, and true and complete copies of
each lease pursuant to which ITGI leases real property to others. Section
6B(l) of the Disclosure Schedule sets forth a true and complete list of all
such leases. The leased real properties are in good operating order and
condition.
A-15
<PAGE>
(m) Contracts and Commitments. Section 6B(m) of the Disclosure Schedule
sets forth each existing contract, obligation, commitment, agreement or
understanding of any type in any of the following categories:
(i) contracts that provide for payments by ITGI in any year
aggregating in excess of $100,000;
(ii) any contract under which ITGI has become absolutely or
contingently or otherwise liable for (1) the performance under a contract
of any other person, firm or corporation or (2) the whole or any part of
the indebtedness or liabilities of any other person, firm or corporation;
(iii) any contract under which any amount payable by ITGI is
dependent upon the revenues or profits of ITGI or its subsidiaries;
(iv) any contract with any director, officer or five percent or
greater stockholder of ITGI or any contract with any entity in which, to
the best of ITGI's knowledge, any director, officer or stockholder or any
family member of any director, officer or stockholder has a material
economic interest; and
(v) any contract that limits or restricts where ITGI may conduct its
business or the type or line of business that ITGI may engage in.
ITGI is not in breach of or default under any such contract, obligation,
commitment, agreement or understanding.
(n) Litigation. Except as described in Section 6B(n) of the Disclosure
Schedule, there is no (1) claim, action, suit or proceeding pending or, to
the best of ITGI's knowledge, threatened against ITGI or any of its
subsidiaries by or before any Governmental Authority or (2) outstanding
judgment, order, writ, injunction or decree of any court, governmental
agency or arbitration tribunal in a proceeding to which ITGI or any of its
subsidiaries was or is a party or by which any of them or any of their
respective assets may be bound or affected.
(o) Environmental Matters. To the best knowledge of ITGI, without any
special inquiry, (i) ITGI and its subsidiaries are, and within applicable
statutes of limitation, have been, in material compliance with all
applicable Environmental Laws, (ii) ITGI and its subsidiaries have all
material permits, authorizations and approvals required under any applicable
Environmental Laws and are in compliance with their requirements, and the
consummation by ITGI of the transactions contemplated hereby will not
require any notification, disclosure, registration, reporting, filing,
investigation, or remediation under any Environmental Law, (iii) there are
no pending or threatened Environmental Claims against ITGI or any of its
subsidiaries, (iv) ITGI has no knowledge of any circumstances that could
reasonably be anticipated to form the basis of an Environmental Claim
against ITGI or any of its subsidiaries or any of their respective
properties or operations and the business operations relating thereto and
(v) there has been no disposal, spill, discharge or release of any hazardous
or toxic substance or material, as defined or regulated by any Environmental
Law, on, at or under any property that could reasonably be expected to
result in material liability of, or material costs to, ITGI under any
Environmental Law.
(p) Ownership of JEFG Common Stock. Except as set forth in Section
6B(p) of the Disclosure Schedule, ITGI and its subsidiaries own no JEFG
Common Stock and are party to no contracts or options which would allow or
obligate ITGI or any of its subsidiaries to purchase JEFG Common Stock.
(q) Finders or Brokers. Other than Donaldson, Lufkin & Jenrette
Securities Corporation, neither ITGI nor any of its subsidiaries has
employed any investment banker broker, finder or
A-16
<PAGE>
intermediary in connection with the transactions contemplated hereby who
might be entitled to any fee, discount or commission.
(r) Fairness Opinion. ITGI has received the opinion of Donaldson,
Lufkin & Jenrette Securities Corporation attached as Appendix E hereto.
(s) Board and Special Committee Recommendations. The Board of Directors
of ITGI has, by a unanimous vote at a meeting of such Board duly held on
March 16, 1999, approved and adopted, and declared advisable, this Agreement
and authorized the declaration and payment of the Special ITGI Cash Dividend
and determined that this Agreement and the Merger are in the best interest
of the stockholders of ITGI, and prior to the date hereof has resolved to
recommend that the holders of ITGI Common Stock approve and adopt this
Agreement. In addition, a Special Committee of the Board of Directors of
ITGI consisting exclusively of independent directors (the "ITGI SPECIAL
COMMITTEE") has, by a unanimous vote at a meeting of such committee held on
March 15, 1999, unanimously approved, and declared advisable, this Agreement
and determined that this Agreement and the Merger are fair to and in the
best interests of ITGI's stockholders other than JEFG.
7. COVENANTS OF JEFG AND ITGI
(a) Certain Changes. Except as contemplated by this Agreement and the
Ancillary Agreements, ITGI agrees that, without the prior written consent of
JEFG, between the date hereof and the Closing Date, ITGI will, and ITGI will
cause each of its subsidiaries to (i) conduct its affairs in the ordinary
course of business consistent with past and then current practice, (ii) not
adopt, amend or modify any employment or personnel contract or plan, or
increase the level of compensation payable to any officer or employee other
than in accordance with past practice or as otherwise required by law or the
terms of any such contract or plan; (iii) refrain from (A) issuing any
capital stock or security convertible into capital stock of ITGI, except
pursuant to Exercisable ITGI Rights that are not subject to Lock-Up
Agreements, (B) granting any option to purchase or acquire ITGI Common
Stock, which option is granted outside of the ordinary course or
inconsistent with past practice or is exercisable at any time prior to April
30, 1999, and (C) taking any other action that would otherwise alter its
capital structure, (iv) refrain from paying any dividend (other than the
Special ITGI Cash Dividend) or making any distribution (including, any stock
split or stock dividend) with respect to its securities, (v) refrain from
entering into any contract or arrangement other than in the ordinary course
of business and (vi) refrain from amending its Certificate of Incorporation
or By-laws. ITGI agrees to promptly advise JEFG if it has more than
18,750,000 shares of ITGI Common Stock outstanding at any time prior to the
Effective Time, or any person holding, or exercising rights under, ITGI
Common Stock Equivalents shall have validly tendered any exercise form
related thereto and demanded the issuance and delivery of ITGI Common Stock
in respect of any such ITGI Common Stock Equivalent prior to the Effective
Time. ITGI agrees not to amend, by written instrument, document, waiver or
other act or practice, any Lock-Up Agreement without JEFG's prior written
consent.
Except as contemplated by this Agreement and the Ancillary Agreements,
JEFG agrees that, without the prior written consent of ITGI, between the
date hereof and the Closing Date, JEFG will, and JEFG will cause each of the
Non-ITGI Subsidiaries to (1) conduct its affairs in the ordinary course of
business consistent with past and then current practice, (2) not adopt,
amend or modify any employment or personnel contract or plan, or increase
the level of compensation payable to any officer or employee other than in
accordance with past practice or as otherwise required by law or the terms
of any such contract or plan; (3) refrain from issuing any capital stock or
security convertible into capital stock, except pursuant to outstanding
stock options and equity compensation awards, or granting any option or
equity compensation awards except any such option or award that by its terms
becomes, upon consummation of the Transfers, an option to
A-17
<PAGE>
purchase or acquire Holding Common Stock or an award in equity of Holding,
or taking any other action that would be specified in Section 6A(e) of the
Disclosure Schedule, or taking any other action that would otherwise alter
its capital structure, (4) refrain from paying any dividend (other than the
Distribution) or making any distribution (including, any stock split or
stock dividend) with respect to its securities, (5) refrain from entering
into any contract or arrangement other than in the ordinary course of
business and (6) refrain from amending its Certificate of Incorporation or
By-laws.
(b) Proxy/Prospectus and Proxy/Information Statement. JEFG agrees that
the Proxy/ Prospectus and any amendment or supplement thereto and the
Proxy/Information Statement and any amendment or supplement thereto, at the
time of mailing thereof and at the time of the Stockholders' Meetings, will
not contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading; PROVIDED, HOWEVER, that the foregoing
shall not apply to any information relating solely to ITGI and any of its
subsidiaries (including financial and statistical information), the Special
ITGI Cash Dividend or the ITGI-provided information concerning the Merger,
as set forth in detail in Schedule B to the Distribution Agreement (the
"ITGI MERGER INFORMATION"). If at any time prior to the Stockholders'
Meetings, either the Proxy/Prospectus or the Proxy/Information Statement
shall, as it relates solely to JEFG or any of the Non-ITGI Subsidiaries, the
Transfers, the Ancillary Agreements, the Distribution or the JEFG Merger
Information (defined below), contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading, JEFG shall promptly notify
ITGI and such parties shall use their best efforts to promptly cause to be
filed with the SEC and, as required by law, disseminated to the stockholders
of JEFG and ITGI an amendment or supplement that will result in the
Proxy/Prospectus and/or the Proxy/Information Statement (as the case may
be), as so amended or supplemented, not containing an untrue statement of a
material fact and not omitting to state a material fact required to be
stated therein or necessary to make the statements therein not misleading;
PROVIDED, HOWEVER, that the foregoing shall not apply to any information
relating solely to ITGI, any of its subsidiaries, the Special ITGI Cash
Dividend and the ITGI Merger Information. JEFG will not file any amendment
or supplement to the Proxy/ Prospectus or Proxy/Information Statement, or
submit any information to the SEC in connection therewith, without prior
consultation with ITGI.
ITGI agrees that the Proxy/Prospectus and any amendment or supplement
thereto and the Proxy/Information Statement and any amendment or supplement
thereto, at the time of mailing thereof and at the time of the Stockholders'
Meetings, will not contain an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading; PROVIDED, HOWEVER, that the foregoing
shall not apply to any information relating solely to JEFG and the Non-ITGI
Subsidiaries (including financial and statistical information), the
Transfers, the Ancillary Agreements, the Distribution or the JEFG-provided
information concerning the Merger, as set forth in detail in Schedule A to
the Distribution Agreement (the "JEFG MERGER INFORMATION"). If at any time
prior to the Stockholders' Meetings, either the Proxy/Prospectus or the
Proxy/Information Statement, as it relates solely to ITGI or any of its
subsidiaries, the Special ITGI Cash Dividend or the ITGI Merger Information,
shall contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, ITGI shall promptly notify JEFG and such
parties shall use their best efforts to promptly cause to be filed with the
SEC and, as required by law, disseminated to the stockholders of JEFG and
ITGI an amendment or supplement that will result in the Proxy/Prospectus
and/or the Proxy/Information Statement (as the case may be), as so amended
or supplemented, not containing an untrue statement of a material fact and
not omitting to state a material fact required to be stated therein or
necessary to make the statements therein not misleading; PROVIDED, HOWEVER,
that the foregoing shall not apply to
A-18
<PAGE>
any information relating solely to JEFG and the Non-ITGI Subsidiaries, the
Transfers, the Ancillary Agreements, the Distribution or the JEFG Merger
Information. ITGI will not file any amendment or supplement to the
Proxy/Prospectus or Proxy/Information Statement, or submit any information
to the SEC in connection therewith, without prior consultation with JEFG.
(c) Further Assurances. 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 the 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.
(d) Expenses. Each of JEFG and ITGI shall be responsible for the
Transaction Expenses (as defined below), as set forth in this paragraph (d).
To the extent JEFG, Holding or ITGI incurs expenses in connection with the
Transactions (as defined below) which do not constitute Transaction
Expenses, the party incurring such expense shall be solely responsible for
such expenses. "TRANSACTION EXPENSES" shall be limited to reasonable
"OUT-OF-POCKET" expenses (i.e., expenses paid to a third party, excluding
internal costs or allocations) of JEFG, Holding or ITGI that have been
incurred because of or in order to effect the JEFG Transactions and the
Special ITGI Cash Dividend (collectively, the "TRANSACTIONS"), including:
(i) fees paid to investment bankers and their counsels,
(ii) fees paid to outside counsel, including those who are giving
legal opinions,
(iii) fees paid to effect all of the Transfers, including (A) consent
payments and fees and expenses in respect of the transfer of JEFG's
8 7/8% Senior Notes due 2004 (the "8 7/8% NOTES") and the 7 1/2% Notes to
Holding pursuant to the Assumption, not to exceed the aggregate amount
set forth in Section 7(d)(iii) of the Disclosure Schedule, and (B)
payments to landlords, third parties or others to whom JEFG has given
guarantees in order to obtain their consents to the release of JEFG from
the related obligations,
(iv) professional and closing fees (but excluding financing costs)
paid in order to replace financing arrangements that have been affected
by the Transactions or new financing arrangements of ITGI or the
Surviving Corporation,
(v) fees paid to compensation and benefit plan consultants,
actuaries, and the like to the extent services are rendered (a) for
changes to existing plans which are necessary in order to effect or
because of the Transactions or (b) to implement new plans which will
replace plans which had been in place at JEFG or ITGI prior to the
Transactions, excluding fees for services rendered to implement new plans
which are not substantially similar in purpose and effect to existing
JEFG plans and costs related to enhanced pension benefits and any
underfunding liability of existing plans,
(vi) payments to the ITGI Special Committee and their counsel,
(vii) costs of acquiring and installing (and licensing fees limited
to first year licensing fees for) software by ITGI, but only to the
extent that such systems provide reasonably similar information and
functionality as that currently used or provided by JEFG or ITGI,
(viii)tax, accounting and auditing services provided by KPMG LLP and
Ernst & Young LLP in connection with the Transactions, and
A-19
<PAGE>
(ix) costs of securityholder matters (exclusive of matters addressed
in clause (iii)(A) above) and agency matters related to the Transactions,
including solicitation, printing, mailing, registrar and transfer agent
fees, exchange agent, distribution agent, trustee and escrow agent fees
and expenses, filing fees, listing fees and other regulatory fees and
licenses.
Expenses of JEFG and Holding which may constitute Transaction Expenses relevant
for the allocation in the second succeeding sentence shall be counted on a
dollar-for-dollar basis for Transaction Expenses incurred which are not tax
deductible and on the basis of $0.565 for each dollar of Transaction Expenses
incurred which are tax deductible and, based upon such procedure, shall not
exceed $11.5 million in the aggregate. Expenses of ITGI which may constitute
Transaction Expenses relevant for the allocation in the following sentence shall
be counted on a dollar-for-dollar basis for Transaction Expenses incurred which
are not tax deductible and on the basis of $0.565 for each dollar of Transaction
Expenses incurred which are tax deductible and, based upon such procedure, shall
not exceed $6.0 million. The allocation of responsibility for Transaction
Expenses between JEFG and ITGI shall be determined by dividing (A) the sum of
(i) the lesser of $11.5 million or the dollar amount of Transaction Expenses
actually incurred by JEFG and Holding (with such lesser amount constituting the
"REIMBURSABLE JEFG EXPENSE CAP") plus (ii) the lesser of $6.0 million or the
dollar amount of Transaction Expenses actually incurred by ITGI (with such
lesser amount constituting the "REIMBURSABLE ITGI EXPENSE CAP"), by (B) two
(with the resulting amount constituting the "RATABLE TRANSACTION EXPENSE
RESPONSIBILITY"). Following determination of the Ratable Transaction Expense
Responsibility, (y) ITGI (or the Surviving Corporation, in the event such
determination occurs after the Effective Time) shall reimburse JEFG (or Holding
or its subsidiaries, in the event such determination occurs after the Effective
Time) for any positive difference resulting after subtracting the Ratable
Transaction Expense Responsibility from the Reimbursable JEFG Expense Cap or (z)
JEFG (or Holding, in the event such determination occurs after the Effective
Time) shall reimburse ITGI (or the Surviving Corporation, in the event such
determination occurs after the Effective Time) for any positive difference
resulting after subtracting the Ratable Transaction Expense Responsibility from
the Reimbursable ITGI Expense Cap.
Notwithstanding the foregoing, (A) expenses that would otherwise be incurred in
the ordinary course of business or are the result of changes being implemented
coincident with the JEFG Transactions at management's discretion do not qualify
as Transaction Expenses, (B) when there is a range of options that may be taken
with respect to an expense that fits within the matters described in clauses (i)
through (ix) above, only the least expensive alternative qualifies as a
Transaction Expense (and any amount in excess of the least expensive alternative
shall be for the account of, and shall be the sole responsibility of, the party
that incurred such expense), and (C) no services rendered or expenses incurred
subsequent to the Effective Time (other than any such expenses incurred to
comply with Section 3.01 of the Distribution Agreement) will qualify as
Transaction Expenses.
Notwithstanding any other provision set forth in this Paragraph (d), (A) JEFG
shall be responsible for all Transaction Expenses in the event that JEFG, as a
stockholder of ITGI, fails to vote in favor of the Merger Agreement and thereby
causes the failure of the Merger Agreement to be approved and adopted at the
ITGI Stockholders' Meeting, (B) ITGI shall be responsible for all Transaction
Expenses in the event that ITGI breaches, or any of its subsidiaries breaches
its representations, warranties or covenants contained in Section 6B(e)(ii),
Section 6B(e)(iii), the second sentence of Section 6B(e)(iv), Section 7(a) (iii)
or the second sentence of Section 7(j) hereof and such action causes an
inability to satisfy any of the conditions set forth in Section 8(h) or 11(b)
hereof, (C) any party that breaches Section 7(m) hereof shall be responsible for
all Transaction Expenses, (D) any party that causes the condition set forth in
Section 8(h) or 11(b) not to be fulfilled shall be responsible for all
Transaction Expenses, and (E) JEFG shall be responsible for all Transaction
Expenses in the event it participates, but does not afford the benefit to the
ITGI Public Stockholders of their full participation, in a transaction described
in Section 7(l) hereof.
A-20
<PAGE>
(e) Access to Information. From the date of this Agreement to the Effective
Time, JEFG and ITGI shall afford the other and its accountants, counsel and
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 (other than data and
information subject to an attorney-client or other privilege), insofar as such
access is reasonably required by the other including, without limitation, for
audit, accounting and litigation purposes.
(f) Affiliates. Sections 7A(f)(i) and (ii) of the Disclosure Schedules list
all persons who may currently be deemed to be "AFFILIATES" of JEFG and ITGI,
respectively, for purposes of Rule 145 under the Securities Act ("AFFILIATES"),
and each such party shall advise the other in writing of any person who becomes
an Affiliate after the date hereof and prior to the Effective Time, and shall
use its commercially reasonable efforts to cause each such person to deliver to
the other party, at or prior to the Effective Time, a written agreement
substantially in the form of Exhibit 7A(f) hereto.
(g) Press Releases. Neither ITGI nor JEFG shall make or issue any press
release or other public statement with respect to any of the transactions
contemplated hereby without obtaining the prior written approval of the other,
which consent shall not be unreasonably withheld.
(h) Consents. JEFG agrees to use its reasonable best efforts to obtain all
Governmental Consents referenced in Section 6A(c) hereof and the Consents listed
on Section 6A(c) of the Disclosure Schedule. ITGI agrees to use its reasonable
best efforts to obtain all Governmental Consents and other consents referenced
in Section 6B(c) hereof.
(i) Amendment of Distribution Agreement. JEFG shall not modify, amend or
waive any provision of the Distribution Agreement, unless JEFG shall have
obtained the consent of ITGI, which consent shall not be unreasonably withheld.
(j) ITGI Lock-Up Covenants. ITGI agrees to refrain, and to cause its
subsidiaries to refrain, from purchasing, or entering into options or contracts
which would allow or obligate ITGI or any of its subsidiaries to purchase, JEFG
Common Stock prior to the Effective Time. ITGI agrees to use its commercially
reasonable efforts to obtain agreements from the holders of ITGI Common Stock
Equivalents not to exercise such options prior to the earlier of (x) the
Effective Time and (y) April 30, 1999.
(k) Termination of Certain Intercompany Agreements. JEFG and ITGI agree
that the Development Rights Agreement and the Intercompany Borrowing Agreement,
each dated March 14, 1994, between JEFG and ITGI, shall be terminated effective
as of the Pre-Closing without liability to any party thereunder, and each party
will execute and deliver prior to the Pre-Closing such instruments as the other
party reasonably may request to give effect to the foregoing.
(l) Other JEFG Covenants Prior to Pre-Closing. In the event that at any
time prior to the Pre-Closing, JEFG receives a third party offer to purchase its
entire equity interest in ITGI, JEFG agrees to use its commercially reasonable
best efforts to endeavor to obtain, but shall not be obligated to obtain, the
same economic terms and benefits of such offer for the benefit of the ITGI
Public Stockholders.
(m) Standstill After Pre-Closing. Each of JEFG and ITGI agrees that it will
not, at any time from and after the Pre-Closing and prior to the Effective Time,
knowingly take any action that would result in ITGI's ceasing to be a member of
the affiliated group (within the meaning of Section 1504(a) of the Code) of
which JEFG is the parent.
(n) JEFG Transfers of Liabilities. JEFG shall take all necessary action
prior to the Pre-Closing Date in order to effect the transfer to Holding (or to
JEFCO, as appropriate), after the Pre-Closing
A-21
<PAGE>
Date and prior to the Effective Time, of all JEFG Liabilities that are not
related to ITGI or ITGI's subsidiaries. If, due to the inability of JEFG to
transfer certain of such JEFG Liabilities to Holding or obtain for itself any
required third party releases from such Liabilities or any required consent in
connection with any transfer set forth in the preceding sentence, and therefore
JEFG shall have Liabilities immediately prior to the Effective Time (excluding
Liabilities related to ITGI or ITGI's subsidiaries, Liabilities of ITGI or the
Surviving Corporation arising pursuant to this Agreement or the Ancillary
Agreements, contingent Liabilities arising by operation of law and Liabilities
related to asserted or unasserted litigation, the responsibility for which
cannot be reasonably quantified or ascertained) (with such JEFG Liabilities,
excluding the Liabilities in the preceding parenthetical, constituting the
"RESIDUAL LIABILITIES"), JEFG shall take such action prior to the Pre-Closing
Date, in form and substance reasonably satisfactory to ITGI, to discharge,
offset, reserve against or otherwise mitigate the Residual Liabilities (through
prepayments, reserves, insurance, defeasance, trust arrangements, replacement
guarantees or the provision to third party creditors, landlords, ITGI or the
Surviving Corporation of one or more letters of credit) for all Residual
Liabilities in excess of the Applicable Amount (defined below). The "APPLICABLE
AMOUNT" of unmitigated Residual Liabilities, as used in the preceding sentence,
shall be $5.0 million from and after the Effective Time until the first
anniversary thereof; $3.33 million from and after the first anniversary until
the second anniversary of the Effective Time; $1.67 million from and after the
second anniversary until the third anniversary of the Effective Time; and $0
from and after the third anniversary of the Effective Time. JEFG agrees to
obtain, for the benefit of ITGI (or the Surviving Corporation after the
Effective Time), 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. 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.
8. CONDITIONS TO THE OBLIGATIONS OF JEFG AND ITGI TO CONSUMMATE THE PRE-CLOSING
The respective obligations of ITGI, on the one hand, and JEFG, on the other
hand, to consummate the Pre-Closing are subject to the fulfillment (or waiver in
writing by a duly authorized officer of the party which did not fail to satisfy
such condition or requirement) of the following requirements and conditions:
(a) Stockholder Approvals. This Agreement (including the Charter Amendment)
and the issuance of JEFG Common Stock pursuant to this Agreement shall have been
approved and adopted by the requisite votes of JEFG's stockholders in accordance
with the DGCL, New York Stock Exchange requirements and the Organizational
Documents of JEFG. This Agreement shall have been approved and adopted by the
requisite votes of ITGI's stockholders in accordance with the DGCL and the
Organizational Documents of ITGI.
(b) No Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction, sanction or other order issued by
any court of competent jurisdiction, self-regulatory organization or body, stock
exchange or other legal or regulatory restraint or prohibition shall have been
issued and be in effect (i) restraining or prohibiting the consummation of the
Merger, the Contribution, the Assumption, the Special ITGI Cash Dividend, the
Distribution or the other transactions contemplated by the Ancillary Agreements
or this Agreement or (ii) prohibiting or limiting the ownership, operation or
control by the Surviving Corporation or JEFG or any of their respective
subsidiaries of any portion of the business or assets of ITGI or its
subsidiaries as of the Effective Time, or compelling the Surviving Corporation
or JEFG or ITGI or any of their respective subsidiaries to dispose of, grant
rights in respect of, or hold separate any portion of the business or assets of
JEFG, ITGI or any of their respective subsidiaries as of the Effective Time; nor
shall any action have been taken by a governmental regulatory authority, agency
or instrumentality, self-regulatory organization or
A-22
<PAGE>
body, stock exchange or any federal, state or foreign statute, rule, regulation,
executive order, decree or injunction shall have been enacted, entered,
promulgated or enforced by any governmental regulatory authority, agency or
instrumentality, self-regulatory organization or body, stock exchange or
arbitrator, which is in effect and has the effect of making the Contribution,
the Assumption, the Special ITGI Cash Dividend, the Distribution or the Merger,
illegal or otherwise prohibiting the consummation of the Contribution, the
Assumption, the Special ITGI Cash Dividend, the Distribution or the Merger.
(c) Proxy/Prospectus and Proxy/Information Statement. The registration
statement with respect to the Proxy/Prospectus shall have been declared
effective under the Securities Act and no stop orders with respect thereto shall
have been issued and the Proxy/Prospectus shall have been furnished to the
stockholders of ITGI. JEFG shall have received all requisite authorizations
under all applicable state securities or blue sky laws necessary to consummate
the issuance of JEFG Common Stock pursuant to this Agreement. The
Proxy/Information Statement shall have been furnished to the stockholders of
JEFG.
(d) NYSE Listing. Approval for listing by the New York Stock Exchange, Inc.
upon official notice of issuance of JEFG Common Stock to be issued in the Merger
shall have been received by JEFG.
(e) Supplemental Indentures. Supplemental indenture(s) in form and
substance satisfactory to JEFG and ITGI shall have been duly executed in respect
of the 8 7/8% Notes, pursuant to which, effective as of the date the Transfers
are completed, Holding shall assume, and JEFG shall be released from, JEFG's
obligations under the 8 7/8% Notes and the related indenture. ITGI and its
counsel shall have been provided complete copies of such supplemental
indenture(s) and the officers' certificate(s) and opinion(s) of JEFG's counsel
(which expressly permit(s) ITGI to rely thereon) provided to the trustee for the
8 7/8% Notes in connection therewith, and such officer's certificate(s) and
opinion(s) shall be satisfactory in form and substance to ITGI.
(f) Accounting Advisory Letter. ITGI and JEFG shall have received a letter
from KPMG LLP, dated as of the Pre-Closing Date, substantially in the form set
forth in Section 8(f) of the Disclosure Schedule.
(g) Escrow. The Escrow Agreement shall have been executed and delivered by
JEFG, ITGI and the Escrow Agent, and all items required to be delivered into
escrow thereunder shall have been delivered, to be released by the Escrow Agent
in accordance with the terms and conditions thereof.
(h) JEFG's Maintenance of Minimum Ownership Levels of ITGI Common Stock.
JEFG and ITGI shall be reasonably satisfied that, at all relevant times prior to
the Pre-Closing Date, 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.
(i) Satisfaction of Distribution Agreement Conditions. All conditions to
the Distribution set forth in Section 2.02 of the Distribution Agreement shall
have been satisfied and if any condition shall not have been satisfied as of the
Pre-Closing Date such condition shall have been waived by JEFG, in its sole
discretion.
(j) Absence of Withdrawal or Amendment of Tax Ruling. The tax ruling from
the Internal Revenue Service relating to the Transfers, the Distribution and
certain aspects of the Merger obtained prior to the date hereof (the "TAX
RULING") shall not have been, prior to the Pre-Closing, withdrawn by the IRS or
modified by the IRS in any material adverse respect.
A-23
<PAGE>
9. CONDITIONS TO THE OBLIGATIONS OF JEFG TO CONSUMMATE THE PRE-CLOSING
The obligations of JEFG under this Agreement to effect the Pre-Closing are
subject to the fulfillment (or waiver in writing by a duly authorized officer of
JEFG), prior to or at the Pre-Closing, of each of the following conditions:
(a) Representations, Warranties and Covenants of ITGI. The representations
and warranties of ITGI herein contained shall be true and correct as of the
Pre-Closing Date in all material respects with the same effect as though made at
such time, except to the extent waived hereunder or affected by the transactions
contemplated herein; ITGI shall have performed in all material respects all
obligations and complied in all material respects with all agreements,
undertakings, covenants and conditions required by this Agreement and the
Ancillary Agreements to be performed or complied with by it at or prior to the
Pre-Closing Date; and ITGI shall have delivered to JEFG a certificate in form
and substance satisfactory to JEFG dated the date of the Pre-Closing Date and
signed by the chief executive officer and the chief financial officer of ITGI to
such effect.
(b) Consents. ITGI shall have obtained all Governmental Consents and shall
have obtained all other Consents referenced in Section 6B(c) and designated to
be required to have been obtained on or prior to the Pre-Closing.
(c) Opinions of Counsel.
(i) ITGI shall have delivered to JEFG opinions, dated the Pre-Closing
Date, satisfactory to counsel for JEFG, of Cahill Gordon & Reindel, counsel
to ITGI, to the effect that:
(1) ITGI is a corporation duly organized, validly existing and in good
standing under the laws of the jurisdiction of its incorporation and
has the requisite corporate power to enter into and perform its
obligations under this Agreement.
(2) The execution, delivery and performance of this Agreement and the
consummation of the Merger as provided herein by ITGI have been duly
authorized and approved by all requisite corporate action; this
Agreement has been duly executed and delivered by ITGI and
constitutes a valid and binding obligation of ITGI, enforceable in
accordance with its terms, subject to any bankruptcy, insolvency,
moratorium or other laws affecting the enforcement of creditors'
rights and by general principles of equity.
(3) Upon the filing of the appropriate certificate of merger with the
Secretary of State of the State of Delaware, the Merger shall be
effective in accordance with the terms of this Agreement and the
DGCL.
(4) All such approvals, consents, authorizations or modifications as may,
to the knowledge of such counsel, be required to permit the
performance by ITGI of its respective obligations under this
Agreement and consummation of the transactions herein contemplated
have been obtained (whether from Governmental Authorities or other
persons).
In rendering its opinion letter, Cahill Gordon & Reindel may rely on
certificates of officers of ITGI or its subsidiaries or government officials,
opinions of other counsel and such other evidence as such counsel for ITGI may
deem necessary or desirable.
(ii) JEFG shall have received an opinion of Morgan, Lewis & Bockius
LLP, in form and substance reasonably satisfactory to JEFG and substantially
in the form of Appendix F (following Morgan, Lewis & Bockius LLP's receipt
of representations of officers of ITGI and JEFG substantially in the form of
Appendices G-1 and G-2), on the basis of certain facts, representations and
assumptions set forth in such opinion, dated the Pre-Closing Date, to the
effect that, with respect to the ITGI Public Stockholders, the Merger will
be treated for federal income tax purposes as a reorganization qualifying
under the provisions of Section 368(a) of the Code, and
A-24
<PAGE>
that each of JEFG and ITGI will be a party to the reorganization within the
meaning of Section 368(b) of the Code.
10. CONDITIONS TO THE OBLIGATIONS OF ITGI TO CONSUMMATE THE PRE-CLOSING
The obligations of ITGI under this Agreement to effect the Pre-Closing are
subject to the fulfillment (or waiver in writing by a duly authorized officer of
ITGI), prior to or at the Pre-Closing, of each of the following conditions:
(a) Representations, Warranties and Covenants of JEFG. The representations
and warranties of JEFG herein contained shall be true and correct as of the
Pre-Closing Date in all material respects with the same effect as though made at
such time, except to the extent waived hereunder or affected by the transactions
contemplated herein; JEFG shall have performed in all material respects all
obligations and complied in all material respects with all agreements,
undertakings, covenants and conditions required by this Agreement and the
Ancillary Agreements to be performed or complied with by it at or prior to the
Pre-Closing Date; and JEFG shall have delivered to ITGI a certificate in form
and substance satisfactory to ITGI dated the Pre-Closing Date and signed by the
chief executive officer and the chief financial officer of JEFG to such effect.
(b) [Intentionally Omitted].
(c) [Intentionally Omitted].
(d) Options. JEFG shall have delivered to ITGI a copy (certified by the
Secretary of JEFG) of duly adopted resolutions of the Board of Directors of JEFG
accelerating the vesting and exercisability of all options to purchase or
acquire JEFG Common Stock, which acceleration shall be effective on or before
the release of the Special ITGI Cash Dividend pursuant to the Escrow Agreement.
JEFG shall have caused all outstanding JEFG Common Stock Equivalents to have
been exercised or canceled, or exchanged (conditioned upon completion of the
Distribution) for options, shares, or common stock equivalents of Holding as of,
or within two business days following the Pre-Closing Date, or reserved against
without the Surviving Corporation's responsibility after the Effective Time.
(e) Transfer and Releases. JEFG shall have taken all necessary action to
effect the transfer (after the Pre-Closing Date before the Effective Time) of
all JEFG Liabilities, excluding the Residual Liabilities, to Holding and to
provide that the unmitigated Residual Liabilities shall not be in excess of the
Applicable Amount.
(f) Consents. JEFG shall have obtained all Governmental Consents referenced
in Section 6A(c) hereof and shall have obtained all Consents listed in Section
10(f) of the Disclosure Schedule.
(g) Opinion of Counsel.
(i) JEFG shall have delivered to ITGI an opinion, dated the Pre-Closing
Date, satisfactory to counsel for ITGI, of Morgan, Lewis & Bockius LLP,
counsel for JEFG, to the effect that:
(1) JEFG is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its
incorporation, and has the requisite corporate power to enter
into and perform its obligations under this Agreement.
(2) The execution, delivery and performance of this Agreement by JEFG
and the Ancillary Agreements by JEFG and Holding and the issuance
of JEFG Common Stock pursuant to this Agreement have been duly
authorized and approved by all requisite corporate action; this
Agreement has been duly executed and delivered by JEFG and
constitutes a valid and binding obligation of JEFG enforceable
against JEFG in accordance with its terms, subject to any
bankruptcy, insolvency, moratorium or other laws affecting the
enforcement of creditors' rights and general
A-25
<PAGE>
principles of equity; the Ancillary Agreements have been duly
executed and delivered by JEFG and Holding, and constitute a
valid and binding obligation of JEFG and Holding and are
enforceable in accordance with their terms, subject to any
bankruptcy, insolvency, moratorium or other laws affecting the
enforcement of creditors' rights and general principles of
equity.
(3) Upon the filing of the appropriate certificate of merger with the
Secretary of State of the State of Delaware, the Merger shall be
effective in accordance with the terms of this Agreement and the
DGCL.
(4) All such approvals, consents, authorizations or modifications as
may, to the knowledge of such counsel, be required to permit the
performance by JEFG of its respective obligations under this
Agreement and consummation of the transactions herein
contemplated have been obtained (whether from Governmental
Authorities or other persons).
(5) The JEFG Common Stock to be issued by JEFG as contemplated by
this Agreement has been duly authorized and upon delivery to the
ITGI Public Stockholders, will be duly and validly issued, fully
paid and non-assessable, and will not have been issued in
violation of any statutory preemptive rights of stockholders.
In rendering its opinion letter, Morgan, Lewis & Bockius LLP may rely on
certificates of officers of JEFG, opinions of other counsel and such other
evidence as such counsel for JEFG may deem necessary or desirable.
(ii) ITGI shall have received an opinion of Cahill Gordon & Reindel, in
form and substance reasonably satisfactory to ITGI and substantially in the
form of Appendix H (following Cahill Gordon & Reindel's receipt of
representations of officers of ITGI and JEFG substantially in the form of
Appendices I-1 and I-2), on the basis of certain facts, representations and
assumptions set forth in such opinion, dated the Pre-Closing Date, to the
effect that the Merger will be treated for federal income tax purposes from
the perspective of the ITGI Public Stockholders as a reorganization
qualifying under the provisions of Section 368(a) of the Code, and that each
of JEFG and ITGI will be a party to the reorganization within the meaning of
Section 368(b) of the Code.
(h) Amendment of Distribution Agreement. No provision of the Distribution
Agreement shall have been modified, amended or waived without the prior written
consent of ITGI, which consent shall not be unreasonably withheld.
(i) Other. All certificates, consents and opinions, including any provision
therein permitting ITGI to rely thereon, delivered in connection with the
supplemental indentures referred to in Section 6(A)(t) shall not have been
withdrawn.
(j) Procurement of Any Necessary Letters of Credit. JEFG shall have
procured and delivered to ITGI all necessary letters of credit concerning
unmitigated Residual Liabilities in excess of the Applicable Amount as may be
required by Section 7(n) hereof.
11. CONDITIONS TO THE OBLIGATIONS OF JEFG AND ITGI TO CONSUMMATE THE MERGER
The obligations of each of JEFG and ITGI under this Agreement to effect the
Merger are subject to the fulfillment (or waiver in writing by a duly authorized
officer of JEFG and ITGI), prior to or at the Effective Time, of each of the
following conditions:
(a) Pre-Closing Consummated. The Pre-Closing shall have been consummated in
accordance with this Agreement and the Escrow Agreement shall have been fully
complied with.
A-26
<PAGE>
(b) JEFG's Maintenance of Minimum Ownership Levels of ITGI Common Stock.
JEFG and ITGI 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.
(c) Absence of Withdrawal or Amendment of Tax Ruling. The Tax Ruling shall
not have been, prior to the Effective Time, withdrawn by the IRS or modified by
the IRS in any material adverse respect.
12. NO SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS
The representations, warranties, covenants and other obligations of JEFG and
ITGI hereunder shall not survive the Merger; PROVIDED, HOWEVER, that Section
7(d) hereof shall survive (i) the Merger in accordance with Section 12.01 of the
Distribution Agreement and (ii) any termination of this Agreement prior to the
Effective Time pursuant to Section 13 hereof.
13. TERMINATION
(a) This Agreement may be terminated and the transactions contemplated
hereby may be abandoned at any time prior to the completion of the Pre-Closing
(i) by mutual written consent of JEFG and ITGI or (ii) by either party upon (x)
the failure of the other party to satisfy any covenant or agreement set forth in
this Agreement or the Ancillary Agreements or (y) upon the discovery of any
representation of the other party which is false in any material respect or for
which there is a material omission to disclose information which makes any
representation of the other party materially misleading or (z) the failure to
satisfy any condition set forth in Section 8 hereof or the failure of the other
party to satisfy a condition to such party's obligation to consummate the
Pre-Closing set forth in Section 9 or 10 hereof, as applicable.
(b) This Agreement may be terminated and the transactions contemplated
hereby may be abandoned at any time after completion of the Pre-Closing and
prior to the Closing (i) by mutual written consent of JEFG and ITGI or (ii) by
either party upon the failure of the condition set forth in Section 11(b) or
11(c) hereof to be satisfied unless and to the extent such failure occurred as a
result of such party's breach of any representation, warranty or covenant set
forth in this Agreement.
14. ENTIRE AGREEMENT
This Agreement constitutes the entire agreement among the parties with
respect to the subject matter hereof and supersedes all prior written and oral
and all contemporaneous oral agreements and understandings with respect to the
subject matter hereof.
15. 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 addressed as follows:
If to ITGI to:
Investment Technology Group, Inc.
380 Madison Avenue, 4th Floor
New York, New York 10017
Attention: Chief Financial Officer
A-27
<PAGE>
With a copy to:
Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005
Attention: Immanuel Kohn, Esq.
If to JEFG to:
Jefferies Group, 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 19103-2921
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.
16. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware regardless of the laws that might otherwise govern
under principles of conflicts of laws applicable thereto.
17. COUNTERPARTS
This Agreement may be executed in counterparts, each of which shall be
deemed to be an original, but all of which shall constitute one and the same
agreement.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized on the day and
year first above written.
JEFFERIES GROUP, INC.
By: /s/ CLARENCE T. SCHMITZ
--------------------------------------
Name: Clarence T. Schmitz
Title: Executive Vice President and
Chief Financial Officer
INVESTMENT TECHNOLOGY GROUP, INC.
By: /s/ RAYMOND L. KILLIAN, JR.
--------------------------------------
Name: Raymond L. Killian, Jr.
Title: Chairman, Chief Executive
Officer and President
A-28
<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>
<CAPTION>
PAGE
-----
<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>
<CAPTION>
PAGE
-----
<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
B-2
<PAGE>
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.
B-3
<PAGE>
"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.
B-4
<PAGE>
"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.
B-5
<PAGE>
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.
B-6
<PAGE>
(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.
B-7
<PAGE>
(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
B-8
<PAGE>
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.
B-9
<PAGE>
(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
B-10
<PAGE>
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.
B-11
<PAGE>
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
B-12
<PAGE>
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.
B-13
<PAGE>
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
B-14
<PAGE>
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.
B-15
<PAGE>
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>
B-16
<PAGE>
APPENDIX C
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");
C-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. 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
C-2
<PAGE>
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
C-3
<PAGE>
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
C-4
<PAGE>
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
C-5
<PAGE>
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.
C-6
<PAGE>
(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,
C-7
<PAGE>
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
C-8
<PAGE>
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
C-9
<PAGE>
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
C-10
<PAGE>
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.
C-11
<PAGE>
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
-----------------------------------------
Clarence T. Schmitz, Executive Vice
President
and CFO
JEF HOLDING COMPANY, INC.
BY /s/ JERRY M. GLUCK
-----------------------------------------
Jerry M. Gluck, Secretary and
General Counsel
</TABLE>
C-12
<PAGE>
APPENDIX D
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
April 27, 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.
D-1
<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 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
D-2
<PAGE>
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.
D-3
<PAGE>
(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
D-4
<PAGE>
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/ CLARENCE T. SCHMITZ
-----------------------------------------
Clarence T. Schmitz, Executive Vice
President
and CFO
"ITGI"
INVESTMENT TECHNOLOGY GROUP, INC.
a Delaware corporation
By: /s/ RAYMOND L. KILLIAN, JR.
-----------------------------------------
Raymond L. Killian, Jr., Chairman,
Chief Executive Officer and President
"HOLDING"
JEF HOLDING COMPANY, INC.
A Delaware corporation
By: /s/ JERRY M. GLUCK
-----------------------------------------
Jerry M. Gluck, Secretary and
General Counsel
</TABLE>
D-10
<PAGE>
Appendix E
[LOGO]
March 17, 1999
J.P. Morgan Securities Inc.
60 Wall Street
New York, NY
0260-0060
The Board of Directors
Jefferies Group, Inc.
11100 Santa Monica Boulevard
Los Angeles, CA 90025
Attention: Frank E. Baxter
Chairman & Chief Executive Officer
Ladies and Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to Jefferies Group, Inc. (the "Company") of the Exchange Ratio (as defined
below) in the proposed merger (the "Merger") of the Company with Investment
Technology Group, Inc. ("ITGI"). Pursuant to the Agreement and Plan of Merger,
dated as of March 17, 1999 (the "Agreement"), between the Company and ITGI, ITGI
will be merged with and into the Company, and each share of Common Stock, par
value $0.01 per share (the "ITGI Common Stock"), of ITGI issued and outstanding
immediately prior to the Effective Time (as defined in the Agreement) (other
than shares held in the treasury of ITGI or held by the Company) shall be
converted into the right to receive such number of shares of Common Stock, par
value $0.01 per share (the "Company Common Stock") of the Company equal to the
result obtained by dividing (x) the total number of shares of Company Common
Stock outstanding immediately prior to the Effective Time by (y) the total
number of shares of ITGI Common Stock held by the Company immediately prior to
the Effective Time (the "Exchange Ratio").
In arriving at our opinion, we have reviewed (i) the Agreement; (ii) the
Proxy/Information Statement of the Company with respect to the Merger (the
"Proxy Statement"); and (iii) the audited financial statements of the Company
and ITGI for the fiscal year ended December 31, 1997, and a draft of the audited
financial statements of the Company and ITGI for the period ended December 31,
1998. In addition, we have held discussions with certain members of the
management of the Company and ITGI with respect to certain aspects of the Merger
and considered such other information as we deemed appropriate for the purposes
of this opinion.
In giving our opinion, we have relied upon and assumed, without independent
verification, the accuracy and completeness of all information that was publicly
available or was furnished to us by the Company and ITGI or otherwise reviewed
by us, and we have not assumed any responsibility or liability therefor. We have
not conducted any valuation or appraisal of any assets or liabilities, nor have
any such valuations or appraisals been provided to us. J.P. Morgan has also
assumed that the Merger will have the tax consequences described in the Proxy
Statement and in discussions with, and materials furnished to us by,
representatives of the Company, and that the other transactions contemplated by
the
E-1
<PAGE>
Agreement will be consummated as described in the Agreement and the Proxy
Statement. We have relied as to all legal matters relevant to rendering our
opinion upon the advice of counsel.
Our opinion is necessarily based on economic, market and other conditions as in
effect on, and the information made available to us as of, the date hereof. It
should be understood that subsequent developments may affect this opinion and
that we do not have any obligation to update, revise, or reaffirm this opinion.
We are expressing no opinion herein as to the price at which the Company Common
Stock will trade at any future time.
We have acted as financial advisor to the Company with respect to the Merger and
other transactions contemplated by the Agreement and the Proxy Statement and
will receive a fee from the Company for our services. J.P. Morgan has from time
to time acted as a financial advisor to the Company, for which it has received
customary fees. In the ordinary course of their businesses, J.P. Morgan and its
affiliates may actively trade the debt and equity securities of the Company or
ITGI for their own account or for the accounts of customers and, accordingly,
they may at any time hold long or short positions in such securities.
On the basis of and subject to the foregoing, it is our opinion as of the date
hereof that the exchange ratio in the proposed Merger is fair, from a financial
point of view, to the Company.
This letter is provided to the Board of Directors of the Company in connection
with and for the purposes of its evaluation of the Merger. This opinion does not
constitute a recommendation to any stockholder of the Company as to how such
stockholder should vote with respect to the Merger.
Very truly yours,
J.P. MORGAN SECURITIES INC.
<TABLE>
<S> <C> <C>
By: /s/ FREDERIC A. ESCHERICH
------------------------------------------
Name: Frederic A. Escherich
Title: Managing Director
</TABLE>
E-2
<PAGE>
Appendix F
DELAWARE GENERAL CORPORATION LAW
SECTION 262 OF SUBCHAPTER IX
APPRAISAL RIGHTS
SECTION 262 APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of stock on
the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares
through the effective date of the merger or consolidation, who has otherwise
complied with subsection (d) of this section and who has neither voted in
favor of the merger or consolidation nor consented thereto in writing
pursuant to Section 228 of this title shall be entitled to an appraisal by
the Court of Chancery of the fair value of his shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used
in this section, the word "stockholder" means a holder of record of stock in
a stock corporation and also a member of record of a nonstock corporation;
the words "stock" and "share" mean and include what is ordinarily meant by
those words and also membership or membership interest of a member of a
nonstock corporation; and the words "depository receipt" mean a receipt or
other instrument issued by a depository representing an interest in one or
more shares, or fractions thereof, solely of stock of a corporation, which
stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or series of
stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251, 252, 254, 257, 258, 263 or 264 of this
title:
(1) Provided, however, that no appraisal rights under this section shall be
available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at
the meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange
or designated as a national market system security on an interdealer
quotation system by the National Association of Securities Dealers, Inc.
or (ii) held of record by more than 2,000 holders; and further provided
that no appraisal rights shall be available for any shares of stock of
the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights under
this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by
the terms of an agreement of merger or consolidation pursuant to
SectionSection251, 252, 254, 257, 258, 263 and 264 of this title to
accept for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed
on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National
Association of Securities Dealers, Inc. or held of record by more
than 2,000 holders;
F-1
<PAGE>
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph;
or
d. Any combination of the shares of stock, depository receipts and cash
in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation party
to a merger effected under Section 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the
assets of the corporation. If the certificate of incorporation contains such
a provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting
of stockholders, the corporation, not less than 20 days prior to the
meeting, shall notify each of its stockholders who was such on the record
date for such meeting with respect to shares for which appraisal rights
are available pursuant to subsection (b) or (c) hereof that appraisal
rights are available for any or all of the shares of the constituent
corporations, and shall include in such notice a copy of this section.
Each stockholder electing to demand the appraisal of his shares shall
deliver to the corporation, before the taking of the vote on the merger
or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to
demand the appraisal of his shares. A proxy or vote against the merger or
consolidation shall not constitute such a demand. A stockholder electing
to take such action must do so by a separate written demand as herein
provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become
effective; or
(2) If the merger or consolidation was approved pursuant to Section 228 or
253 of this title, the surviving or resulting corporation, either before
the effective date of the merger or consolidation or within 10 days
thereafter, shall notify each of the stockholders entitled to appraisal
rights of the effective date of the merger or consolidation and that
appraisal rights are available for any or all of the shares of the
constituent corporation, and shall include in such notice a copy of this
section. The notice shall be sent by certified or registered mail, return
receipt requested, addressed to the stockholder at his address as it
appears on the records of the corporation. Any stockholder entitled to
appraisal rights may, within 20 days after the date of mailing of the
notice, demand in writing from the surviving or resulting corporation the
appraisal of his shares. Such demand will be sufficient if it reasonably
informs the corporation of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of his shares.
F-2
<PAGE>
(e) Within 120 days after the effective date of the merger or consolidation, the
surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the
effective date of the merger or consolidation, any stockholder shall have
the right to withdraw his demand for appraisal and to accept the terms
offered upon the merger or consolidation. Within 120 days after the
effective date of the merger or consolidation, any stockholder who has
complied with the requirements of subsections (a) and (d) hereof, upon
written request, shall be entitled to receive from the corporation surviving
the merger or resulting from the consolidation a statement setting forth the
aggregate number of shares not voted in favor of the merger or consolidation
and with respect to which demands for appraisal have been received and the
aggregate number of holders of such shares. Such written statement shall be
mailed to the stockholder within 10 days after his written request for such
a statement is received by the surviving or resulting corporation or within
10 days after expiration of the period for delivery of demands for appraisal
under subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register
in Chancery in which the petition was filed a duly verified list containing
the names and addresses of all stockholders who have demanded payment for
their shares and with whom agreements as to the value of their shares have
not been reached by the surviving or resulting corporation. If the petition
shall be filed by the surviving or resulting corporation, the petition shall
be accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a newspaper
of general circulation published in the City of Wilmington, Delaware or such
publication as the Court deems advisable. The forms of the notices by mail
and by publication shall be approved by the Court, and the costs thereof
shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the stockholders
who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded
an appraisal for their shares and who hold stock represented by certificates
to submit their certificates of stock to the Register in Chancery for
notation thereon of the pendency of the appraisal proceedings; and if any
stockholder fails to comply with such direction, the Court may dismiss the
proceedings as to such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court shall
appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid
upon the amount determined to be the fair value. In determining such fair
value, the Court shall take into account all relevant factors. In
determining the fair rate of interest, the Court may consider all relevant
factors, including the rate of interest which the surviving or resulting
corporation would have had to pay to borrow money during the pendency of the
proceeding. Upon application by the surviving or resulting corporation or by
any stockholder entitled to participate in the appraisal proceeding, the
Court may, in its discretion, permit discovery or other pretrial proceedings
and may proceed to trial upon the appraisal prior to the final determination
of the stockholder entitled to an appraisal. Any stockholder whose name
appears on the list filed by the surviving or resulting corporation pursuant
to subsection (f) of this section and who has submitted his certificates of
stock to the Register in Chancery, if such is required, may participate
fully in all
F-3
<PAGE>
proceedings until it is finally determined that he is not entitled to
appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares, together
with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the
Court may direct. Payment shall be so made to each such stockholder, in the
case of holders of uncertificated stock forthwith, and the case of holders
of shares represented by certificates upon the surrender to the corporation
of the certificates representing such stock. The Court's decree may be
enforced as other decrees in the Court of Chancery may be enforced, whether
such surviving or resulting corporation be a corporation of this State or of
any state.
(j) The costs of the proceeding may be determined by the Court and taxed upon
the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and
the fees and expenses of experts, to be charged pro rata against the value
of all the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or
to receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation);
provided, however, that if no petition for an appraisal shall be filed
within the time provided in subsection (e) of this section, or if such
stockholder shall deliver to the surviving or resulting corporation a
written withdrawal of his demand for an appraisal and an acceptance of the
merger or consolidation, either within 60 days after the effective date of
the merger or consolidation as provided in subsection (e) of this section or
thereafter with the written approval of the corporation, then the right of
such stockholder to an appraisal shall cease. Notwithstanding the foregoing,
no appraisal proceeding in the Court of Chancery shall be dismissed as to
any stockholder without the approval of the Court, and such approval may be
conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares of
such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
F-4
<PAGE>
JEFFERIES GROUP, INC.
11100 Santa Monica Boulevard, 11th Floor
Los Angeles, California 90025
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE SPECIAL
MEETING OF STOCKHOLDERS, APRIL 20, 1999.
KNOW ALL MEN BY THESE PRESENTS that I, the undersigned stockholder of Jefferies
Group, Inc., a Delaware corporation (the "Company"), do hereby nominate,
constitute, and appoint Frank E. Baxter and Clarence T. Schmitz, or any one or
more of them, my true and lawful attorney(s) with full power of substitution for
me and in my name, place and stead, to vote all of the Common Stock, par value
$.01 per share, of the Company, standing in my name on its books on March 1,
1999, at the Special Meeting of its Stockholders to be held on April 20, 1999 at
the New York Helmsley Hotel, 212 East 42nd Street, New York, New York 10017 at
9:00 a.m., local time, and at any and all postponements or adjournments thereof.
- --------------------------------------------------------------------------------
(1) To consider and vote upon a proposal to approve and adopt the Agreement and
Plan of Merger dated as of March 17, 1999 (the "Merger Agreement"), between
the Company and Investment Technology Group, Inc., a Delaware corporation
and an approximately 80.5% subsidiary of the Company ("ITGI"), providing
for the merger (the "Merger") of ITGI with and into the Company and to also
approve the issuance of the Common Stock of the Company pursuant to the
Merger Agreement. The Merger is subject to numerous conditions as set forth
in the Merger Agreement, including the condition that the Merger would
occur only after the Company distributes (the "Spin-Off") to Company
stockholders through a pro rata dividend all of the outstanding common
stock of JEF Holding Company, Inc. ("New JEF"), a wholly-owned subsidiary
of the Company, following the transfer of all of the Company's assets,
except for the Company's approximately 80.5% interest in the capital stock
of ITGI, and all of the Company's liabilities (other than liabilities of or
related to ITGI), to New JEF or a Company subsidiary that will become a New
JEF subsidiary pursuant to the Transfers and the satisfaction of all other
terms and conditions related to the Spin-Off.
- --------------------------------------------------------------------------------
FOR [ ] AGAINST [ ] ABSTAIN [ ]
- --------------------------------------------------------------------------------
(2) To consider and vote upon a proposal to approve the 1999 Incentive
Compensation Plan of New JEF.
- --------------------------------------------------------------------------------
FOR [ ] AGAINST [ ] ABSTAIN [ ]
- --------------------------------------------------------------------------------
(3) To consider and vote upon a proposal to approve the 1999 Directors' Stock
Compensation Plan of New JEF.
- --------------------------------------------------------------------------------
FOR [ ] AGAINST [ ] ABSTAIN [ ]
- --------------------------------------------------------------------------------
(4) To consider and vote upon a proposal to grant the Company's Board of
Directors discretionary authority to postpone or adjourn the Special
Meeting in order to solicit additional votes to approve any matter set
forth in paragraphs (1), (2) or (3) above if the Secretary of the Company
determines that there are not sufficient votes to approve any such matter.
- --------------------------------------------------------------------------------
FOR [ ] AGAINST [ ] ABSTAIN [ ]
- --------------------------------------------------------------------------------
(5) In their discretion, to transact any other business that may properly come
before the Special Meeting.
- --------------------------------------------------------------------------------
ALL SHARES WILL BE VOTED AS DIRECTED HEREIN AND, UNLESS OTHERWISE DIRECTED, WILL
BE VOTED "FOR" PROPOSALS 1, 2, 3 AND 4 AND IN THE DISCRETION OF THE PERSON
VOTING THE PROXY WITH RESPECT TO ANY OTHER BUSINESS PROPERLY BROUGHT BEFORE THE
MEETING.
<PAGE>
REVERSE SIDE
The undersigned acknowledges receipt of the Notice of Special Meeting
and a Proxy/Information Statement, and revokes all prior Proxies for said
meeting. This Proxy, when properly executed, will be voted in the manner
directed herein by the undersigned stockholder.
SIGNATURE(S) ________________________________________ DATE _____________
SIGNATURE(S) ________________________________________ DATE _____________
NOTE: Please sign exactly as name appears hereon. Joint owners should each
sign. When signing as attorney, executor, administrator, trustee or guardian,
please give full title as such.
