<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
INVESTMENT TECHNOLOGY GROUP, INC.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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
pursuant 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:
-----------------------------------------------------------------------
/ / Fee paid previously with preliminary materials.
/X/ 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: $43,601.33
(2) Form, Schedule or Registration Statement No.: Preliminary Con-
fidential Schedule 14A
(3) Filing Party: Jefferies Group, Inc.
(4) Date Filed: January 15, 1999
<PAGE>
[LOGO]
March 18, 1999
Dear stockholder:
I am pleased to invite you to the annual meeting of the stockholders of
Investment Technology Group, Inc. on April 20, 1999, at 10:00 a.m. (local time),
at the New York Helmsley Hotel, Sutton Place Room, 212 East 42nd Street, New
York, New York. At this important meeting you will be asked to approve the
merger of our company with and into its 80.5% stockholder, Jefferies Group, Inc.
("Parent"), in a series of transactions that will result in the stockholders of
Parent becoming direct stockholders of our company and Parent ceasing to be our
parent company.
Pursuant to an exchange ratio, you will receive approximately 1.59 shares of
common stock of the surviving company in the merger in exchange for each share
of our company's common stock you hold. The surviving company will have
immediately after the merger the same business as we have immediately before the
merger. You will hold the same percentage of the surviving company immediately
following the merger that you hold in our company immediately before the merger.
Therefore, your investment in our company should remain essentially unchanged by
the merger. You will not be taxed on the merger.
Our board of directors, taking into consideration the recommendation of a
special committee consisting of two independent directors, has unanimously
determined that the merger is in the best interests of our company and is fair
to and in the best interests of our stockholders other than Parent. Accordingly,
our board of directors has approved and declared advisable the merger and
recommends that you vote FOR the merger.
In addition, at the annual meeting you will be asked to elect directors to
our board of directors and to approve the selection of our independent auditors.
Parent owns and has the right to vote at the annual meeting sufficient
shares to approve these proposals without the vote of any other stockholder and
has informed us that it intends to vote its shares in their favor.
Whether or not you plan to attend the annual meeting, please take the time
to vote by completing and mailing the enclosed proxy card to us. We encourage
you to read the detailed information in this entire document carefully. This
document also constitutes a prospectus for up to 6,095,000 shares of the
surviving company's common stock to be issued in the merger. We have applied for
listing of the surviving company's common stock on the New York Stock Exchange
under the symbol "ITG."
I appreciate your support in this important event.
Sincerely,
[SIG]
Raymond L. Killian, Jr.
Chairman, Chief Executive Officer and
President
YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEGINNING ON PAGE 7. NEITHER
THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES REGULATOR HAS
APPROVED OR DISAPPROVED OF THE SECURITIES TO BE ISSUED UNDER THIS PROXY
STATEMENT/PROSPECTUS OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS
ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This proxy statement/prospectus is dated March 19, 1999 and is first being
mailed to stockholders on or about March 19, 1999.
<PAGE>
INVESTMENT TECHNOLOGY GROUP, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 20, 1999
To the Stockholders of Investment Technology Group, Inc.:
NOTICE IS HEREBY GIVEN that Investment Technology Group, Inc., a Delaware
corporation ("ITGI"), will hold the annual meeting of stockholders at the New
York Helmsley Hotel, Sutton Place Room, 212 East 42nd Street, New York, New
York, on April 20, 1999 at 10:00 a.m. (local time), and any adjournments or
postponements thereof, for the following purposes:
(1) To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger dated as of March 17, 1999 between ITGI and
Jefferies Group, Inc. ("Parent"), and the merger contemplated thereby. The
merger agreement provides for the merger of ITGI with and into Parent
following the transfer by Parent of all of its assets other than the capital
stock of ITGI held by it, and all of its liabilities other than liabilities
related to our company, to JEF Holding Company, Inc., a newly formed wholly
owned subsidiary of Parent. Parent will survive the merger and be renamed
Investment Technology Group, Inc. In the merger, pursuant to an exchange
ratio, ITGI stockholders other than Parent will receive approximately 1.59
shares of the surviving company's common stock for each share of ITGI common
stock held by them immediately prior to the merger. Included as annexes to
the merger agreement are the certificate of incorporation and bylaws of the
surviving company, which contain provisions that may have the effect of
delaying, prohibiting or otherwise restricting any person from acquiring the
surviving corporation in a transaction not approved by its board of
directors. Therefore, your vote in favor of the merger will have the effect
of approving certain anti-takeover measures for our company following the
merger. The merger is subject to the conditions set forth in the merger
agreement.
(2) To elect six directors to our board of directors to serve until the
next annual meeting and until their successors have been duly elected and
qualified.
(3) To ratify the appointment of KPMG LLP as our independent auditors
for the 1999 fiscal year.
(4) To transact such other business as may properly come before the
annual meeting or any one or more adjournments thereof.
Our board of directors has fixed the close of business on March 1, 1999 as
the record date for determining the stockholders entitled to notice of and to
vote at the annual meeting. Only holders of record of ITGI common stock at the
close of business on March 1, 1999 are entitled to notice of and to vote at the
annual meeting. A complete list of stockholders entitled to vote will be
available during normal business hours at our principal executive offices
located at 380 Madison Avenue, 4th Floor, New York, New York 10017 for a period
of ten days prior to the annual meeting for examination by any ITGI stockholder
for purposes germane to the annual meeting.
OUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED, ADOPTED AND DECLARED
ADVISABLE THE MERGER AND RECOMMENDS THAT YOU VOTE FOR THE MERGER, FOR THE
PROPOSED SLATE OF DIRECTORS AND FOR THE RATIFICATION OF THE APPOINTMENT OF KPMG
LLP AS OUR INDEPENDENT AUDITORS.
You are cordially invited to attend the annual meeting in person. Whether or
not you expect to attend the annual meeting, please sign and mail promptly the
enclosed proxy that is being solicited on behalf of our board of directors. A
return envelope that requires no postage if mailed in the United States is
enclosed for that purpose. The proxies of stockholders who attend the meeting in
person may be withdrawn and such stockholders may vote personally at the
meeting.
<PAGE>
PARENT OWNS AND HAS THE RIGHT TO VOTE AT THE ANNUAL MEETING SUFFICIENT
SHARES TO APPROVE THESE PROPOSALS WITHOUT THE VOTE OF ANY OTHER STOCKHOLDER AND
HAS INFORMED US THAT IT INTENDS TO VOTE ITS SHARES IN THEIR FAVOR.
By Order of the Board of Directors
/s/ TIMOTHY H. HOSKING
Timothy H. Hosking
Secretary
New York, New York
March 19, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
QUESTIONS AND ANSWERS ABOUT THE MERGER..................................................................... 1
SUMMARY.................................................................................................... 2
The Parties to the Transactions.......................................................................... 2
The Annual Meeting....................................................................................... 2
We Will Become an Independent Company Through the Merger................................................. 3
The Merger Will Follow Other Related Transactions........................................................ 3
The Merger Will Affect Your Rights as a Stockholder...................................................... 4
Our Board of Directors Has Approved the Merger........................................................... 4
Donaldson, Lufkin & Jenrette Has Delivered a Fairness Opinion............................................ 4
We are Required to Make Regulatory Filings and Receive Approvals......................................... 4
The Merger Will Not Be Taxable to You.................................................................... 4
RISK FACTORS............................................................................................... 7
THE ANNUAL MEETING......................................................................................... 9
Date, Time and Place of the Annual Meeting............................................................... 9
Matters to Be Considered at the Annual Meeting........................................................... 9
Voting at the Annual Meeting; Record Date; Quorum........................................................ 9
Proxies.................................................................................................. 10
Treatment of Broker Non-Votes and Abstentions at the Annual Meeting...................................... 11
THE MERGER AND RELATED TRANSACTIONS........................................................................ 12
Description of the Transactions.......................................................................... 12
Background of the Transactions........................................................................... 13
A Special Committee of Our Board of Directors Has Recommended the Merger................................. 14
Donaldson, Lufkin & Jenrette Has Delivered a Fairness Opinion Relating to the Merger..................... 18
Our Board of Directors Has Approved the Merger........................................................... 21
U.S. Federal Income Tax Consequences of the Merger....................................................... 21
Comparison of Rights of ITGI Stockholders and New ITGI Stockholders...................................... 23
Exchange Agent........................................................................................... 24
Regulatory Filings and Approvals......................................................................... 24
Resale of New ITGI Common Stock.......................................................................... 25
Listing.................................................................................................. 25
Accounting Treatment of Merger........................................................................... 25
Appraisal Rights......................................................................................... 25
THE MERGER AGREEMENT....................................................................................... 26
Representations and Warranties by Parent................................................................. 26
Representations and Warranties by ITGI................................................................... 28
Certain Covenants and Agreements......................................................................... 29
Pre-Closing.............................................................................................. 32
Conditions to Pre-Closing................................................................................ 32
Conditions to Closing.................................................................................... 35
No Survival of Representations, Warranties and Covenants................................................. 35
Termination.............................................................................................. 35
OTHER AGREEMENTS........................................................................................... 36
Distribution Agreement................................................................................... 36
Tax Sharing and Indemnification Agreement................................................................ 37
Benefits Agreement....................................................................................... 38
MARKET PRICE OF AND DIVIDENDS ON COMMON STOCK.............................................................. 39
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
COMPARATIVE PER SHARE DATA OF PARENT AND ITGI.............................................................. 40
SELECTED HISTORICAL FINANCIAL DATA......................................................................... 41
UNAUDITED PRO FORMA FINANCIAL DATA......................................................................... 42
Unaudited Pro Forma Statement of Financial Condition Data................................................ 42
Unaudited Pro Forma Statement of Income Data............................................................. 43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................... 45
General.................................................................................................. 45
Results of Operations.................................................................................... 46
Dependence on Major Customers............................................................................ 49
Liquidity and Capital Resources.......................................................................... 50
Effects of Inflation..................................................................................... 51
The Year 2000 Issue...................................................................................... 51
Recent Accounting Pronouncements......................................................................... 52
BUSINESS................................................................................................... 53
POSIT.................................................................................................... 53
Average Daily POSIT Share Volume......................................................................... 55
QuantEX.................................................................................................. 55
SmartServers............................................................................................. 56
Electronic Trading Desk.................................................................................. 56
ITG Platform............................................................................................. 57
"ISIS" Pre- and Post-trade Analysis...................................................................... 57
ITG/Opt.................................................................................................. 58
ITG Research............................................................................................. 58
ITG Europe............................................................................................... 58
Australian POSIT......................................................................................... 59
Canadian QuantEX......................................................................................... 59
Arizona Stock Exchange................................................................................... 59
Regulation............................................................................................... 59
Credit Risk.............................................................................................. 61
License and Relationship with BARRA...................................................................... 61
Competition.............................................................................................. 62
Research and Product Development......................................................................... 62
Dependence on Proprietary Intellectual Property; Risks of Infringement................................... 62
Employees................................................................................................ 63
ELECTION OF DIRECTORS...................................................................................... 64
Nominees to Board of Directors........................................................................... 64
Other Executive Officers................................................................................. 65
Director Compensation.................................................................................... 66
Committees of the Board of Directors and Meetings........................................................ 67
Executive Compensation................................................................................... 67
Report of the Compensation Committee on Executive Compensation........................................... 69
Performance Graph........................................................................................ 73
Pension Plan............................................................................................. 73
SECURITY OWNERSHIP......................................................................................... 75
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................................. 78
Tax Sharing Agreement.................................................................................... 78
Jefferies Service Agreement.............................................................................. 78
Execution Agreement...................................................................................... 78
Clearing Agreement....................................................................................... 79
Revenue Sharing Agreement................................................................................ 79
Other.................................................................................................... 80
DESCRIPTION OF CAPITAL STOCK............................................................................... 81
General.................................................................................................. 81
New ITGI Common Stock.................................................................................... 81
New ITGI Preferred Stock................................................................................. 81
Certain Charter and Bylaw Provisions..................................................................... 81
Prohibited Business Transactions......................................................................... 82
Registrar and Transfer Agent............................................................................. 82
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE.................................................... 82
RATIFICATION OF INDEPENDENT AUDITORS....................................................................... 82
LEGAL MATTERS.............................................................................................. 83
EXPERTS.................................................................................................... 83
WHERE YOU CAN FIND MORE INFORMATION........................................................................ 83
OTHER MATTERS; STOCKHOLDER PROPOSALS FOR THE 2000 ANNUAL MEETING OF NEW ITGI............................... 84
</TABLE>
<TABLE>
<S> <C>
Appendix A Agreement and Plan of Merger
Form of Certificate of Incorporation of the Surviving Corporation
Form of Bylaws of the Surviving Corporation
Appendix B Distribution Agreement
Appendix C Benefits Agreement
Appendix D Tax Sharing and Indemnification Agreement
Appendix E Opinion of Donaldson, Lufkin & Jenrette Securities Corporation
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.
iii
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We expect the merger to occur in April 1999, after both our stockholders and
the stockholders of Parent approve it. We are working towards completing the
merger as quickly as possible.
Q: WILL THE MERGER AFFECT THE VALUE OF MY STOCK HOLDING?
A. The aggregate value of your stock in our company may or may not change as a
result of the merger, because we cannot predict the overall stock market
impact of the merger and the related transactions on the trading price of
our stock. However, the surviving company's common stock is likely to trade
immediately following the merger at a per share price lower than the per
share price at which our common stock trades immediately prior to the
merger, because the number of shares of the surviving company's common stock
outstanding immediately after the merger will be greater than the number of
shares of our common stock outstanding immediately before the merger.
Q: WILL I HAVE DISSENTERS' RIGHTS?
A: No. According to Delaware law, you will not have dissenters' rights of
appraisal in connection with the merger.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. You will receive written instructions for exchanging your share
certificates after the merger is completed.
Q: WHAT SHOULD I DO NOW?
A: After you have carefully reviewed this document, you should either:
- attend the annual meeting of stockholders, where you can vote for or
against the merger and the other proposals; or
- mail your completed, dated and signed proxy card in the provided prepaid
envelope as soon as possible so that your shares will be voted at the
annual meeting.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME?
A: Your broker will vote your shares only if you provide instruction on how to
vote your shares. You should follow the directions provided by your broker.
Without instructions, the broker will not vote your shares and the failure
to vote will have the same effect as a vote against the merger.
Q: WHO CAN HELP ANSWER ANY QUESTIONS THAT I MAY HAVE?
A: If you have more questions about the merger or the other proposals, you
should contact: Investment Technology Group, Inc., 380 Madison Avenue, 4th
Floor, New York, New York 10017, Attention: John R. MacDonald, phone number:
(212) 444-6252. If you would like additional copies of this document, you
should contact: Investment Technology Group, Inc., 380 Madison Avenue, 4th
Floor, New York, New York 10017, attention: Timothy H. Hosking, phone
number: (212) 444-6363.
1
<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
MERGER AND THE OTHER TRANSACTIONS FULLY 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
MORE INFORMATION" ON PAGE 83 OF THIS PROXY STATEMENT/PROSPECTUS. THE ACTUAL
TERMS OF THE MERGER ARE CONTAINED IN THE MERGER AGREEMENT. THE MERGER AGREEMENT
IS INCLUDED IN THIS PROXY STATEMENT/PROSPECTUS AS APPENDIX A. IN THIS DOCUMENT,
"WE," "US" AND "OUR" REFERS TO ITGI AND ITS SUBSIDIARIES AND "YOU" REFERS TO
ITGI'S STOCKHOLDERS OTHER THAN PARENT.
THE PARTIES TO THE TRANSACTIONS
JEFFERIES GROUP, INC.
11100 SANTA MONICA BOULEVARD
LOS ANGELES, CALIFORNIA 90025
(310) 445-1199
Jefferies Group, Inc. is a publicly-traded holding company that trades on
the New York Stock Exchange under the symbol "JEF." Parent's four primary
subsidiaries, Jefferies & Company, Inc., Investment Technology Group, Inc.,
described separately below, Jefferies International Limited, and Jefferies
Pacific Limited, provide investment banking, securities brokerage and trading,
and other financial services.
INVESTMENT TECHNOLOGY GROUP, INC.
380 MADISON AVENUE
NEW YORK, NEW YORK 10017
(212) 588-4000
We provide automated equity trading services and transaction research to
institutional investors and brokers. Prior to the initial public offering of our
common stock in 1994, our company was a wholly owned subsidiary of Parent. Since
that time, our common stock has been publicly traded on the Nasdaq National
Market under the symbol "ITGI." As of the date of this proxy
statement/prospectus, Parent owns approximately 80.5% of our outstanding common
stock.
THE ANNUAL MEETING (SEE PAGES 9 TO 11)
We are furnishing this proxy statement/prospectus to you in connection with
the solicitation of proxies by our board of directors for the annual meeting of
our stockholders. The annual meeting will be held at 10:00 a.m. (local time), on
April 20, 1999, at the New York Helmsley Hotel, Sutton Place Room, 212 East 42nd
Street, New York, New York, for the following purposes:
- to approve and adopt the Agreement and Plan of Merger dated as of March
17, 1999 between ITGI and Parent, and the merger of ITGI with and into
Parent contemplated thereby;
- to elect directors to our board of directors; and
- to ratify the appointment of KPMG LLP as our independent auditors for the
1999 fiscal year.
The holders of a majority of the outstanding shares of our common stock must
vote in the affirmative to approve and adopt the merger. The election of
directors will be determined by a plurality of the votes of the shares
represented at the annual meeting. The affirmative vote of the holders of a
majority of the shares represented at the annual meeting will be required for
the ratification of the appointment of KPMG LLP as our independent auditors.
Holders of record of our common stock as of the close of business on March
1, 1999 are entitled to cast one vote for each share of our common stock held on
that date. On that date, there were 18,627,573 shares of our common stock
outstanding and entitled to vote at the annual meeting. Parent owns and has the
right to vote at the annual meeting sufficient shares to approve the proposals
without the vote of any other stockholder and has informed us that it intends to
vote its shares in their favor. Therefore, approval of the proposals is assured
if Parent votes in their favor.
2
<PAGE>
WE WILL BECOME AN INDEPENDENT COMPANY THROUGH THE MERGER (SEE PAGES 13 TO 14)
The merger and related transactions will result in the stockholders of
Parent becoming direct stockholders of our company and Parent ceasing to be our
parent company. We believe that, as fully separate companies, each of ITGI and
Parent will be better understood by investors, better equipped to sharpen the
focus on serving clients and better able to take advantage of opportunities
unique to its businesses. We expect that the depth and breadth of the market for
the common stock of both ITGI and Parent will increase. As an independent
company, we will have greater flexibility with capital structure and will have
the opportunity to use common stock to raise capital and make acquisitions. We
will also be better positioned to obtain and retain the services of key
employees by offering equity-based compensation.
THE MERGER WILL FOLLOW OTHER RELATED TRANSACTIONS (SEE PAGES 12 TO 13)
The merger is part of a series of transactions that will include a special
cash dividend to our stockholders; the transfers by Parent of all of its assets
and liabilities, other than those related to our company, to its wholly owned
subsidiary JEF Holding Company, Inc. ("New Jefferies"); and the distribution to
Parent's stockholders of all of the New Jefferies common stock.
THE SPECIAL CASH DIVIDEND
First, we will pay a special cash dividend of $4.00 per share, payable pro
rata to all of our stockholders of record as of April 20, 1999, including
Parent. The aggregate amount of the special cash dividend will be up to $75
million, of which we will pay $60 million to Parent. Payment of the special cash
dividend is conditioned upon approval of the merger by stockholders of Parent
and ITGI and the satisfaction of other conditions to the merger.
THE JEFFERIES TRANSFERS AND THE NEW JEFFERIES SPIN-OFF
Following the payment of the special cash dividend but before the merger,
Parent will transfer all of its assets other than the capital stock of ITGI held
by it, and all of its liabilities other than liabilities related to our company,
to New Jefferies. After these transfers have been completed, Parent will
distribute pro rata to its stockholders all of the common stock of New
Jefferies. The New Jefferies spin-off will occur immediately prior to the
merger.
After the Jefferies transfers and the New Jefferies spin-off, New Jefferies
will own all of the assets of Parent other than Parent's equity interest in our
company, and Parent's existing stockholders will own all of the equity interest
in New Jefferies. Following the merger, New Jefferies will be renamed Jefferies
Group, Inc., and, through its subsidiaries, carry on the businesses of Parent
prior to the transactions (other than the businesses of our company).
THE MERGER
Immediately following the New Jefferies spin-off, ITGI will merge with and
into Parent. Parent will be the surviving company in the merger ("New ITGI") and
be renamed Investment Technology Group, Inc.
Each of your shares of ITGI common stock will be converted into the right to
receive such number of shares of common stock of New ITGI derived by dividing
(x) the total number of shares of Parent common stock outstanding immediately
prior to the merger by (y) the total number of shares of our common stock held
by Parent immediately prior to the merger. We refer to this ratio as the
exchange ratio.
The exchange ratio will result in:
- our stockholders other than Parent having the same collective percentage
ownership of New ITGI that they held of ITGI prior to the merger; and
- the stockholders of Parent having the same collective percentage ownership
of New ITGI that Parent held of ITGI prior to the merger.
Based on the number of shares of Parent common stock expected to be
outstanding on the date of the merger (23,900,000) and the number of shares of
our common stock held by Parent (15,000,000), you would receive approximately
3
<PAGE>
1.59 shares of common stock of New ITGI for each share of our common stock you
hold. You will receive cash in lieu of any fractional shares.
The charts on the following pages describe the structure of Parent and ITGI
before and after each of the Jefferies transfers, New Jefferies spin-off and the
merger.
THE MERGER WILL AFFECT YOUR RIGHTS AS A STOCKHOLDER (SEE PAGES 23 TO 24)
New ITGI's charter and bylaws will contain provisions that are different
from those in ITGI's charter and bylaws. These provisions may make it more
difficult or more expensive for anyone to complete a tender offer, change in
control or takeover attempt that is opposed by New ITGI's board of directors. As
a result, stockholders may have a reduced likelihood of receiving a takeover
premium or a potential takeover may not occur. Material changes between your
rights as a stockholder of ITGI and as a stockholder of New ITGI include
provisions in New ITGI's charter or bylaws that:
- prohibit stockholder action by written consent;
- limit who may call a special meeting; and
- prohibit stockholder proposals at a special meeting.
OUR BOARD OF DIRECTORS HAS APPROVED THE MERGER (SEE PAGES 14 TO 21)
A special committee of our board of directors, consisting of two independent
directors, carefully reviewed and considered the terms and conditions of the
merger and, believing that the merger is fair to and in the best interests of
our stockholders other than Parent, unanimously determined that the merger is
advisable and recommended that the merger be approved and adopted. In arriving
at its decision, the special committee considered a number of factors, including
a fairness opinion from Donaldson, Lufkin & Jenrette Securities Corporation.
In light of the recommendation of the special committee, our board of
directors unanimously determined that the merger is in the best interests of our
company and is fair to and in the best interests of our stockholders other than
Parent. Accordingly, our board of directors approved and declared advisable the
merger and recommends that you vote FOR the merger.
DONALDSON, LUFKIN & JENRETTE HAS DELIVERED A FAIRNESS OPINION (SEE PAGES 18 TO
21)
In deciding to approve the proposed merger, our board of directors and the
special committee considered the opinion of Donaldson, Lufkin & Jenrette
Securities Corporation that, as of the dates such opinion was delivered orally
and in writing to the special committee and our board of directors, the exchange
ratio was fair, from a financial point of view, to ITGI's stockholders other
than Parent.
The opinion is subject to the written qualifications and limitations
referred to in the opinion. We attach this opinion as appendix E and encourage
you to read it.
THE MERGER WILL NOT BE TAXABLE TO YOU (SEE PAGES 21 TO 23)
You will not owe any U.S. federal income tax as a result of the merger,
other than as to any cash you may receive in lieu of fractional shares. The
special cash dividend will be taxable to you as ordinary dividend income for
U.S. federal income tax purposes.
4
<PAGE>
I. CURRENT STRUCTURE OF PARENT AND ITGI
[LOGO]
II. IMMEDIATELY AFTER THE JEFFERIES TRANSFERS
[LOGO]
5
<PAGE>
III. IMMEDIATELY AFTER THE NEW JEFFERIES SPIN-OFF
[LOGO]
IV. IMMEDIATELY AFTER THE MERGER AND NAME CHANGES
[LOGO]
6
<PAGE>
RISK FACTORS
STOCKHOLDERS SHOULD CONSIDER THE FOLLOWING RISK FACTORS, AS WELL AS THE
OTHER INFORMATION IN THIS DOCUMENT.
WE ALSO CAUTION YOU THAT THIS DOCUMENT INCLUDES FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E
OF THE SECURITIES EXCHANGE ACT OF 1934. ALL STATEMENTS REGARDING THE REASONS FOR
AND INTENDED EFFECTS OF THE MERGER AND RELATED TRANSACTIONS ARE FORWARD-LOOKING
STATEMENTS. ALTHOUGH WE BELIEVE OUR EXPECTATIONS REFLECTED IN SUCH
FORWARD-LOOKING STATEMENTS ARE BASED ON REASONABLE ASSUMPTIONS, WE CANNOT ASSURE
YOU 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 COSTS OR DIFFICULTIES RELATING TO THE ESTABLISHMENT
OF NEW ITGI AS AN INDEPENDENT ENTITY.
IF THE MERGER AND RELATED TRANSACTIONS DO NOT QUALIFY AS TAX-FREE TRANSACTIONS,
ITGI AND YOU MAY HAVE SUBSTANTIAL ADDITIONAL TAX LIABILITIES.
Parent has received rulings from the Internal Revenue Service to the effect,
among other things, that the Jefferies transfers, the New Jefferies spin-off and
the merger will qualify as tax-free transactions with respect to New Jefferies,
Parent, Parent's stockholders and ITGI under Sections 332, 351, 355 and 368 of
the Internal Revenue Code of 1986. The rulings did not state that the merger
will be treated as a tax-free transaction to you; this is covered by the legal
opinions discussed below. The rulings, while generally binding upon the IRS, are
subject to factual representations and assumptions provided to the IRS. If these
factual representations and assumptions were incorrect in any material respect,
the binding effect of the rulings on the IRS 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, New Jefferies,
Parent--and therefore also New ITGI--and ITGI have agreed to restrictions on
their future actions to provide further assurances that the Jefferies transfers,
the New Jefferies spin-off and the merger will qualify as tax-free transactions.
If the Jefferies transfers, the New Jefferies spin-off or the merger fails to
qualify as a tax-free transaction because such restrictions are not complied
with, then:
- New Jefferies will be obligated to indemnify New ITGI for any tax
liability resulting from a breach by Parent or New Jefferies; and
- New ITGI will be obligated to indemnify New Jefferies for any tax
liability resulting from a breach by ITGI or New ITGI.
Such tax liability could be substantial, and there is no assurance that the
breaching party would be able to satisfy its indemnification obligation.
Further, we and Parent have received legal opinions stating that the merger
will be tax-free to you, except as to any cash you receive in lieu of fractional
shares. Such legal opinions neither bind nor preclude the IRS from adopting a
contrary position. If the merger failed to qualify as a tax-free transaction for
you, you could have a substantial tax liability.
NEW ITGI MAY BE LIABLE FOR LIABILITIES OF PARENT FOLLOWING THE MERGER.
Prior to the merger, Parent will transfer all of its assets other than the
capital stock of ITGI held by it, and all of its liabilities other than
liabilities related to our company, to New Jefferies. However, it is possible
that, following the merger, New ITGI will continue to be liable for certain
liabilities of Parent, despite the express assignment of such liabilities to,
and the express assumption of such liabilities by, New Jefferies. Pursuant to
the distribution agreement, benefits agreement and tax sharing and
indemnification agreement described in the section "Other Agreements," New
Jefferies will be obligated to indemnify New ITGI for liabilities related to
Parent and its subsidiaries, but not for liabilities
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related to our company. Under those agreements, New ITGI will be obligated to
indemnify New Jefferies for liabilities related to our company. New ITGI's
ability to recover any costs under such indemnity will depend upon the future
financial strength of New Jefferies; therefore, we cannot assure you that New
Jefferies will fulfill its indemnification obligations.
NEW ITGI'S CHARTER AND BYLAW PROVISIONS MAY HAVE THE EFFECT OF IMPEDING A
HOSTILE TAKEOVER.
Provisions in New ITGI's charter and bylaws that are not in ITGI's charter
and bylaws could have the effect of delaying or preventing a third party from
gaining control of our company in a transaction that our board of directors had
not negotiated and approved, even if such change in control would be beneficial
to stockholders. These provisions include:
- restrictions on who may call a special meeting of stockholders;
- a prohibition on stockholder proposals at special 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.
These provisions, and any issuance of preferred stock with voting or
conversion rights which is permitted under the "blank check preferred stock"
provision of our charter, may adversely affect the voting power of the holders
of New ITGI common stock and may have the effect of delaying or preventing a
change of control of New ITGI not approved by our then board of directors or
adversely affect the market price of New ITGI common stock.
THERE MAY BE SUBSTANTIAL SALES OF OUR COMMON STOCK FOLLOWING THE MERGER, WHICH
MAY ADVERSELY AFFECT THE PRICE OF OUR COMMON STOCK.
Following the merger, there will be approximately 29.7 million shares of New
ITGI common stock outstanding, of which 28.0 million shares will be tradeable
without restriction by persons other than "affiliates" of our company. 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 options to purchase approximately 5.5
million shares of New ITGI common stock at varying exercise prices. We intend to
enter into registration rights agreements under which New ITGI will be required
to file a registration statement with respect to an underwritten public offering
of up to approximately 1.1 million shares issuable upon exercise of options.
Following the merger, the employee stock ownership plan of New Jefferies
will own approximately 1.9 million shares of New ITGI common stock, and our new
employee stock ownership plan will own approximately 117,000 shares of New
Jefferies common stock for the benefit of New ITGI employees. We anticipate that
approximately 117,000 New Jefferies shares held by the employee stock ownership
plan will be exchanged with New ITGI shares held by the New Jefferies employee
stock ownership plan, based upon fair market values for the respective shares.
Parent has advised us that all New ITGI shares not so exchanged must be disposed
of by the New Jefferies plan 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.
These sales of New ITGI common stock, the availability of such shares for
sale or the perception that such sales could occur could have an adverse effect
on the market price prevailing from time to time of New ITGI common stock or our
ability to raise capital through a public offering of New ITGI's equity
securities.
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THE ANNUAL MEETING
DATE, TIME AND PLACE OF THE ANNUAL MEETING
We will hold the annual meeting at 10:00 a.m. (local time), on April 20,
1999, at the New York Helmsley Hotel, Sutton Place Room, 212 East 42nd Street,
New York, New York 10017.
MATTERS TO BE CONSIDERED AT THE ANNUAL MEETING
We will hold the annual meeting for the following purposes:
(1) To consider and vote upon a proposal to approve and adopt the
Agreement and Plan of Merger dated as of March 17, 1999 between ITGI and
Parent, and the merger contemplated thereby. The merger agreement provides
for the merger of ITGI with and into Parent following the transfer by Parent
of all of its assets other than the capital stock of ITGI held by it, and
all of its liabilities other than liabilities related to our company, to New
Jefferies. Parent will survive the merger and be renamed Investment
Technology Group, Inc. In the merger, pursuant to the exchange ratio, ITGI
stockholders other than Parent will receive approximately 1.59 shares of
common stock of New ITGI for each share of ITGI common stock held by them
immediately prior to the merger.
(2) To elect six directors to serve until the next annual meeting and
until their successors have been duly elected and qualified.
(3) To ratify the appointment of KPMG LLP as our independent auditors
for the 1999 fiscal year.
(4) To transact such other business as may properly come before the
annual meeting or any one or more adjournments thereof.
VOTING AT THE ANNUAL MEETING; RECORD DATE; QUORUM
On March 1, 1999, the record date for the annual meeting, there were
18,627,573 shares of our common stock outstanding and entitled to vote at the
annual meeting. Please note the following:
- Each stockholder of record on March 1, 1999 is entitled to cast one vote
per share.
- This vote may be cast at the annual 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 annual meeting is
necessary to constitute a quorum at the annual meeting.
- The merger must be approved and adopted by the affirmative vote of the
holders of at least 9,313,787 shares.
- The election of directors will be determined by a plurality of the votes
cast. A properly executed proxy marked "FOR ALL NOMINEES EXCEPT" with
respect to the election of one or more directors will not be voted with
respect to the director or directors indicated, although it will be
counted for purposes of determining whether there is a quorum.
- For the ratification of the appointment of KPMG LLP as the independent
auditors for the 1999 fiscal year, the affirmative vote of the holders of
a majority of the shares represented in person or by proxy at the annual
meeting and entitled to vote will be required for approval. A
representative of KPMG LLP is expected to be in attendance at the annual
meeting with the opportunity to make a statement and respond to questions.
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- On March 1, 1999, Parent owned 15,000,000 shares of our common stock,
representing approximately 80.5% of our common stock outstanding on that
date. Parent owns and has the right to vote at the annual meeting
sufficient shares to approve the proposals without the vote of any other
stockholder and has informed us that it intends to vote its shares in
their favor. Therefore, the approval of the proposals is assured if Parent
votes in their favor.
- On March 1, 1999, our directors and executive officers owned, in the
aggregate, 72,222 shares, or less than 1%, of our common stock. Our
directors and officers have expressed their present intent to vote their
shares in favor of the proposals.
PROXIES
We are furnishing you this proxy statement/prospectus in connection with the
solicitations of proxies by and on behalf of our board of directors for use at
the annual meeting. Proxies in the form enclosed, which are properly executed
and returned and not subsequently revoked, will be voted at the annual 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 proposals.
If any other matters are properly presented at the annual meeting for
consideration, the persons named in the enclosed forms of proxy and acting
thereunder generally will have discretion to vote on such matters in accordance
with their best judgment. Notwithstanding the foregoing, proxies voting against
a specific proposal may not be used by the persons named in the proxies to vote
for adjournment of the meeting for the purpose of giving management additional
time to solicit votes to approve such proposal.
The grant of a proxy on the enclosed form does not preclude you from
attending the annual meeting and voting in person. You may revoke a proxy at any
time before it is voted. Proxies may be revoked by:
- delivering a written notice of revocation bearing a later date than the
proxy before the vote is taken at the annual meeting;
- duly executing a later dated proxy relating to the same shares of common
stock and delivering it as indicated below before the vote is taken at the
annual meeting; or
- attending the annual meeting and voting in person.
Attendance at the annual meeting will not in and of itself constitute a
revocation of a proxy. Any written notice of revocation or subsequent proxy must
be delivered to EquiServe, P.O. Box 9391, Boston, MA 02205-9969, or Investment
Technology Group, Inc., 380 Madison Avenue, 4th Floor, New York, NY 10017,
Attention: Secretary, before the vote is taken at the annual meeting.
We will bear all expenses of our solicitation of proxies for the annual
meeting. In addition to solicitation by use of the mails, proxies may be
solicited from stockholders by our directors, officers and employees.
Solicitation may take place in person or by telephone, facsimile or other means
of communication. Such directors, officers and employees will not be
additionally compensated, but may be reimbursed for reasonable out-of-pocket
expenses in connection with such solicitation. Arrangements may be made with
brokerage houses, custodians, nominees and fiduciaries for forwarding of proxy
solicitation materials to beneficial owners of our common stock held of record
by such brokerage houses, custodians, nominees and fiduciaries. We will
reimburse such brokerage houses, custodians, nominees and fiduciaries for their
reasonable expenses incurred in doing so.
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TREATMENT OF BROKER NON-VOTES AND ABSTENTIONS AT THE ANNUAL MEETING
All shares of our common stock represented by properly executed proxies
received prior to or at the annual meeting and not revoked will be voted in
accordance with the 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. It is not
expected that any matter other than those referred to herein will be brought
before the stockholders at the annual meeting. However, if other matters are
properly presented, the persons named as proxies will vote in accordance with
their best judgment with respect to such matters, unless authority to do so is
withheld in the proxy.
An automated system administered by our transfer agent will tabulate votes
cast by proxy at the annual meeting, and our transfer agent will tabulate votes
cast in person at the annual meeting. Brokers who hold shares in street name for
customers who are the beneficial owners of such shares are prohibited from
giving a proxy to vote such customers' shares with respect to any proposal in
the absence of specific instructions from such customers. Broker non-votes and
abstentions, tabulated separately, will be included in the determination of the
number of shares present at the annual meeting and whether a quorum is present.
Broker non-votes and abstentions will not be counted in determining whether a
nominee is elected. In determining whether the merger has been approved, broker
non-votes and abstentions will have the effect of votes against the merger. In
determining whether any other proposal has been approved, abstentions will be
counted as votes against such proposal and broker non-votes will not be counted
as votes either for or against such proposal.
DO NOT SEND STOCK CERTIFICATES WITH YOUR PROXY CARDS. IF THE MERGER IS
COMPLETED, TRANSMITTAL FORMS AND INSTRUCTIONS WILL BE SENT TO YOU FOR THE
SURRENDER OF YOUR SHARES OF COMMON STOCK.
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THE MERGER AND RELATED TRANSACTIONS
DESCRIPTION OF THE TRANSACTIONS
The merger will result in the stockholders of Parent becoming direct
stockholders of our company and Parent ceasing to be our parent company. The
merger is part of a series of transactions that will include a special cash
dividend; the transfers by Parent of all of its assets other than the capital
stock of ITGI held by it, and all of its liabilities other than liabilities
related to our company, to New Jefferies; and the distribution to Parent's
stockholders of all of the New Jefferies common stock. The charts on pages 5 and
6 of this document describe the structure of Parent and ITGI before and after
each of the transfers, the New Jefferies spin-off and the merger. The following
is a brief summary of the transactions. This summary is not necessarily complete
and is qualified in its entirety by reference to the merger agreement and the
distribution agreement, which are included as appendices A and B of this proxy
statement/prospectus. We urge you to read each agreement carefully.
THE SPECIAL CASH DIVIDEND
First, we will pay a special cash dividend of $4.00 per share, payable pro
rata to all of our stockholders of record as of April 20, 1999, including
Parent. The aggregate amount of the special cash dividend will be up to $75
million, of which we will pay $60 million to Parent. Our board of directors
declared the special cash dividend on March 16, 1999. Payment of the special
cash dividend is conditioned upon approval of the merger by stockholders of
Parent and ITGI and the satisfaction of other conditions to the merger. We
expect to pay the special cash dividend on April 21, 1999.
The special cash dividend will be a taxable dividend to our stockholders
other than Parent.
Parent has required the special cash dividend as a condition to the merger
for the following purposes:
(1) to increase the consolidated capital of New Jefferies;
(2) to offset in part the leverage arising from the outstanding publicly
traded notes of Parent to be assumed by New Jefferies prior to the
merger; and
(3) to satisfy working capital demands and requirements associated with New
Jefferies' brokerage and investment banking businesses.
Payment of the special cash dividend will result in an immediate reduction
in our cash balances and will reduce ITG Inc.'s net regulatory capital. As
discussed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources," we have entered into a
revolving credit facility to borrow, effective upon the closing of the merger,
up to $20 million on a revolving basis to enable us to satisfy our regulatory
net capital requirements.
THE JEFFERIES TRANSFERS AND THE NEW JEFFERIES SPIN-OFF
Following the payment of the special cash dividend but prior to the merger,
Parent will transfer all of its assets other than its approximately 80.5% equity
interest in our company, and all of its liabilities other than liabilities
related to our company, to New Jefferies. New Jefferies will expressly assume
such liabilities. After these transfers have been completed and the other
conditions specified in the merger agreement have been satisfied, Parent will
distribute all of the outstanding common stock of New Jefferies in a pro rata
dividend to Parent's stockholders. The New Jefferies spin-off would occur
immediately prior to the merger.
THE MERGER
Immediately following the New Jefferies spin-off, ITGI will merge with and
into Parent. Parent will be the surviving company in the merger and be renamed
Investment Technology Group, Inc. Each of your shares of ITGI common stock will
be converted into the right to receive shares of common stock
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of New ITGI. The number of shares to be received will be derived by dividing (x)
the total number of shares of Parent common stock outstanding immediately prior
to the merger by (y) the total number of shares of our common stock held by
Parent immediately prior to the merger.
The exchange ratio will result in:
- our stockholders other than Parent having the same collective percentage
ownership of New ITGI that they held of our company prior to the merger;
and
- the stockholders of Parent having the same collective percentage ownership
of New ITGI that Parent held of our company prior to the merger.
Based on the number of shares of Parent common stock expected to be
outstanding on the date of the merger (23,900,000), and the number of shares of
our common stock held by Parent (15,000,000), you would receive approximately
1.59 shares of common stock of New ITGI for each share of our common stock you
hold. You will receive cash in lieu of any fractional shares equal to the value
thereof, based on the closing regular way price for a share of New Jefferies
common stock on the NYSE composite transaction tape on the first business day
immediately following the merger.
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.
BACKGROUND OF THE TRANSACTIONS
For many years, Parent has been engaged, through its subsidiaries, in the
active conduct of two principal lines of business:
- a full-service global investment banking and brokerage business serving
institutions and small- to medium-sized corporations conducted primarily
through its wholly owned subsidiary, Jefferies & Company; and
- a technology-based equity trading services and transaction research
business serving institutional investors and brokers conducted through
ITGI and its subsidiaries.
Each of these businesses has separate management teams and highly skilled
employees on which its success is dependent. The management and employees of
Parent's other businesses are primarily focused on investment banking,
brokerage, capital raising, research, mergers and acquisition activities,
business restructuring advisory services and a traditional, broker-dealer
business. ITGI'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, Parent had a meeting with the IRS to explore the tax
treatment that would flow from a possible spin-off by Parent of ITGI. At this
meeting, Parent management discussed a proposed spin-off of ITGI, several
related transactions and the business purposes for those proposed transactions
including:
(1) the need to obtain and retain the services of key employees of ITGI by
offering equity-based compensation;
(2) the need to improve the fit and focus of incentive compensation
arrangements for each of Parent's two principal lines of business;
(3) the ability to enhance ITGI's stock as acquisition currency; and
(4) the formation of a leveraged employee stock ownership plan (ESOP) to
acquire shares of ITGI in the open market.
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At a second meeting with the IRS in August 1996, Parent discussed whether a
ruling position announced by the IRS was applicable to compensatory employee
stock options and whether outstanding employee stock options in ITGI common
stock would be treated by the IRS as outstanding stock for purposes of
determining whether Parent had the requisite control of ITGI prior to the
spin-off.
In August 1996, Parent deferred its decision to proceed with the spin-off of
ITGI, largely because the key employee who sought a direct interest in ITGI
common stock before taking the position as chief executive officer of ITGI
advised Parent that a spin-off would not be necessary as a condition to his
acceptance of the position. In addition, Parent's management was concerned that,
at that time, a spin-off could lead to two undercapitalized businesses.
More than a year later, Parent renewed discussion with the IRS regarding the
proposed ITGI spin-off and requested an additional pre-submission conference,
which was held on Tuesday, December 2, 1997. At this conference, Parent's
management discussed the business purposes for the transactions, including:
(1) the need to obtain and retain the services of key employees of ITGI by
offering them equity-based compensation, including through an ESOP,
(2) the need to improve the fit and focus of incentive compensation
arrangements for each of Parent's two principal lines of business, and
(3) the ability to enhance ITGI's stock as acquisition currency.
At this conference, management of Parent also discussed the effect of a more
than 5% stockholder on the fit and focus business purpose and the effect of
outstanding ITGI stock options in analyzing whether Parent had the requisite
control of ITGI prior to the 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 Parent and ITGI concluded that a
separation of the investment banking and brokerage business which is the core
Jefferies business from ITGI's technology-based trade execution and analysis
business would benefit both businesses by enhancing their ability to obtain,
retain and motivate employees through equity-based compensation incentives that
can be linked more directly to the results of their respective businesses.
Parent's management concluded that:
- the current intermingling of the results of the two businesses seriously
dilutes the effectiveness of these programs as they currently exist at
Parent;
- the separation of equity-based compensation, including an ESOP, will
represent a significant long-term commitment to grant stock to employees
and significantly improve the ability of New Jefferies and ITGI to compete
for employees in a tight labor market.
On March 17, 1999 Parent's board of directors unanimously declared the
advisability of the merger agreement and determined that the merger agreement,
the merger and related transactions are fair to and in the best interests of
Parent's stockholders and unanimously approved them.
A SPECIAL COMMITTEE OF OUR BOARD OF DIRECTORS HAS RECOMMENDED THE MERGER
At a meeting of our board of directors on March 17, 1998, the board
determined that the terms of the spin-off of our company from Parent should be
reviewed and negotiated by members of the board who were independent with
respect to Parent. Accordingly, the board unanimously approved the appointment
of a special committee, consisting of William I Jacobs and Robert L. King, to
review the terms of and make recommendations to the board concerning the
spin-off. Neither Mr. Jacobs nor Mr. King is a director, officer or employee of
Parent nor an officer or employee of ITGI. At a meeting on May 12, 1998, the
board authorized the special committee to retain advisors and take all other
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actions that it deemed necessary to the proper and complete conduct of any such
review and recommendation.
After its formation, the special committee retained independent legal
advisors. Prior to commencing negotiations with Parent regarding the spin-off,
the members of the 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 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 special committee held
discussions with the investment banking firm of Donaldson, Lufkin & Jenrette
Securities Corporation regarding Donaldson, Lufkin & Jenrette's engagement as
its financial advisor. At a meeting on April 23, 1998, the special committee
discussed with Donaldson, Lufkin & Jenrette in general terms the evaluation
process and analysis that Donaldson, Lufkin & Jenrette would undertake pursuant
to its engagement.
From April 23, 1998 through May 12, 1998, the special committee and its
advisors reviewed certain public and non-public information with respect to ITGI
and the proposed transaction. 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 Parent to its stockholders of the shares of ITGI owned by
Parent. The special committee in its deliberations sometimes referred to this
alternative spin-off structure used by it for comparative purposes as a dividend
spin-off, and the spin-off structure proposed by Parent as a merger spin-off. At
a meeting of the special committee on May 12, 1998, the advisors reported on
their activities to date. The special committee 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 Parent the terms of the execution, clearing
and other agreements to be entered into between ITGI or its subsidiary ITG Inc.
and Parent or its subsidiary Jefferies & Company, the desirability of obtaining
noteholder consents to New Jefferies' assumption of Parent's obligations under
two outstanding issues of publicly traded notes and the likelihood that Parent
would be able to fulfill its indemnity and other obligations to ITGI following
the spin-off. The special committee determined that a principal objective of the
negotiations with Parent would be to ensure that, as nearly as practicable, ITGI
following the proposed merger spin-off would be in the same position as if the
transaction were structured as a dividend spin-off. In particular, to the
greatest extent possible, ITGI following its merger with Parent should be
substantially free from liabilities, including contingent liabilities, related
to the activities of Parent excluding ITGI and its subsidiaries prior to the
spin-off. The 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 special committee's advisors
continued their "due diligence" investigation of ITGI and Parent and met with
ITGI's legal counsel and commented on preliminary drafts of the transaction
documents. The 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 proposed spin-off transaction. The 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, Parent could fairly be viewed as substantially free of
liabilities unrelated to ITGI's business. Donaldson, Lufkin & Jenrette advised
the 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
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prices at which the surviving corporation's common stock would trade after the
merger. To that time, Parent had taken the position that the merger agreement
should not contain a condition to closing based on accounting treatment in light
of Parent's concerns discussed below. The 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 ITGI's unaffiliated public stockholders. In considering the
implications of these accounting issues, the special committee noted that if in
fact Parent was substantially free from liabilities at the time of the merger,
it would be fair to leave the relative ownership levels of ITGI's stockholders
unchanged. The 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 Parent and ITGI before
mid-December of 1998, Parent communicated to ITGI's management and counsel that
it was reluctant to agree to a closing condition that no goodwill be recognized
by reason of the merger and to a related covenant to cause Parent to be free of
all liabilities prior to the merger. Parent expressed its concern that
satisfying the condition and fulfilling the covenant would hinge on third party
consents and other matters that were beyond Parent's control. As a result, the
merger might be prevented from occurring after the special cash dividend had
been paid and New Jefferies had been spun off.
On December 10, 1998 the 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 Parent. The special committee was advised that Parent continued
to maintain that the accounting consequences of the merger should not affect
ITGI's obligation to complete the transaction in light of Parent's concerns
about the merger not closing. The special committee directed its advisors to
respond that the special committee would not recommend the transaction unless it
was satisfied that no goodwill would be required to be recorded for accounting
purposes. The special committee then reviewed the status of discussions with
Parent regarding ITGI's payment of a special cash dividend and ITGI's
contribution toward the expenses of the spin-off transactions. The 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 minority 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 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 special
committee instructed its advisors that the response to Parent should be to limit
the dividend to no more than $75 million. The 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 transactions.
ITGI's management provisionally had agreed with Parent's management that the
transaction costs to be incurred by each company should be shared equally by the
two companies. The 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 special
committee received a presentation from ITGI's management regarding the terms of
the clearing and execution agreements that had been provisionally agreed with
Parent. The 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 agreements if it so desired within a
relatively short time period (after June 30, 2000 in the case of the clearing
and execution agreements).
On December 14, 1998 the special committee met with its advisors and with
members of ITGI's management and its counsel. At the meeting, the special
committee told ITGI's management that, on
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<PAGE>
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 transactions with Parent:
(1) an important overall objective should continue to be that the effect and
consequences of the proposed merger spin-off transactions be as similar
as possible to those of a dividend spin-off;
(2) it should be a condition to the closing of the spin-off transactions
that ITGI be satisfied concerning the accounting treatment;
(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 cash dividend payable by ITGI 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, Parent, ITGI and representatives of the special
committee agreed in principle to the execution of a preclosing and escrow
agreement in order to address Parent's concerns, and substantially eliminate the
risk, that the special cash dividend might be paid or New Jefferies might be
spun off only to have the merger fail to occur. Parent further agreed that
satisfactory accounting treatment should be a mutual condition to the
consummation of the spin-off transactions and also agreed that the special cash
dividend would be $4.00 per share, amounting to no more than $75 million in the
aggregate. Parent refused to agree to a cap on ITGI's share of expenses, but it
proposed to cap the amount of expenses related to Parent's publicly traded notes
that ITGI would be required to pay. Parent 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 Parent, such as office leases and
financial guarantees. However, Parent 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
Jefferies in respect of all such liabilities. Parent further advised, in
response to an inquiry from ITGI's representatives, that Parent 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 special
committee reported to the 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 special committee, subject however to several
conditions:
(1) at the closing, all or substantially all of Parent's non-ITGI
liabilities must be fully and unconditionally released and ITGI's
obligation to share transaction costs must be capped;
(2) since Parent would not be making a contractual commitment to vote its
shares of ITGI common stock in favor of the merger, Parent 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 Parent; and
(3) final approval of the transaction terms should be given only when all
documentation was complete and satisfactory to the special committee and
after the IRS private letter ruling was received and deemed satisfactory.
In subsequent discussions, Parent agreed to provide protection in the merger
agreement for ITGI's minority 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 Parent had unreleased liabilities in excess of a level agreed by
the parties to be immaterial, New Jefferies would secure its indemnity
obligation in respect of the
17
<PAGE>
excess amount with an irrevocable standby letter of credit issued by a financial
institution. The 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.
On March 16, 1999, the special committee reported to ITGI's board of
directors as follows:
(1) it had reviewed with its advisors and found satisfactory the substance
of the private letter ruling issued by the IRS with respect to the
Jefferies transfers, New Jefferies spin-off and the merger;
(2) it had received a presentation from Donaldson, Lufkin & Jenrette with
respect to the merger and Donaldson, Lufkin & Jenrette's oral opinion
that as of such date, the exchange ratio was fair, from a financial point
of view, to the stockholders of ITGI other than Parent;
(3) it had reviewed the final forms of the merger agreement, the
distribution agreement, the tax sharing and indemnification agreement and
the benefits agreement; and
(4) based on this review, it had concluded that the merger agreement and the
merger were fair to and in the best interests of ITGI's stockholders
other than Parent, and it recommended adoption of the merger agreement by
ITGI's board of directors.
DONALDSON, LUFKIN & JENRETTE HAS DELIVERED A FAIRNESS OPINION RELATING TO THE
MERGER
The special committee asked Donaldson, Lufkin & Jenrette, in its role as
financial advisor to the special committee, to render an opinion to our board of
directors and the special committee as to the fairness from a financial point of
view of the exchange ratio to our stockholders other than Parent. On March 15,
1999 and March 16, 1999, Donaldson, Lufkin & Jenrette delivered to the special
committee and our board of directors, respectively, oral opinions, which
opinions were subsequently confirmed in a written opinion dated as of March 17,
1999, to the effect that, as of such dates, and based on and subject to the
assumptions, limitations and qualifications set forth in such written opinion,
the exchange ratio was fair from a financial point of view to our stockholders
other than Parent.
The full text of the fairness opinion is included as appendix E of this
proxy statement/prospectus. The summary of the fairness opinion set forth in
this proxy statement/prospectus is qualified in its entirety by reference to the
full text of the fairness opinion. We urge you to read the fairness opinion
carefully and in its entirety for the procedures followed, assumptions made,
other matters considered and limits of the review undertaken by Donaldson,
Lufkin & Jenrette in connection with such opinion.
Donaldson, Lufkin & Jenrette prepared the fairness opinion for our board of
directors and the special committee and the fairness opinion was directed only
to the fairness from a financial point of view, as of the dates above, of the
exchange ratio to our stockholders other than Parent. Donaldson, Lufkin &
Jenrette expressed no opinion in the fairness opinion as to the prices at which
our securities would trade prior to the merger and New ITGI's securities would
trade following consummation of the merger. The fairness opinion does not
address the relative merits of the merger, nor does it address the decision of
our board of directors to proceed with the merger. The fairness opinion does not
constitute a recommendation to you as to how you should vote on the merger.
The special committee selected Donaldson, Lufkin & Jenrette as its financial
advisor because it is an internationally recognized investment banking firm that
is familiar with ITGI and its business. As part of its investment banking
business, Donaldson, Lufkin & Jenrette is regularly engaged in the valuation of
businesses and securities in connection with mergers, acquisitions,
underwritings, sales and distributions of listed and unlisted securities,
private placements and valuations for corporate and other purposes. ITGI did not
impose any restrictions or limitations upon Donaldson, Lufkin & Jenrette with
respect to the investigations made or the procedures followed by Donaldson,
Lufkin & Jenrette in rendering the fairness opinion.
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<PAGE>
In arriving at the fairness opinion, Donaldson, Lufkin & Jenrette reviewed
the merger agreement, the distribution agreement, the tax sharing and
indemnification agreement and the benefits agreement. The written fairness
opinion states that Donaldson, Lufkin & Jenrette understood that ITGI and Parent
would be entering into certain additional ancillary agreements. With our board
of directors' and the special committee's consent, Donaldson, Lufkin & Jenrette
assumed that such agreements would be on market terms negotiated at arm's
length. Donaldson, Lufkin & Jenrette also reviewed financial and other
information that was publicly available or furnished to Donaldson, Lufkin &
Jenrette by ITGI and Parent, including information provided during discussions
with their respective managements. Included in the information provided during
discussions with ITGI's management were certain financial analyses and
projections of ITGI prepared by the management of ITGI. In addition, Donaldson,
Lufkin & Jenrette compared certain financial and securities data of ITGI and
Parent with various other companies whose securities are traded in public
markets, reviewed the historical stock prices and trading volumes of the shares
of common stock of ITGI and Parent and conducted such other financial studies,
analyses and investigations as Donaldson, Lufkin & Jenrette deemed appropriate
for purposes of rendering the fairness opinion.
In rendering the fairness opinion, Donaldson, Lufkin & Jenrette relied upon
and assumed the accuracy, completeness and fairness of all of the financial and
other information that was available from public sources, that was provided to
Donaldson, Lufkin & Jenrette by ITGI, its management or other representatives,
or that was otherwise reviewed by Donaldson, Lufkin & Jenrette. With respect to
the financial analyses and projections supplied to Donaldson, Lufkin & Jenrette,
Donaldson, Lufkin & Jenrette assumed that they were reasonably prepared on a
basis reflecting the best currently available estimates and judgments of the
management of ITGI as to the future operating and financial performance of ITGI.
Donaldson, Lufkin & Jenrette did not assume responsibility for making any
independent evaluation of any assets or liabilities of ITGI or Parent or for
independently verifying any of the information reviewed by Donaldson, Lufkin &
Jenrette. With our board of directors' and the special committee's consent,
Donaldson, Lufkin & Jenrette also assumed that no goodwill would be incurred by
ITGI in connection with the merger. Donaldson, Lufkin & Jenrette relied upon the
rulings received by Parent from the IRS in response to requests for rulings
concerning the treatment of the Jefferies transfers, the New Jefferies spin-off,
the merger and related transactions under Sections 332, 351, 355 and
368(a)(1)(D) of the Internal Revenue Code. In addition, with our board of
directors' and the special committee's consent based upon advice of counsel to
ITGI, Donaldson Lufkin & Jenrette assumed that the merger would be tax-free to
ITGI's stockholders other than Parent. With our board of directors' and the
special committee's consent, Donaldson, Lufkin & Jenrette also assumed that all
of Parent's liabilities, including without limitation all of the obligations
under the indentures governing Parent's publicly traded notes, will be assumed
by New Jefferies prior to the merger pursuant to the distribution agreement; and
to the extent not assumed, New Jefferies will indemnify or otherwise make ITGI
whole for such remaining liabilities.
The fairness opinion was necessarily based on economic, market, financial
and other conditions as they existed on, and upon the information made available
to Donaldson, Lufkin & Jenrette as of, the dates above. The written fairness
opinion states that, although subsequent developments may affect the fairness
opinion, Donaldson, Lufkin & Jenrette does not have any obligation to update,
revise or reaffirm its opinion. Donaldson, Lufkin & Jenrette was not requested
to, nor did it, solicit the interest of any other party in acquiring ITGI.
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<PAGE>
THE FOLLOWING IS A SUMMARY OF THE PRESENTATION MADE BY DONALDSON, LUFKIN &
JENRETTE TO THE SPECIAL COMMITTEE AT ITS MEETING ON MARCH 15, 1999, AND TO OUR
BOARD OF DIRECTORS IN SUMMARY FORM ON MARCH 16, 1999, IN CONNECTION WITH
RENDERING THE FAIRNESS OPINION.
EXCHANGE RATIO ANALYSIS. Donaldson, Lufkin & Jenrette examined the
percentage ownership held by ITGI's stockholders, other than Parent, in ITGI
prior to the merger and compared this percentage with the estimated percentage
ownership ITGI's stockholders, other than Parent, will hold in New ITGI
following consummation of the merger. Based on approximately 18,627,573 shares
of common stock of ITGI outstanding as of March 1, 1999, Donaldson, Lufkin &
Jenrette calculated that ITGI's stockholders, other than Parent, owned
approximately 19.5% of the outstanding shares of common stock of ITGI on that
date. Donaldson, Lufkin & Jenrette further noted that, based on the exchange
ratio calculated as of that date, our stockholders other than Parent would own
approximately 19.5% of the outstanding shares of common stock of New ITGI.
Accordingly, Donaldson, Lufkin & Jenrette concluded that the exchange ratio will
result in our stockholders other than Parent owning approximately the same
percentage ownership in New ITGI immediately following the merger, as they owned
in ITGI immediately prior to the merger.
STOCK PRICE HISTORY. To provide contextual and comparative market data,
Donaldson, Lufkin & Jenrette reviewed the daily closing prices of the common
stock of ITGI for the 52-week period ended on March 10, 1999, and compared these
closing prices of the common stock of ITGI with the closing stock prices of the
following over the same period: (1) an index comprised of Ameritrade Holding
Corporation, E*Trade Group, Inc., Charles Schwab Corporation, Automatic Data
Processing, Inc., First Data Corporation, Fiserv, Inc., BARRA, Inc., Reuters
Group plc (collectively, the "ITGI Comparable Companies"); (2) Parent; and (3)
the S&P 500.
COMPARABLE COMPANY ANALYSIS. To provide contextual and comparative market
data, Donaldson, Lufkin & Jenrette analyzed selected historical and projected
operating information, stock market data and financial ratios for the ITGI
Comparable Companies, all of which are traded publicly. Using the stock prices
as of March 10, 1999 ($38.0625 in the case of ITGI), Donaldson, Lufkin &
Jenrette analyzed the per share equity value of each of the ITGI Comparable
Companies, measured as a multiple of selected financial data. In examining the
ITGI Comparable Companies, Donaldson, Lufkin & Jenrette analyzed the per share
equity value of each company as a multiple of latest twelve months earnings per
share, estimated calendar year 1998 earnings per share (based on information
from First Call) and estimated calendar year 1999 earnings per share (based on
information from First Call). Donaldson, Lufkin & Jenrette's analyses of the
ITGI Comparable Companies (excluding Ameritrade Holding Corporation and E*Trade
Group, Inc.) yielded the following:
<TABLE>
<CAPTION>
RANGE FOR ITGI MEDIAN FOR ITGI
COMPARABLE COMPARABLE
COMPARABLE COMPANY ANALYSIS COMPANIES COMPANIES ITGI
- ---------------------------------------------------------------------- --------------- ----------------- ---------
<S> <C> <C> <C>
Latest twelve months earnings per share multiples..................... 16.8x to 97.6x 37.1x 19.3x
Calendar year 1998 estimated earnings per share multiples............. 16.8x to 92.0x 37.1x 16.9x
Calendar year 1999 estimated earnings per share multiples............. 15.6x to 76.0x 31.3x 16.5x
</TABLE>
The summary set forth above does not purport to be a complete description of
the analyses performed by Donaldson, Lufkin & Jenrette but describes, in summary
form, the principal elements of the presentation made by Donaldson, Lufkin &
Jenrette to the special committee on March 15, 1999, and to our board of
directors in summary form on March 16, 1999. The preparation of a fairness
opinion involves various determinations as to the most appropriate and relevant
methods of financial analysis and the application of these methods to the
particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. Each of the analyses Donaldson, Lufkin &
Jenrette conducted was carried out in order to provide a different perspective
on the transaction and to
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<PAGE>
add to the total mix of information available. Donaldson, Lufkin & Jenrette did
not form a conclusion as to whether any individual analysis, considered in
isolation, supported or failed to support an opinion as to fairness from a
financial point of view. Rather, in reaching its conclusion, Donaldson, Lufkin &
Jenrette considered the results of the analyses in light of each other, and
ultimately reached its opinion based on the results of all analyses taken as a
whole. Accordingly, notwithstanding the separate factors summarized above,
Donaldson, Lufkin & Jenrette has indicated to the board of directors and the
special committee that it believes that its analyses must be considered as a
whole and that selecting portions of its analyses and the factors considered by
it, without considering all analyses and factors, could create an incomplete
view of the evaluation process underlying its opinion. The analyses performed by
Donaldson, Lufkin & Jenrette are not necessarily indicative of actual values or
future results, which may be significantly more or less favorable than suggested
by such analyses.
Pursuant to the terms of an engagement agreement dated May 28, 1998, ITGI
has paid Donaldson, Lufkin & Jenrette a retainer fee of $200,000 and a fee of
$550,000 upon Donaldson, Lufkin & Jenrette's notification to the special
committee that Donaldson, Lufkin & Jenrette was prepared to deliver the fairness
opinion. ITGI has also agreed to pay Donaldson, Lufkin & Jenrette a fee of
$100,000 for each update of a prior opinion delivered by Donaldson, Lufkin &
Jenrette at the special committee's request, provided that one such update of a
prior opinion shall be provided by Donaldson, Lufkin & Jenrette with no
additional fee to ITGI. In addition, ITGI has agreed, with certain limitations,
to reimburse Donaldson, Lufkin & Jenrette promptly for all out-of-pocket
expenses, including the reasonable fees and expenses of outside counsel,
incurred by Donaldson, Lufkin & Jenrette in connection with its engagement,
whether or not a transaction is consummated. ITGI also agreed to indemnify
Donaldson, Lufkin & Jenrette and certain related persons against certain
liabilities in connection with its engagement, including liabilities under U.S.
federal securities laws.
In the ordinary course of business, Donaldson, Lufkin & Jenrette and its
affiliates may own or actively trade the securities of ITGI or Parent for their
own accounts and for the accounts of their customers and, accordingly, may at
any time hold a long or short position in the securities of ITGI or Parent.
Donaldson, Lufkin & Jenrette, as part of its investment banking services, is
regularly engaged in the valuation of businesses and securities in connection
with mergers, acquisitions, underwritings, sales and distributions of listed and
unlisted securities, private placements and valuations for corporate and other
purposes.
OUR BOARD OF DIRECTORS HAS APPROVED THE MERGER
In light of the recommendation of the special committee, on March 16, 1999,
our board of directors unanimously declared the advisability of the merger
agreement and determined that the merger agreement and the merger are in the
best interests of our company and are fair to and in the best interests of our
stockholders other than Parent. Accordingly, our board of directors has approved
and declared advisable the merger agreement and the merger and recommends that
you vote FOR the approval and adoption of the merger agreement and the merger.
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, Parent and our stockholders other than
Parent. The discussion which follows is based on the Internal Revenue 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.
TAX RULINGS. Parent has received from the IRS rulings to the effect that,
among other things, the merger will qualify as a tax-free liquidation with
respect to Parent and ITGI under Section 332 of the Internal Revenue Code.
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TAX OPINIONS. Parent has received an opinion from its special counsel,
Morgan, Lewis & Bockius LLP, and ITGI has received an opinion from its special
counsel, Cahill Gordon & Reindel to the effect that:
- with respect to the public stockholders of ITGI other than Parent, the
merger will qualify as a "reorganization" under Section 368(a) of the
Internal Revenue Code; and
- ITGI and Parent each will be a party to that reorganization within the
meaning of Section 368(b) of the Internal Revenue Code.
We have filed these opinions of Morgan, Lewis & Bockius LLP and Cahill
Gordon & Reindel as exhibits to the registration statement of which this proxy
statement/prospectus forms a part. These opinions assume consummation of the
merger in accordance with the provisions of the merger agreement and the absence
of changes in existing law, and rely on assumptions and representations of ITGI
and Parent relating to the requirements of a reorganization. The tax opinions
neither bind nor preclude the IRS 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 IRS or adopted by a court if
the issues are litigated. We believe, based upon the tax rulings and the tax
opinions, that the merger will have the U.S. federal income tax consequences
discussed below.
TAX CONSEQUENCES TO PARENT AND ITGI. No income, gain or loss will be
recognized by Parent or ITGI for federal income tax purposes as a result of the
merger.
TAX CONSEQUENCES TO ITGI'S PUBLIC STOCKHOLDERS. The merger will be treated,
from the perspective of the stockholders of ITGI other than Parent, for U.S.
federal income tax purposes as a reorganization within the meaning of Section
368(a) of the Internal Revenue Code. Parent and ITGI will each be a party to the
reorganization within the meaning of Section 368(b) of the Internal Revenue
Code. Except to the extent that stockholders of ITGI other than Parent receive
cash in lieu of fractional shares of New ITGI common stock, stockholders of ITGI
other than Parent who exchange ITGI common stock in the merger solely for New
ITGI common stock will not recognize gain or loss for federal income tax
purposes upon the receipt of New ITGI common stock in exchange for their ITGI
common stock. The aggregate tax basis for the New ITGI common stock received
pursuant to the merger will equal the aggregate tax basis in the ITGI common
stock exchange 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. The holding period of stockholders of ITGI other than
Parent for the New ITGI 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 at the
time of the merger. Stockholders of ITGI other than Parent who receive cash in
lieu of a fractional share interest in New ITGI 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 stockholder of ITGI
other than Parent 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 at the time of the merger, and will be long-term capital
gain or loss if such ITGI common stock has been held for more than one year at
the time of the merger.
Stockholders of ITGI other than Parent should consult their own tax advisors
regarding the appropriate income tax treatment of their receipt of New ITGI
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.
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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 ARE NOT CITIZENS OR RESIDENTS OF THE UNITED STATES, OR WHO ARE
OTHERWISE SUBJECT TO SPECIAL TREATMENT UNDER THE INTERNAL REVENUE CODE.
COMPARISON OF RIGHTS OF ITGI STOCKHOLDERS AND NEW ITGI STOCKHOLDERS
Upon the consummation of the merger, you will become a stockholder of New
ITGI. Since ITGI and New ITGI are both organized under the laws of the State of
Delaware, any differences in your rights as a stockholder of ITGI and New ITGI
will arise solely from differences in the charter and bylaws of ITGI and New
ITGI rather than from differences of law.
The following are summaries of the material differences between your rights
as a stockholder of ITGI compared with your rights as a stockholder of New ITGI.
The following discussions are not intended to be complete and are qualified in
their entirety by reference to Delaware law; ITGI's charter and bylaws, which
are filed as exhibits to our annual report on Form 10-K incorporated herein by
reference; and New ITGI's charter and bylaws, which are included as exhibits to
the merger agreement included as appendix A of this proxy statement/prospectus.
The chart below sets forth the antitakeover provisions in ITGI's charter and
bylaws compared to New ITGI's charter and bylaws:
<TABLE>
<CAPTION>
ITGI NEW ITGI
---------------------------- -------------
<S> <C> <C> <C>
ANTITAKEOVER PROVISION CHARTER BYLAWS CHARTER
- ----------------------------------------------------------------------------- ------------- ------ -------------
Blank check preferred stock.................................................. X X
No stockholder action by written consent..................................... X
Special stockholders meeting can be called only by board or persons
authorized by board........................................................ X
Advance notice requirements for stockholders to have business considered or
nominate directors before annual stockholders meeting......................
Stockholders may not make proposals at a special stockholders meeting........
Supermajority (66 2/3%) stockholder vote required for charter amendments with
regards to antitakeover provisions......................................... X
Supermajority (66 2/3%) stockholder vote required to amend bylaws with
regards to antitakeover provisions.........................................
<CAPTION>
<S> <C>
ANTITAKEOVER PROVISION BYLAWS
- ----------------------------------------------------------------------------- ------
Blank check preferred stock..................................................
No stockholder action by written consent..................................... X
Special stockholders meeting can be called only by board or persons
authorized by board........................................................ X
Advance notice requirements for stockholders to have business considered or
nominate directors before annual stockholders meeting...................... X
Stockholders may not make proposals at a special stockholders meeting........ X
Supermajority (66 2/3%) stockholder vote required for charter amendments with
regards to antitakeover provisions.........................................
Supermajority (66 2/3%) stockholder vote required to amend bylaws with
regards to antitakeover provisions......................................... X
</TABLE>
The provisions of New ITGI's charter and bylaws described in this section
may delay or make more difficult acquisitions or changes of control of New ITGI
not approved by New ITGI's board of directors. Such provisions could have the
effect of discouraging third parties from making proposals involving an
acquisition or change of control of New ITGI although such proposals, if made,
might be considered desirable by a majority of New ITGI's stockholders. Such
provisions may also have the effect of making it more difficult for third
parties to cause the replacement of the current management of New ITGI without
the concurrence of New ITGI's board of directors.
SPECIAL MEETINGS. ITGI's bylaws state that the board of directors,
president or the secretary may call special meetings of stockholders for any
purpose. The president or the secretary shall call a special meeting of the
stockholders of ITGI whenever stockholders owning 25% of the shares of ITGI
entitled to vote on matters to be submitted to the stockholders makes a written
request. The board of directors or the president may call a special meeting at
any time.
New ITGI's charter and bylaws will provide that special meetings of
stockholders may be called only by the secretary at the request of (1) a
majority of the directors or (2) a person authorized by a
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majority of the directors. Under New ITGI's charter, stockholders will not be
permitted to call special meetings. New ITGI's bylaws will provide that
participants at a special meeting may discuss only business stated in the notice
that the board of directors gave, and stockholders may not bring business before
a special meeting, except in the case of special meetings called for the purpose
of electing directors. In this case, stockholders may nominate directors but
must comply with the same advance written notice provisions as for annual
meetings.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR
NOMINATIONS. New ITGI's bylaws will provide that stockholders seeking to bring
business before or to nominate directors at any meeting of stockholders must
provide to the secretary timely written notice, in proper form, of the
stockholder's intention to bring business before that meeting. To be timely, a
stockholder's notice must be delivered to, or mailed and received at, our
principal executive offices not less than 60 days nor more than 90 days prior to
the first anniversary of the preceding year's annual meeting, with respect to
annual meetings, and not less than 60 days nor more than 90 days prior to such
meeting, with respect to special meetings. New ITGI's bylaws will also specify
certain requirements for a stockholder's notice to be in proper written form.
These provisions may preclude some stockholders from bringing matters before the
stockholders or from making nominations for directors.
Neither ITGI's charter nor its bylaws place any notice or other requirements
or stockholder proposals or director nominations.
ACTION BY STOCKHOLDERS WITHOUT A MEETING. Delaware law provides that,
unless limited by the charter, any action that could be taken by stockholders at
a meeting may be taken without a meeting if a consent or consents in writing,
setting forth the action so taken, is signed by the holders of record of
outstanding stock having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. There is no such limitation in
the ITGI's charter and ITGI's bylaws include a provision permitting the ITGI
stockholders to consent in writing to any action without a meeting. New ITGI's
charter and bylaws will not permit stockholders to take action by any written
consent in lieu of a meeting.
SUPERMAJORITY VOTING. New ITGI's charter and bylaws require 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 antitakeover provisions in New ITGI's charter or bylaws.
The board of directors or the stockholders may amend, supplement or repeal
ITGI's bylaws at any time, except as limited by law.
EXCHANGE AGENT
EquiServe has been selected as exchange agent under the merger agreement. As
soon as practicable after the merger, Parent shall deposit with the exchange
agent, for the benefit of the stockholders of ITGI other than Parent,
certificates representing the shares of New ITGI common stock issuable pursuant
to the merger in accordance with the merger agreement. The exchange agent will
deliver the certificates representing shares of New ITGI common stock upon
surrender for exchange of certificates representing the ITGI common stock.
REGULATORY FILINGS AND APPROVALS
The Securities and Exchange Commission has the authority to prohibit the
dividend by ITG Inc. which will be used by ITGI to pay the special cash
dividend. ITG Inc. is a registered broker-dealer under the Securities Exchange
Act and subject to the SEC's net capital requirements. If the SEC prohibits such
dividend, the merger will not occur. We must also notify the National
Association of Securities Dealers, Inc. and other regulatory bodies about the
merger.
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RESALE OF NEW ITGI COMMON STOCK
All New ITGI common stock received by ITGI stockholders in connection with
the merger will be freely transferable, except that New ITGI common stock
received by persons who are deemed to be our "affiliates" (as such term is
defined in Rule 145 under the Securities Act) at the time of the annual meeting
may be resold by them only in transactions permitted by the resale provisions of
Rule 145 under the Securities Act (or Rule 144 under the Securities Act in the
case of those persons who become our affiliates) or as otherwise permitted under
the Securities Act. Persons who may be deemed to be our "affiliates" generally
include individuals or entities that control, are controlled by, or are under
common control with, us and may include certain of our officers, directors and
principal stockholders. This proxy statement/prospectus cannot be used in
connection with resales of New ITGI common stock received in the merger by any
person who may be deemed to be an "affiliate" of New ITGI under the Securities
Act.
LISTING
The ITGI common stock is currently quoted on the Nasdaq National Market
under the symbol "ITGI." Upon consummation of the merger, ITGI common stock will
no longer be quoted on the Nasdaq National Market.
We have applied for listing of New ITGI common stock on the New York Stock
Exchange under the symbol "ITG." The approval for listing of New ITGI common
stock, subject to official notice of issuance, is a condition to the
consummation of the merger.
ACCOUNTING TREATMENT OF 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.
APPRAISAL RIGHTS
Stockholders will not be entitled to seek appraisal of their shares of our
common stock under Section 262 of the Delaware General Corporation Law, a copy
of which is included as appendix F of this proxy statement/prospectus.
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THE MERGER AGREEMENT
The merger agreement is the agreement pursuant to which ITGI and Parent
agree to merge. It sets forth the number of shares of New ITGI common stock that
ITGI stockholders, other than Parent, will receive in the merger in exchange for
their ITGI shares. This exchange ratio establishes the relative stock ownership
of Parent's stockholders and our stockholders, other than Parent, in New ITGI.
In addition, the merger agreement contains, among other things, representations,
warranties and agreements by Parent and ITGI to each other, conditions to the
merger and termination provisions. We provide a summary of the material
provisions of the merger agreement below. You should review carefully the full
text of the merger agreement, which is included as appendix A of this document.
REPRESENTATIONS AND WARRANTIES BY PARENT
Parent represents and warrants to, and agrees with, ITGI as to a number of
matters, including:
(1) due organization, valid existence and good standing of Parent;
(2) authorization, execution and delivery of the merger agreement and the
distribution agreement, the benefits agreement and the tax sharing and
indemnification agreement (the "ancillary agreements") by Parent,
enforceability of the merger agreement and the ancillary agreements
against Parent and related matters;
(3) no governmental or other third party consent is required in connection
with the execution, delivery and performance by Parent of the merger
agreement or any of the ancillary agreements or the consummation by
Parent of the merger, the Jefferies transfers or the New Jefferies
spin-off (the "Parent Transactions"), except as set forth in the merger
agreement;
(4) the execution, delivery and performance by Parent of the merger
agreement and the ancillary agreements and the consummation by Parent of
the Parent Transactions will not:
(a) violate any provision of the charter or bylaws of Parent;
(b) to the best of Parent's knowledge, violate any law; or
(c) breach any note, bond, mortgage, indenture or deed of trust relating
to indebtedness for borrowed money or any material license, lease or
other agreement, instrument or obligation of Parent or any of its
subsidiaries, other than ITGI and its subsidiaries;
(5) capitalization;
(6) Parent has made and will make all required filings with the SEC and such
filings, as they relate to Parent and its non-ITGI subsidiaries, did not
and will not contain any an untrue statement of a material fact and did
not and will not omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading;
(7) Parent, to the best of its knowledge, has no Liabilities other than (a)
those described in the disclosure schedule, and (b) any Liabilities of or
related to ITGI and its subsidiaries. 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 the merger
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 of assets and liabilities to New Jefferies,
Parent will have no Liabilities other than those described in clause (b)
above and those set forth in the disclosure schedule;
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(8) since December 31, 1998, Parent has not, directly or indirectly, except
as described in the disclosure schedule:
(a) except in the ordinary course of business, purchased or otherwise
acquired, or agreed to purchase or otherwise acquire, any share of
capital stock of Parent, or any options, warrants or other equity
security, debt security or other indebtedness of Parent 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;
(b) except in the ordinary course of business (1) created or incurred any
indebtedness for borrowed money; (2) 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 (3) entered into any
commitment or incurred any Liabilities; or
(c) except in the ordinary course of business, suffered any damage,
destruction or loss that is material to Parent, whether covered by
insurance or not; or (d) agreed to do any of the things described in
the preceding clauses (a) through (c);
(9) no "Assets" of Parent 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.
(10) except as described in the disclosure schedule, there is no litigation
involving Parent or any of its non-ITGI subsidiaries;
(11) except as described in the disclosure schedule, neither Parent nor any
of its non-ITGI subsidiaries has violated law, except where such
violation or failure to comply would not give rise to a material adverse
effect;
(12) except as described in the disclosure schedule, Parent has such
licenses as are necessary to own, lease or operate the properties and to
conduct the business of its non-ITGI subsidiaries in the manner described
in the Parent SEC reports;
(13) labor matters;
(14) except as set forth in the disclosure schedule, neither the execution
and delivery by Parent of the merger agreement or the ancillary
agreements nor the consummation of the Parent Transactions gives rise to
any obligation of Parent or any of its non-ITGI subsidiaries, or any
right of any holder of any security of Parent or any of its non-ITGI
subsidiaries to require Parent to purchase, offer to purchase, redeem or
otherwise prepay or repay any such security, or deposit any funds to
effect the same;
(15) real property leases;
(16) material contracts and commitments;
(17) environmental matters;
(18) finder's or broker's fees;
(19) recommendation of Parent's board of directors; and
(20) New Jefferies and the applicable trustees have executed supplemental
indentures which:
(a) amend in certain respects the indenture relating to an issue of
Parent's publicly traded notes; and
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(b) provide that New Jefferies shall assume, and Parent shall be released
from, Parent's obligations under that indenture, effective as of the
date the Jefferies transfers are completed.
REPRESENTATIONS AND WARRANTIES BY ITGI
ITGI represents and warrants to, and agrees with, Parent relating to a
number of matters, including:
(1) due organization, valid existence and good standing of ITGI;
(2) authorization, execution and delivery of the merger agreement by ITGI,
enforceability of the merger agreement against ITGI and related matters;
(3) no governmental or other third party consent is required in connection
with the execution, delivery and performance by ITGI of the merger
agreement, the declaration and payment of the special cash dividend or
the consummation by ITGI of the merger, except as set forth in the merger
agreement;
(4) the execution, delivery and performance by ITGI of the merger agreement,
the declaration and payment of the special cash dividend and the
consummation by ITGI of the merger will not:
(a) violate any provision of the charter or bylaws of Parent,
(b) to the best of ITGI's knowledge, violate any law; or
(c) reach any note, bond, mortgage, indenture or deed of trust relating
to indebtedness for borrowed money or any material license, lease or
other agreement, instrument or obligation of ITGI or any of its
subsidiaries;
(5) capitalization;
(6) ITGI has made and will make all required filings with the SEC and such
filings, as they relate to ITGI and its subsidiaries, did not and will
not contain any an untrue statement of a material fact and did not and
will not omit to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances
under which they were made, not misleading;
(7) to the best knowledge of ITGI, except for the Liabilities set forth in
or referred to in the ITGI SEC reports, or in this proxy
statement/prospectus, ITGI has no Liabilities other than those described
in the disclosure schedule;
(8) since December 31, 1998, ITGI has not, directly or indirectly, except as
described in the disclosure schedule:
(a) 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;
(b) except in the ordinary course of business (1) created or incurred any
indebtedness for borrowed money; (2) 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 (3) entered into any
commitment or incurred any Liabilities; or
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(c) 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 (d) agreed to do any of the things described in
the preceding clauses (a) through (c);
(9) except as described in the disclosure schedule, neither ITGI nor any of
its subsidiaries has violated law, except where such violation or failure
to comply would not give rise to a material adverse effect;
(10) except as described in the disclosure schedule, ITGI has such licenses
as are necessary to own, lease or operate the properties and to conduct
the business of its subsidiaries in the manner described in the ITGI SEC
reports;
(11) labor matters;
(12) except as set forth in the disclosure schedule, neither the execution
and delivery by ITGI of the merger agreement, payment of the special cash
dividend nor 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;
(13) real property leases;
(14) material contracts and commitments;
(15) except as described in the disclosure schedule, there is no litigation
involving ITGI or any of its subsidiaries;
(16) except as described in the disclosure schedule, ITGI and its
subsidiaries own no Parent common stock and are not a party to any
contracts or options that would allow or obligate ITGI or any of its
subsidiaries to purchase Parent common stock;
(17) environmental matters;
(18) finder's or broker's fees;
(19) recommendation of ITGI's board of directors and the special committee;
and
(20) the supplemental indentures and related documentation concerning New
JEF's assumption of certain of the Senior Notes.
CERTAIN COVENANTS AND AGREEMENTS
MATERIAL CHANGES. ITGI has agreed, for itself and its subsidiaries, that,
except as contemplated by the merger agreement and the ancillary agreements,
during the period from the date of the merger agreement to the closing date,
without the prior written consent of Parent, 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) 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 subject to lock-up agreements, or grant
any options outside of the ordinary course of business, or is
inconsistent
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with past practice that is exercisable at any time prior to April 30,
1999 or take any other action that would otherwise alter its capital
structure;
(4) not pay any dividend 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; and
(6) not amend its charter or bylaws.
ITGI agrees to promptly advise Parent if:
- it has more than 18,750,000 shares of ITGI common stock outstanding at any
time prior to the merger 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 of the
merger. ITGI agrees not to amend, by written instrument, document, waiver
or other act or practice, any lock-up agreement without Parent's prior
written consent.
Parent has agreed, for itself and its subsidiaries, that, except as
contemplated by the merger agreement and the ancillary agreements, 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 pursuant to certain outstanding stock options and equity
compensation awards, or grant any option or equity compensation award
unless it becomes, upon consummation of the Jefferies transfers, an
option in New Jefferies common stock or take any other action that would
otherwise alter its capital structure;
(4) not pay any dividend 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; and
(6) not amend its charter or bylaws.
PROXY STATEMENT/PROSPECTUS AND PROXY/INFORMATION STATEMENT. Parent and ITGI
each take responsibility for information in this proxy statement/prospectus, as
well as the proxy/information statement being distributed to Parent's
stockholders, except that Parent 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, and that ITGI will not be
responsible for information relating solely to Parent and its non-ITGI
subsidiaries, the Jefferies transfers, the ancillary agreements, the New
Jefferies spin-off or the Parent-provided information concerning the merger.
Each agrees to consult with the other before filing any amendment or supplement
to this proxy statement/prospectus or to the proxy/ information statement, or
submitting any information to the SEC in connection therewith.
FURTHER ASSURANCES. In addition to the actions specifically provided for
elsewhere in the merger agreement, each of ITGI and Parent will use its
commercially reasonable efforts to:
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- 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 the merger agreement and to carry out these
terms; and
- 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 the merger 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 the
merger agreement.
EXPENSES. Parent and ITGI agree to pay specified portions of reasonable
"out-of-pocket" expenses of Parent, New Jefferies or ITGI that have been
incurred because of or in order to effect the Parent Transactions and the
special cash dividend, subject to the limitations and qualifications set forth
in the merger agreement.
ACCESS TO INFORMATION. From the date of the merger agreement to the
effective time of the merger, each of Parent and ITGI agrees to 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.
PRESS RELEASES. Neither ITGI nor Parent shall make or issue any press
release or other public statement with respect to any of the transactions
contemplated by the merger agreement without obtaining the prior written
approval of the other, which consent shall not be unreasonably withheld.
CONSENTS. Parent agrees to use its reasonable best efforts to obtain all
required governmental consents referenced in the merger agreement and the other
consents listed in the disclosure schedule. ITGI agrees to use its reasonable
best efforts to obtain all required governmental consents and other consents
referenced in the merger agreement.
AMENDMENT OF DISTRIBUTION AGREEMENT. Parent shall not modify, amend or
waive any provision of the distribution agreement, unless Parent shall have
obtained the consent of ITGI, which consent shall not be unreasonably withheld.
LOCK-UP COVENANTS. ITGI agrees to refrain and cause its subsidiaries to
refrain from purchasing or entering into options or contracts which would
obligate it or any of its subsidiaries to purchase Parent common stock prior to
the consummation of the merger. 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 (a) the merger or (b) April
30, 1999.
STANDSTILL PRIOR TO PRE-CLOSING. If at any time prior to the pre-closing,
Parent receives a third party offer to acquire its entire equity interest in
ITGI, Parent will use its commercially reasonable best efforts to negotiate with
such third party for the purpose of endeavoring to obtain the economic and other
terms and benefits of such offer for the benefit of the other stockholders of
ITGI.
PRE-CLOSING
Subject to the satisfaction of the conditions contained in the merger
agreement, the pre-closing shall be held on the business day following the
stockholders' meetings of Parent and ITGI, unless extended in writing by Parent
and ITGI. At the pre-closing, Parent, ITGI, New Jefferies and The Bank
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of New York, as escrow agent, shall enter into a pre-closing and escrow
agreement so that they may deposit certain items, moneys, documents and
instruments in connection with the transactions contemplated by the merger
agreement and the distribution agreement, into escrow with the escrow agent, to
be held and released by the escrow agent. The pre-closing and escrow
arrangements are intended to allow five days of "when-issued" trading of the New
Jefferies common stock and the New ITGI common stock. Pursuant to the
pre-closing and escrow agreement:
(1) ITGI shall deposit cash into escrow in an amount equal to the special
cash dividend. The special cash dividend shall be released without
condition or limitation by the escrow agent on the business day following
the pre-closing to ITGI's stockholders of record on the special cash
dividend record date;
(2) Documents have been executed and placed into escrow concerning all
Jefferies transfers so that all transfers can be effected pursuant to the
distribution agreement immediately following payment of the special cash
dividend. However, documentation concerning the contribution by Parent to
New Jefferies of Parent's pro rata share of the special cash dividend
need not be included;
(3) Parent shall deposit into escrow an agreement between Parent and the
distribution agent for the New Jefferies common stock. Under this
agreement, the distribution agent shall distribute all New Jefferies
common stock to Parent's stockholders after being instructed to do so by
the escrow agent. The escrow agent shall issue such instructions upon
receipt of a certificate from ITGI and Parent on the fifth business day
following the stockholders' meetings unless prior to 9:00 a.m. on the
closing date ITGI or Parent shall have delivered to the escrow agent a
certificate that Parent owns less than 80% of ITGI or that the IRS has
revoked or amended in any material adverse matter, the tax rulings; and
(4) ITGI and Parent 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 in clause (3).
CONDITIONS TO PRE-CLOSING
MUTUAL CONDITIONS. The parties have agreed to pre-close the merger only if
certain conditions are satisfied as of a date prior to the closing. The
pre-closing date will be no later than the day of the stockholders' meetings
unless extended by both parties in writing. The mutual conditions to the
obligation of Parent or ITGI to complete the pre-closing include the following:
(1) the stockholders of Parent shall have approved and adopted by requisite
vote the merger agreement, including amendments to Parent's certificate
of incorporation and bylaws, and the issuance of the New ITGI common
stock in accordance with Delaware law and the certificate of
incorporation and bylaws of Parent;
(2) the stockholders of ITGI shall have approved and adopted by requisite
vote the merger agreement in accordance with Delaware law and the
certificate of incorporation and bylaws of ITGI.
(3) 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 restraining or prohibiting the consummation of the merger or the
transactions contemplated by the ancillary agreements or the merger
agreement;
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(4) the registration statement with respect to this proxy
statement/prospectus of Parent shall have been declared effective under
the Securities Act and no stop orders with respect thereto shall have
been issued and the proxy statement/information statement shall have been
declared or become effective under the Exchange Act and shall have been
furnished to the stockholders of Parent, the definitive proxy
statement/prospectus shall have been furnished to the stockholders of
ITGI, and Parent shall have received all requisite authorizations under
all applicable state securities or blue sky laws necessary to consummate
the issuance of the New ITGI common stock;
(5) Parent shall have received approval for listing by the NYSE, upon
official notice of issuance of the New ITGI common stock;
(6) supplemental indenture(s) satisfactory to ITGI pursuant to which,
effective as of the date the Jefferies transfers are completed, New
Jefferies shall assume, and Parent shall be released from, Parent's
obligations under an issue of Parent's publicly traded notes and the
related indenture, accompanied by officers certificate(s) and opinion(s)
of Parent's counsel;
(7) receipt of an accounting advisory letter;
(8) execution and delivery of the escrow agreement and the delivery of all
items required to be delivered into escrow thereunder;
(9) Parent owns at least 80% of the outstanding ITGI common stock;
(10) all conditions to the New Jefferies spin-off set forth in the
distribution agreement, other than the release of the special cash
dividend from the escrow under the escrow agreement, shall have been
satisfied or waived by the parties thereto; and
(11) the tax rulings shall not have been withdrawn or modified by the IRS in
any material adverse respect prior to Pre-Closing.
PARENT'S CONDITIONS. The obligations of Parent to effect the pre-closing
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 Parent:
(1) the representations and warranties of ITGI contained in the merger
agreement shall be true and correct at the pre-closing 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 has 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 pre-closing;
(3) ITGI has delivered to Parent a certificate in form and substance
satisfactory to Parent dated the date of the merger and signed by the
chief executive officer and the chief financial officer of ITGI;
(4) ITGI has received all consents designated as required to be obtained
prior to pre-closing;
(5) ITGI has delivered to Parent an opinion of Cahill Gordon & Reindel
covering the matters set forth in the merger agreement; and
(6) Morgan, Lewis & Bockius LLP has delivered to Parent an opinion that the
merger is tax-free to ITGI's public stockholders.
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ITGI'S CONDITIONS. The obligations of ITGI to effect the pre-closing 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 Parent contained in the merger
agreement shall be true and correct at the pre-closing 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) Parent has 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 pre-closing;
(3) Parent has delivered to ITGI a certificate in form and substance
satisfactory to ITGI dated the date of the merger and signed by the chief
executive officer and the chief financial officer of Parent;
(4) Parent has delivered to ITGI a copy (certified by the Secretary of
Parent) of duly adopted resolutions of the Board of Directors of Parent
accelerating the vesting and exercisability of all options to purchase or
acquire Parent common stock effective not later than release of the
special cash dividend from escrow. Parent has caused all outstanding
Parent common stock equivalents to have been exercised or canceled, or
exchanged, conditioned only upon consummation of the Transfers for
options, shares, or common stock equivalents of New Jefferies as of, or
within two business days following the pre-closing date, or reserved
against without New ITGI's responsibility after the effective time of the
merger;
(5) Parent has taken all necessary action to effect the transfer to New
Jefferies of all Parent liabilities that are not related to ITGI. If
Parent cannot transfer any non-ITGI liabilities to New Jefferies, Parent
will take action satisfactory to ITGI to mitigate these liabilities, such
as in the form of prepayments, insurance, reserves and the like. Parent
has obtained one or more letters of credit for the benefit of ITGI to the
extent any such unmitigated liabilities exceed the following amounts:
(a) $5.0 million from the effective time of the merger until its first
anniversary;
(b) $3.33 million from the first anniversary of the effective time of the
merger to its second anniversary;
(c) $1.67 million from the second anniversary of the effective time of
the merger until its third anniversary; and
(d) $0 after the third anniversary of the effective time of the merger.
(6) Parent has obtained all governmental consents referenced in the merger
agreement and has obtained all other required consents on or prior to the
pre-closing;
(7) Parent has delivered to ITGI an opinion of Morgan, Lewis & Bockius LLP
covering the matters set forth in the merger agreement;
(8) Cahill Gordon & Reindel has delivered to ITGI an opinion that the merger
is tax-free to ITGI's public stockholders;
(9) no provision of the distribution agreement shall have been modified,
amended or waived without the prior written consent of ITGI, which shall
not be unreasonably withheld; and
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(10) all certificates, consents and opinions, including any provision
therein permitting ITGI to rely thereon, delivered in connection with the
supplemental indentures relating to Parent's publicly traded notes shall
not have been withdrawn.
CONDITIONS TO CLOSING
The merger is subject to the satisfaction of each of the following
additional conditions:
(1) the pre-closing shall have been consummated in accordance with the
merger agreement, and the escrow agreement has been fully complied with;
(2) at all relevant times prior to the merger, Parent shall have owned at
least 80% of the outstanding ITGI common stock; no other ITGI capital
stock (other than common stock) shall have been issued or outstanding;
and
(3) The favorable tax rulings shall not have been, prior to the effective
time of the merger, withdrawn, or modified in any material adverse
respect, by the IRS.
NO SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS
The representations, warranties, covenants and other obligations of Parent
and ITGI under the merger agreement shall not survive the merger. The expense
provisions, however, shall survive the merger in accordance with the
distribution agreement and any termination of the merger agreement.
TERMINATION
The merger agreement may be terminated at any time prior to the pre-closing
date:
(1) by mutual written consent of Parent 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 IRS has withdrawn, or modified in any material adverse respect,
the tax rulings; or
(3) by a non-breaching party with respect to any failure of the other party
to satisfy a condition to such party's obligation to consummate the
merger.
The merger agreement may be terminated and the transactions contemplated
hereby may be abandoned at any time prior to the closing (a) by mutual written
consent of Parent and ITGI or (b) by either party upon the failure of the
closing conditions to be satisfied.
35
<PAGE>
OTHER AGREEMENTS
DISTRIBUTION AGREEMENT
New Jefferies and Parent have entered into a distribution agreement, which
provides for, among other things, the transfer by Parent of its assets and
liabilities to New Jefferies prior to the merger and the conditions precedent to
the New Jefferies spin-off. Because we, as New ITGI, succeed to Parent's
obligations under the distribution agreement following the merger, the
distribution agreement is the principal agreement that sets forth New Jefferies'
and New ITGI's responsibilities to each other for liabilities relating to them.
TRANSFER OF ASSETS AND LIABILITIES. The distribution agreement provides
generally that prior to the merger:
- all assets of Parent other than the capital stock of ITGI held by it will
be transferred to and become assets of New Jefferies or its subsidiaries;
and
- all Jefferies Liabilities will be assigned to and assumed by New
Jefferies.
"Jefferies Liabilities" means:
(1) all liabilities of New Jefferies under the distribution agreement, the
amended and restated tax sharing agreement or any ancillary agreement;
(2) except as otherwise expressly provided in the distribution agreement,
the amended and restated tax sharing agreement or any ancillary
agreement, all liabilities, other than ITGI Group Liabilities (as defined
below), (a) of Parent, 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 merger; (b) of New Jefferies or any of
its subsidiaries or the New Jefferies business whether arising before, on
or after the merger; or (c) arising out of the ownership or use of the
assets of New Jefferies or any of its subsidiaries, whether arising
before, on or after the merger;
(3) all liabilities arising under or in connection with the registration
statement on Form 10 unless and except to the extent that such claims are
based upon ITGI-provided information;
(4) subject to the expenses section of the distribution agreement, all
liabilities of Parent in respect of its publicly traded notes, including,
without limitation, the related indentures, including all supplemental
indentures, consent solicitations and offering materials;
(5) all liabilities arising with respect to claims based upon New
Jefferies-provided information included or incorporated by reference into
the Form S-4; and
(6) liabilities of Parent under options or other rights to purchase or
acquire any Parent common stock, cancelled or exchanged for options to
purchase shares of New Jefferies common stock.
INDEMNIFICATION BY NEW JEFFERIES. On and after the date of the New
Jefferies spin-off, New Jefferies has agreed to indemnify, defend and hold
harmless Parent and its successors, including New ITGI, 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
actual or threatened 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 (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 Jefferies
Liabilities or the failure of New Jefferies or any of its subsidiaries to
assume, pay, perform or otherwise discharge any of the Jefferies Liabilities.
36
<PAGE>
INDEMNIFICATION BY NEW ITGI. On and after the date of the New Jefferies
spin-off, New ITGI will indemnify, defend and hold harmless New Jefferies and
its subsidiaries and each of their respective directors, officers, employees and
agents (the "New Jefferies Indemnitees") from and against any and all
Indemnifiable Losses incurred or suffered by any of the New Jefferies
Indemnitees in connection with any of the ITGI Group Liabilities or the failure
of New ITGI to pay, perform or otherwise discharge any of the ITGI Group
Liabilities.
"ITGI Group Liabilities" means:
(1) all liabilities of ITGI, in its own right or as the successor to Parent
following the merger, under the indemnification provisions of the
distribution agreement, or under the amended and restated tax sharing
agreement or any ancillary agreement;
(2) except as otherwise expressly provided in the distribution agreement,
the amended and restated tax sharing agreement or any ancillary
agreement, all liabilities, other than Jefferies Liabilities, of ITGI,
any of its subsidiaries or ITGI business or liabilities arising out of
the ownership or use of the assets of ITGI or any of its subsidiaries in
each case whether arising before, on or after the merger;
(3) all liabilities with respect to claims based upon ITGI-provided
information included and incorporated by reference into the Form 10 and
proxy/information statement; and
(4) all liabilities arising with respect to claims based upon ITGI- provided
information included or incorporated by reference in the Form S-4.
PROCEDURES. 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.
TAX SHARING AND INDEMNIFICATION AGREEMENT
New Jefferies, ITGI and Parent have entered into a tax sharing and
indemnification agreement and an amended and restated tax sharing agreement
(collectively, the "tax sharing agreement"). The tax sharing agreement will
allocate tax liabilities between New Jefferies and ITGI and their respective
subsidiaries for 1999 and prior tax years. Under the tax sharing agreement, for
all tax years ending before or including 1999, New Jefferies will bear any
excess over ITGI's share, computed as if ITGI and its subsidiaries were a
separate consolidated or combined group, of the consolidated 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 Jefferies is also responsible for paying all tax
liabilities arising from any tax returns which it files separately. Each of ITGI
and New Jefferies will be responsible for that portion of the federal
consolidated income tax liability of the consolidated group attributable to it.
In addition, each of ITGI and New Jefferies will pay to the other the amount by
which the federal consolidated income tax liability of the consolidated group
has been reduced as a result of the inclusion of ITGI and New Jefferies, and
their respective subsidiaries, in the consolidated group. If the consolidated
group's tax liability for any tax year ending before or including the
distribution date is changed or adjusted as a result of a tax examination or
otherwise, then each of ITGI's and New Jefferies' share of the consolidated
group's adjusted tax liability or benefit shall be recomputed and agreed to by
the parties. Any payments due between New Jefferies 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.
37
<PAGE>
The tax sharing agreement generally provides that in the event that either
New ITGI or New Jefferies takes any action inconsistent with, or fails to take
any action required by, or in accordance with, the qualification of the New
Jefferies spin-off as tax-free, then New ITGI or New Jefferies, 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 New
Jefferies 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 New Jefferies spin-off as a taxable event.
BENEFITS AGREEMENT
New Jefferies and Parent have entered into a benefits agreement, which
provides, among other things, that as of the merger, New Jefferies 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 Parent, excluding ITGI and its subsidiaries. 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 merger, Parent shall amend 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 Jefferies will assume
and become a successor employer with respect to the profit sharing and employee
stock ownership plans currently maintained by Parent and will continue such
plans for the benefit of eligible employees of Parent, 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 merger. 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 Jefferies shall be transferred to the New
ITGI plans to be maintained for the benefit of such employees.
New Jefferies will also assume and become the successor employer for the
defined benefit pension plan currently maintained by Parent. 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 merger, 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 merger, optionees under the Parent stock incentive plan shall
have the opportunity to exercise stock options previously granted under the
plan. New Jefferies shall be responsible for all liabilities relating to stock
options granted by Parent prior to the merger. In contemplation of the New
Jefferies spin-off, the "Capital Accumulation Plan for Key Employees," a
nonqualified deferred compensation plan maintained by Parent, was terminated and
all balances of cash and Parent 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 Jefferies employees will be assumed by New Jefferies. 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 Parent has
paid approximately $1.1 million to ITGI. In addition, prior to the merger,
Parent 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-Employee Directors' Stock Option Plan. Awards
authorized under those plans may be made to employees and directors of New ITGI
following the merger.
38
<PAGE>
MARKET PRICE OF AND DIVIDENDS ON COMMON STOCK
Our common stock is quoted on the Nasdaq National Market under the symbol
"ITGI." We have 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 of our common stock as reported on
the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1999
First Quarter (through March 15, 1999)................................... $ 67.00 $ 39.50
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 our common stock as
reported on the Nasdaq National Market was $46.50. On March 15, 1999, our common
stock was held by approximately 1,500 holders of record or through nominees in
street name accounts with brokers.
We have not paid a dividend since May 4, 1994. Prior to and subject to the
satisfaction of the conditions to the merger, we will pay a special cash
dividend of $4.00 per share to each stockholder of record as of April 20, 1999.
Our revolving credit facility restricts our ability to pay dividends. See
"Management's Discussion of Financial Condition and Results of
Operations--Liquidity and Capital Resources." Our dividend policy following the
merger will be to retain earnings to finance the operations and expansion of our
businesses. Other than the special cash dividend, we do not anticipate paying
any cash dividends on our common stock in the foreseeable future.
39
<PAGE>
COMPARATIVE PER SHARE DATA OF PARENT AND ITGI
The following table sets forth selected per share data for Parent, ITGI and
New ITGI. The unaudited pro forma financial data assume that the merger and
related transactions were consummated on January 1, 1998. Book value data for
all pro forma presentations are based upon the number of outstanding shares of
New ITGI common stock adjusted to include the maximum number of shares of Parent
common stock that could be issued in the merger. Please read the information set
forth below along with the historical consolidated financial statements of
Parent and ITGI in the annual reports on Form 10-K for the fiscal year ended
December 31, 1998 filed with the SEC and incorporated herein by reference and
"Selected Historical Financial Data."
<TABLE>
<CAPTION>
FISCAL YEAR
-------------------------------
<S> <C> <C> <C>
1998 1997 1996
--------- --------- ---------
PARENT HISTORICAL:
Cash dividends declared per share........................................... $ .20 $ .125 $ .0875
Book value per share........................................................ $ 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........................................................ $ 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
ITGI PRO FORMA(1):
Cash dividends declared per share........................................... -- -- --
Book value per share........................................................ $ 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(1)(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 pro forma and equivalent pro forma data do not purport to represent what
ITGI's or New ITGI's results of operations or financial position would have
actually been or to project ITGI's or New ITGI's results of operations for
any future period or financial position at any future date.
(2) The New ITGI equivalent unaudited pro forma data equals the ITGI unaudited
pro forma data times the exchange ratio.
40
<PAGE>
SELECTED HISTORICAL FINANCIAL DATA
Please read the following selected historical financial information along
with our consolidated financial statements in our annual report on Form 10-K for
the fiscal year ended December 31, 1998 filed with the SEC and incorporated
herein by reference.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1998 1997 1996 1995 1994(1)
---------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
CONSOLIDATED STATEMENT 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>
(IN THOUSANDS)
CONSOLIDATED STATEMENT 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 our 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 Inc. and an annual
profits bonus component, the "ITGI Performance Share Plans") and
non-compensatory ITG Inc. stock options (on 10% of the outstanding shares of
ITG Inc. 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 Parent common
stock. ITGI, prior to December 31, 1993, had expenses and paid to Parent an
additional $9.4 million related to the ITGI Performance Share Plans.
Immediately prior to the consummation of the Offering, Parent 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.
41
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
We prepared the following unaudited pro forma statement of financial
condition data for ITGI as of December 31, 1998 assuming the merger and related
transactions had been consummated on that date. We prepared the following
unaudited pro forma statement of income data for ITGI for the year ended
December 31, 1998 assuming the merger and related transactions had been
consummated on January 1, 1998. The pro forma adjustments are based upon
available information and certain assumptions that we believe are reasonable
under the circumstances. The unaudited pro forma financial data are not
necessarily indicative of the operating results or financial position that we
would have achieved if the merger had been consummated on the dates 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 Merger and Related Transactions" and the consolidated
financial statements in our annual report on Form 10-K for the fiscal year ended
December 31, 1998 filed with the SEC and incorporated herein by reference.
UNAUDITED PRO FORMA STATEMENT OF FINANCIAL CONDITION DATA
<TABLE>
<CAPTION>
AT DECEMBER 31, 1998
------------------------------------
<S> <C> <C> <C>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- -----------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <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................................................ -- 1,353A 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 103B 297
Additional paid-in capital............................................... 51,511 1,395B 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>
- ------------------------
A. Reflects payment of the special cash dividend (assumed to be $74.4 million in
the aggregate) and certain transaction expenses of approximately $6.3
million. The special cash dividend is assumed to be paid with a cash
dividend from ITG Inc. of approximately $73.0 million and proceeds of a
42
<PAGE>
$1.4 million loan. The loan allows ITG Inc. to have sufficient regulatory
capital. See "Business-- Regulation." Since the special 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), we will not
borrow a loan, but will have sufficient cash balances generated from our
operations, to fund the entire special cash dividend.
Also reflects a refund from Parent of $2.9 million for tax credit taken by
Parent with respect to the pay-out of our employees who participated in the
Jefferies Group, Inc. Capital Accumulation Plan for Key Employees. 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>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- -----------
<CAPTION>
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Total revenues........................................................... $ 212,205 $ (2,101) C $ 210,104
Total expenses........................................................... 131,270 2,405C 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>
- ------------------------
C. Cash and cash equivalents of $35.7 million were used as a partial payment of
the $72.9 million special cash dividend. The remaining balance of the
special cash dividend was funded with proceeds of a $37.2 million loan. The
note was repaid in full over the year. Based on an assumed rate of interest
of prime plus 2%, we 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 cash dividend will be paid in April 1999 (instead
of on January 1, 1998 as assumed in the Unaudited Pro Forma Statement of
Income Data), we will not borrow a loan, but will have sufficient cash
balances generated from our operations, to fund the entire special 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.
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 cash dividend and
the exchange ratio.
43
<PAGE>
SPECIAL CASH DIVIDEND:
Options and shares reserved under a deferred compensation plan were
adjusted in the following manner as a result of our assumed $72.9 million
special cash dividend.
We adjusted the exercise price of each option and, to compensate for the
resulting loss in intrinsic value of such adjusted options, we increased the
number of shares issuable upon exercise of each option, as follows:
We assumed that the exercise price of each option was 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 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, we assumed a Pre-Dividend Price of
$62.06 per share and a Post-Dividend Price of $58.06 per share. 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.
We also assumed adjustments in the number of shares reserved for
issuance to participants under a deferred compensation plan to account for
the special cash dividend, which such participants will not receive. For
each share reserved for issuance, we will reserve an additional fractional
share equal to $4.00 divided by the Post-Dividend Price which we assumed to
be $58.06. Pursuant to this adjustment, we 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 Parent) 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 Parent common
stock outstanding over the number of shares of ITGI common stock held by
Parent. For pro forma purposes, we used the number of Parent 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
divided 15.0 million). ITGI had 18.6 million shares, net of treasury shares,
issued and outstanding of which Parent owned 15.0 million and other
stockholders held 3.6 million. Therefore, our minority stockholders received
5.7 million shares for the 3.6 million they previously held.
ITGI BASIC AND DILUTED SHARES OUTSTANDING:
The number of basic shares issued and outstanding is equal to the number
of Parent's shares outstanding before the merger of 23.9 million plus 5.7
million shares to be issued to our minority stockholders in the merger. 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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis along with our
financial statements, including the notes, in our annual report on Form 10-K
incorporated by reference herein.
GENERAL
We are a leading provider of automated securities trade execution and
analysis services to institutional equity investors. We are a full-service
execution firm that utilizes transaction processing technology to increase the
effectiveness and lower the cost of institutional and other trading. We generate
substantially all of our 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
our 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 our 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 Parent, 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 expenses are
payments to our 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 include legal,
accounting, consulting and various other expenses in connection with the merger
and related transactions. Other general and administrative expenses include
amortization of goodwill, legal, audit, tax and promotional expenses.
We have entered into a merger agreement with Parent, under which we will
merge with and into Parent, with Parent as the surviving entity in the merger.
Following the merger, Parent will be renamed Investment Technology Group, Inc.
On March 16, 1999 we declared the special cash dividend conditioned upon
approval of the merger by stockholders of Parent and ITGI and the satisfaction
of other conditions to the merger. The following is a discussion of our
historical results of operations and does not reflect the impact of the merger
and the special cash dividend on us, although we believe that they should not
materially affect our future results of operations.
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<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 22.2 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 our
customers and increases in trading volume by our 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.
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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 loss 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 our profitability-based compensation plan,
growth in our employee base of 44 or 20.3%, from 217 to 261 and additional
compensation necessary to attract and retain quality personnel. Over 50% of the
increase in new employees were staffed in technology, product development and
production infrastructure. In addition, our board of directors voted to
accelerate the vesting of the options of our 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 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 an 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 our 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.
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<PAGE>
NET LOSS ON LONG-TERM INVESTMENTS. The decrease in net loss on long-term
investments is due to income of $3.8 million recognized from the sale of our
37.4% equity ownership interest in the 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 our 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 $1.0 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, 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>
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<PAGE>
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. 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 our 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%. We 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 we currently
believe, are advantageous to out-source. The decrease is due primarily to our
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 our 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 Jefferies & Company, increased by approximately
$374,000. Travel and entertainment costs increased by approximately $1.1 million
primarily from an increased effort to promote our 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 our 10 largest customers accounted for
approximately 30.7% of our total revenue while revenue from each of our three
largest customers accounted for 7.9%, 4.5% and 3.2%, respectively, of total
revenue. During 1997, revenue from our 10 largest customers accounted for
approximately 34.5% of our total revenue while revenue from each of our three
largest customers
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<PAGE>
accounted for 8.8%, 5.9%, and 3.4%, respectively, of total revenue. Customers
may discontinue use of our services at any time. The loss of any significant
customers could have a material adverse effect on our 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
Our 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 our assets are liquid, consisting of cash and cash
equivalents or assets readily convertible into cash.
We believe that our cash flow from operations and existing cash balances
will be sufficient to meet our cash requirements. We generally invest our 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.
We also invest a portion of our excess cash balances in cash enhanced
strategies, which we believe should yield higher returns without any significant
effect on risk. As of December 31, 1998, we 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.
Historically, all regulatory capital needs of ITG Inc. have been provided by
cash from operations. See "Business--Regulation." We believe 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, we 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. We have 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 our ability to pay cash
dividends or incur indebtedness and requires us 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 we estimate 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 we believe that the combination of our 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 us.
In 1998, we established a $2 million credit line with a bank to fund
temporary regulatory capital shortfalls encountered periodically by ITG
Australia. The lender charges us interest at the federal funds rate plus 1%. We
lend amounts borrowed to the ITG Australia and charge 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 us by the ITG Australia. Borrowings
from the bank and loans to the ITG
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<PAGE>
Australia will not be permitted during the period that the revolving credit
agreement discussed above is effective.
EFFECTS OF INFLATION
We do 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 our 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
We are well aware of and are 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. We established a "Year 2000 working group" to address the Year 2000
issue. We have targeted our efforts into three major areas: (1) vendors; (2)
company proprietary products; and (3) clients.
VENDORS. Our ability to successfully meet the Year 2000 challenge is in
part dependent on our vendors. We have contacted our vendors to determine the
status of their Year 2000 programs and have created a database recording each
vendor's readiness status. Over 95% of our vendors have responded that their
systems are currently Year 2000 compliant, and substantially all of our vendors
have indicated that they expect their systems to be Year 2000 compliant by
September 30, 1999. Based upon the results of our testing to date, we are
satisfied with the representations we have received from our vendors. We are in
the process of integrating Year 2000 compliant versions of our vendors' software
and hardware with our proprietary products.
COMPANY PROPRIETARY PRODUCTS. We have evaluated our trading systems and
have endeavored to examine all code contained in our internally produced
software. We have completed regression testing of all mission critical systems
and released Year 2000 compliant versions of all such systems other than
QuantEX. We plan 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. We also intend to participate in the Securities Industry Association's
industry-wide testing program in 1999.
CLIENTS. We sent a letter explaining our Year 2000 strategy to all clients
in July 1998. In addition, we contacted clients on a project-by-project basis to
ascertain compatibility between our systems and changes made to the clients'
systems. We plan to provide point-to-point testing opportunities for our clients
starting in April 1999.
YEAR 2000 CONTINGENCY PLANNING
We are 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. Our Year
2000 contingency plan is therefore intended to address failures of
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<PAGE>
internal systems, client connections and connections to trading destinations, as
well as failures of major infrastructure components. We intend to have our
contingency plan in place by July 1999 and to update and refine such plan as
needed on a continuing basis. We believe, however, that such contingency plan
will not provide satisfactory solutions for our 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 Jefferies & Company and W&D to provide services
under their clearing and execution agreement with us. Such failure would prevent
us from operating in whole or in part until such systems or services have been
restored and could have a material adverse effect on us.
In the event any of our internally developed systems fails, we 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, we have imposed a moratorium on employee
vacations during the first two weeks of January 2000, and have made arrangements
to have a number of software development personnel (normally based in our Culver
City office) at our New York headquarters during the final week of December 1999
and the first week of January 2000. Our inability to remediate a failure of any
of our internally developed mission critical systems would prevent us from
operating in whole or in part until such systems have been restored and could
have a material adverse effect on us.
COSTS
We do not believe that the costs incurred to ready our systems for the Year
2000 will have a material effect on our 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, we 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 com-
plete 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 we manage our 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. We
do not anticipate that the implementation of this statement will have a material
impact on our consolidated financial statements.
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<PAGE>
BUSINESS
Following the merger, the surviving corporation will be called Investment
Technology Group, Inc. Our 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, 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. We provide equity trading
services and transaction research to institutional investors and brokers.
We are 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, we offer 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 our
clients.
We generate revenues on a "per transaction" basis for all orders executed.
Orders are delivered to us from our "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. We also work 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
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<PAGE>
flexibility. Clients may specify constraints on the portion of a portfolio that
trades, such as the 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, we have offered POSIT 4. POSIT 4 gives POSIT users the
option of customizing their trading objective and specifying additional
constraints, while preserving the functionality of the existing POSIT system.
This capability is referred to collectively as a POSIT 4 "strategy." 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. We also implement custom applications upon
request. Total volume attributable to POSIT 4 in 1998 is 66 million shares. We
have obtained a patent on the technology underlying POSIT 4.
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The following graph illustrates the average daily volume of shares crossed
on POSIT:
AVERAGE DAILY POSIT SHARE VOLUME
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>
QUANTEX
QuantEX is our 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 so 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 our proprietary 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. Our
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.
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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. We intend 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.
Our 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. Our 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. We do 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 our 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.
We have introduced our first server-based trading strategy with the VWAP
SmartServer. The VWAP SmartServer is designed to allow clients to direct their
orders to us 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 our proprietary products, including extensive use of
POSIT for trade execution. For clients that do not send orders electronically to
POSIT, our account executives receive orders for POSIT matches by telephone, fax
or e-mail. 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 our 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.
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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 our active order traders to
execute the trade with floor brokers or over-the-counter brokers.
The Portfolio Trading Group of our 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, we provide 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, our SmartServers, New York Stock
Exchange and American Stock Exchange via SuperDOT, and the Nasdaq National
Market and other over-the-counter market makers. We intend 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 us 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 our 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
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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 our 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.
ITG RESEARCH
In addition to its role in the firm's overall research and development
effort, Research provides both sales and consulting services to our clients and
prospects. Taken together, these activities are a key component of our overall
relationship development and maintenance activities.
In its sales capacity, Research introduces our 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 our products.
Consulting encompasses a set of value-added services for the benefit of our
clients. These services break down into two main categories: support for our
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), our clients reward the firm for
these value-added research services.
ITG EUROPE
We are pursuing the international market in a variety of ways, through
joint-ventures with strategic partners and the development of specially-tailored
versions of our services. In the fourth quarter of
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1998, we and Societe Generale finalized a 50/50 joint venture through the
creation of Investment Technology Group (Europe) Limited. On November 18, 1998,
ITG Europe launched a new agency brokerage operation that includes the operation
of a European version of the POSIT system 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, we and Burdett, Buckeridge & Young finalized a 50/50 joint venture
through the creation of ITG Australia Limited, a new international brokerage
firm that applies our 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 we are pursuing
U.S. business from Australian investors and providing U.S. clients with access
to the Australian marketplace.
CANADIAN QUANTEX
We have 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, we received
a minority interest in VERSUS. We and VERSUS have also entered into three
agreements for trade execution by us in POSIT and other United States markets:
(a) a routing agreement pursuant to which VERSUS routes orders of Canadian
registered brokers to us, (b) an introducing broker agreement pursuant to which
VERSUS's registered broker affiliate sends institutional orders to us and (c) an
introducing broker agreement pursuant to which VERSUS's registered broker
affiliate sends retail orders to us.
ARIZONA STOCK EXCHANGE
We are the executing broker for all transactions executed on the Arizona
Stock Exchange. We perform this function as a courtesy to our clients. We share
revenues generated from these transactions with the 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 our 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
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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, we anticipate that we will
continue to operate POSIT as part of our 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.
NET CAPITAL REQUIREMENT
As a registered broker-dealer, ITG Inc. is subject to the SEC's uniform 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. We use 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 merger 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". Based on a
closing date of March 31, 1999, we estimate that ITG Inc. will have excess net
regulatory capital of approximately $20 million. In addition, we have arranged a
$20 million revolving credit facility that we will be entitled to draw on to
increase net regulatory capital. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
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Although we believe that the combination of our 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 our business and our results of
operations.
CREDIT RISK
Although ITG Inc. is registered as a broker-dealer, we generally do not
perform traditional broker-dealer services. We do not act as a market-maker with
respect to any securities or otherwise as a principal in any securities
transactions; we act only on an agency basis. Therefore, we do not have exposure
to credit risks in the way that traditional broker-dealers have such exposure.
The relatively low credit risk of our businesses is reflected in the minimal net
capital requirements imposed on ITG Inc. as a broker-dealer.
LICENSE AND RELATIONSHIP WITH BARRA
In 1987, Jefferies & Company and BARRA Inc. formed a joint venture for the
purpose of developing and marketing POSIT. In 1993, Jefferies & Company assigned
all of its rights relating to the joint venture and the license agreement,
discussed below, to us.
The technology used to operate POSIT is licensed to us pursuant to a
perpetual license agreement between us and the joint venture. The license
agreement grants us 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. We pay 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 us 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 license agreement. Under the terms of the joint venture, we 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 us of certain covenants, the performance of which are all
within our control. Although we do not believe that we will experience
difficulty in complying with our obligations under the license agreement, any
termination of the license agreement resulting from an uncured default would
have a material adverse effect on us.
Under the license agreement and the terms of the joint venture, BARRA
continues to provide certain support services to us 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 our 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 us and
Burdett 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. 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 forward rate agreements contracts to
offset interest rate risk, a condition that is pervasive in interest rate swap
portfolios.
In the fourth quarter of 1998, we finalized the formation of ITG Europe with
Societe Generale. The POSIT joint venture has licensed to ITG Europe the POSIT
software.
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COMPETITION
The automated trade execution and analysis services offered by us 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
electronic communications networks such as Instinet, for trade execution
services. Many of our competitors have substantially greater financial, research
and development and other resources. We believe that our services compete on the
basis of access to liquidity, transaction costs, market impact cost, timeliness
of execution and probability of trade completion. Although we believe that
POSIT, QuantEX, ITG Platform and the Electronic Trading Desk and Research
services have established certain competitive advantages, our ability to
maintain these advantages will require continued investment in the development
of our services, additional marketing activities and customer support services.
There can be no assurance that we will have sufficient resources to continue to
make this investment, that our competitors will not devote significantly more
resources to competing services or that we will otherwise be successful in
maintaining our current competitive advantages. In addition, we 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
We believe that fundamental changes in the securities industry have
increased the demand for technology-based services. We devote a significant
portion of our resources to the development and improvement of these services.
Important aspects of our research and development effort include enhancements of
existing software, the ongoing development of new software and services and
investment in technology to enhance our efficiency. The software programs, which
are incorporated into our 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 our business, we incur 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, we may not reduce such expenses quickly and, as
a result, we could experience reduced profitability or losses. Conversely,
sudden surges in transaction volumes can result in increased profit and profit
margin. To ensure that we have the capacity to process projected increases in
transaction volumes, we have 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, we have also made
substantial capital and operating expenditures to enhance future growth
prospects.
We work closely with BARRA on the development of POSIT enhancements. We
expect 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
Our success is dependent, in part, upon our proprietary intellectual
property. We generally rely upon patents, copyrights and trademarks to establish
and protect our rights in our proprietary technology, methods and products. A
third party may still try to challenge, invalidate or circumvent the protective
mechanisms that we select. We cannot assure that any of the rights granted under
any
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patent, copyright or trademark we may obtain will protect our competitive
advantages. In addition, the laws of some foreign countries may not protect our
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 to determine in advance whether any of our 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, we will receive notices from others of claims or
potential claims of intellectual property infringement or we 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 us. Responding to these claims
could also require us 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 us.
In February 1999, we 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 we and/or our customers,
licensees or joint venture partners use in the conduct of business. On March 5,
1999, a Canadian licensee of some of our 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, we may have a duty
to defend or indemnify the licensee for any costs or damages arising out of an
infringing use of the technology we have licensed to them. We are monitoring the
matter and may participate in any challenge to the Belzberg Patent the licensee
may make.
We are unaware of any actual claims of patent infringement leveled against
us or any of our customers, licensees or joint venture partners by any of the
title owners of the Belzberg Patents. Based upon our review to date we believe
that any such claims arising out of the Belzberg Patents would be without merit
and we 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 would be resolved favorably to us or that it would not have a
material adverse affect on us. We will monitor the Belzberg Patent situation and
take action accordingly.
EMPLOYEES
As of December 31, 1998, we employed 261 personnel.
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ELECTION OF DIRECTORS
Under our bylaws, the board of directors is authorized to determine the
number of directors of our company. The number of directors to be elected at the
annual meeting has been fixed at six. Such directors will be elected to serve
until the next annual meeting of stockholders and until their successors shall
have been duly elected and qualified.
Each nominee listed below has consented to being a nominee and to serving as
a director if elected. In the event that any nominee shall be unable to serve as
a director (which is not now anticipated), proxies will be voted for substitute
nominees recommended by the board of directors or the board of directors may
elect to reduce the number of directors. All of the nominees for election as a
director are presently members of the board of directors.
NOMINEES TO BOARD OF DIRECTORS
The following information is submitted concerning the nominees for election
as directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- ----------------------------------------------------------------------
<S> <C> <C>
Raymond L. Killian, Jr............. 61 President, Chief Executive Officer and
Chairman of the Board of Directors
Frank E. Baxter.................... 62 Director
Neal S. Garonzik................... 52 Director
William I Jacobs................... 57 Director
Robert L. King..................... 48 Director
Mark A. Wolfson.................... 46 Director
</TABLE>
Raymond L. Killian, Jr. has been the Chairman of our board of directors
since January 1997 and a director since March 1994. Mr. Killian served as the
President and Chief Executive Officer from March 1994 through January 1997 and
has resumed his service in such capacities since Mr. Mason's death in September
1998. He has directed the activities of our company since 1987. Mr. Killian was
a director of Parent from January 1997 to January 1999, was an Executive Vice
President of Parent from 1985 to 1995, a director and an Executive Vice
President of Jefferies & Company from 1985 to 1991 and served as National Sales
Manager of Jefferies & Company from 1985 to 1990.
Frank E. Baxter has been a director since March 1994. Mr. Baxter has been
Chairman of Parent's board of directors since 1990, Chief Executive Officer of
Parent since 1987, and a director of Parent and Jefferies & Company since 1975.
Mr. Baxter has previously served as President of Parent and Jefferies & Company
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
Jefferies & Company and as the Managing Director of Parent's UK Subsidiary.
Neal S. Garonzik has been a director 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 in London.
William I Jacobs 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
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and, prior to 1985, the President and Managing General Partner of S&B Insurance
Services Company. Mr. Jacobs has been a director of our company since June 1994.
Robert L. King 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 our company
since June 1994.
Mark A. Wolfson has been 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 our company since June 1994.
OTHER EXECUTIVE OFFICERS
The executive officers of our company are appointed by, and serve at the
discretion of, our board of directors. Other than Mr. Killian, for whom
information is provided above, the following sets forth information as to the
other executive officers of our company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- ----------------------------------------------------------------------
<S> <C> <C>
Yossef A. Beinart.................. 42 Executive Vice President and Chief Information Officer
Angelo Bulone...................... 33 Vice President and Controller
David C. Cushing................... 37 Executive Vice President and Director of Research
Christopher J. Heckman............. 38 Senior Vice President and Head of Sales
Timothy H. Hosking................. 39 Senior Vice President, General Counsel and Secretary
John R. MacDonald.................. 43 Senior Vice President and Chief Financial Officer
Nancy M. Paulikas.................. 38 Senior Vice President and Director of Software Development
Joshua D. Rose..................... 41 Executive Vice President
Robert J. Russel................... 44 Executive Vice President
Steven J. Sorice................... 38 Senior Vice President and Head of Trading
James Mark Wright.................. 39 Senior Vice President
</TABLE>
Yossef A. Beinart joined our company in 1992. As Executive Vice President,
he is responsible for research and development and technology matters, and is
the Chief Information Officer. From 1988 to 1991, Mr. Beinart was Vice President
of Development of Integrated Analytics Corporation.
Angelo Bulone has been Vice President and Controller since November 1998.
Mr. Bulone joined our company as the manager of internal and external financial
and regulatory accounting in April 1997. From 1993 to 1997, Mr. Bulone held the
position of Vice President and Controller at I/B/E/S International, Inc.
David C. Cushing is Executive Vice President and Director of Research. He
joined our company 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 has been Senior Vice President and Head of Sales
since March 1998. He joined our company in January 1991 as a sales trader and
became manager of institutional sales and trading of ITG in January 1997.
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<PAGE>
Timothy H. Hosking is Senior Vice President, General Counsel and Secretary.
Prior to joining our company, Mr. Hosking worked for The Fremont Parent 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 is Senior Vice President and Chief Financial Officer. Mr.
MacDonald joined our company as Vice President and Chief Financial Officer in
March 1994. 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 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. From 1984 to 1993, Ms. Paulikas worked at TRW Inc., where she held a
variety of positions in software development and technical management.
Robert J. Russel 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 has been Senior Vice President and Head of Trading since
March 1998. He joined our company in September 1994 as the manager of
broker-dealer trading. Prior to joining ITG, Mr. Sorice was with ESI Securities,
L.P., where he was Head of the International Desk and a Vice President of Sales
and Trading and a partner.
James Mark Wright has been Senior Vice President 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.
DIRECTOR COMPENSATION
Directors of our company will continue to be compensated for their services
following the merger generally as they were compensated prior to the merger.
Directors who are our employees will not be compensated for serving as
directors. Directors who are not our employees will receive an annual retainer
fee of $20,000, plus fees of $1,000 for attendance at each of six regular
meetings of the board of directors and $2,000 for attendance at each special
meeting of the board of directors. The chairman of each committee receives an
annual retainer of $3,000, and all committee members receive $750 for attendance
at each meeting of a committee of the board of directors. Directors of ITGI are
also reimbursed for out-of-pocket expenses.
Under our Non-Employee Directors' Stock Option Plan adopted in 1995, we
grant an option to purchase 10,000 shares to each person who first becomes a
non-employee director at the time of initial election or appointment, and an
option to purchase 2,500 shares to each non-employee director on the 45th day
after each annual stockholders meeting. These options are granted with an
exercise price per share equal to 100% of the fair market value of a share on
the date of grant. Such options expire at the earliest of (1) five years after
the date of grant, (2) 12 months after death, disability or retirement after
reaching age 65 and (3) 60 days after an optionee ceases to serve as a director
for reasons other than death, disability or such retirement. Options become
exercisable three months after the date of grant, except an option granted to a
director less than three months before a cessation of service for reasons other
than death, disability or retirement after reaching age 65 will not thereafter
become exercisable. Directors who are not our employees are eligible to
participate in this plan.
Each director of our company may participate in the Jefferies Group
Charitable Gifts Matching Program pursuant to which Parent will match 100% of
charitable contributions made by such directors
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<PAGE>
up to a maximum dollar amount of $2,000 per person per year. We reimburse Parent
for the costs of participation by our directors in this program.
The children of our directors may also participate (along with the children
of all employees of our company and Parent) 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 are affiliated with our company or with Parent.
COMMITTEES OF THE BOARD OF DIRECTORS AND MEETINGS
Our board of directors held six meetings during 1998. Each incumbent member
of the board of directors who was a director during 1998 attended, during his
term of office, at least 75% of the total number of meetings of the board of
directors and committees thereof of which such director was a member. Our board
of directors has an audit committee and a compensation committee. In addition,
in connection with the merger, our board of directors formed a special
committee. See "The Merger and Related Transactions--A Special Committee of Our
Board of Directors Has Recommended the Merger." Our board of directors does not
have a nominating committee.
The current audit committee members are Mr. Jacobs, Chairman, Mr. Garonzik,
Mr. King and Mr. Wolfson. The audit committee is responsible for reviewing with
our independent auditors, the financial statements, the adequacy of our system
of internal accounting controls and the independent auditors' audit and review
programs and procedures. The audit committee also reviews the professional
services provided by our independent auditors and makes recommendations to the
board of directors as to the engagement or discharge of our auditors. During
1998, there were 3 meetings of the audit committee.
The current compensation committee members are Mr. Wolfson, Chairman, Mr.
Garonzik, Mr. Jacobs and Mr. King. The compensation committee is responsible for
developing and implementing compensation policies, plans and programs for our
executive officers and for the administration of our Amended and Restated 1994
Stock Option and Long-Term Incentive Plan. During 1998, there were 6 meetings of
the compensation committee.
The special committee members are Mr. Jacobs and Mr. King. The special
committee is responsible for reviewing the pending proposal for the merger. We
have paid each member of the special committee a retainer of $20,000 and an
additional $5,000 per month for their services on the committee. In addition, we
have approved an indemnification agreement with the members of the special
committee. See "The Merger and Related Transactions--A Special Committee of Our
Board of Directors Has Recommended the Merger."
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth, for the years indicated, each component of
compensation paid or awarded to, or earned by, each person who served as our
chief executive officer during 1998 and the
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<PAGE>
four other most highly compensated executive officers serving as of December 31,
1998 (collectively, the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION(1) COMPENSATION
--------------------------------------- AWARDS
OTHER SECURITIES
NAME AND PRINCIPAL ANNUAL UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION(2) OPTIONS COMPENSATION(3)
- ----------------------------------------- --------- --------- --------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Raymond L. Killian, Jr.(4)............... 1998 $ 300,000 $1,672,477 $ 53,624 -- $ 54,632
Chairman, President & 1997 300,000 475,957 6,483 -- 68,294
Chief Executive Officer 1996 295,184 725,957 11,477 -- 59,981
Scott P. Mason (5)....................... 1998 219,423(6) 956,250 26,708 6,988
Former President & 1997 296,538 549,557 11,600 --1,000,000 8,216
Chief Executive Officer 1996 240,580 -- -- $ -- --
Yossef A. Beinart........................ 1998 170,000 685,000 18,900 -- 28,840
Executive Vice President & 1997 170,000 340,100 6,785 10,000 35,759
Chief Information Officer 1996 170,000 299,767 4,132 -- 38,417
David C. Cushing......................... 1998 150,000 723,000 19,440 -- 25,987
Executive Vice President & 1997 150,000 335,000 6,157 10,000 51,524
Director of Research 1996 150,000 346,420 3,709 -- 46,113
Christopher J. Heckman................... 1998 225,000 704,000 21,120 -- 26,805
Senior Vice President & 1997 225,000 260,567 6,091 12,500 28,781
Head of Sales 1996 150,000 344,528 3,773 -- 23,309
Steven J. Sorice......................... 1998 225,000 704,000 21,120 -- 24,962
Senior Vice President & 1997 225,000 262,190 5,862 12,500 26,149
Head of Trading 1996 150,000 297,548 3,407 -- 27,215
</TABLE>
- ------------------------------
(1) The amounts shown include cash and non-cash compensation earned by the Named
Executive Officers as well as amounts earned but deferred mandatorily (1998)
or at the election (1997 and 1996) of those Named Executive Officers.
(2) For 1998, a portion of each of the Named Executive Officer's compensation is
mandatorily deferred and each such Named Executive Officer is granted units
representing our common stock with a fair market value equal to such
deferred amount. The amount in the table represents an additional grant of
such units equal to 15% of the number of units granted pursuant to the
mandatory deferral described in the preceding sentence. All such units are
generally settled by issuance of the underlying common stock three years
from the date of grant.
For 1996 and 1997, reflects the amount of a 15% discount on units
representing shares of Parent's common stock purchased by the Jefferies
Group Capital Accumulation Plan for Key Employees (the "Parent CAP") for the
Named Executive Officer's account with compensation that the Named Executive
Officer has elected to defer.
(3) The total amounts for 1998 shown in the "All Other Compensation" column
consist of the following:
(a) Our matching contributions under the Section 401(k) plan of Parent
during the period December 1, 1997 to December 31, 1998, as follows: Mr.
Killian: $13,800; Mr. Mason: $2,500; Mr. Beinart: $13,800; Mr. Cushing:
$13,800; Mr. Heckman: $13,800; and Mr. Sorice: $12,650.
(b) Forfeitures under the Employee Stock Ownership Plan ("ESOP") of Parent.
During the plan year ended November 30, 1998, each Named Executive
Officer's account was credited with 3 shares at an original cost of $2.63
per share, for a total of $8.14, as a result of reallocations resulting
from forfeitures.
(c) For 1998, reflects the amount of a 15% discount on units representing
shares of ITGI common stock purchased by the Investment Technology Group,
Inc. Employee Stock Purchase Plan for the Named Executive Officer's
account with compensation that the Named Executive Officer has elected to
defer, as follows: Mr. Killian: $0; Mr. Mason: $0; Mr. Beinart: $1,982;
Mr. Cushing: $0; Mr. Heckman: $982; and Mr. Sorice: $938. For 1997 and
1996, represents our matching contributions to the Employee Stock
Purchase Plan of Parent.
(d) Contributions of $2,683 and allocations of forfeitures of $1,410 for
each of the Named Executive Officers under the 1998 Profit Sharing Plan
("PSP") of Parent.
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<PAGE>
(e) Dividends and interest payments to the cash accounts of the Named
Executive Officers under the Parent CAP, paid as of December 31, 1998, at
a rate equal to the average rate Parent paid on its margin accounts
carrying credit balances as follows: Mr. Killian: $6,918; Mr. Mason:
$395; Mr. Beinart: $1,328; Mr. Cushing: $1,181; Mr. Heckman: $1,149; and
Mr. Sorice: $1,037.
(f) An amount of "deemed interest" credited to each Parent CAP participant
for 1998, determined by multiplying (i) the daily weighted average amount
in the Parent CAP participant's Profit-Based Deferred Compensation
Account by (ii) an interest rate equal to the fully diluted earnings per
share (if any) of Parent common stock for that fiscal year divided by the
fair market value of a share at the end of the preceding fiscal year. In
1998, the Named Executive Officers received the following amounts of such
"deemed interest": Mr. Killian: $29,821; Mr. Mason: $0; Mr. Beinart:
$7,626; Mr. Cushing: $6,902; Mr. Heckman: $6,770; and Mr. Sorice: $6,233.
(4) Mr. Killian served as President and Chief Executive Officer from 1994 to
1997 and has served as President and Chief Executive Officer since September
1998.
(5) Mr. Mason died on September 7, 1998.
(6) Represents amounts paid to Mr. Mason in his capacity as our consultant
during the year indicated.
OPTION GRANTS TABLE
During 1998, there were no stock option grants to the Named Executive
Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table provides information on the number and value of options
held by the Named Executive Officers at December 31, 1998.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES VALUE OPTIONS AT 12/31/98 AT 12/31/98
ACQUIRED ON REALIZED EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
NAME EXERCISE (#) ($) (#) ($)(1)
- ---------------------- ----------------- ----------- ---------------------------- -----------------------------
<S> <C> <C> <C> <C>
Raymond L. Killian,
Jr.................. 60,000(2) 2,131,875 548,978/0 27,997,693/0
Scott P. Mason........ 20,000 710,000 1,214,963/0 50,889,775/0
Yossef A. Beinart..... 0 0 97,849/8,000 4,846,016/274,104
David C. Cushing...... 0 0 20,873/3,333 994,969/141,896
Christopher J.
Heckman............. 0 0 15,863/6,500 750,136/243,485
Steven J. Sorice...... 0 0 13,306/6,500 619,735/243,485
</TABLE>
- ------------------------
(1) At December 31, 1998, the closing bid price per share of our common stock on
the Nasdaq National Market was $62.063, which was the price used to
determine the year-end value.
(2) Represents the exercise of an option to acquire 60,000 shares of common
stock of Parent.
NOTWITHSTANDING ANYTHING TO THE CONTRARY SET FORTH IN ANY OF OUR PREVIOUS
FILINGS UNDER THE SECURITIES ACT OR THE SECURITIES EXCHANGE ACT THAT MIGHT
INCORPORATE FUTURE FILINGS, INCLUDING THIS PROXY STATEMENT, IN WHOLE OR IN PART,
THE FOLLOWING REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION AND
THE PERFORMANCE GRAPH INCLUDED HEREIN SHALL NOT BE INCORPORATED BY REFERENCE
INTO ANY SUCH FILINGS.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The compensation committee of the board of directors, the members of which
are Messrs. Wolfson, Jacobs and King, has furnished the following report on
executive compensation:
To: The board of directors and stockholders of Investment Technology Group,
Inc.
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<PAGE>
INTRODUCTION
The compensation committee of the board of directors is responsible for
developing and implementing compensation policies, plans and programs for our
executive officers to enhance our profitability, and thus stockholder value, by
providing for competitive levels of compensation, rewarding performance that
enhances profitability and encouraging long-term service. Each of the
compensation committee's members is a person who is not a current or former
employee of our company, Parent or affiliates of Parent. Mr. Wolfson recently
resigned as an outside director of Parent.
The principal components of ongoing compensation of executive officers are
salary, an annual bonus tied to performance and stock option awards providing
incentives and rewards for long-term service and performance. The compensation
committee's functions include reviewing salary levels for executive officers on
an annual basis, establishing and determining the level of performance targets
upon which payment of annual bonuses is conditioned and other terms of such
annual bonuses, granting stock options and otherwise administering our Amended
and Restated 1994 Stock Option and Long-Term Incentive Plan (the "1994 Option
Plan"). The compensation committee acts on behalf of our company in negotiating
the terms of employment agreements (including modifications to existing
employment agreements) with executive officers and advises and makes
recommendations to the board of directors regarding the approval of such
employment agreements and adoption of compensation and benefit plans (including
amendments to existing plans) in which executive officers and directors may
participate.
The compensation committee intends that compensation paid to the Chairman of
the board of directors, Chief Executive Officer and the other executive officers
named in the Summary Compensation Table not be subject to the limitation on tax
deductibility under Section 162(m) of the Internal Revenue Code, as amended (the
"Code"), so long as this can be achieved in a manner consistent with the
compensation committee's other objectives. Code Section 162(m) generally
eliminates a corporation's tax deduction in a given year for payments to certain
named executive officers in excess of $1 million, unless such payments result
from "qualified performance-based compensation." The board of directors in 1997
adopted the Pay-for-Performance Incentive Plan in order that annual incentive
payments (bonuses) to executives which might, together with salary, exceed $1
million in a given year, will qualify as "performance-based compensation" that
is fully deductible under Code Section 162(m). The compensation committee has
been advised that compensation paid in 1998 will not be subject to the
limitation on deductibility under Code Section 162(m).
COMPENSATION OF MR. KILLIAN
Mr. Killian served as Chairman of the board of directors throughout 1998 and
was named President and Chief Executive Officer following Mr. Mason's death. In
January 1998, following news of Mr. Mason's illness, Mr. Killian informed the
board of directors that he would remain actively involved in the day-to-day
management and direction of our company. The compensation committee concluded it
was appropriate to undertake a full review of Mr. Killian's compensation
package. The base annual salary level, the annual bonus level and other terms of
the annual bonus specified below was determined by the Committee in consultation
with an outside compensation consultant and through negotiations with and
subject to the agreement of Mr. Killian. Mr. Killian's base salary and target
annual bonus were set at a total of $1,250,000, an amount believed to be
consistent with the general practice of comparable companies for the chairman
and chief executive officer. Under this compensation package, the division of
Mr. Killian's targeted compensation in 1998 between annual base salary of
$300,000, fixed bonus of $50,000 per quarter to recognize Mr. Killian's level of
experience, and a performance based incentive bonus targeted at $750,000, was
intended to link annual cash compensation to performance to a degree generally
similar to comparable companies reviewed in 1998, and to provide a strong link
between pay and performance.
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<PAGE>
Under the terms of Mr. Killian's compensation package governing the
performance based incentive bonus, the targeted annual bonus of $750,000 was to
be payable if an adjusted net after-tax profit target specified by the
compensation committee for the year was achieved. The amount of the bonus was to
be decreased below $750,000, down to zero, by an amount equal to 10% of the
shortfall of adjusted net after-tax profit below the targeted amount, and was to
be increased above $750,000, subject to no upper limit, by an amount equal to 5%
of the excess of adjusted net after-tax profit above the targeted amount. The
compensation committee established the adjusted net after-tax profit target for
1998 at $32 million, approximately 19% above the 1997 net after-tax profit,
based substantially on the compensation committee's assessment of our budget for
1998. Based on our company's performance in 1998, Mr. Killian's bonus for 1998
was $1,472,477 and the compensation committee directed that payment of
approximately $630,000 of such bonus be deferred until after Mr. Killian's
retirement in a deferred compensation account.
Mr. Killian is required to participate in our stock unit award program.
Under this program, executive officers and other key employees of our company
are required to defer receipt of (and thus defer taxation on) the following
portion of their total cash compensation: 5% of the first $100,000, 10% of the
next $100,000, 15% of the next $400,000, and 20% of total cash compensation in
excess of $600,000. Participants are granted units representing our common stock
with a fair market equal to 115% of the deferred compensation. The value of
units in excess of the value of deferred compensation is disclosed in the
Summary Compensation Table under the "Other Annual Compensation" column.
The compensation committee authorized the grant of no options to Mr. Killian
in 1998. Although stock options represent an important component of overall
compensation, Mr. Killian received substantial option grants prior to 1998,
including those granted under the terms of his prior employment agreement, which
options, along with restricted stock units awarded in 1998 in lieu of
compensation, continued to serve as the long-term compensation component of Mr.
Killian's compensation for 1998.
Prior to January 1, 1998, Mr. Killian participated in the Parent CAP. The
Parent CAP permitted executive officers and other key employees of our company
to defer receipt of (and thus defer taxation on) a substantial portion of their
cash compensation. Under the Parent CAP, part of such deferred amounts are
deemed invested in common stock of Parent at a 15% discount from the average
cost of shares repurchased by Parent for purposes of the Parent CAP, and part of
such deferred amounts are deemed invested in a hypothetical instrument that pays
interest based on the rate represented by the earnings per share (if any) of
Parent's common stock for a given year divided by the fair market value of a
share of such common stock on the last day of the preceding fiscal year. The
amount of earnings on previously deferred compensation credited to Mr. Killian
under the Parent CAP is disclosed in the Summary Compensation Table under the
"Other Annual Compensation" and "All Other Compensation" columns. We reimburse
Parent for the costs of participation by our executives in the Parent CAP and
other employee benefit plans maintained by Parent.
COMPENSATION OF MR. MASON
Mr. Mason, who served as President and Chief Executive Officer until
September 1998, received compensation for 1998 that was generally specified in
his employment agreement. The base annual salary levels, the annual bonus levels
and other terms of annual bonuses specified in the employment agreement were
determined by us in 1997 through negotiations with and subject to the agreement
of Mr. Mason. Mr. Mason's base salary and target annual bonus were set at a
total of $1,200,000, an amount believed to be consistent with the general
practice of comparable companies for the chief executive officer. No attempt was
made to peg this targeted cash compensation to a particular percentile of
compensation paid by comparable companies. Under the employment agreement, the
division of Mr. Mason's targeted compensation in 1998 between annual salary of
$300,000 and a target annual bonus of $900,000 (of which $450,000 was
guaranteed) was intended to link annual cash compensation
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<PAGE>
to performance to a degree generally similar to comparable companies reviewed in
1997, and to provide a strong link between pay and performance.
Under the terms of Mr. Mason's employment agreement governing annual bonus,
the targeted annual bonus of $900,000 was to be payable if our 1998 earnings
before income taxes ("EBIT") for 1998 exceeded 1997 EBIT by 25%. Achievement of
growth in annual EBIT that was positive but less than 25% would result in a
proportionate reduction in the amount payable (thus, if annual EBIT growth were
15%, the amount payable would be 60% (i.e., 15% divided by 25%)) of the annual
incentive payable for target performance. Likewise, achievement of growth in
annual EBIT greater than 25% would result in a proportionate increase in the
amount payable. However, in no event would Mr. Mason receive a bonus of less
than $450,000. Upon his death, Mr. Mason's estate was entitled under the terms
of his employment contract to receive his salary and fixed bonus through the
date of death and $548,558, representing his target bonus pro rated through the
date of his death.
In securing Mr. Mason's services as President and Chief Executive Officer,
the compensation committee concluded that it would be desirable and advisable to
provide a component of compensation in the form of a stock option grant under
the 1994 Option Plan. Accordingly, during 1997 Mr. Mason was granted an option
to purchase 1 million shares of our common stock at an exercise price of $22.175
per share under his employment agreement. This exercise price was approximately
$4.00 above the market price of common stock at the time the terms of the option
were agreed to and at the time the option was granted. The number of shares and
the terms of the stock option grant were determined through negotiations with
and subject to the agreement of Mr. Mason. The compensation committee believes
such amount and terms are consistent with the general practice of comparable
companies for the chief executive officer. No attempt was made to peg this
targeted stock option award to a particular percentile of equity awards made by
comparable companies. Prior to Mr. Mason's death, the compensation committee
reviewed the terms of Mr. Mason's employment agreement and the provisions with
respect to vesting of the option upon death, which provided that substantially
all of the unvested portion of the option (400,000 shares) be forfeited. The
compensation committee recommended to the board of directors that, in light of
Mr. Mason's exemplary performance for our company, his employment agreement be
modified to provide for full vesting of the option upon his death. This
recommendation was subsequently approved by our board of directors.
Mr. Mason was required to participate in our stock unit award program. Under
this program, executive officers and other key employees of our company are
required to defer receipt of (and thus defer taxation on) the following portion
of their total cash compensation: 5% of the first $100,000, 10% of the next
$100,000, 15% of the next $400,000, and 20% of total cash compensation in excess
of $600,000. Participants are granted units representing our common stock with a
fair market equal to 115% of the deferred compensation. The value of units in
excess of the value of deferred compensation is disclosed in the Summary
Compensation Table under the "Other Annual Compensation" column.
Prior to January 1, 1998, Mr. Mason participated in the Parent CAP. The
amount of earnings on deferred compensation credited to Mr. Mason under the
Parent CAP is disclosed in the Summary Compensation Table under the "Other
Annual Compensation" and "All Other Compensation" columns. We reimburse Parent
for the costs of participation by our executives in the Parent CAP and other
employee benefit plans maintained by Parent.
COMPENSATION OF OTHER EXECUTIVE OFFICERS
Our compensation program for other Named Executive Officers in 1998 is
reviewed annually to provide amounts generally consistent with the range paid by
companies in similar industries, but without pegging such amounts to a specific
percentile. The targeted annual bonuses were intended to provide more than half
of each Named Executive Officer's total annual cash compensation at the target
level of performance. This was intended to provide a strong link between pay and
performance.
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The annual bonuses payable to the Named Executive Officers other than
Messrs. Killian and Mason were payable out of a "bonus pool." The amount of the
bonus pool was determined based upon specified increases in client revenues
(less certain costs), with the total amount of the bonus pool increasing as
specified levels of revenues are achieved. Such executives are entitled to
receive discretionary bonus payments targeted to an allocation that is
determined annually with respect to the bonus pool. Our performance in 1998
resulted in bonus payouts that were substantially above targeted levels.
The Committee authorized no new grant of options during 1998 to the other
executive officers. However, previously granted options continued to serve as a
stock-based long-term compensation component of the total compensation of the
other executive officers through 1997.
The other executive officers are required to participate in our stock unit
award program and previously participated in the Parent CAP, the terms of which
are described above.
PERFORMANCE GRAPH
Set forth below is a line graph comparing the cumulative total stockholder
return on our common stock against the cumulative total return of the Russell
2000 Index and the mean of the Lipper Analytical Brokerage Composite and Nasdaq
Computer and Data Processing Services Stock Composite Indices, for the period
commencing May 4, 1994, when we completed our initial public offering and our
common stock began publicly trading, and ending December 31, 1998.
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MEAN OF LIPPER MANAGEMENT
<S> <C> <C> <C>
Company Price and
Investment Russell Nasdaq Computer and Data
Technology 2000 Processing Services Stock
Group, Inc Index Composite Indices
5/4/94 $100.00 $100.00 $100.00
12/31/94 $51.90 $98.40 $105.30
12/30/95 $71.20 $124.20 $154.00
12/31/96 $148.10 $142.50 $204.80
12/31/97 $215.40 $171.70 $297.90
12/31/98 $476.92 $165.75 $413.13
</TABLE>
PENSION PLAN
All of our employees who are citizens or residents of the United States, who
are 21 years of age, whose initial date of service was before April 1, 1997 and
who have completed one year of service with us are covered by the Jefferies
Group Employees' Pension Plan (the "Pension Plan"), a defined benefit plan.
However, benefit accruals for ITGI employees will cease as of February 15, 1999,
and the entire benefit of each ITGI employee who was actually employed on
December 31, 1998 was vested at that time. Additionally, participants who have
attained age 45 and are credited with at least 5 years of vesting service as of
February 15, 1999 will receive enhanced benefits under the Pension Plan, and
ITGI
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employees whose initial date of service is on or after April 1, 1997 and prior
to January 1, 1998 will retroactively become participants in the Pension Plan.
As soon as practicable after the merger, provided approval of the IRS is
obtained, ITGI employees will be allowed to receive distributions of their
entire benefit under the Pension Plan. At the time benefit distributions from
the Pension Plan are made available to ITGI employees, ITGI will pay to the
Pension Plan the amount of approximately $1.5 million in order to pay for the
amount of the underfunding in the Pension Plan attributable to ITGI employees.
The Pension Plan is funded through contributions by ITGI 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 December 31,
1986). Benefits payable under the Pension Plan 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,
commissions, and bonuses) 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 and 1998 is $160,000. Under the benefit formula, an employee who retires
upon normal retirement at age 65 with at least four years of service will
receive a full vested benefit, and an employee who retires at or after 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. The
retirement benefits payable at age 65 for those employees with service prior to
January 1, 1987 are composed of two items: (1) a benefit for service up to
December 1, 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.
As of December 31, 1998, the estimated annual benefits payable upon
retirement at normal retirement age for each of the Named Executive Officers
were: Mr. Killian: $38,407; Mr. Beinart: $50,067; Mr. Cushing: $58,127; Mr.
Heckman: $56,900; and Mr. Sorice: $52,214.
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SECURITY OWNERSHIP
The following table sets forth certain information, as of March 1, 1999,
regarding beneficial ownership of our common stock by (1) each director, (2)
each Named Executive Officer, (3) all directors and executive officers as a
group and (4) each person known by us to beneficially own 5% or more of our
common stock. 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. For the purpose of this table and the
table on the next page, a person or group of persons is deemed to have
"beneficial ownership" of any shares which such person or group has the right to
acquire within 60 days after such date, but such shares are not deemed to be
outstanding for the purposes of computing the percentage ownership of any other
person. 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 our principal
business address unless otherwise indicated.
<TABLE>
<CAPTION>
SHARES OF ITGI
COMMON STOCK PERCENTAGE OF ITGI
BENEFICIALLY COMMON STOCK
OWNED(1) BENEFICIALLY OWNED
-------------------- ---------------------
<S> <C> <C>
Directors
Raymond L. Killian, Jr................................................ 564,836 2.9
Frank E. Baxter....................................................... 4,122 *
Neal S. Garonzik...................................................... 10,000 *
William I Jacobs...................................................... 29,400(2) *
Robert L. King........................................................ 20,000 *
Mark A. Wolfson....................................................... 30,000 *
Other Named Executive Officers
Yossef A. Beinart..................................................... 98,645 *
David C. Cushing...................................................... 20,873 *
Christopher J. Heckman................................................ 17,241 *
Scott P. Mason........................................................ 1,214,963(3) 6.1
Steven J. Sorice...................................................... 16,675 *
All directors and executive officers as a group (17 persons)............ 1,076,793 5.5
5% stockholders
Jefferies Group, Inc.
11100 Santa Monica Boulevard, 10th Floor
Los Angeles, CA 90025................................................. 15,000,000 80.5
</TABLE>
- ------------------------
* Less than 1%.
(1) Unless otherwise indicated in a footnote and subject to applicable community
property and similar statutes, each person listed as the beneficial owner of
shares possesses sole voting and dispositive power with respect to such
shares. Beneficial ownership includes stock options that are exercisable at
March 1, 1999, or within 60 days thereafter, as follows: Mr. Killian:
548,978; Mr. Jacobs: 10,000; Mr. King: 20,000; Mr. Wolfson: 20,000; Mr.
Beinart: 97,849; Mr. Cushing: 20,873; Mr. Heckman: 15,863; Mr. Mason:
1,214,963; Mr. Sorice: 13,306; and all directors and executive officers as a
group: 1,000,406.
(2) Includes 300 shares owned by a son of Mr. Jacobs, and 100 shares owned by a
daughter of Mr. Jacobs, as to which Mr. Jacobs disclaims beneficial
ownership.
(3) Represents shares held by the estate of Mr. Mason.
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The following table sets forth certain information regarding beneficial
ownership of New ITGI common stock (1) by each person who is expected to be a
director of New ITGI, (2) each Named Executive Officer, (3) all persons who are
expected to be a director or executive officer of New ITGI, as a group, and (4)
each person who we expect will beneficially own 5% or more of New ITGI common
stock, based on information as of March 1, 1999 as to beneficial ownership of
our common stock and Parent common stock.
<TABLE>
<CAPTION>
PRO FORMA SHARES OF
NEW ITGI COMMON PERCENTAGE OF NEW ITGI
STOCK BENEFICIALLY COMMON STOCK
OWNED(1) BENEFICIALLY OWNED
------------------- -------------------------
<S> <C> <C>
Directors
Raymond L. Killian, Jr............................................. 1,322,574(2) 4.3
Frank E. Baxter.................................................... 1,569,417(3) 5.3
Neal S. Garonzik................................................... 15,900 *
William I Jacobs................................................... 48,436(4) *
Robert L. King..................................................... 35,181 *
Mark A. Wolfson.................................................... 106,883 *
Other Named Executive Officers
Yossef A. Beinart.................................................. 219,738 *
David C. Cushing................................................... 39,494 *
Christopher J. Heckman............................................. 39,520 *
Scott P. Mason..................................................... 2,137,169(5) 6.7
Steven J. Sorice................................................... 33,383 *
All directors and executive officers as a group (17 persons)......... 3,949,488 12.5
5% stockholders
Jefferies Group, Inc. Employee Stock
Ownership Plan
11100 Santa Monica Boulevard, 10th Floor
Los Angeles, CA 90025.............................................. 1,960,380 6.5
Tweedy, Browne Company L.P. and Affiliates
52 Vanderbilt Ave., 8th Floor
New York, NY 10012................................................. 1,689,744(6) 5.7
</TABLE>
- ------------------------
* Less than 1%.
(1) Pro forma ownership of New ITGI is based on the following assumptions: (a)
shares outstanding of Parent immediately prior to the merger is 23.9
million, (b) exchange ratio is approximately 1.59, (c) adjustment of ITGI
stock options as described under "Unaudited Pro Forma Financial Data," and
(d) the shares held by the Jefferies Group, Inc. Employee Stock Ownership
Plan for the benefit of employees of ITGI have been transferred to a new
employee stock ownership plan established by New ITGI. Unless otherwise
indicated in a footnote and subject to applicable community property and
similar statutes, each person listed as the beneficial owner of shares
possesses sole voting and dispositive power with respect to such shares.
Beneficial ownership includes stock options that are exercisable at March 1,
1999, or within 60 days thereafter, as follows on a pro forma basis: Mr.
Killian: 965,672; Mr. Jacobs: 17,590; Mr. King: 35,181; Mr. Wolfson: 56,489;
Mr. Beinart: 172,120; Mr. Cushing: 36,716; Mr. Heckman: 27,904; Mr. Mason:
2,137,164; Mr. Sorice: 23,406; and all directors and executive officers as a
group: 1,781,059.
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(2) Includes 26,176 shares held under Parent's ESOP, 30,325 held under Parent's
PSP and 4,920 shares held by members of his immediate family, as to which he
disclaims beneficial ownership. Participants in Parent's ESOP have sole
voting power and no dispositive power over shares allocated to the ESOP
accounts. Participants in Parent's PSP have sole voting power and limited
dispositive power over shares allocated to the PSP accounts.
(3) Includes 9,026 shares Mr. Baxter holds as custodian for his children's
accounts; 34,900 shares held under Parent's ESOP; and 298,007 shares held
under Parent's PSP.
(4) Includes 200 shares of common stock owned by a son of Mr. Jacobs, and 200
shares of common stock owned by a daughter of Mr. Jacobs, as to which Mr.
Jacobs disclaims beneficial ownership.
(5) Represents shares held by the estate of Mr. Mason.
(6) Tweedy, Browne Company L.P., a Delaware limited partnership, together with
TBK Partners, L.P., a Delaware limited partnership, and Vanderbilt Partners
L.P., a Delaware limited partnership, filed a combined statement on Schedule
13D dated and reporting beneficial ownership at February 6, 1997 of Parent
common stock, and as of the date hereof, had not filed an amended Schedule
13D in 1998. The holdings for Tweedy, Browne and related entities are
therefore based on the 1997 Schedule 13D, as adjusted for the December 1997
stock split of Parent common stock. As adjusted, Tweedy, Browne reported
beneficial ownership of 1,405,860 shares of Parent common stock, 4.7% 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 of Parent common stock. Vanderbilt
reported having sole voting and dispositive power over 57,844 shares of
Parent common stock. The aggregate number of shares of Parent common stock
with respect to which Tweedy, Browne, TBK and Vanderbilt could be deemed to
be the beneficial owner is 1,689,744 shares (5.7% 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 Tweedy, Browne 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 Tweedy, Browne or Vanderbilt. The general partners
in each of Tweedy, Browne, 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 Tweedy, Browne, TBK and Vanderbilt,
respectively.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TAX SHARING AGREEMENT
During 1998, ITGI was party to a tax sharing agreement with Parent dated as
of January 1, 1994, which provided the method by which the federal, state and
local income or franchise tax liabilities of Parent and ITGI are allocated and
the manner in which allocated liabilities are paid. This tax sharing agreement
was amended and restated to provide it will be applicable to 1998 and prior tax
years and to make it consistent with the new tax sharing and indemnification
agreement, which will be applicable for the 1999 tax year only. See "Other
Agreements--Tax Sharing and Indemnification Agreement."
The aggregate amount we paid in 1998 under this agreement was approximately
$30.3 million.
JEFFERIES SERVICE AGREEMENT
Pursuant to a service agreement between Parent and ITG Inc. (the "Jefferies
Service Agreement"), Jefferies & Company has provided various services to us
consisting of (1) accounting services, payroll accounting and preparation of
regulatory accounting reports, (2) compliance services, including performance of
regulatory oversight functions, quarterly compliance audits, preparation of
periodic regulatory reports, serving as liaison for us in compliance matters,
performance of reviews and analysis of employee and customer trading and
providing compliance related training and education, (3) personnel services,
including services customarily performed by an internal personnel department,
maintaining employee files, administering employee benefit plans and
establishing multi-employer benefit plans, (4) operations services, including
operations support consistent with the terms of the clearing agreement described
below and advisory services for back office activities, (5) legal services,
including consultation with Jefferies' compliance department, (6) data
processing services, including POSIT execution processing and related trade
reporting services, and (7) certain administrative services, including invoicing
and billing, maintenance of Lotus Notes and programming and software
development.
All services were terminated on December 31, 1998, except for accounting
services, payroll accounting and preparation of regulatory accounting reports,
certain administrative services, including invoicing and billing, and certain
personnel services, including administering certain employee benefit plans. The
accounting and administrative services will continue until June 30, 1999 unless
we terminate them earlier at our discretion. Jefferies & Company will be
required to provide us reasonable opportunity to copy, or remove from its
premises, any accounting records relating to us prior to destroying them. The
personnel services will continue until transfer of the assets under certain
employee benefit plans. We will pay Jefferies & Company $27,500 per month for
accounting and administrative services and $12,700 per month for employee
services. Under the Jefferies Service Agreement, we have agreed to indemnify
Jefferies & Company and its affiliates for liabilities related to our failure to
perform our duties and responsibilities under the agreement.
The aggregate amount we paid in 1998 under the Jefferies Service Agreement
was approximately $1.2 million.
EXECUTION AGREEMENT
Pursuant to an execution agreement between W&D Securities, Inc., an
affiliate of Parent, and ITG Inc. (the "Execution Agreement"), W&D is
responsible for trade execution and trade entry on the books and records of ITG
Inc. for all trades executed by W&D on the New York Stock Exchange, on regional
exchanges and in the over-the-counter market and is also responsible for the
clearance and settlement of trades executed on the New York Stock Exchange. We
pay varying per share fees depending on the number of shares for which W&D
provides trade execution services during a calendar month. The aggregate amount
we paid in 1998 under the Execution Agreement was approximately $13.6 million.
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<PAGE>
Effective as of January 1, 1999, W&D and ITG Inc. entered into a new
execution agreement on substantially similar terms as the Execution Agreement
except that: (a) the new agreement has an initial term from 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) charges for services through June 30,
2000 are based on an allocation of costs between New Jefferies and New ITGI
consistent with the allocation methodology employed in 1998. We believe that the
terms of this agreement are generally as favorable as those that could be
negotiated with unaffiliated third parties.
CLEARING AGREEMENT
Pursuant to a Fully Disclosed Clearing Agreement dated as of March 15, 1994
(the "Clearing Agreement"), Jefferies & Company, as clearing broker, provides
certain execution and clearing services for customer and proprietary accounts of
ITG Inc. (the "Introduced Accounts"). These services include, among others, (1)
execution of orders, (2) mailing of confirmations, notices and monthly
statements, (3) providing reports to ITG Inc., (4) settling certain contracts
and transactions, (5) engaging in all cashiering functions and (6) record
keeping. Jefferies & Company is required to remit fees to us on a weekly basis
after deduction of amounts due. Introduced Accounts may only be charged such
fees or other charges as Jefferies & Company 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, Jefferies & Company is responsible for all
Introduced Accounts and transactions in such accounts. Jefferies & Company
reserves the right to reject any proposed account and to terminate any
Introduced Account. The Clearing Agreement also requires us to indemnify
Jefferies & Company against certain liabilities arising from, among other
things, failed settlements, failure of Introduced Accounts to satisfy any
applicable margin requirements, our failure to perform our duties and
obligations and claims between ITG Inc. and its customers. In 1998, we paid
approximately $11.9 million to Jefferies & Company for services performed under
the Clearing Agreement.
Effective as of January 1, 1999, Jefferies & Company and ITG Inc. 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. We believe that the terms of this
agreement are generally as favorable as those that could be negotiated with
unaffiliated third parties.
REVENUE SHARING AGREEMENT
Pursuant to a revenue sharing agreement between ITG Inc. and Jefferies &
Company dated as of March 15, 1994 (the "Revenue Sharing Agreement"), the
parties have agreed that each will pay the other a portion of the transaction
fees generated on each transaction by customers introduced to such party by the
other party. The amount of such payments will equal 40% of transaction fees
generated in the first year in which a customer commences doing business with a
party, 25% of transaction fees in the second year and 15% of transaction fees in
the third through fifth years after the customer commences doing business with a
party. In 1998, ITG Inc. paid approximately $250,000 to Jefferies & Company
pursuant to the Revenue Sharing Agreement. This agreement terminates according
to its terms on March 15, 1999. Such termination will not affect fees payable in
accordance with the above formula with respect to customers introduced prior to
January 1, 1999.
79
<PAGE>
OTHER
During 1998, ITGI paid approximately $767,000 to Jefferies International
Limited (an affiliate of Parent) for certain brokerage and administrative
services provided by Jefferies International Limited in connection with ITGI's
international activities. Of such amount, approximately $764,000 was reimbursed
to ITGI by its affiliate ITG Global Trading, Inc.
Parent extended credit to certain of ITGI's directors, officers, employees
and stockholders in connection with their purchase of securities on margin.
Receivables from the ITGI's executive officers and directors were $925,689 at
December 31, 1998. Such extensions of credit were made in the ordinary course of
business, on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons and did not involve more than the normal risk of collectibility or
present other unfavorable features.
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DESCRIPTION OF CAPITAL STOCK
THE FOLLOWING SUMMARY DESCRIPTION OF THE CAPITAL STOCK OF NEW ITGI IS
QUALIFIED IN ITS ENTIRETY BY THE COMPLETE TEXT OF NEW ITGI'S CHARTER AND NEW
ITGI'S BYLAWS, WHICH ARE ATTACHED AS EXHIBITS A AND B TO THE MERGER AGREEMENT.
GENERAL
The authorized capital stock of New ITGI will consist of 100,000,000 shares
of common stock, par value $.01 per share, and 1,000,000 shares of preferred
stock, par value of $.01 per share. Based upon the number of shares of common
stock of each of our company and Parent outstanding on March 1, 1999, it is
anticipated that approximately 29.7 million shares of New ITGI common stock and
no shares of New ITGI preferred stock will be issued and outstanding immediately
after the completion of the merger.
NEW ITGI COMMON STOCK
Each share of New ITGI common stock will entitle the holder to one vote on
matters submitted to a vote of the stockholders.
The holders of New ITGI common stock will be entitled to receive a ratable
share of any dividends declared by New ITGI's board of directors with respect to
New ITGI common stock. In the event of the liquidation, dissolution or
winding-up of New ITGI, holders of New ITGI common stock will have the right to
a ratable portion of the assets remaining after the payment of liabilities and
liquidation preferences of any outstanding shares of New ITGI preferred stock.
The holders of New ITGI common stock have no preemptive right or rights to
convert their New ITGI common stock into other securities. All outstanding
shares of New ITGI common stock immediately following completion of the merger
will be fully paid and nonassessable. The rights of the holders of New ITGI
common stock will be subject to, and may be adversely affected by, the rights of
the holders of New ITGI preferred stock, if any.
NEW ITGI PREFERRED STOCK
New ITGI's charter provides preferred stock to be issued from time to time
in one or more series. New ITGI's board of directors has the authority to fix
and determine the number of shares constituting each such series and the
relative rights, preferences, privileges and immunities, if any, and any
qualifications, limitations or restrictions thereof, of the shares thereof,
including the authority to fix and determine the dividend rights, dividend
rates, conversion rights, voting rights and terms of redemption (including
sinking fund provisions), redemption prices and liquidation preferences of any
wholly unissued series of New ITGI preferred stock and to increase or decrease
the number of shares of any outstanding series, without further vote or action
by New ITGI stockholders. The issuance of shares of New ITGI preferred stock
could adversely affect the voting power of the holders of New ITGI common stock
and could have the effect of discouraging or making more difficult any attempt
by a person or group to obtain control of New ITGI. No New ITGI preferred stock
is outstanding and no New ITGI preferred stock will be issued in connection with
the merger.
CERTAIN CHARTER AND BYLAW PROVISIONS
New ITGI's charter and bylaws contain certain provisions that may have the
effect of discouraging certain types of transactions that involve an actual or
threatened change of control of New ITGI. These provisions include (1)
restrictions on who may call a special meeting, (2) a prohibition on stockholder
proposals at a special meeting; (3) a prohibition on stockholder action by
written consent; and (4) a prohibition on alteration or amendment of the
antitakeover provisions in the charter and bylaws other
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<PAGE>
than by vote of two-thirds of the stockholders. See "The Merger and Related
Transactions--Comparison of Rights of ITGI Stockholders and New ITGI
Stockholders."
In addition, one of the effects of the existence of unissued and unreserved
New ITGI common stock and preferred stock may be to enable New ITGI's board of
directors to issue shares to persons friendly to current management, which could
render more difficult or discourage an attempt to obtain control of New ITGI by
means of a merger, tender offer, proxy contest or otherwise, and thereby protect
the continuity of New ITGI's management and possibly deprive the shareholders of
opportunities to sell their shares of New ITGI common stock at prices higher
than the prevailing market prices. Such additional shares also could be used to
dilute the stock ownership of persons seeking to obtain control of New ITGI.
PROHIBITED BUSINESS TRANSACTIONS
As a corporation organized under the laws of the State of Delaware, New ITGI
is subject to Section 203 of the Delaware General Corporation Law, which
restricts certain business combinations between a corporation and an "interested
stockholder" (in general, a stockholder owning 15% or more of the outstanding
voting stock) or such stockholder's affiliates or associates for a period of
three years following the date on which the stockholder becomes an "interested
stockholder." The restrictions do not apply if: (1) prior to an interested
stockholder becoming such, the corporation's board of directors approves either
the business combination or the transaction by which such person became an
interested stockholder; (2) upon consummation of the transaction, the interested
stockholder owns at least 85% of the voting stock outstanding at the time the
transaction commenced (excluding shares owned by certain employee stock plans
and by directors who are also officers); or (3) at or subsequent to the time an
interested stockholder becomes such, the business combination is both approved
by the corporation's board of directors and authorized at an annual or special
meeting of stockholders by the affirmative vote of at least two-thirds of the
outstanding voting stock not owned by the interested stockholder.
REGISTRAR AND TRANSFER AGENT
The Registrar and Transfer Agent of New ITGI common stock will be First
Chicago Trust Company of New York.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires our directors and executive
officers, and persons who beneficially own more than 10% of our outstanding
common stock, to file with the SEC initial reports of beneficial ownership and
reports of changes in beneficial ownership of our common stock and other equity
securities of our company. Directors, executive officers and greater-than-10%
stockholders are required by SEC regulations to furnish us with copies of all
Section 16(a) forms they file. During 1998, a statement of changes in beneficial
ownership required to be filed by William I Jacobs was filed late. Based on a
review of the copies of the forms furnished to us and written representations
from our executive officers and directors, all other such persons subject to the
reporting requirements of Section 16(a) filed the required reports with respect
to 1998 on a timely basis.
RATIFICATION OF INDEPENDENT AUDITORS
KPMG LLP was our independent auditor for the year ended December 31, 1998.
On March 15, 1999, KPMG LLP was appointed by the audit committee to serve as our
independent auditors for 1999.
The ratification of the appointment of KPMG LLP is being submitted to the
stockholders at the annual meeting. If such appointment is not ratified, the
board of directors will consider the appointment of other accountants. The board
of directors recommends a vote "FOR" the ratification of the appointment of KPMG
LLP as our independent auditors for the 1999 fiscal year.
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A representative of KPMG LLP, the independent auditors who audited our
consolidated financial statements for 1998, is expected to be present at the
meeting to respond to appropriate questions of stockholders and will have the
opportunity to make a statement if he or she so desires.
LEGAL MATTERS
The validity of New ITGI common stock to be issued in the merger will be
passed upon by Morgan, Lewis & Bockius LLP, Philadelphia, Pennsylvania. Cahill
Gordon & Reindel (a partnership including a professional corporation), New York,
New York, is acting as counsel for ITGI in connection with certain legal matters
relating to the merger and the transactions contemplated hereby.
EXPERTS
The consolidated financial statements of ITGI and Jefferies Group, Inc. 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 and in the registration statement in reliance upon the reports of KPMG
LLP, independent certified public accountants, upon authority of said firm as
experts in accounting and auditing.
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 our company and Parent. 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. You can obtain information about the
Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an
Internet Site that contains reports, proxy and information statements and other
information regarding companies that file electronically with the SEC. The SEC's
Internet address is http://www.sec.gov. You can also inspect these materials of
our company at the offices of the Nasdaq Stock Market, 1735 K Street, N.W.
Washington, D.C. 20006, and those of Parent 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
statement/prospectus, 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 statement/prospectus,
except to the extent that the information is superseded by information in this
proxy statement/prospectus.
This proxy statement/prospectus incorporates by reference the information
contained in our Annual Report on Form 10-K for the year ended December 31, 1998
(SEC file number 0-23644) and Parent's Annual Report on Form 10-K for the year
ended December 31, 1998 (SEC file number 1-11665). We also incorporate by
reference the information contained in all other documents that we or Parent
files with the SEC after the date of this proxy statement/prospectus and before
the annual meeting. The information contained in any of these documents will be
considered part of this proxy statement/prospectus from the date these documents
are filed.
Any statement contained in this proxy statement/prospectus or in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this proxy statement/prospectus to the
extent that a statement contained herein or in any other subsequently filed
document which also is or is deemed to be incorporated by reference herein
modifies or supersedes such statement. Any statement so modified or superseded
shall not be deemed, except as so modified or superseded, to constitute a part
of this proxy statement/prospectus.
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If you are one of our stockholders and would like to receive a copy of any
document incorporated by reference into this proxy statement/prospectus (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
statement/prospectus; any other exhibits will be available upon request at
cost), you should call or write to Investment Technology Group, Inc., 380
Madison Avenue, 4th Floor, New York, New York 10017, Attention: Timothy H.
Hosking (telephone: (212) 588-4000). In order to ensure timely delivery of the
documents prior to the annual meeting, you should make any such request not
later than April 6, 1999.
You should rely only on the information contained in (or incorporated by
reference into) this proxy statement/prospectus. We have not authorized anyone
to give any information different from the information contained in (or
incorporated by reference into) this proxy statement/prospectus. This proxy
statement/prospectus is dated March 18, 1999. You should not assume that the
information contained in this proxy statement/prospectus is accurate as of any
later date, and the mailing of this proxy statement/prospectus to stockholders
shall not mean otherwise.
OTHER MATTERS; STOCKHOLDER PROPOSALS
FOR THE 2000 ANNUAL MEETING OF NEW ITGI
As of the date of this proxy statement/prospectus, our board of directors
knows of no matters that will be presented for consideration at the annual
meeting, other than as described in this proxy statement/prospectus. If any
other matters shall properly come before the annual 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 our board of directors and management.
The deadline for submitting stockholder proposals for inclusion in New
ITGI's 1999 annual meeting proxy materials was November 30, 1998 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 the Secretary of New ITGI must receive any
such proposals 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.
By Order of the Board of Directors,
/s/ TIMOTHY H. HOSKING
Timothy H. Hosking
Secretary
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APPENDIX A
AGREEMENT AND PLAN OF MERGER
BETWEEN
JEFFERIES GROUP, INC.
AND
INVESTMENT TECHNOLOGY GROUP, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
- ----------- ---------
<C> <S> <C>
1. The Merger...................................................................................... A-2
2. Stockholders' Meetings; Pre-Closing, Closing and Effective Time of the Merger; SEC Filings...... A-2
3. Conversion and Cancellation of Securities....................................................... A-4
4. Exchange of Certificates........................................................................ A-4
5. Options......................................................................................... A-6
6. Representations and Warranties.................................................................. A-7
6A. Representations and Warranties of JEFG.......................................................... A-7
6B. Representations and Warranties of ITGI.......................................................... A-12
7. Covenants of JEFG and ITGI...................................................................... A-17
8. Conditions to the Obligations of JEFG and ITGI to Consummate the Pre-Closing.................... A-22
9. Conditions to the Obligations of JEFG to Consummate the Pre-Closing............................. A-24
10. Conditions to the Obligations of ITGI to Consummate the Pre-Closing............................. A-25
11. Conditions to the Obligations of JEFG and ITGI to Consummate the Merger......................... A-26
12. No Survival of Representations, Warranties and Covenants........................................ A-27
13. Termination..................................................................................... A-27
14. Entire Agreement................................................................................ A-27
15. Notices......................................................................................... A-27.....
16. Governing Law................................................................................... A-28
17. Counterparts.................................................................................... A-28
</TABLE>
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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
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(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.
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(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").
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<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
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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
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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.
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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
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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 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).
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(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
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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
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(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 Agreement
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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.
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(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).
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(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).
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(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.
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(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
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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
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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 any information
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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
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(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.
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(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 Date and prior to the Effective
Time, of all JEFG Liabilities that are not related to ITGI or ITGI's
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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 body, stock exchange or any
federal, state or foreign statute, rule, regulation, executive order, decree or
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<PAGE>
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.
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<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 that each of
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<PAGE>
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 principles of
equity;
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<PAGE>
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.
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<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
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<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.
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<PAGE>
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
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<PAGE>
AMENDED AND RESTATED
BY-LAWS
OF
INVESTMENT TECHNOLOGY GROUP, INC.
<PAGE>
AMENDED AND RESTATED
BY-LAWS
OF
INVESTMENT TECHNOLOGY GROUP, INC.
(a Delaware corporation)
ARTICLE I
OFFICES AND FISCAL YEAR
Section 1.01. REGISTERED OFFICE. The registered office of the corporation
shall be in the City of Wilmington, County of New Castle, State of Delaware
until otherwise established by a vote of a majority of the board of directors in
office, and a statement of such change is filed in the manner provided by
statute.
Section 1.02. OTHER OFFICES. The corporation may also have offices at such
other places within or without the State of Delaware as the board of directors
may from time to time determine or the business of the corporation requires.
Section 1.03. FISCAL YEAR. The fiscal year of the corporation shall end on
the 31st of December in each year.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 2.01. PLACE AND TIME. Subject to the laws governing the
corporation, meetings of stockholders of the corporation shall be held at the
registered office of the corporation or at such other place within or without
the State of Delaware and at such time as the Chairman of the board of directors
or the President of the corporation may determine from time to time or as the
Secretary of the corporation may determine within 10 calendar days after receipt
of the written request of a majority of the directors, acting in accordance with
such request. Written notice of the place, date and hour of every meeting of the
stockholders, whether annual or special, shall be given to each stockholder of
record entitled to vote at the meeting not less than ten nor more than sixty
days before the date of the meeting. Every notice of a special meeting shall
state the purpose or purposes thereof.
Section 2.02. SPECIAL MEETINGS. Special meetings of the stockholders of
the corporation may be called only by the secretary of the corporation at the
request of (i) a majority of the total number of directors which the corporation
at the time would have if there were no vacancies or (ii) any person authorized
by the board of directors (through a vote of a majority of the total number of
directors which the corporation at the time would have if there were no
vacancies). Notwithstanding the foregoing, stockholders shall have no right to
call a special meeting of stockholders.
Section 2.03. QUORUM, MANNER OF ACTING AND ADJOURNMENT. The holders of a
majority of the stock issued and outstanding (not including treasury stock) and
entitled to vote thereat, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute, by the certificate of
incorporation or by these by-laws. If, however, such quorum shall not be present
or represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented. At any such
adjourned meeting, at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally notified. If the adjournment is for more than thirty days, or if
after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote at the meeting. When a quorum is present at any meeting, the
vote of the holders of the majority of the stock having voting power present in
person or represented by proxy shall decide any question brought before such
meeting, unless the question is one upon which, by express provision of the
applicable statute or these by-laws, a different
<PAGE>
vote is required in which case such express provision shall govern and control
the decision of such question. Except upon those questions governed by the
aforesaid express provisions, the stockholders present in person or by proxy at
a duly organized meeting can continue to do business until adjournment,
notwithstanding withdrawal of enough stockholders to leave less than a quorum.
Section 2.04. ORGANIZATION. At every meeting of the stockholders, the
chairman of the board, if there be one, or in the case of a vacancy in the
office or absence of the chairman of the board, one of the following persons
present in the order stated: the vice chairman, if one has been appointed, the
president, the executive or senior vice presidents in their order of rank and
seniority, a chairman designated by the board of directors or a chairman chosen
by the stockholders entitled to cast a majority of the votes which all
stockholders present in person or by proxy are entitled to cast, shall act as
chairman, and the secretary, or, in his absence, an assistant secretary, or in
the absence of the secretary and the assistant secretaries, a person appointed
by the chairman, shall act as secretary.
Section 2.05. VOTING. Each stockholder shall, at every meeting of the
stockholders, be entitled to one vote in person or by proxy for each share of
capital stock having voting power held by such stockholder. No proxy shall be
voted on after three years from its date, unless the proxy provides for a longer
period. Every proxy shall be executed in writing by the stockholder or by his
duly authorized attorney-in-fact and filed with the secretary of the
corporation; provided, however, the foregoing clause shall not preclude the
giving of proxies by electronic, telephonic or other means so long as such
procedure is expressly approved by the corporation's board of directors and is
permitted by law. A proxy shall not be revoked by the death or incapacity of the
maker unless, before the vote is counted or the authority is exercised, written
notice of such death or incapacity is given to the secretary of the corporation.
Section 2.06. NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS.
(a) ANNUAL MEETING OF STOCKHOLDERS.
(1) Nominations of persons for election to the board of directors of the
corporation and the proposal of business to be considered by the stockholders
may be made at an annual meeting of stockholders (a) by or at the direction of
the board of directors pursuant to a resolution adopted by a majority of the
total number of directors which the corporation at the time would have if there
were no vacancies or (b) by any stockholder of the corporation who is entitled
to vote at the meeting with respect to the election of directors or the business
to be proposed by such stockholder, as the case may be, who complies with the
notice procedures set forth in clauses (2) and (3) of paragraph (A) of this
Section 2.06 and who is a stockholder of record at the time such notice is
delivered to the secretary of the corporation as provided below.
(2) For nominations or other business to be properly brought before an
annual meeting by a stockholder pursuant to clause (b) of paragraph (A) (1) of
this Section 2.06, the stockholder must have given timely notice thereof in
writing to the secretary of the corporation and such business must be a proper
subject for stockholder action under the Delaware General Corporation Law (the
"DGCL"). To be timely, a stockholder's notice shall be delivered to the
secretary of the corporation at the principal executive office of the
corporation not less than 60 days nor more than 90 days prior to the first
anniversary of the preceding year's annual meeting (or action taken by consent
in lieu of annual meeting); PROVIDED, HOWEVER, that in the event that the date
of the annual meeting is advanced by more than 30 days, or delayed by more than
30 days, from such anniversary date, notice by the stockholder to be timely must
be so delivered not earlier than the 90th day prior to such annual meeting and
not later than either the close of business on (a) the 10th day following the
day on which notice of the date of such meeting was mailed or (b) the 10th day
following the day on which public announcement of the date of such meeting is
first made, whichever first occurs in (a) or (b). Such stockholder's notice
shall set forth (x) as to each person whom the stockholder proposes to nominate
for election or reelection as a director all information relating to such person
that is required to be disclosed in solicitations of
2
<PAGE>
proxies for election of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), including such person's written consent to being named in
the proxy statement as a nominee and to serving as a director if elected; (y) as
to any other business that the stockholder proposes to bring before the meeting,
a brief description of the business desired to be brought before the meeting,
the reasons for conducting such business at the meeting and any material
interest in such business of such stockholder and the beneficial owner, if any,
on whose behalf the proposal is made; and (z) as to the stockholder giving the
notice and the beneficial owner, if any, on whose behalf the nomination or
proposal is made (i) the name and address of such stockholder, as they appear on
the corporation's books, and of such beneficial owner and (ii) the class and
number of shares of the corporation which are owned beneficially and of record
by such stockholder and such beneficial owner.
(3) Notwithstanding anything in the second sentence of paragraph (A) (2) of
this Section 2.06 to the contrary, in the event that the number of directors to
be elected to the board of directors is increased and there is no public
announcement naming all of the nominees for director or specifying the size of
the increased board of directors made by the corporation at least 80 days prior
to the first anniversary of the preceding year's annual meeting, a stockholder's
notice required by paragraph (A) (2) of this Section 2.06 shall also be
considered timely, but only with respect to nominees for any new positions
created by such increase, if it shall be delivered to the secretary of the
corporation at the principal executive offices of the corporation not later than
the close of business on the 10th day following the day on which such public
announcement is first made by the corporation.
(b) SPECIAL MEETING OF STOCKHOLDERS. Only such business shall be conducted
at a special meeting of stockholders as shall have been brought before the
meeting pursuant to the corporation's notice of meeting and in accordance with
these By-laws. Nominations of persons for election to the board of directors may
be made at a special meeting of stockholders at which directors are to be
elected pursuant to the corporation's notice of meeting (a) by or at the
direction of the board of directors or (b) provided that the board of directors
has determined that directors shall be elected at such meeting, by any
stockholder of the corporation who is a stockholder of record at the time of
giving of notice provided for in this Section 2.08, who shall be entitled to
vote at the meeting and who complies with the notice procedures set forth in
this Section 2.08. In the event the corporation calls a special meeting of
stockholders for the purpose of electing one or more directors to the board of
directors, any such stockholder may nominate a person or persons (as the case
may be), for election to such position(s) as specified in the corporation's
notice of meeting, if the stockholder's notice required by paragraph (A)(2) of
this Section 2.08 shall be delivered to the secretary at the principal executive
offices of the corporation not earlier than the close of business on the 90th
day prior to such special meeting and not later than the close of business on
the later of the 60th day prior to such special meeting or the 10th day
following the day on which public announcement is first made of the date of the
special meeting and of the nominees proposed by the board of directors to be
elected at such meeting. In no event shall the public announcement of an
adjournment of a special meeting commence a new time period for the giving of a
stockholders notice as described above.
(c) GENERAL.
(1) Only persons who are nominated in accordance with the procedures set
forth in this Section 2.06 shall be eligible to serve as directors and only such
business shall be conducted at a meeting of stockholders as shall have been
brought before the meeting in accordance with the procedures set forth in this
Section 2.06.
(2) Except as otherwise provided by law, the Certificate of Incorporation or
this Section 2.06, the chairman of the meeting shall have the power and duty to
determine whether a nomination or any business proposed to be brought before the
meeting was made in accordance with the procedures set
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forth in this Section 2.06 and, if any proposed nomination or business is not in
compliance with his Section 2.06, to declare that such defective nomination or
proposal shall be disregarded.
(3) For purposes of this Section 2.06, "public announcement" shall mean
disclosure on a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
corporation with the Securities and Exchange Commission pursuant to Section 13,
14 or 15(d) of the Exchange Act.
(4) Notwithstanding the foregoing provisions of this Section 2.06, a
stockholder shall also comply with all applicable requirements of the Exchange
Act and the rules and regulations thereunder with respect to the matters set
forth in this Section 2.06. Nothing in this Section 2.06 shall be deemed to
affect any rights (i) of stockholders to request inclusion of proposals in the
corporation's proxy materials with respect to a meeting of stockholders pursuant
to Rule 14a-8 under Exchange Act or (ii) of the holders of any series of
Preferred Stock or any other series or class of stock (excluding Common Stock)
as set forth in the Certificate of Incorporation to elect directors under
specified circumstances or to consent to specific actions taken by the
corporation.
Section 2.07. PROCEDURE FOR ELECTION OF DIRECTORS; REQUIRED VOTE. Subject
to the rights of the holders of any series of Preferred Stock or any other
series or class of stock as set forth in the Certificate of Incorporation to
elect directors under specified circumstances, election of directors at all
meetings of the stockholders at which directors are to be elected shall be by a
plurality of the votes cast. Except as otherwise provided by law, the
Certificate of Incorporation, or these By-Laws, in all matters other than the
election of directors, the affirmative vote of a majority of the stock present
in person or represented by proxy at the meeting and entitled to vote on the
matter shall be the act of the stockholders.
Section 2.08. NO STOCKHOLDER ACTION BY WRITTEN CONSENT. Subject to the
rights of the holders of any series of Preferred Stock or any other series or
class of stock (excluding Common Stock) set forth in the Certificate of
Incorporation to elect additional directors under specified circumstances or to
consent to specific actions taken by the corporation, any action required or
permitted to be taken by the stockholders of the corporation must be taken at an
annual or special meeting of the stockholders and may not be taken by any
consent in writing by stockholders of the corporation.
Section 2.09. VOTING LISTS. The officer who has charge of the stock ledger
of the corporation shall prepare and make, at least ten days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting. The list shall be arranged in alphabetical order showing the
address of each stockholder and the number of shares registered in the name of
each stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten days prior to the meeting either at a place within the
city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held. The list shall also be produced and kept at the time and place of
the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
Section 2.10. JUDGES OF ELECTION. All elections of directors may be, but
need not be, by written ballot, unless otherwise provided in the certificate of
incorporation; the vote upon any other matter need not be by ballot. In advance
of any meeting of stockholders, the board of directors may appoint judges of
election, who need not be stockholders, to act at such meeting or any
adjournment thereof. If judges of election are not so appointed, the chairman of
any such meeting may, and upon the demand of any stockholder or his proxy at the
meeting and before voting begins shall, appoint judges of election. The number
of judges shall be either one or three, as determined, in the case of judges
appointed upon demand of a stockholder, by stockholders present entitled to cast
a majority of the votes which all stockholders present are entitled to cast
thereon. No person who is a candidate for office shall act as a judge. In case
any person appointed as judge fails to appear or fails or refuses to
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act, the vacancy may be filled by appointment made by the board of directors in
advance of the convening of the meeting, or at the meeting by the chairman of
the meeting.
If judges of election are appointed as aforesaid, they shall determine the
number of shares outstanding and the voting power of each, the shares
represented at the meeting, the existence of a quorum, the authenticity,
validity and effect of proxies, receive votes or ballots, hear and determine all
challenges and questions in any way arising in connection with the right to
vote, count and tabulate all votes, determine the result, and do such acts as
may be proper to conduct the election or vote with fairness to all stockholders.
If there be three judges of election, the decision, act or certificate of a
majority shall be effective in all respects as the decision, act or certificate
of all.
On request of the chairman of the meeting or of any stockholder or his
proxy, the judges shall make a report in writing of any challenge or question or
matter determined by them, and execute a certificate of any fact found by them.
ARTICLE III
BOARD OF DIRECTORS
Section 3.01. POWERS. The board of directors shall have full power to
manage the business and affairs of the corporation; and all powers of the
corporation, except those specifically reserved or granted to the stockholders
by statute, the certificate of incorporation or these by-laws, are hereby
granted to and vested in the board of directors.
Section 3.02. NUMBER AND TERM OF OFFICE. The board of directors shall
consist of such number of directors, not less than 5 nor more than 17, as may be
determined from time to time by (i) a resolution adopted by a majority of the
total number of directors which the corporation at the time would have if there
were no vacancies or (ii) the affirmative vote of the holders of shares
representing at least 66 2/3% of the voting power of the then outstanding stock
of the corporation entitled to vote generally in the election of directors,
voting together as a single class. The directors shall be elected at each annual
meeting of stockholders of the corporation and shall hold office for a term
expiring at the annual meeting of stockholders held in the year following the
year of their election, and until their successors are elected and qualified.
All directors of the corporation shall be natural persons, but need not be
residents of Delaware or stockholders of the corporation.
Section 3.03. VACANCIES. Vacancies resulting from death, resignation,
retirement, disqualification, removal from office or other cause, and newly
created directorships resulting from any increase in the authorized number of
directors, may be filled only by the affirmative vote of a majority of the
remaining directors, though less than a quorum of the board of directors, or
stockholders of the corporation at any annual meeting, and directors so chosen
shall hold office for a term expiring at the annual meeting of stockholders at
which the term of office of the class to which they have been elected expires
and until such director's successor shall have been duly elected and qualified.
No decrease in the number of authorized directors shall shorten the term of any
incumbent director.
Section 3.04. RESIGNATIONS. Any director of the corporation may resign at
any time by giving written notice to the president or the secretary of the
corporation. Such resignation shall take effect at the date of the receipt of
such notice or at any later time specified therein and, unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective.
Section 3.05. ORGANIZATION. At every meeting of the board of directors,
the chairman of the board, if there be one, or, in the case of a vacancy in the
office or absence of the chairman of the board, one of the following officers
present in the order stated: the vice chairman of the board, if there be one,
the president, the executive or senior vice presidents in their order of rank
and seniority, or a chairman chosen by a majority of the directors present,
shall preside, and the secretary, or, in his
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absence, an assistant secretary, or in the absence of the secretary and the
assistant secretaries, any person appointed by the chairman of the meeting,
shall act as secretary.
Section 3.06. PLACE OF MEETING. The board of directors may hold its
meetings, both regular and special, at such place or places within or without
the State of Delaware as the board of directors may from time to time appoint,
or as may be designated in the notice calling the meeting.
Section 3.07. ORGANIZATION MEETING. The first meeting of each newly
elected board of directors shall be held at such time and place as shall be
fixed by the vote of the stockholders at the annual meeting and no notice of
such meeting shall be necessary to the newly elected directors in order legally
to constitute the meeting, provided a quorum shall be present. In the event of
the failure of the stockholders to fix the time or place of such first meeting
of the newly elected board of directors, or in the event such meeting is not
held at the time and place so fixed by the stockholders, the meeting may be held
at such time and place as shall be specified in a notice given as hereinafter
provided for special meetings of the board of directors, or as shall be
specified in a written waiver signed by all of the directors.
Section 3.08. REGULAR MEETINGS. Regular meetings of the board of directors
may be held without notice at such time and place as shall be designated from
time to time by resolution of the board of directors. If the date fixed for any
such regular meeting be a legal holiday under the laws of the State where such
meeting is to be held, then the same shall be held on the next succeeding
business day, not a Saturday, or at such other time as may be determined by
resolution of the board of directors. At such meetings, the directors shall
transact such business as may properly be brought before the meeting. Any notice
by telephone shall be deemed effective if a message regarding the substance of
the notice is given on a director's behalf to the director's secretary or
assistant or to a member of the director's family.
Section 3.09. SPECIAL MEETINGS. Special meetings of the board of directors
shall be held whenever called by the Chairman or by two or more of the
directors. Notice of each such meeting shall be given to each director by
telephone or in writing at least 24 hours (in the case of notice by telephone or
facsimile) or 48 hours (in the case of notice by telegram or overnight delivery)
or three days (in the case of notice by mail) before the time at which the
meeting is to be held. Each such notice shall state the time and place of the
meeting to be so held.
Section 3.10. QUORUM, MANNER OF ACTING AND ADJOURNMENT. At all meetings of
the board, a majority of the directors shall constitute a quorum for the
transaction of business and the act of a majority of the directors present at
any meeting at which there is a quorum shall be the act of the board of
directors, except as may be otherwise specifically provided by statute or by the
certificate of incorporation. If a quorum shall not be present at any meeting of
the board of directors, the directors present thereat may adjourn the meeting
from time to time, without notice other than announcement at the meeting, until
a quorum shall be present.
Unless otherwise restricted by the certificate of incorporation or these
by-laws, any action required or permitted to be taken at any meeting of the
board of directors or of any committee thereof may be taken without a meeting,
if all members of the board consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the board.
Section 3.11. EXECUTIVE AND OTHER COMMITTEES. The board of directors may,
by resolution adopted by a majority of the whole board, designate an executive
committee and one or more other committees, each committee to consist of one or
more directors and to have such authority as may be specified by the board of
directors, subject to the DGCL. The board may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee. In the absence or disqualification of a
member, and the alternate or alternates, if any, designated for such member, of
any committee the member or members thereof
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present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another director to act at the
meeting in the place of any such absent or disqualified member. Any such
committee shall be governed by the procedural provisions of these By-laws that
govern the operation of the full board of directors, including with respect to
notice and quorum, except to the extent specified otherwise by the board of
directors.
Section 3.12. COMPENSATION OF DIRECTORS. Unless otherwise restricted by
the certificate of incorporation, the board of directors shall have the
authority to fix the compensation of directors. The directors may be paid their
expenses, if any, of attendance at each meeting of the board of directors and
may be paid a fixed sum for attendance at each meeting of the board of directors
or a stated salary as director. No such payment shall preclude any director from
serving the corporation in any other capacity and receiving compensation
therefor. Members of special or standing committees may be allowed like
compensation for attending committee meetings.
ARTICLE IV
NOTICE--WAIVERS--MEETINGS
Section 4.01. NOTICE, WHAT CONSTITUTES. Whenever, under the provisions of
the statutes of Delaware or the certificate of incorporation or of these
by-laws, notice is required to be given to any director or stockholder, it shall
not be construed to mean personal notice, but such notice may be given in
writing, by mail, addressed to such director or stockholder, at his address as
it appears on the records of the corporation, with postage thereon prepaid, and
such notice shall be deemed to be given at the time when the same shall be
deposited in the United States mail. Notice to directors may also be given in
accordance with Section 3.08 hereof.
Section 4.02. WAIVERS OF NOTICE. Whenever any written notice is required
to be given under the provisions of the certificate of incorporation, these
by-laws, or by statute, a waiver thereof in writing, signed by the person or
persons entitled to such notice, whether before or after the time stated
therein, shall be deemed equivalent to the giving of such notice. Except in the
case of a special meeting of stockholders, neither the business to be transacted
at, nor the purpose of, any regular or special meeting of the stockholders,
directors, or members of a committee of directors need be specified in any
written waiver of notice of such meeting.
Attendance of a person, either in person or by proxy, at any meeting, shall
constitute a waiver of notice of such meeting, except where a person attends a
meeting for the express purpose of objecting to the transaction of any business
because the meeting was not lawfully called or convened.
Section 4.03. CONFERENCE TELEPHONE MEETINGS. One or more directors may
participate in a meeting of the board, or of a committee of the board, by means
of conference telephone or similar communications equipment by means of which
all persons participating in the meeting can hear each other. Participation in a
meeting pursuant to this section shall constitute presence in person at such
meeting.
Section 4.04. PRESUMPTION OF ASSENT. A director of the corporation who is
present at a meeting of the board of directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless
his dissent shall be entered in the minutes of the meeting or unless he shall
file his written dissent to such action with the person acting as the secretary
of the meeting before the adjournment thereof or shall forward such dissent by
registered mail to the secretary of the corporation immediately after the
adjournment of the meeting. Such right to dissent shall not apply to a director
who voted in favor of such action.
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ARTICLE V
OFFICERS
Section 5.01. NUMBER, QUALIFICATIONS AND DESIGNATION. The officers of the
corporation shall be chosen by the board of directors and shall be a president,
one or more vice presidents, a secretary, a treasurer, and such other officers
as may be elected in accordance with the provisions of Section 5.03 of this
Article. One person may hold more than one office. Officers may be, but need not
be, directors or stockholders of the corporation. The board of directors may
elect from among the members of the board a chairman of the board and a vice
chairman of the board who shall be officers of the corporation.
Section 5.02. ELECTION AND TERM OF OFFICE. The officers of the
corporation, except those elected by delegated authority pursuant to Section
5.03 of this Article, shall be elected annually by the board of directors, and
each such officer shall hold his office until his successor shall have been
elected and qualified, or until his earlier resignation, or removal. Any officer
may resign at any time upon written notice to the corporation.
Section 5.03. SUBORDINATE OFFICERS, COMMITTEES AND AGENTS. The board of
directors may from time to time elect such other officers and appoint such
committees, employees or other agents as it deems necessary, who shall hold
their offices for such terms and shall exercise such powers and perform such
duties as are provided in these by-laws, or as the board of directors may from
time to time determine. The board of directors may delegate to any officer or
committee the power to elect subordinate officers and to retain or appoint
employees or other agents, or committees thereof, and to prescribe the authority
and duties of such subordinate officers, committees, employees or other agents.
Section 5.04. THE CHAIRMAN AND VICE CHAIRMAN OF THE BOARD. The chairman of
the board or, in his absence, the vice chairman of the board shall preside at
all meetings of the stockholders and of the board of directors, and shall
perform such other duties as may from time to time be assigned to them by the
board of directors.
Section 5.05. THE PRESIDENT. The president shall be the chief executive
officer of the corporation and shall have general supervision over the business
and operations of the corporation, subject, however, to the control of the board
of directors. He shall sign, execute, and acknowledge, in the name of the
corporation, deeds, mortgages, bonds, contracts or other instruments, authorized
by the board of directors, except in cases where the signing and execution
thereof shall be expressly delegated by the board of directors, or by these
by-laws, to some other officer or agent of the corporation; and, in general,
shall perform all duties incident to the office of president, and such other
duties as from time to time may be assigned to him by the board of directors.
Section 5.06. THE VICE PRESIDENTS. The board of directors may appoint one
or more executive vice presidents, one or more senior vice presidents and such
other vice presidents as the board shall deem proper. In the absence or
disability of the president, the executive and senior vice presidents, in order
of rank as fixed by the board of directors, shall perform all duties of the
president, and when so acting, shall have all of the powers of and be subject to
all of the restrictions upon the president. Under no circumstances shall any
vice president other than senior vice presidents or executive vice presidents
perform any of the duties or have any of the powers of the president. Executive
vice presidents and senior vice presidents shall have such other powers and
perform such other duties as from time to time may be prescribed for them
respectively by the board of directors. All other vice presidents shall have
only those duties and powers expressly and specifically authorized by resolution
of the board of directors, and, absent such authorization, no such vice
presidents shall have the power to bind the corporation to any obligation,
contractual or otherwise, whether or not in writing.
Section 5.07. THE SECRETARY. The secretary, or an assistant secretary,
shall attend all meetings of the stockholders and of the board of directors and
shall record the proceedings of the stockholders and
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of the directors and of committees of the board in a book or books to be kept
for that purpose; see that notices are given and records and reports properly
kept and filed by the corporation as required by law; be the custodian of the
seal of the corporation and see that it is affixed to all documents to be
executed on behalf of the corporation under its seal; and, in general, perform
all duties incident to the office of secretary, and such other duties as may
from time to time be assigned to him by the board of directors or the president.
Section 5.08. THE TREASURER. The treasurer or an assistant treasurer shall
have or provide for the custody of the funds or other property of the
corporation and shall keep a separate book account of the same to his credit as
treasurer; collect and receive or provide for the collection and receipt of
moneys earned by or in any manner due to or received by the corporation; deposit
all funds in his custody as treasurer in such banks or other places of deposit
as the board of directors may from time to time designate; whenever so required
by the board of directors, render an account showing his transactions as
treasurer and the financial condition of the corporation; and, in general,
discharge such other duties as may from time to time be assigned to him by the
board of directors or the president.
Section 5.09. OFFICERS' BONDS. No officer of the corporation need provide
a bond to guarantee the faithful discharge of his duties unless the board of
directors shall by resolution so require a bond, in which event such officer
shall give the corporation a bond (which shall be renewed if and as required) in
such sum and with such surety or sureties as shall be satisfactory to the board
of directors for the faithful performance of the duties of his office.
Section 5.10. SALARIES. The salaries of the officers and agents of the
corporation elected by the board of directors shall be fixed from time to time
by the board of directors except to the extent that the board of directors shall
have delegated power to officers of the corporation to fix, from time to time,
the salaries of such officers' assistant or subordinate officers.
ARTICLE VI
CERTIFICATES OF STOCK, TRANSFER, ETC.
Section 6.01. ISSUANCE. Each stockholder shall be entitled to a
certificate or certificates for shares of stock of the corporation owned by him
upon his request therefor. The stock certificates of the corporation shall be
numbered and registered in the stock ledger and transfer books of the
corporation as they are issued. They shall be signed by the Chairman of the
board or a vice president and by the secretary or an assistant secretary or the
treasurer or an assistant treasurer. It shall not be necessary for such
certificates to bear the corporate seal, unless required by law. Any of or all
the signatures upon such certificate may be a facsimile, engraved or printed. In
case any officer, transfer agent or registrar who has signed, or whose facsimile
signature has been placed upon, any share certificate shall have ceased to be
such officer, transfer agent or registrar, before the certificate is issued, it
may be issued with the same effect as if he were such officer, transfer agent or
registrar at the date of its issue.
Section 6.02. TRANSFER. Upon surrender to the corporation or the transfer
agent of the corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books. No transfer shall be made which would be
inconsistent with the provisions of Article 8, Title 6 of the Delaware Uniform
Commercial Code--Investment Securities.
Section 6.03. STOCK CERTIFICATES. Stock certificates of the corporation
shall be in such form as provided by statute and approved by the board of
directors. The stock record books and the blank stock certificates books shall
be kept by the secretary or by any agency designated by the board of directors
for that purpose.
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Section 6.04. LOST, STOLEN, DESTROYED OR MUTILATED CERTIFICATES. The board
of directors may direct a new certificate or certificates to be issued in place
of any certificate or certificates theretofore issued by the corporation alleged
to have been lost, stolen or destroyed, upon the making of an affidavit of that
fact by the person claiming the certificate of stock to be lost, stolen or
destroyed. When authorizing such issue of a new certificate or certificates, the
board of directors may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
certificate or certificates, or his legal representative, to advertise the same
in such manner as it shall require and/or to give the corporation a bond in such
sum as it may direct as indemnity against any claim that may be made against the
corporation with respect to the certificate alleged to have been lost, stolen or
destroyed.
Section 6.05. RECORD HOLDER OF SHARES. The corporation shall be entitled
to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books as the owner
of shares, and shall not be bound to recognize any equitable or other claim to
or interest in such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise provided
by the laws of Delaware.
Section 6.06. DETERMINATION OF STOCKHOLDERS OF RECORD. In order that the
corporation may determine the stockholders entitled to notice of or to vote at
any meeting of stockholders or any adjournment thereof, or entitled to receive
payment of any dividend or other distribution or allotment of any rights, or
entitled to exercise any rights in respect of any change, conversion or exchange
of stock or for the purpose of any other lawful action, the board of directors
may fix, in advance, a record date, which shall not be more than sixty nor less
than ten days before the date of such meeting, nor more than sixty days prior to
any other action.
If no record date is fixed:
(1) The record date for determining stockholders entitled to notice of
or to vote at a meeting of stockholders shall be at the close of business on
the day next preceding the day on which notice is given, or, if notice is
waived, at the close of business on the day next preceding the day on which
the meeting is held.
(2) The record date for determining stockholders for any other purpose
shall be at the close of business on the day on which the board of directors
adopts the resolution relating thereto.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the board of directors may fix a new record date for the
adjournment meeting.
ARTICLE VII
GENERAL PROVISIONS
Section 7.01. DIVIDENDS. Dividends upon the capital stock of the
corporation, subject to the provisions of the certificate of incorporation, if
any, may be declared by the board of directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property, or in
shares of the capital stock of the corporation, subject to the provisions of the
certificate of incorporation. Before payment of any dividend, there may be set
aside out of any funds of the corporation available for dividends such sum or
sums as the directors from time to time, in their absolute discretion, think
proper as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the corporation, or
for such other purpose as the directors shall think conducive to the interest of
the corporation, and the directors may modify or abolish any such reserve in the
manner in which it was created.
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Section 7.02. ANNUAL STATEMENTS. The board of directors shall present at
each annual meeting, and at any special meeting of the stockholders when called
for by vote of the stockholders, a full and clear statement of the business and
condition of the corporation.
Section 7.03. CONTRACTS. Except as otherwise provided in these by-laws,
the board of directors may authorize any officer or officers including the
chairman and vice chairman of the board of directors, or any agent or agents, to
enter into any contract or to execute or deliver any instrument on behalf of the
corporation and such authority may be general or confined to specific instances.
Section 7.04. CHECKS. All checks, notes, bills of exchange or other orders
in writing shall be signed by such person or persons as the board of directors
may from time to time designate.
Section 7.05. CORPORATE SEAL. The corporate seal shall have inscribed
thereon the name of the corporation, the year of its organization and the words
"Corporate Seal, Delaware." The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
Section 7.06. DEPOSITS. All funds of the corporation shall be deposited
from time to time to the credit of the corporation in such banks, trust
companies, or other depositories as the board of directors may approve or
designate, and all such funds shall be withdrawn only upon checks signed by such
one or more officers or employees as the board of directors shall from time to
time determine.
Section 7.07. CORPORATE RECORDS. Every stockholder shall, upon written
demand under oath stating the purpose thereof, have a right to examine, in
person or by agent or attorney, during the usual hours for business, for any
proper purpose, the stock ledger, books or records of account, and records of
the proceedings of the stockholders and directors, and make copies or extracts
therefrom. A proper purpose shall mean a purpose reasonably related to such
person's interest as a stockholder. In every instance where an attorney or other
agent shall be the person who seeks the right to inspection, the demand under
oath shall be accompanied by a power of attorney or such other writing which
authorizes the attorney or other agent to so act on behalf of the stockholder.
The demand under oath shall be directed to the corporation at its registered
office in Delaware or at its principal place of business. Where the stockholder
seeks to inspect the books and records of the corporation, other than its ledger
or list of stockholders, the stockholder shall first establish (1) compliance
with the provisions of this section respecting the form and manner of making
demand for inspection of such document; and (2) that the inspection sought is
for a proper purpose. Where the stockholder seeks to inspect the stock ledger or
list of stockholders of the corporation and has complied with the provisions of
this section respecting the form and manner of making demand for inspection of
such documents, the burden of proof shall be upon the corporation to establish
that the inspection sought is for an improper purpose.
Section 7.08. AMENDMENT OF BY-LAWS. These By-laws may be amended, added
to, rescinded or repealed at any meeting of the board of directors or of the
stockholders, PROVIDED that notice of the proposed change was given in the
notice of the meeting and, in the case of the board of directors, in a notice
given no less than twenty-four hours prior to the meeting; PROVIDED, HOWEVER,
that in the case of amendments by stockholders, notwithstanding any other
provisions of these By-laws or any provision of law which might otherwise permit
a lesser vote or no vote, but in addition to any affirmative vote of the holders
of any series of Preferred Stock or any other series or class of stock set forth
in the Certificate of Incorporation which is required by law, the Certificate of
Incorporation or these By-laws, the affirmative vote of the holders of shares
representing at least 66 2/3% of the voting power of the then outstanding stock
of the corporation entitled to vote generally in the election of directors,
present or represented by proxy, voting together as a single class, shall be
required to alter, amend or repeal Sections 2.03, 2.06, 2.08, 3.02, 3.03 or this
8.08 of these By-laws.
11
<PAGE>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
INVESTMENT TECHNOLOGY GROUP, INC.
<PAGE>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
INVESTMENT TECHNOLOGY GROUP, INC.(1)
ARTICLE ONE
NAME
The name of the Corporation is:
Investment Technology Group, Inc.
ARTICLE TWO
REGISTERED ADDRESS
The address of its registered office in the State of Delaware is Corporation
Trust Center, 1209 Orange Street, in the City of Wilmington, County of New
Castle. The name of its registered agent at such address is The Corporation
Trust Company.
ARTICLE THREE
PURPOSE
The nature of the business or purposes to be conducted or promoted is to
engage in any lawful act or activity for which corporations may be organized
under the General Corporation Law of the State of Delaware (the "DGCL").
ARTICLE FOUR
CAPITAL STOCK
A. AUTHORIZED STOCK.
The total number of shares of stock which the Corporation shall have
authority to issue is one hundred one million (101,000,000), of which stock one
hundred million (100,000,000) shares of the par value of One Cent ($.01) each,
amounting in the aggregate to One Million Dollars ($1,000,000) shall be Common
Stock and of which one million (1,000,000) shares of the par value of One Cent
($.01) each, amounting in the aggregate to Ten Thousand Dollars ($10,000) shall
be Preferred Stock.
The designations and the powers, preferences and rights, and the
qualifications, limitations or restrictions of the Preferred Stock and Common
Stock are as follows:
B. PREFERRED STOCK.
The Board of Directors is hereby expressly authorized at any time, and from
time to time, to create and provide for the issuance of shares of Preferred
Stock in one or more series (the "Series Preferred Stock") and, by filing a
certificate pursuant to the DGCL (hereinafter referred to as a "Preferred Stock
Designation"), to establish the number of shares to be included in each such
series, and to fix the designations, preferences and relative, participating,
optional or other special rights of the shares of each such series and the
qualifications, limitations or restrictions thereof, as shall be
- ------------------------
(1) Will be part of Certificate of Merger.
1
<PAGE>
stated and expressed in the resolution or resolutions providing for the issue
thereof adopted by the Board of Directors, including, but not limited to, the
following:
(i) the designation of and the number of shares constituting such series,
which number the Board of Director may thereafter (except as otherwise
provided in the Preferred Stock Designation) increase or decrease (but
not below the number of shares of such series then outstanding);
(ii) the dividend rate for the payment of dividends on such series, if any,
the conditions and dates upon which such dividends shall be payable,
the preference or relation which such dividends, if any, shall bear to
the dividends payable on any other class or classes of or any other
series of capital stock, the conditions and dates upon which such
dividends, if any, shall be payable, and whether such dividends, if
any, shall be cumulative or non-cumulative;
(iii) whether the shares of such series shall be subject to redemption by the
Corporation, and, if made subject to such redemption, the times, prices
and other terms and conditions of such redemption;
(iv) the terms and amount of any sinking fund provided for the purchase or
redemption of the shares of such series;
(v) whether or not the shares of such series shall be convertible into or
exchangeable for shares of any other class or classes of, any other
series of any class or classes of capital stock of, or any other
security of, the Corporation or any other corporation, and, if provision
be made for any such conversion or exchange, the times, prices, rates,
adjustments and any other terms and conditions of such conversion or
exchange;
(vi) the extent, if any, to which the holders of the shares of such series
shall be entitled to vote as a class or otherwise with respect to the
election of directors or otherwise;
(vii) the restrictions, if any, on the issue or reissue of shares of the same
series or of any other class or series;
(viii) the amounts payable on and the preferences, if any, of the shares of
such series in the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation; and
(ix) any other relative rights, preferences and limitations of that series.
C. COMMON STOCK.
Each holder of Common Stock shall have one vote in respect of each share of
Common Stock held by such holder of record on the books of the Corporation for
the election of directors and on all other matters on which stockholders of the
Corporation are entitled to vote. Subject to any rights that may be conferred
upon any holders of Preferred Stock or any other series or class of stock as set
forth in this Certificate of Incorporation (excluding Common Stock), upon
dissolution, the holders of Common Stock then outstanding shall be entitled to
receive the net assets of the Corporation. Such net assets shall be divided
among and paid to the holders of Common Stock, on a pro rata basis, according to
the number of shares of Common Stock held by them. Subject to any rights that
may be conferred upon any holders of Preferred Stock or any other series or
class of stock as set forth in this Certificate of Incorporation (excluding
Common Stock), the holders of shares of Common Stock shall be entitled to
receive, as, when and if declared by the Board of Directors, out of the assets
of the Corporation which are by law available therefor, dividends payable either
in cash, in stock or otherwise.
2
<PAGE>
ARTICLE FIVE
BOARD OF DIRECTORS AND STOCKHOLDER ACTION
A. Subject to the rights of any holders of any class or series of capital stock
as specified in the resolution providing for such class or series of capital
stock, the business and affairs of the Corporation shall be managed by or
under the direction of the Board of Directors. The exact number of directors
shall be fixed, and may be increased or decreased from time to time in such
manner as may be prescribed, by the By-laws of the Corporation.
B. The election of directors need not be by written ballot unless the By-Laws
shall so provide.
C. Directors shall be elected and hold such term of office as provided in the
By-laws of the Corporation
D. Subject to the rights of holders of any class or series of capital stock as
specified in the resolution providing for such class or series of capital
stock, no person shall be eligible for election as a director of the
Corporation unless nominated in accordance with the procedures set forth in
the By-laws of the Corporation.
E. Except as may be provided in a resolution or resolutions providing for any
class or series of Preferred Stock pursuant to Article Four hereof, any
action required or permitted to be taken by the stockholders of the
Corporation must be effected at a duly called annual or special meeting of
such holders and may not be effected by any written consent in lieu of a
meeting by such holders.
F. Special meetings of the stockholders of the Corporation may be called only
by the secretary of the Corporation at the request of (i) a majority of the
total number of directors which the Corporation at the time would have if
there were no vacancies or (ii) any person authorized by the Board of
Directors (through a vote of a majority of the total number of directors
which the Corporation at the time would have if there were no vacancies).
Notwithstanding the foregoing, stockholders shall have no right to call a
special meeting of stockholders.
G. Notwithstanding anything contained in this Certificate of Incorporation to
the contrary, the affirmative vote of the holders of shares representing at
least 66 2/3% of the voting power of the then outstanding stock of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class, shall be required to amend, repeal or adopt any
provisions inconsistent with this Article FIVE.
ARTICLE SIX
PERSONAL LIABILITY OF DIRECTORS
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under section 174 of the DGCL, or (iv) for any
transaction from which the director derived an improper personal benefit. If the
DGCL is hereinafter amended to permit a corporation to further eliminate or
limit the liability of a director of a corporation, then the liability of a
director of the Corporation, in addition to the circumstances in which a
director is not personally liable as set forth in the preceding sentence, shall
be further eliminated or limited to the fullest extent permitted by the DGCL as
so amended. Any amendment, repeal, or modification of this Article Six shall not
adversely affect any right or protection of a director of the Corporation for
any act or omission occurring prior to the date when such amendment, repeal or
modification became effective.
3
<PAGE>
ARTICLE SEVEN
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Corporation shall, to the fullest extent permitted by section 145 of the
DGCL, as the same may be amended and supplemented, indemnify each director and
officer of the Corporation from and against any and all of the expenses,
liabilities or other matters referred to in or covered by said section and the
indemnification provided for herein shall not be deemed exclusive of any other
rights to which those indemnified may be entitled under any By-Law, agreement,
vote of stockholders, vote of disinterested directors or otherwise, and shall
continue as to a person who has ceased to be a director or officer and shall
inure to the benefit of the heirs, executors and administrators of such persons
and the Corporation may purchase and maintain insurance on behalf of any
director or officer to the extent permitted by section 145 of the DGCL.
ARTICLE EIGHT
AMENDMENTS
The Corporation reserves the right to amend, alter, change or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by statute, and all rights conferred upon stockholders are
granted subject to this reservation. The Board of Directors shall have the power
to adopt, change and repeal the By-Laws of the Corporation.
4
<PAGE>
APPENDIX B
DISTRIBUTION AGREEMENT
BETWEEN
JEFFERIES GROUP, INC.
AND
JEF HOLDING COMPANY, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C>
ARTICLE I--DEFINITIONS.................................................................................... B-2
Section 1.01. Definitions............................................................................. B-2
ARTICLE II--THE DISTRIBUTION.............................................................................. B-5
Section 2.01. Cooperation Prior to the Distribution................................................... B-5
Section 2.02. JEFG Board Action; Conditions Precedent to the Distribution............................. B-6
Section 2.03. The Distribution........................................................................ B-6
ARTICLE III--CONVEYANCE OF ASSETS, OBLIGATIONS AND RIGHTS; ASSUMPTION OF LIABILITIES; CONDUCT OF HOLDING
PENDING DISTRIBUTION.................................................................................... B-6
Section 3.01. Conveyance of Assets, Obligations and Rights; Assumption and Release of Liabilities..... B-6
Section 3.02. Conduct of Holding and JEFG Pending Distribution........................................ B-8
Section 3.03. Further Assurances and Consents......................................................... B-8
ARTICLE IV--INDEMNIFICATION............................................................................... B-8
Section 4.01. Holding Indemnification of the ITGI Group............................................... B-8
Section 4.02. ITGI Indemnification of the Holding Group............................................... B-8
Section 4.03. Insurance and Third Party Obligations................................................... B-9
ARTICLE V--HOLDING REPRESENTATIONS........................................................................ B-9
Section 5.01. Holding Representations................................................................. B-9
ARTICLE VI--INDEMNIFICATION PROCEDURES; CONTRIBUTION...................................................... B-10
Section 6.01. Notice and Payment of Claims............................................................ B-10
Section 6.02. Notice and Defense of Third-Party Claims................................................ B-10
Section 6.03. Contribution............................................................................ B-11
ARTICLE VII--EMPLOYEE MATTERS............................................................................. B-11
Section 7.01. Benefits Agreement...................................................................... B-11
ARTICLE VIII--TAX MATTERS................................................................................. B-11
ARTICLE IX--ACCOUNTING MATTERS............................................................................ B-12
Section 9.01. Accounting Treatment of Assets Transferred.............................................. B-12
ARTICLE X--INFORMATION.................................................................................... B-12
Section 10.01. Provision of Corporate Records......................................................... B-12
Section 10.02. Access to Information.................................................................. B-12
Section 10.03. Litigation Cooperation................................................................. B-12
Section 10.04. Reimbursement.......................................................................... B-12
Section 10.05. Retention of Records................................................................... B-12
Section 10.06. Confidentiality........................................................................ B-12
ARTICLE XI--INTEREST ON PAYMENTS.......................................................................... B-13
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
PAGE
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<S> <C>
ARTICLE XII--MISCELLANEOUS................................................................................ B-13
Section 12.01. Expenses............................................................................... B-13
Section 12.02. Notices................................................................................ B-13
Section 12.03. Amendment and Waiver................................................................... B-14
Section 12.04. Entire Agreement....................................................................... B-14
Section 12.05. Parties in Interest.................................................................... B-14
Section 12.06. Disputes............................................................................... B-14
Section 12.07. Survival............................................................................... B-15
Section 12.08. Severability........................................................................... B-15
Section 12.09. Governing Law.......................................................................... B-15
Section 12.10. Counterparts........................................................................... B-15
</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");
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<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.
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Section 2.02. JEFG BOARD ACTION; CONDITIONS PRECEDENT TO THE DISTRIBUTION.
JEFG's Board of Directors shall, in its discretion, establish the Record Date
and the Distribution Date and any appropriate procedures in connection with the
Distribution. In no event shall the Distribution occur unless the following
conditions shall have been satisfied:
(a) any necessary regulatory approvals shall have been received;
(b) the Form 10 shall have been declared, or become, effective under the
Exchange Act;
(c) ITGI shall have declared and paid the Special ITGI Cash Dividend to the
holders of ITGI Common Stock, including JEFG;
(d) the JEFG Contribution and the Transfers shall have been completed;
(e) JEFG and the trustees under the indentures governing the JEFG Debt
Obligation shall have executed supplemental indentures in form and substance
satisfactory to JEFG and such trustees and their respective counsel, pursuant to
which Holding shall assume, and JEFG shall be released from obligations
concerning the JEFG Debt Obligation, effective as of the date the Transfers are
completed;
(f) Holding's Board of Directors, as named in the Form 10, shall have been
elected by JEFG, as sole stockholder of Holding, as directors of Holding
effective as of the Distribution Date, and the Holding Certificate and Holding
By-laws shall be in effect;
(g) the Holding Common Stock shall have been approved for listing on the New
York Stock Exchange, subject to official notice of issuance;
(h) The tax ruling obtained from the Internal Revenue Service ("IRS") on
March 11, 1999 concerning the treatment of the Transfers and the Distribution
and related transactions under Sections 332, 351, 355 and 368(a)(1)(D) of the
Code shall not have been, prior to the Effective Time, withdrawn by the IRS or
modified by the IRS in any material adverse respect;
(i) all conditions to the Pre-Closing (as defined in the Merger Agreement)
of the Merger shall have been satisfied or waived by JEFG or ITGI, as
appropriate, and the Pre-Closing shall have been consummated; and
(j) JEFG shall be reasonably satisfied that, at all relevant times prior to
the Effective Time, JEFG owns at least 80% of the outstanding ITGI Common Stock
and that no capital stock of ITGI (other than ITGI Common Stock) shall have been
issued or outstanding.
Section 2.03. THE DISTRIBUTION. On or before the Distribution Date, subject
to satisfaction or waiver of the conditions set forth in this Agreement, JEFG
shall deliver to the Distribution Agent a certificate or certificates
representing all of the then outstanding shares of Holding Common Stock held by
JEFG, endorsed in blank, and shall instruct the Distribution Agent to distribute
to each holder of record of JEFG Common Stock as of the close of business on the
Record Date a certificate or certificates representing one share of Holding
Common Stock for each share of JEFG Common Stock held of record as of the close
of business on the Record Date. Holding agrees to provide all certificates for
shares of Holding Common Stock that the Distribution Agent shall require in
order to effect the Distribution.
ARTICLE III
CONVEYANCE OF ASSETS, OBLIGATIONS AND RIGHTS;
ASSUMPTION OF LIABILITIES;
CONDUCT OF HOLDING PENDING DISTRIBUTION
Section 3.01. CONVEYANCE OF ASSETS, OBLIGATIONS AND RIGHTS; ASSUMPTION AND
RELEASE OF LIABILITIES.
(a) Prior to the completion of the Transfers, JEFG shall make the JEFG
Contribution.
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(b) Prior to the Distribution Date and effective with the Transfers (i) all
Holding Assets are intended to be and shall become Assets of the Holding Group
and (ii) all Holding Liabilities are intended to be and shall become exclusively
the Liabilities of the Holding Group.
(c) Prior to, or in connection with, the completion of the Transfers, JEFG
shall transfer or cause to be transferred to Holding (or JEFCO, as appropriate),
and JEFG shall disclaim (as appropriate) all right, title and interest of JEFG
in and to any and all of the Holding Assets and the Holding Business. Effective
as of the Transfers, all of JEFG's rights and obligations under the Intercompany
Agreements shall be transferred and assigned, without limitation or alteration
of the rights or responsibilities hereunder or thereunder, to Holding.
(d) Before the Distribution Date, effective as of the date of the Transfers,
Holding shall execute supplemental indentures in form and substance satisfactory
to JEFG, the trustee under the Indentures governing the JEFG Debt Obligation and
their respective counsel pursuant to which, among other things, Holding shall
assume, and JEFG shall be released from, the JEFG Debt Obligation, all of which
shall be effective prior to the Distribution Date.
(e) Set forth on Schedule 3.01(e) hereto is each Holding Asset and each
Holding Liability that requires a third-party consent to transfer such Holding
Asset or Holding Liability from JEFG to Holding (or to JEFCO, as appropriate).
If any such Holding Asset or Holding Liability may not be transferred by reason
of the requirement to obtain the consent of any third party and such consent has
not been obtained by the Distribution Date, then such Holding Asset or Holding
Liability shall not be transferred until such consent has been obtained. In the
event that any conveyance of an Asset constituting a Holding Asset or a
Liability constituting a Holding Liability is not effected on or before the
Distribution Date, the obligation to transfer such Asset or such Liability as
the case may be, shall continue past the Distribution Date and shall be
accomplished as soon thereafter as practicable. JEFG and its successors
(including ITGI) will cooperate with Holding to provide, or cause the owner of
such Holding Asset to use all reasonable efforts to provide, to the appropriate
member of the Holding Group all the rights and benefits under such Holding
Asset, or cause such owner to enforce such Holding Asset for the benefit of such
member. Such parties shall otherwise cooperate and use all reasonable efforts to
provide the economic and operational equivalent of an assignment or transfer of
the Holding Asset or Holding Liability, as the case may be. Holding shall duly
pay, perform or discharge, or cause the appropriate member of the Holding Group
to duly pay, perform or discharge, from and after the date of the Transfers,
each Holding Liability, including without limitation any Holding Liability
referred to in the second sentence of this paragraph; provided, the foregoing
provisions of this paragraph (e) do not affect Holding's obligation to assume
all of the Holding Liabilities at the date of the Transfers and therefore duly
pay, perform or discharge all of the Holding Liabilities from and after such
time.
(f) From and after the Distribution Date, each party shall promptly transfer
or cause the members of its Group promptly to transfer to the other party or the
appropriate member of the other party's Group, from time to time, any property
held by any such party that pursuant to this Agreement is or is intended to be
an Asset of the other party or a member of its Group. Without limiting the
foregoing, funds received by a member of one Group upon the payment of accounts
receivable that pursuant to this Agreement is or is intended to belong to a
member of the other Group shall be transferred to the other Group by wire
transfer not more than five business days after receipt of such payment.
(g) Holding agrees that it will not, without the prior written consent of
ITGI, take any action that attempts or purports to amend or modify any
agreement, including any real property lease or sublease, to which JEFG is a
party at or prior to the Transfers and from which (i) JEFG is not fully and
unconditionally released at or prior to the Transfers and (ii) the Surviving
Corporation (as the successor to JEFG pursuant to the Merger) is not fully and
unconditionally released after the Merger.
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(h) Holding agrees to obtain and deliver to ITGI, for the benefit of ITGI
one or more letters of credit in an aggregate undrawn face amount not less than
the amount by which the aggregate unmitigated Residual Liabilities exceeds the
Applicable Amount, consistent with the definitions and terms provided for under
Section 7(n) of the Merger Agreement. Such letters of credit shall be issued by
one or more nationally recognized financial institutions reasonably satisfactory
to ITGI, be in form and substance reasonably satisfactory to ITGI and expire not
earlier than 135 days after the date on which the related unmitigated Residual
Liabilities terminate.
Section 3.02. CONDUCT OF HOLDING AND JEFG PENDING DISTRIBUTION.
(a) Prior to the Distribution Date, neither Holding nor JEFG shall, without
the prior consent in writing of the other, make any public announcement
concerning the Distribution and each party shall use its respective best efforts
not to take any action which may prejudice or delay the consummation of the
Distribution.
(b) Prior to the Distribution Date, the business of Holding shall be
operated for the sole benefit of JEFG as its sole stockholder.
Section 3.03. FURTHER ASSURANCES AND CONSENTS. In addition to the actions
specifically provided for elsewhere in this Agreement, each of the parties
hereto will use its commercially reasonable efforts to (i) execute and deliver
such further instruments and documents and take such other actions as any other
party may reasonably request in order to effectuate the purposes of this
Agreement and to carry out the terms hereof and (ii) take, or cause to be taken,
all actions, and to do, or cause to be done, all things, reasonably necessary,
proper or advisable under applicable laws, regulations and agreements or
otherwise to consummate and make effective the transactions contemplated by this
Agreement, including, without limitation, using its reasonable efforts to obtain
any consents and approvals and to make any filings and applications necessary or
desirable in order to consummate the transactions contemplated by this
Agreement.
ARTICLE IV
INDEMNIFICATION
Section 4.01. HOLDING INDEMNIFICATION OF THE ITGI GROUP. On and after the
Distribution Date, Holding shall indemnify, defend and hold harmless each member
of the ITGI Group, and each of their respective directors, officers, employees
and agents (the "ITGI Indemnitees") from and against any and all claims, costs,
damages, losses, liabilities and expenses (including, without limitation,
reasonable expenses of investigation and reasonable attorney fees and expenses,
but excluding consequential damages of the indemnified party, in connection with
any and all Actions or threatened Actions) (collectively, "Indemnifiable
Losses") incurred or suffered by any of the ITGI Indemnitees and arising out of,
or due to or otherwise in connection with any of the Holding Liabilities or the
failure of Holding or any member of the Holding Group to assume, pay, perform or
otherwise discharge any of the Holding Liabilities.
Section 4.02. ITGI INDEMNIFICATION OF THE HOLDING GROUP. On and after the
Distribution Date, ITGI (as the successor to JEFG following the Merger) shall
indemnify, defend and hold harmless each member of the Holding Group and each of
their respective directors, officers, employees and agents (the "Holding
Indemnitees") from and against any and all Indemnifiable Losses incurred or
suffered by any of the Holding Indemnitees and arising out of, or due to or
otherwise in connection with any of the ITGI Group Liabilities or the failure of
ITGI or any member of the ITGI Group to pay, perform or otherwise discharge any
of the ITGI Group Liabilities.
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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 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,
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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.
(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 fees
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and expenses incurred by the Indemnified Party in defending such Third-Party
Claim) if there are one or more legal defenses available only to the Indemnified
Party that conflict, in one or more significant substantive respects, with those
available to the Indemnifying Party with respect to such Third-Party Claim and
(ii) if at any time after assuming the defense of a Third-Party Claim an
Indemnifying Party shall fail to prosecute or shall withdraw from the defense of
such Third-Party Claim, the Indemnified Party shall be entitled to resume the
defense thereof with counsel selected by such Indemnified Party and the
Indemnifying Party shall be liable for the reasonable fees and expenses of
counsel incurred by the Indemnified Party in such defense. The Indemnifying
Party may settle, compromise or discharge a Third-Party Claim, provided, the
Indemnifying Party shall have obtained the prior written consent of the
Indemnified Party, which consent shall not be unreasonably withheld. If, after
receipt of notice of a Third-Party Claim, the Indemnifying Party does not
undertake to defend such Third-Party Claim within 90 days of such notice, the
Indemnified Party may, but shall have no obligation to, contest any lawsuit or
action with respect to such Third-Party Claim and the Indemnifying Party shall
be bound by the results obtained with respect thereto by the Indemnified Party.
Indemnification shall be made by periodic payments of the amount thereof during
the course of the investigation or defense, as and when bills are received or
Indemnifiable Loss is incurred. The parties agree to render to each other such
assistance as may reasonably be requested in order to ensure the proper and
adequate defense of any Third-Party Claim. The remedies provided in this Article
VI shall be cumulative and shall not preclude assertion by any Indemnified Party
of any other rights or the seeking of any and all other remedies against any
Indemnifying Party.
Section 6.03. CONTRIBUTION. To the extent that any indemnification provided
for in Section 4.01 or 4.02 is unavailable to an Indemnified Party or is
insufficient in respect of any of the Indemnifiable Losses of such Indemnified
Party, then the Indemnifying Party, in lieu of, or in addition to, indemnifying
such Indemnified Party hereunder, shall contribute to the amount paid or payable
by such Indemnified Party as a result of such Indemnifiable Losses (i) in such
proportion as is appropriate to reflect the relative benefits received by such
Indemnifying Party on the one hand and the Indemnified Party on the other hand
from the transaction or other matter which resulted in the Indemnifiable Losses
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) but also the relative fault of the
Indemnifying Party on the one hand and of the Indemnified Party on the other
hand in connection with the action, inaction, statements or omissions that
resulted from such Indemnifiable Losses as well as any other relevant equitable
considerations.
ARTICLE VII
EMPLOYEE MATTERS
Section 7.01. BENEFITS AGREEMENT. All matters relating to or arising out of
any employee benefit, compensation or welfare arrangement in respect of any
present and former employee of the ITGI Group or the Holding Group shall be
governed by the Benefits Agreement, except as may be expressly stated herein. In
the event of any inconsistency between the Benefits Agreement and this
Agreement, the Benefits Agreement shall govern.
ARTICLE VIII
TAX MATTERS
All matters relating to Taxes shall be governed exclusively by the Tax
Agreement, except as may be expressly stated herein. In the event of any
inconsistency between the Tax Agreement and this Agreement, the Tax Agreement
shall govern.
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ARTICLE IX
ACCOUNTING MATTERS
Section 9.01. ACCOUNTING TREATMENT OF ASSETS TRANSFERRED. All transfers of
Assets of JEFG to JEFCO or Holding pursuant to this Agreement shall constitute
contributions by JEFG to the capital of JEFCO or Holding, as appropriate.
ARTICLE X
INFORMATION
Section 10.01. PROVISION OF CORPORATE RECORDS. ITGI (as successor to JEFG
pursuant to the Merger) and Holding shall arrange as soon as practicable
following the Effective Time for the provision to the other of copies of any
requested corporate documents (e.g. minute books, stock registers, stock
certificates, documents of title, contracts, etc.) in its possession relating to
the other or its business and affairs; provided, however, this Section 10.01
shall not create any obligation to retain documents beyond that which is
required pursuant to such entity's records retention policies. JEFG and Holding
agree that Holding shall retain control and custody of original copies of all
corporate documents of JEFG relating to matters and events on or prior to the
Effective Time.
Section 10.02. ACCESS TO INFORMATION. From and after the Effective Time,
ITGI (as successor to JEFG pursuant to the Merger) and Holding shall each afford
the other and its accountants, counsel and other designated representatives
reasonable access (including using reasonable efforts to give access to persons
or firms possessing information) and duplicating rights during normal business
hours to all records, books, contacts, instruments, computer data and other data
and information in its possession relating to the business and affairs of the
other, insofar as such access is reasonably required by the other including,
without limitation, for audit, accounting and litigation purposes.
Section 10.03. LITIGATION COOPERATION. ITGI (as successor to JEFG pursuant
to the Merger) and Holding shall each use reasonable efforts to make available
to the other, upon written request, its officers, directors, employees and
agents as witnesses to the extent that such persons may reasonably be required
in connection with any legal, administrative or other proceedings arising out of
the business of the other prior to the Effective Time in which the requesting
party may from time to time be involved.
Section 10.04. REIMBURSEMENT. ITGI (as successor to JEFG pursuant to the
Merger) and Holding, each providing copies of documents, information or
witnesses under Sections 10.01, 10.02 or 10.03 to the other, shall be entitled
to receive from the recipient, upon the presentation of invoices therefor,
payment for all reasonable out-of-pocket costs and expenses as may be reasonably
incurred in providing such information or witnesses.
Section 10.05. RETENTION OF RECORDS. Except as otherwise required by law or
agreed to in writing, each party shall, and shall cause the members of its Group
to, retain all information relating to the other's business in accordance with
the past practice of such party. Notwithstanding the foregoing, except as
otherwise provided in the Tax Agreement, either party may destroy or otherwise
dispose of any information at any time following the first anniversary of the
Merger in accordance with the corporate record retention policy maintained by
such party with respect to its own records.
Section 10.06. CONFIDENTIALITY. Each party shall, and shall cause each
member of its Group to, hold and cause its directors, officers, employees,
agents, consultants and advisors to hold, in strict confidence all information
concerning the other party (except to the extent that such information can be
shown to have been (a) in the public domain through no fault of such party or
(b) later lawfully acquired after the Distribution on a non-confidential basis
from other sources not subject to a confidentiality obligation by the party to
which it was furnished), and neither party shall release or disclose such
information to any other person, except its auditors, attorneys, financial
advisors, bankers and other consultants and
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advisors who shall be advised of and agree in writing to comply with the
provisions of this Section 10.06. In the event that a party (the "RECEIVING
PERSON") is requested pursuant to, or required by, applicable law, regulation,
rule or by legal process to disclose any information regarding the other party
(the "DISCLOSING PERSON"), the Receiving Person agrees that it will provide the
Disclosing Person with prompt notice of such request or requirement in order to
enable the Disclosing Person to seek an appropriate protective order or other
remedy, to consult with the Receiving Person with respect to the Disclosing
Person taking steps to resist or narrow the scope of such request or
requirement, or to waive compliance, in whole or in part, with the terms of this
Section 10.06. In any such event, the Receiving Person will disclose only that
portion of any information regarding the Disclosing Party which the Receiving
Person is advised by counsel is legally required and will use its reasonable
best efforts to ensure that all such information that is so disclosed will be
accorded confidential treatment.
ARTICLE XI
INTEREST ON PAYMENTS
Except as otherwise expressly provided in this Agreement, all payments by
one party to the other under this Agreement, any Intercompany Agreement or any
Ancillary Agreement shall be paid, by wire transfer of immediately available
funds to an account in the United States designated by the recipient, within 30
days after receipt of an invoice or other written request for payment setting
forth the specific amount due and a description of the basis therefor in
reasonable detail. Any amount remaining unpaid beyond its due date, including
disputed amounts that are ultimately determined to be payable, shall bear
interest at a floating rate of interest equal to 2.5% over the higher of the
Federal funds rate or the London Interbank Offered Rate.
ARTICLE XII
MISCELLANEOUS
Section 12.01. EXPENSES. The obligations of JEFG and ITGI under Section 7(d)
("Expenses") of the Merger Agreement shall survive (i) any termination of the
Merger Agreement and (ii) the Effective Time of the Merger, with (x) Holding
succeeding to the obligations of, and being credited for any Expense payments
made prior to the Effective Time by, JEFG thereunder and (y) ITGI (as the
successor to JEFG following the Merger) succeeding to the obligations of, and
being credited for any Expense payments made by, ITGI thereunder.
Section 12.02. NOTICES. All notices and communications under this Agreement
after the Distribution Date shall be in writing and any communication or
delivery hereunder shall be deemed to have been duly given when received
addressed as follows:
If to JEFG or any of its successors, to:
Investment Technology Group, Inc.
380 Madison Avenue, 4th Floor
New York, New York 10017
Attention: Chief Financial Officer
With a copy to:
Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005
Attention: Immanuel Kohn, Esq.
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If to Holding, to:
Jefferies Group, Inc.
JEF Holding Company, Inc.
11100 Santa Monica Boulevard, 11th Floor
Los Angeles, California 90025
Attention: Chief Financial Officer
With a copy to:
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103
Attention: Brian J. Lynch, Esq.
Such notices shall be deemed received (i) as of the date of delivery by hand
delivery, (ii) one business day after such notice is given to a national
overnight delivery service or (iii) five business days after placed in the
United States mail, provided such mail is sent by certified mail with return
receipt requested. Either party may, by written notice so delivered to the other
party, change the address to which delivery of any notice shall thereafter be
made.
Section 12.03. AMENDMENT AND WAIVER. This Agreement may not be altered or
amended, nor may rights hereunder be waived, except by an instrument in writing
executed by the party or parties to be charged with such amendment or waiver. No
waiver of any terms, provision or condition of or failure to exercise or delay
in exercising any rights or remedies under this Agreement, in any one or more
instances, shall be deemed to be, or construed as, a further or continuing
waiver of any such term, provision, condition, right or remedy or as a waiver of
any other term, provision or condition of this Agreement.
Section 12.04. ENTIRE AGREEMENT. This Agreement, together with the Merger
Agreement and the Ancillary Agreements, constitutes the entire understanding of
the parties hereto with respect to the subject matter hereof, superseding all
negotiations, prior discussions and prior agreements and understandings relating
to such subject matter. To the extent that the provisions of this Agreement are
inconsistent with the provisions of any Ancillary Agreement, the provisions of
such Ancillary Agreement shall prevail.
Section 12.05. PARTIES IN INTEREST. Neither of the parties hereto may assign
its rights or delegate any of its duties under this Agreement without the prior
written consent of each other party. This Agreement shall be binding upon, and
shall inure to the benefit of, the parties hereto and their respective
successors and permitted assigns. Nothing contained in this Agreement, express
or implied, is intended to confer any benefits, rights or remedies under
Articles IV, V and VI hereof upon any person or entity other than members of the
ITGI Group and the Holding Group and the ITGI Indemnitees and the Holding
Indemnitees and their respective successors and permitted assigns.
Section 12.06. DISPUTES.
(a) Resolution of any and all disputes arising from or in connection with
this Agreement, whether based on contract, tort, statute or otherwise,
including, but not limited to, disputes in connection with claims by third
parties (collectively, "DISPUTES"), shall be subject to the provisions of this
Section 12.06; provided, however, that nothing contained herein shall preclude
either party from seeking or obtaining (i) injunctive relief or (ii) equitable
or other judicial relief to enforce the provisions hereof or to preserve the
status quo pending resolution of Disputes hereunder.
(b) Either party may give the other party written notice of any Dispute not
resolved in the normal course of business. The parties shall thereupon attempt
in good faith to resolve any Dispute promptly by negotiation between executives
who have authority to settle the controversy and who are at a higher
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level of management than the persons with direct responsibility for
administration of this Agreement. Within 20 days after delivery of the notice,
the receiving party shall submit to the other a written response. The notice and
the response shall include a statement of such party's position and a summary of
arguments supporting that position and the name and title of the executive who
will represent that party and of any other person who will accompany such
executive. Within 45 days after delivery of the first notice, the executives of
both parties shall meet at a mutually acceptable time and place, and thereafter
as often as they reasonably deem necessary, to attempt to resolve the Dispute.
All reasonable requests for information made by one party to the other will be
honored.
(c) If the Dispute has not been resolved by negotiation within 60 days of
the first party's notice, or if the parties failed to meet within 45 days, the
parties shall endeavor to settle the Dispute by mediation under the then current
Commercial Mediation Rules of the American Arbitration Association.
(d) If the Dispute has not been resolved within 180 days after delivery of
the first notice under Section 12.06(b), either party may commence any
litigation or other procedure allowed by law.
Section 12.07. SURVIVAL. The rights and obligations under this Agreement
shall survive the Distribution and Merger and any sale or other transfer by any
member of Holding Group and/or the ITGI Group or any assignment or sale by them
of any Assets or Liabilities.
Section 12.08. SEVERABILITY. The provisions of this Agreement are severable
and should any provision hereof be void, voidable or unenforceable under any
applicable law, such provision shall not affect or invalidate any other
provision of this Agreement, which shall continue to govern the relative rights
and duties of the parties as though such void, voidable or unenforceable
provision were not a part hereof.
Section 12.09. GOVERNING LAW. This Agreement shall be construed in
accordance with, and governed by, the laws of the State of New York, without
regard to the conflicts of law rules of such state.
Section 12.10. COUNTERPARTS. This Agreement may be executed in one or more
counterparts each of which shall be deemed an original instrument, but all of
which together shall constitute but one and the same Agreement.
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<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>
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<PAGE>
APPENDIX C
BENEFITS AGREEMENT
BETWEEN
JEFFERIES GROUP, INC.
AND
JEF HOLDING COMPANY, INC.
<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");
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NOW, THEREFORE, in consideration of the foregoing premises and the mutual
agreements and covenants contained in this Agreement, the parties hereby agree
as follows:
ARTICLE I
DEFINITIONS
Section 1.01. DEFINITIONS. Capitalized terms used herein without
definition have the meanings given to them in the Distribution Agreement. As
used herein, the following terms have the following meanings:
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"HOLDING EMPLOYEE" means (i) any person who was an employee immediately
prior to the Effective Time of any member of the JEFG Group (other than any
member of the ITGI Group), including any such employee who is absent from work
at the Effective Time on account of sick leave, short-term or long-term
disability or leave of absence, but excluding any such employee designated by
Holding and ITGI as remaining an employee of a member of the JEFG Group
following the Effective Time; (ii) any employee of any member of the Holding
Group (whether before or after the Effective Time); and (iii) any former
employee of any member of the JEFG Group (other than any member of the ITGI
Group).
"HOLDING GROUP" means Holding and its subsidiaries.
"ITGI GROUP" means ITGI and its subsidiaries.
"JEFG EMPLOYEE" means (i) any employee of any member of the ITGI Group,
including any such employee who is absent from work on account of sick leave,
short-term or long-term disability or leave of absence; (ii) any person who was
an employee immediately prior to the Effective Time of any other member of the
JEFG Group and who is designated by Holding and ITGI as remaining an employee of
a member of the JEFG Group following the Effective Time; and (iii) any former
employee of any member of the ITGI Group.
"JEFG GROUP" means JEFG and its subsidiaries, excluding any member of the
Holding Group.
ARTICLE II
EMPLOYEES AND ALLOCATION OF LIABILITIES
Section 2.01. ALLOCATION OF EMPLOYEE LIABILITIES.
(a) As of the Effective Time, Holding shall assume, retain and be liable for
all wages, salaries, welfare, pension, incentive compensation and other
employee-related liabilities and obligations ("EMPLOYEE LIABILITIES") with
respect to Holding Employees, except as specifically provided otherwise in this
Agreement. JEFG shall assume, retain and be liable for Employee Liabilities with
respect to JEFG Employees, except as specifically provided otherwise in this
Agreement.
Section 2.02. OFFER OF EMPLOYMENT; BENEFIT PLAN COVERAGE.
(a) Holding shall offer all Holding Employees (other than those described in
clause (iii) of the definition thereof) employment with the Holding Group as of
the Effective Time. As of the Effective Time, all such Holding Employees shall
cease to be employees of the JEFG Group.
(b) Holding Employees shall not continue to be participants in benefit plans
maintained by the JEFG Group on or after the Effective Time and, instead, shall
be eligible to participate in applicable Holding plans, as determined by
Holding, as of the Effective Time. Holding shall treat service of each Holding
Employee with the JEFG Group before the Effective Time as if such service had
been with
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Holding for purposes of determining eligibility to participate, eligibility for
benefits, benefit forms and vesting under plans maintained by Holding.
Section 2.03. ADMINISTRATION. Holding and JEFG shall each make its
appropriate employees and data regarding employee benefit coverage available to
the other at such reasonable times as may be necessary for the proper
administration by the other of any and all matters relating to employee benefits
and worker's compensation claims affecting its employees. Prior to the Effective
Time and for any period of time during which Holding is administering any
employee benefit plans for the benefit of JEFG Employees, ITGI shall continue to
pay to Holding such amounts for administrative services as it was paying for
such purpose as of the date of execution of this Agreement.
ARTICLE III
PROFIT SHARING, EMPLOYEE STOCK OWNERSHIP
AND PENSION PLANS
Section 3.01. PROFIT SHARING PLAN.
(a) As of the Effective Time, the Jefferies Group, Inc. Employees' Profit
Sharing Plan (the "JEFG PSP") shall be transferred to and maintained by, and all
liability relating thereto shall be assumed by, Holding. Prior to the Effective
Time, JEFG will amend the JEFG PSP to fully vest the accounts of all
participants who are active employees on December 31, 1998 as of that date and
to provide for the cessation of further benefit accruals in the plan by JEFG
Employees as of December 31, 1998. JEFG shall reimburse Holding for any
contribution made subsequent to the end of the plan year of the JEFG PSP ending
November 30, 1998 to the extent that such contribution is allocated to JEFG
Employees, including any such contribution allocated to JEFG Employees for the
month of December of 1998. Such reimbursement by JEFG shall be made to Holding
no later than 30 days following the date on which Holding makes the contribution
to the JEFG PSP for the year ending November 30, 1998. Contributions to the JEFG
PSP for the plan year ending November 30, 1998 shall be based on calendar year
1998 combined profits of Holdings and ITGI.
(b) As soon as practical following the date the final contribution for the
plan year ending November 30, 1998 is made to the JEFG PSP, and except as
provided below, assets of the JEFG PSP equal to the aggregate account balances
of the JEFG Employees under the JEFG PSP (including contributions accrued
through December 31, 1998) shall be transferred to, at ITGI's election, (x) a
defined contribution plan and trust (the "ITG PSP") maintained by a member of
the JEFG Group intended to be qualified under Sections 401 and 501 of the Code
and providing for salary reduction contributions pursuant to Section 401(k) of
the Code or (y) the ITGI ESOP (as defined below). The transfer to the ITGI PSP
shall be made in cash or notes evidencing plan loans to JEFG Employees and the
transfer to the ITGI ESOP shall be made in JEFG common stock or Holdings common
stock. Any outstanding balances of plan loans to JEFG Employees shall be
transferred with the underlying accounts. The account balances of the JEFG
Employees shall be valued as of the date immediately preceding the date on which
the transfer is made, which value shall include the earnings, gains and losses,
appreciation and depreciation of the investment funds in which the accounts are
invested through the date immediately preceding the date on which the transfer
is made. Notwithstanding any provision of this Agreement to the contrary,
Holding and the JEFG PSP shall remain responsible for providing any unpaid
benefits accrued under the JEFG PSP for former JEFG Employees who have
outstanding plan loans from the JEFG PSP as of the date of transfer of the
account balances, and neither JEFG nor ITGI shall be responsible for any
administrative expenses relating thereto.
(c) Pending the transfer of assets to the ITG PSP, Holding will administer
the JEFG PSP in accordance with the terms of the plan, ERISA and the Code, and
will make distributions to JEFG Employees on the basis of their employment
status with the JEFG Group. In addition, pending the transfer of assets to the
ITG PSP, JEFG Employees shall have the ability to direct the investment of
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their accounts under the JEFG PSP in the same manner as they had immediately
prior to the Effective Time. Loans from the JEFG PSP to JEFG Employees which are
outstanding during the period from January 1, 1999 through the date of transfer
of assets to the ITG PSP shall be serviced by having ITGI make applicable
payroll deductions which shall be forwarded to Holding, as plan administrator,
for payment to the JEFG PSP. As soon as practicable after the date hereof,
Holding will provide to ITGI a list of such plan loans to JEFG Employees
outstanding as of December 15, 1998, including the outstanding loan balances as
of December 31, 1998 and a list of the remaining scheduled loan repayments for
each such JEFG Employee. Holding and ITGI shall jointly administer the loan
provisions of the JEFG PSP as applied to the JEFG Employees for the period from
January 1, 1999 through the date of transfer of assets to the ITG PSP.
Section 3.02. EMPLOYEE STOCK OWNERSHIP PLAN.
(a) As of the Effective Time, the Jefferies Group, Inc. Employee Stock
Ownership Plan (the "JEFG ESOP") shall be transferred to and maintained by, and
all liability relating thereto shall be assumed by, Holding. Prior to the
Effective Time, JEFG will amend the JEFG ESOP to provide that all participants
who are active employees on December 31, 1998 shall be fully vested in their
accounts as of the Effective Time. Participation in the JEFG ESOP by JEFG
Employees shall continue until the Effective Time.
(b) Following the date of consummation of the Transactions, the parties
hereto currently expect that the Holding Common Stock held by the JEFG ESOP for
the account of JEFG Employees will be exchanged to the extent possible for JEFG
Common Stock held for the account of Holding Employees and that the exchange
will occur within approximately ninety days after the Effective Time. Unless the
parties hereto mutually agree otherwise, the price at which any such exchange
shall occur shall be based upon the average respective closing prices of JEFG
Common Stock and Holding Common Stock for the ten trading days ending on the
date before the day on which the exchange occurs. Any remaining JEFG Common
Stock held in the accounts of Holding Employees shall be sold at such time or
times as is deemed prudent under ERISA and the cash proceeds received from such
sale shall be credited to such accounts.
(c) As soon as practical following the Effective Time, an employee stock
ownership plan and trust (the "ITG ESOP") shall be established by a member of
the JEFG Group intended to be qualified under Sections 401 and 501 of the Code
and assets of the JEFG ESOP equal to the aggregate account balances of the JEFG
Employees under the JEFG ESOP shall be transferred to the ITG ESOP. The transfer
shall be made in cash, Holding Common Stock and JEFG Common Stock according to
the investment of each JEFG Employee's account as of the date on which the
transfer is made. The account balances of the JEFG Employees shall be valued as
of the date on which the transfer is made, which value shall include the
earnings, gains and losses, appreciation and depreciation of the investments in
which the accounts are invested through the date on which the transfer is made.
Pending the transfer of the assets to the ITGI ESOP, Holding will administer the
JEFG ESOP in accordance with the terms of the plan, ERISA and the Code, and will
make distributions to JEFG Employees at such time as their employment might
terminate with the JEFG Group.
Section 3.03. PENSION PLAN. As of the Effective Time, the Jefferies Group,
Inc. Employees Pension Plan (the "JEFG PENSION PLAN") shall be transferred to
and maintained by, and all liability relating thereto shall be assumed by,
Holding. JEFG Employees shall participate in the JEFG Pension Plan and accrue
benefits under the plan through February 15, 1999. Prior to the Effective Time,
JEFG will amend the JEFG Pension Plan in the manner set forth in Exhibit A.
Holding shall submit the JEFG Pension Plan, as amended as set forth in Exhibit
A, to the Internal Revenue Service for a determination as to its qualification
under Section 401(a) of the Code as soon as possible following the date hereof,
but in no event later than March 15, 1999. As soon as practicable following
receipt by Holding of a favorable determination letter from the Internal Revenue
Service with respect to the JEFG Pension Plan, as amended in the manner set
forth in Exhibit A and including the provision for lump sum
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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 practicable after the Effective Time,
and JEFG shall make such amendments to the plans as may be
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required by the Internal Revenue Service in order for JEFG to receive favorable
determination letters with respect to the plans.
ARTICLE IV
STOCK OPTION AND OTHER EQUITY-BASED COMPENSATION PLANS
Section 4.01. EMPLOYEE STOCK OPTION PLANS. Holding shall be responsible
for all liabilities relating to stock options granted by JEFG prior to the
Effective Time.
Section 4.02. CAP AND EMPLOYEE STOCK PURCHASE PLANS.
(a) JEFG shall accelerate vesting in the matching contributions to its
Employee Stock Purchase Plan and distribute the JEFG Common Stock in this plan
to participants prior to the Effective Time. Holding shall be responsible for
all liability under the JEFG Employee Stock Purchase Plan.
(b) The disposition of the nonqualified deferred compensation plan of JEFG
(the "CAPITAL ACCUMULATION PLAN FOR KEY EMPLOYEES") shall be as described in the
Unanimous Written Consent of the Board of Directors of JEFG adopted as of
January 13, 1999 (a copy of which is attached as Exhibit B).
ARTICLE V
OTHER EMPLOYEE PLANS
Section 5.01. WELFARE BENEFIT PLANS.
(a) As of the Effective Time, Holding shall assume all liability under
and with respect to all welfare benefit plans maintained by JEFG, including,
without limitation, medical, health, disability, accident, life insurance,
death, dental and other benefit plans or arrangements and such plans shall
be transferred to, and maintained by, Holding. Effective January 1, 1999,
ITGI established welfare benefit plans for eligible JEFG Employees, which
provide medical, health, disability, accident, life insurance, death, dental
or other benefits.
(b) (i) JEFG shall be liable for all employee health (including,
without limitation, medical and dental), life insurance (including, without
limitation, disability waiver of premium claims and any other life insurance
disability claims) and long-term disability claims, and any other welfare
benefit claims, and any expenses related thereto, ("WELFARE CLAIMS") that
are incurred on or after January 1, 1999 with respect to JEFG Employees and
their beneficiaries and dependents.
(ii) Holding shall be liable for all Welfare Claims that are incurred
on, after or before the Effective Time with respect to Holding
Employees and their beneficiaries and dependents.
(iii) If either party pays any welfare benefit claims that are a
liability of the other party, the responsible party shall reimburse
the paying party for all such payments.
(c) For purposes of this Section 5.01, a health benefit claim is
incurred when the medical services are rendered, and a life insurance claim
is incurred when the covered person dies. A claim for a hospital admission
shall be deemed to have been incurred on the date of admission to the
hospital and shall continue for the duration of that period of hospital
confinement; costs for all services provided during that period of hospital
confinement shall be included in the claim. A long-term disability claim
shall be deemed to have been incurred on the date the condition causing the
disability rendered the employee disabled, as determined by the committee or
plan administrator making the determination; costs for all long-term
disability benefits relating to the claim shall be included in the claim.
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(d) Holding shall be liable for any health care continuation
obligations under Section 4980B of the Code and Section 601 through 608 of
ERISA with respect to Holding Employees and former Holding Employees and
persons who are "qualified beneficiaries" (as that term is used in Section
4980B of the Code) of such employees.
(e) The Distribution shall not be considered an event entitling any
employee to salary continuation or other severance benefits.
Section 5.02. VACATION PAY AND SIMILAR ITEMS. Holding shall assume or
retain liability for all unpaid vacation pay, sick pay and personal leave
accrued by Holding Employees as of the Effective Time. JEFG shall assume or
retain liability for all unpaid vacation pay, sick pay and personal leave
accrued by JEFG Employees as of the Effective Time.
ARTICLE VI
HOLDING REPRESENTATIONS
Holding represents to JEFG as follows:
Section 6.01. ANNEX A hereto contains a true and complete list of "all
employee benefit plans" as defined in Section 3(3) of ERlSA, and each other
plan, arrangement or policy relating to stock options, stock purchases,
compensation, deferred compensation, severance, fringe benefits and other
employee benefits which are maintained or contributed to by any member of the
JEFG Group or as to which any member of the JEFG Group has any direct or
indirect, actual or contingent liability, other than plans, arrangements or
policies maintained by the ITGI Group (such JEFG Group plans, arrangements and
policies, the "Benefit Plans"), and copies of such plans, arrangements, policies
and related relevant materials have been made available to ITGI.
Section 6.02. No member of the Holding Group or JEFG Group has incurred,
or is reasonably likely to incur, any material liability under Title IV of ERISA
(other than for PBGC insurance premiums, all of which have been paid when due).
All contributions to any "employee benefit plan" (as defined in Section 3(3) of
ERISA) required to be made by any member of the JEFG Group or the Holding Group
in accordance with the terms of such plan and, when applicable, Section 302 of
ERISA or Section 412 if the Code, have been timely made.
Section 6.03. Each member of the JEFG Group and each Benefit Plan are in
compliance in all material respects with the applicable provisions of ERISA and
the Code. Each Benefit Plan intended to qualify under Section 401 of the Code is
so qualified. With respect to all Benefit Plans, there are no audits,
investigations or claims pending or, to the knowledge of Holding, threatened
(other than routine claims for benefits). There have been no nonexempt
prohibited transactions under the Code or ERISA with respect to any Benefit
Plans. With respect to all Benefit Plans that are welfare plans (as defined in
ERISA Section 3(1)), such plans have complied in all material respects with the
COBRA continuation coverage requirements of Code Section 4980B. No member of the
JEFG Group has any liability with respect to any plans providing benefits with
respect to employees employed outside the United States.
Section 6.04. The consummation of the transactions contemplated by the
Distribution Agreement and this Agreement will not result in JEFG being liable
to any individual for severance pay.
ARTICLE VII
INDEMNIFICATION
Section 7.01. HOLDING INDEMNIFICATION OF THE JEFG GROUP. On or after the
Effective Time, Holding shall indemnify, defend and hold harmless each member of
the JEFG Group, and each of their respective directors, officers, employees and
agents (the "JEFG Indemnitees") from and against any and all claims, costs,
damages, losses, liabilities and expenses (including, without limitation,
reasonable
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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 the notice delivered by the Indemnified Party pursuant to the first
sentence of this Section 8.02; provided that if
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the Indemnifying Party does not within the same 90 day period give the
Indemnified Party written notice objecting to such claim and setting forth the
grounds therefor or electing to assume the defense, the Indemnifying Party shall
be deemed to have acknowledged, as between the parties hereto, its liability for
such Third-Party Claim. Any contest of a Third Party Claim as to which the
Indemnifying Party has elected to assume the defense shall be conducted by
attorneys employed by the Indemnifying Party and reasonably satisfactory to the
Indemnified Party; provided that the Indemnified Party shall have the right to
participate in such proceedings and to be represented by attorneys of its own
choosing at the Indemnified Party's sole cost and expense. Notwithstanding the
foregoing, (i) the Indemnifying Party shall not be entitled to assume the
defense of any Third-Party Claim (and shall be liable to the Indemnified Party
for the reasonable fees and expenses incurred by the Indemnified Party in
defending such Third-Party Claim) if there are one or more legal defenses
available only to the Indemnified Party that conflict, in one or more
significant substantive respects, with those available to the Indemnifying Party
with respect to such Third-Party Claim and (ii) if at any time after assuming
the defense of a Third-Party Claim an Indemnifying Party shall fail to prosecute
or shall withdraw from the defense of such Third-Party Claim, the Indemnified
Party shall be entitled to resume the defense thereof with counsel selected by
such Indemnified Party and the Indemnifying Party shall be liable for the
reasonable fees and expenses of counsel incurred by the Indemnified Party in
such defense. The Indemnifying Party may settle, compromise or discharge a
Third-Party Claim, provided, the Indemnifying Party shall have obtained the
prior written consent of the Indemnified Party, which consent shall not be
unreasonably withheld. If, after receipt of notice of a Third-Party Claim, the
Indemnifying Party does not undertake to defend such Third-Party Claim within 90
days of such notice, the Indemnified Party may, but shall have no obligation to,
contest any lawsuit or action with respect to such Third-Party Claim and the
Indemnifying Party shall be bound by the results obtained with respect thereto
by the Indemnified Party. Indemnification shall be made by periodic payments of
the amount thereof during the course of the investigation or defense, as and
when bills are received or Indemnifiable Loss is incurred. The parties agree to
render to each other such assistance as may reasonably be requested in order to
ensure the proper and adequate defense of any Third-Party Claim. The remedies
provided in this Article VIII shall be cumulative and shall not preclude
assertion by any Indemnified Party of any other rights or the seeking of any and
all other remedies against any Indemnifying Party.
Section 8.03. CONTRIBUTION. To the extent that any indemnification
provided for in Section 7.01 or 7.02 is unavailable to an Indemnified Party or
is insufficient in respect of any of the Indemnifiable Losses of such
Indemnified Party, then the Indemnifying Party, in lieu of, or in addition to,
indemnifying such Indemnified Party hereunder, shall contribute to the amount
paid or payable by such Indemnified Party as a result of such Indemnifiable
Losses (i) in such proportion as is appropriate to reflect the relative benefits
received by such Indemnifying Party on the one hand and the Indemnified Party on
the other hand from the transaction or other matter which resulted in the
Indemnifiable Losses or (ii) if the allocation provided by clause (i) above is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) but also the relative
fault of the Indemnifying Party on the one hand and of the Indemnified Party on
the other hand in connection with the action, inaction, statements or omissions
that resulted from such Indemnifiable Losses as well as any other relevant
equitable considerations.
ARTICLE IX
MISCELLANEOUS
Section 9.01. NOTICES. All notices and communications under this Agreement
shall be in writing and any communication or delivery hereunder shall be deemed
to have been duly given when received
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addressed as follows:If to JEFG, to:
Investment Technology Group, Inc.
380 Madison Avenue, 4th Floor
New York, New York 10017
Attention: Chief Financial Officer
With a copy to:
Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005
Attention: Immanuel Kohn, Esq.
If to Holding, to:
Jefferies Group, Inc.
JEF Holding Company, Inc.
11100 Santa Monica Boulevard, 11th Floor
Los Angeles, California 90025
Attention: Chief Financial Officer
With a copy to:
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103
Attention: Brian J. Lynch, Esq.
Such notices shall be deemed received (i) as of the date of delivery by hand
delivery, (ii) one business day after such notice is given to a national
overnight delivery service or (iii) five business days after placed in the
United States mail, provided such mail is sent by certified mail with return
receipt requested. Either party may, by written notice so delivered to the other
party, change the address to which delivery of any notice shall thereafter be
made.
Section 9.02. AMENDMENT AND WAIVER. This Agreement may not be altered or
amended, nor may rights hereunder be waived, except by an instrument in writing
executed by the party or parties to be charged with such amendment or waiver and
by ITGI. No waiver of any terms, provision or condition of or failure to
exercise or delay in exercising any rights or remedies under this Agreement, in
any one or more instances, shall be deemed to be, or construed as, a further or
continuing waiver of any such term, provision, condition, right or remedy or as
a waiver of any other term, provision or condition of this Agreement.
Section 9.03. ENTIRE AGREEMENT. This Agreement, together with the
Distribution Agreement, constitutes the entire understanding of the parties
hereto with respect to the subject matter hereof, superseding all negotiations,
prior discussions and prior agreements and understandings relating to such
subject matter. To the extent that the provisions of this Agreement are
inconsistent with the provisions of the Distribution Agreement, the provisions
of this Agreement shall prevail.
Section 9.04. PARTIES IN INTEREST. Neither of the parties hereto may
assign its rights or delegate any of its duties under this Agreement without the
prior written consent of each other party and of ITGI. This Agreement shall be
binding upon, and shall inure to the benefit of, the parties hereto and
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their respective successors and permitted assigns. Nothing contained in this
Agreement, express or implied, is intended to confer any benefits, rights or
remedies upon any person or entity other than members of the JEFG Group and
Holding, and the JEFG Indemnitees and Holding Indemnitees and their respective
successors and assigns under Articles VII and VIII hereof.
Section 9.05. FURTHER ASSURANCES AND CONSENTS. In addition to the actions
specifically provided for elsewhere in this Agreement, each of the parties
hereto will use its reasonable efforts to (i) execute and deliver such further
instruments and documents and take such other actions as any other party may
reasonably request in order to effectuate the purposes of this Agreement and to
carry out the terms hereof and (ii) take, or cause to be taken, all actions, and
to do, or cause to be done, all things, reasonably necessary, proper or
advisable under applicable laws, regulations and agreements or otherwise to
consummate and make effective the transactions contemplated by this Agreement,
including, without limitation, using its reasonable efforts to obtain any
consents and approvals and to make any filings and applications necessary or
desirable in order to consummate the transactions contemplated by this
Agreement.
Section 9.06. SEVERABILITY. The provisions of this Agreement are severable
and should any provision hereof be void, voidable or unenforceable under any
applicable law, such provision shall not affect or invalidate any other
provision of this Agreement, which shall continue to govern the relative rights
and duties of the parties as though such void, voidable or unenforceable
provision were not part hereof.
Section 9.07. EXPRESS THIRD-PARTY BENEFICIARY. Prior to the Merger, ITGI
is an express third party beneficiary of this Agreement and shall be entitled to
enforce the provisions hereof as if a party hereto.
Section 9.08. GOVERNING LAW. This Agreement shall be construed in
accordance with, and governed by, the laws of the State of New York, without
regard to the conflicts of law rules of such state.
Section 9.09. COUNTERPARTS. This Agreement may be executed in one or more
counterparts each of which shall be deemed an original instrument, but all of
which together shall constitute but one and the same Agreement.
Section 9.10. DISPUTES. Resolution of any and all disputes arising from or
in connection with this Agreement, whether based on contract, tort, statute or
otherwise, including, but not limited to, disputes in connection with claims by
third parties shall be exclusively governed by and settled in accordance with
provisions identical to those set forth in Section 11.10 of the Distribution
Agreement, which Section is hereby incorporated by this reference.
Section 9.11. Holding will provide to ITGI, as soon as practicable
following its request, any information reasonably needed by ITGI relating to any
of the employee benefit plans referred to in this Agreement. In addition, as
soon as practicable following the Effective Time Holding will provide to ITGI
copies of all domestic relations orders received with respect to JEFG Employees
in connection with the JEFG ESOP, the JEFG PSP and the JEFG Pension Plan.
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IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
<TABLE>
<S> <C> <C>
JEFFERIES GROUP, INC.
BY /s/ CLARENCE T. SCHMITZ
-----------------------------------------
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>
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APPENDIX D
TAX SHARING AND INDEMNIFICATION AGREEMENT
AMONG
JEFFERIES GROUP, INC.,
JEF HOLDING COMPANY, INC.
AND
INVESTMENT TECHNOLOGY GROUP, INC.
<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.
(b) "Consolidated Return" shall mean a consolidated Federal income tax
return filed pursuant to Section 1501 of the Code.
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(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 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.
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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.
(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,
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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 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.
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<PAGE>
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 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
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<PAGE>
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 subsidiaries, their business operations, capital
structure and organization, are complete and accurate in all material
respects.
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<PAGE>
(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.
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<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.
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(g) All notices and other communications hereunder shall be deemed to
have been duly given if given in writing and delivered by either in person
or by facsimile with receipt acknowledged or confirmed or by certified or
registered mail, return receipt requested, postage prepaid and addressed as
follows:
(i)If to JEFG or any of its successors prior to the Distribution at:
Jefferies Group, Inc.
11100 Santa Monica Boulevard, 11th Floor
Los Angeles, California 90025
Attention: Chief Executive Officer
Facsimile: 310-914-1013
With a copy to:
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103
Attention: Brian J. Lynch, Esq.
(ii)If to JEFG or any of its successors after the Distribution at:
Investment Technology Group, Inc.
380 Madison Avenue, 4th Floor
New York, New York 10017
Attention: Chief Financial Officer
Facsimile: 212-444-6490
With a copy to:
Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005
Attention: Immanuel Kohn, Esq.
(iii)If to ITGI or any of its successors at:
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.
D-10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed and their respective corporate seals to be affixed hereto, all on the
date and year first above written.
<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/ CLARENCE T. SCHMITZ
-----------------------------------------
Clarence T. Schmitz, Executive Vice
President
and CFO
</TABLE>
D-11
<PAGE>
APPENDIX E
OPINION
OF
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
<PAGE>
[LOGO]
APPENDIX E
March 17, 1999
Board of Directors
Special Committee of the Board of Directors
Investment Technology Group, Inc.
380 Madison Avenue
New York, New York 10017
Gentlemen:
You have requested our opinion as to the fairness, from a financial point of
view, to holders of common stock of Investment Technology Group, Inc. (the
"Company"), par value $.01 per share (the "Company Common Stock"), other than
Jefferies Group, Inc. ("JEFG"), of the Exchange Ratio (as defined below).
Pursuant to the Agreement and Plan of Merger, dated as of March 17, 1999 (the
"Merger Agreement") entered into by the Company and JEFG, the Company will be
merged with and into JEFG (the "Merger").
We understand that pursuant to the Distribution Agreement, dated as of March
17, 1999 (the "Distribution Agreement") entered into by JEFG and JEF Holding
Company, Inc., a wholly-owned subsidiary of JEFG ("Holding"), immediately
preceding the Merger: (i) JEFG will transfer to Holding, and Holding will accept
from JEFG, all of JEFG's assets other than JEFG's capital stock in the Company,
and JEFG will assign to Holding, and Holding will assume from JEFG, all of
JEFG's liabilities, all in accordance with the terms of the Distribution
Agreement (such transfer, acceptance, assignment and assumption, the
"Transfer"), and (ii) immediately after the Transfer, all of the capital stock
of Holding will be distributed (the "Distribution") to JEFG's stockholders.
We also understand that immediately prior to the Distribution, the Company
will declare and pay a dividend to all its stockholders, including JEFG, in an
amount equal to $4.00 in cash per share of Company Common Stock.
Pursuant to the Merger Agreement, each outstanding share of Company Common
Stock, other than shares of Company Common Stock held in the treasury of the
Company or by JEFG, 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, par value $.01 per share ("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 of the Merger by (y) the
total number of shares of Company Common Stock held by JEFG immediately prior to
the effective time of the Merger (the "Exchange Ratio"), all as set forth more
fully in the Merger Agreement. At the effective time of the Merger, JEFG will be
renamed Investment Technology Group, Inc.
In arriving at our opinion, we have reviewed the Merger Agreement, the
Distribution Agreement, the Tax Sharing and Indemnification Agreement, dated as
of March 17, 1999, and the Benefits Agreement, dated as of March 17, 1999
(collectively, the "Agreements"). We also understand that the Company and JEFG
will be entering into certain additional ancillary agreements. We have assumed
with your consent that such agreements are on market terms negotiated at arm's
length. We also have reviewed financial and other information that was publicly
available or furnished to us by the Company
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<PAGE>
Board of Directors
Special Committee of the Board of Directors
Investment Technology Group, Inc.
Page 2
and JEFG including information provided during discussions with their respective
managements. Included in the information provided during discussions with the
Company's management were certain financial analyses and projections of the
Company prepared by the management of the Company. In addition, we have compared
certain financial and securities data of the Company and JEFG with various other
companies whose securities are traded in public markets, reviewed the historical
stock prices and trading volumes of the Company Common Stock and JEFG Common
Stock and conducted such other financial studies, analyses and investigations as
we deemed appropriate for purposes of this opinion. We were not requested to,
nor did we, solicit the interest of any other party in acquiring the Company.
In rendering our opinion, we have relied upon and assumed the accuracy and
completeness of all of the financial and other information that was available to
us from public sources, that was provided to us by the Company, its management
or other representatives, or that was otherwise reviewed by us. With respect to
the financial analyses and projections supplied to us, we have assumed that they
have been reasonably prepared on the basis reflecting the best currently
available estimates and judgments of the management of the Company as to the
future operating and financial performance of the Company. We have not assumed
any responsibility for making any independent evaluation of any assets or
liabilities of the Company or JEFG or for making any independent verification of
any of the information reviewed by us. With your consent, we have also assumed
that no goodwill will be incurred by the Company in connection with the Merger.
We have relied upon the rulings received from the Internal Revenue Service
("IRS") in response to JEFG's submission to the IRS of requests for rulings
concerning the treatment of the Transfer, the Distribution, the Merger and
related transactions under Sections 332, 351, 355 and 368(a)(1)(D) of the
Internal Revenue Code of 1986 (the "Code"). In addition, with your consent based
upon the advice of counsel to the Company, we have assumed that the Merger will
qualify as a reorganization for the Company's stockholders other than JEFG under
Section 368(a)(1)(A) of the Code. With your consent, we have assumed that all of
JEFG's liabilities, including without limitation all of the obligations under
the indentures governing JEFG's 8 7/8% Senior Notes due 2004 and 7 1/2% Senior
Notes due 2007, will be assumed by Holding in the Transfer (or to the extent not
assumed, Holding will indemnify or otherwise make the Company whole for such
remaining liabilities) pursuant to the Distribution Agreement.
Our opinion is necessarily based on economic, market, financial and other
conditions as they exist on, and on the information made available to us as of,
the date of this letter. It should be understood that, although subsequent
developments may affect this opinion, we do not have any obligation to update,
revise or reaffirm this opinion. We are expressing no opinion herein as to the
prices at which the Company's securities will actually trade prior to, and
JEFG's securities (to be renamed Investment Technology Group, Inc. at the
effective time of the Merger) will actually trade following consummation of, the
Merger. Our opinion does not address the relative merits of the Merger, nor does
it address the Company's Board of Directors' decision to proceed with the
Merger. Our opinion does not constitute a recommendation to any stockholder as
to how such stockholder should vote on the proposed transaction.
Donaldson, Lufkin & Jenrette Securities Corporation, as part of its
investment banking services, is regularly engaged in the valuation of businesses
and securities in connection with mergers, acquisitions, underwritings, sales
and distributions of listed and unlisted securities, private placements and
valuations for corporate and other purposes.
E-2
<PAGE>
Board of Directors
Special Committee of the Board of Directors
Investment Technology Group, Inc.
Page 3
Based upon the foregoing and such other factors as we deem relevant, we are
of the opinion that the Exchange Ratio is fair to the holders of Company Common
Stock, other than JEFG, from a financial point of view.
Very truly yours,
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By: /s/ JAMES M. BRONER
----------------------------------------
James M. Broner
Senior Vice President
E-3
<PAGE>
APPENDIX F
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
<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.
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<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>
<TABLE>
<CAPTION>
/ X / PLEASE MARK VOTES
AS IN THIS EXAMPLE
- ---------------------------------------------------------------
INVESTMENT TECHNOLOGY GROUP, INC.
- ---------------------------------------------------------------
<S> <C>
This proxy, when property executed, will be voted in the manner 1. Approval and adoption of the merger agreement
directed by the undersigned stockholder. If no direction is made, and the merger.
this proxy will be voted FOR the merger agreement and merger, the
proposed slate of directors and the ratification of appointment FOR / / AGAINST / / ABSTAIN / /
of KPMG LLP as the independent auditors.
2. Election of Directors.
The undersigned hereby acknowledges receipt of the Form 10-K NOMINEES FOR DIRECTORS:
and the Notice of Annual Meeting of Stockholders and the Proxy
Statement, and hereby revokes all previously granted proxies. FOR ALL WITH- FOR ALL
NOMINEES HOLD NOMINEES EXCEPT
/ / / / / /
Frank E. Baxter Raymond L. Killian, Jr.
Neal S. Garonzik Robert L. King
William I. Jacobs Mark A. Wolfson
RECORD DATE SHARES: If you wish to withhold authority to vote your
shares from my individual nominees(s), mark the
"For All Nominees Except" box and strike a line
through the name(s) of the nominees(s).
3. Ratification of the appointment of KPMG LLP as
the independent auditors for the 1999 fiscal year.
FOR / / AGAINST / / ABSTAIN / /
--------------- Mark box at right if an address change or
Please be sure to sign and date this Proxy Date comment has been noted on the reverse side
- --------------------------------------------------------------- of this card. / /
- -----Stockholder sign here-----------------Co-owner sign here--
DETACH CARD DETACH CARD
</TABLE>
INVESTMENT TECHNOLOGY GROUP, INC.
Dear Stockholder,
Please take note of the important information enclosed with this Proxy. There
are a number of issues related to the management and operation of your Company
that require your immediate attention and approval. These are discussed in
detail in the enclosed proxy materials.
Your vote counts, and you are strongly encourage to exercise your right to
vote your shares.
Please mark the boxes on this proxy card to indicate how your shares will be
voted. Then sign the card, detach it and return your proxy vote in the
enclosed postage paid envelope.
Your vote must be received prior to the Annual Meeting of Stockholders, April
20, 1999.
Thank you in advance for your prompt consideration of these matters.
Sincerely,
Timothy H. Hosking
Secretary
<PAGE>
INVESTMENT TECHNOLOGY GROUP, INC.
Proxy Card for Annual Meeting of Stockholders on April 20, 1999
This proxy is solicited by the Board of Directors of the Company. The
undersigned hereby appoints Raymond L. Killian, Jr., John R. MacDonald and
Timothy H. Hosking, and each of them, as proxies, with full power of
substitution, to represent the undersigned and to vote all shares of Common
Stock of Investment Technology Group, Inc., held of record by the undersigned
on March 1, 1999, or which the undersigned would otherwise be entitled to
vote at the Annual Meeting of Stockholders to be held on April 20, 1999 and
any adjournment thereof, upon all matters that may properly come before the
meeting. All shares votable by the undersigned will be voted by the proxies
named above in the manner specified on the reverse side of this card, and such
proxies are authorized to vote in their discretion on such other matters as
may properly come before the meeting.
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PLEASE SIGN ON REVERSE SIDE AND RETURN IN THE ENCLOSED ENVELOPE
- -------------------------------------------------------------------------------
Please sign this proxy exactly as your name(s) appear(s) on the books of the
Company. Joint owners should each sign personally. Trustees and other
fiduciaries should indicate the capacity in which they sign, and where more
than one name appears, a majority must sign. If a corporation, this signature
should be that of an authorized officer who should state his or her title.
- -------------------------------------------------------------------------------
HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS
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