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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER 0--23644
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INVESTMENT TECHNOLOGY GROUP, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
DELAWARE 13-3757717
(State of incorporation) (IRS Employer Identification No.)
380 MADISON AVENUE, NEW YORK, NEW YORK (212) 588-4000
(Address of principal executive offices) (Registrant's telephone number, including
area code)
10017
(Zip Code)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
------------------------
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COMMON STOCK, $0.01 PAR VALUE NASDAQ NATIONAL MARKET
(Title of class) (Name of exchange on which registered)
Aggregate market value of the voting stock held Number of shares outstanding of the
Registrant's
by non-affiliates of the Registrant at March Class of common stock at March 15, 1999:
15, 1999:
$168,832,991 18,630,817
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-K or any amendment to this
form 10-K [ ]
DOCUMENTS INCORPORATED BY REFERENCE:
Proxy Statement relating to the 1999 Annual Meeting of Stockholders
(incorporated, in part, in Form 10-K Part III).
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1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
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PART I
Item 1. Business............................................................................ 4
Item 2. Properties.......................................................................... 14
Item 3. Legal Proceedings................................................................... 14
Item 4. Submission of Matters to a Vote of Security Holders................................. 15
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters................ 16
Item 6. Selected Financial Data............................................................. 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 19
Item 7A. Quantitative and Qualitative Disclosure about Market Risk........................... 27
Item 8. Financial Statements and Supplementary Data......................................... 28
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.......................................................................... 51
PART III
Item 10. Directors and Executive Officers of the Registrant.................................. 51
Item 11. Executive Compensation.............................................................. 51
Item 12. Security Ownership of Certain Beneficial Owners and Management...................... 51
Item 13. Certain Relationships and Related Transactions...................................... 51
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K................... 52
</TABLE>
QUANTEX -REGISTERED TRADEMARK- ("QUANTEX") IS A REGISTERED TRADEMARK OF
INVESTMENT TECHNOLOGY GROUP, INC.
POSIT -REGISTERED TRADEMARK- ("POSIT") IS A REGISTERED SERVICE MARK OF THE POSIT
JOINT VENTURE.
SMARTSERVER IS A SERVICE MARK OF INVESTMENT TECHNOLOGY GROUP, INC.
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FORWARD-LOOKING STATEMENTS
In addition to the historical information contained throughout this Annual
Report on Form 10-K, there are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"). All statements regarding our expected future financial
position, results of operations, cash flows, dividends, financing plans,
business strategies, competitive positions, plans and objectives of management
for future operations, and concerning securities markets and economic trends are
forward-looking statements. Although we believe our expectations reflected in
such forward-looking statements are based on reasonable assumptions, there can
be no assurance 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, the actions of both current and potential new competitors, rapid changes
in technology, fluctuations in market trading volumes, market volatility,
changes in the regulatory environment, risk of errors or malfunctions in our
systems or technology, cash flows into or redemptions from equity funds, effects
of inflation, customer trading patterns, securities industry participants'
responses to Year 2000 issues, as well as general economic and business
conditions; securities, credit and financial and market conditions; adverse
changes or volatility in interest rates.
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PART I
ITEM 1. BUSINESS.
Investment Technology Group, Inc. ("ITGI" or the "Company") was formed as a
Delaware corporation on March 10, 1994 and its principal subsidiaries 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 directcomputer-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
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available to be bought or sold in the system. When this occurs, shares are
allocated pro rata across participants, resulting in partial execution. POSIT
has been designed to allow clients trade execution flexibility. Clients may
specify constraints on the portion of a portfolio that trades, such as the
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
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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,
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, or 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,
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which can result in censure, fine, the issuance of cease-and-desist orders or
the suspension or expulsion of a broker-dealer, its officers or employees. The
principal purpose of regulation and discipline of broker-dealers is the
protection of clients and the securities markets, rather than the protection of
creditors and stockholders of broker-dealers.
ITG Inc. is required by law to belong to the Securities Investor Protection
Corporation. In the event of a broker-dealer's insolvency, the Securities
Investor Protection Corporation fund provides protection for client accounts up
to $500,000 per customer, with a limitation of $100,000 on claims for cash
balances.
REGULATION ATS
Since the formation of the POSIT joint venture, POSIT has operated under a
no-action letter from the SEC staff that it would take no enforcement action if
POSIT were operated without registering as an exchange. As a result, POSIT has
not been registered with the SEC as an exchange, although ITG Inc. is registered
as a broker-dealer and is subject to regulation as such. Material changes to
POSIT currently require prior notice to the SEC pursuant to the conditions of
the no-action letter and under Rule 17a-23 under the Exchange Act. On December
2, 1998, the SEC adopted Regulation ATS, which repeals Rule 17a-23 and
establishes a new regulatory framework for alternative trading systems such as
POSIT. Regulation ATS will allow alternative trading systems to choose to
register as exchanges or as broker-dealers and will require compliance with
informational requirements that are similar to Rule 17a-23. However, POSIT will
no longer be subject to the restrictions of the no-action letter. Upon
effectiveness of Regulation ATS on April 21, 1999, 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. Jefferies Group,
Inc. ("Jefferies Group") and we have previously announced plans to separate
Jefferies & Company, Inc. ("Jefferies & Company") and other Jefferies Group
subsidiaries from our company through a spin-off and upstream merger and the
related transactions. If the spin-off and upstream merger and the related
transactions had been completed on December 31, 1998, on a pro forma basis ITG
Inc. would have had regulatory net capital of $10 million, which includes pro
forma borrowing of approximately $1.4 million. Based on a closing of the
upstream merger of March 31, 1999, we estimate that ITG Inc. will have excess
net regulatory
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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. For a discussion of these transactions and the
anticipated effects on operating and regulatory capital, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources and--Jefferies Group and ITGI Plan
to Separate into Two Independent Companies". 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
12
<PAGE>
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.
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.
13
<PAGE>
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 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.
EMPLOYEES
As of December 31, 1998, we employed 261 personnel.
ITEM 2. PROPERTIES
Our principal offices are located at 380 Madison Avenue in New York City
where we occupy the entire 4(th) floor or approximately 44,704 square feet of
office space. In anticipation of future expansion we have leased a portion of
the 5(th) floor (approximately 12,726 square feet of office space). This space
is currently being sub-let. The lease payment as compared to the rental income
will have an immaterial effect upon our operating results. The fifteen-year
lease term for both the fourth and fifth floors expire in 2012.
We also maintain a research, development and technical support services
facility in Culver City, California where we occupy approximately 44,316 square
feet of office space. We lease the California facility pursuant to a ten-year
lease agreement that expires in December 2005.
Additionally, we also maintain a "hot" backup and regional office for
Financial Engineering Research and QuantEX support in Boston, Massachusetts
where we occupy approximately 10,588 square feet of office space. The ten-year
lease term for this space expires in 2005.
ITEM 3. LEGAL PROCEEDINGS
In 1998, we received a "30-day letter" proposing certain adjustments which,
if sustained, would result in a tax deficiency of approximately $9.6 million
plus interest. The adjustments proposed relate to (i) the disallowance of
deductions taken in connection with the termination of certain compensation
plans at the time of our initial public offering in 1994 and (ii) the
disallowance of tax credits taken in connection with certain research and
development expenditures. We believe that the tax benefits in question were
taken properly and intend to vigorously contest the proposed adjustments. Based
on the facts and circumstances known at this time, we are unable to predict when
this matter will be resolved or the costs associated with its resolution.
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
14
<PAGE>
Patents"). One or more of the Belzberg Patents may relate to the devices, means
an or methods that we and/or 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 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 favorable 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter ended December 31, 1998.
15
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
COMMON STOCK DATA
Our common stock is quoted on the Nasdaq National Market under the symbol
"ITGI". In connection with the spin-off and upstream merger and the related
transactions, 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>
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, we believe
that our common stock was held by approximately 1,500 stockholders of record or
through nominee 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 upstream 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 facillity 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
consummation of the upstream 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.
16
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The selected Consolidated Statement of Operations data and the Consolidated
Statement of Financial Condition data presented below as of and for each of the
years in the five-year period ended December 31, 1998, are derived from our
consolidated financial statements, which financial statements have been audited
by KPMG LLP, independent auditors. Earnings per share information prior to 1997
has been retroactively restated to conform with the FASB SFAS No. 128, EARNINGS
PER SHARE. Such data should be read in connection with the consolidated
financial statements contained on pages 28 through 51.
<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
outstanding (in millions)................................... 19.3 18.9 18.6 18.5 17.5
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
OTHER SELECTED FINANCIAL DATA:
Revenues per trading day (in thousands)....................... $ 842 $ 542 $ 439 $ 287 $ 225
Shares executed per day (in millions)......................... 43 27 22 15 10
Revenues per average number of employees (in thousands)....... $ 888 $ 733 $ 814 $ 689 $ 675
Average number of employees................................... 239 187 137 105 84
Total number of customers(2).................................. 535 452 417 354 274
POSIT....................................................... 490 414 396 330 253
QuantEX..................................................... 54 50 55 81 58
Platform.................................................... 266 138 36 N/A N/A
Total number of customer installations:
QuantEX..................................................... 144 138 109 97 78
Platform.................................................... 507 204 67 N/A N/A
Return on average stockholders' equity........................ 37.4% 33.9% 45.5% 39.3% (35.0)%
Book value per share.......................................... $ 7.73 $ 5.15 $ 3.68 $ 2.47 $ 1.72
Tangible book value per share................................. $ 7.66 $ 5.04 $ 3.54 $ 2.27 $ 1.52
Price to earnings ratio using diluted net earnings per share
of common stock............................................. 27.6 19.7 15.3 11.4 N/A
</TABLE>
17
<PAGE>
The following graph represents the number of shares ITG Inc. executed as a
percentage of the market volume in the U.S. market.( 3)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
ITG VOLUME AS A PERCENTAGE OF MARKET VOLUME
<S> <C>
1993 0.0153
1994 0.017
1995 0.019
1996 0.0226
1997 0.0224
1998 0.0294
</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) and non-compensatory ITG 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 Jefferies Group common stock. Prior to December 31, 1993, we
had expensed and paid to Jefferies Group an additional $9.4 million related
to the above-mentioned Performance Share Plans. Immediately prior to the
consummation of the Offering, Jefferies Group transferred its $9.4 million
liability and an equivalent amount of cash to us and it was to be applied
by the us as part of the termination of the 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 Performance Share Plans expense in the first two
quarters of 1994 under the terms of the prior agreement. The total
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 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.
(2) Customers include those clients who have generated revenues in each year
in excess of $1,000.00.
(3) The percentages on the graph are total ITG shares executed divided by the
"market" volume. Total ITG shares executed includes total POSIT shares,
QuantEX shares and shares executed by the Electronic Trading Desk. Market
volume includes shares executed by and as provided by the New York Stock
Exchange and Nasdaq. Market volume excludes ITG shares executed.
18
<PAGE>
ITEM 7. 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.
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 Jefferies Group, fringe benefits, including employer contributions
for medical insurance, life insurance, retirement plans and payroll taxes,
reduced by the employee portion of capitalized software. Transaction processing
expenses consist of floor brokerage and clearing fees. Software royalties
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 related to the Company's proposed spin-off and upstream merger and the
related transactions. Other general and administrative expenses include
amortization of goodwill, legal, audit, tax and promotional expenses.
19
<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,
-------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
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.
20
<PAGE>
The following table itemizes expenses by category (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
--------------------
1998 1997 CHANGE % CHANGE
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
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.
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
Long-
21
<PAGE>
View 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,
--------------------
1997 1996 CHANGE % CHANGE
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
Compensation and employee benefits..................................... $ 30,479 $ 25,047 $ 5,432 21.7%
Transaction processing................................................. 21,413 15,737 5,676 36.1
Software royalties..................................................... 9,848 8,798 1,050 11.9
Occupancy and equipment................................................ 9,204 6,111 3,093 50.6
Consulting............................................................. 2,017 2,492 (475) (19.1)
Telecommunications and data processing services........................ 6,605 4,789 1,816 37.9
Net loss on long-term investments...................................... 297 -- 297 N/A
Spin-off costs......................................................... -- -- -- N/A
Other general and administrative....................................... 9,919 7,581 2,338 30.8
Income taxes........................................................... 20,343 17,666 2,677 15.2
</TABLE>
COMPENSATION AND EMPLOYEE BENEFITS. The increase in compensation and
employee benefits expenses is due to an increase in the number of employees
offset by an increase in capitalized software.
22
<PAGE>
Capitalized software development costs increased approximately $4.4 million,
primarily due to additional projects and an increase in staff engaged in
software development. Compensation and employee benefits expenses per person
decreased $18,000, or 11.3%, from $159,000 to $141,000.
TRANSACTION PROCESSING. The increase in transactions processing expenses is
primarily due to the expense associated with a higher volume of transactions and
shares. Transaction processing expenses as a percentage of revenues increased
from 14.1% to 15.6%, primarily from a shift in the business mix towards QuantEX
and Electronic Trading Desk services. Those products have slightly lower margins
than POSIT due to charges for floor brokerage fees which are not incurred with
the POSIT business.
SOFTWARE ROYALTIES. As software royalties are contractually fixed at 13% of
POSIT revenues, the increase is wholly attributable to an increase in POSIT
revenues.
OCCUPANCY AND EQUIPMENT. The increase in occupancy and equipment expense is
due primarily to relocation of 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, respectfully.
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 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
23
<PAGE>
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 is 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, 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. The 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 the 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 Australia will not be permitted during the
period that the revolving credit agreement discussed above is effective.
24
<PAGE>
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 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
25
<PAGE>
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 complete sets
of financial statements of the enterprise and in condensed financial statements
of interim periods issued to shareholders. It also requires that these
enterprises report certain information about their products and services, the
geographical areas in which they operate, and their major customers. SFAS 131 is
effective for fiscal years beginning after December 15, 1997, although earlier
application was permitted. The disclosure requirements of this standard were not
applicable since the Company manages its operations through a single line of
business (institutional agency trade executions).
In March 1998, the Accounting Standards Executive Committee issued Statement
of Position 98-1 "ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR
OBTAINED FOR INTERNAL USE". SOP 98-1 provides guidance on accounting for the
costs of computer software developed or obtained for internal use. It identifies
the characteristics of internal-use software and provides examples to assist in
determining when the computer software is for internal use. SOP 98-1 is
effective for financial statements for fiscal years beginning after December 15,
1998, although earlier application is encouraged, and should be applied to
internal-use computer software costs incurred in those fiscal years for all
projects, including those in progress upon initial application of this SOP. We
do not anticipate that the implementation of this statement will have a material
impact on our consolidated financial statements.
JEFFERIES GROUP AND ITGI PLAN TO SEPARATE INTO TWO INDEPENDENT COMPANIES
On March 17, 1998, we announced that we were planning the separation of
Jefferies & Company and other Jefferies Group subsidiaries from our company
through a series of transactions, including a special cash dividend, the
transfer of Jefferies Group's assets and liabilities (other than those related
to our company), a spin-off and a merger. Upon the consummation of the spin-off
and upstream merger
26
<PAGE>
and the related transactions, the stockholders of Jefferies Group will be
stockholders of our company and Jefferies Group will cease to be our parent
company.
First, the Company will pay a special cash dividend of $4.00 per share,
payable pro rata to all of our stockholders of record on April 20, 1999,
including Jefferies Group. The aggregate amount of the special cash dividend
will be up to $75 million, of which we will pay $60.0 million to Jefferies
Group.
Following the payment of the special cash dividend, Jefferies Group 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 a new company ("New Jefferies"). After such transfers have been
completed and certain other conditions have been satisfied, Jefferies Group will
distribute all of the outstanding common stock of New Jefferies pro rata to
Jefferies Group stockholders.
The spin-off will be followed immediately by a tax-free merger of our
company into Jefferies Group, with our public shareholders receiving shares of
Jefferies Group. Jefferies Group will then be renamed Investment Technology
Group, Inc. ("New ITGI"). Based on the number of shares of Jefferies Group
common stock expected to be outstanding on the date of the spin-off and upstream
merger (approximately 23,900,000) and the number of shares of our common stock
held by Jefferies Group (15,000,000), our public stockholders other than
Jefferies Group will receive approximately 1.59 shares of common stock of New
ITGI for each share of our common stock held by them.
The spin-off and upstream merger and the related transactions are contingent
on a number of factors, including receipt of all board of directors and
shareholder approvals of Jefferies Group and our company and other required
regulatory and contractual approvals. The spin-off and upstream merger and the
related transactions are expected to close in April 1999.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
None.
27
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
FINANCIAL REPORTS SECTION
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
Management's Responsibility for Compliance and Financial Reporting............................... 29
Independent Auditors' Report..................................................................... 30
Consolidated Statements of Income................................................................ 31
Consolidated Statements of Financial Condition................................................... 32
Consolidated Statements of Changes in Stockholders' Equity....................................... 33
Consolidated Statements of Cash Flows............................................................ 34
Notes to Consolidated Financial Statements....................................................... 35
</TABLE>
28
<PAGE>
MANAGEMENT'S RESPONSIBILITY FOR COMPLIANCE AND FINANCIAL REPORTING
TO THE SHAREHOLDERS:
The management of Investment Technology Group, Inc. is responsible for the
integrity and objectivity of the financial information presented in this Annual
Report. Financial information appearing throughout the Annual Report is
consistent with that in the accompanying financial statements. The financial
statements have been prepared by management of our company in conformity with
generally accepted accounting principles in the United States. The financial
statements reflect, where applicable, management's best judgments and estimates.
The management of our company has established and maintains an internal
control structure and monitors that structure for compliance with established
policies and procedures. The objectives of an internal control structure are to
provide reasonable, but not absolute, assurance as to the integrity and
reliability of the financial statements, the protection of assets from
unauthorized use or disposition, and that transactions are executed in
accordance with management's authorization.
Management also recognizes its responsibility to foster and maintain a
strong ethical environment within our company to ensure that its business
affairs are conducted with integrity and in accordance with high standards of
personal and corporate conduct. This responsibility is characterized and
reflected in our company's Statement of Policy on Standards of Employee Conduct,
which is distributed to all of our employees. As part of the monitoring system,
we maintain Corporate Compliance Personnel, who have oversight responsibilities
for administering and coordinating the application of these standards of
conduct. Senior legal and compliance personnel have been directed to report
compliance concerns directly to the President of our company. Ongoing oversight
of compliance activities is the responsibility of our President.
Our board of directors appoints an audit committee composed solely of
outside directors. The function of the audit committee is to oversee the
accounting, reporting, audit and internal control policies and procedures
established by our management. The committee meets regularly with management and
the internal and independent auditors. The auditors have free access to the
audit committee without the presence of management. The audit committee reports
regularly to our board of directors on its activities, and such other matters as
it deems necessary.
Our company's annual consolidated financial statements have been audited by
KPMG LLP, independent auditors, who were appointed by the board of directors.
Management has made available to KPMG LLP all of our company's financial records
and related data, as well as the minutes of directors' meetings.
Furthermore, management believes that all its representations to KPMG LLP
are valid and appropriate. In addition, KPMG LLP, in determining the nature and
extent of their auditing procedures, considered our company's accounting
procedures and policies and the effectiveness of the related internal control
structure.
Management believes that, as of December 31, 1998, our company's internal
control structure was adequate to accomplish the objectives discussed herein.
<TABLE>
<S> <C> <C>
Raymond L. Killian, Jr. John R. MacDonald Angelo Bulone
Chairman, Chief Executive Officer Senior Vice President Vice President
and President and Chief Financial Officer and Controller
</TABLE>
29
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Investment Technology Group, Inc.:
We have audited the accompanying consolidated statements of financial
condition of Investment Technology Group, Inc. and subsidiaries as of December
31, 1998 and 1997, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Investment
Technology Group, Inc. and subsidiaries as of December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1998, in conformity with generally
accepted accounting principles.
KPMG LLP
New York, New York
January 20, 1999
30
<PAGE>
INVESTMENT TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1998 1997 1996
---------- ---------- ----------
REVENUES:
Commissions................................................................ $ 205,163 $ 133,700 $ 108,821
Interest and dividends..................................................... 3,635 2,650 1,751
Other...................................................................... 3,407 692 984
---------- ---------- ----------
Total revenues........................................................... 212,205 137,042 111,556
EXPENSES:
Compensation and employee benefits......................................... 51,462 30,479 25,047
Transaction processing..................................................... 26,920 21,413 15,737
Software royalties......................................................... 15,247 9,848 8,798
Occupancy and equipment.................................................... 11,886 9,204 6,111
Consulting................................................................. 2,338 2,017 2,492
Telecommunications and data processing services............................ 8,138 6,605 4,789
Net loss on long-term investments.......................................... 204 297 --
Spin-off costs............................................................. 1,936 -- --
Other general and administrative........................................... 13,139 9,919 7,581
---------- ---------- ----------
Total expenses........................................................... 131,270 89,782 70,555
Income before income tax expense............................................. 80,935 47,260 41,001
Income tax expense........................................................... 37,541 20,343 17,666
---------- ---------- ----------
NET INCOME................................................................... $ 43,394 $ 26,917 $ 23,335
---------- ---------- ----------
---------- ---------- ----------
Basic net earnings per share of common stock................................. $ 2.36 $ 1.48 $ 1.28
---------- ---------- ----------
---------- ---------- ----------
Diluted net earnings per share of common stock............................... $ 2.25 $ 1.42 $ 1.26
---------- ---------- ----------
---------- ---------- ----------
Basic weighted average shares outstanding.................................... 18,365 18,178 18,284
---------- ---------- ----------
---------- ---------- ----------
Diluted weighted average shares and common stock
equivalents outstanding.................................................... 19,289 18,940 18,586
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are integral parts
of this statement.
31
<PAGE>
INVESTMENT TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1998 1997
---------- ----------
ASSETS
Cash and cash equivalents................................................................. $ 77,324 $ 14,263
Securities owned, at fair value........................................................... 39,615 37,358
Receivables from brokers, dealers and other, net.......................................... 24,127 10,131
Due from affiliates....................................................................... 722 1,365
Investments............................................................................... 1,000 10,935
Premises and equipment.................................................................... 19,662 19,506
Capitalized software...................................................................... 6,450 5,973
Goodwill.................................................................................. 1,373 1,922
Deferred taxes............................................................................ 2,784 2,460
Other assets.............................................................................. 7,455 9,728
---------- ----------
Total assets.............................................................................. $ 180,512 $ 113,641
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses..................................................... $ 24,154 $ 12,664
Payable to brokers, dealers and other..................................................... 1,881 61
Software royalties payable................................................................ 4,070 2,663
Securities sold, not yet purchased, at fair value......................................... 288 3
Due to affiliates......................................................................... 2,557 2,999
Income taxes payable to affiliate......................................................... 3,853 1,488
---------- ----------
Total liabilities..................................................................... 36,803 19,878
---------- ----------
Lease commitments (note 14)
Contingencies (note 17)
STOCKHOLDERS' EQUITY:
Preferred stock, par value $0.01; shares authorized:
5,000,000; shares issued: none.......................................................... -- --
Common stock, par value $0.01; shares authorized:
30,000,000; shares issued: 19,405,361 in 1998 and 18,818,468 in 1997.................... 194 188
Additional paid-in capital................................................................ 51,511 38,554
Retained earnings......................................................................... 104,925 61,531
Common stock held in treasury, at cost; shares:
815,000 in 1998 and 597,500 in 1997..................................................... (12,760) (6,510)
Accumulated other comprehensive loss:
Currency translation adjustment......................................................... (161) --
---------- ----------
Total stockholders' equity............................................................ 143,709 93,763
---------- ----------
Total liabilities and stockholders' equity................................................ $ 180,512 $ 113,641
---------- ----------
---------- ----------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are integral parts
of this statement.
32
<PAGE>
INVESTMENT TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON
ADDITIONAL STOCK ACCUMULATED
PREFERRED COMMON PAID-IN RETAINED HELD IN COMPREHENSIVE
STOCK STOCK CAPITAL EARNINGS TREASURY LOSS
----------- ----------- ----------- ----------- ----------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995.......... $ -- $ 187 $ 36,055 $ 11,279 $ (2,042) $ --
Net income............................ -- -- -- 23,335 -- --
Purchase of common stock for treasury
(135,000 shares).................... -- -- -- -- (1,721) --
----------- ----- ----------- ----------- ----------- -----
Balance at December 31, 1996.......... -- 187 36,055 34,614 (3,763) --
Net income............................ -- -- -- 26,917 -- --
Issuance of restricted stock (24,219
shares)............................. -- -- 630 -- -- --
Issuance of common stock in connection
with the employee stock option plan
(92,249 shares)..................... -- 1 1,869 -- -- --
Purchase of common stock for treasury
(152,300 shares).................... -- -- -- -- (2,747) --
----------- ----- ----------- ----------- ----------- -----
Balance at December 31, 1997.......... -- 188 38,554 61,531 (6,510) --
Issuance of common stock in connection
with the employee stock option plan
(574,978 shares).................... -- 6 12,652 -- -- --
Issuance of common stock in connection
with the employee stock purchase
plan (11,915 shares)................ -- -- 305 -- -- --
Purchase of common stock for treasury
(217,500 shares).................... -- -- -- -- (6,250) --
Comprehensive income/(loss):
Net income.......................... -- -- -- 43,394 -- --
Other comprehensive loss, net of tax
($0.00):
Currency translation adjustment... -- -- -- -- -- (161)
Comprehensive income..................
----------- ----- ----------- ----------- ----------- -----
Balance at December 31, 1998.......... $ -- $ 194 $ 51,511 $ 104,925 $ (12,760) $ (161)
----------- ----- ----------- ----------- ----------- -----
----------- ----- ----------- ----------- ----------- -----
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balance at December 31, 1995.......... $ 45,479
Net income............................ 23,335
Purchase of common stock for treasury
(135,000 shares).................... (1,721)
-------------
Balance at December 31, 1996.......... 67,093
Net income............................ 26,917
Issuance of restricted stock (24,219
shares)............................. 630
Issuance of common stock in connection
with the employee stock option plan
(92,249 shares)..................... 1,870
Purchase of common stock for treasury
(152,300 shares).................... (2,747)
-------------
Balance at December 31, 1997.......... 93,763
Issuance of common stock in connection
with the employee stock option plan
(574,978 shares).................... 12,658
Issuance of common stock in connection
with the employee stock purchase
plan (11,915 shares)................ 305
Purchase of common stock for treasury
(217,500 shares).................... (6,250)
Comprehensive income/(loss):
Net income.......................... 43,394
Other comprehensive loss, net of tax
($0.00):
Currency translation adjustment... (161)
-------------
Comprehensive income.................. 43,233
-------------
Balance at December 31, 1998.......... $ 143,709
-------------
-------------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are integral parts
of this statement.
33
<PAGE>
INVESTMENT TECHNOLOGY GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
<S> <C> <C> <C>
1998 1997 1996
---------- ---------- ---------
Cash flows from operating activities:
Net income..................................................................... $ 43,394 $ 26,917 $ 23,335
Adjustments to reconcile net income to net cash provided by operating
activities:
Deferred income tax benefit.................................................. (324) (103) (2,027)
Depreciation and amortization................................................ 11,599 6,642 3,957
Undistributed loss (income) of affiliates.................................... 3,535 441 (267)
Provision for doubtful accounts receivable................................... 96 84 352
Decrease (increase) in operating assets:
Securities owned, at fair value.............................................. (2,258) (12,199) (899)
Receivables from brokers, dealers and other.................................. (14,092) (2,468) 2,149
Due from affiliates.......................................................... 643 94 3,541
Investments.................................................................. 9,935 (5,742) (5,193)
Other assets................................................................. (4,620) (6,930) (1,849)
Increase (decrease) in operating liabilities:
Accounts payable and accrued expenses........................................ 11,592 4,118 5,069
Payable to brokers, dealers and other........................................ 1,820 56 (113)
Software royalties payable................................................... 1,407 389 480
Securities sold, not yet purchased, at fair value............................ 285 (1,223) 1,226
Due to affiliates............................................................ (443) 1,077 (321)
Income taxes payable to affiliate............................................ 2,365 (147) 945
---------- ---------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................................. 64,934 11,006 30,385
---------- ---------- ---------
Cash flows from investing activities:
Purchase of premises and equipment........................................... (7,658) (15,679) (5,624)
Sale of equity investment.................................................... 8,049 -- --
Investment in joint venture.................................................. (4,790) -- --
Capitalization of software development costs................................. (4,025) (4,422) (1,645)
---------- ---------- ---------
NET CASH USED IN INVESTING ACTIVITIES...................................... (8,424) (20,101) (7,269)
---------- ---------- ---------
Cash flows from financing activities:
Purchase of common stock for treasury........................................ (6,250) (2,747) (1,721)
Issuance of common stock..................................................... 12,962 2,500 --
---------- ---------- ---------
NET CASH PROVIDED BY/(USED) IN FINANCING ACTIVITIES........................ 6,712 (247) (1,721)
---------- ---------- ---------
Effect of foreign currency translation on cash and cash equivalents.......... (161) -- --
Net increase (decrease) in cash and cash equivalents....................... 63,061 (9,342) 21,395
Cash and cash equivalents--beginning of year................................... 14,263 23,605 2,210
---------- ---------- ---------
Cash and cash equivalents--end of year......................................... $ 77,324 $ 14,263 $ 23,605
---------- ---------- ---------
---------- ---------- ---------
Supplemental cash flow information:
Interest paid................................................................ $ 20 $ 146 $ 223
---------- ---------- ---------
---------- ---------- ---------
Income taxes paid to affiliate............................................... $ 30,296 $ 19,947 $ 18,798
---------- ---------- ---------
---------- ---------- ---------
</TABLE>
The accompanying Notes to Consolidated Financial Statements are integral parts
of this statement.
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ORGANIZATION AND BASIS OF PRESENTATION
The Consolidated Financial Statements include the accounts of Investment
Technology Group, Inc. and its wholly-owned subsidiaries ("ITGI" or the
"Company"), which principally 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. Investments in companies of fifty percent or less
are accounted for using the equity method. Jefferies Group, Inc. ("Jefferies
Group") owned over 80% of the Company's common stock at December 31, 1998.
The Company is a leading provider of various sophisticated software
solutions for automated institutional agency trade execution and the related
services. The Company's line of business offers products and services to help
clients access liquidity, execute trades more efficiently, and make better
trading decisions. These software solution products include: POSIT, the world's
largest intra-day electronic equity matching system; QuantEX, a fully-integrated
trade routing, analysis and management system; ITG Platform, a tool that
provides connection to POSIT, ITG's electronic trading desk and SuperDOT; ISIS,
a set of analytical tools for systematically lowering the costs of trading;
SmartServers, which offer server based implementation of trading strategies;
ITG/OPT, a computer-based equity portfolio selection system; and research,
development, sales and consulting services to clients.
All material intercompany balances and transactions have been eliminated in
consolidation. The consolidated financial statements reflect all adjustments,
which are in the opinion of management, necessary for the fair statement of
results.
Jefferies Group and the Company have previously announced plans to separate
Jefferies & Company and other Jefferies Group subsidiaries from the Company
through a spin-off and upstream merger and the related transactions (see Note
16--Jefferies Group and the Company Plan to Separate into Two Independent
Companies).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH AND CASH EQUIVALENTS
The Company has defined cash and cash equivalents as highly liquid
investments, with original maturities of less than ninety days, which are part
of the cash management activities of the Company.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all of the Company's financial instruments are carried at fair
value or amounts approximating fair value. Cash and cash equivalents, securities
owned and certain receivables, are carried at fair value or contracted amounts
which approximate fair value due to the short period to maturity and repricing
characteristics. Similarly, liabilities are carried at amounts approximating
fair value. Securities sold, not yet purchased are valued at quoted market
prices.
SECURITIES TRANSACTIONS
Revenues substantially consist of commission revenues. Receivable from
brokers, dealers and other, net consists of commissions receivable and
receivable from a partial liquidation of the TQA Arbitrage Fund L.P.
Transactions in securities, commission revenues and related expenses are
recorded on a trade-date basis.
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Securities owned, at fair value consisted of highly liquid, variable rate
municipal securities and auction rate preferred stock as of December 31, 1998
and 1997.
CAPITALIZED SOFTWARE
The Company capitalizes software development expenses where technological
feasibility of the product has been established. Technological feasibility is
established when the Company has completed all planning, designing, coding and
testing activities that are necessary to establish that the product can be
produced to meet design specifications. The assessment of recoverability of
capitalized software development costs requires considerable judgment by
management with respect to certain external factors, including, but not limited
to, anticipated future gross revenues, estimated economic life and changes in
software and hardware technologies. The Company is amortizing capitalized
software costs using the straight-line method over the estimated economic useful
life, the life of which is generally under two years. Amortization begins when
the product is available for release to customers.
GOODWILL
In May 1991, Jefferies Group acquired Integrated Analytics Corporation
("IAC") and contributed its business to ITG in 1992. IAC's principal product,
MarketMind, was used to develop the Company's QuantEX product. Goodwill, which
represents the excess of purchase price for IAC over the fair value of the IAC
net assets acquired, is amortized on a straight-line basis over ten years. The
Company assesses the recoverability of this intangible asset by determining
whether the amortization of the goodwill balance over its remaining life can be
recovered through undiscounted future operating cash flows of the acquired
operation. At December 31, 1998 and 1997, net goodwill amounted to $1.4 million
and $1.9 million, net of accumulated amortization of $3.9 million and $3.4
million, respectively.
INCOME TAXES
The Company is a member of the Jefferies Group affiliated group ("Group")
for purposes of filing a Federal income tax return (i.e., Jefferies Group owns
more than 80% of the Company). The Company's tax liability is determined on a
"separate return" basis. That is, the Company is required to pay to Jefferies
Group its proportionate share of the consolidated tax liability plus any excess
of its "separate" tax liability (assuming a separate tax return were to be filed
by the Company) over its proportionate amount of the consolidated Group tax
liability. Alternatively, Jefferies Group is required to pay the Company an
"additional amount" to the extent the consolidated tax liability of the Group is
decreased by reason of inclusion of the Company in the Group.
Income taxes are accounted for on the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. Deferred tax
assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost and are depreciated using the
straight-line method over the estimated useful lives of the assets (generally
three to five years). Leasehold improvements are
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
amortized using the straight-line method over the lesser of the estimated useful
lives of the related assets or the non-cancelable lease term.
EXPENSES
COMPENSATION AND EMPLOYEE BENEFITS include base salaries, bonuses,
employment agency fees, part-time employee compensation, commissions paid to
Jefferies & Company employees (note 8), capitalized software (note 4) and fringe
benefits, including employer contributions for medical insurance, life
insurance, retirement plans and payroll taxes. TRANSACTION PROCESSING consists
of floor brokerage and clearing fees. SOFTWARE ROYALTIES are payments to BARRA,
Inc., the Company's joint venture partner in POSIT. Royalty payments are
calculated at an effective rate of 13% of adjusted POSIT revenues. OCCUPANCY AND
EQUIPMENT includes rent, depreciation, amortization of leasehold improvements,
maintenance, utilities, occupancy taxes and property insurance. CONSULTING is
for equity research, product development and other activities that the Company
believes it is advantageous to out-source. 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 goodwill
amortization, equity loss pick-up, and initial start up costs associated with
ITG Europe and ITG Australia and the net gain on the sale of the investment in
the LongView Group, Inc. SPIN-OFF COSTS include legal, accounting, consulting
and various other expenses related to the Company's proposed spin-off and
upstream merger discussed in Note 16. OTHER GENERAL AND ADMINISTRATIVE includes
goodwill amortization, legal, audit, tax and promotional expenses.
RESEARCH AND DEVELOPMENT
All research and development costs are expensed as incurred. Research and
development costs were $11.0 million, $8.4 million and $6.8 million for 1998,
1997 and 1996, respectively.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets, liabilities, revenues and expenses and the
disclosure of contingent assets, liabilities, revenues and expenses to prepare
these financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' amounts to
conform to the current year's presentation.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, EARNINGS PER
SHARE, which is effective for financial statements for both interim and annual
periods ending after December 15, 1997. As of December 31, 1997 the Company was
required to change the method currently used to compute earnings per share and
to restate all prior periods presented. Under the new SFAS, the Company is
required to report both basic and diluted earnings per share. Basic earnings per
share is determined by dividing earnings by the average number of shares of
common stock outstanding, while diluted earnings per share is determined
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
by dividing earnings by the average number of shares of common stock adjusted
for the dilutive effect of common stock equivalents. Earnings per share for 1997
and 1996 have been restated to conform to the provisions of this statement.
DIVIDENDS
Any future payments of dividends will be at the discretion of the Company's
Board of Directors and will depend on the Company's financial condition, results
of operations, capital requirements and other factors deemed relevant. The
Company's revolving credit facility substantially limits the ability of the
Company to pay dividends.
(3) PREMISES AND EQUIPMENT
The following is a summary of premises and equipment as of December 31, 1998
and 1997:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
(DOLLARS IN
THOUSANDS)
Furniture, fixtures and equipment.................................... $ 29,007 $ 22,120
Leasehold improvements............................................... 6,505 6,257
--------- ---------
Total............................................................ 35,512 28,377
Less: accumulated depreciation and amortization...................... 15,850 8,871
--------- ---------
$ 19,662 $ 19,506
--------- ---------
--------- ---------
</TABLE>
JEFFERIES GROUP PREMISES AND EQUIPMENT
Prior to November 1994, premises and equipment for the Company were
purchased by Jefferies Group. Jefferies Group owns and recorded such assets.
Jefferies Group charges the Company depreciation and amortization on such
premises and equipment on a monthly basis. The following is a summary of such of
premises and equipment as of December 31, 1998 and 1997 as recorded by Jefferies
Group:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
(DOLLARS IN
THOUSANDS)
Furniture, fixtures and equipment...................................... $ 4,803 $ 4,803
Leasehold improvements................................................. 942 942
--------- ---------
Total.............................................................. 5,745 5,745
Less: accumulated depreciation and amortization........................ 5,745 5,297
--------- ---------
$ -- $ 448
--------- ---------
--------- ---------
</TABLE>
Most of the capital expenditures in the two schedules above are for
computer-related equipment.
Depreciation and amortization expense amounted to $7,502,000, $4,614,000 and
$2,034,000 in 1998, 1997 and 1996, respectively.
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) CAPITALIZED SOFTWARE COSTS
The following is a summary of capitalized software costs as of December 31,
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
(DOLLARS IN
THOUSANDS)
Capitalized software costs........................................... $ 14,235 $ 10,210
Less: accumulated amortization....................................... 7,785 4,237
--------- ---------
Total............................................................ $ 6,450 $ 5,973
--------- ---------
--------- ---------
</TABLE>
Approximately $4,025,000 of software costs were capitalized in 1998
primarily for the development of new versions of QuantEX and ITG Platform. In
addition, approximately $2,540,000 of total capitalized software costs were not
subject to amortization as of December 31, 1998, as certain products have
reached technological feasibility but are not yet available for release.
Capitalized software costs are being amortized over one to two years, the
life of which is generally less than two years. In 1998, 1997 and 1996, the
Company included $3,548,000, $1,478,000 and $1,374,000, respectively, of
amortized software costs in other general and administrative expenses.
(5) INCOME TAXES
The Company's operations are included in the consolidated Federal income tax
return of Jefferies Group. All income tax liabilities/assets are due to/from
Jefferies Group.
Income tax expense (benefit) consists of the following components:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Current
Federal.................................................... $ 26,624 $ 14,220 $ 13,722
State...................................................... 11,241 6,226 5,971
--------- --------- ---------
Total........................................................ 37,865 20,446 19,693
--------- --------- ---------
Deferred
Federal.................................................... (338) (62) (1,408)
State...................................................... 14 (41) (619)
--------- --------- ---------
(324) (103) (2,027)
--------- --------- ---------
Total........................................................ $ 37,541 $ 20,343 $ 17,666
--------- --------- ---------
--------- --------- ---------
</TABLE>
Deferred income taxes are provided for temporary differences in reporting
certain items, principally deferred compensation. The tax effects of temporary
differences that gave rise to the deferred tax asset at December 31, 1998 and
1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
(DOLLARS IN
THOUSANDS)
Deferred compensation.................................................. $ 1,745 $ 2,144
State income tax....................................................... 1,345 870
Premises and equipment................................................. (916) (970)
Other.................................................................. 610 416
--------- ---------
Total.................................................................. $ 2,784 $ 2,460
--------- ---------
--------- ---------
</TABLE>
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) INCOME TAXES (CONTINUED)
At December 31, 1998 and 1997, the Company had income taxes payable to
Jefferies Group of $3,853,000 and $1,488,000, respectively.
The provision for income tax expense differs from the expected Federal
income tax rate of 35% for 1998, 1997 and 1996 for the following reasons:
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
(DOLLARS IN THOUSANDS)
Computed expected income tax expense......................... $ 28,327 $ 16,541 $ 14,350
Increase in income taxes resulting from:
Amortization of goodwill................................... 192 268 192
State income tax expense, net of
Federal income taxes....................................... 7,316 4,020 3,479
Research and development tax credits....................... (320) (320) (159)
Non-taxable interest income................................ (664) (317) (473)
Limited deductibility of meals and entertainment........... 228 209 168
Non-deductible spin-off expenses........................... 678 -- --
Dividend received deduction................................ (217) -- --
Non-deductible foreign losses.............................. 860 -- --
Other...................................................... 1,141 (58) 109
--------- --------- ---------
Total income tax expense..................................... $ 37,541 $ 20,343 $ 17,666
--------- --------- ---------
--------- --------- ---------
</TABLE>
The Company believes that it is more likely than not that the deferred tax
asset will be realized pursuant to the Company's Tax Sharing Agreement with
Jefferies Group which entitles the Company to a compensating tax payment from
Jefferies Group.
(6) DEBT
The Company has an intercompany borrowing agreement with Jefferies Group
permitting the Company to borrow up to $15.0 million. Outstanding balances, if
any, will be due March 31, 1999 and will accrue interest at 1.75% above the one
month London Interbank Offering Rate. No amounts have ever been borrowed under
this agreement. 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.
(7) EMPLOYEE BENEFIT PLANS
JEFFERIES GROUP PLANS
All employees of the Company 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 the Company are covered
by the Jefferies Group Employees' Pension Plan (the "Pension Plan"), a defined
benefit plan. The plan is subject to the provisions of the Employee Retirement
Income Security Act of 1974. However, benefit accruals for the Company's
employees will cease as of February 15, 1999, and the entire benefit of each
employee who was actually employed on December 31, 1998 will be 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
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) EMPLOYEE BENEFIT PLANS (CONTINUED)
under the Pension Plan, and the Company's 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.
The net periodic pension cost allocated to the Company was $819,000,
$208,000 and $151,000 in 1998, 1997 and 1996, respectively.
Jefferies Group incurs expenses related to various benefit plans covering
substantially all employees, including an Employee Stock Purchase Plan ("ESPP")
and a profit sharing plan, which includes a salary reduction feature designed to
qualify under Section 401(k) of the Internal Revenue Code. As of February 1,
1998, employees of the Company were no longer eligible to participate in the
ESPP and as of December 31, 1998 were no longer eligible to participate in the
profit sharing plan.
Jefferies Group also incurs expenses related to a Capital Accumulation Plan
for certain officers and key employees of Jefferies Group and the Company.
Participation in the plan was optional, with those who elected to participate
agreeing to defer graduated percentages of their compensation. As of January 1,
1998 employees of the Company were no longer eligible to defer compensation in
the Capital Accumulation Plan. This was replaced with the Company's Stock Unit
Award Program as described below.
For 1998, 1997 and 1996, the Company expensed and contributed to these plans
$2,568,000, $2,096,000, and $1,590,000, respectively.
ITG PLANS
Effective as of January 1, 1999, all employees employed as of that date were
immediately eligible to participate in the Investment Technology Group, Inc.
Retirement Savings Plan and the Investment Technology Group, Inc. Guaranteed
Money Purchase Pension Plan (the "Plans"). These Plans include all eligible
compensation (base salary, bonus, commissions and overtime) up to the Internal
Revenue Service annual maximum currently at $160,000. The Plans' features
include a guaranteed company contribution of 3% of eligible pay to be made to
all eligible employees regardless of participation in the Plans, a discretionary
company contribution based on total consolidated company profits between 0% and
8% regardless of participation in the Plans and a Company matching contribution
of 66 2/3% of voluntary employee contributions up to a maximum of 6% of eligible
compensation per year.
Effective January 1, 1998, selected members of senior management and key
employees participated in the Stock Unit Award Program ("SUA"), a mandatory
tax-deferred compensation program established under the 1994 Option Plan. Under
the SUA, the selected participants of the Company are required to defer receipt
of (and thus defer taxation on) a graduated portion of their total cash
compensation for units representing common stock equal in value to 115% of the
compensation deferred. Each participant is automatically granted units, as of
the last day of each calendar quarter based on participant's actual or assigned
compensation reduction. The units are at all times fully vested and
non-forfeitable. The units are to be settled on or after the third anniversary
of the date of grant. In 1998, the Company included the participant's deferral
in compensation expense and recognized additional compensation expense of
$477,000, which represents the 15% excess over the amount actually deferred by
the participants. As of December 31, 1998, we had 111,683 units issued to the
employees in the SUA. Such units are included in the calculation of diluted
weighted average shares outstanding in order to determine diluted earnings per
share.
In 1997, the Board of Directors of the Company approved the ITG Employee
Stock Purchase Plan ("ITG ESPP"). The ITG ESPP became effective February 1, 1998
and allows all full-time employees to
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) EMPLOYEE BENEFIT PLANS (CONTINUED)
purchase the Company's common stock at a 15% discount through automatic payroll
deductions. The ITG ESPP is qualified as an employee stock purchase plan under
Section 423 of the Internal Revenue Code.
(8) RELATED PARTY TRANSACTIONS
Jefferies & Company has provided to the Company pursuant to a service
agreement, specified administrative services, at fixed monthly costs during
1998. Administrative services included accounting, payroll, compliance services,
personnel services, legal services, data processing and telecommunications.
All services were terminated on December 31, 1998, except for accounting
services, and preparation of regulatory accounting reports, and certain
personnel services, including administering certain employee benefit plans. The
accounting and administrative services will continue until June 30, 1999 unless
the Company terminates them earlier. The personnel services will continue until
transfer of the assets under certain Jefferies Group employee benefit plans to
Company Plans. The costs of such services to the Company during 1998, 1997 and
1996 were $1,186,000, $1,162,000 and $690,000, respectively.
The Company has paid to Jefferies & Company an aggregate of $250,000,
$247,000 and $502,000 for 1998, 1997 and 1996, respectively, as compensation to
Jefferies & Company's account executives for introducing customers to POSIT
pursuant to a 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.
Jefferies & Company has provided substantially all clearing services to the
Company, pursuant to a Fully Disclosed Clearing Agreement. Aggregate costs of
such services to the Company were $11.9 million, $9.3 million and $7.3 million
during 1998, 1997 and 1996, respectively, included in transaction processing
expenses.
The Clearing Agreement is for a term of five years ending March 15, 1999 and
is subject to termination at any time by either party on 180 days' written
notice or upon default by the other party. ITG Inc. and Jefferies & Company are
entering into a new clearing agreement on substantially similar terms as the
Clearing Agreement with an initial term of January 2, 1999 to June 30, 2000.
Various other affiliates of Jefferies Group, including Jefferies & Company,
Inc., W & D Securities, Inc. and Jefferies International Limited, have provided
other services to the Company. Certain occupancy and equipment expense has been
provided to the Company at cost by Jefferies Group and Jefferies & Company. W &
D Securities, Inc. performed certain execution services on the New York Stock
Exchange and other exchanges for the Company. The cost of these execution
services were $13.6 million, $10.8 million and $6.5 million in 1998, 1997 and
1996, respectively, and is primarily included in transaction processing expense.
W & D Securities Inc. and ITG Inc. are entering into a new execution agreement
on substantially similar terms as the current execution agreement with an
initial term of January 2, 1999 to June 30, 2000. Included in other general and
administrative expenses are fees paid to Jefferies International Limited of
$767,000 for various broker and administrative services, of which $764,000 was
reimbursed to the Company by its affiliates ITG Global Trading Incorporated and
ITG International Limited. Included in revenues are financing costs of $911,000
paid to Jefferies & Company. Also, included in revenues, are licensing and
consulting fees paid by W&D Securities, Inc. amounting to $165,000.
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) RELATED PARTY TRANSACTIONS (CONTINUED)
Jefferies & Company has executed trades in an agency capacity for certain of
its customers using ITG's services. Commission fees of $4.8 million, $3.1
million and $1.7 million in 1998, 1997 and 1996, respectively, and are included
in the Company's revenues.
Transactions with Jefferies Group and its affiliates are provided at arms
length and are settled in the normal course of business by the Company.
Throughout the Notes to Consolidated Financial Statements there are other
related party transactions (see Notes 3, 5 and 7).
(9) OFF BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK
In the normal course of business, the Company is involved in the execution
of various customer securities transactions. Securities transactions are subject
to the credit risk of counter party or customer nonperformance. However,
transactions are collateralized by the underlying security, thereby reducing the
associated risk to changes in the market value of the security through
settlement date. Therefore, the settlement of these transactions is not expected
to have a material effect upon the Company's financial statements. It is also
the Company's policy to review, as necessary, the credit worthiness of each
counter party and customer.
(10) NET CAPITAL REQUIREMENT
ITG Inc. is subject to the Uniform Net Capital Rule (Rule 15c3-1) under the
Securities Exchange Act of 1934, which requires the maintenance of minimum net
capital. ITG Inc. has elected to use the alternative method permitted by Rule
15c3-1, which requires that ITG Inc. maintain minimum net capital, as defined,
equal to the greater of $250,000 or 2% of aggregate debit balances arising from
customer transactions, as defined.
At December 31, 1998, ITG Inc. had net capital of $72.0 million, which was
$71.7 million in excess of required net capital. See Note 16 for the Company's
proposed spin-off and upstream merger and the related dividend transactions.
(11) ITGI STOCK OPTIONS
At December 31, 1998, the Company had a non-compensatory stock option plan.
Under the 1994 Stock Option and Long-term Incentive Plan (the "1994 Plan"),
non-compensatory options to purchase 3,650,000 shares of the Company's Common
Stock are reserved for issuance under the plan. Except for certain options
granted in conjunction with the initial public offering in May 1994, the
majority of the options will vest in one-third increments on the first, second,
and third anniversaries of the date the options were priced. Shares of Common
Stock which are attributable to awards which have expired, terminated or been
canceled or forfeited during any calendar year are generally available for
issuance or use in connection with future awards during such calendar year.
Options that have been granted under the 1994 Stock Option and Long-Term
Incentive Plan are exercisable on dates ranging from May 1997 to November 2007.
The Plan will remain in effect until March 31, 2007, unless sooner terminated by
the Board of Directors. After this date, no further stock options shall be
granted but previously granted stock options shall remain outstanding in
accordance with their applicable terms and conditions, as stated in the Stock
Option and Long-term Incentive Plan.
In June 1995, the Board of Directors adopted, subject to stockholder
approval, the Non-Employee Directors' Plan. The Non-Employee Directors' Plan
generally provides for an annual grant to each non-employee director of an
option to purchase 2,500 shares of Common Stock. In addition, the
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) ITGI STOCK OPTIONS (CONTINUED)
Non-Employee Directors' Plan provides for the automatic grant to a non-employee
director, at the time he or she is initially elected, of a stock option to
purchase 10,000 shares of Common Stock. Stock options granted under the
Non-Employee Directors' Plan are non-qualified stock options having an exercise
price equal to the fair market value of the Common Stock at the date of grant.
All stock options become exercisable three months after the date of grant. Stock
options granted under the Non-Employee Directors' Plan expire five years after
the date of grant. A total of 125,000 shares of Common Stock are reserved and
available for issuance under the Non-Employee Directors' Plan.
At the time of the Company's initial public offering in May 1994, stock
options to acquire an aggregate of 2,728,000 shares of Common Stock were granted
to officers and other employees of the Company. Of these options granted,
2,442,000 shares were 100% vested on May 4, 1994. In 1995, the Compensation
Committee of the Board of Directors determined that a value-neutral repricing of
such options would serve to provide enhanced incentives to officers and
employees of the Company. Accordingly, on the recommendation of the Compensation
Committee, the Company offered a stock option repricing program pursuant to
which all holders (options granted under the Non-Employee Directors' Plan were
not eligible for repricing) of outstanding stock options with an exercise price
of $13.00 per share were permitted to elect to exchange all or a portion of such
stock options for a smaller number of stock options to acquire shares of Common
Stock at exercise prices of $13.00, $11.06 and $9.13 per share. The repricing
program was offered to option holders on a value neutral basis using the Black
Scholes option valuation model. In all, approximately 66% of the outstanding
stock options eligible for repricing were repriced at the election of the
holders of such options.
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for its non-compensatory stock option plans. Accordingly, no
compensation costs have been recognized for its stock option plan. Had
compensation cost for the Company's stock option plans been determined
consistent with FASB Statement No. 123, the Company's net income and earnings
per share would have been reduced to the pro forma amounts indicated below
(dollars in thousands, except per share data):
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C> <C>
Net income.............................. As reported $ 43,394 $ 26,917 $ 23,335
Pro forma $ 41,713 $ 23,375 $ 20,279
Basic net earnings per share of common
stock................................. As reported $ 2.36 $ 1.48 $ 1.28
Pro forma $ 2.27 $ 1.29 $ 1.11
Diluted earnings per share common
stock................................. As reported $ 2.25 $ 1.42 $ 1.26
Pro forma $ 2.16 $ 1.23 $ 1.09
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black Scholes option valuation model with the following weighted average
assumptions used for grants in 1998 and 1997, respectively: zero dividend yield
for all years; risk free interest rates of 5.5, 6.6 and 6.1 percent; expected
volatility of 45, 54 and 49 percent; and expected lives of seven, five and four
years.
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) ITGI STOCK OPTIONS (CONTINUED)
A summary of the status of the Company's stock option plan as of December
31, 1998, 1997 and 1996 and changes during the years ended on those dates is
presented below:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------- ----------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
- ------------------------------------------------------- ---------- ----------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year....................... 3,458,216 $ 15.63 2,311,059 $ 11.96 2,271,351 $ 11.82
Granted................................................ 22,500 29.55 1,241,904 22.29 49,877 16.96
Exercised.............................................. (568,312) 12.94 (94,249) 13.00 -- --
Forfeited.............................................. (24,298) 20.43 (498) 13.00 (10,169) 13.00
---------- ----------- ---------- ----------- ---------- -----------
Outstanding at end of year............................. 2,888,106 $ 16.21 3,458,216 $ 15.63 2,311,059 $ 11.96
---------- ----------- ---------- ----------- ---------- -----------
---------- ----------- ---------- ----------- ---------- -----------
Options exercisable at year-end........................ 2,722,282 $ 15.77 1,737,923 $ 15.25 None
Weighted average fair value per share of options
granted during the year.............................. $ 15.68 $ 10.76 $ 7.93
</TABLE>
The following table summarizes information about fixed stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ -------------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
AT REMAINING AVERAGE AT AVERAGE
DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
RANGE OF EXERCISE PRICES 1998 LIFE (YEARS) PRICE 1998 PRICE
- -------------------------------------------------- ------------ --------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C>
$ 7.50 10.00.................................... 445,909 1.9 $ 9.08 445,909 $ 9.08
11.00 15.00.................................... 1,167,117 0.9 12.30 1,167,117 12.30
16.00 20.00.................................... 157,976 3.4 19.22 73,256 18.94
21.00 25.00.................................... 1,019,604 3.1 22.21 1,010,000 22.19
26.00 30.00.................................... 92,500 8.4 27.80 26,000 27.97
31.00 32.10.................................... 5,000 4.3 32.10 -- --
------------ ------------
$ 7.50 32.10.................................... 2,888,106 2.2 $ 16.21 2,722,282 $ 15.77
------------ ------------
------------ ------------
</TABLE>
During 1998, the Company granted 111,683 units representing restricted stock
awards under our Stock Unit Award deferred compensation plan. See note
7--Employee Benefit Plans. Although the 1994 Plan allows for the granting of
performance-based stock options, no such options were granted during 1998, 1997
and 1996 and no such options were outstanding at December 31, 1998, 1997 and
1996.
Restricted stock of 24,219 shares was granted in 1997 as part of the
Company's settlement for its equity investment in The LongView Group. The
restriction period was for one year.
In 1997, the Company granted to Scott P. Mason, its then President and CEO,
a non-qualified stock option to acquire 1,000,000 shares of Common Stock, having
an exercise price of $22.175. During 1997, 400,000 of these options became
exercisable. Upon Mr. Mason's death in 1998, the remaining 600,000 options were
deemed by the board to be exercisable. The effects of such decision resulted in
additional compensation expense of $2.8 million at December 31, 1998. The
options expire in September 2000.
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) INTEREST EXPENSE
Included in other general and administrative expenses is interest expense of
$20,000, $146,000 and $223,000 for 1998, 1997 and 1996, respectively.
(13) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 1998 and 1997
consisted of the following;
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
(DOLLARS IN
THOUSANDS)
Accounts payable and accrued expenses................................ $ 6,581 $ 4,150
Deferred compensation plan........................................... 3,801 --
Deferred options..................................................... 2,778 64
Accrued soft dollar expenses......................................... 6,692 3,125
Accrued bonus expense................................................ 1,757 2,849
Accrued rent expense................................................. 2,445 2,276
Deferred revenues.................................................... 100 200
--------- ---------
Total............................................................ $ 24,154 $ 12,664
--------- ---------
--------- ---------
</TABLE>
(14) LEASE COMMITMENTS
The Company entered into lease and sublease agreements with third parties
for certain offices and equipment, which expire at various dates through 2005.
Rent expense for the years ended December 31, 1998, 1997 and 1996 was $3.2
million, $2.6 million and $1.9 million, respectively. Minimum future rentals
under non-cancelable operating leases follow (dollars in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
- -----------------------------------------------------------------------------------
<S> <C>
1999............................................................................... $ 3,059
2000............................................................................... 3,116
2001............................................................................... 2,712
2002............................................................................... 2,524
2003............................................................................... 2,914
Thereafter......................................................................... 18,818
---------
Total.......................................................................... $ 33,143
---------
---------
</TABLE>
(15) EARNINGS PER SHARE
Net earnings per share of common stock is based upon an adjusted weighted
average number of shares of common stock outstanding. The average number of
outstanding shares for the years ended December 31, 1998, 1997 and 1996 were
18.4 million, 18.2 million and 18.3 million, respectively.
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) EARNINGS PER SHARE (CONTINUED)
The following is a reconciliation of the basic and diluted earnings per
share computations for the years ended December 31, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
(AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
Net income for basic and diluted earnings per share.............................. $ 43,394 $ 26,917 $ 23,335
--------- --------- ---------
--------- --------- ---------
Shares of common stock and common stock equivalents:
Average number of common shares................................................ 18,365 18,178 18,284
--------- --------- ---------
Average shares used in basic computation....................................... 18,365 18,178 18,284
Effect of dilutive securities--options......................................... 924 762 302
--------- --------- ---------
Average shares used in diluted computation..................................... 19,289 18,940 18,586
--------- --------- ---------
--------- --------- ---------
Earnings per share:
Basic.......................................................................... $ 2.36 $ 1.48 $ 1.28
--------- --------- ---------
--------- --------- ---------
Diluted........................................................................ $ 2.25 $ 1.42 $ 1.26
--------- --------- ---------
--------- --------- ---------
</TABLE>
(16) JEFFERIES GROUP AND THE COMPANY PLAN TO SEPARATE INTO TWO INDEPENDENT
COMPANIES
On March 17, 1998, the Company announced plans for the separation of
Jefferies & Company and other Jefferies Group subsidiaries from the Company
through a series of transactions, including a special cash dividend, the
transfer of most of Jefferies Group's assets and liabilities (other than those
related to the Company), a spin-off and an upstream merger (collectively, the
"Transactions"). Upon the consummation of the upstream merger and the related
transactions, the stockholders of Jefferies Group will be stockholders of the
Company and Jefferies Group will cease to be the Company's parent.
First, the Company will pay a special cash dividend of $4.00 per share,
payable pro rata to all of its stockholders of record, including Jefferies Group
(the "Special Cash Dividend"). The aggregate amount of the Special Cash Dividend
will be up to $75.0 million, of which the Company will pay $60.0 million to
Jefferies Group.
Following the payment of the Special Cash Dividend, Jefferies Group will
transfer all of its assets (other than its equity interest in the Company) and
all of its liabilities (other than liabilities related to the Company) to a new
company ("New Jefferies"). After such transfers have been completed and certain
other conditions have been satisfied, Jefferies Group will distribute (the
"Spin-Off") all of the outstanding common stock of New Jefferies pro rata to its
stockholders.
The Spin-Off will be followed immediately by a tax-free merger of the
Company into Jefferies Group, with the Company's public shareholders receiving
shares of Jefferies Group. Jefferies Group will then be renamed Investment
Technology Group, Inc. ("New ITGI"). Based on the number of shares of Jefferies
Group common stock expected to be outstanding on the date of the spin-off and
upstream merger (approximately 23,900,000) and the number of shares of the
Company's common stock held by Jefferies Group (15,000,000), the Company's
public stockholders other than Jefferies Group will receive approximately 1.59
shares of common stock of New ITGI for each share of the Company's common stock
held by them.
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(16) JEFFERIES GROUP AND THE COMPANY PLAN TO SEPARATE INTO TWO INDEPENDENT
COMPANIES (CONTINUED)
The upstream merger and the related transactions are contingent on a number
of factors, including receipt of all Board of Directors and shareholder
approvals of Jefferies Group and the Company, receipt of a favorable tax ruling
from the Internal Revenue Service and other required regulatory and contractual
approvals. The upstream merger and the related transactions are currently
expected to close in April 1999.
(17) CONTINGENCIES
In 1998, the Company received a "30-day letter" proposing certain
adjustments which, if sustained, would result in a tax deficiency of
approximately $9.6 million plus interest. The adjustments proposed relate to (i)
the disallowance of deductions taken in connection with the termination of
certain compensation plans at the time of our initial public offering in 1994
and (ii) the disallowance of tax credits taken in connection with certain
research and development expenditures. We believe that the tax benefits in
question were taken properly and intend to vigorously contest the proposed
adjustments. Based on the facts and circumstances known at this time, we are
unable to predict when this matter will be resolved or the costs associated with
its resolution.
(18) SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED)
The following tables set forth certain unaudited financial data for the
Company's quarterly operations in 1998, 1997 and 1996. The following information
has been prepared on the same basis as the annual information presented
elsewhere in this report and, in the opinion of management, includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the information for the quarterly periods presented. The
operating results for any quarter are not necessarily indicative of results for
any future period.
48
<PAGE>
INVESTMENT TECHNOLOGY GROUP, INC.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER
YEAR ENDED DECEMBER 31, 1998 31, 1997
-------------------------------------------------- -----------
<S> <C> <C> <C> <C> <C>
FOURTH THIRD SECOND FIRST FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- ----------- -----------
<CAPTION>
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Total Revenue............................................. $ 62,216 $ 57,697 $ 50,905 $ 41,387 $ 36,272
Expenses:
Compensation and employee benefits...................... 14,500 14,152 12,225 10,585 8,999
Transaction processing.................................. 7,639 6,917 6,710 5,564 5,718
Software royalties...................................... 4,072 4,416 3,774 2,985 2,579
Occupancy and equipment................................. 3,195 3,071 2,823 2,797 2,814
Consulting.............................................. 767 357 393 821 487
Telecommunications and data processing services......... 1,853 2,179 2,325 1,781 1,988
Net (gain) loss on long-term investments................ 1,749 (3,632) 1,085 1,002 --
Spin-off costs.......................................... 1,083 479 374 -- 297
Other general and administrative........................ 3,871 4,027 2,529 2,712 2,742
----------- ----------- ----------- ----------- -----------
Total expenses........................................ 38,729 31,966 32,238 28,337 25,624
----------- ----------- ----------- ----------- -----------
Income before income tax expense.......................... 23,487 25,731 18,667 13,050 10,648
Income tax expense........................................ 11,267 11,847 8,739 5,688 4,739
----------- ----------- ----------- ----------- -----------
Net income................................................ $ 12,220 $ 13,884 $ 9,928 $ 7,362 $ 5,909
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Basic net earnings per share of common stock.............. $ 0.66 $ 0.75 $ 0.54 $ 0.40 $ 0.32
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Diluted net earnings per share of common stock............ $ 0.63 $ 0.72 $ 0.52 $ 0.38 $ 0.31
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Basic weighed average shares outstanding.................. 18,484 18,420 18,330 18,233 18,188
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Diluted weighted average shares and common stock
equivalents outstanding................................. 19,468 19,234 19,208 19,154 19,107
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
<CAPTION>
YEAR ENDED DECEMBER 31,
1996
------------------------
<S> <C> <C>
THIRD SECOND FIRST FOURTH THIRD
QUARTER QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- ----------- -----------
<S> <C> <C>
Total Revenue............................................. $ 33,437 $ 36,679 $ 30,654 $ 29,892 $ 28,684
Expenses:
Compensation and employee benefits...................... 7,599 7,007 6,874 6,947 6,225
Transaction processing.................................. 5,110 5,682 4,903 3,922 4,340
Software royalties...................................... 2,306 2,581 2,382 2,283 2,272
Occupancy and equipment................................. 2,521 2,010 1,859 1,928 1,899
Consulting.............................................. 585 574 371 494 452
Telecommunications and data processing services......... 1,504 2,156 957 1,396 1,217
Net (gain) loss on long-term investments................ -- -- -- -- --
Spin-off costs.......................................... -- -- -- -- --
Other general and administrative........................ 2,486 2,744 1,947 1,614 2,072
----------- ----------- ----------- ----------- -----------
Total expenses........................................ 22,111 22,754 19,293 18,584 18,477
----------- ----------- ----------- ----------- -----------
Income before income tax expense.......................... 11,326 13,925 11,361 11,308 10,207
Income tax expense........................................ 4,857 5,917 4,830 4,813 4,330
----------- ----------- ----------- ----------- -----------
Net income................................................ $ 6,469 $ 8,008 $ 6,531 $ 6,495 $ 5,877
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Basic net earnings per share of common stock.............. $ 0.36 $ 0.44 $ 0.36 $ 0.36 $ 0.32
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Diluted net earnings per share of common stock............ $ 0.34 $ 0.43 $ 0.35 $ 0.35 $ 0.32
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Basic weighed average shares outstanding.................. 18,144 18,128 18,254 18,255 18,256
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
Diluted weighted average shares and common stock
equivalents outstanding................................. 19,104 18,702 18,809 18,727 18,558
----------- ----------- ----------- ----------- -----------
----------- ----------- ----------- ----------- -----------
<CAPTION>
SECOND FIRST
QUARTER QUARTER
----------- -----------
Total Revenue............................................. $ 26,313 $ 26,667
Expenses:
Compensation and employee benefits...................... 6,006 5,869
Transaction processing.................................. 3,776 3,699
Software royalties...................................... 2,022 2,221
Occupancy and equipment................................. 1,257 1,027
Consulting.............................................. 692 854
Telecommunications and data processing services......... 925 1,251
Net (gain) loss on long-term investments................ -- --
Spin-off costs.......................................... -- --
Other general and administrative........................ 1,783 2,112
----------- -----------
Total expenses........................................ 16,461 17,033
----------- -----------
Income before income tax expense.......................... 9,852 9,634
Income tax expense........................................ 4,285 4,238
----------- -----------
Net income................................................ $ 5,567 $ 5,396
----------- -----------
----------- -----------
Basic net earnings per share of common stock.............. $ 0.30 $ 0.29
----------- -----------
----------- -----------
Diluted net earnings per share of common stock............ $ 0.30 $ 0.29
----------- -----------
----------- -----------
Basic weighed average shares outstanding.................. 18,262 18,364
----------- -----------
----------- -----------
Diluted weighted average shares and common stock
equivalents outstanding................................. 18,572 18,435
----------- -----------
----------- -----------
</TABLE>
Earnings per share for quarterly periods are based on average common shares
outstanding in individual quarters; thus, the sum of earnings per share of the
quarters may not equal the amounts reported for the full year. Earnings per
share for prior periods have been restated to conform with Statement of
Financial Accounting Standards No. 128, EARNINGS PER SHARE.
49
<PAGE>
INVESTMENT TECHNOLOGY GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------- -------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- ----------- ----------- ----------- -----------
<CAPTION>
(AS A PERCENTAGE OF TOTAL REVENUES)
<S> <C> <C> <C> <C> <C> <C> <C>
Total Revenue....................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Expenses:
Compensation and employee
benefits........................ 23.3 24.5 24.0 25.6 24.8 22.7 19.1
Transaction processing............ 12.3 12.0 13.2 13.7 15.8 15.3 15.5
Software royalties................ 6.5 7.7 7.4 7.2 7.1 6.9 7.0
Occupancy and equipment........... 5.1 5.3 5.5 6.8 7.8 7.5 5.5
Consulting........................ 1.2 0.6 0.8 2.0 1.3 1.7 1.6
Telecommunications and data
processing services............. 3.0 3.8 4.6 4.3 5.5 4.5 5.9
Net (gain) loss on investments.... 2.8 (6.3) 2.1 2.4 0.2 0.0 0.0
Spin-off costs.................... 1.7 0.8 0.7 0.0 0.0 0.0 0.0
Other general and
administrative.................. 6.2 7.0 5.0 6.6 7.3 7.4 7.5
----- ----- ----- ----- ----- ----- -----
Total expenses.................. 62.2 55.4 63.3 68.5 70.7 66.0 62.1
----- ----- ----- ----- ----- ----- -----
Income before income tax expense.... 37.8 44.6 36.7 31.5 29.3 34.0 37.9
Income tax expense................ 18.1 20.5 17.2 13.7 13.0 14.7 16.1
----- ----- ----- ----- ----- ----- -----
Net income.......................... 19.6% 24.1% 19.5% 17.8% 16.3% 19.3% 21.8%
----- ----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- ----- -----
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------
<S> <C> <C> <C> <C> <C>
FIRST FOURTH THIRD SECOND FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Total Revenue....................... 100.0% 100.0% 100.0% 100.0% 100.0%
Expenses:
Compensation and employee
benefits........................ 22.4 23.2 21.7 22.8 22.0
Transaction processing............ 16.0 13.1 15.1 14.4 13.9
Software royalties................ 7.8 7.6 7.9 7.7 8.3
Occupancy and equipment........... 6.1 6.4 6.6 4.8 3.9
Consulting........................ 1.2 1.7 1.6 2.6 3.2
Telecommunications and data
processing services............. 3.1 4.7 4.2 3.5 4.7
Net (gain) loss on investments.... 0.0 0.0 0.0 0.0 0.0
Spin-off costs.................... 0.0 0.0 0.0 0.0 0.0
Other general and
administrative.................. 6.4 5.4 7.2 6.8 7.9
----- ----- ----- ----- -----
Total expenses.................. 63.0 62.1 64.3 62.6 63.9
----- ----- ----- ----- -----
Income before income tax expense.... 37.0 37.9 35.7 37.4 36.1
Income tax expense................ 15.7 16.2 15.2 16.2 15.9
----- ----- ----- ----- -----
Net income.......................... 21.3% 21.7% 20.5% 21.2% 20.2%
----- ----- ----- ----- -----
----- ----- ----- ----- -----
</TABLE>
50
<PAGE>
(19) SUBSEQUENT EVENTS (UNAUDITED)
On March 16, 1999, the Company entered into an agreement with a bank to
borrow, effective upon the closing of the merger, up to $20 million (the
"Commitment") on a revolving basis to enable ITG Inc. to satisfy its regulatory
net capital requirements. The 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 the 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 the Company's ability to pay cash dividends or incur
indebtedness and requires the Company to comply with certain financial
covenants.
The intercompany borrowing agreement with Jefferies Group terminated on
March 15, 1999. In addition, the credit line established with our bank to fund
temporary regulatory capital shortfalls encountered periodically by ITG
Australia will not be permitted during the period that the revolving credit
agreement discussed above is effective.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There were no changes in or disagreements with accountants reportable
herein.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to this item will be contained in the Proxy
Statement for the 1999 Annual Meeting of Stockholders, which is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information with respect to this item will be contained in the Proxy
Statement for the 1999 Annual Meeting of Stockholders, which is incorporated
herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information with respect to this item will be contained in the Proxy
Statement for the 1999 Annual Meeting of Stockholders, which is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information with respect to this item will be contained in the Proxy
Statement for the 1999 Annual Meeting of Stockholders, which is incorporated
herein by reference.
51
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
Included in Part II of this report:
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report........................................................... 30
Consolidated Statements of Income...................................................... 31
Consolidated Statements of Financial Condition......................................... 32
Consolidated Statements of Changes in Stockholders' Equity............................. 33
Consolidated Statements of Cash Flows.................................................. 34
Notes to Consolidated Financial Statements............................................. 35
</TABLE>
(a)(2) Schedules
Schedules are omitted because the required information either is not
applicable or is included in the financial statements or the notes thereto.
(a)(3) Exhibits
<TABLE>
<S> <C>
2.1* Agreement and Plan of Merger, dated as of March 17, 1999, by and between Jefferies
Group, Inc. and the Company.
2.2* Distribution Agreement, dated as of March 17, 1999, by and among Jefferies Group,
Inc. and JEF Holding Company, Inc.
3.1 Certificate of Incorporation of the Company (incorporated by reference to Exhibit
3.1 to Registration Statement Number 33-76474 on Form S-1 as declared effective by
the Securities and Exchange Commission on May 4, 1994 (the "Registration
Statement")).
3.2 By-laws of the Company (incorporated by reference to Exhibit 3.2 to Registration
Statement).
4.1 Form of Certificate for Common Stock of the Company (incorporated by reference to
Exhibit 4.1 to Registration Statement).
10.1 Joint Venture Agreement, dated October 1, 1987, between Jefferies & Company, Inc.
and BARRA, Inc. (formerly Barr Rosenberg Associates, Inc.) (incorporated by
reference to Exhibit 10.1.1 to Registration Statement).
10.1.1 Exclusive Software License Agreement, dated October 1, 1987, between the POSIT
Joint Venture and Jefferies & Company, Inc. (incorporated by reference to Exhibit
10.1.2 to Registration Statement).
10.1.2 Amendment No. 1 to Exclusive Software License Agreement, dated August 1, 1990,
between the POSIT Joint Venture and Jefferies & Company, Inc. (incorporated by
reference to Exhibit 10.1.3 to Registration Statement).
10.1.3 Consent of BARRA, Inc. to the assignment to the Company of the interests of
Jefferies & Company, Inc. in the Posit Joint Venture referenced in item 10.1.1 and
rights in the Software License Agreement referenced in item 10.1.2 (incorporated by
reference to Exhibit 10.1.4 to Registration Statement).
10.1.4* Joint Venture Agreement, dated as of November 17, 1998, by and among Investment
Technology Group International Limited, Societe Generale, Investment Technology
Group SG Limited, Investment Technology Group Limited and Investment Technology
Group Europe Limited.
10.2 Service Agreement, dated March 15, 1994, by and between Jefferies & Company, Inc.
and ITG Inc. (incorporated by reference to Exhibit 10.2.2 to Registration
Statement).
</TABLE>
52
<PAGE>
<TABLE>
<S> <C>
10.2.1* Amendment No. 1 to Service Agreement, dated as of January 1, 1999, by and between
Jefferies & Company, Inc. and ITG Inc.
10.2.2* Execution Agreement, dated as of January 1, 1999, by and between W & D Securities,
Inc. and ITG Inc.
10.2.3* Fully Disclosed Clearing Agreement, dated as of January 1, 1999, by and between
Jefferies & Company, Inc. and ITG Inc.
10.2.4* Benefits Agreement, dated as of March 17, 1999, by and between Jefferies Group,
Inc. and JEF Holding Company, Inc.
10.2.5* Amended and Restated Tax Sharing Agreement, dated as of March 17, 1999, by and
among Jefferies Group, Inc., JEF Holding Company, Inc. and the Company.
10.2.6* Tax Sharing and Indemnification Agreement, dated as of March 17, 1999, by and among
Jefferies Group, Inc., JEF Holding Company, Inc. and the Company.
10.2.7* Credit Agreement dated as of March 16, 1999, among Investment Technology Group,
Inc., as Borrower and the Bank of New York, as Lender
10.3. Employment Agreement between the Company, ITG Inc. and Raymond L. Killian, Jr.
(incorporated by reference to Exhibit 10.3.2 to Registration Statement).
10.3.1 Amendment No. 2 to Employment Agreement between Raymond L. Killian, Jr., the
Company and ITG Inc. (incorporated by reference to Exhibit 10.3.2A to the Annual
Report on Form 10-K for the year ended December 31, 1996.)
10.3.2 Employment Agreement between the Company and Scott P. Mason. (incorporated by
reference to Exhibit 0.3.18 to the Annual Report on Form 10-K for the year ended
December 31, 1996).
10.3.3 Stock Option Agreement between the Company and Scott P. Mason (incorporated by
reference to Exhibit 10.3.3 to Registration Statement).
10.3.4 Form of Employment Agreement between the Company and Joshua D. Rose (incorporated
by reference to Exhibit 10.3.4 to Registration Statement).
10.3.5 Employment Agreement between the Company, ITG Inc. and Yossef A. Beinart
(incorporated by reference to Exhibit 10.3.6 to Registration Statement Number
33-76474 on Amendment Number 3 to Form S-1 as filed with the Securities and
Exchange Commission on May 2, 1994).
10.3.6 Amendment to Form of Employment Agreement between the Company, ITG Inc. and Senior
Vice Presidents Electing to Reprice Stock Options. (incorporated by reference to
Exhibit 10.3.4A to the Annual Report on Form 10-K for the year ended December 31,
1996).
10.4. Amended and Restated 1994 Stock Option and Long-Term Incentive Plan. (incorporated
by reference to Exhibit A to the 1997 Annual Meeting Proxy Statement).
10.4.1 Non-Employee Directors' Stock Option Plan. (incorporated by reference to Appendix A
to the 1996 Annual Meeting Proxy Statement).
10.4.2 Capital Accumulation Plan for Key Employees of Jefferies Group, Inc. (incorporated
by reference to Exhibit 10.3.7 to Registration Statement).
10.4.3 Form of Stock Option Agreement between the Company and certain employees of the
Company (incorporated by reference to Exhibit 10.3.3 to Registration Statement).
10.4.4 Pay-For-Performance Incentive Plan (incorporated by reference to Exhibit B to the
1997 Annual Meeting Proxy Statement).
10.4.5 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.3.1A to the
Annual Report on Form 10-K for the year ended December 31, 1997)
</TABLE>
53
<PAGE>
<TABLE>
<S> <C>
10.4.6* 1998 Amended and Restated Stock Unit Award Program
10.5. Lease, dated July 11, 1990, between AEW/LBA Acquisition Co. LLC (as successor to
400 Corporate Pointe, Ltd.) and Integrated Analytics Corporation, as assigned by
Integrated Analytics Corporation to the Company (incorporated by reference to
Exhibit 10.3.3 to Registration Statement).
10.5.1 First Amendment to Lease, dated as of June 1, 1995, between AEW/LBA Acquisition Co.
LLC (as successor to 400 Corporate Pointe, Ltd.) and the Company(incorporated by
reference to Exhibit 10.5.7 to Annual Report of Form 10-K for the year ended
December 31, 1996).
10.5.2 Second Amendment to Lease, dated as of December 5, 1996, between Arden Realty
Limited Partnership and the Company. (incorporated by reference to Exhibit 10.5.2
to the Annual Report on Form 10-K for the year ended December 31, 1997.)
10.5.3 Lease, dated October 4, 1996, between Spartan Madison Corp. and the Company.
(incorporated by reference to Exhibit 10.5.3 to the Annual Report on Form 10-K for
the year ended December 31, 1997.)
10.5.4 First Supplemental Agreement, dated as of January 29, 1997, between Spartan Madison
Corp. and the Company. (incorporated by reference to Exhibit 10.5.4 to the Annual
Report on Form 10-K for the year ended December 31, 1997.)
10.5.5 Second Supplemental Agreement, dated as of November 25, 1997, between Spartan
Madison Corp. and the Company. (incorporated by reference to Exhibit 10.5.5 to the
Annual Report on Form 10-K for the year ended December 31, 1997.)
10.5.6 Lease dated March 10, 1995, between Boston Wharf Co. and the Company. (incorporated
by reference to Exhibit 10.5.6 to the Annual Report on Form 10-K for the year ended
December 31, 1997.)
10.6 Form of QuantEX Software and Hardware License Agreement (incorporated by reference
to Exhibit 10.3.3 to Registration Statement).
21* Subsidiaries of Company.
23* Consent of KPMG LLP.
27* Financial Data Schedule.
</TABLE>
- ------------------------
* Filed herewith
(b) Reports on Form 8-K.
On November 6, 1998, the Company filed a Form 8-K reporting updated
financial information regarding the previously announced plan by Jefferies Group
and the Company to separate Jefferies Group's 100% owned subsidiary, Jefferies &
Company and Jefferies Group's 80.5% owned subsidiary, the Company, through a
proposed spin-off and related transactions.
(c) Index to Exhibits
See list of exhibits at Item 14(a)(3) above and exhibits following.
54
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
INVESTMENT TECHNOLOGY GROUP, INC.
By: /s/ RAYMOND L. KILLIAN, JR.
-----------------------------------------
Raymond L. Killian, Jr.
Chairman of the Board, Chief Executive
Officer and President
</TABLE>
Dated: March 18, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons and on behalf of the
Registrant in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ RAYMOND L. KILLIAN, JR. Chairman of the Board,
- ------------------------------ Chief Executive Officer March 18, 1999
Raymond L. Killian, Jr. President and Director
Senior Vice President and
/s/ JOHN R. MACDONALD Chief Financial Officer
- ------------------------------ (Principal Financial March 18, 1999
John R. MacDonald Officer)
/s/ ANGELO BULONE Vice President and
- ------------------------------ Controller (Principal March 18, 1999
Angelo Bulone Accounting Officer)
/s/ FRANK E. BAXTER
- ------------------------------ Director March 18, 1999
Frank E. Baxter
/s/ NEAL S. GARONZIK
- ------------------------------ Director March 18, 1999
Neal S. Garonzik
/s/ WILLIAM I JACOBS
- ------------------------------ Director March 18, 1999
William I Jacobs
/s/ ROBERT L. KING
- ------------------------------ Director March 18, 1999
Robert L. King
/s/ MARK A. WOLFSON
- ------------------------------ Director March 18, 1999
Mark A. Wolfson
</TABLE>
55
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBITS NUMBERED
NUMBER DESCRIPTION PAGE
- --------- ------------------------------------------------------------------------------------------ -------------
<S> <C> <C>
2.1* Agreement and Plan of Merger, dated as of March 17, 1999, by and between Jefferies Group,
Inc. and the Company.
2.2* Distribution Agreement, dated as of March 17, 1999, by and among Jefferies Group, Inc. and
JEF Holding Company, Inc.
3.1 Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to
Registration Statement Number 33-76474 on Form S-1 as declared effective by the Securities
and Exchange Commission on May 4, 1994 (the "Registration Statement")).
3.2 By-laws of the Company (incorporated by reference to Exhibit 3.2 to Registration
Statement).
4.1 Form of Certificate for Common Stock of the Company (incorporated by reference to Exhibit
4.1 to Registration Statement).
10.1 Joint Venture Agreement, dated October 1, 1987, between Jefferies & Company, Inc. and
BARRA, Inc. (formerly Barr Rosenberg Associates, Inc.) (incorporated by reference to
Exhibit 10.1.1 to Registration Statement).
10.1.1 Exclusive Software License Agreement, dated October 1, 1987, between the POSIT Joint
Venture and Jefferies & Company, Inc. (incorporated by reference to Exhibit 10.1.2 to
Registration Statement).
10.1.2 Amendment No. 1 to Exclusive Software License Agreement, dated August 1, 1990, between the
POSIT Joint Venture and Jefferies & Company, Inc. (incorporated by reference to Exhibit
10.1.3 to Registration Statement).
10.1.3 Consent of BARRA, Inc. to the assignment to the Company of the interests of Jefferies &
Company, Inc. in the Posit Joint Venture referenced in item 10.1.1 and rights in the
Software License Agreement referenced in item 10.1.2 (incorporated by reference to Exhibit
10.1.4 to Registration Statement).
10.1.4* Joint Venture Agreement, dated as of November 17, 1998, by and among Investment Technology
Group International Limited, Societe Generale, Investment Technology Group SG Limited,
Investment Technology Group Limited and Investment Technology Group Europe Limited.
10.2 Service Agreement, dated March 15, 1994, by and between Jefferies & Company, Inc. and ITG
Inc. (incorporated by reference to Exhibit 10.2.2 to Registration Statement).
10.2.1* Amendment No. 1 to Service Agreement, dated as of January 1, 1999, by and between
Jefferies & Company, Inc. and ITG Inc.
10.2.2* Execution Agreement, dated as of January 1, 1999, by and between W & D Securities, Inc.
and ITG Inc.
10.2.3* Fully Disclosed Clearing Agreement, dated as of January 1, 1999, by and between Jefferies
& Company, Inc. and ITG Inc.
10.2.4* Benefits Agreement, dated as of March 17, 1999, by and between Jefferies Group, Inc. and
JEF Holding Company, Inc.
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBITS NUMBERED
NUMBER DESCRIPTION PAGE
- --------- ------------------------------------------------------------------------------------------ -------------
<S> <C> <C>
10.2.5* Amended and Restated Tax Sharing Agreement, dated as of March 17, 1999, by and among
Jefferies Group, Inc., JEF Holding Company, Inc. and the Company.
10.2.6* Tax Sharing and Indemnification Agreement, dated as of March 17, 1999, by and among
Jefferies Group, Inc., JEF Holding Company, Inc. and the Company.
10.2.7* Credit Agreement dated as of March 16, 1999, among Investment Technology Group, Inc., as
Borrower and the Bank of New York, as Lender
10.3. Employment Agreement between the Company, ITG Inc. and Raymond L. Killian, Jr.
(incorporated by reference to Exhibit 10.3.2 to Registration Statement).
10.3.1 Amendment No. 2 to Employment Agreement between Raymond L. Killian, Jr., the Company and
ITG Inc. (incorporated by reference to Exhibit 10.3.2A to the Annual Report on Form 10-K
for the year ended December 31, 1996.)
10.3.2 Employment Agreement between the Company and Scott P. Mason. (incorporated by reference to
Exhibit 0.3.18 to the Annual Report on Form 10-K for the year ended December 31, 1996).
10.3.3 Stock Option Agreement between the Company and Scott P. Mason (incorporated by reference
to Exhibit 10.3.3 to Registration Statement).
10.3.4 Form of Employment Agreement between the Company and Joshua D. Rose (incorporated by
reference to Exhibit 10.3.4 to Registration Statement).
10.3.5 Employment Agreement between the Company, ITG Inc. and Yossef A. Beinart (incorporated by
reference to Exhibit 10.3.6 to Registration Statement Number 33-76474 on Amendment Number
3 to Form S-1 as filed with the Securities and Exchange Commission on May 2, 1994).
10.3.6 Amendment to Form of Employment Agreement between the Company, ITG Inc. and Senior Vice
Presidents Electing to Reprice Stock Options. (incorporated by reference to Exhibit
10.3.4A to the Annual Report on Form 10-K for the year ended December 31, 1996).
10.4. Amended and Restated 1994 Stock Option and Long-Term Incentive Plan. (incorporated by
reference to Exhibit A to the 1997 Annual Meeting Proxy Statement).
10.4.1 Non-Employee Directors' Stock Option Plan. (incorporated by reference to Appendix A to the
1996 Annual Meeting Proxy Statement).
10.4.2 Capital Accumulation Plan for Key Employees of Jefferies Group, Inc. (incorporated by
reference to Exhibit 10.3.7 to Registration Statement).
10.4.3 Form of Stock Option Agreement between the Company and certain employees of the Company
(incorporated by reference to Exhibit 10.3.3 to Registration Statement).
10.4.4 Pay-For-Performance Incentive Plan (incorporated by reference to Exhibit B to the 1997
Annual Meeting Proxy Statement).
10.4.5 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.3.1A to the Annual
Report on Form 10-K for the year ended December 31, 1997)
10.4.6* 1998 Amended and Restated Stock Unit Award Program
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBITS NUMBERED
NUMBER DESCRIPTION PAGE
- --------- ------------------------------------------------------------------------------------------ -------------
<S> <C> <C>
10.5. Lease, dated July 11, 1990, between AEW/LBA Acquisition Co. LLC (as successor to 400
Corporate Pointe, Ltd.) and Integrated Analytics Corporation, as assigned by Integrated
Analytics Corporation to the Company (incorporated by reference to Exhibit 10.3.3 to
Registration Statement).
10.5.1 First Amendment to Lease, dated as of June 1, 1995, between AEW/LBA Acquisition Co. LLC
(as successor to 400 Corporate Pointe, Ltd.) and the Company(incorporated by reference to
Exhibit 10.5.7 to Annual Report of Form 10-K for the year ended December 31, 1996).
10.5.2 Second Amendment to Lease, dated as of December 5, 1996, between Arden Realty Limited
Partnership and the Company. (incorporated by reference to Exhibit 10.5.2 to the Annual
Report on Form 10-K for the year ended December 31, 1997.)
10.5.3 Lease, dated October 4, 1996, between Spartan Madison Corp. and the Company. (incorporated
by reference to Exhibit 10.5.3 to the Annual Report on Form 10-K for the year ended
December 31, 1997.)
10.5.4 First Supplemental Agreement, dated as of January 29, 1997, between Spartan Madison Corp.
and the Company. (incorporated by reference to Exhibit 10.5.4 to the Annual Report on Form
10-K for the year ended December 31, 1997.)
10.5.5 Second Supplemental Agreement, dated as of November 25, 1997, between Spartan Madison
Corp. and the Company. (incorporated by reference to Exhibit 10.5.5 to the Annual Report
on Form 10-K for the year ended December 31, 1997.)
10.5.6 Lease dated March 10, 1995, between Boston Wharf Co. and the Company. (incorporated by
reference to Exhibit 10.5.6 to the Annual Report on Form 10-K for the year ended December
31, 1997.)
10.6 Form of QuantEX Software and Hardware License Agreement (incorporated by reference to
Exhibit 10.3.3 to Registration Statement).
21* Subsidiaries of Company.
23* Consent of KPMG LLP.
27* Financial Data Schedule.
</TABLE>
- ------------------------
* Filed herewith
58
<PAGE>
Appendix A
AGREEMENT AND PLAN OF MERGER
Agreement and Plan of Merger (this "AGREEMENT"), dated as of the 17th day of
March, 1999, by and between JEFFERIES GROUP, INC., a Delaware corporation
("JEFG"), and INVESTMENT TECHNOLOGY GROUP, INC., a Delaware corporation ("ITGI",
and, together with JEFG, the "CONSTITUENT CORPORATIONS").
WHEREAS, the Board of Directors of JEFG has approved the business
transactions pursuant to which all the assets, businesses and Liabilities (as
defined below) of ITGI and its subsidiaries will be separated from all other
assets, businesses and Liabilities of JEFG;
WHEREAS, JEFG and JEF Holding Company, Inc., a Delaware corporation and
wholly-owned subsidiary of JEFG ("HOLDING"), concurrently herewith are entering
into a Distribution Agreement (the "DISTRIBUTION AGREEMENT"), which provides
that (x) JEFG will transfer to Jefferies & Company, Inc., a Delaware corporation
and wholly-owned subsidiary of JEFG ("JEFCO"), prior to the time that JEFCO
becomes a subsidiary of Holding in connection with the Contribution (defined
below), and to Holding, and JEFCO and Holding will accept from JEFG, all of
JEFG's assets other than JEFG's capital stock in ITGI (collectively, the
"CONTRIBUTION"), and JEFG will assign to Holding (or to JEFCO, as appropriate),
and Holding and JEFCO (as appropriate) will assume from JEFG, all JEFG
liabilities excluding all liabilities of, or related to, ITGI (the "ASSUMPTION")
(such transfer and acceptance pursuant to the Contribution and such assignment
and assumption pursuant to the Assumption being collectively referred to herein
as the "TRANSFERS"), and (y) all of the outstanding common stock of Holding (the
"Holding Common Stock") will be distributed in a pro rata dividend (the
"DISTRIBUTION") to JEFG's stockholders;
WHEREAS, as of March 16, 1999, ITGI declared a dividend in an amount equal
to $4.00 per share in cash payable on the business day immediately succeeding
the consummation of the pre-closing to the Merger referred to in Sections 2, 8,
9 and 10 hereof (the "PRE-CLOSING") to all its stockholders of record as of
April 20, 1999, including JEFG (the "SPECIAL ITGI CASH DIVIDEND");
WHEREAS, following the Special ITGI Cash Dividend, the Transfers, and the
Distribution, (x) ITGI will merge (the "MERGER," and together with the Transfers
and the Distribution, collectively the "JEFG TRANSACTIONS") with and into JEFG
and (y) outstanding shares of Common Stock, par value $0.01 per share (the "ITGI
COMMON STOCK"), of ITGI will be canceled or converted into the right to receive
shares of Common Stock, par value $0.01 per share (the "JEFG COMMON STOCK"), of
JEFG in the manner set forth herein;
WHEREAS, JEFG, Holding and ITGI concurrently herewith are entering into a
Tax Sharing and Indemnification Agreement (the "TAX AGREEMENT"), which sets
forth the rights and obligations of JEFG and Holding following the Merger with
respect to certain tax matters, and JEFG and Holding concurrently herewith are
entering into a Benefits Agreement (the "BENEFITS AGREEMENT," and together with
the Distribution Agreement and the Tax Agreement, the "ANCILLARY AGREEMENTS"),
which sets forth the rights and obligations of JEFG and Holding following the
Merger with respect to certain employee benefit matters;
WHEREAS, the Boards of Directors of JEFG and ITGI have each determined that
the combination of JEFG and ITGI into one publicly traded corporation after the
Transfers and the Distribution is in the best interest of JEFG and ITGI and have
each approved this Merger Agreement and the Merger upon the terms and conditions
set forth herein;
WHEREAS, for federal income tax purposes, it is intended that the Merger
qualify as a tax-free liquidation of ITGI into JEFG under Section 332 of the
Internal Revenue Code of 1986, as amended
A-1
<PAGE>
(the "CODE"), and a reorganization for ITGI's stockholders, excluding JEFG (the
"ITGI PUBLIC STOCKHOLDERS") under Section 368(a)(1)(A) of the Code;
NOW THEREFORE, in consideration of the agreements and conditions set forth
below, the parties hereto, intending to be legally bound, hereby agree as
follows:
1. THE MERGER
Subject to the terms and conditions hereof and in accordance with the
General Corporation Law of the State of Delaware, as amended (the "DGCL"), at
the Effective Time (as hereinafter defined): (a) ITGI shall be merged with and
into JEFG and the separate existence of ITGI shall cease; (b) JEFG, as the
surviving corporation in the Merger (the "SURVIVING CORPORATION"), (i) shall
continue its corporate existence under the laws of the State of Delaware, (ii)
shall change its name to "INVESTMENT TECHNOLOGY GROUP, INC.", and (iii) shall
succeed to all rights, assets, liabilities and obligations of ITGI in accordance
with the DGCL; (c) the Certificate of Incorporation of JEFG, as in effect
immediately prior to the Effective Time, shall continue as the Certificate of
Incorporation of the Surviving Corporation, as amended and restated as set forth
on Appendix A hereto (with the amendments referred to therein being referred to
herein as the "CHARTER AMENDMENT"); (d) the By-laws of JEFG, as in effect
immediately prior to the Effective Time, shall continue as the By-laws of the
Surviving Corporation, as amended and restated as set forth on Appendix B
hereto; (e) the directors of ITGI immediately prior to the Effective Time shall
be the directors of the Surviving Corporation; and (f) the officers of ITGI
immediately prior to the Effective Time shall continue as the officers of the
Surviving Corporation. From and after the Effective Time, the Merger will have
all the effects provided by applicable law.
2. STOCKHOLDERS' MEETINGS; PRE-CLOSING, CLOSING AND EFFECTIVE TIME OF THE
MERGER; SEC FILINGS
(a) Prior to the date hereof, JEFG and Holding have jointly prepared and
filed with the Securities and Exchange Commission (the "SEC") under the
Securities Exchange Act of 1934, as amended and the rules and regulations
thereunder (the "EXCHANGE ACT"), a proxy statement/information statement (as
amended from time to time, the "PROXY/INFORMATION STATEMENT") and JEFG and ITGI
have jointly prepared and filed with the SEC a proxy statement/prospectus (as
amended from time to time, the "PROXY/PROSPECTUS"). The Proxy/Information
Statement comprises and will comprise (i) proxy material of JEFG with respect to
the approval and adoption of this Agreement (including the Charter Amendment)
and the issuance of JEFG Common Stock pursuant to this Agreement and the
approval of certain employee benefit plans of Holding (the "PLAN PROPOSALS") and
(ii) an information statement with respect to the Distribution and Holding,
which will be filed with the SEC as part of a Form 10 registration statement of
Holding under the Exchange Act. The Proxy/Prospectus comprises and will comprise
proxy material of ITGI with respect to the approval and adoption of this
Agreement, the election of ITGI directors and the ratification of ITGI's auditor
appointment and a registration statement (as amended from time to time, the
"REGISTRATION STATEMENT"), including a prospectus, of JEFG under the Securities
Act of 1933, as amended and the rules and regulations thereunder (the
"SECURITIES ACT"), with respect to JEFG Common Stock to be issued to the ITGI
Public Stockholders pursuant to this Agreement in connection with the Merger.
JEFG will use its best efforts to respond to any comments of the SEC and take
such other actions as may be necessary or appropriate with respect to the
Proxy/Information Statement to enable the Proxy/Information Statement in
definitive form to be mailed to JEFG's stockholders as promptly as practicable.
Each of JEFG and ITGI will use their respective best efforts to respond to any
comments of the SEC and take such other actions as may be necessary or
appropriate to enable the SEC to declare the Registration Statement effective
under the Securities Act and to cause a Proxy/Prospectus in definitive form to
be mailed to ITGI's stockholders as promptly as practicable.
A-2
<PAGE>
(b) JEFG shall submit this Agreement and the issuance of JEFG Common Stock
pursuant to this Agreement and the Plan Proposals to the holders of JEFG Common
Stock and ITGI shall submit this Agreement, the election of ITGI directors and
the ratification of ITGI's auditor appointment and to the holders of ITGI Common
Stock, respectively, for approval and adoption at stockholders' meetings to be
held April 20, 1999 (the "STOCKHOLDERS' MEETINGS").
(c) Subject to the satisfaction of the conditions contained in Sections 8,
9 and 10 hereof, the Pre-Closing shall occur on the day of the Stockholders'
Meetings, unless extended in writing by JEFG and ITGI (the "PRE-CLOSING DATE").
Immediately following completion of the Pre-Closing, JEFG, ITGI, Holding and The
Bank of New York, as escrow agent (the "ESCROW AGENT"), shall enter into a
pre-closing and escrow agreement dated as of the Pre-Closing Date, substantially
in the form of Appendix C hereto (the "ESCROW AGREEMENT"), pursuant to which:
(1) ITGI shall deposit into escrow, cash in an amount equal to the
aggregate Special ITGI Cash Dividend, to be released without
condition or limitation by the Escrow Agent on the business day
following the completion of the Pre-Closing to all of ITGI's
stockholders of record as of the close of business on the date of the
Stockholders' Meetings;
(2) Documents shall be executed and placed into escrow to effectuate, in
accordance with the Distribution Agreement, any remaining Transfers
immediately following the Escrow Agent's payment to JEFCO of $60
million, consistent with the direction of JEFG delivered on the
Pre-Closing Date instructing the Escrow Agent to make such payment to
JEFCO in respect of JEFG's pro rata share of the Special ITGI Cash
Dividend, which remaining Transfers will be effected through the
Escrow Agent in accordance with the Escrow Agreement immediately
following payment of the Special ITGI Cash Dividend;
(3) JEFG shall deposit into escrow an agreement between JEFG and
EquiServe, as distribution agent for the Holding Common Stock (the
"DISTRIBUTION AGENT"), pursuant to which JEFG shall irrevocably
direct the Distribution Agent to, and the Distribution Agent shall
agree to, distribute all Holding Common Stock to JEFG's stockholders
immediately after being instructed to do so by the Escrow Agent, who
shall issue such instructions unless the Escrow Agent receives a
certificate from ITGI or JEFG on or prior to 9:00 a.m. E.T. on the
Closing Date that either or both of the conditions referred to in
Section 11(b) or (c) shall not have been satisfied; and
(4) ITGI and JEFG shall deposit into escrow the executed Certificate of
Merger (as defined below), to be filed without condition or
limitation by the Escrow Agent with the Secretary of State of the
State of Delaware after the Escrow Agent's (i) issuance of the
instructions to the Distribution Agent described in clause (3) above
and (ii) receipt of confirmation from the Distribution Agent
confirming in writing its book-entry distribution of all Holding
Common Stock to JEFG's stockholders.
Subject to completion of the Pre-Closing and upon the satisfaction of the
conditions contained in Section 11(b) and (c) herein, the Constituent
Corporations shall hold a closing (the "CLOSING") at the offices of Morgan,
Lewis & Bockius LLP, New York, New York on the fifth business day following the
date of the Stockholders' Meetings unless extended in writing by JEFG and ITGI
(the "CLOSING DATE"). On the Closing Date, the Escrow Agent, on behalf of the
Constituent Corporations, shall cause the Merger to be consummated by filing a
certificate of merger (the "CERTIFICATE OF MERGER") with the Secretary of State
of the State of Delaware in accordance with clause (4) above and the provisions
of the Escrow Agreement (the date and time of such filing, or such later date or
time agreed upon by JEFG and ITGI in accordance with the DGCL and set forth
therein, the "EFFECTIVE TIME").
A-3
<PAGE>
3. CONVERSION AND CANCELLATION OF SECURITIES
(a) At the Effective Time, each share of ITGI Common Stock issued and
outstanding immediately prior to the Effective Time (other than shares of ITGI
Common Stock described in Section (b) of this Section) shall, by virtue of the
Merger and without any action on the part of the holder thereof, be converted
into the right to receive such number of shares of JEFG Common Stock equal to
the result obtained by dividing (x) the total number of shares of JEFG Common
Stock outstanding immediately prior to the Effective Time by (y) the total
number of shares of ITGI Common Stock held by JEFG immediately prior to the
Effective Time (the "EXCHANGE RATIO"); provided that no fractional shares of
JEFG Common Stock shall be issued and, in lieu thereof, a cash payment shall be
made as provided in Section 4(i) herein.
(b) At the Effective Time, each share of ITGI Common Stock held in the
treasury of ITGI or held by JEFG immediately prior to the Effective Time, shall
by virtue of the Merger and without any action on the part of the holder
thereof, be automatically canceled and retired and cease to exist, and no cash,
securities or other property shall be payable in respect thereof.
(c) The holders of shares of ITGI Common Stock or JEFG Common Stock shall
not be entitled to appraisal rights as a result of either of the Transfers or
the Merger.
4. EXCHANGE OF CERTIFICATES
(a) Prior to the Pre-Closing Date, JEFG shall select a bank or trust
company to act as exchange agent (the "EXCHANGE AGENT") in connection with the
surrender of certificates evidencing shares of ITGI Common Stock converted into
shares of JEFG Common Stock pursuant to the Merger. On the Pre-Closing Date,
JEFG shall deposit with the Escrow Agent one or more certificates representing
the shares of JEFG Common Stock issuable pursuant to Section 3(a) (the "MERGER
STOCK"), which shares of Merger Stock shall be issued in accordance with this
Agreement at the Effective Time. At and following the Effective Time, JEFG shall
deliver to the Exchange Agent such cash as may be required from time to time to
make payment of cash in lieu of fractional shares in accordance with Section
4(i) hereof.
(b) As soon as practicable after the Effective Time, JEFG shall cause the
Exchange Agent to mail to each person who was, at the Effective Time, a holder
of record of a certificate or certificates that immediately prior to the
Effective Time evidenced outstanding shares of ITGI Common Stock (the
"CERTIFICATES") (i) a letter of transmittal specifying that delivery shall be
effected, and risk of loss and title to the Certificates shall pass, only upon
delivery of the Certificates to the Exchange Agent, which shall be in a form and
contain any other provisions as JEFG and the Surviving Corporation may
reasonably agree and (ii) instructions for use in effecting the surrender of the
Certificates in exchange for certificates representing the Merger Stock. Upon
the proper surrender of Certificates to the Exchange Agent, together with a
properly completed and duly executed letter of transmittal and such other
documents as may be required by the Exchange Agent, the holder of such
Certificate shall be entitled to receive in exchange therefor certificates
representing the shares of Merger Stock that such holder has the right to
receive pursuant to the terms hereof (together with any dividend or distribution
with respect thereto made after the Effective Time and any cash paid in lieu of
fractional shares pursuant to Section 4(i)), and the Certificate so surrendered
shall be canceled. In the event of a transfer of ownership of ITGI Common Stock
that is not registered in the transfer records of ITGI, a certificate
representing the proper number of shares of Merger Stock may be issued to a
transferee if the Certificate representing such ITGI Common Stock is presented
to the Exchange Agent, accompanied by all documents required to evidence and
effect such transfer and by evidence reasonably satisfactory to JEFG that any
applicable stock transfer tax has been paid.
(c) After the Effective Time, each outstanding Certificate which
theretofore represented shares of ITGI Common Stock shall, until surrendered for
exchange in accordance with this Section 4, be
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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 repurchase) under, any of the terms,
conditions or provisions of (x) any note, bond, mortgage,
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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
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Agreement and the Charter Amendment), the Ancillary Agreements, the JEFG
Transactions and the Plan Proposals and determined that the JEFG
Transactions are in the best interest of the stockholders of JEFG, and prior
to the date hereof has resolved to recommend that the holders of JEFG Common
Stock approve and adopt this Agreement (including the issuance of JEFG
Common Stock pursuant to this Agreement and the Charter Amendment) and the
Plan Proposals.
(t) Holding Debt Assumption. Supplemental indentures have been duly
executed in respect of JEFG's 7 1/2% Senior Notes Due 2007 (the "7 1/2%
NOTES") which (i) amend in certain respects the indenture relating to the
7 1/2% Notes and (ii) effective as of the date the Transfers are completed,
provide that Holding shall assume, and JEFG shall be released from, JEFG's
obligations under the 7 1/2% Notes and the related indenture. Complete
copies of such supplemental indentures, along with the officers'
certificates, opinions of JEFG's counsel and consents of holders of the
7 1/2% Notes provided to the trustee for the 7 1/2% Notes in connection
therewith have been provided to ITGI and its counsel.
6B. REPRESENTATIONS AND WARRANTIES OF ITGI. ITGI represents and warrants
to, and agrees with, JEFG as follows:
(a) Organization, Etc. ITGI is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and
has all requisite power and authority to own, lease and operate is
properties and to carry on its business as it is now being conducted as
described in the ITGI SEC Reports (defined below). Except as set forth on
Section 6B(a) of the Disclosure Schedule, ITGI is duly qualified as a
foreign corporation to do business, and is in good standing, in each
jurisdiction where the character of its properties owned or leased or the
nature of its activities makes such qualification necessary, except where
such failure to so qualify would not have any material adverse effect on
ITGI and its subsidiaries taken as a whole (an "ITGI MATERIAL ADVERSE
EFFECT"). ITGI has provided to JEFG complete and correct copies of the
Organizational Documents, as currently in effect, of ITGI.
(b) Authority of ITGI. ITGI has full corporate power and authority to
(i) execute, deliver and perform its obligations under this Agreement and
(ii) to declare and pay the Special ITGI Cash Dividend and to consummate the
Merger. The execution, delivery and performance of this Agreement, the
payment of the Special ITGI Cash Dividend (subject to approval and adoption
of this Agreement and the Merger by the JEFG and ITGI stockholders and the
satisfaction or waiver of all other conditions to the Merger) and the
consummation of the Merger have been duly and validly authorized by the
Board of Directors of ITGI, and no other corporate proceedings on the part
of ITGI are necessary to authorize this Agreement or to consummate the
Merger, other than the approval and adoption of this Agreement by ITGI
stockholders as required by the DGCL. This Agreement has been duly and
validly executed and delivered by ITGI and constitutes a valid and binding
agreement of ITGI, enforceable against ITGI in accordance with its terms.
(c) No Governmental Consent. No Governmental Consent or other Consent
is required in connection with the execution, delivery and performance by
ITGI of this Agreement, the declaration and payment of the Special ITGI Cash
Dividend or the consummation by ITGI of the Merger, except (i) the filing of
the Proxy/Prospectus under the Exchange Act and the Securities Act and the
effectiveness thereof under the Securities Act, (ii) the applicable approval
of this Agreement and the Merger by the holders of ITGI Common Stock as
required by the DGCL, (iii) the filing of the Certificate of Merger with the
Secretary of State of the State of Delaware, (iv) such consents, approvals,
orders, permits, authorizations, registrations, declarations and filings as
may be required under the Blue Sky laws of various states, (v) the listing
on the New York Stock Exchange of the common stock of the Surviving
Corporation and (vi) as set forth in Section 6B(c) of the Disclosure
Schedule.
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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
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any information relating solely to JEFG and the Non-ITGI Subsidiaries, the
Transfers, the Ancillary Agreements, the Distribution or the JEFG Merger
Information. ITGI will not file any amendment or supplement to the
Proxy/Prospectus or Proxy/Information Statement, or submit any information
to the SEC in connection therewith, without prior consultation with JEFG.
(c) Further Assurances. In addition to the actions specifically
provided for elsewhere in this Agreement, each of the parties hereto will
use its commercially reasonable efforts to (i) execute and deliver such
further instruments and documents and take such other actions as the other
party may reasonably request in order to effectuate the purposes of this
Agreement and to carry out the terms hereof and (ii) take, or cause to be
taken, all actions, and to do, or cause to be done, all things, reasonably
necessary, proper or advisable under applicable laws, regulations and
agreements or otherwise to consummate and make effective the transactions
contemplated by this Agreement, including, without limitation, using its
reasonable efforts to obtain any consents and approvals and to make any
filings and applications necessary or desirable in order to consummate the
transactions contemplated by this Agreement.
(d) Expenses. Each of JEFG and ITGI shall be responsible for the
Transaction Expenses (as defined below), as set forth in this paragraph (d).
To the extent JEFG, Holding or ITGI incurs expenses in connection with the
Transactions (as defined below) which do not constitute Transaction
Expenses, the party incurring such expense shall be solely responsible for
such expenses. "TRANSACTION EXPENSES" shall be limited to reasonable
"OUT-OF-POCKET" expenses (i.e., expenses paid to a third party, excluding
internal costs or allocations) of JEFG, Holding or ITGI that have been
incurred because of or in order to effect the JEFG Transactions and the
Special ITGI Cash Dividend (collectively, the "TRANSACTIONS"), including:
(i) fees paid to investment bankers and their counsels,
(ii) fees paid to outside counsel, including those who are giving
legal opinions,
(iii) fees paid to effect all of the Transfers, including (A) consent
payments and fees and expenses in respect of the transfer of JEFG's
8 7/8% Senior Notes due 2004 (the "8 7/8% NOTES") and the 7 1/2% Notes to
Holding pursuant to the Assumption, not to exceed the aggregate amount
set forth in Section 7(d)(iii) of the Disclosure Schedule, and (B)
payments to landlords, third parties or others to whom JEFG has given
guarantees in order to obtain their consents to the release of JEFG from
the related obligations,
(iv) professional and closing fees (but excluding financing costs)
paid in order to replace financing arrangements that have been affected
by the Transactions or new financing arrangements of ITGI or the
Surviving Corporation,
(v) fees paid to compensation and benefit plan consultants,
actuaries, and the like to the extent services are rendered (a) for
changes to existing plans which are necessary in order to effect or
because of the Transactions or (b) to implement new plans which will
replace plans which had been in place at JEFG or ITGI prior to the
Transactions, excluding fees for services rendered to implement new plans
which are not substantially similar in purpose and effect to existing
JEFG plans and costs related to enhanced pension benefits and any
underfunding liability of existing plans,
(vi) payments to the ITGI Special Committee and their counsel,
(vii) costs of acquiring and installing (and licensing fees limited
to first year licensing fees for) software by ITGI, but only to the
extent that such systems provide reasonably similar information and
functionality as that currently used or provided by JEFG or ITGI,
(viii)tax, accounting and auditing services provided by KPMG LLP and
Ernst & Young LLP in connection with the Transactions, and
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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
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Date and prior to the Effective Time, of all JEFG Liabilities that are not
related to ITGI or ITGI's subsidiaries. If, due to the inability of JEFG to
transfer certain of such JEFG Liabilities to Holding or obtain for itself any
required third party releases from such Liabilities or any required consent in
connection with any transfer set forth in the preceding sentence, and therefore
JEFG shall have Liabilities immediately prior to the Effective Time (excluding
Liabilities related to ITGI or ITGI's subsidiaries, Liabilities of ITGI or the
Surviving Corporation arising pursuant to this Agreement or the Ancillary
Agreements, contingent Liabilities arising by operation of law and Liabilities
related to asserted or unasserted litigation, the responsibility for which
cannot be reasonably quantified or ascertained) (with such JEFG Liabilities,
excluding the Liabilities in the preceding parenthetical, constituting the
"RESIDUAL LIABILITIES"), JEFG shall take such action prior to the Pre-Closing
Date, in form and substance reasonably satisfactory to ITGI, to discharge,
offset, reserve against or otherwise mitigate the Residual Liabilities (through
prepayments, reserves, insurance, defeasance, trust arrangements, replacement
guarantees or the provision to third party creditors, landlords, ITGI or the
Surviving Corporation of one or more letters of credit) for all Residual
Liabilities in excess of the Applicable Amount (defined below). The "APPLICABLE
AMOUNT" of unmitigated Residual Liabilities, as used in the preceding sentence,
shall be $5.0 million from and after the Effective Time until the first
anniversary thereof; $3.33 million from and after the first anniversary until
the second anniversary of the Effective Time; $1.67 million from and after the
second anniversary until the third anniversary of the Effective Time; and $0
from and after the third anniversary of the Effective Time. JEFG agrees to
obtain, for the benefit of ITGI (or the Surviving Corporation after the
Effective Time), one or more letters of credit in an aggregate undrawn face
amount not less than the amount by which the aggregate unmitigated Residual
Liabilities exceeds the Applicable Amount. Such letters of credit shall be
issued by one or more nationally recognized financial institutions reasonably
satisfactory to ITGI, be in form and substance reasonably satisfactory to ITGI
and expire not earlier than 135 days after the date on which the related
unmitigated Residual Liabilities terminate.
8. CONDITIONS TO THE OBLIGATIONS OF JEFG AND ITGI TO CONSUMMATE THE PRE-CLOSING
The respective obligations of ITGI, on the one hand, and JEFG, on the other
hand, to consummate the Pre-Closing are subject to the fulfillment (or waiver in
writing by a duly authorized officer of the party which did not fail to satisfy
such condition or requirement) of the following requirements and conditions:
(a) Stockholder Approvals. This Agreement (including the Charter Amendment)
and the issuance of JEFG Common Stock pursuant to this Agreement shall have been
approved and adopted by the requisite votes of JEFG's stockholders in accordance
with the DGCL, New York Stock Exchange requirements and the Organizational
Documents of JEFG. This Agreement shall have been approved and adopted by the
requisite votes of ITGI's stockholders in accordance with the DGCL and the
Organizational Documents of ITGI.
(b) No Injunctions or Restraints; Illegality. No temporary restraining
order, preliminary or permanent injunction, sanction or other order issued by
any court of competent jurisdiction, self-regulatory organization or body, stock
exchange or other legal or regulatory restraint or prohibition shall have been
issued and be in effect (i) restraining or prohibiting the consummation of the
Merger, the Contribution, the Assumption, the Special ITGI Cash Dividend, the
Distribution or the other transactions contemplated by the Ancillary Agreements
or this Agreement or (ii) prohibiting or limiting the ownership, operation or
control by the Surviving Corporation or JEFG or any of their respective
subsidiaries of any portion of the business or assets of ITGI or its
subsidiaries as of the Effective Time, or compelling the Surviving Corporation
or JEFG or ITGI or any of their respective subsidiaries to dispose of, grant
rights in respect of, or hold separate any portion of the business or assets of
JEFG, ITGI or any of their respective subsidiaries as of the Effective Time; nor
shall any action have been taken by a governmental regulatory authority, agency
or instrumentality, self-regulatory organization or
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body, stock exchange or any federal, state or foreign statute, rule, regulation,
executive order, decree or injunction shall have been enacted, entered,
promulgated or enforced by any governmental regulatory authority, agency or
instrumentality, self-regulatory organization or body, stock exchange or
arbitrator, which is in effect and has the effect of making the Contribution,
the Assumption, the Special ITGI Cash Dividend, the Distribution or the Merger,
illegal or otherwise prohibiting the consummation of the Contribution, the
Assumption, the Special ITGI Cash Dividend, the Distribution or the Merger.
(c) Proxy/Prospectus and Proxy/Information Statement. The registration
statement with respect to the Proxy/Prospectus shall have been declared
effective under the Securities Act and no stop orders with respect thereto shall
have been issued and the Proxy/Prospectus shall have been furnished to the
stockholders of ITGI. JEFG shall have received all requisite authorizations
under all applicable state securities or blue sky laws necessary to consummate
the issuance of JEFG Common Stock pursuant to this Agreement. The
Proxy/Information Statement shall have been furnished to the stockholders of
JEFG.
(d) NYSE Listing. Approval for listing by the New York Stock Exchange, Inc.
upon official notice of issuance of JEFG Common Stock to be issued in the Merger
shall have been received by JEFG.
(e) Supplemental Indentures. Supplemental indenture(s) in form and
substance satisfactory to JEFG and ITGI shall have been duly executed in respect
of the 8 7/8% Notes, pursuant to which, effective as of the date the Transfers
are completed, Holding shall assume, and JEFG shall be released from, JEFG's
obligations under the 8 7/8% Notes and the related indenture. ITGI and its
counsel shall have been provided complete copies of such supplemental
indenture(s) and the officers' certificate(s) and opinion(s) of JEFG's counsel
(which expressly permit(s) ITGI to rely thereon) provided to the trustee for the
8 7/8% Notes in connection therewith, and such officer's certificate(s) and
opinion(s) shall be satisfactory in form and substance to ITGI.
(f) Accounting Advisory Letter. ITGI and JEFG shall have received a letter
from KPMG LLP, dated as of the Pre-Closing Date, substantially in the form set
forth in Section 8(f) of the Disclosure Schedule.
(g) Escrow. The Escrow Agreement shall have been executed and delivered by
JEFG, ITGI and the Escrow Agent, and all items required to be delivered into
escrow thereunder shall have been delivered, to be released by the Escrow Agent
in accordance with the terms and conditions thereof.
(h) JEFG's Maintenance of Minimum Ownership Levels of ITGI Common Stock.
JEFG and ITGI shall be reasonably satisfied that, at all relevant times prior to
the Pre-Closing Date, JEFG owns at least 80% of the outstanding ITGI Common
Stock and that no capital stock of ITGI (other than ITGI Common Stock) shall
have been issued or outstanding.
(i) Satisfaction of Distribution Agreement Conditions. All conditions to
the Distribution set forth in Section 2.02 of the Distribution Agreement shall
have been satisfied and if any condition shall not have been satisfied as of the
Pre-Closing Date such condition shall have been waived by JEFG, in its sole
discretion.
(j) Absence of Withdrawal or Amendment of Tax Ruling. The tax ruling from
the Internal Revenue Service relating to the Transfers, the Distribution and
certain aspects of the Merger obtained prior to the date hereof (the "TAX
RULING") shall not have been, prior to the Pre-Closing, withdrawn by the IRS or
modified by the IRS in any material adverse respect.
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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
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that each of JEFG and ITGI will be a party to the reorganization within the
meaning of Section 368(b) of the Code.
10. CONDITIONS TO THE OBLIGATIONS OF ITGI TO CONSUMMATE THE PRE-CLOSING
The obligations of ITGI under this Agreement to effect the Pre-Closing are
subject to the fulfillment (or waiver in writing by a duly authorized officer of
ITGI), prior to or at the Pre-Closing, of each of the following conditions:
(a) Representations, Warranties and Covenants of JEFG. The representations
and warranties of JEFG herein contained shall be true and correct as of the
Pre-Closing Date in all material respects with the same effect as though made at
such time, except to the extent waived hereunder or affected by the transactions
contemplated herein; JEFG shall have performed in all material respects all
obligations and complied in all material respects with all agreements,
undertakings, covenants and conditions required by this Agreement and the
Ancillary Agreements to be performed or complied with by it at or prior to the
Pre-Closing Date; and JEFG shall have delivered to ITGI a certificate in form
and substance satisfactory to ITGI dated the Pre-Closing Date and signed by the
chief executive officer and the chief financial officer of JEFG to such effect.
(b) [Intentionally Omitted].
(c) [Intentionally Omitted].
(d) Options. JEFG shall have delivered to ITGI a copy (certified by the
Secretary of JEFG) of duly adopted resolutions of the Board of Directors of JEFG
accelerating the vesting and exercisability of all options to purchase or
acquire JEFG Common Stock, which acceleration shall be effective on or before
the release of the Special ITGI Cash Dividend pursuant to the Escrow Agreement.
JEFG shall have caused all outstanding JEFG Common Stock Equivalents to have
been exercised or canceled, or exchanged (conditioned upon completion of the
Distribution) for options, shares, or common stock equivalents of Holding as of,
or within two business days following the Pre-Closing Date, or reserved against
without the Surviving Corporation's responsibility after the Effective Time.
(e) Transfer and Releases. JEFG shall have taken all necessary action to
effect the transfer (after the Pre-Closing Date before the Effective Time) of
all JEFG Liabilities, excluding the Residual Liabilities, to Holding and to
provide that the unmitigated Residual Liabilities shall not be in excess of the
Applicable Amount.
(f) Consents. JEFG shall have obtained all Governmental Consents referenced
in Section 6A(c) hereof and shall have obtained all Consents listed in Section
10(f) of the Disclosure Schedule.
(g) Opinion of Counsel.
(i) JEFG shall have delivered to ITGI an opinion, dated the Pre-Closing
Date, satisfactory to counsel for ITGI, of Morgan, Lewis & Bockius LLP,
counsel for JEFG, to the effect that:
(1) JEFG is a corporation duly organized, validly existing and in
good standing under the laws of the jurisdiction of its
incorporation, and has the requisite corporate power to enter
into and perform its obligations under this Agreement.
(2) The execution, delivery and performance of this Agreement by JEFG
and the Ancillary Agreements by JEFG and Holding and the issuance
of JEFG Common Stock pursuant to this Agreement have been duly
authorized and approved by all requisite corporate action; this
Agreement has been duly executed and delivered by JEFG and
constitutes a valid and binding obligation of JEFG enforceable
against JEFG in accordance with its terms, subject to any
bankruptcy, insolvency, moratorium or other laws affecting the
enforcement of creditors' rights and general
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principles of equity; the Ancillary Agreements have been duly
executed and delivered by JEFG and Holding, and constitute a
valid and binding obligation of JEFG and Holding and are
enforceable in accordance with their terms, subject to any
bankruptcy, insolvency, moratorium or other laws affecting the
enforcement of creditors' rights and general principles of
equity.
(3) Upon the filing of the appropriate certificate of merger with the
Secretary of State of the State of Delaware, the Merger shall be
effective in accordance with the terms of this Agreement and the
DGCL.
(4) All such approvals, consents, authorizations or modifications as
may, to the knowledge of such counsel, be required to permit the
performance by JEFG of its respective obligations under this
Agreement and consummation of the transactions herein
contemplated have been obtained (whether from Governmental
Authorities or other persons).
(5) The JEFG Common Stock to be issued by JEFG as contemplated by
this Agreement has been duly authorized and upon delivery to the
ITGI Public Stockholders, will be duly and validly issued, fully
paid and non-assessable, and will not have been issued in
violation of any statutory preemptive rights of stockholders.
In rendering its opinion letter, Morgan, Lewis & Bockius LLP may rely on
certificates of officers of JEFG, opinions of other counsel and such other
evidence as such counsel for JEFG may deem necessary or desirable.
(ii) ITGI shall have received an opinion of Cahill Gordon & Reindel, in
form and substance reasonably satisfactory to ITGI and substantially in the
form of Appendix H (following Cahill Gordon & Reindel's receipt of
representations of officers of ITGI and JEFG substantially in the form of
Appendices I-1 and I-2), on the basis of certain facts, representations and
assumptions set forth in such opinion, dated the Pre-Closing Date, to the
effect that the Merger will be treated for federal income tax purposes from
the perspective of the ITGI Public Stockholders as a reorganization
qualifying under the provisions of Section 368(a) of the Code, and that each
of JEFG and ITGI will be a party to the reorganization within the meaning of
Section 368(b) of the Code.
(h) Amendment of Distribution Agreement. No provision of the Distribution
Agreement shall have been modified, amended or waived without the prior written
consent of ITGI, which consent shall not be unreasonably withheld.
(i) Other. All certificates, consents and opinions, including any provision
therein permitting ITGI to rely thereon, delivered in connection with the
supplemental indentures referred to in Section 6(A)(t) shall not have been
withdrawn.
(j) Procurement of Any Necessary Letters of Credit. JEFG shall have
procured and delivered to ITGI all necessary letters of credit concerning
unmitigated Residual Liabilities in excess of the Applicable Amount as may be
required by Section 7(n) hereof.
11. CONDITIONS TO THE OBLIGATIONS OF JEFG AND ITGI TO CONSUMMATE THE MERGER
The obligations of each of JEFG and ITGI under this Agreement to effect the
Merger are subject to the fulfillment (or waiver in writing by a duly authorized
officer of JEFG and ITGI), prior to or at the Effective Time, of each of the
following conditions:
(a) Pre-Closing Consummated. The Pre-Closing shall have been consummated in
accordance with this Agreement and the Escrow Agreement shall have been fully
complied with.
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(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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With a copy to:
Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005
Attention: Immanuel Kohn, Esq.
If to JEFG to:
Jefferies Group, Inc.
11100 Santa Monica Boulevard, 11th Floor
Los Angeles, California 90025
Attention: Chief Financial Officer
With a copy to:
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103-2921
Attention: Brian J. Lynch, Esq.
Such notices shall be deemed received (i) as of the date of delivery by hand
delivery, (ii) one business day after such notice is given to a national
overnight delivery service or (iii) five business days after placed in the
United States mail, provided such mail is sent by certified mail with return
receipt requested. Either party may, by written notice so delivered to the other
party, change the address to which delivery of any notice shall thereafter be
made.
16. GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the
laws of the State of Delaware regardless of the laws that might otherwise govern
under principles of conflicts of laws applicable thereto.
17. COUNTERPARTS
This Agreement may be executed in counterparts, each of which shall be
deemed to be an original, but all of which shall constitute one and the same
agreement.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf by its officers thereunto duly authorized on the day and
year first above written.
JEFFERIES GROUP, INC.
By: /s/ CLARENCE T. SCHMITZ
--------------------------------------
Name: Clarence T. Schmitz
Title: Executive Vice President and
Chief Financial Officer
INVESTMENT TECHNOLOGY GROUP, INC.
By: /s/ RAYMOND L. KILLIAN, JR.
--------------------------------------
Name: Raymond L. Killian, Jr.
Title: Chairman, Chief Executive
Officer and President
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APPENDIX B
DISTRIBUTION AGREEMENT
DATED AS OF
MARCH 17, 1999
BETWEEN
JEFFERIES GROUP, INC.
AND
JEF HOLDING COMPANY, INC.
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TABLE OF CONTENTS
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ARTICLE I--DEFINITIONS..................................................................................... 2
Section 1.01. Definitions.............................................................................. 2
ARTICLE II--THE DISTRIBUTION............................................................................... 7
Section 2.01. Cooperation Prior to the Distribution.................................................... 7
Section 2.02. JEFG Board Action; Conditions Precedent to the Distribution.............................. 8
Section 2.03. The Distribution......................................................................... 9
ARTICLE III--CONVEYANCE OF ASSETS, OBLIGATIONS AND RIGHTS; ASSUMPTION OF LIABILITIES; CONDUCT OF HOLDING
PENDING DISTRIBUTION..................................................................................... 9
Section 3.01. Conveyance of Assets, Obligations and Rights; Assumption and Release of Liabilities...... 9
Section 3.02. Conduct of Holding and JEFG Pending Distribution......................................... 11
Section 3.03. Further Assurances and Consents.......................................................... 11
ARTICLE IV--INDEMNIFICATION................................................................................ 12
Section 4.01. Holding Indemnification of the ITGI Group................................................ 12
Section 4.02. ITGI Indemnification of the Holding Group................................................ 12
Section 4.03. Insurance and Third Party Obligations.................................................... 12
ARTICLE V--HOLDING REPRESENTATIONS......................................................................... 12
Section 5.01. Holding Representations.................................................................. 12
ARTICLE VI--INDEMNIFICATION PROCEDURES; CONTRIBUTION....................................................... 14
Section 6.01. Notice and Payment of Claims............................................................. 14
Section 6.02. Notice and Defense of Third-Party Claims................................................. 14
Section 6.03. Contribution............................................................................. 15
ARTICLE VII--EMPLOYEE MATTERS.............................................................................. 16
Section 7.01. Benefits Agreement....................................................................... 16
ARTICLE VIII--TAX MATTERS.................................................................................. 16
ARTICLE IX--ACCOUNTING MATTERS............................................................................. 16
Section 9.01. Accounting Treatment of Assets Transferred............................................... 16
ARTICLE X--INFORMATION..................................................................................... 16
Section 10.01. Provision of Corporate Records.......................................................... 17
Section 10.02. Access to Information................................................................... 17
Section 10.03. Litigation Cooperation.................................................................. 17
Section 10.04. Reimbursement........................................................................... 17
Section 10.05. Retention of Records.................................................................... 17
Section 10.06. Confidentiality......................................................................... 17
ARTICLE XI--INTEREST ON PAYMENTS........................................................................... 18
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ARTICLE XII--MISCELLANEOUS................................................................................. 18
Section 12.01. Expenses................................................................................ 18
Section 12.02. Notices................................................................................. 19
Section 12.03. Amendment and Waiver.................................................................... 20
Section 12.04. Entire Agreement........................................................................ 20
Section 12.05. Parties in Interest..................................................................... 20
Section 12.06. Disputes................................................................................ 20
Section 12.07. Survival................................................................................ 21
Section 12.08. Severability............................................................................ 21
Section 12.09. Governing Law........................................................................... 21
Section 12.10. Counterparts............................................................................ 21
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Schedule A -- Holding Provided Information Concerning the Merger
Schedule B -- ITGI Provided Information Concerning the Merger
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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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NOW, THEREFORE, in consideration of the foregoing premises and the mutual
agreements and covenants contained in this Agreement, the parties hereby agree
as follows:
ARTICLE I
DEFINITIONS
Section 1.01. DEFINITIONS. As used herein, the following terms have the
following meaning:
"Action" means any claim, suit, arbitration, inquiry, proceeding or
investigation by or before any court, governmental or other regulatory or
administrative agency or commission or any other tribunal.
"Analytical" means Jefferies Analytical Trading Group, Inc., a Delaware
corporation.
"Ancillary Agreements" means the Benefits Agreement and the Tax Agreement
and all of the written agreements, instruments, understandings, assignments and
other arrangements entered into in connection with the transactions contemplated
hereby excluding, however, the Merger Agreement and all instruments and
documents related thereto.
"Assets" means all properties, rights, contracts, leases and claims, of
every kind and description, wherever located, whether tangible or intangible,
and whether real, personal or mixed.
"Assumption" is defined in the recitals to this Agreement.
"Benefits Agreement" means the Benefits Agreement entered into in connection
with the Distribution between JEFG and Holding, as amended from time to time.
"Code" is defined in the recitals to this Agreement.
"Commission" means the Securities and Exchange Commission.
"Contribution" is defined in the recitals to this Agreement.
"Distribution" is defined in the recitals to this Agreement.
"Distribution Agent" means EquiServe, in its capacity as agent for JEFG in
connection with the Distribution.
"Distribution Date" means April 27, 1999 or such other business day as of
which the Distribution shall be effective, as determined by the Board of
Directors of JEFG; provided, however, that the Distribution Date shall occur (in
time) prior to the Effective Time.
"Effective Time" means the date and time at which the Merger is consummated.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Form S-4" means the registration statement on Form S-4 filed by JEFG
pursuant to the Securities Act with respect to the JEFG Common Stock issuable in
the Merger pursuant to the Merger Agreement, as such registration statement may
be amended from time to time.
"Form 10" means the registration statement on Form 10 filed by Holding with
the Commission to effect the registration of the class of Holding Common Stock
pursuant to the Exchange Act, as such registration statement may be amended from
time to time.
"Group" means the ITGI Group or the Holding Group, as applicable.
"Holding" is defined in the preamble to this Agreement.
"Holding Assets" means all Assets of JEFG (a) including without limitation
(1) all of the capital stock, and options, warrants or other rights to purchase
capital stock, of Analytical, Investment, Japan, JEFCO, JIL, Licensing, Pacific,
and Switzerland, and all of the preferred stock and options, warrants or
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other rights to purchase capital stock (including all of the common stock) of
W&D, (2) all cash, receivables, marketable securities and real and personal
property of JEFG, (3) all Assets that are (i) owned of record by or held in the
name of a member of the Holding Group, (ii) used exclusively by one or more
members of the Holding Group prior to, on or following the Effective Time and
(4) the names "Jefferies," "Jefferies Group" and "Jefferies Group, Inc." and all
variations thereof and all trademarks, trade names, copyrights or other
intellectual property right related thereto, but (b) excluding the capital stock
of ITGI.
"Holding Business" means the businesses conducted by JEFG prior to or at the
Effective Time or by any member of the Holding Group prior to, on and following
the Effective Time, excluding in each such case the ITGI Business.
"Holding By-laws" means the By-laws of Holding in the form filed as an
exhibit to the Form 10, as last amended, under the Exchange Act.
"Holding Certificate" means the certificate of incorporation of Holding in
the form filed as an exhibit to the Form 10, as last amended, under the Exchange
Act.
"Holding Common Stock" is defined in the recitals to this Agreement.
"Holding Group" shall mean Holding, Analytical, Investment, Japan, JEFCO,
JIL, Licensing, Pacific, Switzerland and W&D and their successors and permitted
assigns.
"Holding Liabilities" means (i) all Liabilities of Holding under this
Agreement, any Intercompany Agreement or any Ancillary Agreement, (ii) except as
otherwise expressly provided in this Agreement, any Intercompany Agreement or
any Ancillary Agreement, all Liabilities, other than ITGI Group Liabilities, (x)
of JEFG, to the extent those Liabilities arise out of or relate to any event,
occurrence, act, omission or state of affairs that occurred or existed prior to
the Effective Time, (y) of any member of the Holding Group or the Holding
Business, whether arising before, on or after the Effective Time or (z) arising
out of the ownership or use of the Holding Assets, whether arising before, on or
after the Effective Time, (iii) all Liabilities arising under or in connection
with the Form 10 unless and except to the extent that such claims are based upon
the ITGI Provided Information, (iv) subject to the provisions of Section 12.01
of this Agreement, all Liabilities comprising the JEFG Debt Obligation, (v) all
Liabilities arising with respect to claims based upon the Holding Provided
Information included or incorporated by reference into the Form S-4 and (vi)
Liabilities of JEFG under options or other rights to purchase or acquire any
JEFG Common Stock, to the extent such options or rights, prior to the Effective
Time, are not exercised for JEFG Common Stock, canceled or exchanged for options
to purchase shares of Holding Common Stock.
"Holding Provided Information" means information included or incorporated by
reference into the Form S-4, Form 10, or Joint Proxy/Information Statement that
relates exclusively to JEFG (excluding ITGI and its subsidiaries) prior to the
Effective Time, the consolidated financial statements and financial and
statistical data of JEFG (excluding the financial statements and statistical and
financial data of ITGI and its subsidiaries), any member of the Holding Group,
the Holding Business, the Ancillary Agreements, the Transfers, the Distribution
or the Holding provided information concerning the Merger as set forth in
Schedule A attached hereto and made a part hereof.
"Intercompany Agreements" means an amended and restated tax sharing
agreement, dated March 17, 1999, between JEFG, Holding and ITGI.
"Investment" means JEF Investment Company, a Delaware corporation.
"ITGI" means Investment Technology Group, Inc., a Delaware corporation,
before and/or after the Merger, as the context requires as set forth herein.
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"ITGI Business" means the businesses conducted exclusively by ITGI and its
subsidiaries prior to, on and following the Effective Time.
"ITGI Common Stock" is defined in the recitals to this Agreement.
"ITGI Group" means ITGI and its subsidiaries prior to, on and following the
Effective Time.
"ITGI Group Liabilities" means (i) all Liabilities of ITGI (in its own right
or as the successor to JEFG following the Merger) under Sections 4.02 and 12.01
of this Agreement, or under any Intercompany Agreement or any Ancillary
Agreement, (ii) except as otherwise expressly provided in this Agreement, any
Intercompany Agreement or any Ancillary Agreement, all Liabilities (other than
Holding Liabilities) of ITGI, any member of the ITGI Group or the ITGI Business
or Liabilities arising out of the ownership or use of the Assets of the ITGI
Group, in each case whether arising before, on or after the Effective Time,
(iii) all Liabilities with respect to claims based upon the ITGI Provided
Information included and incorporated by reference into the Form 10 and Joint
Proxy/ Information Statement, and (iv) all Liabilities arising with respect to
claims based upon ITGI Provided Information included or incorporated by
reference into the Form S-4.
"ITGI Provided Information" means information included or incorporated by
reference into the Form S-4, Form 10 or Joint Proxy/Information Statement that
relates exclusively to ITGI, any member of the ITGI Group, the ITGI Business,
JEFG after the Effective Time, the consolidated historical financial statements
of ITGI, the pro forma consolidated financial statements of ITGI (as the
successor to JEFG following the Merger), the financial and statistical data of
ITGI, the Special ITGI Cash Dividend or the ITGI provided information concerning
the Merger as set forth in Schedule B attached hereto and made a part hereof.
"Japan" means Jefferies (Japan) Limited, a company formed under the laws of
England.
"JEFCO" shall mean Jefferies & Company, Inc., a Delaware corporation.
"JEFG" is defined in the preamble to this Agreement.
"JEFG Common Stock" is defined in the recitals to this Agreement.
"JEFG Contribution" means an amount of money to be contributed by JEFG to
the capital of JEFCO prior to the Distribution Date equal to at least $60
million.
"JEFG Debt Obligation" means the Liabilities of JEFG in respect of its
8 7/8% Senior Notes due 2004 and 7 1/2% Senior Notes due 2007, including,
without limitation, the related indentures (including all supplemental
indentures thereto), consent solicitations and offering materials.
"JIL" means Jefferies International Limited, a company formed under the laws
of England.
"Joint Proxy/Information Statement" means the joint proxy/information
statement, as amended from time to time, filed by JEFG and Holding with the SEC
under the Exchange Act to be sent to each holder of JEFG Common Stock in
connection with the Distribution and the Merger.
"Liabilities" means any and all claims, debts, commitments, liabilities and
obligations, absolute or contingent, matured or not matured, liquidated or
unliquidated, accrued or unaccrued, known or unknown, whenever arising,
including all costs and expenses relating thereto, and including, without
limitation, those debts, commitments, liabilities and obligations arising under
this Agreement, any law, rule, regulation, action, order or consent decree of
any governmental entity or any award of any arbitrator of any kind, and those
arising under any contract, commitment or undertaking.
"Licensing" means Jefferies Licensing Corporation, a Delaware corporation.
"Merger" is defined in the recitals to this Agreement.
"Merger Agreement" is defined in the recitals to this Agreement.
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"Pacific" means Jefferies Pacific Limited, a company formed under the laws
of Hong Kong.
"Record Date" is defined in the recitals to this Agreement.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Special ITGI Cash Dividend" is defined in the recitals to this Agreement.
"Switzerland" means Jefferies (Switzerland) Ltd., a company formed under the
laws of Switzerland.
"Tax" shall have the meaning given to such term in the Tax Agreement.
"Tax Agreement" means the Tax Sharing and Indemnification Agreement entered
into in connection with the Distribution among JEFG, Holding and ITGI, as
amended from time to time.
"Transfers" is defined in the recitals to this Agreement.
"Transactions" shall mean the Transfers, the Distribution and the Merger.
"W&D" means W&D Securities, Inc., a Delaware corporation.
ARTICLE II
THE DISTRIBUTION
Section 2.01. COOPERATION PRIOR TO THE DISTRIBUTION.
(a) JEFG and Holding shall prepare, and JEFG shall mail on or prior to the
Distribution Date to the holders of JEFG Common Stock, the Joint
Proxy/Information Statement, which shall set forth appropriate disclosure
concerning Holding, the Distribution, the Merger and certain other matters
required by the Exchange Act. JEFG and Holding shall also prepare, and Holding
shall file with the Commission, the Form 10, which shall incorporate by
reference portions of the Joint Proxy/Information Statement. JEFG and Holding
shall use all reasonable efforts to cause the Form 10 to be declared, or become,
effective under the Exchange Act as soon as reasonably practicable and on or
before the Distribution Date.
(b) JEFG and Holding shall cooperate in preparing, filing with the
Commission under the Securities Act and causing to become effective any
registration statements or amendments thereto that are appropriate to reflect
the establishment of or amendments to any employee benefit plan contemplated by
the Benefits Agreement.
(c) JEFG and Holding shall, by means of a stock split or stock distribution,
cause the number of outstanding shares of Holding Common Stock held by JEFG as
of the Record Date to be equal to the number of shares of Holding Common Stock
to be distributed in the Distribution.
(d) JEFG and Holding shall take all such action as may be necessary or
appropriate under the securities or blue sky laws of states or other political
subdivisions of the United States in connection with the transactions
contemplated by this Agreement or any Ancillary Agreement.
(e) Holding shall prepare, file and pursue an application to succeed to the
listing of JEFG and thereby effectuate the listing of the Holding Common Stock
on the New York Stock Exchange, and such related matters and other matters as
shall be required by the New York Stock Exchange.
(f) On or prior to the Distribution Date, JEFG and Holding shall cooperate
in carrying out the transactions and events described in Article III hereof.
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Section 2.02. JEFG BOARD ACTION; CONDITIONS PRECEDENT TO THE DISTRIBUTION.
JEFG's Board of Directors shall, in its discretion, establish the Record Date
and the Distribution Date and any appropriate procedures in connection with the
Distribution. In no event shall the Distribution occur unless the following
conditions shall have been satisfied:
(a) any necessary regulatory approvals shall have been received;
(b) the Form 10 shall have been declared, or become, effective under the
Exchange Act;
(c) ITGI shall have declared and paid the Special ITGI Cash Dividend to the
holders of ITGI Common Stock, including JEFG;
(d) the JEFG Contribution and the Transfers shall have been completed;
(e) JEFG and the trustees under the indentures governing the JEFG Debt
Obligation shall have executed supplemental indentures in form and substance
satisfactory to JEFG and such trustees and their respective counsel, pursuant to
which Holding shall assume, and JEFG shall be released from obligations
concerning the JEFG Debt Obligation, effective as of the date the Transfers are
completed;
(f) Holding's Board of Directors, as named in the Form 10, shall have been
elected by JEFG, as sole stockholder of Holding, as directors of Holding
effective as of the Distribution Date, and the Holding Certificate and Holding
By-laws shall be in effect;
(g) the Holding Common Stock shall have been approved for listing on the New
York Stock Exchange, subject to official notice of issuance;
(h) The tax ruling obtained from the Internal Revenue Service ("IRS") on
March 11, 1999 concerning the treatment of the Transfers and the Distribution
and related transactions under Sections 332, 351, 355 and 368(a)(1)(D) of the
Code shall not have been, prior to the Effective Time, withdrawn by the IRS or
modified by the IRS in any material adverse respect;
(i) all conditions to the Pre-Closing (as defined in the Merger Agreement)
of the Merger shall have been satisfied or waived by JEFG or ITGI, as
appropriate, and the Pre-Closing shall have been consummated; and
(j) JEFG shall be reasonably satisfied that, at all relevant times prior to
the Effective Time, JEFG owns at least 80% of the outstanding ITGI Common Stock
and that no capital stock of ITGI (other than ITGI Common Stock) shall have been
issued or outstanding.
Section 2.03. THE DISTRIBUTION. On or before the Distribution Date, subject
to satisfaction or waiver of the conditions set forth in this Agreement, JEFG
shall deliver to the Distribution Agent a certificate or certificates
representing all of the then outstanding shares of Holding Common Stock held by
JEFG, endorsed in blank, and shall instruct the Distribution Agent to distribute
to each holder of record of JEFG Common Stock as of the close of business on the
Record Date a certificate or certificates representing one share of Holding
Common Stock for each share of JEFG Common Stock held of record as of the close
of business on the Record Date. Holding agrees to provide all certificates for
shares of Holding Common Stock that the Distribution Agent shall require in
order to effect the Distribution.
ARTICLE III
CONVEYANCE OF ASSETS, OBLIGATIONS AND RIGHTS;
ASSUMPTION OF LIABILITIES;
CONDUCT OF HOLDING PENDING DISTRIBUTION
Section 3.01. CONVEYANCE OF ASSETS, OBLIGATIONS AND RIGHTS; ASSUMPTION AND
RELEASE OF LIABILITIES.
(a) Prior to the completion of the Transfers, JEFG shall make the JEFG
Contribution.
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(b) Prior to the Distribution Date and effective with the Transfers (i) all
Holding Assets are intended to be and shall become Assets of the Holding Group
and (ii) all Holding Liabilities are intended to be and shall become exclusively
the Liabilities of the Holding Group.
(c) Prior to, or in connection with, the completion of the Transfers, JEFG
shall transfer or cause to be transferred to Holding (or JEFCO, as appropriate),
and JEFG shall disclaim (as appropriate) all right, title and interest of JEFG
in and to any and all of the Holding Assets and the Holding Business. Effective
as of the Transfers, all of JEFG's rights and obligations under the Intercompany
Agreements shall be transferred and assigned, without limitation or alteration
of the rights or responsibilities hereunder or thereunder, to Holding.
(d) Before the Distribution Date, effective as of the date of the Transfers,
Holding shall execute supplemental indentures in form and substance satisfactory
to JEFG, the trustee under the Indentures governing the JEFG Debt Obligation and
their respective counsel pursuant to which, among other things, Holding shall
assume, and JEFG shall be released from, the JEFG Debt Obligation, all of which
shall be effective prior to the Distribution Date.
(e) Set forth on Schedule 3.01(e) hereto is each Holding Asset and each
Holding Liability that requires a third-party consent to transfer such Holding
Asset or Holding Liability from JEFG to Holding (or to JEFCO, as appropriate).
If any such Holding Asset or Holding Liability may not be transferred by reason
of the requirement to obtain the consent of any third party and such consent has
not been obtained by the Distribution Date, then such Holding Asset or Holding
Liability shall not be transferred until such consent has been obtained. In the
event that any conveyance of an Asset constituting a Holding Asset or a
Liability constituting a Holding Liability is not effected on or before the
Distribution Date, the obligation to transfer such Asset or such Liability as
the case may be, shall continue past the Distribution Date and shall be
accomplished as soon thereafter as practicable. JEFG and its successors
(including ITGI) will cooperate with Holding to provide, or cause the owner of
such Holding Asset to use all reasonable efforts to provide, to the appropriate
member of the Holding Group all the rights and benefits under such Holding
Asset, or cause such owner to enforce such Holding Asset for the benefit of such
member. Such parties shall otherwise cooperate and use all reasonable efforts to
provide the economic and operational equivalent of an assignment or transfer of
the Holding Asset or Holding Liability, as the case may be. Holding shall duly
pay, perform or discharge, or cause the appropriate member of the Holding Group
to duly pay, perform or discharge, from and after the date of the Transfers,
each Holding Liability, including without limitation any Holding Liability
referred to in the second sentence of this paragraph; provided, the foregoing
provisions of this paragraph (e) do not affect Holding's obligation to assume
all of the Holding Liabilities at the date of the Transfers and therefore duly
pay, perform or discharge all of the Holding Liabilities from and after such
time.
(f) From and after the Distribution Date, each party shall promptly transfer
or cause the members of its Group promptly to transfer to the other party or the
appropriate member of the other party's Group, from time to time, any property
held by any such party that pursuant to this Agreement is or is intended to be
an Asset of the other party or a member of its Group. Without limiting the
foregoing, funds received by a member of one Group upon the payment of accounts
receivable that pursuant to this Agreement is or is intended to belong to a
member of the other Group shall be transferred to the other Group by wire
transfer not more than five business days after receipt of such payment.
(g) Holding agrees that it will not, without the prior written consent of
ITGI, take any action that attempts or purports to amend or modify any
agreement, including any real property lease or sublease, to which JEFG is a
party at or prior to the Transfers and from which (i) JEFG is not fully and
unconditionally released at or prior to the Transfers and (ii) the Surviving
Corporation (as the successor to JEFG pursuant to the Merger) is not fully and
unconditionally released after the Merger.
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(h) Holding agrees to obtain and deliver to ITGI, for the benefit of ITGI
one or more letters of credit in an aggregate undrawn face amount not less than
the amount by which the aggregate unmitigated Residual Liabilities exceeds the
Applicable Amount, consistent with the definitions and terms provided for under
Section 7(n) of the Merger Agreement. Such letters of credit shall be issued by
one or more nationally recognized financial institutions reasonably satisfactory
to ITGI, be in form and substance reasonably satisfactory to ITGI and expire not
earlier than 135 days after the date on which the related unmitigated Residual
Liabilities terminate.
Section 3.02. CONDUCT OF HOLDING AND JEFG PENDING DISTRIBUTION.
(a) Prior to the Distribution Date, neither Holding nor JEFG shall, without
the prior consent in writing of the other, make any public announcement
concerning the Distribution and each party shall use its respective best efforts
not to take any action which may prejudice or delay the consummation of the
Distribution.
(b) Prior to the Distribution Date, the business of Holding shall be
operated for the sole benefit of JEFG as its sole stockholder.
Section 3.03. FURTHER ASSURANCES AND CONSENTS. In addition to the actions
specifically provided for elsewhere in this Agreement, each of the parties
hereto will use its commercially reasonable efforts to (i) execute and deliver
such further instruments and documents and take such other actions as any other
party may reasonably request in order to effectuate the purposes of this
Agreement and to carry out the terms hereof and (ii) take, or cause to be taken,
all actions, and to do, or cause to be done, all things, reasonably necessary,
proper or advisable under applicable laws, regulations and agreements or
otherwise to consummate and make effective the transactions contemplated by this
Agreement, including, without limitation, using its reasonable efforts to obtain
any consents and approvals and to make any filings and applications necessary or
desirable in order to consummate the transactions contemplated by this
Agreement.
ARTICLE IV
INDEMNIFICATION
Section 4.01. HOLDING INDEMNIFICATION OF THE ITGI GROUP. On and after the
Distribution Date, Holding shall indemnify, defend and hold harmless each member
of the ITGI Group, and each of their respective directors, officers, employees
and agents (the "ITGI Indemnitees") from and against any and all claims, costs,
damages, losses, liabilities and expenses (including, without limitation,
reasonable expenses of investigation and reasonable attorney fees and expenses,
but excluding consequential damages of the indemnified party, in connection with
any and all Actions or threatened Actions) (collectively, "Indemnifiable
Losses") incurred or suffered by any of the ITGI Indemnitees and arising out of,
or due to or otherwise in connection with any of the Holding Liabilities or the
failure of Holding or any member of the Holding Group to assume, pay, perform or
otherwise discharge any of the Holding Liabilities.
Section 4.02. ITGI INDEMNIFICATION OF THE HOLDING GROUP. On and after the
Distribution Date, ITGI (as the successor to JEFG following the Merger) shall
indemnify, defend and hold harmless each member of the Holding Group and each of
their respective directors, officers, employees and agents (the "Holding
Indemnitees") from and against any and all Indemnifiable Losses incurred or
suffered by any of the Holding Indemnitees and arising out of, or due to or
otherwise in connection with any of the ITGI Group Liabilities or the failure of
ITGI or any member of the ITGI Group to pay, perform or otherwise discharge any
of the ITGI Group Liabilities.
Section 4.03. INSURANCE AND THIRD PARTY OBLIGATIONS. No insurer or any other
third party shall be (a) entitled to a benefit it would not be entitled to
receive in the absence of the foregoing
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indemnification provisions, (b) relieved of the responsibility to pay any claims
to which it is obligated or (c) entitled to any subrogation rights with respect
to any obligation hereunder.
ARTICLE V
HOLDING REPRESENTATIONS
Section 5.01. HOLDING REPRESENTATIONS. Holding represents and warrants to
JEFG as follows:
(a) Organization, Etc. Holding is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
all requisite power and authority to own, lease and operate its properties and
to carry on its business as it is now being conducted. Holding is a newly formed
corporation that, since formation and the initial capitalization effected
thereby, has not acquired, assumed or become contractually obligated to acquire
or assume any assets or liabilities, except as set forth on Schedule 5.01(a)
hereof. Since formation, Holding has not conducted any activity other than the
execution and delivery of this Agreement and the Ancillary Agreements and
activities coincident with the Transfers and the Distribution and incidental
hereunder and under the Ancillary Agreements, and other than that which is
contemplated hereby.
(b) Authority of Holding. Holding has full corporate power and authority to
execute, deliver and perform its obligations under this Agreement and each of
the Ancillary Agreements and to effectuate the Transfers and consummate the
Distribution. The execution, delivery and performance of this Agreement and each
of the Ancillary Agreements and the consummation of the Transfers and the
Distribution has been duly and validly authorized by the Board of Directors of
Holding, and no other corporate proceedings on the part of Holding are necessary
to consummate or authorize any of the Ancillary Agreements or to effectuate the
Transfers and consummate the Distribution. Each of this Agreement and the
Ancillary Agreements has been duly and validly executed and delivered by Holding
and constitutes valid and binding agreements of Holding, enforceable against
Holding in accordance with their respective terms.
(c) No Consent. No filing or registration with, or permit, authorization,
consent or approval of, or notification or disclosure (collectively,
"Governmental Consents") to, any United States (federal, state or local) or
foreign government, or governmental, regulatory or administrative authority,
agency or commission, court or other body or any arbitral tribunal (each, a
"Governmental Authority") or any other third party (collectively, "Consents") is
required in connection with the execution, delivery and performance by Holding
of this Agreement or any of the Ancillary Agreements or the consummation by
Holding of the Transfers and the Distribution, except (i) the filing of the Form
10 under the Exchange Act and the effectiveness thereof under the Exchange Act,
(ii) such consents, approvals, orders, permits, authorizations, registrations,
declarations and filings as may be required under the Blue Sky laws of various
states, (iii) the listing on the New York Stock Exchange of the Holding Common
Stock in connection with the Distribution and (iv) as set forth in Schedule
5.01(c) hereof.
(d) No Violation. Assuming that all Consents have been duly made or obtained
as contemplated by Section 5.01(c), the execution, delivery and performance by
Holding of this Agreement and the Ancillary Agreements and the consummation of
the Transfers and the Distribution will not (i) violate any provision of the
certificate of incorporation or bylaws of Holding, (ii) violate any statute,
rule, regulation, order or decree of any Governmental Authority by which Holding
or any of its assets may be bound or affected or (iii) result in a violation or
breach of, or constitute (with or without due notice or lapse of time or both) a
default (or give rise to any right of termination, cancellation, acceleration,
redemption or repurchase) under, any of the terms, conditions or provisions of
(x) any note, bond, mortgage, indenture or deed of trust relating to
indebtedness for borrowed money or (y) any license, lease or other agreement,
instrument or obligation to which Holding is a party or by which it or any of
its assets may be bound or affected.
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(e) Capitalization of Holding. All issued and outstanding shares of capital
stock of Holding are held by JEFG as of the date hereof and are duly authorized
and validly issued, fully paid, nonassessable and free of preemptive rights and
respect thereto. Other than this Agreement and the transactions contemplated
thereby and the awards contemplated by the Benefits Agreement or the Joint
Proxy/Information Statement, there are no options, warrants, calls,
subscriptions, or other rights, agreements or commitments obligating Holding to
issue, transfer or sell any shares of capital stock of Holding or any other
securities convertible into or evidencing the right to subscribe for any such
shares. Prior to the date hereof, there has not been any issuance of capital
stock of Holding other than to JEFG.
ARTICLE VI
INDEMNIFICATION PROCEDURES; CONTRIBUTION
Section 6.01. NOTICE AND PAYMENT OF CLAIMS. If any ITGI or Holding
Indemnitee (the "INDEMNIFIED PARTY") determines that it is or may be entitled to
indemnification by a party (the "INDEMNIFYING PARTY") under Article IV (other
than in connection with any Action or claim subject to Section 6.02), the
Indemnified Party shall deliver to the Indemnifying Party a written notice
specifying, to the extent reasonably practicable, the basis for its claim for
indemnification and the amount for which the Indemnified Party reasonably
believes it is entitled to be indemnified. After the Indemnifying Party shall
have been notified of the amount for which the Indemnified Party seeks
indemnification, the Indemnifying Party shall, within 90 days after receipt of
such notice, pay the Indemnified Party such amount in cash or other immediately
available funds (or reach agreement with the Indemnified Party as to a mutually
agreeable alternative payment schedule) unless the Indemnifying Party objects to
the claim for indemnification or the amount thereof. If the Indemnifying Party
does not give the Indemnified Party written notice objecting to such claim and
setting forth the grounds therefor within the same 90 day period, the
Indemnifying Party shall be deemed to have acknowledged its liability for such
claim and the Indemnified Party may exercise any and all of its rights under
applicable law to collect such amount.
Section 6.02. NOTICE AND DEFENSE OF THIRD-PARTY CLAIMS. Promptly following
the earlier of (a) receipt of notice of the commencement by a third party of any
Action against or otherwise involving any Indemnified Party or (b) receipt of
information from a third party alleging the existence of a claim against an
Indemnified Party, in either case, with respect to which indemnification may be
sought pursuant to this Agreement (a "THIRD-PARTY CLAIM"), the Indemnified Party
shall give the Indemnifying Party written notice thereof. The failure of the
Indemnified Party to give notice as provided in this Section 6.02 shall not
relieve the Indemnifying Party of its obligations under this Agreement, except
to the extent that the Indemnifying Party is materially prejudiced by such
failure to give notice. Within 90 days after receipt of such notice, the
Indemnifying Party may by giving written notice thereof to the Indemnified
Party, (a) acknowledge, as between the parties hereto, responsibility for, and
at its option, elect to assume the defense of such Third-Party Claim at its sole
cost and expense or (b) object to the claim of indemnification set forth in the
notice delivered by the Indemnified Party pursuant to the first sentence of this
Section 6.02; PROVIDED that if the Indemnifying Party does not within the same
90 day period give the Indemnified Party written notice objecting to such claim
and setting forth the grounds therefor or electing to assume the defense, the
Indemnifying Party shall be deemed to have acknowledged, as between the parties
hereto, its responsibility for such Third-Party Claim. Any contest of a Third
Party Claim as to which the Indemnifying Party has elected to assume the defense
shall be conducted by attorneys employed by the Indemnifying Party and
reasonably satisfactory to the Indemnified Party; PROVIDED that the Indemnified
Party shall have the right to participate in such proceedings and to be
represented by attorneys of its own choosing at the Indemnified Party's sole
cost and expense. Notwithstanding the foregoing, (i) the Indemnifying Party
shall not be entitled to assume the defense of any Third-Party Claim (and shall
be liable to the Indemnified Party for the reasonable
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fees and expenses incurred by the Indemnified Party in defending such
Third-Party Claim) if there are one or more legal defenses available only to the
Indemnified Party that conflict, in one or more significant substantive
respects, with those available to the Indemnifying Party with respect to such
Third-Party Claim and (ii) if at any time after assuming the defense of a
Third-Party Claim an Indemnifying Party shall fail to prosecute or shall
withdraw from the defense of such Third-Party Claim, the Indemnified Party shall
be entitled to resume the defense thereof with counsel selected by such
Indemnified Party and the Indemnifying Party shall be liable for the reasonable
fees and expenses of counsel incurred by the Indemnified Party in such defense.
The Indemnifying Party may settle, compromise or discharge a Third-Party Claim,
provided, the Indemnifying Party shall have obtained the prior written consent
of the Indemnified Party, which consent shall not be unreasonably withheld. If,
after receipt of notice of a Third-Party Claim, the Indemnifying Party does not
undertake to defend such Third-Party Claim within 90 days of such notice, the
Indemnified Party may, but shall have no obligation to, contest any lawsuit or
action with respect to such Third-Party Claim and the Indemnifying Party shall
be bound by the results obtained with respect thereto by the Indemnified Party.
Indemnification shall be made by periodic payments of the amount thereof during
the course of the investigation or defense, as and when bills are received or
Indemnifiable Loss is incurred. The parties agree to render to each other such
assistance as may reasonably be requested in order to ensure the proper and
adequate defense of any Third-Party Claim. The remedies provided in this Article
VI shall be cumulative and shall not preclude assertion by any Indemnified Party
of any other rights or the seeking of any and all other remedies against any
Indemnifying Party.
Section 6.03. CONTRIBUTION. To the extent that any indemnification provided
for in Section 4.01 or 4.02 is unavailable to an Indemnified Party or is
insufficient in respect of any of the Indemnifiable Losses of such Indemnified
Party, then the Indemnifying Party, in lieu of, or in addition to, indemnifying
such Indemnified Party hereunder, shall contribute to the amount paid or payable
by such Indemnified Party as a result of such Indemnifiable Losses (i) in such
proportion as is appropriate to reflect the relative benefits received by such
Indemnifying Party on the one hand and the Indemnified Party on the other hand
from the transaction or other matter which resulted in the Indemnifiable Losses
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) but also the relative fault of the
Indemnifying Party on the one hand and of the Indemnified Party on the other
hand in connection with the action, inaction, statements or omissions that
resulted from such Indemnifiable Losses as well as any other relevant equitable
considerations.
ARTICLE VII
EMPLOYEE MATTERS
Section 7.01. BENEFITS AGREEMENT. All matters relating to or arising out of
any employee benefit, compensation or welfare arrangement in respect of any
present and former employee of the ITGI Group or the Holding Group shall be
governed by the Benefits Agreement, except as may be expressly stated herein. In
the event of any inconsistency between the Benefits Agreement and this
Agreement, the Benefits Agreement shall govern.
ARTICLE VIII
TAX MATTERS
All matters relating to Taxes shall be governed exclusively by the Tax
Agreement, except as may be expressly stated herein. In the event of any
inconsistency between the Tax Agreement and this Agreement, the Tax Agreement
shall govern.
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ARTICLE IX
ACCOUNTING MATTERS
Section 9.01. ACCOUNTING TREATMENT OF ASSETS TRANSFERRED. All transfers of
Assets of JEFG to JEFCO or Holding pursuant to this Agreement shall constitute
contributions by JEFG to the capital of JEFCO or Holding, as appropriate.
ARTICLE X
INFORMATION
Section 10.01. PROVISION OF CORPORATE RECORDS. ITGI (as successor to JEFG
pursuant to the Merger) and Holding shall arrange as soon as practicable
following the Effective Time for the provision to the other of copies of any
requested corporate documents (e.g. minute books, stock registers, stock
certificates, documents of title, contracts, etc.) in its possession relating to
the other or its business and affairs; provided, however, this Section 10.01
shall not create any obligation to retain documents beyond that which is
required pursuant to such entity's records retention policies. JEFG and Holding
agree that Holding shall retain control and custody of original copies of all
corporate documents of JEFG relating to matters and events on or prior to the
Effective Time.
Section 10.02. ACCESS TO INFORMATION. From and after the Effective Time,
ITGI (as successor to JEFG pursuant to the Merger) and Holding shall each afford
the other and its accountants, counsel and other designated representatives
reasonable access (including using reasonable efforts to give access to persons
or firms possessing information) and duplicating rights during normal business
hours to all records, books, contacts, instruments, computer data and other data
and information in its possession relating to the business and affairs of the
other, insofar as such access is reasonably required by the other including,
without limitation, for audit, accounting and litigation purposes.
Section 10.03. LITIGATION COOPERATION. ITGI (as successor to JEFG pursuant
to the Merger) and Holding shall each use reasonable efforts to make available
to the other, upon written request, its officers, directors, employees and
agents as witnesses to the extent that such persons may reasonably be required
in connection with any legal, administrative or other proceedings arising out of
the business of the other prior to the Effective Time in which the requesting
party may from time to time be involved.
Section 10.04. REIMBURSEMENT. ITGI (as successor to JEFG pursuant to the
Merger) and Holding, each providing copies of documents, information or
witnesses under Sections 10.01, 10.02 or 10.03 to the other, shall be entitled
to receive from the recipient, upon the presentation of invoices therefor,
payment for all reasonable out-of-pocket costs and expenses as may be reasonably
incurred in providing such information or witnesses.
Section 10.05. RETENTION OF RECORDS. Except as otherwise required by law or
agreed to in writing, each party shall, and shall cause the members of its Group
to, retain all information relating to the other's business in accordance with
the past practice of such party. Notwithstanding the foregoing, except as
otherwise provided in the Tax Agreement, either party may destroy or otherwise
dispose of any information at any time following the first anniversary of the
Merger in accordance with the corporate record retention policy maintained by
such party with respect to its own records.
Section 10.06. CONFIDENTIALITY. Each party shall, and shall cause each
member of its Group to, hold and cause its directors, officers, employees,
agents, consultants and advisors to hold, in strict confidence all information
concerning the other party (except to the extent that such information can be
shown to have been (a) in the public domain through no fault of such party or
(b) later lawfully acquired after the Distribution on a non-confidential basis
from other sources not subject to a confidentiality obligation by the party to
which it was furnished), and neither party shall release or disclose such
information to any other person, except its auditors, attorneys, financial
advisors, bankers and other
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consultants and advisors who shall be advised of and agree in writing to comply
with the provisions of this Section 10.06. In the event that a party (the
"RECEIVING PERSON") is requested pursuant to, or required by, applicable law,
regulation, rule or by legal process to disclose any information regarding the
other party (the "DISCLOSING PERSON"), the Receiving Person agrees that it will
provide the Disclosing Person with prompt notice of such request or requirement
in order to enable the Disclosing Person to seek an appropriate protective order
or other remedy, to consult with the Receiving Person with respect to the
Disclosing Person taking steps to resist or narrow the scope of such request or
requirement, or to waive compliance, in whole or in part, with the terms of this
Section 10.06. In any such event, the Receiving Person will disclose only that
portion of any information regarding the Disclosing Party which the Receiving
Person is advised by counsel is legally required and will use its reasonable
best efforts to ensure that all such information that is so disclosed will be
accorded confidential treatment.
ARTICLE XI
INTEREST ON PAYMENTS
Except as otherwise expressly provided in this Agreement, all payments by
one party to the other under this Agreement, any Intercompany Agreement or any
Ancillary Agreement shall be paid, by wire transfer of immediately available
funds to an account in the United States designated by the recipient, within 30
days after receipt of an invoice or other written request for payment setting
forth the specific amount due and a description of the basis therefor in
reasonable detail. Any amount remaining unpaid beyond its due date, including
disputed amounts that are ultimately determined to be payable, shall bear
interest at a floating rate of interest equal to 2.5% over the higher of the
Federal funds rate or the London Interbank Offered Rate.
ARTICLE XII
MISCELLANEOUS
Section 12.01. EXPENSES. The obligations of JEFG and ITGI under Section 7(d)
("Expenses") of the Merger Agreement shall survive (i) any termination of the
Merger Agreement and (ii) the Effective Time of the Merger, with (x) Holding
succeeding to the obligations of, and being credited for any Expense payments
made prior to the Effective Time by, JEFG thereunder and (y) ITGI (as the
successor to JEFG following the Merger) succeeding to the obligations of, and
being credited for any Expense payments made by, ITGI thereunder.
Section 12.02. NOTICES. All notices and communications under this Agreement
after the Distribution Date shall be in writing and any communication or
delivery hereunder shall be deemed to have been duly given when received
addressed as follows:
If to JEFG or any of its successors, to:
Investment Technology Group, Inc.
380 Madison Avenue, 4th Floor
New York, New York 10017
Attention: Chief Financial Officer
With a copy to:
Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005
Attention: Immanuel Kohn, Esq.
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If to Holding, to:
Jefferies Group, Inc.
JEF Holding Company, Inc.
11100 Santa Monica Boulevard, 11th Floor
Los Angeles, California 90025
Attention: Chief Financial Officer
With a copy to:
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103
Attention: Brian J. Lynch, Esq.
Such notices shall be deemed received (i) as of the date of delivery by hand
delivery, (ii) one business day after such notice is given to a national
overnight delivery service or (iii) five business days after placed in the
United States mail, provided such mail is sent by certified mail with return
receipt requested. Either party may, by written notice so delivered to the other
party, change the address to which delivery of any notice shall thereafter be
made.
Section 12.03. AMENDMENT AND WAIVER. This Agreement may not be altered or
amended, nor may rights hereunder be waived, except by an instrument in writing
executed by the party or parties to be charged with such amendment or waiver. No
waiver of any terms, provision or condition of or failure to exercise or delay
in exercising any rights or remedies under this Agreement, in any one or more
instances, shall be deemed to be, or construed as, a further or continuing
waiver of any such term, provision, condition, right or remedy or as a waiver of
any other term, provision or condition of this Agreement.
Section 12.04. ENTIRE AGREEMENT. This Agreement, together with the Merger
Agreement and the Ancillary Agreements, constitutes the entire understanding of
the parties hereto with respect to the subject matter hereof, superseding all
negotiations, prior discussions and prior agreements and understandings relating
to such subject matter. To the extent that the provisions of this Agreement are
inconsistent with the provisions of any Ancillary Agreement, the provisions of
such Ancillary Agreement shall prevail.
Section 12.05. PARTIES IN INTEREST. Neither of the parties hereto may assign
its rights or delegate any of its duties under this Agreement without the prior
written consent of each other party. This Agreement shall be binding upon, and
shall inure to the benefit of, the parties hereto and their respective
successors and permitted assigns. Nothing contained in this Agreement, express
or implied, is intended to confer any benefits, rights or remedies under
Articles IV, V and VI hereof upon any person or entity other than members of the
ITGI Group and the Holding Group and the ITGI Indemnitees and the Holding
Indemnitees and their respective successors and permitted assigns.
Section 12.06. DISPUTES.
(a) Resolution of any and all disputes arising from or in connection with
this Agreement, whether based on contract, tort, statute or otherwise,
including, but not limited to, disputes in connection with claims by third
parties (collectively, "DISPUTES"), shall be subject to the provisions of this
Section 12.06; provided, however, that nothing contained herein shall preclude
either party from seeking or obtaining (i) injunctive relief or (ii) equitable
or other judicial relief to enforce the provisions hereof or to preserve the
status quo pending resolution of Disputes hereunder.
(b) Either party may give the other party written notice of any Dispute not
resolved in the normal course of business. The parties shall thereupon attempt
in good faith to resolve any Dispute promptly by negotiation between executives
who have authority to settle the controversy and who are at a higher
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level of management than the persons with direct responsibility for
administration of this Agreement. Within 20 days after delivery of the notice,
the receiving party shall submit to the other a written response. The notice and
the response shall include a statement of such party's position and a summary of
arguments supporting that position and the name and title of the executive who
will represent that party and of any other person who will accompany such
executive. Within 45 days after delivery of the first notice, the executives of
both parties shall meet at a mutually acceptable time and place, and thereafter
as often as they reasonably deem necessary, to attempt to resolve the Dispute.
All reasonable requests for information made by one party to the other will be
honored.
(c) If the Dispute has not been resolved by negotiation within 60 days of
the first party's notice, or if the parties failed to meet within 45 days, the
parties shall endeavor to settle the Dispute by mediation under the then current
Commercial Mediation Rules of the American Arbitration Association.
(d) If the Dispute has not been resolved within 180 days after delivery of
the first notice under Section 12.06(b), either party may commence any
litigation or other procedure allowed by law.
Section 12.07. SURVIVAL. The rights and obligations under this Agreement
shall survive the Distribution and Merger and any sale or other transfer by any
member of Holding Group and/or the ITGI Group or any assignment or sale by them
of any Assets or Liabilities.
Section 12.08. SEVERABILITY. The provisions of this Agreement are severable
and should any provision hereof be void, voidable or unenforceable under any
applicable law, such provision shall not affect or invalidate any other
provision of this Agreement, which shall continue to govern the relative rights
and duties of the parties as though such void, voidable or unenforceable
provision were not a part hereof.
Section 12.09. GOVERNING LAW. This Agreement shall be construed in
accordance with, and governed by, the laws of the State of New York, without
regard to the conflicts of law rules of such state.
Section 12.10. COUNTERPARTS. This Agreement may be executed in one or more
counterparts each of which shall be deemed an original instrument, but all of
which together shall constitute but one and the same Agreement.
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IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the day and year first above written.
<TABLE>
<S> <C> <C>
JEFFERIES GROUP, INC.
By /s/ CLARENCE T. SCHMITZ
-----------------------------------------
Name: Clarence T. Schmitz
Title: Executive Vice President and CFO
JEF HOLDING COMPANY, INC.
By /s/ JERRY M. GLUCK
-----------------------------------------
Name: Jerry M. Gluck
Title: Secretary and General Counsel
</TABLE>
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EXHIBIT 10.1.4
JOINT VENTURE AGREEMENT
BY AND AMONG
ITG INTERNATIONAL LIMITED,
SOCIETE GENERALE,
INVESTMENT TECHNOLOGY GROUP SG LIMITED,
INVESTMENT TECHNOLOGY GROUP LIMITED,
AND
INVESTMENT TECHNOLOGY GROUP EUROPE LIMITED
DATED AS OF NOVEMBER 17, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE 1
DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
1.2 Additional Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
1.3 Interpretation and Construction of This Agreement. . . . . . . . . . . . . . 13
ARTICLE 2
FORMATION AND OFFICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.1 Formation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.2 Principal Executive Offices and Other Offices. . . . . . . . . . . . . . . . 14
2.3 Purpose of Joint Venture . . . . . . . . . . . . . . . . . . . . . . . . . . 14
ARTICLE 3
CAPITALIZATION OF THE COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
3.1 Authorized Capital; Initial Subscriptions. . . . . . . . . . . . . . . . . . 15
3.2 Contributions to the Company . . . . . . . . . . . . . . . . . . . . . . . . 15
3.3 Initial Capital Contributions of the Venturers . . . . . . . . . . . . . . . 15
3.4 Additional Capital Contributions of the Venturers. . . . . . . . . . . . . . 16
3.5 Failure to Make Additional Capital Contributions . . . . . . . . . . . . . . 17
3.6 Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.7 Pre-emptive Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.8 Distributions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
3.9 Business Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3.10 Preparation of Approved Annual Budget. . . . . . . . . . . . . . . . . . . . 20
3.11 Approved Annual Budget for Initial Financial Year. . . . . . . . . . . . . . 21
ARTICLE 4
OPERATIVE AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
4.1 Operative Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF VENTURERS. . . . . . . . . . . . . . . . . . . . . . 21
5.1 Representations and Warranties of ITGI . . . . . . . . . . . . . . . . . . . 21
5.2 Representations and Warranties of SG . . . . . . . . . . . . . . . . . . . . 23
ARTICLE 6
CERTAIN COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.1 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
6.2 Commitment of Venturers to the Joint Venture . . . . . . . . . . . . . . . . 25
6.3 Effect of Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . 25
6.4 Notice of Venturer Change of Control . . . . . . . . . . . . . . . . . . . . 25
6.5 Election to Treat Companies as Partnerships. . . . . . . . . . . . . . . . . 25
ARTICLE 7
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
7.1 Composition of the Boards. . . . . . . . . . . . . . . . . . . . . . . . . . 25
7.2 Responsibilities of the Company Board. . . . . . . . . . . . . . . . . . . . 26
7.3 Certain Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
7.4 Language . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.5 Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
<PAGE>
7.6 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.7 Management of Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . 30
ARTICLE 8
COMMITTEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
8.1 Composition and Responsibilities of the Founders Committee . . . . . . . . . 30
8.2 Composition and Responsibilities of the Executive Committee. . . . . . . . . 31
8.3 Composition and Responsibilities of the Management Committee . . . . . . . . 32
8.4 Composition and Responsibilities of the Compensation and Audit Committee . . 33
ARTICLE 9
GOVERNANCE PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
9.1 Meetings; Quorum; Notice . . . . . . . . . . . . . . . . . . . . . . . . . . 33
9.2 Removal; Resignation; Vacancies. . . . . . . . . . . . . . . . . . . . . . . 35
9.3 No Remuneration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
ARTICLE 10
INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
10.1 Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
ARTICLE 11
DEADLOCKS 38
11.1 Deadlocks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
ARTICLE 12
TRANSFERS OF VENTURE INTERESTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
12.1 General Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
12.2 Permitted Transferees. . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
12.3 Right of First Refusal.. . . . . . . . . . . . . . . . . . . . . . . . . . . 41
12.4 Venturer Change of Control . . . . . . . . . . . . . . . . . . . . . . . . . 43
12.5 Governmental Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
12.6 Closing of Purchase of Venture Interests . . . . . . . . . . . . . . . . . . 43
ARTICLE 13
FINANCIAL AND ACCOUNTING MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
13.1 Books and Records; Financial Year. . . . . . . . . . . . . . . . . . . . . . 44
13.2 Financial Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
13.3 Right of Inspection of Books . . . . . . . . . . . . . . . . . . . . . . . . 45
13.4 Accounting Principles. . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
13.5 Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
ARTICLE 14
OTHER ACTIVITIES BY THE VENTURERS;
EXPANSION OF TERRITORY; CONFIDENTIALITY. . . . . . . . . . . . . . . . . . . . . . . . 45
14.1 In General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
14.2 Non-Competition Obligations. . . . . . . . . . . . . . . . . . . . . . . . . 46
14.3 Non-Competition Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . 46
14.4 Expansion of Territory . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
14.5 Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
ARTICLE 15
TERM AND TERMINATION DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
15.1 Term of JV Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
<PAGE>
15.2 Termination of Joint Venture . . . . . . . . . . . . . . . . . . . . . . . . 48
15.3 Termination Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
15.4 Termination Upon Default, Etc. . . . . . . . . . . . . . . . . . . . . . . . 49
15.5 Closing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
15.6 Termination by Dissolution . . . . . . . . . . . . . . . . . . . . . . . . . 50
ARTICLE 16
POST TERMINATION PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
16.1 Consequences of Termination. . . . . . . . . . . . . . . . . . . . . . . . . 50
16.2 Non-Solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
16.3 Transition Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
ARTICLE 17
NEGOTIATIONS; ARBITRATION; SUBMISSION TO JURISDICTION. . . . . . . . . . . . . . . . . 52
17.1 Negotiations; Arbitration. . . . . . . . . . . . . . . . . . . . . . . . . . 52
ARTICLE 18
MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
18.1 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
18.2 Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
18.3 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
18.4 Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
18.5 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
18.6 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
18.7 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
18.8 No Assignment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
18.9 No Third-Party Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . 57
18.10 Publicity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
18.11 Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
18.12 Disclaimer of Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
18.13 Relationship of the Parties. . . . . . . . . . . . . . . . . . . . . . . . . 57
18.14 Fiduciary Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
</TABLE>
<PAGE>
EXHIBITS
Exhibit A - Clearing Agreement
Exhibits B,
C and D - Employment Agreements
Exhibit E - ITG License Agreement
Exhibit F - POSIT License Agreement
Exhibit G - Service Agreement
SCHEDULES
Schedule 1.1 - Reference Value
Schedule 3.1 - Loans
Schedule 3.9 - Business Plan
Schedule 7.5 - List of Officers
<PAGE>
JOINT VENTURE AGREEMENT
JOINT VENTURE AGREEMENT (this "Agreement"), is made and entered
into as of this 17th day of November, 1998 by and among ITG International
Limited, a company organized under the laws of Ireland ("ITGI"), Societe
Generale, a company organized under the laws of France ("SG"; and together with
ITGI, sometimes referred to herein collectively as the "Venturers" and
individually as a "Venturer"), Investment Technology Group SG Limited, a company
organized under the laws of Ireland (the "Company"), Investment Technology Group
Limited, a company organized under the laws of Ireland ("ITGL"), and Investment
Technology Group Europe Limited, a company organized under the laws of Ireland
("ITGE"; and together with the Venturers, the Company and ITGL, sometimes
referred to herein collectively, as the "Parties" and individually as a
"Party").
W I T N E S E T H
WHEREAS, certain affiliates of ITGI operate brokerage businesses
primarily in the United States and co-own and have co-developed an electronic
trading system commonly referred to as "POSIT" or "Portfolio System for
Institutional Traders," used by financial institutions and other brokerage
customers outside of European markets and comprised of a core system to which
such customers submit, directly and confidentially, buy and sell orders and
related systems for matching such orders and executing residual trades
(collectively, the "POSIT System");
WHEREAS, SG and certain of its affiliates operate brokerage and
banking businesses throughout Europe and have access to various institutional
brokerage customers who may potentially be interested in utilizing a POSIT
System developed to match buy and sell orders in European equity securities
(hereinafter referred to, as "EuroPOSIT");
WHEREAS, it is anticipated that with the advent of the European
Monetary Union many European markets will in the near future become, or be
viewed as, a single European market and the Venturers share an objective of
establishing EuroPOSIT as a recognized brokerage service within such single
European market;
WHEREAS, the Venturers have heretofore formed the
<PAGE>
JV Companies for the purpose of developing and exploiting EuroPOSIT for use in
such European market; and
WHEREAS, in connection therewith, the Venturers desire to make
certain contributions to the Company of working capital, to provide for the
management of the Company and for certain restrictions on the transferability of
their respective Equity Interests in the Company, among other things, all in
furtherance of the objectives set forth above and subject to the terms and
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing premises and
the mutual agreements contained herein, the Parties hereto, intending to be
legally bound, hereby agree as follows:
ARTICLE 1
DEFINITIONS
1.1 DEFINITIONS. As used herein, the following terms shall have the
following meanings, unless the context otherwise requires:
"Affiliate" shall mean, with respect to any Person, any other Person
that directly, or indirectly through one or more intermediaries, Controls or is
Controlled by, or is under common Control with, such Person. The JV Companies
shall not be deemed Affiliates of the Venturers or their Affiliates for purposes
of this Agreement.
"Agreement" shall mean this Joint Venture Agreement made between ITGI,
SG, the Company, ITGL and ITGE, as same may be amended from time to time.
"Americas" shall mean North America, South America and Central America
and the countries, territories and possessions located in the Caribbean region.
"Applicable Law" shall mean all applicable provisions of all (i)
constitutions, treaties, statutes, laws (including common law), rules,
regulations, ordinances or codes of any Governmental Authority, and (ii) orders,
decisions, injunctions, judgments, awards and decrees of any Governmental
Authority.
"Applicable Rate" shall mean, during any period during
<PAGE>
which interest is due and payable, the rate of interest per annum then being
charged with respect to the then outstanding Senior Debt of the Company;
PROVIDED, HOWEVER, if no such Senior Debt is then outstanding, "Applicable Rate"
shall mean, (i) in the case of a Reference Value calculation, the then current
sterling one-year London Inter-bank Offered Rate and (ii) in all other cases,
the then current sterling one-month London Inter-bank Offered Rate.
"Approval" shall mean any consent, approval, license, permit or
authorization.
"Authorized Investments" shall mean, at any time, (i) any time deposit,
certificate of deposit or bankers acceptance, maturing not more than one year
after such time, maintained with or issued or guaranteed by either (a) a
commercial banking institution (including U.S. branches of foreign banking
institutions) that is a member of the Federal Reserve System and has assets of
not less than $1,000,000,000, or (b) a European Union commercial banking
institution with assets of not less than $1,000,000,000, (ii) exchequer bills,
government gilts and other U.S. or European Union government or local authority
guaranteed securities, maturing not more than one year after such time or (iii)
commercial paper, maturing not more than nine months after the date of issue,
which is issued by a corporation (other than an Affiliate of a Venturer)
organized under the laws of any state of the United States, the District of
Columbia or any country in the European Union and rated at least AAA by Standard
& Poor's or the equivalent rating by Moody's rating services; PROVIDED, HOWEVER,
an Authorized Investment must be denominated in the Euro, Pounds Sterling or the
U.S. Dollar.
"Bankruptcy" shall mean, with respect to any Person, (i) the
commencement, under any bankruptcy, reorganization, arrangement, adjustment of
debt, relief of debtors, appointment of examiner, dissolution, insolvency or
liquidation or similar Applicable Law of any jurisdiction, whether now or
hereafter in effect, by such Person of a case or proceeding seeking (A) the
entry as to such Person of an order of relief, (B) such Person's own bankruptcy,
liquidation, reorganization, rehabilitation or composition or adjustment of
debts, or (C) a suspension or moratorium of payments, (ii) the commencement
against such Person of any case or proceeding of the type described in clause
(i) of this definition which remains undismissed for a period of 30
<PAGE>
days; (iii) the appointment of a custodian, trustee, administrator or similar
official under any Applicable Law described in clause (i) of this definition
with respect to such Person, or the taking charge by such custodian, trustee,
administrator or similar official, of all or any substantial part of the
property of such Person; (iv) any adjudication that such Person is insolvent or
bankrupt; (v) the entering of any order of relief in, or other order approving,
any case or proceeding of the type described in clause (i) of this definition;
(vi) the making by such Person of a general assignment for the benefit of its
creditors; (vii) the failure by such Person to pay, or the statement by such
Person that it is unable to pay or shall be unable or deemed unable to pay its
debts generally as they become due under Applicable Law; (viii) the calling by
such Person of a meeting of its creditors with a view to arranging a composition
or adjustment of its debts; or (ix) any indication by such Person, either by an
act or failure to act, of its consent to, approval of or acquiescence in any of
the actions, orders or events described in the foregoing clauses of this
definition.
"BARRA" shall mean BARRA Inc., a company organized under the laws of the
State of California, U.S.A.
"Business Day" shall mean any day on which commercial banks in each of
the cities of New York, New York, London, England, Dublin, Ireland and Paris,
France are normally open for the conduct of commercial banking business.
"Business Plan" shall mean the Business Plan referred to in Section 3.9
and implemented as provided herein.
"Clearing Agreement" shall mean the Clearing Agreement dated as of July
3, 1998 between ITGL and Pershing Limited, a true and correct copy of which is
attached hereto as EXHIBIT A.
"Committees" shall mean, collectively, the Audit Committee and the
Compensation Committee and such other committee or sub-committee as may be
formed from time to time by any of the JV Boards.
"Competing Services" shall mean, (i) the JV Business described in clause
(a) of Section 2.3 and (ii) any services substantially similar to such JV
Business, PROVIDED, HOWEVER, nothing herein shall preclude either of the
Venturers from conducting any business activity which is
<PAGE>
being conducted by it on the date of this Agreement, or is derived from the
business activity being conducted by it on the date of this Agreement and is not
substantially similar to such JV Business.
"Constituent Documents" shall mean the charters, bylaws, memorandum or
articles of association, or such other similar documents as may be required or
otherwise entered into in connection with the formation of the JV Companies
pursuant to Section 2.1(a).
"Contract" shall mean any loan or credit agreement, note, bond,
indenture, mortgage, deed of trust, lease, franchise, contract, or other
agreement, obligation, instrument or binding commitment of any nature.
"Control" (including, with its correlative meanings, "Controlled by" and
"under common Control with") shall mean, with respect to any Person, any of the
following: (i) ownership, directly or indirectly, by such Person of equity
securities entitling it to exercise in the aggregate more than fifty percent
(50%) of the voting power of the Equity Share Capital of the entity in question,
or (ii) the possession by such Person of the power, directly or indirectly, (A)
to elect a majority of the board of directors (or equivalent governing body) of
the entity in question; or (B) to direct or cause the direction of the
management and policies of or with respect to the entity in question, whether
through ownership of securities, by Contract or otherwise.
"Distribution" shall mean any distribution by the Company by means of
any dividend payment, whether in cash, shares, other Equity Interests or
otherwise, any payment or application of any of its assets to purchase, redeem
or otherwise retire Equity Interests held by a Venturer, any distribution by way
of reduction of capital, partial liquidation or otherwise in respect of any such
Equity Interests held by such Venturer or any interest or other payment in
respect of, or any repayment, repurchase or redemption of, Subordinated Debt of
the Company or any Subsidiary of the Company held by or on behalf of a Venturer.
"Employment Agreements" shall mean, collectively, the (i) Employment
Agreement dated as of November 17, 1998 between ITGE and Alasdair Haynes, (ii)
Employment Agreement dated as of November 17, 1998 between ITGL and Malcom
<PAGE>
Robertson and (iii) Employment Agreement dated as of November 17, 1998 between
ITGE and Adrian Collins, true and correct copies of which are attached hereto as
EXHIBITS B, C AND D, respectively.
"Equity Interest" shall mean in relation to the JV Companies "Equity
Share Capital" as such term is defined at Section 155 of the Irish Companies Act
1963, or any rights, entitlement or option to convert into, subscribe for or
otherwise acquire any Equity Share Capital.
"Equity Share Capital" in relation to the JV Companies shall have the
meaning ascribed to such term at Clause 155 of the Irish Companies Act 1963.
"Financial Year" shall mean the period commencing January 1 in any year
and ending on December 31 in such year, except that the first Financial Year
with respect to each JV Company formed pursuant to Article 2 hereof, shall
commence on the date of its formation and end on December 31, 1999.
"Governmental Approval" shall mean any consent, approval, authorization,
waiver, grant, concession, license, exemption or order of, registration,
certificate, declaration or filing with, or report or notice to, any
Governmental Authority.
"Governmental Authority" shall mean any federation, nation, state,
sovereign or government, any federal, supranational, regional, state or local
political subdivision, any governmental or administrative body, instrumentality,
department or agency, any self regulatory organization (as defined by Section 8
of the Financial Services Act of 1986 of the United Kingdom) or any court,
administrative hearing body, commission or other similar dispute resolving panel
or body, and any other entity exercising executive, legislative, judicial,
regulatory or administrative functions of a government to which any party hereto
or any JV Company is subject.
"Indebtedness" shall mean, without duplication, all (i) obligations for
borrowed money or other extensions of credit, whether secured or unsecured and
whether absolute or contingent, including, without limitation, unmatured
reimbursement obligations with respect to letters of credit or guarantees issued
on behalf of any Person and all obligations for the deferred purchase price of
property,
<PAGE>
including finance leases and hire purchase agreements, (ii) obligations
evidenced by bonds, notes, debentures or other similar instruments, (iii)
obligations secured by any mortgage, pledge, security interest or other lien on
property owned or acquired by the Company or its Subsidiaries, (iv) capital
lease obligations, sale-leaseback or similar obligations and (v) all guarantees,
endorsements or other contingent or surety obligations (other than endorsement
of instruments for collection in the ordinary course of business) with respect
to obligations of others, including, without limitation, any obligation to
furnish funds, directly or indirectly (whether by virtue of partnership
arrangements, commission agreements, or otherwise), through the purchase of
goods, supplies or services or by way of Ordinary Shares purchase, capital
contribution, advance or loan.
"Injunction" shall mean any preliminary, temporary, interim or final
injunction, temporary restraining order or other court ordered legal prohibition
or equitable remedy requiring or prohibiting action.
"Invest or Participate" (including, with its correlative meanings,
"Investment or Participation", "Invested or Participated" and "Investing or
Participating"), as it relates to a Party or any of its Affiliates, shall mean,
with respect to any other Person that Offers Competing Services, directly or
indirectly through an Affiliate, (a) to acquire, as a principal, partner,
shareholder, beneficial owner or in any similar capacity, any ownership interest
in such Person or (b) by contract or otherwise to manage, operate or finance
such Person, or to participate in the management, operation or financing of such
Person, or to act as agent, representative, consultant or in any similar
capacity for such Person, or to use the name of such Person, or permit the use
of the name of such Party or its Affiliate by such Person, to the extent that
any of such activities described in this clause (b) are related to such
Competing Services.
"ITGI License Agreement" shall mean the ITGI License Agreement dated as
of November 17, 1998 among ITGI and the Company, a true and correct copy of
which is attached hereto as EXHIBIT E.
"Irish GAAP" shall mean generally accepted accounting principles as in
effect from time to time in Ireland.
<PAGE>
"Joint Venture" shall mean the JV Companies and the rights and
obligations of the Parties and their Affiliates under this Agreement and the
other Operative Agreements.
"JV Boards" shall mean, collectively, the Company Board and the Boards
of Directors of each Subsidiary of the Company.
"JV Companies" shall mean, collectively, the Company, ITGL, ITGE and
their respective Subsidiaries, if any, that may hereafter be formed.
"Judgment" shall mean any judgment, order, judicial decree or arbitral
award.
"Major Competitor" shall mean a Person or any Affiliate of such Person
which materially competes for business through a business substantially similar
to that operated by the Joint Venture, or a Person which has taken substantial
steps to become such a competitor.
"Material Non-Monetary Default" shall mean a breach by a Venturer of any
of the terms or provisions of Sections 14.2, 14.3 or 14.5 of this Agreement,
which breach is not cured by such Venturer within thirty (30) days after written
notice hereof is furnished to such Venturer by the other Venturer.
"Non-Share Capital" shall mean Additional Capital Contributions made
pursuant to Section 3.4 hereof which the Company has not determined to treat as
either Equity Share Capital or Subordinated Debt.
"Offer" (including, with its correlative meanings, "Offering" or
"Offered") shall mean, with respect to electronic brokerage related products and
services, directly or indirectly, offering, producing, providing, selling,
promoting, distributing or marketing such product or service.
"Operative Agreements" shall mean this Agreement, POSIT License
Agreement, Service Agreements, Clearing Agreement, ITGI License Agreement and
the Employment Agreements.
"Party" or "Parties" shall have the respective meanings ascribed to such
terms in the first paragraph hereof.
"Percentage Interest" with respect to any Person's investment in another
Person, shall mean such Person's
<PAGE>
equity interest therein (whether voting or non-voting) expressed as a percentage
of the total outstanding Equity Share Capital of such other Person (whether
voting or non-voting).
"Permitted Affiliate" shall mean a Subsidiary of a Venturer, no minority
interest in which is owned or held or the benefits of which are in any way
enjoyed, directly or indirectly, by any Person engaged in a Competing Business.
"Permitted Lien" shall mean: (i) materialmen=s, mechanics=, carriers=,
workmen=s, repairmen=s or other like liens arising in the ordinary course of
business for amounts not yet due or which are being contested in good faith by
appropriate proceedings, (ii) liens for current taxes not yet due or any taxes
being contested in good faith by appropriate proceedings, (iii) liens to secure
performance of statutory obligations, (iv) any lien securing any purchase money
indebtedness incurred in the ordinary course of business and (v) liens of
lessors under Leases.
"Person" shall mean an individual or a partnership, an association, a
joint venture, a corporation, a business or a trust or other entity organized
under any Applicable Law, an unincorporated organization or any Governmental
Authority.
"POSIT License Agreement" shall mean the POSIT License Agreement dated
as of November 17, 1998 between POSIT JV, a California limited purpose
partnership, and the Company, a true and correct copy of which is attached
hereto as EXHIBIT H.
"Proceeding" shall mean any action, litigation, suit, proceeding or
formal investigation or review of any nature, civil, criminal, regulatory or
otherwise, before any Governmental Authority.
"Public Offering" shall mean (i) any BONA FIDE public offering of equity
securities (or securities exchangeable for or convertible into equity
securities) of the Company pursuant to an effective registration statement under
the Securities Act or any other Applicable Law or any other offering which
results in such securities being listed for trading on any national or
provincial securities exchange in the Territory or the United States or included
for trading in any national market system or otherwise available for trading on
the Amsterdam Stock Exchange, the Brussels Stock
<PAGE>
Exchange, the London Stock Exchange, the Luxembourg Stock Exchange, EASDAQ or
any other major international securities exchange, or (ii) any offer of equity
securities (or securities exchangeable for or convertible into equity
securities) of a Person made in reliance on Rule 144A under the Securities Act.
"Reference Value" shall mean the Reference Value determined pursuant to
the procedures set forth on SCHEDULE 1.1 attached hereto.
"Schedule of Capital Calls" shall mean the Schedule of Capital Calls
attached to the Business Plan as Appendix 19.
"Securities Act" shall mean the United States Securities Act of 1933, or
any similar United States Federal statute, and the rules and regulations of the
U.S. Securities and Exchange Commission thereunder, all as the same shall be in
effect from time to time.
"Security Interest" shall mean any debenture, mortgage, pledge, security
interest, adverse claim, encumbrance, lien (statutory or otherwise) or charge of
any kind (including any agreement to give any of the foregoing, any conditional
sale or other title retention agreement, any lease in the nature thereof, the
filing of or agreement to give any financing statement under the Uniform
Commercial Code (or similar filing pursuant to Applicable Law of any
jurisdiction) or any other type of preferential arrangement for the purpose, or
having the effect, of protecting a creditor against loss or securing the payment
or performance of any obligation.
"Senior Debt" of any Person shall mean indebtedness of such Person
ranking senior in right of payment and in liquidation to any other Indebtedness
of such Person.
"Service Agreements" shall mean, collectively, (i) Service Agreement to
be dated as of November 17, 1998 among the JV Companies and ITG, (ii) Service
Agreement to be dated as of November 17, 1998 among the JV Companies and SG, and
(iii) Service Agreement dated as of October 6, 1998 between ITGL and ITGE, a
true and correct copy of which is attached hereto as EXHIBIT G.
"Stop Loss", in the case of any Venturer, shall mean Capital Calls in
excess of the sum of: (i) the amount contributed by a Venturer pursuant to
Section 3.3 and
<PAGE>
(ii) fifty percent (50%) of the maximum amount referred to in clause (i) of
Section 3.4(a).
"Subordinated Debt" of any Person shall mean Indebtedness of such Person
ranking junior in right of payment and in liquidation to any other Indebtedness
of such Person.
"Subsidiary" shall mean, with respect to any Person (the "Parent"), any
other Person in which the Parent, one or more direct or indirect Subsidiaries of
the Parent, or the Parent and one or more if its direct or indirect Subsidiaries
(i) have the ability, through ownership of securities individually or as a
group, ordinarily, in the absence of contingencies, to elect a majority of the
directors (or individuals performing similar functions) of such other Person,
and (ii) own more than fifty percent (50%) of the Equity Share Capital. The JV
Companies will not be deemed Subsidiaries of the Venturers or their Affiliates
for purposes of this Agreement.
"Territory" shall mean the countries of Austria, Belgium, Denmark,
Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands,
Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom and such
other countries and territories thereof as the Venturers shall mutually agree in
writing after the date hereof to add as a Territory pursuant to Section 14.4;
PROVIDED, HOWEVER, that in no event shall the Americas, Japan, Australia, New
Zealand or Canada be a Territory (collectively, the "Excluded Territories").
"Third Party Approval" shall mean the approval of any Person other than
a Governmental Authority or a JV Company.
"Transfer" shall mean any transfer, directly or indirectly,
conditionally, contingently, voluntarily or involuntarily, whether or not for
value, by operation of law or otherwise, including any sale, pledge, security
interest or encumbrance, assignment, gift, merger, combination or other
transaction or the entering into any agreement, arrangement, undertaking or
action which results or may result in any of the foregoing.
"Venture Interest", in the case of any Venturer, shall mean the Equity
Interests in the Company held by the Venturer and any Subordinated Indebtedness
owed by the Company to the Venturer.
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"Venturer Change of Control", with respect to a Venturer, shall mean the
acquisition by any Person or group of Persons acting in concert, directly or
indirectly, of equity securities of such Venturer (or such Venturer's Parent)
entitling it or them to exercise in the aggregate thirty percent (30%) or more
of the voting power of such Venturer (or such Venturer's Parent).
"Venturer Subordinated Debt" shall mean Subordinated Debt of the Company
owing to one of its Venturers that is subordinated to any other Indebtedness of
the Company other than other Subordinated Debt of the Company owing to one of
its Venturers.
"Wholly-Owned" shall mean, when used to designate the ownership interest
of any Person in an entity, that such Person owns directly or indirectly all of
Equity Share Capital and voting power of such entity, other than any DE MINIMIS
ownership in such entity as required by Applicable Law.
1.2 ADDITIONAL DEFINITIONS.
Additional Capital Contributions Section 3.4
Approved Annual Budget Section 3.10
Audit Committee Section 8.4
Bona Fide Offer Section 12.3(a)
Business Section 1.3
Capital Call Section 3.4(a)
Capital Call Notice Section 3.4(b)
Capital Call Period Section 3.4(b)
Class A Voting Ordinary Shares Section 3.1
Class B Non-Voting Ordinary Shares Section 3.1
Company Affiliate Section 10.1(a)
Company Board Section 7.1
Compensation Committee Section 8.4
Control Call Notice Date Section 12.4(b)
Control Put Notice Date Section 12.4(a)
Cure Period Section 3.5(a)
Deadlock Section 11.1(b)
Defaulting Venturer Section 3.5(a)
Default Termination Value Section 15.4
Development Phase Schedule 1.1(a)(i)
Distributable Cash Section 3.8
Executive Committee Section 8.2(a)
Formative Phase Schedule 1.1(a)(ii)
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Founders Committee Section 8.1(a)
Funding Breach Section 3.5(a)
Funding Default Section 3.5(b)
Initial Profit Year Section 3.8
ITGE Board Section 7.1(b)
ITGL Board Section 7.1(b)
JV Business Section 2.3
Listed Phase Schedule 1.1(a)(iii)
Management Committee Section 8.3(a)
Mature Phase Schedule 1.1(a)(iv)
Non-Defaulting Venturer Section 3.5(b)
Non-Transferring Party Section 12.6
Offeree Section 12.3(a)
Offered Interest Section 12.3(a)
Ordinary Shares Section 3.1
Profit Year Section 3.8
Proposed Transferee Section 12.3(a)
Resolution Section 11.1(d)
Resolution Call Notice Date Section 11.1(f)
Resolution Put Notice Date Section 11.1(e)
Seller Section 12.3(a)
Senior Officers Section 17.1(a)
Specified Court Section 17.1(d)
Termination Conditions Section 15.2
Termination Notice Section 15.2
Third Party Arbitrator Section 11.1(d)
Transferring Party Section 12.6
Transition Plan Section 16.3
Venturer Resolution Section 11.1(d)
Written Offer Section 12.3(a)
1.3 INTERPRETATION AND CONSTRUCTION OF THIS AGREEMENT. The
definitions in Section 1.1 and 1.2 shall apply equally to both the singular and
plural forms of the terms defined. Whenever the context may require, any
pronoun shall include the corresponding masculine, feminine and neuter forms.
The words "include," "includes" and "including" shall be deemed to be followed
by the phrase "without limitation." All reference herein to Articles, Sections,
Exhibits and Schedules shall be deemed to be references to Articles and Sections
of, and Exhibits and Schedules to, this Agreement unless the context shall
otherwise require. The table of contents and the headings of the Articles and
Sections are inserted for convenience of reference only and are not intended to
be a part of or to affect the meaning or interpretation of this Agreement.
Unless the context shall otherwise require any reference to any agreement or
other instrument or statute or regulation
<PAGE>
is to such agreement, instrument or statute or regulation as amended and
supplemented from time to time (and, in the case of a statute or regulation, to
any replacement provision). Any reference in this Agreement to a "day" or a
number of "days" (without the explicit qualification of "Business") shall be
interpreted as a reference to a calendar day or number of calendar days. If any
action or notice is to be taken or given on or by a particular calendar day, and
such calendar day is not a Business Day, then such action or notice shall be
deferred until, or may be taken or given, on the next Business Day. In the
event of a conflict between any provision of a Constituent Document and any
provision of this Agreement, this Agreement shall prevail.
ARTICLE 2
FORMATION AND OFFICES
2.1 FORMATION.
(a) It is the Venturers' intent to operate the Joint Venture
in a holding company structure with the business and operations of the Joint
Venture to be conducted through ITGL and ITGE, and, accordingly, the Venturers
have heretofore caused the formation of (i) the Company under the name
"Investment Technology Group SG Limited" as a company under the laws of Ireland,
(ii) ITGL under the name "Investment Technology Group Limited" as a company
under the laws of Ireland and as the Wholly-Owned Subsidiary of the Company and
(iii) ITGE under the name "Investment Technology Group Europe Limited" as a
company under the laws of Ireland and as the Wholly-Owned Subsidiary of ITGL.
From and after the date hereof, the Venturers shall take such action as may be
necessary and appropriate so that the Constituent Documents shall incorporate
the terms and conditions of this Agreement to the extent practicable and
customary in the jurisdiction of formation of the Company and each of the other
JV Companies.
(b) Except as otherwise provided herein, each of the
Venturers shall own fifty percent (50%) of the voting Equity Interests of the
Company.
2.2 PRINCIPAL EXECUTIVE OFFICES AND OTHER OFFICES. It is the
intention of the Venturers that the JV Companies maintain offices that are
separate from the Venturers' respective offices, at such location or locations
as the
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Company Board shall determine from time to time. The principal executive
offices of ITGL and ITGE will initially be located at Dublin Exchange
Facility, IFSC, 2nd Floor, Custom House Docks, Dublin 1, Ireland. The U.K.
branch of ITGE will also initially maintain offices at River Plate House,
7-11 Finsbury Circus, London, England. The Company will be initially located
at Wilmington Trust Company, Rodney Square North, 1100 North Market Street,
Wilmington, Delaware 19890.
2.3 PURPOSE OF JOINT VENTURE. The sole purpose and the nature of
the business (the "JV Business") to be conducted and promoted by the Joint
Venture are (a) to develop and exploit EuroPOSIT in the Territory in
accordance with the Operative Agreements, (b) to operate brokerage operations
in the Territory, and (c) to engage in any and all activities necessary,
advisable, convenient or incidental to the foregoing. Unless otherwise
approved by the Venturers, the activities of the JV Companies shall be
limited to the activities set forth in the Operative Agreements, Business
Plan and the Constituent Documents and the JV Companies shall not conduct any
other business operations whatsoever.
ARTICLE 3
CAPITALIZATION OF THE COMPANY
3.1 AUTHORIZED CAPITAL; INITIAL SUBSCRIPTIONS. The Venturers
shall cause the Constituent Documents of the Company to provide that (A)(i)
the authorized Equity Share Capital of the Company shall consist of
50,000,000 Ordinary Shares of which 45,000,000 shares shall be designated
Class A Voting Ordinary Shares (the "Class A Voting Ordinary Shares"), having
one vote per share and (ii) 5,000,000 shares shall be designated Class B
Non-Voting Ordinary Shares (the "Class B Non-Voting Ordinary Shares"; and
together with the Class A Voting Ordinary Shares, the "Ordinary Shares"),
having no voting rights and (B) no Ordinary Shares will entitle the holder
thereof to any preferences upon Distributions by the Company by way of
dividends or otherwise. It is the intention of the Venturers that the Class
B Non-Voting Ordinary Shares will be reserved for issuance (i) to the
Venturers upon the making of Additional Capital Contributions pursuant to
Sections 3.4 and 3.5 and (ii) in connection with performance based incentive
compensation for management and other personnel of the JV Companies.
<PAGE>
(b) As of the date hereof, ITG and SG have advanced certain sums
to ITGL in the form of loans as set forth in Schedule 3.1.
3.2 CONTRIBUTIONS TO THE COMPANY. Except as otherwise expressly
provided in this Agreement, no Venturer shall be required to make any
contributions to the capital of the Companies or subscribe for additional
shares of the equity securities of the JV Companies.
3.3 INITIAL CAPITAL CONTRIBUTIONS OF THE VENTURERS. On or prior
to the November 30 1998, each Venturer shall have made initial capital
contributions to the Company consisting of GBL2,900,000 in exchange for
50,000 Class A Voting Ordinary Shares and GBL2,850,000 Non-Share Capital.
3.4 ADDITIONAL CAPITAL CONTRIBUTIONS OF THE VENTURERS.
(a) From and after the date hereof, the Company may require
(each such requirement, a "Capital Call") each Venturer to make additional
cash capital contributions ("Additional Capital Contributions") to the
Company (i) of up to an aggregate of GBL2,100,000, in such increments and at
such times as contemplated by the Schedule of Capital Calls, or as may
otherwise be approved by the Company Board, and (ii) in such amounts and at
such times as may be set forth in Approved Annual Budgets, it being
understood that the Venturer's Additional Capital Contributions shall be made
in GB Pounds Sterling by wire transfer of immediately available funds and,
except as otherwise provided in Section 3.5, each Venturer's Additional
Capital Contributions shall be made in equal amounts.
(b) If the Company determines to make a Capital Call, the
Company shall send to each Venturer a notice thereof (a "Capital Call Notice"),
which shall set forth, among other things, (i) the amount of the Additional
Capital Contribution to be made by each of the Venturers, (ii) the period (the
"Capital Call Period") within which such Additional Capital Contribution shall
be made, which period shall not end less than ten (10) Business Days after the
date on which such Capital Call Notice is given, and (iii) its determination as
to whether such Additional Capital Contribution will be in the form of
<PAGE>
Equity Share Capital, Non-Share Capital or Subordinated Debt. Upon receipt
of Additional Capital Contributions in the form of Equity Share Capital from
a Venturer, the Company shall issue to such Venturer shares of Class B
Non-Voting Ordinary Shares based on the per share value of the Ordinary
Shares as determined by the Company Board at the time of the Capital Call.
Upon receipt of Additional Capital Contributions in the form of Subordinated
Debt from a Venturer, the Company shall issue to such Venturer a promissory
note evidencing such indebtedness having such terms and provisions (including
maturity, interest rate and events of default) as determined by the Company
Board at the time of the Capital Call. Any Additional Capital Contributions
in the form of Non-Share Capital received from a Venturer shall be recorded
in the books and records of the Company but the Company shall not issue any
certificate or other instrument to such Venturer in respect thereof.
3.5 FAILURE TO MAKE ADDITIONAL CAPITAL CONTRIBUTIONS.
(a) Following the expiration of a Capital Call Period, the
Company shall promptly notify each Venturer of the failure by any Venturer (a
"Defaulting Venturer") to make its respective Additional Capital Contribution
pursuant to the Capital Call Notice (such failure to make an Additional
Capital Contribution is referred to herein as a "Funding Breach"). The
Defaulting Venturer shall have thirty (30) days (the "Cure Period") from the
date of notice of the Funding Breach to cure such Funding Breach by
delivering to the Company the Additional Capital Contribution required under
the Capital Call Notice together with interest thereon calculated at the
Applicable Rate from the date of the Funding Breach to and including the date
of payment. If the Funding Breach is so cured, the Defaulting Venturer shall
be entitled to receive, and the Company shall issue to the Defaulting
Venturer, the Class B Non-Voting Shares, promissory note evidencing
Subordinated Debt or credit on the Company's books and records for Non-share
Capital to which the Defaulting Venturer would have otherwise been entitled
to receive under Section 3.4(b) upon the making of the applicable Capital
Call.
(b) If a Defaulting Venturer shall fail to deliver its
Additional Capital Contribution together with interest thereon as provided in
Section 3.5(a) within the Cure Period, then a funding default (a "Funding
Default") shall have occurred and all rights of the Defaulting Venturer to make
an Additional Capital Contribution pursuant to such Capital Call shall cease
and, for a period of ninety (90) days after the occurrence of the Funding
Default, the
<PAGE>
non-defaulting Venturer (the "Non-Defaulting Venturer") shall have the option
to provide all or any part of the Defaulting Venturer's Additional Capital
Contribution to the Company without payment of any interest. Upon receipt of
an Additional Capital Contribution pursuant to this Section 3.5(b) by a
Non-Defaulting Venturer, the Non-Defaulting Venturer shall be entitled to
receive, and the Company shall issue to the Non-Defaulting Venturer, a number
of Class B Non-Voting Shares as would reflect the additional Equity Interest
to which such Non-Defaulting Venturer would be entitled (with any excess of
the amount contributed over the number of Class B Non-Voting Shares so issued
to be credited to a share premium account). To the extent that the issuance
of such shares results in any adjustment of the Percentage Interests, the
governance rights of the Venturers under this Agreement shall not be affected.
3.6 LOANS. (a) Except as provided in Section 3.4 or 3.6(c), no
Venturer shall be obligated to loan funds to any JV Company. Loans by a
Venturer to the Company shall not be considered capital contributions. The
amount of any such loans shall be a debt of the Company owed to such Venturer
in accordance with the terms and conditions upon which such loans are made.
(b) With the prior written consent of the other Venturer, a
Venturer may (but shal not be obligated to) guarantee a loan made to the JV
Companies. If a Venturer guarantees a loan made to any JV Company and it is
required to make payment pursuant to such guarantee to the maker of the loan,
then the amounts so paid to the maker of the loan shall be treated as a loan
by such Venturer to the JV Company repayable on demand and not as an
Additional Capital Contribution. In the event that only one of the Venturers
provides such a guarantee, the other Venturer hereby agrees to indemnify the
Venturer who provides such guarantee for fifty percent (50%) of any amounts
paid under such guarantee and for fifty percent (50%) of any other costs,
liabilities or expenses incurred in respect thereof.
(c) It is the intention of the Venturers that the JV
Companies be financed in a manner that enables the JV Companies to have a
Debt to Equity ratio that enables them to fulfill any regulatory capital
requirements imposed on the JV Business under the Applicable Laws of any
Territory in which the JV Companies are conducting or intend to conduct JV
Business. To the extent necessary to maintain such regulatory capital
requirements, the Venturers may in
<PAGE>
their discretion loan such funds as may be necessary to the JV Companies,
each Venturer shall participate in such loans on a PRO RATA basis based on
its Percentage Interest at the time such loans are made and, as necessary,
the Venturers shall enter into intercreditor agreements to ensure that such
loans shall be subordinate in right of payment to any Senior Debt of the JV
Companies from time to time.
3.7 PRE-EMPTIVE RIGHTS. The Company shall not issue any equity
securities or any warrant, option or other security convertible into or
exercisable for such equity securities of the Company (other than any
issuance of shares of Class A Voting Ordinary Shares as described in Section
3.1(b) and any shares of Class B Non-Voting Ordinary Shares as contemplated
by Sections 3.1(a), 3.4 and 3.5), or enter into any agreement in respect of
such issuance, unless the issuance has been approved as required by this
Agreement and pursuant to which the Company offers to each of the Venturers
the right to participate proportionately according to the Percentage Interest
of such Venturer, as of the date of such proposed issuance, on the same terms
and conditions, unless otherwise approved by the Executive Committee. Any
right granted pursuant to the preceding sentence shall be exercised by
written notice to the Company given within thirty (30) days after delivery to
each Venturer of written notice of such proposed issuance. If any Venturer
fails to respond to the Company within the 30-day notice period, such failure
shall be deemed to be the rejection of the right of such Venturer to
participate in the purchase of the equity of the Company to be issued. At
any time within ninety (90) days following the date the Company has received
notice (or deemed rejection) from each Venturer accepting or rejecting its
right to participate, the Company may carry out the proposed issuance. The
provisions of this Section 3.7 shall not apply to an issuance of Equity Share
Capital of the Company or any other Equity Interest in the Company, including
without limitation any warrant, option or security convertible into or
exercisable for such Equity Share Capital in connection with a Public
Offering, an acquisition completed in the ordinary course of the JV Business
or an employee benefit plan or incentive compensation plan.
3.8 DISTRIBUTIONS. Unless the Venturers mutually otherwise agree
in writing to permit Distributions at an earlier time or on a different
basis, the Venturers shall, and shall cause their representatives on the
Company Board, to take all such action so that the Company shall not make any
Distributions until such time as profits as accumulated
<PAGE>
since the formation of the Company are in excess of losses as accumulated
since the formation of the Company as reflected in the annual consolidated
financial statements prepared for the Company and the Subsidiaries for the
Financial Year then ended (the first such Financial Year being hereinafter
referred to as an "Initial Profit Year" and each such subsequent Financial
Year being hereinafter referred to as a "Profit Year"). Thereupon, the
Venturers shall cause their representatives on the Company Board, to take all
such action so that "Distributable Cash" held by the Company, unless
otherwise determined by the Company Board, shall be distributed as
Distributions to the Venturers in accordance with their respective Percentage
Interests at least semi-annually in respect of the preceding six-month
period; PROVIDED, HOWEVER, that all fees then payable under the Service
Agreements shall have been paid, as required thereunder prior to any
Distribution to the Venturers pursuant to this Section. Unless otherwise
approved by the Company Board, all Distributions to Venturers shall be in
cash in GB Pounds Sterling. Distributable Cash shall mean seventy percent
(70%) of the amount by which cash and cash equivalents (less the Company=s
debt proceeds and contributions to capital, less, amounts specified in the
Approved Annual Budget to serve as a source of funds for capital expenditures
and, less, required amounts needed pursuant to Applicable Law to ensure that
the Company has sufficient regulatory capital) as shown in the Company=s
quarterly consolidated statement of cash flows as of the end of the relevant
fiscal quarter exceeds the cash and cash equivalents as shown in the
Company=s consolidated statement of cash flows as of the end of the preceding
fiscal quarter (after taking into account any Distributions as of the end of
such preceding fiscal quarter). The Company shall cause its Subsidiaries to
make Distributions to the Company to the extent necessary to facilitate the
making of Distributions by the Company as contemplated by this Section 3.8,
subject to mandatory provisions of Applicable Law. In no event shall the
Company or its Subsidiaries make Distributions in excess of amounts permitted
under Applicable Law.
3.9 BUSINESS PLAN. In furtherance of the Joint Venture, the
Venturers have established the Business Plan which sets forth the manner in
which the JV Business is to be conducted by the JV Companies during the
5-year period beginning on the date hereof and embodies the overall business
strategy for the Joint Venture until such time as
<PAGE>
it may be amended or modified upon the approval of the Company Board. A true
and correct copy of the Business Plan on the date hereof is attached hereto
as SCHEDULE 3.9.
3.10 PREPARATION OF APPROVED ANNUAL BUDGET. The Executive
Committee shall prepare for presentation by the chief executive officer of
the Company to the Company Board on or before October 31 in each year
beginning October 31, 1999, an annual budget for the Company and its
Subsidiaries setting forth in reasonable detail the proposed and projected
operating revenues and expenses for the Company and its Subsidiaries for the
year beginning the following January 1. Upon approval of such proposed annual
budget by the Company Board (with such changes, if any, as the Company Board
may determine), each annual budget shall constitute an "Approved Annual
Budget" for purposes hereof.
3.11 APPROVED ANNUAL BUDGET FOR INITIAL FINANCIAL YEAR.
Notwithstanding anything to the contrary contained in Section 3.10, a true
and correct copy of the Approved Annual Budget for the initial Financial Year
of the Company and its Subsidiaries is set out in the document attached at
SCHEDULE 3.9.
ARTICLE 4
OPERATIVE AGREEMENTS
4.1 OPERATIVE AGREEMENTS. On or prior to the date hereof, each of
the Venturers has and has caused its Affiliates insofar as within its power,
to enter into each of the following Operative Agreements, to which such
Venturer or its Affiliates, as the case may be, are parties:
(i) POSIT License Agreement;
(ii) Service Agreements;
(iii) Clearing Agreement;
(iv) ITGI License Agreement; and
(v) Employment Agreements.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF VENTURERS
<PAGE>
5.1 REPRESENTATIONS AND WARRANTIES OF ITGI. ITGI represents and
warrants to SG as follows:
(a) ORGANIZATION AND STANDING. ITGI is a limited liability
company validly incorporated and subsisting under the law of the jurisdiction
of its incorporation and has all requisite corporate power and corporate
authority necessary to enable it to own, lease or otherwise hold its
properties and assets and to carry on its business as presently conducted.
(b) DUE AUTHORIZATION. ITGI has all requisite corporate
power and corporate authority to enter into and perform its obligations under
this Agreement and to consummate the transactions to be consummated by it
hereunder. ITGI has all requisite corporate power and corporate authority to
enter into and perform its obligations under the other Operative Agreements
to which it is a party and to consummate the transactions to be consummated
thereby by it. The execution, delivery and performance by ITGI of the
Operative Agreements to which it is a party have been duly authorized by all
necessary corporate action on the part of ITGI. This Agreement has been, and
the other Operative Agreements to which ITGI is a party have been, duly
executed and delivered by it. This Agreement constitutes, and the other
Operative Agreements to which ITGI is a party constitute, legal, valid and
binding obligations of ITGI, enforceable against it in accordance with their
respective terms, subject to the effect of any applicable bankruptcy,
reorganization, insolvency, moratorium or similar laws affecting creditors'
rights generally and subject to the effect of general principles of equity,
including, without limitation, the possible unavailability of specific
performance or injunctive relief regardless of whether considered in a
proceeding in equity or at law.
(c) NO CONFLICTS. The execution, delivery and performance
by ITGI of this Agreement does not, and the execution, delivery and
performance by ITGI of the other Operative Agreements to which it is a party
and the compliance with the terms of the Operative Agreements to which it is
a party will not conflict with, result in any violation of or default (with
or without notice or lapse of time or both) under, give rise to a right of
termination, cancellation or acceleration of any obligation (in each case by
any third party) or to the loss of any benefit under, or result in or require
the creation, imposition or extension
<PAGE>
of any Security Interest upon any of its properties or assets under (i) any
provision of its Certificate of Incorporation or by-laws or similar
constituent documents, or (ii) any Judgment, Injunction, Applicable Law or
Contract to which it is a party or by which it or any of its properties is
bound. To the knowledge of ITGI, no Third Party Approval and no Governmental
Approval is required to be obtained or made by ITGI in connection with the
execution, delivery and performance of this Agreement, the other Operative
Agreements to which it is a party, and the transactions contemplated hereby
and thereby.
(d) BROKERS OR FINDERS. No Person is or will be entitled
to any broker's or finder's fee, or any other commission or similar fee in
connection with any of the transactions contemplated hereby as a result of
any action taken by or on behalf of ITGI.
(e) LITIGATION. There is no Proceeding pending or, to the
knowledge of ITGI, threatened against ITGI reasonably likely to restrain,
enjoin or otherwise prevent the consummation of the transactions contemplated
hereby.
5.2 REPRESENTATIONS AND WARRANTIES OF SG. SG represents and
warrants to ITGI as follows:
(a) ORGANIZATION AND STANDING. SG is a corporation duly
organized, validly existing and in good standing under the law of the
jurisdiction of its incorporation and has all requisite corporate power and
corporate authority necessary to enable it to own, lease or otherwise hold
its properties and assets and to carry on its business as presently conducted.
(b) DUE AUTHORIZATION. SG has all requisite corporate
power and corporate authority to enter into and perform its obligations under
this Agreement and to consummate the transactions to be consummated by it
hereunder. SG has all requisite corporate power and corporate authority to
enter into and perform its obligations under the other Operative Agreements
to which it is a party and to consummate the transactions to be consummated
thereby by it. The execution, delivery and performance by SG of the
Operative Agreements to which it is a party have been duly authorized by all
necessary corporate action on the part of SG. This Agreement has been, and
the other Operative Agreements to which SG is a party have been,
<PAGE>
duly executed and delivered by it. This Agreement constitutes, and the other
Operative Agreements to which SG is a party constitute, legal, valid and
binding obligations of SG, enforceable against it in accordance with their
respective terms, subject to the effect of any applicable bankruptcy,
reorganization, insolvency, moratorium or similar laws affecting creditors'
rights generally and subject to the effect of general principles of equity,
including, without limitation, the possible unavailability of specific
performance or injunctive relief regardless of whether considered in a
proceeding in equity or at law.
(c) NO CONFLICTS. The execution, delivery and performance
by SG of this Agreement does not, and the execution, delivery and performance
by SG of the other Operative Agreements to which it is a party and the
compliance with the terms of the Operative Agreements to which it is a party
will not conflict with, result in any violation of or default (with or
without notice or lapse of time or both) under, give rise to a right of
termination, cancellation or acceleration of any obligation (in each case by
any third party) or to the loss of any benefit under, or result in or require
the creation, imposition or extension of any Security Interest upon any of
its properties or assets under (i) any provision of its Certificate of
Incorporation or by-laws or similar constituent documents, or (ii) any
Judgment, Injunction, Applicable Law or Contract to which it is a party or by
which it or any of its properties is bound. To the knowledge of SG, no Third
Party Approval and no Governmental Approval is required to be obtained or
made by ITGI in connection with the execution, delivery and performance of
this Agreement, the other Operative Agreements to which it is a party, and
the transactions contemplated hereby and thereby.
(d) BROKERS OR FINDERS. No Person is or will be entitled
to any broker's or finder's fee, or any other commission or similar fee in
connection with any of the transactions contemplated hereby as a result of
any action taken by or on behalf of SG.
(e) LITIGATION. There is no Proceeding pending or, to the
knowledge of SG, threatened against SG reasonably likely to restrain, enjoin
or otherwise prevent the consummation of the transactions contemplated hereby.
(f) NON-COMPETE. As of the date of this Agreement, neither
SG nor any of its Affiliates conducts any
<PAGE>
business activity which is the same as or substantially similar to the JV
Business as described in clause (a) of Section 2.3.
ARTICLE 6
CERTAIN COVENANTS
6.1 FURTHER ASSURANCES. From and after the date hereof, each of
the Parties shall use its reasonable efforts to do or cause to be done, and
to cause its Affiliates to do or cause to be done, such further acts and
things and deliver or cause to be delivered to each other Party or its
designees such additional agreements and instruments as such Party or its
designees may reasonably require or deem advisable to carry into effect the
purpose of the Operative Agreements or to better assure and confirm unto such
Party or its designees its rights, powers and remedies hereunder and
thereunder.
6.2 COMMITMENT OF VENTURERS TO THE JOINT VENTURE.
Each of ITGI and SG agrees that it will (i) ensure that its
relevant personnel are equally and fully committed to the success of the
Joint Venture, (ii) devote sufficient resources so that it can comply fully
with obligations under the Operative Agreements to which it is a party, and
(iii) fulfill its obligations under this Agreement and any other Operative
Agreements to which it is a party.
6.3 EFFECT OF APPLICABLE LAW. If any provision contained in any
Operative Agreement relating to a JV Company is inconsistent with or
prohibited by the Applicable Laws of the jurisdiction in which such JV
Company is formed, the Parties agree to take all reasonable steps necessary
to modify such provision in a manner which is as similar as possible in terms
and effect as the original provision and which preserves substantially the
intended purpose of the original provision, but which is not inconsistent
with or prohibited by, the Applicable Laws of the jurisdiction in which such
JV Company is formed.
6.4 NOTICE OF VENTURER CHANGE OF CONTROL. If a Venturer Change of
Control occurs or is likely to occur with respect to a Venturer, subject to
Applicable Law, such Venturer shall promptly give prior written notice to the
other Venturer of such Venturer Change of Control.
<PAGE>
6.5 ELECTION TO TREAT COMPANIES AS PARTNERSHIPS. The Venturers
agree to join in, and agree to cause any Subsidiaries to join in, an election
to treat each of the Company, ITGL and ITGE as a partnership for U.S. tax
purposes under Section 7701 of the Code and Section 301.7701-3 of the
Treasury Regulations.
ARTICLE 7
MANAGEMENT
7.1 COMPOSITION OF THE BOARDS. (a) The board of directors of
the Company (the "Company Board") shall consist of: (i) six (6) voting
representatives, and (ii) additional non-voting representatives consisting of
any members of the Executive Committee that are not otherwise serving as a
voting representative on the Company Board. ITGI shall be entitled to
designate three (3) such voting representatives to the Company Board, one of
which will be the chief executive officer or chairman of ITGI, Inc. SG shall
be entitled to designate three (3) such voting representatives, one of which
will be the chief executive officer or chairman of SG Securities (London)
Ltd. In each election of representatives, each Venturer shall vote its
Equity Share Capital in the Company to effect the election of the nominees so
designated (including the election of the non-voting representatives who
consist of the members of the Executive Committee). Each of the Venturers
agree to cause its designated representatives on the Company Board to act in
accordance with the Business Plan.
(b) The board of directors of ITGL (the "ITGL Board") and
ITGE (the "ITGE Board") shall each consist of: (i) six (6) voting
representatives, and (ii) two (2) additional non-voting representatives who
must reside in Ireland. ITGI shall be entitled to designate three (3) such
voting representatives and one (1) such non-voting representative to each of
the ITGL and ITGE Board, one of which will be the chief executive officer or
chairman of ITG, Inc. SG shall be entitled to designate three (3) such
voting representatives and one (1) such non-voting representative, one of
which will be the chief executive officer or chairman of SG Securities
(London) Ltd. In each election of representatives, each Venturer shall vote
its Equity Interests in the Company to effect the election of the nominees so
designated.
(c) Each of the Venturers shall appoint one of
<PAGE>
its voting representatives (or in his absence, an alternate) on each of the
JV Boards to serve as a co-chairman, each of whom shall chair meetings of the
respective JV Board on an alternating basis.
(d) Subject to Applicable Law, the JV Boards shall operate
in accordance with the general governance provisions contained in Article 9.
7.2 RESPONSIBILITIES OF THE COMPANY BOARD. The Company Board
shall be responsible for the management of the business and affairs of the
Company. Without limiting the generality of the foregoing, the Company shall
and shall procure that each JV Company shall not take any action with respect
to the following matters without the affirmative vote of the Company Board:
(i) action by the Company or any of its Subsidiaries which
(A) is outside the ordinary course of business operations of the Company or
any such Subsidiary and (B) has not been reflected in an Approved Annual
Budget;
(ii) incurrence of any Indebtedness or the making of any
capital expenditure by the Company or any of its Subsidiaries in excess of
GBL100,000 in any case, or in the aggregate in any Financial Year, except as
contemplated by the Approved Annual Budget and except, in the case of
Indebtedness, for endorsements for collection or deposits in the ordinary
course of business;
(iii) mortgage, pledge or the granting of any other Security
Interest with respect to the assets of the Company and its Subsidiaries,
except purchase money mortgages in the ordinary course of business and other
Permitted Liens;
(iv) making of any loans or the agreement to make any loans
by the Company or any of its Subsidiaries or the guarantee by any of them of
any Indebtedness of any other Person in excess of GBL100,000, in any
<PAGE>
case, or in the aggregate in any Financial Year;
(v) entering into any transaction, directly or indirectly
(including, without limitation, any purchase, sale, lease, investment, loan,
service or management agreement or other transaction) with either Venturer or
any of their respective Affiliates involving the receipt or expenditure by
the Company and any of its Subsidiaries of more than GBL100,000, in any case,
or in the aggregate in any Financial Year, except as expressly contemplated
by this Agreement or any of the other Operative Agreements or as specified in
the Approved Annual Budget for such Financial Year or the Business Plan;
(vi) declaration, setting aside, or payment of Distributions
by the Company or any of its Subsidiaries or any redemptions, purchase or
other acquisition of the equity securities of the Company or any of its
Subsidiaries;
(vii) any amendment of the Constituent Documents;
(viii) any issuance, transfer, pledge or sale of equity
securities by the Company, including, without limitation, capital stock,
options, warrants or similar instruments, except as specifically provided in
this Agreement;
(ix) entering into or conducting any business other than the
JV Business;
(x) any appointment or change in the Company's independent
auditors;
(xi) approval of any material amendment or modification of
the Business Plan;
(xii) approval of any annual budget or any material
amendment or modification of any Approved Annual Budget;
<PAGE>
(xiii) except as expressly provided herein with respect to the
Founders Committee, the Executive Committee, the Audit Committee and the
Compensation Committee, establishment of any committee of the Company Board
and the delegation of powers thereto, it being expressly understood that any
such committee shall at all time have an equal number of voting
representatives designated by each of the Venturers;
(xiv) appointment of the board of directors of any Subsidiary;
(xv) (A) any acquisition by the Company or any of its
Subsidiaries (in one or a series of related transactions) of, or any
investment by the Company or any of its Subsidiaries (in one or a series of
related transactions) in, assets or properties of any Person other than a
Wholly-Owned Subsidiary (whether by acquiring shares or other equity
securities, partnership interests or evidences of Indebtedness of any Person,
by contributing to the capital of any Person, by making a loan, advance or
other extension of credit to any other Person) in any case if the purchase
price or amount to be invested in more than GBL100,000, or (B) the investment
of cash included in the working capital of the Company in other than
Authorized Investments;
(xvi) any sale, assignment or transfer of any assets or
properties of the Company in any Financial Year in excess of GBL100,000 in
the case of any particular asset or property or in the aggregate in the case
of a group of similar assets or properties except for such sales, assignments
or transfers in the ordinary course of business; and
<PAGE>
(xvii) approval of any quarterly, semi-annual or annual
financial statements of the Company and its Subsidiaries.
7.3 CERTAIN RESTRICTIONS. Anything herein to the contrary
notwithstanding, in no event shall the Company Board approve any of the
following matters without the prior written consent of each Venturer:
(i) any amendment of the Constituent Documents of the
Company;
(ii) any sale or other transfer (in one or a series of
related transactions) of substantially all of the assets and properties of
the Joint Venture;
(iii) whether, directly or indirectly, by operation of law or
otherwise, any merger with, consolidation with, acquisition of all or
substantially all of the assets or capital stock of, or other combination
with, any Person; or
(iv) the winding-up or dissolution of any JV Company except
as otherwise provided in Section 15.6.
7.4 LANGUAGE. The proceedings of meetings of the board of
directors of each of the JV Companies shall be conducted in the English
language. The formal minutes of meetings of the board of directors of each
of the JV Companies shall be maintained in the English language. The Company
shall ensure that all senior management of the JV Companies will have a good
working knowledge of English.
7.5 OFFICERS. The principal officers of the Company shall consist
of a Director and a Secretary. The principal officers of the ITGL shall
consist of a chief executive officer, deputy chairman and chief operating
officer. The Company Board shall also have the power to appoint such other
officers as it deems appropriate and delegate such powers to such officers as
shall not be inconsistent with this Agreement, the Business Plan, Applicable
Law and the Constituent Documents of the Company and ITGL, which may include
a finance director, head of sales trading, head of settlements and head of
technology. As of the date hereof, the initial slates of officers of the
Company and ITGL shall
<PAGE>
be as set forth on SCHEDULE 7.5 attached hereto.
7.6 COMPENSATION. It is the intent of the Venturers that
compensation and other forms of remuneration for employees and officers of
the JV Companies, including incentive bonus plans, share participation
schemes, pension plans and employee benefits plans, medical insurance,
vacation and other benefit plans shall be consistent with the guidelines
outlined in the Business Plan and, to the extent practicable, shall
participate in the benefit plans offered by SG Securities (London), Ltd. with
the costs of such participation being borne by the Company.
7.7 MANAGEMENT OF SUBSIDIARIES. The general provisions of
Sections 7.1, 7.3, 7.4, 7.5 and 7.6 shall, to the extent practicable, govern
the management of each Subsidiary of the Company including ITGL and ITGE.
ARTICLE 8
COMMITTEES
8.1 COMPOSITION AND RESPONSIBILITIES OF THE FOUNDERS COMMITTEE.
(a) The Venturers hereby constitute, effective on the date
hereof, a founders committee (the "Founders Committee") consisting of two
voting representatives designated by each Venturer. The voting
representatives designated by ITGI shall at all times be senior ranking
officers of ITG, Inc. or its Affiliates and the voting representatives
designated by SG shall at all times be senior ranking officers of SG
Securities (London) Ltd. or its Affiliates. As of the date hereof, the
voting representatives of the Founders Committee designated by ITGI are
Raymond L. Killian Jr. and Howard C. Naphtali and the voting representatives
designated by SG are Hugh Hughes and Yves Tuloup.
(b) The Founders Committee will be responsible for (i)
resolving Deadlocks and (ii) any other matter assigned to the Founders
Committee pursuant to the terms of this Agreement or any other Operative
Agreement.
(c) Consistent with Section 8.1(b), the Parties agree and
shall give instructions to their respective representatives on the Founders
Committee, that the purpose of the Founders Committee is not to engage in
<PAGE>
the management of the JV Companies, which management shall be effected in
accordance with the Business Plan by the respective JV Boards, the Committees
and the management of each of the JV Companies without referring, unless
required pursuant to this Agreement or the other Operative Agreements, such
matters to the Founders Committee.
(d) The Founders Committee shall not operate in accordance
with the general governance provisions contained in Article 9 and, following
formation, the Founders Committee shall develop its own procedural guidelines
for governance, including, without limitation, guidelines for the appointment
of a chairman or co-chairmen thereof. The Founders Committee shall not meet
in Ireland.
8.2 COMPOSITION AND RESPONSIBILITIES OF THE EXECUTIVE COMMITTEE.
(a) ITGL shall constitute, effective on the date hereof or
as soon thereafter as reasonably practicable, an executive committee of ITGL
(the "Executive Committee") consisting of the chief executive officer, deputy
chairman and chief operating officer of ITGL.
(b) The Parties agree that the purpose of the Executive
Committee is to establish and resolve matters of policy and not to engage in
the management of ITGL.
(c) The Executive Committee shall not operate in accordance
with the general governance provisions contained in Article 9 and, following
formation, the Executive Committee shall develop its own procedural
guidelines for governance, including, without limitation, guidelines for
appointment of a chairman or co-chairmen thereof.
8.3 COMPOSITION AND RESPONSIBILITIES OF THE MANAGEMENT COMMITTEE.
(a) From and after the date hereof, ITGE shall constitute a
management committee of ITGE (the "Management Committee") consisting of all
of the respective senior and mid-level managers and department heads of ITGE
including, without limitation, the chief executive officer, chief operating
officer, head of technology, head of operations, deputy chairman, head of
sales trading and finance director of ITGE, and such other non-managerial
members as the Management Committee may appoint from time to time to serve
<PAGE>
thereon.
(b) The Management Committee shall have the authority and
responsibility to run the day-to-day operations of ITGE subject at all times
to the direction and control of ITGE. It is the intention of the Venturers
that, in the event that ITGE in the future has more than one Subsidiary,
there may be established more than one Management Committee or sub-committee
so that authority and responsibility to run the day-to-day operations of each
Subsidiary, or of groups of several Subsidiaries, may be appropriately
delegated.
(c) The Management Committee shall not be operated in
accordance with the general governance provisions contained in Article 9 and
the Management Committee (and any such sub-committee thereof) will, when
constituted, establish governance procedures; PROVIDED, HOWEVER, that such
governance procedures shall follow the following guidelines:
(i) the members shall establish a regular weekly meeting
schedule except that any non-managerial level member thereof will only be
required to attend meetings on a monthly basis; and
(ii) the chief executive officer or, if such officer is not
present at a meeting, the next most senior officer of the JV Companies in
attendance shall act as chairman and preside over any such meetings.
8.4 COMPOSITION AND RESPONSIBILITIES OF THE COMPENSATION AND AUDIT
COMMITTEE. The ITGL Board shall establish a Compensation Committee (the
"Compensation Committee") and an Audit Committee (the "Audit Committee") each
composed of two members who also serve on the ITGL Board, one of whom will be
selected by the voting representatives serving on the Company Board that were
designated by ITGI and the other of whom will be selected by the voting
representatives serving on the Company Board that were designated by SG;
PROVIDED, HOWEVER, that the members of the Audit Committee must not be
Affiliates of either Venturer.
The Compensation and Audit Committees shall have
<PAGE>
such authority as may be delegated to them from time to time by the ITGL
Board with respect to compensation and financial matters, respectively.
ARTICLE 9
GOVERNANCE PROVISIONS
9.1 MEETINGS; QUORUM; NOTICE.
(a) The chairman (including any then acting alternating
co-chairman) of each of the JV Boards shall prepare or direct the preparation
of the agenda for, and preside over, meetings of the JV Board on which he
serves as chairman. The chairman shall deliver such agenda to each
representative on the JV Board on which he serves as chairman at least two
Business Days prior to giving of notice of a regular or special meeting and
any representative on such JV Board may add items to such agenda.
(b) The Venturers anticipate that a regular meeting of each
of the JV Boards shall be held at least once every six months. The Company
Board shall not meet in Ireland and any meetings of the ITGL or ITGE Board
shall take place in Ireland. Special meetings of any JV Board may be called
by any voting representative on such JV Board and shall be held at such place
as may be determined by such JV Board; PROVIDED, HOWEVER, special meetings of
the Company Board shall not take place in Ireland and any special meetings of
the ITGL or ITGE Board shall take place in Ireland. Written notice of the
time and place of each regular and special meeting of any JV Board shall be
given by or at the direction of the chairman or co-chairman, as the case may
be, of such JV Board to each representative on such JV Board, in the case of
a regular meeting, at least ten Business Days, and in the case of a special
meeting, at least two Business Days, before such meeting. Whenever notice is
required to be given to any representative on any JV Board, such notice shall
specify the agenda for such meeting and, to the extent appropriate, shall be
accompanied by supporting documentation. The required notice to any
representative may be waived by such representative in writing. Attendance
by a representative at a meeting shall constitute a waiver of any required
notice of such meeting by such representative, except when such
representative attends such meeting for the express purpose of objecting, at
the beginning of the meeting, to the transaction of any
<PAGE>
business because the meeting is not properly called or convened.
(c) Except as expressly provided in this Agreement, the
presence of at least one voting representative designated by each of ITGI and SG
to serve on such JV Board shall be required to constitute a quorum for the
transaction of any business by any JV Board. Each Party shall use its
reasonable efforts to ensure the existence of a quorum at any duly convened
meeting of any JV Board. Except as expressly provided in this Agreement, no
action shall be taken by any JV Board with respect to any matter without the
affirmative vote of all of the voting representatives on such JV Board present
at a duly constituted meeting and no action shall be taken by the JV Boards with
respect to any matter without the affirmative vote of a majority of the voting
representatives of such Board present at a duly constituted meeting. If fewer
than all of the voting representatives designated to such JV Board by a given
Venturer are present at a meeting, to the extent permitted by Applicable Law,
each representative or representatives of a Venturer present at such meeting
shall be entitled to vote the entire voting power held by all voting
representatives designated by such Venturer. If more than one voting
representative appointed by a given Venturer is present at a meeting, to the
extent permitted by Applicable Law, such representatives shall vote such
Venturer's entire voting power in the same manner.
(d) While the Venturers intend that their representatives on
each of the JV Boards shall attend meetings of such JV Boards in person, the
Venturers acknowledge that representatives may from time to time be prevented
from doing so due to various circumstances. Representatives on each JV Board
may, therefore to the extent permitted by Applicable Law, participate in a
meeting of such Board by means of conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and participation in a meeting pursuant to this Section 9.1(d) shall
constitute presence in person at such meeting, except where a representative
participates in the meeting for the express purpose of objecting, at the
beginning of the meeting, to the transaction of any business on the ground that
the meeting is not properly called or convened.
(e) To the extent permitted by Applicable Law, any action
required or permitted to be taken at a meeting of
<PAGE>
any JV Board may be taken without a meeting if a written consent, setting forth
the action so taken, is signed by all the voting representatives on such JV
Board and filed with the minutes of the proceedings of such Board. Such consent
shall have the same force and effect as a unanimous affirmative vote of the
representatives on such JV Board.
9.2 REMOVAL; RESIGNATION; VACANCIES. A Venturer's designated
representatives on each JV Board shall hold office at the pleasure of such
Venturer which designated them. Any such Venturer may at any time, by written
notice to the other Venturer and the applicable JV Board, remove (with or
without cause) its representative on such JV Board and designate a new
representative. Subject to Applicable Law, no representative may be removed
except by the Venturer designating the same. Any representative on any JV Board
may resign at any time by giving written notice to the Venturer which appointed
such representative and to such JV Board. Such resignation shall take effect on
the date shown on or specified in such notice or, if such notice is not dated
and the date of resignation is not specified in such notice, on the date of the
receipt of such notice by the applicable JV Board. No acceptance of such
resignation shall be necessary to make it effective. Any vacancy on any JV
Board shall be filled only by the Venturer whose representative has caused the
vacancy, by giving written notice to such Body and to each other Venturer, and
each of the Venturers agree, as necessary, to vote, or to cause its designated
representatives on such JV Board to vote, for any Person so nominated by the
Venturer or other Person whose representative has caused such vacancy.
9.3 NO REMUNERATION. Unless the Venturers otherwise agree, no
person shall be entitled to any fee, remuneration or compensation in connection
with his service as a representative on or as a member of any JV Board.
Notwithstanding the foregoing, the two non-executive, non-voting directors of
ITGL and ITGE who are residents of Ireland shall be paid an attendance fee of
Punt ,1,000 per meeting.
ARTICLE 10
INDEMNIFICATION
10.1 INDEMNIFICATION.
<PAGE>
(a) To the fullest extent permitted under Applicable Law, the
JV Companies shall indemnify and hold harmless, or cause its Subsidiaries to
indemnify and hold harmless, each of their respective Affiliates and all
officers, directors and shareholders (including the Venturers) of such
Affiliates, and each director and officer of any JV Company and any Person
serving in any similar capacity for another Person (including any JV Board)
affiliated with the JV Companies at the request of the Company or any of its
Subsidiaries (solely for purposes of this Section 10.1, each of the foregoing
Persons being referred to as, a "Company Affiliate"), from and against any and
all losses, claims, demands, costs, damages, liabilities, expenses of any nature
(including reasonable attorneys' fees and disbursements), judgments, fines,
settlements and other amounts arising from any and all claims, demands, actions,
suits or proceedings, whether civil, criminal, administrative or investigative,
in which a Company Affiliate may be involved, or threatened to be involved, as a
party or otherwise, arising out of or incidental to the business of the Joint
Venture, regardless of whether a Company Affiliate continues to be a Company
Affiliate, at the time any such liability or expense is paid or incurred, if (i)
the Company Affiliate acted in good faith and in a manner it or he reasonably
believed to be in, or not opposed to, the interests of the JV Companies and,
with respect to any criminal proceeding, had no reason to believe its or his
conduct was unlawful, and (ii) the Company Affiliate's conduct did not
constitute actual fraud, gross negligence or willful or wanton misconduct. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of NOLO CONTENDERE, or its equivalent, shall not, in
and of itself, create a presumption or otherwise constitute evidence that the
Company Affiliate acted in a manner contrary to that specified in (i) or (ii)
above.
(b) Expenses (including reasonable legal fees and expenses)
incurred in defending any proceeding subject to subsection (a) of this Section
10.1 shall be paid by the JV Companies in advance of the final disposition of
such proceeding upon receipt of a written affirmation by the Company Affiliate
of his or its good faith belief that he or it has met the standard of conduct
necessary for indemnification under this Section 10.1 and a written undertaking
(which need not be secured) by or on behalf of the Company Affiliate to repay
such amount if it shall ultimately be determined, by a court of competent
<PAGE>
jurisdiction or otherwise, that the Company Affiliate is not entitled to be
indemnified by the Company as authorized hereunder.
(c) The indemnification provided by this Section 10.1 shall
be in addition to any other rights to which each Company Affiliate may be
entitled under any agreement or vote of a JV Board by the vote of
representatives that are disinterested and unaffiliated with such Company
Affiliate, as a matter of law or otherwise, both as to action in the Company
Affiliate's capacity as a Company Affiliate or as a Person serving at the
request of a JV Company and shall continue as to a Company Affiliate who has
ceased to serve in such capacity and shall inure to the benefit of the heirs,
successors, assigns, administrators and personal representatives of such Company
Affiliate.
(d) The JV Companies shall purchase and maintain directors
and officers insurance or, similar coverage, for its directors and its officers
in such amounts and with such deductibles or self-insured retentions as are
customary for Persons engaged in businesses similar in size and type to those
engaged in by the Joint Venture.
(e) Any indemnification hereunder shall be satisfied only out
of the assets of the JV Companies and the Venturers shall not be subject to
personal liability by reason of these indemnification provisions.
(f) A Company Affiliate shall not be denied indemnification
in whole or in part under this Section 10.1 because the Company Affiliate had an
interest in the transaction with respect to which the indemnification applies if
the transaction was otherwise permitted by the terms of this Agreement and all
material facts relating to such Company Affiliate's interest were adequately
disclosed to the appropriate JV Board at the time the transaction was
consummated.
(g) The provisions of this Section 10.1 are for the benefit
of the Company Affiliates and the heirs, successors, assigns, administrators and
personal representatives of the Company Affiliates and shall not be deemed to
create any rights for the benefit of any other Persons.
(h) Any repeal or amendment of any provisions of this Section
10.1 shall be prospective only and shall not
<PAGE>
adversely affect any Company Affiliate's right existing at the time of such
repeal or amendment.
ARTICLE 11
DEADLOCKS
11.1 DEADLOCKS.
(a) The parties agree that all Deadlocks on the Company
Board, the ITGL Board or the ITGE Board shall be resolved in accordance with
this Article 11.
(b) A deadlock (a "Deadlock") shall be deemed to have
occurred upon the failure of the Company Board, the ITGL Board or the ITGE
Board, as the case may be, to reach a decision with respect to any of the
following matters after a vote has been taken by the requisite voting
representatives on the Company Board, the ITGL Board or the ITGE Board, as the
case may be,:
(i) approval of any annual budget;
(ii) approval of a Capital Call in excess of the Stop Loss;
(iii) approval of financings (debt or equity);
(iv) approval of any acquisition or disposition in excess of
GB,1,000,000;
(v) approval of any material change in the purpose and
strategic direction of the JV Business from that set
forth in the Business Plan; or
(vi) decisions relating to the hiring, firing or compensation
of the chief executive officer of the Company.
(c) If a Deadlock occurs on the Company Board, the ITGL Board
or the ITGE Board, as the case may be, any voting representative on the Company
Board, the ITGL Board or the ITGE Board, as the case may be, within twenty (20)
days of the vote which give rise to such Deadlock, by written notice to the
other voting representatives on such board, and to the Founders Committee, refer
the Deadlock for
<PAGE>
resolution pursuant to Section 11.1(d). If no such voting representative
refers such Deadlock to the Founders Committee for resolution within such
20-day period, no further action shall be taken by the Company Board, the
ITGL Board or the ITGE Board, as the case may be, with respect to the
proposal which gave rise to such Deadlock, but such proposal may be presented
at a subsequent meeting of such board and any resulting Deadlock shall again
be resolved in accordance with this Section 11.1(c).
(d) If a Deadlock is referred to the Founders Committee for
resolution, the Founders Committee shall have thirty (30) days to consider
and attempt to resolve such Deadlock. If the Deadlock cannot be resolved by
the Founders Committee within such 30-day period, the Founders Committee
shall designate either (i) any voting representative serving on the Company
Board, the ITGL Board or the ITGE Board, as the case may be, that is not an
Affiliate of either Venturer or (ii) another person that is not an Affiliate
of either Venturer and is qualified to act as an arbitrator with respect to
the particular proposal that is the subject of the Deadlock (such
representative or other person being herein referred to as, the "Third Party
Arbitrator"). Such Third Party Arbitrator shall arbitrate the subject of the
Deadlock in accordance with the rules of the International Chamber of
Commerce (the "ICC") in effect on the date hereof and shall have thirty (30)
days from his designation to recommend a course of action with respect to
such Deadlock by sending written notices setting forth such course of action
to the Company Board, the ITGL Board or the ITGE Board, as the case may be,
and the Venturers (the "Resolution"). Unless during the 10-Business Day
period following receipt of such notice the Venturers mutually agree upon a
different course of action than the Resolution (in which event such different
course of action shall for purposes of this Agreement be referred to as the
"Venturer Resolution"), the Resolution or the Venturer Resolution, as the
case may be, shall be final and binding on the Parties and the Venturers
shall cause their voting representatives on the Company Board, the ITGL Board
or the ITGE Board, as the case may be, to take action accordingly.
(e) If there has been no Venturer Resolution and ITGI has
not delivered a notice to SG pursuant to Section 11.1(f), following receipt
of the notice of Resolution pursuant to Section 11.1(d), SG shall have the
right at any time within a period of thirty (30) days from receipt thereof,
by written notice to ITGI, to require ITGI
<PAGE>
to purchase all, but not less than all, of its Venture Interest for a cash
price equal to one hundred-fifty percent (150%) of the applicable Reference
Value. Such right shall be exercised by delivery of a written notice by SG
to ITGI within such 30-day period. The date of such notice is referred to
herein as the "Resolution Put Notice Date". Promptly following the
Resolution Put Notice Date, the Venturers shall commence determining the
Reference Value as set forth on SCHEDULE 1.1.
(f) If there has been no Venturer Resolution and SG has not
delivered a notice to ITGI pursuant to Section 11.1(e), following receipt of
the notice of Resolution pursuant to Section 11.1(d), ITGI shall have the
right at any time within a period of thirty (30) days commencing from the
receipt thereof, by written notice to SG, to require SG to sell all, but not
less than all, of its Venture Interest for a cash price equal to one
hundred-fifty percent (150%) of the applicable Reference Value. Such right
shall be exercised by delivery of a written notice by ITGI to SG within such
30-day period. The date of such notice is referred to herein as the
"Resolution Call Notice Date." Promptly following the Resolution Call Notice
Date, the Venturers shall commence determining the Reference Value as set
forth on SCHEDULE 1.1.
(g) The closing of a purchase and sale pursuant to Section
11.1(e) or 11.1(f) shall occur in accordance with Sections 12.5 and 12.6.
ARTICLE 12
TRANSFERS OF VENTURE INTERESTS
12.1 GENERAL RESTRICTIONS. No Venturer may Transfer all or any
part of such Venturer's Venture Interest, except as provided in this
Agreement. Any purported Transfer of a Venturer's Venture Interest or a
portion thereof in violation of the terms of this Agreement shall be null and
void and of no effect. Any permitted transferee desiring to make a further
Transfer shall become subject to all the provisions of this Article 12 to the
same extent and in the same manner as any Venturer desiring to make any
Transfer.
12.2 PERMITTED TRANSFEREES. Notwithstanding the provisions of
Sections 12.3 and 12.4, each Venturer shall have the right to Transfer, by a
written instrument, all or any part of its Venture Interest to a Permitted
Affiliate;
<PAGE>
PROVIDED, HOWEVER, that such transfer is not materially financially
detrimental to the JV Companies and that such Permitted Affiliate shall
execute an instrument in form and substance reasonably satisfactory to the
Company Board accepting and adopting the terms and provisions of this
Agreement and the other Operative Agreements to which the transferor is a
party and shall pay all reasonable expenses of the Company in connection with
such Transfer, it being understood that upon such Transfer the transferor
shall remain obligated under the Operative Agreements unless the Company
Board otherwise agrees.
12.3 RIGHT OF FIRST REFUSAL.
(a) If any Venturer (the "Seller") desires to Transfer all,
and not less than all, of its Venture Interest (the "Offered Interest")
pursuant to a bona fide offer (the "Bona Fide Offer") from a third party (the
"Proposed Transferee"), other than a transferee permitted by Section 12.2, it
shall submit a written offer (the "Written Offer") to Transfer such Venture
Interest (collectively, the "Offered Interest") to the other Venturer (the
"Offeree") on terms and conditions, including price, not less favorable to
the Offeree than those on which the Seller proposes to Transfer such Offered
Interest to the Proposed Transferee. The Written Offer shall disclose the
identity of the Proposed Transferee, the Person or Persons, if any, that
Control such Proposed Transferee, the Offered Interest proposed to be
Transferred, the total number of Ordinary Shares and principal amount of any
Subordinated Debt owned by the Seller, the terms and conditions, including
price, of the proposed Transfer, and any other material facts relating to the
proposed Transfer. The Written Offer shall further state that the Offeree
may acquire, in accordance with the provisions of this Agreement, all of the
Offered Interest for the price and upon the other terms and conditions,
including deferred payment (if applicable), set forth therein.
(b) The Offeree shall be permitted to confirm that the Bona
Fide Offer is firm and subject only to conditions that could reasonably be
expected to be satisfied, by (i) review of the documents involved in such
Bona Fide Offer and (ii) requiring that the Proposed Transferee submit
evidence reasonably satisfactory to the Offeree of any financing for such
purchase.
(c) (i) If the Offeree elects to purchase the
<PAGE>
Offered Interest at the price offered by the Proposed Transferee, the Offeree
shall communicate in writing its election to purchase to the Seller, which
communication shall be delivered to the Seller within 30 days of the date the
Written Offer was made. Such communication shall, when taken in conjunction
with the Written Offer, be deemed to constitute a valid, legally binding and
enforceable agreement for the sale and purchase of the Offered Interest.
(ii) The closing of the sale and purchase of the
Offered Interest to the Offeree shall occur in accordance with Sections 12.5
and 12.6.
(iii) If the Offeree does not elect to so purchase
the Offered Interest, the Seller may sell the entire Offered Interest to the
Proposed Transferee within 90 days following the expiration of the thirty
(30) day period referred to in Section 12.3(c), upon terms that are no more
favorable to the Proposed Transferee than those set forth in the Written
Offer. For purposes of the preceding sentence, a purchase price that is less
than ninety-five percent (95%) of the purchase price set forth in the Written
Offer will be deemed more favorable to the Proposed Transferee. If the
Proposed Transferee does not carry out its purchase within said 90-day
period, or else withdraws its offer or introduces any changes thereto, the
Offered Interests may not be sold, assigned or transferred unless previously
offered to the Venturers once again pursuant to this Section 12.3.
12.4 VENTURER CHANGE OF CONTROL
(a) SG shall have the right at any time within sixty (60)
days after the later of (i) the occurrence of a Venturer Change of Control or
(ii) the giving of notice of such Venturer Change of Control pursuant to
Section 6.4, by written notice to ITGI (the date of such notice is referred
to herein as the "Control Put Notice Date"), to require ITGI to purchase all,
but not less than all, of its Venture Interest for a cash price equal to the
Reference Value. Promptly following the Control Put Notice Date, the
Venturers shall commence determining the Reference Value as set forth on
SCHEDULE 1.1.
(b) ITGI shall have the right at any time within sixty (60)
days after the later of (i) the occurrence of a Venturer Change of Control or
(ii) the giving of notice
<PAGE>
of a Venturer Change of Control pursuant to Section 6.4, by written notice to
SG (the date of such notice is referred to herein as the "Control Call Notice
Date"), to require SG to sell all, but not less than all, of its Venture
Interest for a cash price equal to the applicable Reference Value. Promptly
following the Control Call Notice Date, the Venturers shall commence
determining the Reference Value as set forth on SCHEDULE 1.1.
(c) The closing of a purchase and sale pursuant to Section
12.4(a) or 12.4(b) shall occur in accordance with Sections 12.5 and 12.6.
12.5 GOVERNMENTAL APPROVALS. Each of the Parties shall use all
reasonable commercial efforts to obtain all Governmental Approvals required
to effect any purchase and sale of Venture Interests pursuant to Sections
11.1(e), 11.1(f), 12.3(c)(ii), 12.4(a) or 12.4(b). If the required
Governmental Approvals have not been received at the time any such closing is
scheduled to occur, the contemplated transfer shall be deferred and made
conditional until such time as the required Governmental Approvals have been
obtained.
12.6 CLOSING OF PURCHASE OF VENTURE INTERESTS. Unless the
Venturers otherwise agree, the closing of any purchase and sale of Venture
Interests pursuant to Sections 11.1(e), 11.1(f), 12.3(c)(ii), 12.4(a) or
12.4(b) shall occur at the Company's principal executive office within sixty
(60) days after the applicable notice of purchase and sale has been
furnished. At such closing, (i) the Venturer transferring such Venture
Interests (the "Transferring Party") shall transfer, assign and deliver to
the Person purchasing such Venture Interests (the "Non-Transferring Party")
the certificates or other documents evidencing the Venture Interests being
purchased, duly endorsed for transfer, together with such assignments
separate from any such certificate and other documents or instruments
reasonably required by counsel for the Non-Transferring Party to consummate
such purchase, and (ii) the Non-Transferring Party shall pay the purchase
price in cash in GB Pounds Sterling. In addition, at the closing of such
purchase and sale, (A) the Transferring Party shall deliver to the
Non-Transferring Party an executed, written representation, in form and
substance reasonably satisfactory to legal counsel for the Non-Transferring
party, that the Transferring Party owns the Venture Interests free and clear
of all Security Interests and that upon the delivery of the Venture
<PAGE>
Interests, the Transferring Party shall have transferred all of its right,
title and interest in the Venture Interests, and (B) the Non-Transferring
Party shall deliver to the Transferring party such investment representations
as may be reasonably required to comply with applicable securities laws.
ARTICLE 13
FINANCIAL AND ACCOUNTING MATTERS
13.1 BOOKS AND RECORDS; FINANCIAL YEAR. The Company shall, and
shall cause its Subsidiaries to, to the extent permitted by Applicable Law,
keep its accounts and financial and cost records in GB Pounds Sterling in
English. The fiscal year of the Joint Venture and each of the JV Companies
shall be the Financial Year.
13.2 FINANCIAL INFORMATION. The Company shall prepare in
accordance with Irish GAAP (i) not later than sixty (60) days after the end
of each Financial Year audited financial statements in English of the Company
and its Subsidiaries, and (ii) not later than thirty (30) days after the end
of each fiscal quarter (other than the final quarter of a Financial Year),
unaudited financial statements in English of the Company and its Subsidiaries
and shall also cause the Company to provide on a timely basis all statements
in English necessary for each Venturer to prepare its tax returns as they
relate to such Venturer=s interest in the Company.
13.3 RIGHT OF INSPECTION OF BOOKS. Each JV Company shall keep
full, complete and accurate books of account, record and information with
respect to its affairs and the same shall be maintained at the principal
office of the JV Company. Entries shall be made in such books of account and
records of all such matters, transactions and things as are usually written
and entered in books of account and records kept by Persons engaged in
businesses similar to the business of the JV Company or required by
Applicable Law. Each Venturer shall have the right, acting reasonably and in
coordination with the JV Companies= auditors and accounting personnel and, to
the extent practicable, the other Venturer, to audit, examine, and make
copies of or extracts from the books of account and records of the Company
and its Subsidiaries at all reasonable times during usual business hours.
Such right may be exercised through any agent or
<PAGE>
employee of such Venturer designated in writing by it or by an independent
certified accountant designated in writing by such Venturer. Each Venturer
shall bear all expenses incurred in any examination made for such Venturer's
account.
13.4 ACCOUNTING PRINCIPLES. Unless otherwise agreed by the
Venturers, the accounts and records of the Company and its Subsidiaries shall
be maintained in accordance with Irish GAAP.
13.5 AUDITORS. The auditors of the Company, ITGL and ITGE shall be
an internationally recognized auditing firm nominated by the Company Board
and approved by the Venturers. Such firm shall be KPMG Peat Marwick LLP
until changed by a vote of the Venturers. All audit reports and reports to
management on internal controls and procedures prepared by such auditing firm
shall be made available to the Company Board and each Venturer.
ARTICLE 14
OTHER ACTIVITIES BY THE VENTURERS;
EXPANSION OF TERRITORY; CONFIDENTIALITY
14.1 IN GENERAL. The Venturers acknowledge that to support their
intention to make the Joint Venture the principal embodiment of the JV
Business of the Venturers and to protect adequately their interests in the JV
Companies, it is necessary and essential that the Venturers enter into and
adhere to the covenants contained in this Article 14.
14.2 NON-COMPETITION OBLIGATIONS.
(a) From and after the date hereof and until a date twelve
(12) months following the termination of the JV Companies pursuant to the
terms of this Agreement, except as otherwise expressly provided in Section
14.3 or as provided in Section 12 of the POSIT License Agreement and until a
date twelve (12) months following the termination of the JV Companies
pursuant to the terms of this Agreement, no Venturer or any of its Affiliates
shall:
(i) Offer Competing Services; or
<PAGE>
(ii) Invest or Participate in any Person that Offers Competing
Services; or
(iii) Except as required by Applicable Law, no senior officer
or member of the board of directors of a Venturer shall
serve as senior officer or member of a board of
directors, managing board or similar governing body of
a Major Competitor of the JV Companies.
(b) In the event that the ITGI License Agreement is
terminated by ITGI in accordance with Section 8(a)(iv) of the ITGI License
Agreement, the non-compete obligations set forth in Section 14.2(a) above
shall cease to apply.
14.3 NON-COMPETITION EXCEPTIONS. Except as expressly set forth in
this Section 14.3, nothing in this Article 14 shall be construed to prohibit
any of the following activities by a Venturer or any of its Affiliates after
the date hereof.
(a) INVESTMENTS. The acquisition or ownership by a
Venturer (directly or indirectly through an Affiliate) (other than where such
acquisition or ownership is held by such Venturer solely as a trustee or
nominee for an unaffiliated third party) of a Person or an Equity Interest in
such a Person through merger, consolidation, purchase of stock or assets or
otherwise, if the annual consolidated gross revenues attributable to
Competing Services of such Person do not exceed five percent (5%) of the
annual consolidated gross revenues of such Person as set forth in the most
recently available audited financial statements of such Person as of the date
of execution of the definitive agreement providing for such acquisition.
(b) FIVE PERCENT INVESTMENTS. The acquisition or ownership
by a Venturer (directly or indirectly through an Affiliate) of any securities
of a publicly held Person engaged in Competing Services, if such securities
(i) were not acquired directly from such Person in a private placement or
similar transaction, (ii) do not represent more than five percent (5%) of the
aggregate voting power of the outstanding equity securities of such Person
(other than where such acquisition or ownership is held by such Venturer
solely as a trustee or nominee for an unaffiliated third
<PAGE>
party) (assuming the conversion, exercise or exchange of all such securities
held by such Venturer or its Affiliate that are convertible, exercisable or
exchangeable into or for voting securities), and (iii) in the case of debt
securities, entitle the holder thereof to receive only interest or other
returns that are not based on the value or results of operations of such
Person.
(c) INVESTMENT FUNDS. The acquisition or ownership
(directly or indirectly thorough an Affiliate) by a Venturer of an ownership
interest in an investment fund or plan (including pension and retirement
plans) investing on behalf of the employees or retirees of such Venturer or
its Affiliates or the continued sponsorship by such Venturer (or Affiliate)
thereof; provided that no investment by any such fund or plan has the purpose
or effect of changing or influencing the Control of any Person that Offers
Competing Services.
14.4 EXPANSION OF TERRITORY. Each of the Venturers acknowledges
that the JV Business shall only be conducted in connection with equity
securities traded on securities exchanges located within the Territory and
that the countries and regions comprising the Territory can only be changed
by mutual agreement in writing by the Venturers. The foregoing
notwithstanding, in the event any Venturer contemplates Offering Competing
Services in any country or region in South Africa, Turkey or Asia that is not
part of an Excluded Territory, such Venturer shall first consult with the
other Venturer with respect to expanding the Territory to include such
country or region.
14.5 CONFIDENTIALITY. Each Venturer shall use, and shall cause its
Affiliates, employees and agents to use, their respective reasonable best
efforts to ensure that the terms of this Agreement, the other Operative
Agreements (including all Exhibits and Schedules hereto and thereto) and
confidential proprietary information concerning the other Venturer, the JV
Business and affairs of the Company and its Subsidiaries are not disclosed to
third parties unless the other Venturer shall have consented to such
disclosure in writing; PROVIDED, HOWEVER, that such information may be
disclosed to third parties to the extent reasonably required to accomplish
any proposed transfer under Article 12, as necessary in connection with any
private offering of securities of a Venturer or any of its Affiliates, if the
Person to which the information is disclosed agrees in writing to keep such
information
<PAGE>
confidential, as necessary in connection with any Public Offering of
securities of a Venturer or any of its Affiliates (and related reporting
obligations occasioned thereby), and as required by law.
ARTICLE 15
TERM AND TERMINATION DEFAULT
15.1 TERM OF JV COMPANIES. Each JV Company shall continue without
interruption until it is dissolved and terminated pursuant to the terms of
this Agreement, the Constituent Documents and Applicable Law.
15.2 TERMINATION OF JOINT VENTURE. The following shall be
"Termination Conditions" with respects to the Joint Venture:
(a) a Funding Breach with respect to a Capital Call (in
which case the non-defaulting Venturer may deliver a written notice (a)
"Termination Notice") in accordance with Section 15.3;
(b) a Material Non-Monetary Default (in which case the
non-defaulting Venturer may deliver a Termination Notice in accordance with
Section 15.3);
(c) the Bankruptcy of a Venturer (in which case the
non-bankrupt Venturer may deliver a Termination Notice in accordance with
Section 15.3);
(d) the termination of the POSIT License (in which case any
Venturer may deliver a Termination Notice in accordance with Section 15.3); or
(e) written mutual consent of the Venturers (in which case
any Venturer may deliver a Termination Notice in accordance with Section
15.3).
15.3 TERMINATION NOTICE.
(a) If a Termination Condition occurs, a Party entitled to
deliver a Termination Notice pursuant to Section 15.2 may give such
Termination Notice to the other Parties and to the Executive Committee within
60 days following the date upon which such Party becomes aware of the
occurrence of the Termination Condition. If any Venturer delivers a
Termination Notice, the other Venturer shall be precluded
<PAGE>
from delivering a subsequent Termination Notice.
(b) Each Venturer acknowledges and agrees that (i) it shall
not challenge the validity of any provision of this Article 15 in any
Proceeding and (ii) each Venturer shall have a right to seek specific
performance of each provision of this Article 15.
15.4 TERMINATION UPON DEFAULT, ETC. In the case of a Termination
Condition under Section 15.2(a), (b) or (c), the non-defaulting Venturer
delivering the Termination Notice shall have the right to exercise its option
to purchase all but not less than all, of the Venture Interest of the
defaulting Venturer at eighty percent (80%) of the defaulting Venturer's
investment to date plus interest on amounts invested from time to time at the
Applicable Rate (the "Default Termination Value") by delivering a written
notice of exercise within sixty (60) days following the occurrence of any
such Termination Condition. This reduction to eighty percent (80%) of the
investment to date plus interest on amounts invested from time to time at the
Applicable Rate is agreed by both parties as a reasonable pre-estimate by way
of liquidated damages of the likely loss, direct and indirect, which would be
incurred by the non-defaulting Venturer in consequence of a Termination
Condition arising under Section 15.2 (a) (b) or (c) hereof in relation to the
defaulting Venturer, this assessment taking into account the financial and
other commitments made by both Venturers under this Agreement in relation to
the establishment and proposed long term operation of the Joint Venture.
Such written notice shall constitute an offer by the non-defaulting Venturer
to purchase the Venture Interests of the defaulting Venturer at a price equal
to the Default Termination Value, and the defaulting Venturer hereby accepts
any such offer by the non-defaulting Venturer. If the non-defaulting
Venturer fails to deliver such written notice of such exercise within said
60-day period, it will be deemed to have elected not to purchase the Venture
Interest of the defaulting Venturer. In the event that non-defaulting
Venturers purchases the Venture Interest of the defaulting Venturers pursuant
to this Section 15.4, the purchase price for the Venture Interest shall be an
amount payable in cash in GB Pounds Sterling.
15.5 CLOSING. Each of the Parties shall use its reasonable efforts
to obtain all Governmental Approvals required to effect the purchase and sale
of Venture Interests, pursuant to Section 15.4. Unless the Parties
<PAGE>
have failed to receive all required Governmental Approvals, the closing of
the purchase of a Venture Interest pursuant to this Article 15 shall be held
at the offices of the purchasing Venturer within ten (10) days after the
final determination of the purchase price to be paid to the selling Venturer.
If in spite of the Venturers' efforts in this regard, the required
Governmental Approvals have not been received at the time the closing is
scheduled to occur, the closing shall be postponed until such date as the
Venturers shall have obtained the required Governmental Approvals; provided
that, if such Governmental Approvals are not obtained prior to the first
anniversary of the date on which such closing is postponed, at the request of
any Venturer, the Venturers shall negotiate in good faith to provide for the
termination of the Joint Venture pursuant to such mutually agreeable terms
and conditions as will permit the Venturers to obtain all Governmental
Approvals required for the termination of the Joint Venture, and as will have
substantially the same economic consequences to the Venturers as the
transaction contemplated by Section 15.4. At the closing, the purchasing
Venturer and the selling Venturer shall make the deliveries specified in
Section 12.6.
15.6 TERMINATION BY DISSOLUTION. In the case of a Termination
Condition under Section 15.2(d) or (e) upon delivery of a Termination Notice,
the Venturers shall proceed to dissolve the Joint Venture by the Venturers
causing their representatives on the JV Boards to proceed with the winding up
of the affairs and liquidation of the JV Companies through the sale of their
respective assets and properties. Notwithstanding the foregoing, in the
event that a Venturer fails to give a Termination Notice within the time
period set forth in Section 15.3, such Venturer shall be deemed to have
waived its right to dissolve, with respect to the event or events which gave
rise to such right to dissolve.
<PAGE>
ARTICLE 16
POST TERMINATION PROVISIONS
16.1 CONSEQUENCES OF TERMINATION. Upon the transfer by at least
one Venturer of its entire Venture Interest in accordance with this Agreement
(other than a transfer pursuant to Section 12.2), this Agreement and the
other Operative Agreements shall forthwith cease to have effect as between
such Party and the other Parties, and all further obligations of such Party
(and its Affiliates) to such other Parties (and their Affiliates) and of such
other Parties (and their Affiliates) to such Party (and its Affiliates) shall
terminate with this Agreement and the other Operative Agreements without
further liability, except that:
(a) such transfer shall not constitute a waiver of any
rights that any Party (or any of its Affiliates) may have by reason of a
breach of this Agreement or any other Operative Agreement, subject to any
limitations thereon in this Agreement or the other Operative Agreements;
(b) the provisions of this Article 16, Article 10, Article
14, other than Section 14.4, and Article 18, other than Sections 18.8 and
18.10 of this Agreement shall continue in full force and effect; and
(c) The rights and obligations of the Parties (and their
Affiliates) under the Service Agreements shall continue in full force and
effect for a period of six months from such transfer; and
(d) the rights and obligations of the Parties (and their
Affiliates) under the Operative Agreements, other than the Service
Agreements, shall continue in full force and effect to the extent provided in
the Transition Plan.
16.2 NON-SOLICITATION. Anything herein to the contrary
notwithstanding, upon the Transfer by SG of all of its Venture Interest in
accordance with this Agreement, for a period commencing on the date of such
Transfer and ending on the first anniversary of such Transfer, SG shall not,
and shall cause its Affiliates not to, induce or attempt to influence any
employees of the JV Companies or any of their Affiliates to terminate such
employee's employment therewith.
16.3 TRANSITION PLAN. The Parties agree to negotiate
<PAGE>
in good faith to develop a plan (the "Transition Plan") which will govern the
rights and obligations of the parties under the Operative Agreements
following an event described in Section 16.1 and which will ensure that the
successor to the JV Business shall continue to supply services to its
customers without disruption. Each of the Parties agrees to cause its
Affiliates and, insofar as within its control, the JV Companies, to comply
with the provisions of the Transition Plan.
ARTICLE 17
NEGOTIATIONS; ARBITRATION; SUBMISSION TO JURISDICTION
17.1 NEGOTIATIONS; ARBITRATION. (a) In the event of any dispute,
controversy or claim (other than a Deadlock) arising out of or relating to
this Agreement, or the performance, breach, termination, or invalidity
hereof, such dispute, controversy or claim shall be the subject of an attempt
at an amicable solution, for which purpose any party shall give notice to the
other parties, giving a concise description of the matter in question and the
position of such party in respect thereof and proposing a meeting among the
chief executive officers, executive managing directors or their designees
(the "Senior Officers") of the ultimate parent companies of the Venturers in
The City of Dublin (or such other place as they may agree) with the purpose
of resolving the dispute, controversy or claim.
(b) In the event such a meeting is called, the meeting
shall take place within ten (10) Business Days of its being requested.
Unless the parties otherwise agree, if such meeting does not take place
within such ten (10) Business Days or if within ten (10) Business Days after
such meeting the Senior Officers have not resolved such matter, then the
matter shall be settled by arbitration in accordance with the rules of the
ICC in effect on the date hereof. The arbitration shall be the sole and
exclusive forum for resolution of the dispute, controversy or claim, and the
award shall be final and binding. Judgment thereon may be entered by any
court having jurisdiction. The number of arbitrators shall be three (or such
other number as shall be stipulated by the most recent then existing Rules of
the ICC), each of whom shall be disinterested in the dispute, controversy or
claim and shall be impartial and independent of any party. Each Venturer
(and its Affiliates, as applicable) and Venturer (and its Affiliates, as
applicable) shall appoint one arbitrator, and the two so appointed shall
<PAGE>
choose a third arbitrator. If the arbitrators chosen by the Venturers cannot
agree on the choice of the third arbitrator within a period of thirty (30)
days after both of them have been appointed, then the third arbitrator shall
be appointed by the ICC. The parties and the appointing authority may
appoint from among the nationals of any country, whether or not a party is a
national of that country. The place of arbitration shall be The City of
Dublin, Ireland. The arbitration shall be conducted in the English language
and any foreign-language documents presented at such arbitration shall be
accompanied by an English translation thereof. The arbitrators shall state
the reasons upon which the award is based. The arbitrators shall apply the
laws of Ireland without regard to the principles of conflicts of laws.
(c) Any matter expressed in this Agreement to be a matter
for review, collaboration, consultation, consent, decision, agreement or vote
by the parties or any of them shall not, in the event of failure of decision
or agreement, constitute a dispute or difference to be referred to or settled
by arbitration proceedings.
(d) Each of the parties hereby submits to the exclusive
jurisdiction of the Irish Courts (the "Specified Court") in any action, suit
or proceeding with respect to the enforcement of the arbitration provisions
of this Agreement and the non-exclusive jurisdiction of such court with
respect to the enforcement of any award thereunder. Each party irrevocably
appoints the agent for service specified opposite its name on the signature
pages hereof as its authorized agent in the city of Dublin, Ireland upon
which process may be served in any related proceeding, and agrees that
service of process upon such agent, and written notice of said service to
such party, by the person serving the same to the address so provided, shall
be deemed in every respect effective service of process upon such party in
any such action, suit or proceeding. Each party further agrees to take any
and all action as may be necessary to maintain such designation and
appointment of such agent in full force and effect for the duration of this
Agreement.
ARTICLE 18
MISCELLANEOUS
18.1 NOTICES. Except as expressly provided herein, notices and
other communications provided for herein shall be in writing in the English
language and shall be delivered
<PAGE>
by hand or courier service, mailed or sent by telex, facsimile, graphic
scanning or other telegraphic communications equipment of the sending Party,
as follows:
If to ITGI, to:
ITG International Limited
c/o KPMG Peat Marwick LLP
P.O. Box HM906
Hamilton HMDX
Bermuda
Attn: Claudio Satasi
with a copy to:
ITG, Inc.
380 Madison Avenue, 4th Floor
New York, New York 10017
U.S.A.
Attn: General Counsel
Tel: (212) 588-4000
Fax: (212) 444-6345
with a copy to:
Weil, Gotshal & Manges LLP
767 Fifth Avenue
New York, New York 10153
U.S.A.
Attn: David E. Zeltner, Esq.
Tel: (212) 310-8220
Fax: (212) 310-8007
with a copy to:
MHC Corporate Secretarial Services Limited,
at its registered office for the time being
in Dublin, Ireland
Attn: David O'Donnell
Tel: 353 1 6611788
Fax: 353 1 6611431
If to SG, to:
Tour Societe Generale
92972 Paris - La Defense Cedex
France
Attn: Yves Tuloup
<PAGE>
Tel: 33 1 4213 7388
Fax: 33 1 4213 7390
Attn: Pierre Teniere
Tel: 33 1 4213 2136
Fax: 33 1 4213 6925
with a copy to:
Societe Generale Securities (London) Ltd.
Exchange House
Primrose Street
London EC2
Attn: Hugh Hughes / Nigel Brahams
Tel: 44 171 762 4444
Fax: 44 171 762 4555
with a copy to:
Goodbody Secretarial Limited at its registered office
for the time being in Dublin, Ireland
Attn: James Dudley
Tel: 353 1 661 3311
Fax: 353 1 661 3278
or to such other address or attention of such other Person as such Party shall
advise the other Parties in writing. All notices and other communications given
to the Parties hereto in accordance with the provisions of this Agreement shall
be deemed to have been given on the date of receipt. Communications sent by
telex, facsimile, graphic scanning or other telegraphic communications equipment
shall be deemed to have been received when confirmation of their delivery is
received by the sender.
18.2 APPLICABLE LAW. The validity, construction and performance of
this Agreement shall be governed by and construed in accordance with the law of
Ireland, regardless of the laws that might otherwise govern under applicable
principles of conflicts or choice of law.
18.3 SEVERABILITY. If any provision of this Agreement shall be held
to be illegal, invalid or unenforceable, the Parties agree that such provision
will be enforced to the maximum extent permissible so as to effect the intent of
the Parties, and the validity, legality and enforceability of
<PAGE>
the remaining provisions of this Agreement shall not in any way be affected
or impaired thereby. If necessary to effect the intent of the Parties, the
Parties will negotiate in good faith to amend this Agreement to replace the
unenforceable language with enforceable language which as closely as possible
reflects such intent.
18.4 AMENDMENTS. This Agreement may be modified only by a written
amendment signed by all of the parties to this Agreement.
18.5 WAIVER. The waiver by a Party of any instance of any other
Party's non-compliance with any obligation or responsibility herein shall be in
writing and signed by the waiving Party and shall not be deemed a waiver of
other instances of such other Party's non-compliance.
18.6 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement, and
shall become effective when one or more counterparts shall have been signed by
each Party and delivered to the other Parties.
18.7 ENTIRE AGREEMENT. The provisions of this Agreement set forth the
entire agreement and understanding among the Parties as to the subject matter
hereof and supersede all prior agreements, oral or written, and all other prior
communications between the Parties relating to the subject matter and those
written agreements executed and delivered contemporaneously herewith.
18.8 NO ASSIGNMENT. (a) Except as specifically provided herein, no
Party shall, directly or indirectly, assign this Agreement or any of its rights
or obligations hereunder without the prior written consent of the other Parties.
(b) Any attempted assignment of this Agreement in violation
of this Section 18.8 shall be void and of no effect.
(c) This Agreement shall be binding upon, inure to the
benefit of and be enforceable by the Parties and their respective successors and
permitted assigns.
18.9 NO THIRD-PARTY BENEFICIARIES. Except for the provisions of
Article 10 hereof, this Agreement is for the sole benefit of the Parties and
their permitted assigns, and
<PAGE>
nothing herein express or implied shall give or be construed to give to any
Person, other than the Parties and such assigns, any legal or equitable
rights hereunder.
18.10 PUBLICITY. The Parties shall use reasonable efforts to consult
in good faith with each other with a view to agreeing upon any press release or
public announcement relating to the transactions contemplated hereby or by the
other Operative Agreements prior to the consummation thereof.
18.11 CONSTRUCTION. This Agreement has been negotiated by the Parties
and their respective counsel and shall be fairly interpreted in accordance with
its terms and without any strict construction in favor of or against any of the
Parties.
18.12 DISCLAIMER OF AGENCY. Except for provisions herein expressly
authorizing one Party to act for another, this Agreement shall not constitute
any Party as a legal representative or agent of any other Party, nor shall a
Party have the right or authority to assume, create or incur any liability or
any obligation of any kind, express or implied, against or in the name or on
behalf of any other Party or any of its Affiliates or the Joint Venture or any
of the JV Companies unless otherwise expressly permitted by such Party.
18.13 RELATIONSHIP OF THE PARTIES. The relationship among the Parties
shall not be that of partners and nothing herein contained shall be deemed to
constitute a partnership among them.
18.14 FIDUCIARY DUTIES. Subject to Applicable Law, no Party or any of
its Affiliates nor any officer, director, employee or former employee of any
Party or its Affiliate shall have any obligation, or be liable, to any Party,
the Joint Venture or any JV Company for exercising any of the rights of such
Party or such Affiliate under this Agreement or any other Operative Agreement to
which it is or will be a party, for exercising or failing to exercise its rights
as a shareholder of any JV Company or for breach of any fiduciary or other
similar duty to any Party, the Joint Venture or any JV Company by reason of such
conduct, other than a breach of any Operative Agreement.
IN WITNESS WHEREOF, each of the Parties has cause its respective duly
authorized officers to execute this
<PAGE>
Agreement as of the day and year first above written.
<PAGE>
ITG International Limited
By: /s/ Howard C. Naphtali
-------------------------------
Name: Howard C. Naphtali
Title: President
Societe Generale
By: /s/ H. L. Hughes
-------------------------------
Name: H. L. Hughes
Title: Authorized Signatory
Investment Technology Group SG Limited
By: /s/ H. L. Hughes
-------------------------------
Name: H. L. Hughes
Title: President
Investment Technology Group Limited
By: /s/ Alasdair Haynes
-------------------------------
Name: Alasdair Haynes
Title: CEO
Investment Technology Group
Europe Limited
By: /s/ Adrian Collins
-------------------------------
Name: Adrian Collins
Title: Deputy Chairman
<PAGE>
November 17, 1998
GUARANTEE BY INVESTMENT TECHNOLOGY GROUP, INC.
To Societe Generale, Investment Technology Group SG Limited, Investment
Technology Group Limited and Investment Technology Group Europe Limited
(collectively, the "Guaranteed Parties")
1. In consideration of the Guaranteed Parties entering into a Joint Venture
Agreement (the "Agreement") by and among the Guaranteed Parties and ITG
International Limited ("ITGI"), dated as of November 17, 1998,
Investment Technology Group, Inc. ("Guarantor"), the corporate parent of
ITGI, unconditionally and irrevocably, as a primary and continuing
obligation, guarantees to the Guaranteed Parties, the proper and
punctual performance by ITGI of all of ITGI's obligations under the
Agreement and undertakes to pay on demand, all amounts whatsoever owing
by ITGI under the Agreement.
2. This guarantee is a continuing guarantee and will remain in force until
all the obligations (actual or contingent) of ITGI under the Agreement
have been discharged in full.
3. The Guarantor shall not, without first obtaining the Guaranteed Parties'
written consent, act in a liquidation or winding up of ITGI in
competition with the Guaranteed Parties for any amount whatsoever owing
by ITGI pursuant to the Agreement.
4. All amounts payable hereunder shall be paid in full without any
deduction or withholding whatsoever (whether in respect of set-off,
counterclaim, duties, taxes or charges) unless such deduction or
withholding is required by law, in which event the Guarantor shall pay
under the Agreement an additional amount so that the net amount received
by the Guaranteed Parties will equal the full amount which the
Guaranteed Parties would have received had such amount been paid
directly by ITGI.
5. The Guarantor acknowledges that it has represented to
<PAGE>
the Guaranteed Parties and hereby warrants, that it has full power and
authority to enter into this Guarantee, that it has taken all necessary
corporate or other actions to authorize the same, and that as executed,
this Guarantee (and the performance of all its obligations herein
contained) does not and will not constitute a breach of any law or
governmental regulation or order to which the Guarantor is subject, or
any agreement by which the Guarantor is bound, and is and will be valid,
binding and enforceable in accordance with its terms.
6. Terms defined in the Agreement shall bear the same meanings when used
herein.
7. Any notice or demand herein shall be in writing in the English language
and shall be delivered by hand or courier service, mailed or sent by
facsimile, as follows:
Investment Technology Group, Inc.
380 Madison Avenue, 4th Floor
New York, New York 10017
United States
Attn: General Counsel
Fax: 212-444-6345
or to such other address or attention of such other person as the
Guarantor shall advise the Guaranteed Parties in writing. All notices
and demands given or served in accordance with the provisions of this
Guarantee shall be deemed to have been given on the date of receipt.
Communications sent by facsimile shall be deemed to have been received
when confirmation of delivery is received by the sender.
8. The validity, construction and performance of this Guarantee shall be
governed by and construed in accordance with the laws of Ireland
regardless of the laws that might otherwise govern under applicable
principles of conflicts or choice of law.
Investment Technology Group, Inc.
By: /s/ Raymond L. Killian, Jr.
---------------------------------------
Name: Raymond L. Killian, Jr.
<PAGE>
Title: Chairman
<PAGE>
AMENDMENT NO. 1 TO
SERVICE AGREEMENT DATED MARCH 15, 1994 BETWEEN
JEFFERIES & COMPANY, INC. AND ITG INC.
Jefferies & Company, Inc. ("Jefferies") and ITG Inc. ("ITG") hereby
enter into this Amendment, dated as of January 1, 1999, to that certain Service
Agreement dated March 15, 1994, by and between Jefferies and ITG (the "Service
Agreement").
1. Sections 1.a(ii), 1.b, 1.d, 1.e, 1.f(ii), 1.f(iii) and 1.g are
hereby deleted from the Service Agreement.
2. Exhibits 1 through 6 are hereby deleted from the Service Agreement
and replaced with Exhibits 1 through 2 hereof.
3. Sections 1.c(i), 1.c(ii) and 1.c(iii) are hereby deleted and
replaced with the following:
c. Jefferies shall administer the qualified and
non-qualified benefit plans that ITG provides its
employees through Jefferies or Jefferies Group, Inc.
4. Section 6 is hereby deleted and replaced with the following:
6. TERM AND TERMINATION
a. Services provided under this Agreement shall
terminate automatically, without any further
action by either of the parties hereto, as
follows:
(i) With respect to the Accounting
Services set forth in Section 1.a,
on June 30, 1999; and
(ii) With respect to the Personnel
Services set forth in Section 1.c,
on the later to occur of (A) such
date as the plan assets for ITG's
employees have been transferred by
the Jefferies Group, Inc.
Employees' Profit Sharing Plan to a
defined contribution plan and trust
maintained by Investment Technology
Group, Inc. or an employee stock
ownership plan and trust maintained
by Investment Technology Group,
Inc. (the "ITG ESOP") and (B) such
date as the plan assets for ITG's
employees have been transferred by
the Jefferies Group, Inc. Employee
Stock Ownership Plan to the ITG
ESOP.
b. Upon termination of either of the services
described in Section 6.a above, the related
charges applicable thereto shall also
terminate.
c. This Agreement shall terminate
automatically, without any further action by
either of the parties hereto, upon the
termination of each of the Accounting
Services and Personnel Services as provided
in Section 6.a above.
d. Upon termination of this Agreement, the
obligations of each party under Sections 2
and 3 of this Agreement shall survive such
termination.
e. Jefferies agrees to provide ITG reasonable
opportunity to copy, or remove from
Jefferies' premises, any accounting records
relating to
<PAGE>
Investment Technology Group, Inc. and its
subsidiaries prior to destroying them.
Except as specifically amended hereby, the terms and conditions of the
Service Agreement shall remain in full force and effect.
ITG INC. JEFFERIES & COMPANY, INC.
By: /s/ Raymond L. Killian, Jr. By: /s/ Clarence T. Schmitz
------------------------------ ------------------------------
Name: Raymond L. Killian, Jr. Name: Clarence T. Schmitz
Title: President Title Executive Vice President
<PAGE>
EXECUTION AGREEMENT
This Agreement is made this 1st day of January, 1999, by and between W & D
Securities, Inc. ("W & D"), a California corporation, and ITG Inc. ("ITG"), a
Delaware corporation.
WHEREAS, ITG has entered into an agreement with W & D (the "Omnibus
Clearing Agreement") to clear and settle transactions which are executed by
W & D on the New York Stock Exchange ("NYSE") on behalf of customers of ITG; and
WHEREAS, ITG desires to avail itself of certain services offered by W & D
with respect to executions effected on the NYSE and other regional exchanges;
and
WHEREAS, W & D desires to provide to ITG the services described below
subject to the terms and conditions of this Agreement;
NOW, THEREFORE, for and in consideration of the promises and mutual
agreements set forth herein, W & D and ITG agree as follows:
1. SERVICES PROVIDED BY W & D WITH RESPECT TO ITG'S TRADE ENTRY AND EXECUTION
a. W & D's Operations Department shall be responsible for trade execution
and trade entry on the books and records of Jefferies & Company, Inc. for all
trades executed by W & D as agent for ITG on the NYSE, on any other regional
stock exchange, and in the over-the-counter market. W & D's Operations
Department will also be responsible pursuant to the Omnibus Clearing Agreement
for the clearance and settlement of all trades executed by W & D as agent for
ITG on the NYSE. W & D will provide daily reconciliation of orders sent by ITG
not later than 12:00 pm on T+1.
b. W & D's Operations Department shall be available for trade entry and
clearance and settlement of trades executed on the NYSE pursuant to the Omnibus
Clearing Agreement, so long as the Omnibus Clearing Agreement remains in effect.
c. W & D shall provide to ITG the full benefit of any operating systems
changes, whether automated or manual, implemented by W & D. W & D will continue
to provide the support for order handling, systems and account set-up that it
currently provides to ITG.
d. W & D shall negotiate, pay and account within 15 days of month end all
specialist and $2 broker bills.
2. CONFIDENTIALITY
a. W & D will exercise reasonable care to prevent access to information
regarding ITG or ITG's customers by unauthorized persons and will keep
confidential any information it has concerning the business of ITG.
Notwithstanding the foregoing, W & D shall be held harmless
<PAGE>
for complying with any request for information or documents by the Securities
and Exchange Commission or other regulatory or self-regulatory authority or
any court order or other legal process which W & D believes to be valid and
effective.
b. ITG will keep confidential any information it may acquire regarding
W & D and its business. Notwithstanding the foregoing, ITG shall be held
harmless for complying with any request for information or documents by the
Securities and Exchange Commission or other regulatory authority or any court
order or other legal process which ITG believes to be valid and effective.
3. INDEMNIFICATION
ITG will indemnify, protect and hold harmless W & D, its officers and
employees, and each person, if any, controlling W & D, from and against all
manner of claims, demands, proceedings, suits or actions (whether in law or in
equity) and liabilities, losses, expenses and costs (including attorneys' fees)
in the event (i) ITG fails to properly exercise its obligations as set forth
herein, or (ii) any customer of or regulator for ITG institutes a claim, suit,
action, arbitration or other proceeding against W & D for any reason, PROVIDED,
HOWEVER, that W & D shall not be entitled to indemnification in any such manner
if W & D is found to have acted with gross negligence in the performance of its
services under this Agreement.
4. REPRESENTATIONS AND WARRANTIES
a. ITG represents and warrants as follows:
(1) ITG is and during the term of this Agreement will remain a member
in good standing of the National Association of Securities Dealers, Inc.;
(2) ITG is and during the term of this Agreement will remain duly
registered or licensed and in good standing as a broker-dealer under all
applicable federal and state securities laws;
(3) ITG has all requisite authority, whether arising under applicable
federal or state laws and rules and regulations of any securities exchange or
securities association to which it is subject, to enter into this Agreement and
to retain the services of W & D in accordance with the terms hereof; and
(4) ITG is now and during the term of this Agreement will remain in
compliance with the capital and financial reporting requirements of every
securities exchange and/or securities association of which it is a member, the
Securities and Exchange Commission, and every state in which it is licensed as a
broker-dealer.
b. W & D represents and warrants as follows:
(1) W & D is and during the term of this Agreement will remain a
member in good standing of the National Association of Securities Dealers, Inc.
and the NYSE;
<PAGE>
(2) W & D is and during the term of this Agreement will remain duly
registered or licensed and in good standing as a broker-dealer under all
applicable federal and state securities laws;
(3) W & D has all requisite authority, whether arising under
applicable federal or state laws and rules and regulations of any securities
exchange or securities association to which it is subject, to enter into this
Agreement and to retain the services of W & D in accordance with the terms
hereof; and
(4) W & D is now and during the term of this Agreement will remain in
compliance with the capital and financial reporting requirements of every
securities exchange and/or securities association of which it is a member, the
Securities and Exchange Commission, and every state in which it is licensed as a
broker-dealer.
5. COMPENSATION
During the term of this Agreement, W & D shall be compensated by ITG based
on the schedule that appears on Exhibit A hereto. The parties may amend said
schedule from time to time in writing and such amendment shall not affect any
other term of this Agreement.
6. TERM AND TERMINATION
a. The term of this Agreement shall be a period of eighteen months from
the date hereof, and shall renew automatically for successive one (1) year terms
unless terminated earlier in accordance with Section 6(b), 6(c), or 6(d).
b. This Agreement may be terminated by either party without cause upon
written notice delivered in person or by registered mail to the other party at
least 180 days prior to the effective date of termination, PROVIDED, HOWEVER,
that the first date on which such notice of termination may be given by either
party hereto is January 1, 2000.
c. This Agreement may be terminated immediately by either party if any
representations or warranties cease to be true or if any duties,
responsibilities or obligations are not duly performed during the term of this
Agreement. Notwithstanding the foregoing, should any party choose not to
exercise its right to terminate this Agreement when such a right is first
available, such action shall not be deemed a waiver of such right if available
on a subsequent occasion and the non-terminating party's legal and/or equitable
remedies for any breach(es) of this Agreement will remain in full force and
effect.
d. This Agreement shall terminate automatically on the effective date of
termination of the Fully-Disclosed Clearing Agreement between ITG and Jefferies
& Company, Inc. without any further action by either party hereto.
e. The Core Glue System Software License Agreement between ITG and W & D
shall terminate automatically on the effective date of termination of this
Agreement.
<PAGE>
f. Upon any termination of this Agreement for any reason whatsoever, the
Supplemental Account Agreement between ITG and Jefferies & Company, Inc.
relating to ITG's use of Optimark services shall terminate automatically without
any further action by either party hereto.
7. NOTICE
For the purpose of delivery of any notice hereunder, W & D's address shall
be:
W & D Securities, Inc.
Harborside Financial Center
Plaza III, Suite 704
Jersey City, NJ 07311
Attention: President
and ITG's address shall be:
ITG Inc.
380 Madison Avenue, 4th Floor
New York, NY 10017
Attention: President
8. MISCELLANEOUS
a. W & D agrees that it will use ITG Glue for the routing of orders
placed by ITG; however, W & D shall have the right to adopt or use new or
different routing technology for orders, including those placed by ITG, if W & D
determines that the new technology is superior to ITG Glue.
b. This Agreement shall be governed by the State of New York, without
giving effect to principles of conflicts of laws.
c. W & D shall provide to ITG on within 45 days of the end of W & D's
first three fiscal quarters and 90 days of the end of W & D's fiscal year, W &
D's balance sheet and a consolidating income statement. Such financial
information shall be prepared in accordance with Exhibit B hereto.
d. This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors, assigns, and transferees. No
assignment or amendment shall be valid unless the other party consents to such
assignment or amendment in writing. Neither this Agreement nor the performance
of services by W & D hereunder shall be construed to create a joint venture,
partnership or agency relationship of any type between ITG and W & D.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have each caused this Agreement to
be executed by their duly authorized officers as of the day and year set forth
above.
W & D SECURITIES, INC. ITG INC.
By: /s/ Donald Wiese By: /s/ Raymond L. Killian, Jr.
---------------------------- --------------------------------
Donald Wiese Raymond L. Killian, Jr.
President President
<PAGE>
FULLY DISCLOSED CLEARING AGREEMENT
This Agreement, made this 1st day of January, 1999, between JEFFERIES & COMPANY,
INC. (the "Clearing Broker") and ITG INC. (the "Introducing Broker"), sets forth
the terms and conditions under which the Clearing Broker will provide execution
and clearing services, on a fully disclosed basis, for certain customer and
proprietary accounts of the Introducing Broker.
I. SERVICES TO BE PROVIDED BY THE CLEARING BROKER
A. Subject to the terms and conditions of this Agreement and to the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended (the "1934 Act"), the Investment Advisers Act of 1940, as amended, the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
Government Securities Act of 1986, as amended, or any rules or regulations
thereunder, and to any other applicable law, rule or regulation, federal, state
or local, including the rules of the Board of Governors of the Federal Reserve
System, and to any applicable constitution, by-law, rule, regulation, or stated
policy or practice of any securities exchange or nation or other regulatory or
self-regulatory body or agency (collectively, the "Laws and Regulations"), the
Clearing Broker will provide the following services to the Introducing Broker:
1. The Clearing Broker will provide trade clearance of executions
for such customers or proprietary accounts of the Introducing Broker as have
been accepted by the Clearing Broker, but only insofar as such executions are
transmitted by the Introducing Broker or its authorized agents to the Clearing
Broker. Authorized modes of transmission shall include electronic host-to-host,
facsimile, e-mail and authorized telephonic instructions, but only as such modes
of transmission are mutually agreed upon by Clearing Broker and Introducing
Broker with respect to particular Customers (as defined herein). These accounts,
including any syndicate account for any underwriting of which the Introducing
Broker is manager, are hereinafter referred to as the "Introduced Accounts" and
the beneficial owners thereof (except for Introduced Accounts that are
proprietary accounts of the Introducing Broker) are hereinafter referred to as
the "Customers."
2. The Clearing Broker will prepare and mail, telex or fax, as
requested, confirmations and notices, and will prepare and mail monthly
statements (or quarterly statements if no activity in any Introduced Account
occurs during any quarter covered by such statement) directly to every
Introduced Account on the Clearing Broker's forms for such purposes.
3. Unless otherwise agreed, the Clearing Broker will supply the
Introducing Broker on each business day with copies of Customer confirmations,
money lines, and daily commission detail reports and such other reports that the
Clearing Broker has been providing Introducing Broker in the ordinary course of
business. In addition to the foregoing, Clearing Broker will provide Introducing
Broker with and Reference Data (as defined herein) which Clearing Broker has
been providing Introducing Broker, PROVIDED, HOWEVER, that Clearing Broker may
cease providing the Reference Data or make changes to the types of reference
data it provides in the event that Clearing Broker is not allowed by a
third-party provider of information to provide the information to a
non-affiliate or changes the types of reference data which it receives. For
purposes of this Section, the term "Reference Data"
<PAGE>
means the name and address of the Customer and Institution, and security master
data. Unless the Introducing Broker notifies the Clearing Broker within a
reasonable time (and for the purposes hereof, a period of one (1) business day
after receipt of such information shall be a reasonable time) of mistakes or
discrepancies in the above-described reports and information, the Clearing
Broker shall be entitled to consider all such information supplied to the
Introducing Broker to be correct.
4. The Clearing Broker will settle contracts and transactions in
securities (including options to buy or sell securities) (i) between the
Introducing Broker and other brokers and dealers, (ii) between the Introducing
Broker and the Introduced Accounts of Customers, and (iii) between the
Introducing Broker and persons other than Customers or other brokers and
dealers.
5. The Clearing Broker will collect and pay SEC fees on behalf of
the Introducing Broker.
6. The Clearing Broker will engage in all cashiering functions for
the Introduced Accounts, including the receipt, delivery, borrowing, lending and
transfer of securities, the making and receipt of payments therefor, the custody
and safeguarding of securities and payments so received, the handling of margin
accounts, the receipt and distribution of dividends and other distributions, the
processing of exchange offers, rights offerings, warrants, tender offers, and
redemptions, and such other functions as may be agreed upon by the parties;
provided, however, that if mutually agreed to by the Introducing Broker and the
Clearing Broker, cashiering functions with respect to receipt of cash and
securities may be performed directly by the Introducing Broker.
7. The Clearing Broker will establish and maintain all prescribed
books and records of transactions executed or cleared through it that are not
specifically assigned to the Introducing Broker pursuant to the terms of this
Agreement, including a stock record, and a daily record of required margin, or
by the constitution, by-laws, rules, regulations, or stated policies or
practices of the National Association of Securities Dealers, Inc. ("NASD") or
any other securities exchange of which the Clearing Broker is a member (the
"Standards").
B. The Clearing Broker shall not provide to the Introducing Broker any
services that are not specifically set forth in this Agreement, including, but
not limited to, the following:
1. Clearing, execution, accounting, bookkeeping or cashiering, or
any other services with respect to commodities transactions, including contracts
for future delivery of commodities and options on such contracts or on
commodities, or any other transactions not involving securities;
2. Preparation of the Introducing Broker's payroll records,
financial statements or any analysis or review thereof or any recommendations
relating thereto:
3. Preparation or issuance of checks in payment of the
Introducing Broker's expenses, other than expenses incurred by the Clearing
Broker on behalf of the Introducing Broker pursuant to this Agreement;
- 2 -
<PAGE>
4. Payment of commission, salaries, or other remuneration to the
Introducing Broker's employees;
5. Preparation and filing of reports with the Securities and
Exchange Commission (the "SEC"), any state securities commission, any National
Securities Exchange, or other securities exchange, the NASD or any other
securities association or other regulatory or self-regulatory body or agency
with which the Introducing Broker or any Introduced Account is associated or by
which it is regulated, including compliance with any applicable reporting,
disclosure or requirements of ERISA in respect of transactions for Introduced
Accounts; provided, however, that (a) the Clearing Broker shall at the request
of the Introducing Broker, promptly cooperate in providing the Introducing
Broker with any necessary information and data contained in records kept by the
Clearing Broker and not otherwise available to the Introducing Broker for use in
Introducing Broker's preparation of such reports, and (b) the Introducing Broker
shall be responsible for all costs incurred by the Clearing Broker in connection
with the preparation and provision of such information.
6. Making and maintaining reports and records required to be kept by
the Introducing Broker by the Currency and Foreign Transactions Reporting Act of
1970 and the regulations promulgated pursuant thereto, or any similar law or
regulations enacted or adopted hereafter;
7. Verification of the address changes of any Introduced Account;
8. Obtaining, verifying, and interpreting account information, and
insuring that such information meets the requirements of any "know your customer
rule" of the Rules, the Standards and any other Laws and Regulations;
9. Maintaining records of personal and financial information
concerning any Introduced Account and orders received therefor, and maintaining
all documents and agreements executed by any Introduced Account (other than
those ordinarily maintained by the Clearing Broker);
10. Holding for safekeeping the securities of any Introduced
Account registered in the name of the Customer;
11. Accepting deposits from the Introducing Broker in the form of
cash; or
12. Verification of changes in the identity or address of any person
holding any power of attorney over any Introduced Account.
C. The Clearing Broker shall limit its services pursuant to the terms
of this Agreement to that of clearing functions and the related services
expressly set forth herein. Neither this Agreement nor any operation hereunder
shall create a general or limited partnership, association, joint venture,
branch, or agency relationship between the Introducing Broker and the Clearing
Broker.
- 3 -
<PAGE>
D. The Clearing Broker will not be bound to make any investigation into
the facts surrounding any transaction that it may have with the Introducing
Broker on a principal or agency basis or that the Introducing Broker may have
with its Customers or other persons, nor will the Clearing Broker be under any
responsibility for compliance by the Introducing Broker with any Rules,
Standards or laws and Regulations that may be applicable to the Introducing
Broker or any Introduced Account.
E. The Clearing Broker shall use reasonable efforts to implement a plan
of contingency recovery and testing by June 30, 2000.
II. CLEARING FEES, INTEREST CHARGES, AND COMMISSIONS
A. The Introducing Broker agrees to pay the Clearing Broker for its
services pursuant to this Agreement such amounts as are set forth in Schedule A.
Said compensation schedules may be changed from time to time as may be agreed to
in writing by the Introducing Broker and the Clearing Broker. The Clearing
Broker will remit to the Introducing Broker 88% of the Introducing Broker's
weekly gross commission revenue based on trade date sent on the second business
day of the following week. Within twelve (12) business days after the trade
month end, the Clearing Broker will remit to the Introducing Broker the net
trade month commission balance (gross commissions, less weekly remittances,
service and clearing amounts, and other charges, including amounts due the
Clearing Broker by the Introducing Broker arising from any losses, liabilities,
or damages in accordance with the terms of this Agreement). All remittances
shall be made by the Clearing Broker to the Introducing Broker by wire transfer
of immediately available funds.
In the event that the Introducing Broker defaults (as defined in
Article X below), the Clearing Broker shall have the right to offset any and all
liabilities, costs, or expenses due it from the Introducing Broker that remain
unpaid as of the date of such Event of Default against commission revenue due
the Introducing Broker, the Clearing Deposit, or any other assets of the
Introducing Broker then in the possession of the Clearing Broker.
B. In the event that the monthly compensation otherwise payable to the
Clearing Broker for its services hereunder is not greater than $10,000 in any
calendar month, the Clearing Broker may deduct from the commission revenue due
the Introducing Broker and/or from the Collateral Account, an amount equal to
the difference between (i) $10,000, and (ii) the amount of fees mutually agreed
upon by the Clearing Broker and the Introducing Broker.
C. Interest income earned through charges on debit balances in any
Introduced Account shall be proprietary to and fully retained by the Clearing
Broker. Interest paid or credit given for any credit balances which from time to
time may be left on deposit with the Clearing Broker shall be at the discretion
of the Clearing Broker unless otherwise specified by Schedule A attached hereto.
D. It is expressly understood and agreed that the Clearing Broker may
not and will not exercise any control whatsoever over or influence in any way,
the commissions, mark-ups, or other charges or expenses between the Introducing
Broker and the Introduced Accounts. The Clearing Broker
- 4 -
<PAGE>
shall charge each of the Introduced Accounts such commissions, mark-ups,
charges, and expenses as the Introducing Broker directs, in writing; provided,
however, that such commissions, mark-ups, charges, and expenses shall be
implemented (i) only to the extent they are within the usual and normal
capabilities of the Clearing Broker's data processing and operations systems,
and (ii) only after such reasonable time as the Clearing Broker may deem
necessary to avoid disruption of its normal operating capabilities. Further, the
Introducing Broker shall be responsible for all costs, if any, associated with
any modifications to the Clearing Broker's systems and procedures which may be
necessary to accommodate the Introducing Broker.
III. PROCEDURES FOR INTRODUCED ACCOUNTS
A. At the time of the opening of each Introduced Account, the
Introducing Broker shall supply to the Clearing Broker a new account form on
such forms as the Clearing Broker will supply to the Introducing Broker (unless
otherwise mutually agreed by the parties) and shall supply any other additional
or supplementary documentation or information that the Clearing Broker may in
its sole discretion request the Introducing Broker to obtain from the Customer,
including, but not limited to, a cash account agreement on a form approved by
the Clearing Broker ("Cash Account Agreement"), and all other documents that the
Clearing Broker initially supplied to the Customer. If applicable, the
Introducing Broker shall furnish the Clearing Broker with appropriate Alert
and/or SID references for the Customer and the Clearing Broker will update such
information when updates are received from Alert and/or SID. At the time of the
opening of Introduced Accounts that are margin accounts, the Introducing Broker
shall furnish the Clearing Broker with executed customer agreements,
hypothecation and rehypothecation agreements, and consents to loans of
securities on forms to be provided by the clearing broker (collectively, the
"Margin Agreement"). If any Introduced Account has been opened without the
Clearing Broker having previously received the foregoing information or
documents, failure of the Clearing Broker to receive such information or
documents shall not be deemed to be a waiver of the information or documentation
requirements set forth herein. With respect to each Introduced Account that is a
proprietary account, an executed Margin Agreement shall be furnished to the
Clearing Broker. In addition, the terms of such Cash Account Agreement or Margin
Agreement, as amended from time to time, are incorporated by reference herein.
Upon the request of the Clearing Broker, the Introducing Broker shall furnish
the Clearing Broker with any other additional or supplementary documents and
agreements executed by the Introduced Account on forms supplied by the Clearing
Broker that the Clearing Broker may require in connection with the opening,
operating or maintaining of Introduced Accounts. The Clearing Broker may, at its
option, mail Cash Account Agreements, Margin Agreements or other documentation
directly to the Introduced Accounts upon notification by the Introducing Broker.
The Introducing Broker shall promptly provide the Clearing Broker with basic
data and copies of documents relating to each of the Introduced Accounts,
including, but not limited to, copies of records of any receipts of the
Introduced Accounts' funds or securities received directly by the Introducing
Broker, as shall be necessary for the Clearing Broker to discharge its service
obligations hereunder. The Clearing Broker shall provide, upon request, any
documentation and agreements related to the opening and maintenance of any
Introduced Accounts.
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B. If the documents necessary to comply with the account documentation
requirements of the Rules, Standards and Laws and Regulations have not been
received by the Clearing Broker after request has been made therefor, the
Clearing Broker shall give the Introducing Broker notification that no orders
will be accepted (other than liquidating orders) for the Introduced Account
involved. If orders are placed for such account after this notice is given, no
commission credit will be granted on such orders. On receipt of the necessary
documents, this restriction will be lifted with respect to future commissions,
but any commissions withheld will not be credited or paid. This Agreement is not
in any way intended to limit the responsibility of the Clearing Broker under the
Rules, Standards, Laws and Regulations with respect to Introduced Accounts.
Further, acceptance of an order after notification has been given shall not
constitute a waiver of the Clearing Broker's right to reject any trade.
C. All transactions in any Introduced Account are to be considered cash
transactions until such time as the Clearing Broker has received and accepted
Margin Agreements, duly and validly executed in respect of such Introduced
Account.
D. At the time of the opening of any agency Introduced Account, the
Introducing Broker shall furnish the Clearing Broker with the name of any
principal for whom the agent is acting and written evidence of the agent's
authority.
E. The Introducing Broker shall be solely and exclusively responsible
for approval of all accounts and transactions therein and all similar applicable
Rules, Standards, Laws and Regulations and shall specifically approve the
opening of any new account before forwarding such account to the Clearing Broker
as a potential Introduced Account.
F. The Clearing Broker reserves the right to reject any account that
the Introducing Broker may tender to the Clearing Broker as a potential
Introduced Account. The Clearing Broker also reserves the right to terminate any
account previously accepted by it as an Introduced Account.
G. The Introducing Broker shall be solely and exclusively responsible
for ensuring that its Customers shall not be minors or subject to those
prohibitions existing under the Rules, Standards, Laws and Regulations generally
relating to the incapacity of any Introduced Account or any conflict of interest
relating to such Introduced Account.
H. With respect to Introduced Accounts that are margin accounts, the
Clearing Broker is responsible for compliance with Regulation T, 12 C.F.R. Part
220, promulgated by the Board of Governors of the Federal Reserve System (the
"Board"), and any interpretive ruling issued by the Board, and the letter
rulings of the Federal Reserve Bank of New York, Rules and interpretations of
the NASD and any other applicable margin and margin maintenance requirements of
the Rules, Standards, Laws and Regulations. The Introducing Broker is
responsible to the Clearing Broker for the collection of the margin required to
support each transaction for, and to maintain margin in, each Introduced
Account, in conformity with the above margin and margin maintenance
requirements. After such initial margin on each transaction has been received,
maintenance margin calls shall be generated by the Clearing Broker and made by
the Clearing Broker or by the Introducing Broker at the instructions of
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the Clearing Broker. The Clearing Broker shall have the absolute right to
modify, in its sole discretion, the margin requirements for any Introduced
Account or any security position from time to time so that the Clearing Broker
may call for additional margin and shall have sole discretion as to the amount
of margin to be required of and maintained by Introduced Accounts.
I. The Introducing Broker shall be solely and exclusively responsible
for the payment and delivery of all "when issued" or "when distributed"
transactions that the Clearing Broker may accept, forward, or execute for
Introduced Accounts.
J. The Introducing Broker agrees that all Customers of the Introducing
Broker who engage in DVP transactions (and their agents) will utilize the
facilities of a securities depository for the confirmation, acknowledgment, and
book entry settlement of all depository eligible transactions, subject to the
exceptions to Rules or Standards pertaining to "COD" or "DVP" transactions.
K. To facilitate the keeping of records by the Clearing Broker, the
Introducing Broker shall turn over promptly to the Clearing Broker any and all
payments and securities that the Introducing Broker receives from Customers.
Concurrently with the delivery of such payments or securities to the Introducing
Broker, it shall furnish the Clearing Broker with such information as may be
relevant or necessary to enable the Clearing Broker to record promptly and
properly such payments and securities in the respective Introduced Accounts.
L. On all Over-the-Counter transactions for Introduced Accounts, the
Introducing Broker shall furnish the Clearing Broker with the names of the
respective purchasing and selling broker-dealers (except as otherwise provided
below), the names of the purchasing and selling Customers, and the wholesale and
retail purchase and sale prices. When the selection of the contra broker in an
Over-the-Counter transaction is left to the Clearing Broker's discretion, the
Clearing Broker will assume responsibility for any failure to pay by the contra
broker. When the Introducing Broker executes its own Over-the-Counter order or
designates the contra broker, in the event that the Over-the-Counter contra
broker fails to perform its part of the transaction, the Introducing Broker will
reimburse the Clearing Broker for any loss sustained thereby. The Clearing
Broker reserves the right at any time to limit the size of transactions that the
Clearing Broker will accept for clearance in these circumstances. The Clearing
Broker will give the Introducing Broker reasonable notice (i.e., at least 10
days' notice in most circumstances, 30 days' notice for Credit Committee
limitations and whatever notice is possible in the event of regulatory or
self-regulatory limitations) of such limitations. If, after the Introducing
Broker has received notice of such limitation (whether notice was reasonable or
not), the Introducing Broker executes an order in excess of the limit
established by the Clearing Broker, the Clearing Broker shall have the right to
notify the other party and other dealer that it will not accept the transaction
for clearance and settlement.
M. The Introducing Broker shall be solely and exclusively responsible
for approving all orders for the Introduced Accounts and for establishing
procedures to ensure that such approved orders are transmitted properly to the
Clearing Broker for execution. The Clearing Broker reserves the right
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to reject any order that the Introducing Broker may transmit to the Clearing
Broker for execution or clearance.
N. The Introducing Broker shall be solely and exclusively responsible
for the supervisory review of all orders for the Introduced Accounts and shall
ensure that any orders and instructions given by it or any of its employees to
the Clearing Broker pursuant to the terms of this Agreement shall have been
properly authorized in advance.
O. The Introducing Broker shall be solely and exclusively responsible
for making every reasonable effort to ascertain the essential facts relative to
any Introduced Account and any order therefor, in compliance with "know your
customer" provisions of the Rules or the Standards, including but not otherwise
limited to ascertaining the authority of all orders for Introduced Accounts, and
the genuineness of all certificates, papers, and signatures provided by each
Introduced Account. Any investment advice furnished to an Introduced Account
shall be the sole and exclusive responsibility of the Introducing Broker.
P. The Introducing Broker shall be solely and exclusively responsible
for review of all Introduced Accounts and for compliance with any supervisory
responsibility with respect to the accounts introduced under this Agreement,
including but not otherwise limited to matters involving the investment
objectives of the Introduced Accounts, the suitability of the investments made
by the Introduced Accounts, the reasonable basis for recommendations made to
Introduced Accounts, and the frequency of trading in the Introduced Accounts,
whether or not such transactions are instituted by the Introducing Broker, its
partners, officers, employees or any registered investment adviser.
Q. The Introducing Broker shall be solely and exclusively responsible
for the handling and supervisory review of any Introduced Accounts over which
the Introducing Broker's partners, officers or employees have discretionary
authority, and any interpretations thereof and any other applicable Rules,
Standards, Laws and Regulations. The Introducing Broker shall furnish the
Clearing Broker with such documentation with respect thereto as may be requested
by the Clearing Broker. The Introducing Broker hereby warrants that with regard
to any orders or instructions given by the Introducing Broker with respect to
such discretionary accounts, its partners, officers or employees shall have been
fully and properly authorized relative thereto and that the execution of such
orders shall not be in violation of the Rules, Standards, Laws and Regulations.
R. The Introducing Broker shall be solely and exclusively responsible
for the handling and supervisory review of any Introduced Account for an
employee or officer of any member organization, self-regulatory organization,
bank, trust company, insurance company, or other organization engaged in the
securities business, and any other applicable Rules, Standards, Laws and
Regulations. The Introducing Broker shall furnish the Clearing Broker with such
documentation with respect thereto as may be requested by the Clearing Broker.
S. The Introducing Broker shall be solely and exclusively responsible
for ensuring that it is authorized to do business in any jurisdiction in which
any Introduced Account resides or is domiciled.
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T. The Introducing Broker shall be solely and exclusively responsible
for compliance with any and all disclosure documents and prospectus delivery
requirements in connection with Introduced Accounts that are option accounts and
with any principal training or registration requirements relating to options
trading in Introduced Accounts.
U. The Introducing Broker and the Clearing Broker shall each be
responsible for the respective compliance of each with any supervisory
procedures under Rule 3010 of the NASD Manual, Conduct Rules and, to the extent
applicable, any other related provisions of the Rules, Standards, Laws and
Regulations including but not otherwise limited to supervising the activities
and training of their respective registered representatives, as well as all of
their other respective employees in the performance of functions specifically
allocated to them pursuant to the terms of this Agreement.
V. The Introducing Broker shall be solely and exclusively responsible
for sales and purchases for the Introduced Accounts that may create or result in
a violation of any of the Rules, Standards, Laws and Regulations.
W. The Introducing Broker shall be solely and exclusively responsible
for compliance with the Rules, Standards, Laws and Regulations in the same
manner and to the same degree as if the Introducing Broker were performing the
services for the Introduced Accounts that have been assumed by the Clearing
Broker pursuant to this Agreement.
X. The Introducing Broker shall be solely and exclusively responsible
for compliance with any Rules, Standards, Laws and Regulations concerning
transfers of restricted or control securities in Introduced Accounts. Securities
delivered to the Clearing Broker on behalf of an Introduced Account for delivery
in respect of a sale shall not be in legended form.
Y. The Introducing Broker shall be solely and exclusively responsible
for compliance with Rule 10b-16 under the 1934 Act; provided, however, that any
document provided to Customers in connection therewith shall be approved in
writing by the Clearing Broker in advance.
Z. In connection with all transactions for Introduced Accounts, the
Introducing Broker shall be solely responsible for compliance with all rules
relating to the Small Order Execution System ("SOES") of the NASD including,
without limitation, prohibitions on proprietary trading and volume restrictions.
AA. All transactions heretofore had between the Introducing Broker and
the Clearing Broker with respect to orders given by or for the Introduced
Accounts and cleared through the Clearing Broker shall be subject to the
provisions of this Agreement.
BB. For purposes of the Securities and Exchange Commission's financial
responsibility rules and the Securities Investor Protection Act, Introducing
Broker's customers will be considered customers of Clearing Broker and not
customers of Introducing Broker. Nothing herein shall cause Introducing Broker's
customers to be construed or interpreted as customers of Clearing Broker for any
other
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purpose, or to negate the intent of any other section of the Fully Disclosed
Clearing Agreement, including, but not limited to, the delineation of
responsibilities as set forth elsewhere in the Fully Disclosed Clearing
Agreement.
IV. INFORMATION TO BE PROVIDED BY THE INTRODUCING BROKER
A. The Introducing Broker shall provide the Clearing Broker with copies
of the Introducing Broker's annual audited financial statements as well as
copies of all financial information and reports filed by the Introducing Broker
with the NASD, the SEC, and any other National Securities Exchange (where a
member) (including but not otherwise limited to monthly and quarterly Financial
and Operational Combined Uniform Single Reports, i.e., "FOCUS" Reports)
simultaneously with the filing therewith.
B. The Introducing Broker shall submit to the Clearing Broker on a
monthly basis, or at more frequent intervals if so requested by the Clearing
Broker, information and reports relating to the Introducing Broker's financial
integrity, including but not otherwise limited to information regarding the
Introducing Broker's aggregate indebtedness ratio and net capital.
C. The Introducing Broker shall provide the Clearing Broker with all
appropriate data in its possession pertinent to the proper performance and
supervision of any function or responsibility specifically allocated to the
Clearing Broker pursuant to the terms of this Agreement.
D. The Introducing Broker shall provide the Clearing Broker with any
amendment or supplement to the Form BD of the Introducing Broker.
E. Upon the execution of this Agreement, the Introducing Broker shall
provide to the Clearing Broker a written list of all securities with respect to
which the Introducing Broker is a market-maker. The Introducing Broker shall
give the Clearing Broker prior written notice of any proposed changes in its
market-making activities, including changes in the identity of the securities
for which it makes a market. The Introducing Broker shall provide the Clearing
Broker on a timely basis with information sufficient to ensure that any
confirmation sent to Customers by the Clearing Broker on the Introducing
Broker's behalf contain correct information on the Introducing Brokers' role in
the transaction. The Clearing Broker shall have the right to limit or prohibit
the Introducing Broker's market-making activities with respect to any security.
V. INFORMATION TO BE PROVIDED BY THE CLEARING BROKER
A. The Clearing Broker shall provide the Introducing Broker with all
appropriate data in its possession pertinent to the proper performance and
supervision of any function specifically allocated to the Introducing Broker
pursuant to the terms of this Agreement. The Introducing Broker shall be
responsible for all costs incurred by the Clearing Broker in connection with the
preparation and provision of such information.
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B. The Clearing Broker shall provide the Introducing Broker with copies
of the Clearing Broker's annual audited financial statements as well as copies
of all financial information and reports filed by the Clearing Broker with the
NASD, the SEC, and any other National Securities Exchange (where a member)
(including but not otherwise limited to monthly and quarterly Financial and
Operational Combined Uniform Single Reports, i.e., "FOCUS" Reports)
simultaneously with the filing therewith.
VI. COMMUNICATIONS WITH CUSTOMERS AND OTHERS
A. Any new Customers of the Introducing Broker shall be provided by the
Clearing Broker with a Welcome Letter, notifying the new Customer as to the
general nature of the services to be provided by the Clearing Broker pursuant to
this Agreement, the respective obligations of the parties hereto, and any other
Customer-related responsibilities of the parties to this Agreement prior to such
Customers becoming Introduced Accounts.
B. The Customers shall be informed pursuant to such Welcome Letter that
all inquiries and correspondence should be directed to the Introducing Broker.
In the event such correspondence is not directed to the party who is responsible
under the terms of this Agreement for the area to which the correspondence
relates, the Introducing Broker or the Clearing Broker shall expeditiously
forward such correspondence to the appropriate party which shall respond to it.
C. The Clearing Broker shall carry all Introduced Accounts in the name
of the Customer, with a notation on its books and records that such Introduced
Accounts were introduced by the Introducing Broker, and all monthly or quarterly
statements, confirmations, and notices of funds or securities due relating to
such Introduced Accounts shall also indicate that the Introduced Accounts were
introduced by the Introducing Broker, that the role of the Clearing Broker is
that of a clearing broker only, and that the Introducing Broker will continue as
broker for the Introduced Accounts. Inadvertent omission of such notations shall
not be deemed to constitute a breach of this Agreement. Copies of the forms
covering all of the foregoing shall be furnished by the Clearing Broker to the
Introducing Broker.
D. The Introducing Broker shall not, without the prior written approval
of the Clearing Broker, place any advertisement in any newspaper, publication,
periodical or any other media or communicate with any customer or the public in
any manner whatsoever if such advertisement or communication in any manner makes
reference to the Clearing Broker or any affiliate of the Clearing Broker or to
the clearing arrangements and the services embodied in this Agreement. This
paragraph does not limit the Introducing Broker from informing prospective
clients or Customers that it has a clearing arrangement with the Clearing
Broker; provided, however, that such information was specifically requested by
the prospective client or Customer.
E. Should the Introducing Broker in any way hold itself out as,
advertise or represent that it is the agent of, affiliated with, or a branch of
the Clearing Broker, the Clearing Broker shall have the power, at its option, to
terminate this Agreement and the Introducing Broker shall be liable for any
loss,
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liability, damage, cost or expense (including but not otherwise limited to fees
and expenses of legal counsel) sustained or incurred by the Clearing Broker as a
result of such advertisement or representation. Notwithstanding the provisions
of paragraph C of Article X below that any dispute or controversy between the
parties relating to or arising out of this Agreement shall be referred to and
settled by arbitration, in connection with any breach by the Introducing Broker
of this paragraph, the Clearing Broker may, at any time prior to the initial
arbitration hearing pertaining to such dispute or controversy, by application to
the United States District Court for the Southern District of New York or the
Supreme Court of the State of New York for the County of New York seek any such
temporary or provisional relief or remedy ("provisional remedy") provided for by
the laws of the United States of America or the laws of the State of New York as
would be available in an action based upon such dispute or controversy in the
absence of an agreement to arbitrate. The parties acknowledge and agree that it
is their intention to have any such application for a provisional remedy decided
by the court to which it is made and that such application shall not be referred
to or settled by arbitration. No such application to either said court for a
provisional remedy, nor any act or conduct by either party in furtherance of or
in opposition to such application, shall constitute a relinquishment or waiver
of any right to have the underlying dispute or controversy with respect to which
such application is made settled by arbitration in accordance with paragraph C
of Article XI below.
VII. ERRORS, CONTROVERSIES AND INDEMNITIES
A. The Clearing Broker hereby agrees to indemnify, defend and hold
harmless the Introducing Broker and each person, if any, who controls the
Introducing Broker within the meaning of Section 20 of the 1934 Act, from and
against any and all losses, claims, damages, liabilities and expenses, including
attorneys' fees and costs, arising out of the bad faith, gross negligence or
criminal acts or omissions on the part of any of the Clearing Broker's
directors, officers, or employees with respect to the services provided by the
Clearing Broker under this Agreement.
B. The Introducing Broker hereby agrees to indemnify, defend and hold
harmless the Clearing Broker and each person, if any, who controls the Clearing
Broker within the meaning of Section 20 of the 1934 Act from and against any and
all losses, claims, damages, liabilities and expenses, including attorneys' fees
and costs, arising out of one or more of the following:
1. Failure of any Introduced Account to make timely payment
for the securities purchased by it or timely and good delivery of securities
sold for it, the existence in any Introduced Account of any unsecured debit or
unsecured short position, or the failure of any Introduced Account timely to
comply with margin or margin maintenance calls (if such calls are timely made by
the Clearing Broker), whether or not any margin extensions have been granted by
the Clearing Broker and whether or not such extensions have been requested by
the Introducing Broker;
2. Any check or draft given to the Clearing Broker by any
Introduced Account being returned to the Clearing Broker unpaid or any delivery
versus payment or receipt versus payment transaction being rejected by any
Customer (or its agent);
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3. Failure of the Introducing Broker to properly perform its
duties, obligations and responsibilities as set forth in this Agreement;
provided, however, that the participation of any employee of the Clearing Broker
in any transactions referred to herein shall not affect the Introducing Broker's
Indemnification obligations hereunder unless such participation by such employee
of the Clearing Broker was in bad faith or grossly negligent;
4. Any dishonest, fraudulent, negligent or criminal act or
omission on the part of any of the Introducing Broker's officers, partners,
employees, registered representatives, agents or Customers;
5. All claims or disputes between the Introducing Broker and
its customers with respect to the matters set forth in this Agreement, it being
understood and agreed: (A) that the Introducing Broker guarantees the validity
of Customer orders in the form such orders are transmitted to the Clearing
Broker by the Introducing Broker and guarantees to the Clearing Broker that each
Customer will promptly and fully perform its commitments and obligations with
respect to all transactions in its accounts carried by the Clearing Broker and
(B) that checks received by the Clearing Broker from the Introducing Broker's
Customers shall not constitute payment until the proceeds have actually been
received and credited to the Clearing Broker by its bank;
6. Any adverse claims with respect to any Customer securities
delivered to or cleared by the Clearing Broker, it being understood and agreed
that the clearing Broker shall be deemed to be an intermediary between the
Introducing Broker and its Customers, and the Clearing Broker shall be deemed to
make no representations or warranties other than as provided in Section 8-306(3)
of the Uniform Commercial Code;
7. The default by any over-the-counter contra broker with whom
the Introducing Broker deals on a principal basis, giving the Clearing Broker
for clearance;
8. The default by any third-party contra broker with whom the
Introducing Broker rather than the Clearing Broker executes a transaction for
itself or a Customer;
9. A claim by any third-party or contra broker arising out of
the Clearing Broker's rejection of any transaction pursuant to Article III of
this Agreement;
10. The breach by the Introducing Broker of any representation
or warranty made by it under this Agreement;
11. The Clearing Broker's guarantee of any signatures with
respect to transactions in the accounts of any customers; and
12. The failure of any Customers to fulfill their obligations
to the Introducing Broker or to the Clearing Broker, whether or not such failure
is within the Introducing Broker's control.
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C. In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to this Article VII, such person (hereinafter called the
indemnified party) shall promptly notify the person against whom such indemnity
may be sought (hereinafter called the indemnifying party) in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
satisfactory to the indemnified party to represent the indemnified party. It is
understood that the indemnifying party shall not, in connection with any
proceeding or related proceedings in the same jurisdiction, be liable for the
reasonable fees and expenses of more than one separate firm (in addition to any
local counsel) for all such indemnified parties, and that all such fees and
expenses shall be reimbursed as they are incurred. The indemnifying party shall
not be liable for any settlement of any proceeding effected without its written
consent, but if settled with such consent or if there be a final judgment for
the plaintiff, the indemnifying party agrees to indemnify the indemnified party
from and against any loss or liability by reason of such settlement or judgment.
Notwithstanding the foregoing sentence, if at any time an indemnified party
shall have requested an indemnifying party to reimburse the indemnified party
for fees and expenses of counsel as contemplated in this Section, the
indemnifying party agrees that it shall be liable for any settlement of any
proceeding effected without its written consent if (1) such settlement is
entered into more than thirty (30) days after receipt by such indemnifying party
of the aforesaid request and (ii) such indemnifying party shall not have
reimbursed the indemnified party in accordance with such request prior to the
date of such settlement. No indemnifying party shall, without the prior written
consent of the indemnified party, effect any settlement of any pending or
threatened proceeding in respect of which any indemnified party is or could have
been a party and indemnity could have been sought hereunder by such indemnified
party, unless such settlement includes an unconditional release of such
indemnified party from all liability on claims that are the subject matter of
such proceeding.
D. The indemnification provisions in this Article VII, and the
indemnification provisions embodied within Article III hereof, shall remain
operative and in full force and effect, regardless of the termination of this
Agreement, and shall survive any such termination.
E. In no event shall the Clearing Broker be responsible to the
Introducing Broker, to any of its Customers or to any other person for indirect
or consequential damages arising out of any actual or alleged failure by the
Clearing Broker to perform the functions or provide the services to the
Introducing Broker required by this Agreement, even if notified of the
possibility thereof. The Clearing Broker's sole responsibility and liability for
any such actual or alleged failure will be to the Introducing Broker and only to
the extent expressly provided by this Agreement.
VIII. ADDITIONAL REPRESENTATIONS AND WARRANTIES
A. The Introducing Broker represents, warrants, and covenants as
follows:
1. The Introducing Broker shall (a) maintain at all times a
net capital computed in accordance with Rule 15c3-1 of the 1934 Act of at least
$100,000 except during periods when it is in an underwriting syndicate, when it
shall have not less than $1,000,000 of net capital and (b) immediately notify
the Clearing Broker when (i) its net capital is less than the amount set forth
in (a)
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above, (ii) its Aggregate Indebtedness Ratio reaches or exceeds 10 to 1, or
(iii) if the Introducing Broker has elected to operate under paragraph (f) of
Rule 15c3-1, when its net capital is less than 5% of aggregate debit items
computed in accordance with Rule 15c3-3.
2. The Introducing Broker is a member in good standing of the
NASD. The Introducing Broker agrees to promptly notify the Clearing Broker of
any additional exchange memberships or affiliations. The Introducing Broker
shall also comply with whatever non-member access rules have been promulgated by
any National Securities Exchange or any other securities exchange of which it is
not a member.
3. The Introducing Broker is and during the term of this
Agreement will remain duly registered or licensed and in good standing as a
broker-dealer under all applicable laws and Regulations.
4. The Introducing Broker has all the requisite authority in
conformity with all applicable Rules to enter into this Agreement and to retain
the services of the Clearing Broker in accordance with the terms hereof and has
taken all necessary action to authorize the execution of this Agreement and the
performance of the obligations hereunder.
5. The Introducing Broker is in compliance, and during the
term of this Agreement will remain in compliance with (i) the capital and
financial reporting requirements of every National Securities Exchange or other
securities exchange and/or securities association of which it is a member, (ii)
the capital requirements of the SEC, and (iii) the capital requirements of every
state in which it is licensed as a broker-dealer.
6. The Introducing Broker shall keep confidential any
confidential information the Introducing Broker may acquire as a result of this
Agreement regarding the business and affairs of the Clearing Broker, which
requirement shall survive the life of this Agreement.
7. The Introducing Broker warrants and represents that all
transactions introduced to the Clearing Broker on behalf of an Introduced
Account are authorized by the Introduced Account.
8. All orders or transactions for Introduced Accounts shall
comply in all respects with the Laws, Regulations, Rules and Standards.
9. The Introducing Broker shall not generate and/or prepare
any statements, bills, or confirmations respecting any Introduced Account unless
expressly authorized to do so in writing by the Clearing Broker.
10. The Introducing Broker shall maintain a $250,000 blanket
brokers bond insurance policy covering any and all acts of its employees,
agents, and partners to protect and indemnify the Clearing Broker against any
loss, liability, damage, cost or expense (including but not
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otherwise limited to fees and expenses of legal counsel) that the Clearing
Broker may suffer or incur, directly or indirectly, as a result of any act of
the Introducing Broker's employees, agents, or partners.
11. The Introducing Broker agrees that the Clearing Broker
shall be its only clearing agent and that all transactions, in any customer or
proprietary account serviced by the Introducing Broker, shall be cleared
exclusively through the Clearing Broker.
B. The Clearing Broker represents, warrants, and covenants as follows:
1. The Clearing Broker is a member in good standing of the
NASD.
2. The Clearing Broker is and during the term of this
Agreement will remain duly licensed and in good standing as a broker-dealer
under all applicable laws and Regulations.
3. The Clearing Broker has all the requisite authority, in
conformity with all applicable Rules, Standards, Laws and Regulations to enter
into and perform this Agreement and has taken all necessary action to authorize
the execution of this Agreement and the performance of the obligations
hereunder.
4. The Clearing Broker is in compliance, and during the term
of this Agreement will remain in compliance with (i) the capital and financial
report reporting requirements of every National Securities Exchange and/or other
securities exchange or association of which it is a member, (ii) the capital
requirements of the SEC, and (iii) the capital requirements of every state in
which it is licensed as a broker-dealer.
5. The Clearing Broker represents and warrants that the names
and addresses of the customers of the Introducing Broker that have or may come
to its attention in connection with the clearing and related functions it has
assumed under this Agreement are confidential and shall not be utilized by the
Clearing Broker except in connection with the functions performed by the
Clearing Broker pursuant to this Agreement. Notwithstanding the foregoing,
should an Introduced Account request, on an unsolicited basis, that the Clearing
Broker become its broker, acceptance of such Introduced Account by the Clearing
Broker shall in no way violate this representation and warranty, nor result in a
breach of this Agreement.
6. The Clearing Broker shall keep confidential any
confidential information it may acquire as a result of this Agreement regarding
business and affairs of the Introducing Broker, which requirement shall survive
the life of this Agreement.
IX. TERM
Subject to the provisions of Article X hereof, the term of this
Agreement shall be a period of eighteen months from the date hereof, and shall
renew automatically for successive one (1) year terms unless terminated in
accordance with Article X hereof.
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X. TERMINATION
A. Notwithstanding any provision of this Agreement, the following
events or occurrences shall constitute an Event of Default under this Agreement:
1. Either party hereto shall fail to perform or observe any
term, covenant, or condition to be performed hereunder (including, but not
limited to, any representation, warranty, or covenant relating to net capital
requirements) and such failure shall continue to be unremedied for a period of
ten (10) days after receipt of written notice from the nondefaulting party to
the defaulting party specifying the failure and demanding that the same be
remedied; or
2. Any representation or warranty made by either party hereto
shall prove to be incorrect at any time in any material respect; or
3. A receiver, liquidator, or trustee of either party hereto
or of any property held by either party, is appointed by court order and such
order remains in effect for more than 30 days; or either party is adjudicated
bankrupt or insolvent; or a substantial amount of property of either party is
sequestered by court order and such order remains in effect for more than 30
days; or a petition is filed against either party under any bankruptcy,
reorganization, arrangement, insolvency, readjustment of debt, dissolution or
liquidation law of any jurisdiction, whether now or hereafter in effect, and is
not dismissed within 30 days after such filings; or
4. Either party hereto files a petition in voluntary
bankruptcy or seeks relief under any provision of any bankruptcy,
reorganization, arrangement, insolvency, readjustment of debt, dissolution or
liquidation law of any jurisdiction, whether now or hereafter in effect, or
consents to the filing of any petition against it under any such law; or
5. Either party hereto makes an assignment for the benefit of
its creditors, or admits in writing its inability to pay its debts generally as
they become due, or consents to the appointment of a receiver, trustee or
liquidator of either party, or of any property held by either party; or
6. Either party hereto is enjoined, disabled, suspended,
prohibited, or otherwise unable to engage in the securities business as a result
of any administrative or judicial proceeding or action by the SEC, any state
securities law administrator, any National Securities Exchange, or any
self-regulatory organization having jurisdiction over that party.
B. Upon the occurrence of any such Event of Default, the nondefaulting
party may, at its option, by notice to the defaulting party declare that this
Agreement shall be thereby terminated and such termination shall be effective as
of the date such notice has been communicated to the defaulting party, If the
Introducing Broker defaults, the Clearing Broker shall have sole discretion to
determine what orders, if any, it shall accept for any Introduced Account, and
shall in addition to all rights it has under this Agreement, have all rights
granted to it under the Cash Account Agreement and Margin
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Agreement incorporated by reference herein. In such event, the Clearing Broker
shall be entitled, upon the consent of the Customer, to accept instructions
directly from the Customer.
C. This Agreement may be canceled by either of the parties hereto upon
180 days' written notice to the other, provided, however, that the first date
such written notice may be given is January 1, 2000.
D. This Agreement shall terminate automatically on the effective date
of termination of the Execution Agreement between the Introducing Broker and W &
D, Inc. without any further action by either party hereto.
E. Upon any termination of this Agreement for any reason whatsoever,
the Supplemental Account Agreement between the Clearing Broker and the
Introducing Broker relating to the Introducing Broker's use of Optimark services
shall terminate automatically without any further action by either party hereto.
XI. MISCELLANEOUS
A. This Agreement supersedes any previous agreement and may be modified
only by a writing signed by both parties to this Agreement. Such modification
shall not be deemed to be a cancellation of this Agreement.
B. This Agreement shall be submitted to and/or approved by any National
Securities Exchange, or other regulatory and self-regulatory bodies vested with
the authority to review and/or approve this Agreement or any amendment or
modifications hereof. In the event of any such disapproval, the parties hereto
agree to bargain in good faith to achieve the requisite approval.
C. Any dispute or controversy between the Introducing Broker and the
Clearing Broker relating to or arising out of their relationship or this
Agreement shall be settled by arbitration before and under the Code of
Arbitration Procedures of the NASD, unless the transaction which gave rise to
such dispute or controversy was effected in another exchange or market which
provides arbitration facilities, in which case it shall be settled by
arbitration under such facilities.
D. This Agreement shall be binding upon all successors, assigns or
transferees of both parties hereto, irrespective of any change with regard to
the name of or the personnel of the Introducing Broker or the Clearing Broker.
Any assignment of this Agreement shall be subject to the requisite review and/or
approval of any regulatory or self-regulatory agency or body whose review and/or
approval must be obtained prior to the effectiveness and validity of such
assignment. No assignment of this Agreement by the Introducing Broker shall be
valid unless the Clearing Broker consents to such an assignment in writing. Any
assignment by the Clearing Broker to any subsidiary that it may create or
acquire or controlled directly or indirectly by the Clearing Broker will be
deemed valid and enforceable in the absence of any consent from the Introducing
Broker. Neither this Agreement nor any operation hereunder is intended to be,
shall not be deemed to be, and shall not be treated as a general
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or limited partnership, association or joint venture or agency relationship
between the Introducing Broker and the Clearing Broker.
E. The construction and effect of every provision of this Agreement,
the rights of the parties hereunder and any questions arising out of the
Agreement, shall be subject to the statutory and common law of the State of New
York without reference to the conflict of law provisions thereof.
F. The headings preceding the text, articles, and sections hereof have
been inserted for convenience and reference only and shall not be construed to
affect the meaning, construction, or effect of this Agreement.
G. This Agreement shall cover only the types of services set forth
herein and is in no way intended nor shall it be construed to bestow upon the
Introducing Broker any special treatment regarding any other arrangements,
agreements or understandings that presently exist or which may hereafter exist
between the Introducing Broker and the Clearing Broker and any affiliate or the
Clearing Broker. The Introducing Broker shall be under no obligation whatsoever
to deal with the Clearing Broker or any of its subsidiaries or any companies
controlled directly or indirectly by or affiliated with the Clearing Broker, in
any capacity other than as set forth in this Agreement. Similarly, the Clearing
Broker shall be under no obligation whatsoever to deal with the Introducing
Broker or any of its affiliates in any capacity other than as set forth in this
Agreement.
H. If any provision or condition of this Agreement shall be held to be
invalid or unenforceable by any court, or regulatory or self-regulatory agency
or body, such invalidity or unenforceability shall attach only to such provision
or condition. The validity of the remaining provisions and conditions shall not
be affected thereby and this Agreement shall be carried out as if any such
invalid or unenforceable provision or condition were not contained herein.
I. The enumeration herein of specific remedies shall not be exclusive
of any other remedies. Any delay or failure by any party to this Agreement to
exercise any right, power, remedy or privilege herein contained, or now or
hereafter existing under any applicable statute or law, shall not be construed
to be a waiver of such right, power, remedy or privilege or to limit the
exercise of such right, power, remedy or privilege. No single, partial or other
exercise of any such right, power, remedy or privilege shall preclude the
further exercise thereof or the exercise of any other right, power, remedy or
privilege.
J. All notices, consents, directions, approvals, restrictions,
requests, or other communications required or permitted to be delivered
hereunder shall be given to the parties hereto, effective upon delivery, as
follows:
If to the Clearing Broker: Jefferies & Company, Inc.
11100 Santa Monica Boulevard
11th Floor
Los Angeles, CA 90025
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Attention: Jerry M. Gluck, Esq.
If to the Introducing Broker: ITG Inc.
380 Madison Avenue
4th Floor
New York, NY 10017
Attention: Timothy H. Hosking
Either party may change its address for notice purposes by giving written notice
pursuant to registered mail of the new address to the other party. Termination
shall not affect any of the rights and liabilities of the parties hereof
incurred before the date of receipt of such notice of termination.
K. The Clearing Broker shall not be liable for any loss caused,
directly or indirectly, by government restrictions, exchange or market rulings,
suspension of trading, war, strikes or other conditions beyond the control of
the Clearing Broker. In the event that any communications network, data
processing system, or computer system used by the Clearing Broker or by the
Introducing Broker, whether or not owned by the Clearing Broker, is rendered
inoperable, the Clearing Broker shall not be liable to the Introducing Broker
for any loss, liability, claim, damage or expense resulting, either directly or
indirectly, therefrom.
L. The Clearing Broker shall have the right to investigate, or arrange
for an appropriate party to investigate, the Introducing Broker's credit.
Nothing in this paragraph shall be construed to relieve the Introducing Broker
of its obligation to oversee its financial integrity.
M. Without the prior written consent of the Clearing Broker, the
Introducing Broker will not during the period of this Agreement and for one year
following its termination, hire or attempt to hire any person who is employed by
the Clearing Broker or whose employment with the Clearing Broker terminated
within the one-year period prior to the termination of this Agreement.
Made and executed at New York, New York, on the date first hereinabove set
forth.
ITG INC. JEFFERIES & COMPANY, INC.
By: /S/ RAYMOND L. KILLIAN, JR. By: /S/ CLARENCE T. SCHMITZ
------------------------------ ------------------------------
Raymond L. Killian, JR. . Clarence T. Schmitz
Chairman, Chief Executive Executive Vice President
Officer and President
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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
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JEFG Pension Plan, as amended in the manner set forth in Exhibit A and including
the provision for lump sum distributions to JEFG Employees, JEFG Employees shall
be allowed to receive distributions, including lump sum distributions, of their
entire benefit under the JEFG Pension Plan in accordance with the terms of the
JEFG Pension Plan, as amended as set forth in Exhibit A. Following the Effective
Time and the receipt by Holdings of the favorable Internal Revenue Service
determination letter referred to above and approximately two weeks prior the
date benefits are expected to be payable to all JEFG Employees from the JEFG
Pension Plan, JEFG will pay to the JEFG Pension Plan an amount, computed as set
forth below, in order to pay for the underfunding of the JEFG Pension Plan
allocable to JEFG Employees for benefits accrued through December 31, 1998.
First, the lump sum equivalent of all benefits accrued as of January 1, 1999
under the JEFG Pension Plan, as amended as set forth in Exhibit A, will be
calculated for all participants using a discount rate equal to 5.25%, compounded
annually (the GATT interest rate for November, 1998) and the mortality table
described in Rev. Rul. 95-6. The "JEFG LIABILITY PERCENTAGE" will then be
determined by dividing the aggregate lump sum value of the accrued benefits, as
so computed as of January 1, 1999, of the JEFG Employees by the total of the
aggregate lump sum value of all such accrued benefits as so computed for all
participants. The amount of the payment which JEFG is required to make to the
JEFG Pension Plan pursuant to this Section 3.03(a) will be the total of the
following: (i) the total benefit due the JEFG Employees, calculated as of the
date of actual distribution (using the GATT interest rate in effect for November
of the plan year immediately prior to the year benefits are actually distributed
and the mortality table described in Rev. Rul. 95-6), less (ii) the actual value
of the assets of the JEFG Pension Plan as of the last day of the month in which
the determination letter referred to above is received from the Internal Revenue
Service (as such value is reported by the trustee of the JEFG Pension Plan)
multiplied by the JEFG Liability Percentage, less (iii) the amount of the
benefits accrued by JEFG Employees between January 1, 1999 and February 15,
1999, determined as set forth in clause (i) above, plus (iv) interest for 30
days on such resulting amount (the clause (i) amount less the amounts of clauses
(ii) and (iii)) at the GATT interest rate in effect at the time of such
calculation. Holding shall administer the payment of such distributions in
accordance with the terms of the JEFG Pension Plan, ERISA and the Code. The
entire accrued benefit under the JEFG Pension Plan of each JEFG Employee who is
actively employed on December 31, 1998 shall be fully vested as of December 31,
1998. In the event the Internal Revenue Service, as a condition to issuing a
favorable determination letter, requires Holding to revise the amendment set
forth in Exhibit A so as to modify the distribution provisions to JEFG
Employees, including any modification that would eliminate the payment of lump
sum distributions to JEFG Employees prior to the time they separate from service
with JEFG, distributions shall be made to JEFG Employees only in accordance with
the JEFG Pension Plan as it may be amended to secure the favorable determination
letter.
Section 3.04. ASSUMPTION OF LIABILITIES UPON TRANSFER OF PLAN ASSETS;
FILINGS.
(a) Effective on the date of the transfer of assets of the JEFG PSP and the
JEFG ESOP to the ITG PSP and/or the ITG ESOP, (i) JEFG and its applicable
benefit plan shall assume all liabilities to pay benefits in connection with the
transferred assets, and (ii) Holding shall have no further liability to pay
benefits with respect to the assets and liabilities that are transferred. On and
after the date of such transfer, the JEFG Group shall have no liability with
respect to Holding's pension, employee stock ownership and profit sharing plans,
and Holding shall have no liability with respect to JEFG's employee stock
ownership and profit sharing plans.
(b) Holding and JEFG shall make the appropriate filings required under the
Code or ERISA in connection with the transfers described in this Article III in
a timely manner. The parties agree that the transfers described in Sections 3.01
and 3.02 shall be made in accordance with Section 414(l) of the Code.
(c) JEFG shall submit to the Internal Revenue Service requests for favorable
determination letters with respect to the tax-qualified status of the ITG PSP,
if adopted, and the ITG ESOP as soon as
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practicable after the Effective Time, and JEFG shall make such amendments to the
plans as may be required by the Internal Revenue Service in order for JEFG to
receive favorable determination letters with respect to the plans.
ARTICLE IV
STOCK OPTION AND OTHER EQUITY-BASED COMPENSATION PLANS
Section 4.01. EMPLOYEE STOCK OPTION PLANS. Holding shall be responsible
for all liabilities relating to stock options granted by JEFG prior to the
Effective Time.
Section 4.02. CAP AND EMPLOYEE STOCK PURCHASE PLANS.
(a) JEFG shall accelerate vesting in the matching contributions to its
Employee Stock Purchase Plan and distribute the JEFG Common Stock in this plan
to participants prior to the Effective Time. Holding shall be responsible for
all liability under the JEFG Employee Stock Purchase Plan.
(b) The disposition of the nonqualified deferred compensation plan of JEFG
(the "CAPITAL ACCUMULATION PLAN FOR KEY EMPLOYEES") shall be as described in the
Unanimous Written Consent of the Board of Directors of JEFG adopted as of
January 13, 1999 (a copy of which is attached as Exhibit B).
ARTICLE V
OTHER EMPLOYEE PLANS
Section 5.01. WELFARE BENEFIT PLANS.
(a) As of the Effective Time, Holding shall assume all liability under
and with respect to all welfare benefit plans maintained by JEFG, including,
without limitation, medical, health, disability, accident, life insurance,
death, dental and other benefit plans or arrangements and such plans shall
be transferred to, and maintained by, Holding. Effective January 1, 1999,
ITGI established welfare benefit plans for eligible JEFG Employees, which
provide medical, health, disability, accident, life insurance, death, dental
or other benefits.
(b) (i) JEFG shall be liable for all employee health (including,
without limitation, medical and dental), life insurance (including, without
limitation, disability waiver of premium claims and any other life insurance
disability claims) and long-term disability claims, and any other welfare
benefit claims, and any expenses related thereto, ("WELFARE CLAIMS") that
are incurred on or after January 1, 1999 with respect to JEFG Employees and
their beneficiaries and dependents.
(ii) Holding shall be liable for all Welfare Claims that are incurred
on, after or before the Effective Time with respect to Holding
Employees and their beneficiaries and dependents.
(iii) If either party pays any welfare benefit claims that are a
liability of the other party, the responsible party shall reimburse
the paying party for all such payments.
(c) For purposes of this Section 5.01, a health benefit claim is
incurred when the medical services are rendered, and a life insurance claim
is incurred when the covered person dies. A claim for a hospital admission
shall be deemed to have been incurred on the date of admission to the
hospital and shall continue for the duration of that period of hospital
confinement; costs for all services provided during that period of hospital
confinement shall be included in the claim. A long-term disability claim
shall be deemed to have been incurred on the date the condition causing the
disability rendered the employee disabled, as determined by the committee or
plan administrator making the determination; costs for all long-term
disability benefits relating to the claim shall be included in the claim.
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(d) Holding shall be liable for any health care continuation
obligations under Section 4980B of the Code and Section 601 through 608 of
ERISA with respect to Holding Employees and former Holding Employees and
persons who are "qualified beneficiaries" (as that term is used in Section
4980B of the Code) of such employees.
(e) The Distribution shall not be considered an event entitling any
employee to salary continuation or other severance benefits.
Section 5.02. VACATION PAY AND SIMILAR ITEMS. Holding shall assume or
retain liability for all unpaid vacation pay, sick pay and personal leave
accrued by Holding Employees as of the Effective Time. JEFG shall assume or
retain liability for all unpaid vacation pay, sick pay and personal leave
accrued by JEFG Employees as of the Effective Time.
ARTICLE VI
HOLDING REPRESENTATIONS
Holding represents to JEFG as follows:
Section 6.01. ANNEX A hereto contains a true and complete list of "all
employee benefit plans" as defined in Section 3(3) of ERlSA, and each other
plan, arrangement or policy relating to stock options, stock purchases,
compensation, deferred compensation, severance, fringe benefits and other
employee benefits which are maintained or contributed to by any member of the
JEFG Group or as to which any member of the JEFG Group has any direct or
indirect, actual or contingent liability, other than plans, arrangements or
policies maintained by the ITGI Group (such JEFG Group plans, arrangements and
policies, the "Benefit Plans"), and copies of such plans, arrangements, policies
and related relevant materials have been made available to ITGI.
Section 6.02. No member of the Holding Group or JEFG Group has incurred,
or is reasonably likely to incur, any material liability under Title IV of ERISA
(other than for PBGC insurance premiums, all of which have been paid when due).
All contributions to any "employee benefit plan" (as defined in Section 3(3) of
ERISA) required to be made by any member of the JEFG Group or the Holding Group
in accordance with the terms of such plan and, when applicable, Section 302 of
ERISA or Section 412 if the Code, have been timely made.
Section 6.03. Each member of the JEFG Group and each Benefit Plan are in
compliance in all material respects with the applicable provisions of ERISA and
the Code. Each Benefit Plan intended to qualify under Section 401 of the Code is
so qualified. With respect to all Benefit Plans, there are no audits,
investigations or claims pending or, to the knowledge of Holding, threatened
(other than routine claims for benefits). There have been no nonexempt
prohibited transactions under the Code or ERISA with respect to any Benefit
Plans. With respect to all Benefit Plans that are welfare plans (as defined in
ERISA Section 3(1)), such plans have complied in all material respects with the
COBRA continuation coverage requirements of Code Section 4980B. No member of the
JEFG Group has any liability with respect to any plans providing benefits with
respect to employees employed outside the United States.
Section 6.04. The consummation of the transactions contemplated by the
Distribution Agreement and this Agreement will not result in JEFG being liable
to any individual for severance pay.
ARTICLE VII
INDEMNIFICATION
Section 7.01. HOLDING INDEMNIFICATION OF THE JEFG GROUP. On or after the
Effective Time, Holding shall indemnify, defend and hold harmless each member of
the JEFG Group, and each of their respective directors, officers, employees and
agents (the "JEFG Indemnitees") from and against any and all claims, costs,
damages, losses, liabilities and expenses (including, without limitation,
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reasonable expenses of investigation and reasonable attorneys fees and expenses
in connection with any and all Actions or threatened Actions) (collectively,
"INDEMNIFIABLE LOSSES") incurred or suffered by any of the JEFG Indemnitees and
arising out of, or due to or otherwise in connection with (x) any of the
employee benefit liabilities and obligations assumed or retained by Holding
pursuant to this Agreement or (y) the failure of Holding or any member of the
Holding Group to pay, perform or otherwise discharge, any of the employee
benefit liabilities and obligations assumed or retained, and representations and
agreements made, by Holding pursuant to this Agreement.
Section 7.02. JEFG INDEMNIFICATION OF HOLDING. On and after the Effective
Time, JEFG shall indemnify, defend and hold harmless Holding, and each of its
respective directors, officers, employees and agents (the "HOLDING INDEMNITEES")
from and against any and all Indemnifiable Losses incurred or suffered by any of
the Holding Indemnitees and arising out of, or due to or otherwise in connection
with (x) any of the employee benefit liabilities and obligations assumed or
retained by JEFG pursuant to the Agreement or (y) the failure of JEFG or any
member of the JEFG Group to pay, perform or otherwise discharge, any of the
employee benefit liabilities and obligations assumed or retained, and agreements
made, by JEFG pursuant to this Agreement.
Section 7.03. INSURANCE AND THIRD PARTY OBLIGATIONS. No insurer or any
other third party shall be (a) entitled to a benefit it would not be entitled to
receive in the absence of the foregoing indemnification provisions, (b) relieved
of the responsibility to pay any claims to which it is obligated or (c) entitled
to any subrogation rights with respect to any obligation hereunder.
ARTICLE VIII
INDEMNIFICATION PROCEDURES
Section 8.01. NOTICE AND PAYMENT OF CLAIMS. If any JEFG or Holding
Indemnitee (the "INDEMNIFIED PARTY") determines that it is or may be entitled to
indemnification by a party (the "INDEMNIFYING PARTY") under Article VII (other
than in connection with any Action or claim subject to Section 8.02), the
Indemnified Party shall deliver to the Indemnifying Party a written notice
specifying, to the extent reasonably practicable, the basis for its claim for
indemnification and the amount for which the Indemnified Party reasonably
believes it is entitled to be indemnified. After the Indemnifying Party shall
been notified of the amount for which the Indemnified Party seeks
indemnification, the Indemnifying Party shall, within 90 days after receipt of
such notice, pay the Indemnified Party such amount in cash or other immediately
available funds (or reach agreement with the Indemnified Party as to a mutually
agreeable alternative payment schedule) unless the Indemnifying Party objects to
the claim for indemnification or the amount thereof. If the Indemnifying Party
does not give the Indemnified Party written notice objecting to such claim and
setting forth the grounds therefor within the same 90 day period, the
Indemnifying Party shall be deemed to have acknowledged its liability for such
claim and the Indemnified Party may exercise any and all of its rights under
applicable law to collect such amount.
Section 8.02. NOTICE AND DEFENSE OF THIRD-PARTY CLAIMS. Promptly following
the earlier of (a) receipt of notice of the commencement by a third party of any
Action against or otherwise involving any Indemnified Party or (b) receipt of
information from a third party alleging the existence of a claim against an
Indemnified Party, in either case, with respect to which indemnification may be
sought pursuant to this Agreement (a "THIRD-PARTY CLAIM"), the Indemnified Party
shall give the Indemnifying Party written notice thereof. The failure of the
Indemnified Party to give notice as provided in this Section 8.02 shall not
relieve the Indemnifying Party of its obligations under this Agreement, except
to the extent that the Indemnifying Party is prejudiced by such failure to give
notice. Within 90 days after receipt of such notice, the Indemnifying Party may
(a) by giving written notice thereof to the Indemnified Party, acknowledge
liability for and at its option elect to assume the defense of such Third-Party
Claim at its sole cost and expense or (b) object to the claim of indemnification
set forth in
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the notice delivered by the Indemnified Party pursuant to the first sentence of
this Section 8.02; provided that if the Indemnifying Party does not within the
same 90 day period give the Indemnified Party written notice objecting to such
claim and setting forth the grounds therefor or electing to assume the defense,
the Indemnifying Party shall be deemed to have acknowledged, as between the
parties hereto, its liability for such Third-Party Claim. Any contest of a Third
Party Claim as to which the Indemnifying Party has elected to assume the defense
shall be conducted by attorneys employed by the Indemnifying Party and
reasonably satisfactory to the Indemnified Party; provided that the Indemnified
Party shall have the right to participate in such proceedings and to be
represented by attorneys of its own choosing at the Indemnified Party's sole
cost and expense. Notwithstanding the foregoing, (i) the Indemnifying Party
shall not be entitled to assume the defense of any Third-Party Claim (and shall
be liable to the Indemnified Party for the reasonable fees and expenses incurred
by the Indemnified Party in defending such Third-Party Claim) if there are one
or more legal defenses available only to the Indemnified Party that conflict, in
one or more significant substantive respects, with those available to the
Indemnifying Party with respect to such Third-Party Claim and (ii) if at any
time after assuming the defense of a Third-Party Claim an Indemnifying Party
shall fail to prosecute or shall withdraw from the defense of such Third-Party
Claim, the Indemnified Party shall be entitled to resume the defense thereof
with counsel selected by such Indemnified Party and the Indemnifying Party shall
be liable for the reasonable fees and expenses of counsel incurred by the
Indemnified Party in such defense. The Indemnifying Party may settle, compromise
or discharge a Third-Party Claim, provided, the Indemnifying Party shall have
obtained the prior written consent of the Indemnified Party, which consent shall
not be unreasonably withheld. If, after receipt of notice of a Third-Party
Claim, the Indemnifying Party does not undertake to defend such Third-Party
Claim within 90 days of such notice, the Indemnified Party may, but shall have
no obligation to, contest any lawsuit or action with respect to such Third-Party
Claim and the Indemnifying Party shall be bound by the results obtained with
respect thereto by the Indemnified Party. Indemnification shall be made by
periodic payments of the amount thereof during the course of the investigation
or defense, as and when bills are received or Indemnifiable Loss is incurred.
The parties agree to render to each other such assistance as may reasonably be
requested in order to ensure the proper and adequate defense of any Third-Party
Claim. The remedies provided in this Article VIII shall be cumulative and shall
not preclude assertion by any Indemnified Party of any other rights or the
seeking of any and all other remedies against any Indemnifying Party.
Section 8.03. CONTRIBUTION. To the extent that any indemnification
provided for in Section 7.01 or 7.02 is unavailable to an Indemnified Party or
is insufficient in respect of any of the Indemnifiable Losses of such
Indemnified Party, then the Indemnifying Party, in lieu of, or in addition to,
indemnifying such Indemnified Party hereunder, shall contribute to the amount
paid or payable by such Indemnified Party as a result of such Indemnifiable
Losses (i) in such proportion as is appropriate to reflect the relative benefits
received by such Indemnifying Party on the one hand and the Indemnified Party on
the other hand from the transaction or other matter which resulted in the
Indemnifiable Losses or (ii) if the allocation provided by clause (i) above is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause (i) but also the relative
fault of the Indemnifying Party on the one hand and of the Indemnified Party on
the other hand in connection with the action, inaction, statements or omissions
that resulted from such Indemnifiable Losses as well as any other relevant
equitable considerations.
ARTICLE IX
MISCELLANEOUS
Section 9.01. NOTICES. All notices and communications under this Agreement
shall be in writing and any communication or delivery hereunder shall be deemed
to have been duly given when received
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addressed as follows:If to JEFG, to:
Investment Technology Group, Inc.
380 Madison Avenue, 4th Floor
New York, New York 10017
Attention: Chief Financial Officer
With a copy to:
Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005
Attention: Immanuel Kohn, Esq.
If to Holding, to:
Jefferies Group, Inc.
JEF Holding Company, Inc.
11100 Santa Monica Boulevard, 11th Floor
Los Angeles, California 90025
Attention: Chief Financial Officer
With a copy to:
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103
Attention: Brian J. Lynch, Esq.
Such notices shall be deemed received (i) as of the date of delivery by hand
delivery, (ii) one business day after such notice is given to a national
overnight delivery service or (iii) five business days after placed in the
United States mail, provided such mail is sent by certified mail with return
receipt requested. Either party may, by written notice so delivered to the other
party, change the address to which delivery of any notice shall thereafter be
made.
Section 9.02. AMENDMENT AND WAIVER. This Agreement may not be altered or
amended, nor may rights hereunder be waived, except by an instrument in writing
executed by the party or parties to be charged with such amendment or waiver and
by ITGI. No waiver of any terms, provision or condition of or failure to
exercise or delay in exercising any rights or remedies under this Agreement, in
any one or more instances, shall be deemed to be, or construed as, a further or
continuing waiver of any such term, provision, condition, right or remedy or as
a waiver of any other term, provision or condition of this Agreement.
Section 9.03. ENTIRE AGREEMENT. This Agreement, together with the
Distribution Agreement, constitutes the entire understanding of the parties
hereto with respect to the subject matter hereof, superseding all negotiations,
prior discussions and prior agreements and understandings relating to such
subject matter. To the extent that the provisions of this Agreement are
inconsistent with the provisions of the Distribution Agreement, the provisions
of this Agreement shall prevail.
Section 9.04. PARTIES IN INTEREST. Neither of the parties hereto may
assign its rights or delegate any of its duties under this Agreement without the
prior written consent of each other party and of ITGI. This Agreement shall be
binding upon, and shall inure to the benefit of, the parties hereto and
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their respective successors and permitted assigns. Nothing contained in this
Agreement, express or implied, is intended to confer any benefits, rights or
remedies upon any person or entity other than members of the JEFG Group and
Holding, and the JEFG Indemnitees and Holding Indemnitees and their respective
successors and assigns under Articles VII and VIII hereof.
Section 9.05. FURTHER ASSURANCES AND CONSENTS. In addition to the actions
specifically provided for elsewhere in this Agreement, each of the parties
hereto will use its reasonable efforts to (i) execute and deliver such further
instruments and documents and take such other actions as any other party may
reasonably request in order to effectuate the purposes of this Agreement and to
carry out the terms hereof and (ii) take, or cause to be taken, all actions, and
to do, or cause to be done, all things, reasonably necessary, proper or
advisable under applicable laws, regulations and agreements or otherwise to
consummate and make effective the transactions contemplated by this Agreement,
including, without limitation, using its reasonable efforts to obtain any
consents and approvals and to make any filings and applications necessary or
desirable in order to consummate the transactions contemplated by this
Agreement.
Section 9.06. SEVERABILITY. The provisions of this Agreement are severable
and should any provision hereof be void, voidable or unenforceable under any
applicable law, such provision shall not affect or invalidate any other
provision of this Agreement, which shall continue to govern the relative rights
and duties of the parties as though such void, voidable or unenforceable
provision were not part hereof.
Section 9.07. EXPRESS THIRD-PARTY BENEFICIARY. Prior to the Merger, ITGI
is an express third party beneficiary of this Agreement and shall be entitled to
enforce the provisions hereof as if a party hereto.
Section 9.08. GOVERNING LAW. This Agreement shall be construed in
accordance with, and governed by, the laws of the State of New York, without
regard to the conflicts of law rules of such state.
Section 9.09. COUNTERPARTS. This Agreement may be executed in one or more
counterparts each of which shall be deemed an original instrument, but all of
which together shall constitute but one and the same Agreement.
Section 9.10. DISPUTES. Resolution of any and all disputes arising from or
in connection with this Agreement, whether based on contract, tort, statute or
otherwise, including, but not limited to, disputes in connection with claims by
third parties shall be exclusively governed by and settled in accordance with
provisions identical to those set forth in Section 11.10 of the Distribution
Agreement, which Section is hereby incorporated by this reference.
Section 9.11. Holding will provide to ITGI, as soon as practicable
following its request, any information reasonably needed by ITGI relating to any
of the employee benefit plans referred to in this Agreement. In addition, as
soon as practicable following the Effective Time Holding will provide to ITGI
copies of all domestic relations orders received with respect to JEFG Employees
in connection with the JEFG ESOP, the JEFG PSP and the JEFG Pension Plan.
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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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AMENDED AND RESTATED TAX SHARING AGREEMENT
THIS AGREEMENT is entered into as of the 17th day of March, 1999, by and
among JEFFERIES GROUP, INC., a Delaware corporation ("JEFG") , JEF HOLDING
COMPANY, INC., a Delaware corporation ("HOLDING"), and INVESTMENT TECHNOLOGY
GROUP, INC., a Delaware corporation ("ITGI").
WITNESSETH:
WHEREAS, as of January 1, 1994, JEFG and ITGI entered into a tax sharing
agreement to define the method by which Federal, state and local income and
franchise taxes would be allocated between JEFG as the common parent and ITGI as
a subsidiary of JEFG (the "1994 Tax Sharing Agreement"); and
WHEREAS, the JEFG Board of Directors has determined that it is appropriate
and desirable to distribute all of the shares of HOLDING common stock that it
owns to the holders of JEFG common stock (the "Distribution") in a transaction
intended to qualify as a tax-free distribution for federal income tax purposes
under Section 355 of the Internal Revenue Code of 1986, as amended (the "Code");
and
WHEREAS, JEFG has applied to the Internal Revenue Service for a private
letter ruling (the "Ruling") to the effect that the Distribution will qualify as
a tax-free distribution for federal income tax purposes under Section 355 of the
Code; and
WHEREAS, ITGI will be the principal subsidiary of JEFG immediately after
the Distribution; and
<PAGE>
WHEREAS, it is intended that ITGI will merge with and into JEFG
following the Distribution (the "Merger"); and
WHEREAS, it is intended that HOLDING and its subsidiaries will
accordingly cease to be members of the affiliated group (within the meaning of
Section 1504(a) of the Code) of which JEFG is the common parent, effective on or
about [April 27, 1999] (the "Effective Date"); and
WHEREAS, JEFG, HOLDING and ITGI have entered into a tax sharing and
indemnification agreement, dated as of March 17, 1999, which is to apply
only to the 1999 taxable year (the "Tax Sharing and Indemnification Agreement");
and
WHEREAS, the parties desire to amend the 1994 Tax Sharing Agreement in
certain respects, including but not limited to the addition of HOLDING as a
party and the exclusion of the 1999 taxable year (the "1999 Taxable Year") and
all subsequent taxable years from its coverage, and to restate the 1994 Tax
Sharing Agreement in its entirety,
NOW, THEREFORE, in consideration of the foregoing and of the mutual
promises, covenants and conditions hereinafter contained, the parties hereto
agree that the 1994 Tax Sharing Agreement is hereby amended and restated in its
entirety as follows:
1. DEFINITIONS
The following terms as used in this Agreement shall have the meanings
set forth below:
(a) "Additional Amount" shall mean the amount determined under
Section 3 hereof.
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(b) "Consolidated Return" shall mean a consolidated Federal
income tax return filed pursuant to Section 1501 of the Code.
(c) "Consolidated Taxable Income" shall mean the consolidated
Federal taxable income of the JEFG Group for any taxable year for which the JEFG
Group files a Consolidated Return.
(d) "Consolidated Tax Liability" shall mean the consolidated
Federal income tax liability of the JEFG Group for any taxable year for which
the JEFG Group files a Consolidated Return.
(e) "IRS" shall mean the Internal Revenue Service.
(f) "JEFG Group" shall mean the affiliated group of corporations
of which JEFG is the common parent. In the event that the merger takes place as
contemplated and JEFG changes its name to Investment Technology Group, Inc.
("New ITGI"), the term "JEFG Group" shall include the affiliated group of
corporations of which New ITGI is the common parent.
(g) "Loss Amount" shall mean the amount determined under Section
2 hereof.
(h) "Member" shall mean each includible member of the JEFG Group.
(i) "Regulations" shall mean the Treasury Regulations as in
effect from time to time.
(j) "Separate Return Tax Liability" shall mean the Federal income
tax liability of a Member and its subsidiaries computed as if they had filed a
separate Federal income
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tax return for the applicable taxable year with the modifications set forth in
Section 1.1552-1(a)(2)(ii) of the Regulations. If the computation of a Member's
Separate Return Tax Liability as provided herein does not result in a positive
amount, such Member's Separate Return Tax Liability shall be deemed to be zero.
(k) "Separate Taxable Income" shall mean an amount determined
with respect to a Member and its subsidiaries in accordance with Section
1.1502-12 of the Regulations with the adjustments contained in Section
1.1552-1(a)(1)(ii) of the Regulations. If the computation of a Member's Separate
Taxable Income as provided herein does not result in a positive amount, such
Member's Separate Taxable Income shall be deemed to be zero.
(l) "Separate Tax Liability" shall mean the amount determined
under Section 2 hereof.
2. SEPARATE TAX LIABILITY
(a) The Separate Tax Liability of ITGI for each taxable year
shall be the amount set forth in paragraph (b) hereof as modified by paragraphs
(c) and (d) hereof.
(b) The amount referred to in this paragraph (b) shall be an
amount equal to that portion of the Consolidated Tax Liability for such taxable
year that the Separate Taxable Income of ITGI for such taxable year bears to the
sum of the Separate Taxable Incomes of all Members for such taxable year;
PROVIDED, HOWEVER, that such amount shall not exceed the Consolidated Tax
Liability for such taxable year.
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(c) The amount computed pursuant to paragraph (b) above shall be
increased by 100% of the excess, if any, of the ITGI Separate Return Tax
Liability for such taxable year over such amount (the "Loss Amount").
(d) Any federal, state or local income tax deduction resulting
from (i) the payment to the JEFG Pension Plan described in Section 3.03(a) of
the Benefits Agreement (or from benefits distributions related thereto), or (ii)
the payment of benefits under the JEFG CAP Plan to JEFG employees (each as
defined in the Benefits Agreement), shall be for the benefit of ITGI (and the
JEFG Group after the Distribution) and not for the benefit of HOLDING.
3. ADDITIONAL AMOUNT
The Additional Amount for each taxable year shall be equal to
100% of the amount, if any, by which the Consolidated Tax Liability has been
decreased by reason of the inclusion of ITGI and its subsidiaries in the JEFG
Group for such taxable year.
4. FILING AND PAYMENTS
(a) HOLDING shall file or cause to be filed the Consolidated
Return for the JEFG Group for the 1998 taxable year.
(b) JEFG shall file or cause to be filed the Consolidated Return
for the JEFG Group for all taxable periods covered under this Agreement other
than the 1998 taxable year.
(c) For any taxable year, payment of (i) the Separate Tax
Liability of ITGI by ITGI (less any Loss Amount paid to HOLDING) to JEFG (or to
the IRS after the
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Merger), (ii) the excess of the Consolidated Liability over the amount described
in (i) (the "Holding Liability") by HOLDING to JEFG (or to ITGI after the
Merger), (iii) the Additional Amount, if any, by HOLDING to ITGI and (iv) the
Loss Amount, if any, by ITGI to HOLDING with respect to such taxable year shall
be made as follows:
(A) For each taxable year, HOLDING has estimated the
Separate Tax Liability (less any Loss Amount to be paid to HOLDING), the
Holding Liability, the Additional Amount and the Loss Amount for such
taxable year.
(B) ITGI and HOLDING have each paid on or before each of the
due dates for HOLDING to make payment of estimates of JEFG Group's Federal
income taxes for each taxable year one-fourth of the amount estimated
pursuant to paragraph (i) above (collectively, the "Estimated Amounts").
If, after paying any such installment of the Estimated Amounts, HOLDING
made a new estimate, the amount of each remaining installment (if any) was
equal to the amount which would have been payable if the new estimate had
been made when the first estimate for the taxable year was made, increased
or decreased, as applicable, by the amount computed by dividing:
(1) the difference between (1) the amount of the
Estimated Amounts required to be paid before the date on which the new
estimate is made, and (2) the amount of the Estimated Amounts which
would have been required to be paid before such date if the new
estimate had been made when the first estimate was made, by
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(2) the number of installments remaining to be paid on
or after the date on which the new estimate is made.
(d) If, after the end of any taxable year, at the time of the
filing of an application for extension of the time to file the tax return for
such taxable year, if so filed, it is determined that the estimated Separate Tax
Liability of ITGI (less any Loss Amount paid to HOLDING), Holding Liability,
Additional Amount or Loss Amount for such taxable period exceeds the aggregate
amount paid pursuant to subparagraph (c), with respect to such taxable period,
then such excess shall be paid on or before the later of (i) the 15th day of the
third month after the end of such taxable period, and (ii) the date on which
such excess is finally determined, which shall be no later than 30 days after
the extension for such taxable period is filed.
(e) If, after the end of each taxable year with respect to which
HOLDING or JEFG filed a Consolidated Return pursuant to this Agreement, it is
determined that the actual Separate Tax Liability of ITGI (less any Loss Amount
paid to HOLDING), Holding Liability, Additional Amount or Loss Amount for such
taxable period exceeds the aggregate amount paid pursuant to subparagraph (c)
and (d), with respect to such taxable period, then such excess shall be paid on
or before the later of (i) the 15th day of the third month after the end of such
taxable period, and (ii) the date on which such excess is finally determined,
which shall be no later than 30 days after the Consolidated Return for such
taxable period is filed.
(f) If it is determined that the amount paid pursuant to
subparagraphs (c), (d), or (e) above with respect to any taxable period exceeds
the actual Separate Tax Liability of ITGI (less any Loss Amount paid to
HOLDING), Holding Liability, Additional Amount or
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Loss Amount for such taxable period, then such excess shall be repaid on or
before the later of (i) the 15th day of the third month after the end of such
taxable period, and (ii) the date on which such excess is finally determined,
which shall be no later than 30 days after the Consolidated Return for such
taxable period is filed.
5. CARRYBACKS
(a) If the JEFG Group has a consolidated unused investment
credit, a consolidated unused foreign tax credit, a consolidated excess
charitable contribution, a consolidated net capital loss or a consolidated net
operating loss, as such terms are defined in the Regulations (a "Consolidated
Excess Amount") for any taxable year, the portion of such Consolidated Excess
Amount which is attributable to a Member (the "Separate Excess Amount") shall be
computed in accordance with Section 1.1502-79 of the Regulations. Any
consolidated unused research and experimentation credit of the JEFG Group shall
be treated and calculated in a manner consistent with the foregoing sentence,
and shall be included in the term "Consolidated Excess Amount."
(b) If such Consolidated Excess Amount is carried back to a prior
taxable year of the JEFG Group during which ITGI or one of its subsidiaries was
a Member, then the amounts due under this Agreement for such prior taxable year
shall be redetermined by taking into account such Consolidated Excess Amount and
any Separate Excess Amounts allocable to such taxable year.
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(c) Payment of any amount due under this Section 5 shall be made
on the date that a credit or refund is allowed with respect to the taxable year
to which such payment relates.
6. SUBSEQUENT ADJUSTMENTS AND PROCEDURAL MATTERS
(a) If any adjustments (other than adjustments made pursuant to
Section 5 hereof) are made to the income, gains, losses, deductions or credits
of the JEFG Group for a taxable year during which ITGI or one of its
subsidiaries was a member, whether by reason of the filing of an amended return
or a claim for refund with respect to such taxable year or an audit with respect
to such taxable year by the IRS, the amounts due under this Agreement for such
taxable year shall be redetermined by taking into account such adjustments. If,
as a result of such redetermination, any amounts due under this Agreement shall
differ from the amounts previously paid, then payment of such difference shall
be made (a) in the case of an adjustment resulting in a credit or refund, on the
date on which such credit or refund is allowed with respect to such adjustment
or (b) in the case of an adjustment resulting in the assertion of a deficiency,
on the date such deficiency is paid. Any amounts due under this paragraph (a)
shall include any interest attributable thereto computed in accordance with
Sections 6601 or 6611 of the Code, as the case may be, and any penalties or
additional amounts which may be imposed.
(b) If any tax audit is undertaken by any tax authority, HOLDING
shall initially have primary control of any dealings with such tax authority.
Upon a determination that such audit could give rise to an increase in either
HOLDING's or ITGI's liability under this Agreement, then HOLDING or ITGI, as the
case may be shall be given
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primary control of any dealings with such tax authority; provided, however, that
the other party will be consulted with respect to any matters which could result
in an increase in the other party's liability under this Agreement.
(c) If any adjustment or deficiency is proposed, asserted or
assessed by any tax authority which would give rise to an increase in either
HOLDING's or ITGI's liability under this Agreement, then HOLDING or ITGI, as the
case may be, shall have the primary right to contest, compromise or settle any
such adjustment or deficiency; provided, however, that the other party will be
consulted with respect to any matters which could result in an increase in such
other party's liability under this Agreement. If such adjustment or deficiency
would give rise to an increase in both HOLDING's and ITGI's liability under this
Agreement, then HOLDING and ITGI shall jointly have the right to contest,
compromise or settle any such adjustment or deficiency.
7. CARRYBACKS FROM SEPARATE RETURN YEARS
This Agreement shall have no application to the carryback of a
net operating loss or credit from a separate return year (within the meaning of
Section 1.1502-1(e) of the Treasury Regulations) to any taxable year of JEFG
Group, and no recomputation or other payment shall be made in respect of such
carryback.
8. FILING OF CALIFORNIA SINGLE RETURNS
HOLDING may file or cause to be filed a single return for
California franchise and income tax purposes ("California Single Return") for
those affiliated corporations that are includible in a California combined
report (the "JEFG Combined Group") for each of the
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taxable years for which the JEFG Combined Group is required or permitted to file
such a return. To the extent that it qualifies under California law, JEFG shall
be the "key corporation" with respect to any such California Single Return and,
to the extent that it does not so qualify, shall designate a "key corporation"
from among the members of the JEFG Combined Group that does so qualify. Each
party to this Agreement hereby consents to any such designation on behalf of
itself and any direct or indirect subsidiary thereof. With regard to any income
year with respect to which the JEFG Combined Group files, or it is reasonably
anticipated that the JEFG Combined Group will file, a California Single Return
which includes ITGI, the estimated and final California tax liability of each
member of the JEFG Combined Group shall be determined, to the extent permitted
by California law, in a manner consistent with the principles set forth in this
Agreement, and payments of the estimated and final tax liability so determined
shall be made to the key corporation at the time that payments of corresponding
Federal payments are due.
9. FILING OF STATE CONSOLIDATED RETURNS
To the extent permitted or required by the applicable laws of any
state other than California, JEFG and its affiliated corporations (the "state
consolidated group"), at the election of HOLDING in its sole discretion, may
join for any taxable year in the filing of a single, combined or consolidated
franchise or income tax return ("state consolidated return") with any such
corporation required to file a franchise or income tax return in such state for
such taxable year. With regard to any taxable year with respect to which the
state consolidated group files, or it is reasonably anticipated will file, a
state consolidated return which includes ITGI, the
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estimated and final state tax liability of each member of the state consolidated
group shall be determined, to the extent permitted by law of the state in which
the return is to be filed, in a manner consistent with the principles set forth
in this Agreement, and payments of the estimated and final tax liability so
determined shall be made to the member of the state consolidated group
responsible for payment of the state consolidated group's tax liability at the
time that payments of corresponding Federal payments are due.
10. FURTHER ACTIONS
Each of the parties hereto agrees, and agrees to cause any direct
or indirect subsidiary of such party, to file such consents, elections and other
documents and take such other action as may be necessary or appropriate to carry
out the purpose of this Agreement.
11. RECORD RETENTION AND COSTS
(a) HOLDING will retain all records relating to the determination
of taxes hereunder as agent and custodian for JEFG, and HOLDING will make such
records available to JEFG.
(b) HOLDING and ITGI agree to split equally the third-party costs
arising from the preparation and filing of all tax returns filed pursuant to
this Agreement (including any applicable computations relating to carrybacks).
12. DETERMINATIONS
All determinations required hereunder shall be made by KPMG LLP.
Such determinations shall be binding and conclusive upon the parties for
purposes hereof.
13. INTEREST
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If any payment required to be made pursuant to Section 4, 5, 8 or
9 of this Agreement is not made within the time periods specified in those
Sections, the delinquent payment shall bear interest from its due date until the
date of actual payment at the rate (or rates) charged by the Internal Revenue
Service on underpayments of tax for the periods in question.
14. MISCELLANEOUS PROVISIONS
(a) All references and provisions under this Agreement that refer
to ITGI shall be deemed to refer also to JEFG with respect to any period after
the Merger.
(b) This Agreement applies only to all taxable periods prior to
the 1999 taxable year (which is covered by the Tax Sharing and Indemnification
Agreement) in which ITGI is included in the JEFG Group.
(c) This Agreement contains the entire understanding of the
parties hereto with respect to the subject matter contained herein. No
alteration, amendment or modification of any of the terms of this Agreement
shall be valid unless made by an instrument signed in writing by an authorized
officer of each party hereto.
(d) This Agreement has been made in and shall be construed and
enforced in accordance with the laws of the State of New York from time to time
obtaining.
(e) This Agreement shall be binding upon and inure to the benefit
of each party hereto and their respective successors and assigns.
(f) This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
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(g) All notices and other communications hereunder shall be
deemed to have been duly given if given in writing and delivered by either in
person or by facsimile with receipt acknowledged or confirmed or by certified or
registered mail, return receipt requested, postage prepaid and addressed as
follows:
(i) If to JEFG or any of its successors prior to the Distribution
at:
Jefferies Group, Inc.
11100 Santa Monica Boulevard, 11th Floor
Los Angeles, California 90025
Attention: Chief Executive Officer
Facsimile: 310-914-1013
With a copy to:
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103
Attention: Brian J. Lynch, Esq.
(ii) If to JEFG or any of its successors after the Distribution
at:
Investment Technology Group, Inc.
380 Madison Avenue, 4th Floor
New York, New York 10017
Attention: Chief Financial Officer
Facsimile: 212-444-6490
With a copy to:
Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005
Attention: Immanuel Kohn, Esq.
(iii) If to ITGI or any of its successors at:
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Investment Technology Group, Inc.
380 Madison Avenue, 4th Floor
New York, New York 10017
Attention: Chief Financial Officer
Facsimile: 212-444-6490
With a copy to:
Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005
Attention: Immanuel Kohn, Esq.
(iv) If to HOLDING at:
Jefferies Group, Inc.
JEF Holding Company, Inc.
11100 Santa Monica Boulevard, 11th Floor
Los Angeles, California 90025
Attention: Chief Financial Officer
With a copy to:
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103
Attention: Brian J. Lynch, Esq.
(h) The headings of the paragraphs of this Agreement are inserted
for convenience only and shall not constitute a part hereof.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be duly executed and their respective corporate seals to be affixed hereto,
all on the date and year first above written.
"JEFG" JEFFERIES GROUP, INC.,
a Delaware corporation
By: /s/ CLARENCE T. SCHMITZ
-----------------------------------
Clarence T. Schmitz,
Executive Vice President and CFO
"ITGI" INVESTMENT TECHNOLOGY GROUP, INC.
a Delaware corporation
By: /s/ RAYMOND KILLIAN
-----------------------------------
Raymond Killian, President/CEO
"HOLDING" JEF HOLDING COMPANY, INC.
A Delaware corporation
By: /s/ JERRY M. GLUCK
-----------------------------------
Jerry M. Gluck, General Counsel
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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.
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(b) "Consolidated Return" shall mean a consolidated Federal income tax
return filed pursuant to Section 1501 of the Code.
(c) "Consolidated Taxable Income" shall mean the consolidated Federal
taxable income of the JEFG Group for any taxable year for which the JEFG
Group files a Consolidated Return.
(d) "Consolidated Tax Liability" shall mean the consolidated Federal
income tax liability of the JEFG Group for any taxable year for which the
JEFG Group files a Consolidated Return.
(e) "IRS" shall mean the Internal Revenue Service.
(f) "JEFG Group" shall mean the affiliated group of corporations of
which JEFG is the common parent. In the event that the merger takes place as
contemplated and JEFG changes its name to Investment Technology Group, Inc.
("New ITGI"), the term "JEFG Group" shall include the affiliated group of
corporations of which New ITGI is the common parent.
(g) "Loss Amount" shall mean the amount determined under Section 2
hereof.
(h) "Member" shall mean each includible member of the JEFG Group.
(i) "Regulations" shall mean the Treasury Regulations as in effect from
time to time.
(j) "Separate Return Tax Liability" shall mean the Federal income tax
liability of a Member and its subsidiaries computed as if they had filed a
separate Federal income tax return for the applicable taxable year with the
modifications set forth in Section 1.1552-1(a)(2)(ii) of the Regulations. If
the computation of a Member's Separate Return Tax Liability as provided
herein does not result in a positive amount, such Member's Separate Return
Tax Liability shall be deemed to be zero. For purposes of this definition,
ITGI's Separate Return Tax Liability shall include JEFG's Separate Return
Tax Liability for the period after the Distribution.
(k) "Separate Taxable Income" shall mean an amount determined with
respect to a Member and its subsidiaries in accordance with Section
1.1502-12 of the Regulations with the adjustments contained in Section
1.1552-1(a)(1)(ii) of the Regulations. If the computation of a Member's
Separate Taxable Income as provided herein does not result in a positive
amount, such Member's Separate Taxable Income shall be deemed to be zero.
For purposes of this definition, ITGI's Separate Taxable Income shall
include JEFG's Separate Taxable Income for the period after the
Distribution.
(l) "Separate Tax Liability" shall mean the amount determined under
Section 2 hereof.
2. SEPARATE TAX LIABILITY
(a) The Separate Tax Liability of ITGI shall be the amount set forth in
paragraph (b) hereof as modified by paragraphs (c) and (d) hereof.
(b) The amount referred to in this paragraph (b) shall be an amount
equal to that portion of the Consolidated Tax Liability for such taxable
year that the Separate Taxable Income of ITGI for such taxable year bears to
the sum of the Separate Taxable Incomes of all Members for such taxable
year; PROVIDED, HOWEVER, that such amount shall not exceed the Consolidated
Tax Liability for such taxable year.
(c) The amount computed pursuant to paragraph (b) above shall be
increased by 100% of the excess, if any, of the ITGI Separate Return Tax
Liability for such taxable year over such amount (the "Loss Amount").
(d) Any federal, state or local income tax deduction resulting from (i)
the payment to the JEFG Pension Plan described in Section 3.03(a) of the
Benefits Agreement (or from benefits distributions related thereto), or (ii)
the payment of benefits under the JEFG CAP Plan to JEFG
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employees (each as defined in the Benefits Agreement), shall be for the
benefit of ITGI (and the JEFG Group after the Distribution) and not for the
benefit of HOLDING.
3. ADDITIONAL AMOUNT
The Additional Amount shall be equal to 100% of the amount, if any, by which
the Consolidated Tax Liability for the 1999 Taxable Year has been decreased by
reason of the inclusion of ITGI and its subsidiaries in the JEFG Group for the
1999 Taxable Year.
4. PAYMENTS
For the 1999 Taxable Year, payment of (i) the Separate Tax Liability of ITGI
by ITGI (less any Loss Amount paid to HOLDING) to JEFG (or to the IRS after the
Merger), (ii) the excess of the Consolidated Tax Liability over the amount
described in (i) (the "Holding Liability") by HOLDING to JEFG, (iii) the
Additional Amount, if any, by HOLDING to ITGI and (iv) the Loss Amount, if any,
by ITGI to HOLDING with respect to such taxable year shall be made as follows:
(a) On or before the 15th day of the fourth month of such taxable year,
JEFG shall cause KPMG LLP to estimate the Separate Tax Liability (less any
Loss Amount to be paid to HOLDING), the Holding Liability, the Additional
Amount and the Loss Amount for such taxable year.
(b) ITGI shall pay to JEFG (or to the IRS after the Merger), HOLDING
shall pay to JEFG, HOLDING shall pay to ITGI and ITGI shall pay to HOLDING
on or before each of the due dates for JEFG to make payment of estimates of
JEFG Group's Federal income taxes for such taxable year one-fourth of the
amount estimated pursuant to paragraph (a) above (collectively, the
"Estimated Amounts"). If, after paying any such installment of the Estimated
Amounts, KPMG LLP makes a new estimate, the amount of each remaining
installment (if any) shall be the amount which would have been payable if
the new estimate had been made when the first estimate for the taxable year
was made, increased or decreased, as applicable, by the amount computed by
dividing:
(i) the difference between (A) the amount of the Estimated Amounts
required to be paid before the date on which the new estimate is made,
and (B) the amount of the Estimated Amounts which would have been
required to be paid before such date if the new estimate had been made
when the first estimate was made, by
(ii) the number of installments remaining to be paid on or after the
date on which the new estimate is made.
(c) If, after the end of the 1999 Taxable Year, at the time of the
filing of an application for extension of the time to file the tax return
for the 1999 Taxable Year, if so filed, it is determined that the estimated
Separate Tax Liability of ITGI (less any Loss Amount paid to HOLDING),
Holding Liability, Additional Amount or the Loss Amount for such taxable
period exceeds the aggregate amount paid pursuant to subparagraph (b) above
with respect to such taxable period, then such excess shall be paid on or
before the later of (i) the 15th day of the third month after the end of
such taxable period, and (ii) the date on which such excess is finally
determined, which shall be no later than 30 days after the extension for
such taxable period is filed.
(d) If, after the end of the 1999 Taxable Year, it is determined that
the actual Separate Tax Liability of ITGI (less any Loss Amount paid to
HOLDING), Holding Liability, Additional Amount or Loss Amount for such
taxable period exceeds the aggregate amount paid pursuant to subparagraph
(b) and (c) above with respect to such taxable period, then such excess
shall be paid on or before the later of (i) the 15th day of the third month
after the end of such taxable period, and (ii) the date on which such excess
is finally determined, which shall be no later than 30 days after the
Consolidated Return for such taxable period is filed.
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(e) If, after the end of the 1999 Taxable Year, it is determined that
the amount paid pursuant to subparagraphs (b), (c) or (d) above with respect
to such taxable period exceeds the actual Separate Tax Liability of ITGI
(less any Loss Amount paid to HOLDING), Holding Liability, Additional Amount
or Loss Amount for such taxable period, then such excess shall be paid on or
before the later of (i) the 15th day of the third month after the end of
such taxable period, and (ii) the date on which such excess is finally
determined, which shall be no later than 30 days after the Consolidated
Return for such taxable period is filed.
5. CARRYBACKS
(a) If the JEFG Group has a consolidated unused investment credit, a
consolidated unused foreign tax credit, a consolidated excess charitable
contribution, a consolidated net capital loss or a consolidated net
operating loss, as such terms defined in the Regulations (a "Consolidated
Excess Amount") for any taxable year, the portion of such Consolidated
Excess Amount which is attributable to a Member (the "Separate Excess
Amount") shall be computed in accordance with Section 1.1502-79 of the
Regulations. Any consolidated unused research and experimentation credit of
the JEFG Group shall be treated and calculated in a manner consistent with
the foregoing sentence, and shall be included in the term "Consolidated
Excess Amount."
(b) If such Consolidated Excess Amount originates in the 1999 Taxable
Year, it will be carried back to a prior taxable year of the JEFG Group and
the effect of such carryback will be determined in accordance with the Prior
Agreement.
(c) Payment of any amount due under this Section 5 shall be made on the
date that a credit or refund is allowed with respect to the taxable year to
which such payment relates.
6. SUBSEQUENT ADJUSTMENTS AND PROCEDURAL MATTERS
(a) If any adjustments (other than adjustments made pursuant to Section
5 hereof) are made to the income, gains, losses, deductions or credits of
the JEFG Group for the 1999 Taxable Year, whether by reason of the filing of
an amended return or a claim for refund with respect to such taxable year or
an audit with respect to such taxable year by the IRS, the amounts due under
this Agreement for such taxable year shall be redetermined by taking into
account such adjustments. If, as a result of such redetermination, any
amounts due under this Agreement shall differ from the amounts previously
paid, then payment of such difference shall be made (a) in the case of an
adjustment resulting in a credit or refund, on the date on which such credit
or refund is allowed with respect to such adjustment or (b) in the case of
an adjustment resulting in the assertion of a deficiency, on the date on
which such deficiency is paid. Any amounts due under this paragraph (a)
shall include any interest attributable thereto computed in accordance with
Sections 6601 or 6611 of the Code, as the case may be, and any penalties or
additional amounts which may be imposed.
(b) If any tax audit is undertaken by any tax authority, HOLDING shall
initially have primary control of any dealings with such tax authority. Upon
a determination that such audit could give rise to an increase in either
HOLDING's or ITGI's liability under this Agreement, then HOLDING or ITGI, as
the case may be, shall be given primary control of any dealings with such
tax authority; provided, however, that the other party will be consulted
with respect to any matters which could result in an increase in the other
party's liability under this Agreement.
(c) If any adjustment or deficiency is proposed, asserted or assessed
by any tax authority which would give rise to an increase in either
HOLDING's or ITGI's liability under this Agreement, then HOLDING or ITGI, as
the case may be, shall have the primary right to contest, compromise or
settle any such adjustment or deficiency; provided, however, that the other
party will be consulted with respect to any matters which could result in an
increase in such other party's
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liability under this Agreement. If such adjustment or deficiency would give
rise to an increase in both HOLDING's and ITGI's liability under this
Agreement, then HOLDING and ITGI shall jointly have the right to contest,
compromise or settle any such adjustment or deficiency.
7. CARRYBACKS FROM SEPARATE RETURN YEARS
This Agreement shall have no application to the carryback of a net operating
loss or credit from a separate return year (within the meaning of Section
1.1502-1(e) of the Treasury Regulations) to any taxable year of JEFG Group, and
no recomputation or other payment shall be made in respect of such carryback.
8. FILING OF CALIFORNIA SINGLE RETURNS
HOLDING may file or cause to be filed a single return for California
franchise and income tax purposes ("California Single Return") for those
affiliated corporations that are includible in a California combined report (the
"JEFG Combined Group") for the 1999 Taxable Year if the JEFG Combined Group is
required or permitted to file such a return. To the extent that it qualifies
under California law, JEFG shall be the "key corporation" with respect to any
such California Single Return and, to the extent that it does not so qualify,
shall designate a "key corporation" from among the members of the JEFG Combined
Group that does so qualify. Each party to this Agreement hereby consents to any
such designation on behalf of itself and any direct or indirect subsidiary
thereof. With regard to any income year with respect to which the JEFG Combined
Group files, or it is reasonably anticipated that the JEFG Combined Group will
file, a California Single Return for the 1999 Taxable Year, the estimated and
final California tax liability of each member of the JEFG Combined Group shall
be determined, to the extent permitted by California law, in a manner consistent
with the principles set forth in this Agreement, and payments of the estimated
and final tax liability so determined shall be made to the key corporation at
the time that payments of corresponding Federal payments are due.
9. FILING OF STATE CONSOLIDATED RETURNS
To the extent permitted or required by the applicable laws of any state
other than California, JEFG and its affiliated corporations (the "state
consolidated group"), at the election of HOLDING in its sole discretion, may
join for the 1999 Taxable Year in the filing of a single, combined or
consolidated franchise or income tax return ("state consolidated return") with
any such corporation required to file a franchise or income tax return in such
state for such taxable year. With regard to the 1999 Taxable Year with respect
to which the state consolidated group files, or it is reasonably anticipated
will file, a state consolidated return which includes ITGI, the estimated and
final state tax liability of each member of the state consolidated group shall
be determined, to the extent permitted by law of the state in which the return
is to be filed, in a manner consistent with the principles set forth in this
Agreement, and payments of the estimated and final tax liability so determined
shall be made to the member of the state consolidated group responsible for
payment of the state consolidated group's tax liability at the time that
payments of corresponding Federal payments are due.
10. LIABILITY FOR TAKING CERTAIN ACTIONS INCONSISTENT WITH THE TREATMENT OF
THE DISTRIBUTION AS TAX-FREE.
(a) Notwithstanding any other provision of this Agreement (other than
in this Section 10), (i) in the event that any party, or employee, officer,
or director of such party, takes any action inconsistent with, or fails to
take any action required by, or in accordance with, the treatment of the
Distribution as tax-free, then such party shall be liable for the
inconsistent action or failure to take required action of it or its
employees, officers and directors and shall indemnify and hold the other
parties harmless from any tax liabilities, including the costs thereof,
resulting from such
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inconsistent action or failure to take required action, and (ii) if any
party engages in any transaction involving its stock or assets or makes any
factual statement or representation to the Internal Revenue Service in or in
connection with the Ruling that is inaccurate or incomplete in any material
respect, and as a result of that transaction or inaccuracy or incompleteness
of such factual statement or representation, the Distribution is treated as
a taxable event notwithstanding the receipt of the Ruling, then the party
engaging in such transaction or making such factual statement or
representation shall hold the other parties harmless from any tax
liabilities, including the costs thereof, that result from the treatment of
the Distribution as a taxable event.
(b) For purposes of this Section 10, (i) any action taken (or failure
to take action) prior to the Distribution by any subsidiary of JEFG (other
than ITGI or a subsidiary of ITGI) or any employee, officer or director of
such subsidiary of JEFG shall be deemed to be an action taken (or failure to
take action) by HOLDING (and not JEFG) or by an employee, officer or
director of HOLDING (and not JEFG); (ii) any action taken (or failure to
take action) prior to the Distribution by JEFG or any employee, officer or
director of JEFG shall be deemed to be an action taken (or failure to take
action) by HOLDING (and not JEFG) or by an employee, officer or director of
HOLDING (and not JEFG); (iii) any action taken (or failure to take action)
prior to the Distribution by any subsidiary of ITGI or any employee, officer
or director of such subsidiary of ITGI shall be deemed an action (or failure
to take action) by ITGI (and not HOLDING) or by an employee, officer or
director of ITGI (and not HOLDING); (iv) any action taken (or failure to
take action) prior to the Distribution by any employee, officer or director
of ITGI shall be deemed to be an action taken (or failure to take action) by
ITGI (and not HOLDING) or by an employee, officer or director of ITGI (and
not HOLDING); (v) any action taken (or failure to take action) after the
Distribution by JEFG, any subsidiary of JEFG (including ITGI and any
subsidiary of ITGI) (other than HOLDING or a subsidiary of HOLDING) or any
employee, officer or director of JEFG or such subsidiary of JEFG (including
ITGI and any subsidiary of ITGI) shall be deemed to be an action taken (or
failure to take action) by ITGI or by an employee, officer or director of
ITGI; and (vi) any action taken (or failure to take action) after the
Distribution by HOLDING, any subsidiary of HOLDING or any employee, officer
or director of HOLDING or such subsidiary of HOLDING shall be deemed to be
an action taken (or failure to take action) by HOLDING or by an employee,
officer or director of HOLDING.
(c) For purposes of this Section 10, any factual statement or
representation made by JEFG in or in connection with the Ruling with respect
to (i) ITGI and any subsidiary of ITGI, or with respect to JEFG following
the Distribution, including, without limitation, the intentions of JEFG
following the Distribution, shall be deemed to be a factual statement or
representation made by ITGI (and not HOLDING) or by an employee, officer or
director of ITGI (and not HOLDING), and (ii) JEFG and any subsidiary of JEFG
(other than ITGI or any subsidiary of ITGI and other than with respect to
JEFG following the Distribution, including, without limitation, the
intentions of JEFG following the Distribution) shall be deemed to be a
factual statement or representation made by HOLDING (and not JEFG) or by an
employee, officer or director of HOLDING (and not JEFG).
(d) ITGI has reviewed the materials submitted to the IRS in and in
connection with the Ruling. All such materials concerning ITGI and all such
materials concerning JEFG following the Distribution, including, without
limitation, any factual statements and representations concerning ITGI, its
business operations, capital structure and organization, are complete and
accurate in all material respects.
(e) HOLDING has reviewed the materials submitted to the IRS in and in
connection with the Ruling. All such materials concerning JEFG and
subsidiaries (other than (i) materials relating to ITGI or any subsidiary of
ITGI and (ii) materials concerning JEFG following the Distribution)
including, without limitation, any factual statements and representations
concerning JEFG or its
D-6
<PAGE>
subsidiaries, their business operations, capital structure and organization,
are complete and accurate in all material respects.
(f) HOLDING and ITGI agree to split equally the costs of defending the
Ruling in a subsequent examination by the IRS if it is reasonably determined
that no party is otherwise responsible for such costs as provided in this
Section 10.
(g) ITGI is considering an internal restructuring involving a transfer
by ITG Inc. ("ITGX") of the assets, liabilities and employees of ITGX's
research and development division to a newly formed subsidiary of ITGX (the
"R&D Subsidiary"), followed by a distribution by ITGX of all of the stock of
the R&D Subsidiary to ITGI (such transfer and distribution referred to
hereinafter as the "Internal Spin"). ITGI hereby represents and warrants
that ITGI and ITGX have not consummated the Internal Spin in its entirety
and have not consummated either of (i) such transfer of assets, liabilities
and employees to the R&D Subsidiary or (ii) such distribution of the stock
of the R&D Subsidiary. ITGI further represents and agrees that it will not
consummate, and will cause ITGX not to consummate, either the Internal Spin
in its entirety or either of (i) such transfer of assets, liabilities and
employees to the R&D Subsidiary or (ii) such distribution of the stock of
the R&D Subsidiary unless and until it has received a ruling from the IRS
that any such consummation will not adversely affect any ruling issued by
the IRS pursuant to the Ruling, and the subsequent supplements to the
Ruling.
11. REPRESENTATIONS OF HOLDING. HOLDING represents and warrants to ITGI
that, to the best of its knowledge, subject to the exceptions provided in
Schedule attached hereto, and subject to other exceptions that are not
material individually or in the aggregate:
(a) JEFG will have prepared and timely filed with the appropriate
taxing authority all tax returns and reports required to be filed through
the date of the Distribution, taking into account any extension of time to
file granted to JEFG;
(b) JEFG will have timely paid all taxes (including interest and
penalties thereon and additions thereto) due and payable by it (including
any federal income tax liability of the JEFG Group and any tax liability of
a combined or consolidated state, local or foreign group which includes JEFG
for any period prior to the Distribution);
(c) any deficiencies or assessments asserted in writing against JEFG by
any taxing authority through the date of the Distribution will have been
paid or fully settled;
(d) JEFG is not presently under examination or audit by any taxing
authority;
(e) no extension of the period for assessment or collection of any tax
is currently in effect with respect to JEFG;
(f) copies of all tax returns and reports filed by JEFG and any other
books and records and other information relating to any liability (or
potential liability) of JEFG for taxes have been made available to ITGI; and
(g) no Member of the JEFG Group has entered into any intercompany
transaction (as that term is defined in Section 1.1502-13 of the Treasury
Regulations) that may result in any material tax or addition to tax such as
interest or penalties.
12. FURTHER ACTIONS
Each of the parties hereto agrees, and agrees to cause any direct or
indirect subsidiary of such party, to file such consents, elections and other
documents and take such other action as may be necessary or appropriate to carry
out the purpose of this Agreement.
D-7
<PAGE>
13. RECORD RETENTION, RETURN PREPARATION AND COSTS
(a) HOLDING will retain all records relating to the determination of
taxes hereunder as agent and custodian for JEFG, and HOLDING will make such
records available to JEFG.
(b) KPMG LLP will prepare all tax returns to be filed pursuant to this
Agreement in a manner consistent with past practice and will make all
computations relating to estimated taxes and carrybacks for purposes of this
Agreement.
(c) HOLDING and ITGI agree to split equally the costs arising from the
preparation and filing of all tax returns filed pursuant to this Agreement
(including any applicable computations relating to carrybacks).
14. DETERMINATIONS
Except as provided in Section 13 of this Agreement, all determinations
required hereunder shall be made by the independent public accountants regularly
employed by the JEFG Group at the time that such determination is required to be
made. Such determinations shall be binding and conclusive upon the parties for
purposes hereof.
15. INTEREST
If any payment required to be made pursuant to Section 4, 5, 8 or 9 of this
Agreement is not made within the time periods specified in those Sections, the
delinquent payment shall bear interest from its due date until the date of
actual payment at the rate (or rates) charged by the Internal Revenue Service on
underpayments of tax for the periods in question.
16. MISCELLANEOUS PROVISIONS
(a) All references and provisions under this Agreement that refer to
ITGI shall be deemed to refer also to JEFG with respect to any period after
the Merger.
(b) This Agreement applies only with respect to the 1999 Taxable Year
and the Prior Agreement remains in full force and effect with respect to all
tax years prior to the 1999 Taxable Year.
(c) This Agreement contains the entire understanding of the parties
hereto with respect to the subject matter contained herein. No alteration,
amendment or modification of any of the terms of this Agreement shall be
valid unless made by an instrument signed in writing by an authorized
officer of each party hereto.
(d) This Agreement has been made in and shall be construed and enforced
in accordance with the laws of the State of New York from time to time
obtaining.
(e) This Agreement shall be binding upon and inure to the benefit of
each party hereto and their respective successors and assigns.
(f) This Agreement may be executed simultaneously in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(g) All notices and other communications hereunder shall be deemed to
have been duly given if given in writing and delivered by either in person
or by facsimile with receipt
D-8
<PAGE>
acknowledged or confirmed or by certified or registered mail, return receipt
requested, postage prepaid and addressed as follows:
(i)If to JEFG or any of its successors prior to the Distribution at:
Jefferies Group, Inc.
11100 Santa Monica Boulevard, 11th Floor
Los Angeles, California 90025
Attention: Chief Executive Officer
Facsimile: 310-914-1013
With a copy to:
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103
Attention: Brian J. Lynch, Esq.
(ii)If to JEFG or any of its successors after the Distribution at:
Investment Technology Group, Inc.
380 Madison Avenue, 4th Floor
New York, New York 10017
Attention: Chief Financial Officer
Facsimile: 212-444-6490
With a copy to:
Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005
Attention: Immanuel Kohn, Esq.
(iii)If to ITGI or any of its successors at:
Investment Technology Group, Inc.
380 Madison Avenue, 4th Floore
New York, New York 10017
Attention: Chief Financial Officer
Facsimile: 212-444-6490
With a copy to:
Cahill Gordon & Reindel
80 Pine Street
New York, New York 10005
Attention: Immanuel Kohn, Esq.
D-9
<PAGE>
(iv)If to HOLDING at:
Jefferies Group, Inc.
JEF Holding Company, Inc.
11100 Santa Monica Boulevard, 11th Floor
Los Angeles, California 90025
Attention: Chief Financial Officer
With a copy to:
Morgan, Lewis & Bockius LLP
1701 Market Street
Philadelphia, PA 19103
Attention: Brian J. Lynch, Esq.
(h) The headings of the paragraphs of this Agreement are inserted for
convenience only and shall not constitute a part hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed and their respective corporate seals to be affixed hereto, all on the
date and year first above written.
<TABLE>
<S> <C> <C>
"JEFG" JEFFERIES GROUP, INC.,
a Delaware corporation
By: /s/ CLARENCE T. SCHMITZ
-----------------------------------------
Clarence T. Schmitz, Executive Vice
President
and CFO
"ITGI"
INVESTMENT TECHNOLOGY GROUP, INC.
a Delaware corporation
By: /s/ RAYMOND L. KILLIAN, JR.
-----------------------------------------
Raymond L. Killian, Jr., Chairman,
Chief Executive Officer and President
"HOLDING"
JEF HOLDING COMPANY, INC.
A Delaware corporation
By: /s/ JERRY M. GLUCK
-----------------------------------------
Jerry M. Gluck, Secretary and General
Counsel
</TABLE>
D-10
<PAGE>
CREDIT AGREEMENT
dated as of March 16, 1999
among
INVESTMENT TECHNOLOGY GROUP, INC.,
as Borrower
and
THE BANK OF NEW YORK,
as Lender
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE 1. DEFINITIONS.......................................................1
Section 1.01 Defined Terms.............................................1
Section 1.02 Terms Generally..........................................12
Section 1.03 Accounting Terms; GAAP...................................12
ARTICLE 2. THE CREDITS......................................................13
Section 2.01 Commitment...............................................13
Section 2.02 Requests for Loans.......................................13
Section 2.03 Funding of Loans.........................................13
Section 2.04 Termination and Reduction of Commitment..................13
Section 2.05 Repayment of Loans; Evidence of Debt.....................14
Section 2.06 Prepayment of Loans......................................14
Section 2.07 Payments Generally; Pro Rata Treatment; Sharing of
Setoffs..................................................15
ARTICLE 3. INTEREST, FEES, YIELD PROTECTION, ETC............................15
Section 3.01 Interest.................................................15
Section 3.02 Fees.....................................................16
Section 3.03 Capital Adequacy.........................................17
Section 3.04 Taxes....................................................17
Section 3.05 Mitigation Obligations...................................18
ARTICLE 4. REPRESENTATIONS AND WARRANTIES...................................18
Section 4.01 Organization; Powers.....................................18
Section 4.02 Authorization; Enforceability............................18
Section 4.03 Governmental Approvals; No Conflicts.....................19
Section 4.04 Financial Condition; No Material Adverse Change..........19
Section 4.05 Properties...............................................19
Section 4.06 Litigation and Environmental Matters.....................20
Section 4.07 Compliance with Laws and Agreements......................20
Section 4.08 Investment and Holding Company Status....................20
Section 4.09 Taxes....................................................20
Section 4.10 ERISA....................................................21
Section 4.11 Disclosure...............................................21
Section 4.12 Subsidiaries.............................................21
Section 4.13 Labor Matters............................................21
Section 4.14 Solvency.................................................22
Section 4.15 Security Documents.......................................22
Section 4.16 Federal Reserve Regulations..............................22
</TABLE>
<PAGE>
<TABLE>
<S> <C>
Section 4.17 Membership...............................................23
Section 4.18 Assessments by the SIPC..................................23
Section 4.19 Year 2000................................................23
ARTICLE 5. CONDITIONS.......................................................23
Section 5.01 Effective Date...........................................23
Section 5.02 Conditions to First Loans................................25
Section 5.03 Each Credit Event........................................26
ARTICLE 6. AFFIRMATIVE COVENANTS............................................27
Section 6.01 Financial Statements and Other Information...............27
Section 6.02 Notices of Material Events...............................28
Section 6.03 Existence; Conduct of Business...........................29
Section 6.04 Payment of Obligations...................................29
Section 6.05 Maintenance of Properties................................29
Section 6.06 Books and Records; Inspection Rights.....................29
Section 6.07 Compliance with Laws.....................................29
Section 6.08 Use of Proceeds..........................................30
Section 6.09 Information Regarding Collateral.........................30
Section 6.10 Insurance................................................30
Section 6.11 Additional Domestic Subsidiaries.........................31
Section 6.12 Further Assurances.......................................31
Section 6.13 Environmental Compliance.................................31
Section 6.14 Membership...............................................31
ARTICLE 7. NEGATIVE COVENANTS...............................................32
Section 7.01 Indebtedness.............................................32
Section 7.02 Liens....................................................33
Section 7.03 Fundamental Changes......................................34
Section 7.04 Investments, Loans, Advances, Guarantees and
Acquisitions.............................................35
Section 7.05 Asset Sales..............................................36
Section 7.06 Sale and Lease-Back Transactions.........................36
Section 7.07 Hedging Agreements.......................................36
Section 7.08 Restricted Payments......................................36
Section 7.09 Transactions with Affiliates.............................37
Section 7.10 Restrictive Agreements...................................37
Section 7.11 Concerning the POSIT License Agreement...................38
Section 7.12 Leverage Ratio...........................................38
Section 7.13 Net Capital..............................................38
Section 7.14 Consolidated Shareholders' Equity........................38
Section 7.15 Capital Expenditures.....................................38
Section 7.16 Initial Transactions.....................................38
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
ARTICLE 8. EVENTS OF DEFAULT................................................38
ARTICLE 9. MISCELLANEOUS....................................................41
Section 9.01 Notices..................................................41
Section 9.02 Waivers; Amendments......................................41
Section 9.03 Expenses; Indemnity; Damage Waiver.......................42
Section 9.04 Successors and Assigns...................................43
Section 9.05 Survival.................................................44
Section 9.06 Counterparts; Integration................................45
Section 9.07 Severability.............................................45
Section 9.08 Right of Setoff..........................................45
Section 9.09 Governing Law; Jurisdiction; Consent to Service of
Process..................................................45
Section 9.10 WAIVER OF JURY TRIAL.....................................46
Section 9.11 Headings.................................................46
Section 9.12 Interest Rate Limitation.................................46
SCHEDULES:
Schedule 4.06 Disclosed Matters
Schedule 4.10 Exceptions to Section 4.10 (ERISA)
Schedule 4.12 Subsidiaries
Schedule 7.01 Existing Indebtedness
Schedule 7.02 Existing Liens
Schedule 7.04 Existing Investments
Schedule 7.04(f) Certain Entities
Schedule 7.11 Existing Restrictions
EXHIBITS:
Exhibit A Form of Note
Exhibit B Form of Opinion of Borrower's Counsel (Section 5.01)
Exhibit B-1 Form of Opinion of Borrower's Counsel (Section 5.02)
Exhibit C Form of Security Agreement
Exhibit D Form of Assumption Agreement
</TABLE>
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<PAGE>
CREDIT AGREEMENT, dated as of March 16, 1999, between INVESTMENT
TECHNOLOGY GROUP, INC. and THE BANK OF NEW YORK.
The parties hereto agree as follows:
ARTICLE 1. DEFINITIONS
Section 1.01 Defined Terms
As used in this Agreement, the following terms have the meanings
specified below:
"Affiliate" means, with respect to a specified Person, another
Person that directly, or indirectly through one or more intermediaries, Controls
or is Controlled by or is under common Control with the Person specified.
"Alternate Base Rate" means, for any day, a rate per annum equal to
the greater of (a) the Prime Rate in effect on such day and (b) the Federal
Funds Rate in effect on such day plus 1/2 of 1%. Any change in the Alternate
Base Rate due to a change in the Prime Rate or the Federal Funds Rate shall be
effective from and including the effective date of such change in the Prime Rate
or the Federal Funds Rate, respectively.
"Assumption Agreement" means the Assumption Agreement, substantially
in the form of Exhibit D.
"Available Amount" means, on any date of determination, an amount
equal to the lesser of (i) the Commitment and (ii) the sum of (x) 16.666667% of
the fair market value of equity securities owned by ITG and (y) the fair market
value of money market instruments, including cash and cash equivalents, owned by
the Borrower and the Subsidiaries.
"Availability Period" means the period from and including the date
on which the conditions set forth in Sections 5.01 and 5.02 shall have been
satisfied (or waived pursuant to Section 9.02) to but excluding the Commitment
Termination Date.
"Board" means the Board of Governors of the Federal Reserve System
of the United States of America.
"Borrower" means (i) prior to the consummation of the merger
referred to in paragraph (d) of the definition of "Initial Transactions",
Investment Technology Group, Inc., a Delaware corporation and (ii) thereafter
Jefferies Group, Inc., a Delaware corporation to be renamed Investment
Technology Group, Inc. as described in paragraph (e) of the definition of
"Initial Transactions".
"Borrowing Request" means a request by the Borrower for a Loan in
accordance with Section 2.02.
<PAGE>
"Business Day" means any day that is not a Saturday, Sunday or other
day on which commercial banks in New York City are authorized or required by law
to remain closed.
"Capital Expenditures" of any Person means expenditures (whether
paid in cash or other consideration or accrued as a liability) for fixed or
capital assets (excluding any capitalized software and any capitalized interest
and any such asset acquired in connection with normal replacement and
maintenance programs properly charged to current operations and excluding any
replacement assets acquired with the proceeds of insurance) made by such Person.
"Capital Lease Obligations" of any Person means the obligations of
such Person to pay rent or other amounts under any lease of (or other
arrangement conveying the right to use) real or personal property, or a
combination thereof, which obligations are required to be classified and
accounted for as capital leases on a balance sheet of such Person under GAAP,
and the amount of such obligations shall be the capitalized amount thereof
determined in accordance with GAAP.
"Change in Control" means (a) upon the consummation of the Initial
Transactions or at any time thereafter, the acquisition of ownership, directly
or indirectly, beneficially or of record, by any Person or group (within the
meaning of the Securities Exchange Act of 1934 and the rules of the Securities
and Exchange Commission thereunder as in effect on the date hereof) of shares
representing 50% or more of the aggregate ordinary voting power or economic
interests represented by the issued and outstanding equity securities of the
Borrower on a fully diluted basis, (b) the failure of the Borrower to own
directly, beneficially and of record, 100% of the aggregate ordinary voting
power represented by the issued and outstanding equity securities of ITG on a
fully diluted basis or (c) the occupation of a majority of the seats (other than
vacant seats) on the board of directors of the Borrower by Persons who were
neither (i) nominated by the board of directors of the Borrower in connection
with the 1999 annual stockholders' meeting, nor (ii) appointed by directors so
nominated.
"Change in Law" means (a) the adoption of any law, rule or
regulation after the date of this Agreement, (b) any change in any law, rule or
regulation or in the interpretation or application thereof by any Governmental
Authority after the date of this Agreement or (c) compliance by the Lender (or,
for purposes of Section 3.03(a), by any lending office of the Lender or by the
Lender's holding company, if any) with any request, guideline or directive
(whether or not having the force of law) of any Governmental Authority made or
issued after the date of this Agreement.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time.
"Collateral" means any and all "Collateral", as defined in any
applicable Security Document.
"Commitment" means the commitment of the Lender to make Loans
hereunder, expressed as an amount representing the maximum aggregate amount of
the Credit Exposure hereunder, as such commitment may be reduced from time to
time pursuant to Section 2.04. The initial amount of the Lender's Commitment is
$20,000,000.
-2-
<PAGE>
"Commitment Termination Date" means March 14, 2000.
"Consolidated Cash Interest Expense" means, for any period,
Consolidated Interest Expense for such period minus the sum of (a) pay-in-kind
or accreted Consolidated Interest Expense not involving any payment of cash, (b)
to the extent included in Consolidated Interest Expense, the amortization of
fees paid by the Borrower or any Subsidiary in connection with the incurrence of
any Indebtedness and (c) the amortization of debt discounts, if any, or fees in
respect of any interest rate cap agreement or other agreement or arrangement
entered into by the Borrower or any Subsidiary designed to protect the Borrower
or such Subsidiary against fluctuations in interest rates.
"Consolidated EBIT" means, for any period, net income for such
period of the Borrower and the Subsidiaries, determined on a consolidated basis
in accordance with GAAP, plus, without duplication and to the extent deducted in
determining such net income, the sum of (a) Consolidated Cash Interest Expense
for such period and (b) the aggregate amount of cash taxes paid for such period.
Notwithstanding anything to the contrary in this definition, for purposes
hereof, the term "Consolidated EBIT" shall be computed, on a consistent basis,
to reflect purchases, acquisitions, sales, transfers and dispositions made by
the Borrower and the Subsidiaries (other than in the ordinary course of
business) during the relevant period as if they occurred at the beginning of
such period.
"Consolidated Interest Expense" means, for any period, interest and
fees accrued, accreted or paid by the Borrower and the Subsidiaries during such
period in respect of the Indebtedness of the Borrower and the Subsidiaries,
determined on a consolidated basis in accordance with GAAP, including (a) the
amortization of debt discounts to the extent included in interest expense in
accordance with GAAP, (b) the amortization of all fees (including fees with
respect to interest rate cap agreements or other agreements or arrangements
entered into by the Borrower or any Subsidiary designed to protect the Borrower
or such Subsidiary, as applicable, against fluctuations in interest rates)
payable in connection with the incurrence of Indebtedness to the extent included
in interest expense in accordance with GAAP and (c) the portion of any rents
payable under capital leases allocable to interest expense in accordance with
GAAP.
"Consolidated Shareholders' Equity" means at any date of
determination, shareholders' equity of the Borrower and the Subsidiaries
determined on a consolidated basis in accordance with GAAP.
"Consolidated Total Debt" means, as of any date, the aggregate
principal amount of all Indebtedness of the Borrower and the Subsidiaries that
would be reflected as liabilities on a consolidated balance sheet of the
Borrower and the Subsidiaries as of such date prepared in accordance with GAAP.
"Control" means the possession, directly or indirectly, of the power
to direct or cause the direction of the management or policies of a Person,
whether through the ability to exercise voting power, by contract or otherwise.
The terms "Controlling" and "Controlled" have meanings correlative thereto.
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<PAGE>
"Credit Exposure" means, at any time, the sum of the aggregate
outstanding principal amount of the Loans at such time.
"Default" means any event or condition which constitutes an Event of
Default or that upon notice, lapse of time or both would, unless cured or
waived, become an Event of Default.
"Disclosed Matters" means the actions, suits and proceedings and the
environmental matters disclosed in Schedule 4.06.
"dollars" or "$" refers to lawful money of the United States of
America.
"Domestic Subsidiary" means any Subsidiary that is organized under
the laws of the United States of America or any State or political subdivision
thereof.
"Effective Date" means the date on which the conditions specified in
Section 5.01 are satisfied (or waived in accordance with Section 9.02).
"Environmental Laws" means all laws, rules, regulations, codes,
ordinances, orders, decrees, judgments, injunctions, notices or binding
agreements issued, promulgated or entered into by any Governmental Authority,
relating in any way to the environment, preservation or reclamation of natural
resources, the management, release or threatened release of any Hazardous
Material or to health and safety matters.
"Environmental Liability" means any liability, contingent or
otherwise (including any liability for damages, costs of environmental
remediation, fines, penalties or indemnities), of the Borrower or any Subsidiary
directly or indirectly resulting from or based upon (a) violation of any
Environmental Law, (b) the generation, use, handling, transportation, storage,
treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous
Materials, (d) the release or threatened release of any Hazardous Materials into
the environment or (e) any contract, agreement or other consensual arrangement
pursuant to which liability is assumed or imposed with respect to any of the
foregoing.
"ERISA" means the Employee Retirement Income Security Act of 1974,
as amended from time to time.
"ERISA Affiliate" means any trade or business (whether or not
incorporated) that, together with the Borrower or any Subsidiary, is treated as
a single employer under Section 414(b) or (c) of the Code or, solely for
purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a
single employer under Section 414 of the Code.
"ERISA Event" means (a) any "reportable event", as defined in
Section 4043 of ERISA or the regulations issued thereunder with respect to a
Plan (other than an event for which the 30-day notice period is waived); (b) the
existence with respect to any Plan of an "accumulated funding deficiency" (as
defined in Section 412 of the Code or Section 302 of ERISA), whether or not
waived; (c) the filing pursuant to Section 412(d) of the Code or Section
-4-
<PAGE>
303(d) of ERISA of an application for a waiver of the minimum funding standard
with respect to any Plan; (d) the incurrence by the Borrower or any ERISA
Affiliate of any liability under Title IV of ERISA with respect to the
termination of any Plan; (e) the receipt by the Borrower or any ERISA Affiliate
from the PBGC or a plan administrator of any notice relating to an intention to
terminate any Plan or Plans or to appoint a trustee to administer any Plan; (f)
the incurrence by the Borrower or any ERISA Affiliate of any liability with
respect to the withdrawal or partial withdrawal from any Plan or Multiemployer
Plan; or (g) the receipt by the Borrower or any ERISA Affiliate of any notice,
or the receipt by any Multiemployer Plan from the Borrower or any ERISA
Affiliate of any notice, concerning the imposition of Withdrawal Liability or a
determination that a Multiemployer Plan is, or is expected to be, insolvent or
in reorganization, within the meaning of Title IV of ERISA.
"Event of Default" has the meaning assigned to such term in Article
8.
"Excluded Taxes" means, with respect to the Lender or any other
recipient of any payment to be made by or on account of any obligation of the
Borrower under any Loan Document, (a) net income taxes and franchise taxes in
lieu of net income taxes imposed by the United States of America, or by the
jurisdiction under the laws of which such recipient is organized or in which its
principal office is located or in which its applicable lending office is located
and (b) any branch profits taxes imposed by the United States of America or any
similar tax imposed by any other jurisdiction in which the Borrower is located.
"Federal Funds Rate" means, for any day, the rate per annum
(rounded, if necessary, to the next greater 1/100 of 1%) equal to the rate per
annum at which the Lender is offered overnight Federal funds by a Federal funds
broker selected by the Lender at or about 2:00 p.m., New York City time, on such
day, provided that if such day is not a Business Day, the Federal Funds Rate for
such day shall be such rate at which the Lender is offered overnight Federal
funds by such Federal funds broker at or about 2:00 p.m., New York City time, on
the next preceding Business Day.
"Financial Officer" means the chief financial officer, principal
accounting officer, treasurer or controller of the Borrower.
"FOCUS Report" means a Financial and Operational Combined Uniform
Single Report which is or may be required to be filed on a monthly or quarterly
basis, as the case may be, with the Securities and Exchange Commission, the NASD
or other Governmental Authority or self-regulatory organization or any report
which is required by the Securities and Exchange Commission, the NASD or other
Governmental Authority or self-regulatory organization in lieu of such report.
"GAAP" means generally accepted accounting principles in the United
States of America.
"Governmental Authority" means the government of the United States
of America, any other nation or any political subdivision thereof, whether state
or local, and any agency, authority, instrumentality, regulatory body, court,
central bank or other entity (including
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the NASD or other applicable examining authority) exercising executive,
legislative, judicial, taxing, regulatory or administrative powers or functions
of or pertaining to government.
"Guarantee" of or by any Person (the "guarantor") means any
obligation, contingent or otherwise, of the guarantor guaranteeing or having the
economic effect of guaranteeing any Indebtedness or other obligation of any
other Person (the "primary obligor") in any manner, whether directly or
indirectly, and including any obligation of the guarantor, direct or indirect,
(a) to purchase or pay (or advance or supply funds for the purchase or payment
of) such Indebtedness or other obligation or to purchase (or to advance or
supply funds for the purchase of) any security for the payment thereof, (b) to
purchase or lease property, securities or services for the purpose of assuring
the owner of such Indebtedness or other obligation of the payment thereof, (c)
to maintain working capital, equity capital or any other financial statement
condition or liquidity of the primary obligor as to enable the primary obligor
to pay such Indebtedness or other obligation or (d) as an account party in
respect of any letter of credit or letter of guaranty issued to support such
Indebtedness or obligation, provided that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guaranteed" has a meaning correlative thereto.
"Hazardous Materials" means all explosive or radioactive substances
or wastes and all hazardous or toxic substances, wastes or other pollutants,
including petroleum or petroleum distillates, asbestos or asbestos containing
materials, polychlorinated biphenyls, radon gas, infectious or medical wastes
and all other substances or wastes of any nature regulated pursuant to any
Environmental Law.
"Hedging Agreement" means any interest rate protection agreement,
foreign currency exchange agreement, commodity price protection agreement or
other interest or currency exchange rate or commodity price hedging arrangement.
"Indebtedness" of any Person means, without duplication, (a) all
obligations of such Person for borrowed money or with respect to deposits or
advances of any kind, (b) all obligations of such Person evidenced by bonds,
debentures, notes or similar instruments, (c) all obligations of such Person
upon which interest charges are customarily paid, (d) all obligations of such
Person under conditional sale or other title retention agreements relating to
property acquired by such Person, (e) all obligations of such Person in respect
of the deferred purchase price of property or services (excluding current
accounts payable incurred in the ordinary course of business), (f) all
Indebtedness of others secured by (or for which the holder of such Indebtedness
has an existing right, contingent or otherwise, to be secured by) any Lien on
property owned or acquired by such Person, whether or not the Indebtedness
secured thereby has been assumed, (g) all Guarantees by such Person of
Indebtedness of others, (h) all Capital Lease Obligations of such Person, (i)
all obligations, contingent or otherwise, of such Person as an account party in
respect of letters of credit and letters of guaranty and (j) all obligations,
contingent or otherwise, of such Person in respect of bankers' acceptances. The
Indebtedness of any Person shall include the Indebtedness of any other entity
(including any partnership in which such Person is a general partner) to the
extent such Person is liable therefor as a result of such
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Person's ownership interest in or other relationship with such entity, except to
the extent the terms of such Indebtedness provide that such Person is not liable
therefor.
"Indemnified Taxes" means Taxes other than Excluded Taxes.
"Indemnitee" has the meaning assigned to such term in Section
9.03(b).
"Initial Restricted Payment" means the payment of a dividend by ITG
to the Borrower and the Borrower to its shareholders in an amount not to exceed
$75,000,000.
"Initial Transaction Date" means the date on which the Initial
Transactions are consummated.
"Initial Transaction Documents" means the Agreement and Plan of
Merger, Distribution Agreement, Benefits Agreement, Amended and Restated Tax
Sharing Agreement and Tax Sharing and Indemnification Agreement, each dated as
of March 17, 1999, executed or delivered in connection with the Initial
Transactions.
"Initial Transactions" means the following transactions consummated
on or before the Effective Date:
(a) the making of the Initial Restricted Payment;
(b) the contribution by Jefferies Group of all of its assets
(other than its capital stock in the Borrower) and all of its liabilities
(other than liabilities related to the Borrower) to JEFCO and its
subsidiaries;
(c) the distribution by Jefferies Group to its shareholders of
all of its capital stock in JEFCO;
(d) the merger of the Borrower with and into Jefferies Group,
with Jefferies Group as the survivor and the assumption by Jefferies Group
of the obligations of the Borrower under the Loan Documents pursuant to
the Assumption Agreement; and
(e) the change of Jefferies Group's name to "Investment
Technology Group, Inc.".
"ITG" means ITG Inc., a Delaware corporation and a wholly owned
Subsidiary.
"JEFCO" means JEF Holding Company, Inc., a Delaware corporation.
"Jefferies & Co." means Jefferies & Company, Inc., a Delaware
corporation.
"Jefferies Group" means Jefferies Group, Inc., a Delaware
corporation.
"Lender" means The Bank of New York and its successors and assigns.
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"Leverage Ratio" means, as of any date, the quotient of (a)
Consolidated Total Debt as of such date divided by (b) Consolidated EBIT for the
period of the most recent four consecutive fiscal quarters ending before such
date for which financial statements are available.
"Lien" means, with respect to any asset, (a) any mortgage, deed of
trust, lien, pledge, hypothecation, encumbrance, charge or security interest in,
on or of such asset, (b) the interest of a vendor or a lessor under any
conditional sale agreement, capital lease or title retention agreement relating
to such asset and (c) in the case of securities, any purchase option, call or
similar right of a third party with respect to such securities.
"Loan Documents" means this Agreement, the Note, the Assumption
Agreement and the Security Documents.
"Loan" means a Loan referred to in Section 2.01 and made pursuant to
Section 2.02.
"Margin Stock" has the meaning assigned to such term in Regulation
U.
"Material Adverse Effect" means a material adverse effect on (a) the
business, assets, operations, prospects or condition, financial or otherwise, of
the Borrower and the Subsidiaries, taken as a whole, (b) the ability of the
Borrower to perform any of its obligations under any Loan Document or (c) the
rights of or benefits available to the Lender under any Loan Document.
"Material Indebtedness" means Indebtedness (other than Indebtedness
under the Loan Documents) or obligations in respect of one or more Hedging
Agreements, of any one or more of the Borrower and the Subsidiaries in an
aggregate principal amount exceeding $1,000,000. For purposes of determining
Material Indebtedness, the "principal amount" of the obligations of the Borrower
or any Subsidiary in respect of any Hedging Agreement at any time shall be the
maximum aggregate amount (giving effect to any netting agreements) that the
Borrower or such Subsidiary, as applicable, would be required to pay if such
Hedging Agreement were terminated at such time.
"Maturity Date" means March 15, 2001.
"Multiemployer Plan" means a multiemployer plan as defined in
Section 4001(a)(3) of ERISA.
"Net Capital" means "net capital" as defined in Rule 15c3-1 or any
successor rule as in effect at the time of determination.
"Note" means a promissory note evidencing the Loans payable to the
order of the Lender substantially in the form of Exhibit A.
"Obligations" has the meaning assigned to such term in the Security
Agreement.
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"Other Taxes" means any and all current or future stamp or
documentary taxes or any other excise or property taxes, charges or similar
levies arising from any payment made hereunder or from the execution, delivery
or enforcement of, or otherwise with respect to, the Loan Documents.
"Participant" has the meaning assigned to such term in Section
9.04(c).
"PBGC" means the Pension Benefit Guaranty Corporation referred to
and defined in ERISA and any successor entity performing similar functions.
"Perfection Certificate" means a certificate in the form of Annex 1
to the Security Agreement or any other form approved by the Lender.
"Permitted Encumbrances" means:
(a) Liens imposed by law for taxes that are not yet due or are
being contested in compliance with Section 6.04;
(b) carriers', warehousemen's, mechanics', materialmen's,
repairmen's and other like Liens imposed by law, arising in the ordinary
course of business and securing obligations that are not overdue by more
than 30 days or are being contested in compliance with Section 6.04;
(c) pledges and deposits made in the ordinary course of
business in compliance with workers' compensation, unemployment insurance
and other social security laws or regulations;
(d) deposits to secure the performance of bids, trade
contracts, leases, statutory obligations, surety and appeal bonds,
performance bonds and other obligations of a like nature, in each case in
the ordinary course of business;
(e) judgment liens in respect of judgments that do not
constitute an Event of Default under clause (k) of Article 8; and
(f) easements, zoning restrictions, rights-of-way and similar
encumbrances on real property imposed by law or arising in the ordinary
course of business that do not secure any monetary obligations and do not
materially detract from the value of the affected property or interfere
with the ordinary conduct of business of the Borrower or any Subsidiary.
"Permitted Investments" means:
(a) direct obligations of, or obligations the principal of and
interest on which are unconditionally guaranteed by, the United States of
America (or by any agency thereof to the extent that such obligations are
backed by the full faith and credit of the United States of America), in
each case measuring within one year from the date of acquisition thereof;
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(b) investments in commercial paper maturing within 270 days
from the date of acquisition thereof and having, at such date of
acquisition, the highest credit rating obtainable from Standard & Poor's
Ratings Services, a division of The McGraw-Hill Companies, or any
successor thereto, or from Moody's Investors Service, Inc. or any
successor thereto;
(c) investments in certificates of deposit, banker's
acceptances and time deposits maturing within 180 days from the date of
acquisition thereof issued or guaranteed by or placed with, and money
market deposit accounts issued or offered by, any domestic office of any
commercial bank organized under the laws of the United States of America
or any State thereof that has a combined capital and surplus and undivided
profits of not less than $500,000,000;
(d) fully collateralized repurchase agreements with a term of
not more than 30 days for securities described in clause (a) of this
definition and entered into with a financial institution satisfying the
criteria described in clause (c) of this definition; and
(e) investments made by the Borrower and the Subsidiaries in
the ordinary course of business.
"Person" means any natural person, corporation, limited liability
company, trust, joint venture, association, company, partnership, Governmental
Authority or other entity.
"Plan" means any employee pension benefit plan (other than a
Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section
412 of the Code or Section 302 of ERISA, and in respect of which the Borrower,
any Subsidiary or any ERISA Affiliate is (or, if such plan were terminated,
would under Section 4069 of ERISA be deemed to be) an "employer" as defined in
Section 3(5) of ERISA.
"POSIT Joint Venture" means the joint venture between ITG (as
successor in interest to Jefferies & Co.) and BARRA Inc. formed in 1987.
"POSIT License Agreement" means the License Agreement, dated as of
October 1, 1987, as amended, between the POSIT Joint Venture and between ITG (as
successor in interest to Jefferies & Co.).
"Prime Rate" means the rate of interest per annum publicly announced
from time to time by the Lender as its prime rate in effect at its principal
office in New York City; each change in the Prime Rate shall be effective from
and including the date such change is publicly announced as being effective. The
Prime Rate is not intended to be the lowest rate of interest charged by the
Lender in connection with extensions of credit to borrowers.
"Regulation T" means Regulation T of the Board as from time to time
in effect and all official rulings and interpretations thereunder or thereof.
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"Regulation U" means Regulation U of the Board as from time to time
in effect and all official rulings and interpretations thereunder or thereof.
"Regulation X" means Regulation X of the Board as from time to time
in effect and all official rulings and interpretations thereunder or thereof.
"Related Parties" means the Lender's Affiliates, directors,
officers, employees, agents and advisors.
"Restricted Payment" means, as to any Person, any dividend or other
distribution by such Person (whether in cash, securities or other property) with
respect to any shares of any class of equity securities of such Person, or any
payment (whether in cash, securities or other property), including any sinking
fund or similar deposit, on account of the purchase, redemption, retirement,
acquisition, cancellation or termination of any such shares or any option,
warrant or other right to acquire any such shares except upon the exercise of
any options, warrants or other rights to acquire such shares.
"Rule 15c3-1" means Rule 15c3-1 of the General Rules and Regulations
as promulgated by the Securities and Exchange Commission under the Securities
and Exchange Act of 1934, as amended (17 CFR 240.15c3-1), as such Rule may be
amended from time to time, or any rule or regulation of the Securities and
Exchange Commission which replaces Rule 15c3-1.
"Security Agreement" means the Security Agreement, substantially in
the form of Exhibit C, between the Borrower and the Lender.
"Security Documents" means the Security Agreement and each other
security agreement, instrument or other document executed or delivered pursuant
to Section 6.12 or 6.13 to secure any of the Obligations.
"SIPC" means The Securities Investor Protection Corporation and any
successor organization discharging the functions of The Securities Investor
Protection Corporation.
"Street Loans" means short term borrowings, whether or not
collateralized, borrowed for the purpose of facilitating settlement or financing
of securities or commodities transactions in the ordinary course of business.
"subsidiary" means, with respect to any Person (the "parent") at any
date, any corporation, limited liability company, partnership, association or
other entity the accounts of which would be consolidated with those of the
parent in the parent's consolidated financial statements if such financial
statements were prepared in accordance with GAAP as of such date, as well as any
other corporation, limited liability company, partnership, association or other
entity of which securities or other ownership interests representing more than
50% of the equity or more than 50% of the ordinary voting power or, in the case
of a partnership, more than 50% of the general partnership interests are, as of
such date, owned, controlled or held by the parent or one or more subsidiaries
of the parent.
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"Subsidiary" means any subsidiary of the Borrower.
"Taxes" means any and all current or future taxes, levies, imposts,
duties, deductions, charges or withholdings imposed by any Governmental
Authority.
"Transactions" means (a) the execution, delivery and performance by
the Borrower of each Loan Document, (b) the borrowing of the Loans, (c) the use
of the proceeds of the Loans and (d) the Initial Transactions.
"Withdrawal Liability" means liability to a Multiemployer Plan as a
result of a complete or partial withdrawal from such Multiemployer Plan, as such
terms are defined in Part I of Subtitle E of Title IV of ERISA.
Section 1.02 Terms Generally
The definitions of terms herein shall apply equally to the singular
and plural forms of the terms defined. Whenever the context may require, any
pronoun shall include the corresponding masculine, feminine and neuter forms.
The words "include", "includes" and "including" shall be deemed to be followed
by the phrase "without limitation". The word "will" shall be construed to have
the same meaning and effect as the word "shall". Unless the context requires
otherwise, (a) any definition of or reference to any agreement, instrument or
other document herein shall be construed as referring to such agreement,
instrument or other document as from time to time amended, supplemented or
otherwise modified (subject to any restrictions on such amendments, supplements
or modifications set forth herein), (b) any reference herein to any Person shall
be construed to include such Person's successors and assigns, (c) the words
"herein", "hereof" and "hereunder", and words of similar import, shall be
construed to refer to this Agreement in its entirety and not to any particular
provision hereof, (d) all references herein to Articles, Sections, Exhibits and
Schedules shall be construed to refer to Articles and Sections of, and Exhibits
and Schedules to, this Agreement and (e) the words "asset" and "property" shall
be construed to have the same meaning and effect and to refer to any and all
tangible and intangible assets and properties, including cash, securities,
accounts and contract rights.
Section 1.03 Accounting Terms; GAAP
Except as otherwise expressly provided herein, all terms of an
accounting or financial nature shall be construed in accordance with GAAP, as in
effect from time to time, provided that, if the Borrower notifies the Lender
that the Borrower requests an amendment to any provision hereof to eliminate the
effect of any change occurring after the date hereof in GAAP or in the
application thereof on the operation of such provision (or if the Lender
notifies the Borrower that it requests an amendment to any provision hereof for
such purpose), regardless of whether any such notice is given before or after
such change in GAAP or in the application thereof, then such provision shall be
interpreted on the basis of GAAP as in effect and applied immediately before
such change shall have become effective until such notice shall have been
withdrawn or such provision amended in accordance herewith. Unless the context
otherwise requires, any reference to a fiscal period shall refer to the relevant
fiscal period of the Borrower.
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ARTICLE 2. THE CREDITS
Section 2.01 Commitment
Subject to the terms and conditions set forth herein, the Lender
agrees to make Loans to the Borrower from time to time during the Availability
Period in an aggregate principal amount that will not result in the Credit
Exposure exceeding the Available Amount. Within the foregoing limits and subject
to the terms and conditions set forth herein, the Borrower may borrow, prepay
and reborrow Loans. At the time that each Loan is made, such Loan shall be in an
aggregate amount that is an integral multiple of $100,000 and not less than
$1,000,000, provided that a Loan may be in an aggregate amount that is equal to
the entire unused balance of the Commitment.
Section 2.02 Requests for Loans
To request a Loan, the Borrower shall notify the Lender of such
request by telephone not later than 11:00 a.m., New York City time, on the date
of the proposed Loan. Each such telephonic Borrowing Request shall be
irrevocable and shall be confirmed promptly by hand delivery or telecopy to the
Lender of a written Borrowing Request in a form approved by the Lender and
signed by the Borrower. Each such telephonic and written Borrowing Request shall
specify the following information:
(i) the aggregate amount of the requested Loan;
(ii) the date of such Loan, which shall be a Business
Day;
(iii) the location and number of the Borrower's account
to which funds are to be disbursed, which shall comply with the
requirements of Section 2.03; and
(iv) a reasonably detailed calculation of the Leverage
Ratio on a pro forma basis immediately after giving effect to such
Loan and the use of the proceeds thereof.
Section 2.03 Funding of Loans
Subject to Sections 5.02 and 5.03, the Lender shall make each Loan
on the proposed date thereof by 2:00 p.m., New York City time, by crediting or
otherwise transferring the proceeds of the requested Loan to an account of the
Borrower maintained with the Lender and designated by the Borrower in the
applicable Borrowing Request.
Section 2.04 Termination and Reduction of Commitment
(a) Unless previously terminated, the Commitment shall terminate on
the Commitment Termination Date.
(b) The Borrower may at any time terminate, or from time to time
reduce, the Commitment, provided that (i) the Borrower shall not terminate or
reduce the Commitment if,
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after giving effect to any concurrent prepayment of the Loans in accordance with
Section 2.06, the Credit Exposure would exceed the Commitment, and (ii) each
such reduction (other than a termination) shall be in an amount that is an
integral multiple of $100,000 and not less than $1,000,000.
(c) The Borrower shall notify the Lender of any election to
terminate or reduce the Commitment under paragraph (b) of this Section at least
three Business Days prior to the effective date of such termination or
reduction, specifying such election and the effective date thereof. Each notice
delivered by the Borrower pursuant to this Section shall be irrevocable,
provided that a notice of termination of the Commitment delivered by the
Borrower may state that such notice is conditioned upon the effectiveness of
other credit facilities, in which case such notice may be revoked by the
Borrower (by notice to the Lender on or prior to the specified effective date)
if such condition is not satisfied. Any termination or reduction of the
Commitment hereunder shall be permanent.
Section 2.05 Repayment of Loans; Evidence of Debt
(a) The Borrower hereby unconditionally promises to pay to the
Lender the then unpaid principal amount of each Loan on the Maturity Date.
(b) If on any day the Credit Exposure exceeds the Available Amount,
the Borrower shall, no later than the following Business Day, prepay the Loans
in an amount equal to such excess.
(c) The Lender shall maintain accounts in which it shall record (i)
the amount of each Loan made hereunder, (ii) the amount of any principal or
interest due and payable or to become due and payable from the Borrower to the
Lender hereunder and (iii) the amount of any sum received by the Lender
hereunder. The entries made in such accounts shall, to the extent not
inconsistent with any entries made in any Note, be prima facie evidence of the
existence and amounts of the obligations recorded therein, provided that the
failure of the Lender to maintain such accounts or any error therein shall not
in any manner affect the obligation of the Borrower to repay the Loans in
accordance with the terms of this Agreement.
(d) The Loans evidenced by the Note and interest thereon shall at
all times (including after assignment pursuant to Section 9.04) be represented
by one or more Notes in like form payable to the order of the payee named
therein and its registered assigns.
Section 2.06 Prepayment of Loans
(a) The Borrower shall have the right at any time and from time to
time to prepay any Loan in whole or in part, subject to the requirements of this
Section.
(b) In the event of any partial reduction or termination of the
Commitment, then (i) at or prior to the date of such reduction or termination,
the Lender shall notify the Borrower of the Credit Exposure after giving effect
thereto and (ii) if such sum would exceed the Commitment after giving effect to
such reduction or termination, then the Borrower shall, on the
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date of such reduction or termination, prepay Loans in an amount sufficient to
eliminate such excess.
(c) The Borrower shall notify the Lender by telephone (confirmed by
telecopy) of any prepayment not later than 11:00 a.m., New York City time, on
the date of prepayment. Each such notice shall be irrevocable and shall specify
the prepayment date and the principal amount of each Loan or portion thereof to
be prepaid, provided that, if a notice of prepayment is given in connection with
a conditional notice of termination of the Commitment as contemplated by Section
2.04, then such notice of prepayment may be revoked if such notice of
termination is revoked in accordance with Section 2.04. Each partial prepayment
of any Loan under Sections 2.04(b) and 2.06(a) shall, when added to the amount
of each concurrent reduction of the Commitment and prepayment of Loans under
such Sections, be in an integral multiple $100,000 and not less than $1,000,000.
Prepayments shall be accompanied by accrued interest to the extent required by
Section 3.01.
Section 2.07 Payments Generally; Pro Rata Treatment; Sharing of Setoffs
(a) The Borrower shall make each payment required to be made by it
hereunder or under any other Loan Document (whether of principal of Loans,
interest or fees, or of amounts payable under Section 3.03, 3.04 or 9.03, or
otherwise) prior to 12:00 noon, New York City time, on the date when due, in
immediately available funds, without setoff or counterclaim. Any amounts
received after such time on any date may, in the discretion of the Lender, be
deemed to have been received on the next succeeding Business Day for purposes of
calculating interest thereon. All such payments shall be made to the Lender by
wire transfer to Account No. GLA 111231, ABA 021000018, or to such other account
as to which the Lender may notify the Borrower in writing from time to time. If
any payment hereunder shall be due on a day that is not a Business Day, the date
for payment shall be extended to the next succeeding Business Day, and, in the
case of any payment accruing interest, interest thereon shall be payable for the
period of such extension. All payments hereunder shall be made in dollars.
(b) If at any time insufficient funds are received by and available
to the Lender to pay fully all amounts of principal of Loans, interest, fees and
commissions then due hereunder, such funds shall be applied (i) first, towards
payment of interest, fees and commissions then due hereunder, and (ii) second,
towards payment of principal of Loans then due hereunder.
ARTICLE 3. INTEREST, FEES, YIELD PROTECTION, ETC.
Section 3.01 Interest
(a) Each Loan shall bear interest at the Alternate Base Rate for the
period from the date such Loan is made until the date which is two weeks
thereafter and thereafter, if applicable, at the Alternate Base Rate plus 2%.
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(b) Notwithstanding the foregoing, if an Event of Default has
occurred and is continuing, then, so long as such Event of Default is
continuing, all principal of and interest on each Loan and each fee and other
amount payable by the Borrower hereunder shall bear interest, after as well as
before judgment, at a rate per annum equal to (i) in the case of principal of
any Loan, 2% plus the rate otherwise applicable to such Loan as provided in the
preceding paragraph of this Section or (ii) in the case of any other amount, 2%
plus the Alternate Base Rate.
(c) Accrued interest on each Loan shall be payable in arrears on the
last day of each March, June, September and December, provided that (i) interest
accrued pursuant to paragraph (b) of this Section shall be payable on demand and
(ii) in the event of any repayment or prepayment of any Loan, accrued interest
on the principal amount repaid or prepaid shall be payable on the date of such
repayment or prepayment.
(d) All interest hereunder shall be computed on the basis of a year
of 360 days, except that interest computed at times when the Alternate Base Rate
is based on the Prime Rate shall be computed on the basis of a year of 365 days
(or 366 days in a leap year), and in each case shall be payable for the actual
number of days elapsed (including the first day but excluding the last day). The
applicable Alternate Base Rate shall be determined by the Lender, and such
determination shall be conclusive absent clearly demonstrable error.
Section 3.02 Fees
(a) The Borrower agrees to pay to the Lender for its own account, a
commitment fee, which shall accrue at a rate per annum equal to 0.35% on the
daily amount of the unused Commitment during the period from and including the
Effective Date to but excluding the Commitment Termination Date. Accrued
commitment fees shall be payable in arrears on the last day of March, June,
September and December of each year, each date on which the Commitment is
permanently reduced and on the date on which the Commitment terminates,
commencing on the first such date to occur after the date hereof. All commitment
fees shall be computed on the basis of a year of 365 days (or 366 days in a leap
year) and shall be payable for the actual number of days elapsed (including the
first day but excluding the last day).
(b) The Borrower agrees to pay to the Lender for its own account, an
upfront fee equal to 1.50% of the Commitment, of which one-half shall be payable
on the Effective Date and the balance on the Initial Transaction Date.
(c) Unless on or before July 31, 1999, (i) the Net Capital of ITG
(calculated without regard to loans made by the Borrower to ITG with the
proceeds of the Loans) is greater than or equal to the sum of the Commitment on
such date plus $5,000,000, and (ii) Consolidated Shareholders' Equity is greater
than or equal to $80,000,000, the Borrower agrees to pay to the Lender for its
own account, an additional fee equal to $500,000, payable on such date.
(d) The Borrower agrees to pay to the Lender, for its own account,
fees and other amounts payable in the amounts and at the times separately agreed
upon between the Borrower and the Lender.
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(e) All fees and other amounts payable hereunder shall be paid on
the dates due, in immediately available funds, to the Lender. Fees and other
amounts paid shall not be refundable under any circumstances.
Section 3.03 Capital Adequacy
(a) If the Lender determines that any Change in Law regarding
capital requirements has or would have the effect of reducing the rate of return
on the Lender's capital or on the capital of the Lender's holding company as a
consequence of this Agreement or the Loans made by the Lender to a level below
that which the Lender or the Lender's holding company could have achieved but
for such Change in Law (taking into consideration the Lender's policies and the
policies of the Lender's holding company with respect to capital adequacy), then
from time to time the Borrower will pay to the Lender such additional amount or
amounts as will compensate the Lender or the Lender's holding company for any
such reduction suffered.
(b) A certificate of the Lender setting forth the amount or amounts
necessary to compensate the Lender or its holding company, as applicable, as
specified in paragraph (a) of this Section shall be delivered to the Borrower
and shall be conclusive absent manifest error. The Borrower shall pay the Lender
the amount shown as due on any such certificate within 10 days after receipt
thereof. Failure or delay on the part of the Lender to demand compensation
pursuant to this Section shall not constitute a waiver of the Lender's right to
demand such compensation.
Section 3.04 Taxes
(a) Any and all payments by or on account of any obligation of the
Borrower hereunder and under any other Loan Document shall be made free and
clear of and without deduction for any Indemnified Taxes or Other Taxes,
provided that, if the Borrower shall be required to deduct any Indemnified Taxes
or Other Taxes from such payments, then (i) the sum payable shall be increased
as necessary so that, after making all required deductions (including deductions
applicable to additional sums payable under this Section), the Lender receives
an amount equal to the sum it would have received had no such deductions been
made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall
pay the full amount deducted to the relevant Governmental Authority in
accordance with applicable law.
(b) In addition, the Borrower shall pay any Other Taxes to the
relevant Governmental Authority in accordance with applicable law.
(c) The Borrower shall indemnify the Lender, within ten days after
written demand therefor, for the full amount of any Indemnified Taxes or Other
Taxes paid by the Lender on or with respect to any payment by or on account of
any obligation of the Borrower under the Loan Documents (including Indemnified
Taxes or Other Taxes imposed or asserted on or attributable to amounts payable
under this Section) and any penalties, interest and reasonable expenses arising
therefrom or with respect thereto, whether or not such Indemnified Taxes or
Other Taxes were correctly or legally imposed or asserted by the relevant
Governmental Authority. A certificate as to the amount of such payment or
liability delivered to the Borrower by the Lender shall be conclusive absent
manifest error.
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(d) As soon as practicable after any payment of Indemnified Taxes or
Other Taxes by the Borrower to a Governmental Authority that were deducted under
Section 3.04(a), the Borrower shall deliver to the Lender the original or a
certified copy of a receipt issued by such Governmental Authority evidencing
such payment, a copy of the return reporting such payment or other evidence of
such payment reasonably satisfactory to the Lender.
Section 3.05 Mitigation Obligations
If the Lender requests compensation under Section 3.03, or if the
Borrower is required to pay any additional amount to the Lender or any
Governmental Authority for the account of the Lender pursuant to Section 3.04,
then the Lender shall use reasonable efforts to designate a different lending
office for funding or booking its Loans (or any participation therein) hereunder
or to assign its rights and obligations hereunder to another of its offices,
branches or affiliates, if, in the judgment of the Lender, such designation or
assignment (i) would eliminate or reduce amounts payable pursuant to Section
3.03 or 3.04, as applicable, in the future and (ii) would not subject the Lender
to any unreimbursed cost or expense and would not otherwise be disadvantageous
to the Lender. The Borrower hereby agrees to pay all reasonable costs and
expenses incurred by the Lender in connection with any such designation or
assignment.
ARTICLE 4. REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Lender that:
Section 4.01 Organization; Powers
Each of the Borrower and the Subsidiaries is duly organized, validly
existing and in good standing under the laws of the jurisdiction of its
organization, has all requisite power and authority to carry on its business as
now conducted and, except where the failure to do so, individually or in the
aggregate, could not reasonably be expected to result in a Material Adverse
Effect, is qualified to do business in, and is in good standing in, every
jurisdiction where such qualification is required.
Section 4.02 Authorization; Enforceability
The Transactions are within the corporate, partnership or other
analogous powers of each of the Borrower and the Subsidiaries to the extent it
is a party thereto and have been duly authorized by all necessary corporate,
partnership or other analogous and, if required, equityholder action. Each Loan
Document has been duly executed and delivered by each of the Borrower and the
Subsidiaries to the extent it is a party thereto and constitutes a legal, valid
and binding obligation thereof, enforceable in accordance with its terms,
subject to applicable bankruptcy, insolvency, reorganization, moratorium or
other laws affecting creditors' rights generally.
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Section 4.03 Governmental Approvals; No Conflicts
The Transactions (a) do not require any consent or approval of,
registration or filing with, or any other action by, any Governmental Authority,
except such as have been obtained or made and are in full force and effect, (b)
will not violate any applicable law or regulation or the charter, by-laws or
other organizational documents of the Borrower or any of the Subsidiaries or any
order of any Governmental Authority, (c) will not violate or result in a default
under any indenture, agreement or other instrument binding upon the Borrower or
any of the Subsidiaries or its assets, or give rise to a right thereunder to
require any payment to be made by the Borrower or any of the Subsidiaries, and
(d) will not result in the creation or imposition of any Lien on any asset of
the Borrower or any of the Subsidiaries other than Liens expressly permitted by
Section 7.02.
Section 4.04 Financial Condition; No Material Adverse Change
(a) The Borrower has heretofore furnished to the Lender its Form
10-K for the fiscal year ended December 31, 1998 containing the consolidated
statement of financial condition and statements of income, changes in
stockholders' equity and cash flows of the Borrower and the Subsidiaries as of
and for the fiscal year ended December 31, 1998 and 1997, reported on by KPMG
LLP, independent public accountants. The consolidated financial statements
referred to in the preceding sentence present fairly, in all material respects,
the financial condition and results of operations of the Borrower and
consolidated Subsidiaries as of such dates and for the indicated periods in
accordance with GAAP and are consistent with the books and records of the
Borrower (which books and records are correct and complete).
(b) The contents of the FOCUS Report of ITG as of December 31, 1998,
a copy of which has been furnished to the Lender, are correct in all material
respects.
(c) Since December 31, 1998, there has been no material adverse
change in the business, assets, operations, prospects or condition, financial or
otherwise, of the Borrower and the Subsidiaries, taken as a whole.
Section 4.05 Properties
(a) Each of the Borrower and the Subsidiaries has good title to, or
valid leasehold interests in, all its real and personal property material to its
business, except for minor defects in title that do not interfere with its
ability to conduct its business as currently conducted or to utilize such
properties for their intended purposes.
(b) Each of the Borrower and the Subsidiaries owns, or is entitled
to use, all trademarks, tradenames, copyrights, patents and other intellectual
property material to its business, and the use thereof by the Borrower and the
Subsidiaries does not infringe upon the rights of any other Person, except for
any such infringements that, individually or in the aggregate, could not
reasonably be expected to result in a Material Adverse Effect.
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Section 4.06 Litigation and Environmental Matters
(a) There are no actions, suits or proceedings by or before any
arbitrator or Governmental Authority pending against or, to the knowledge of the
Borrower, threatened against or affecting the Borrower or any of the
Subsidiaries (i) that, if adversely determined, could reasonably be expected,
individually or in the aggregate, to result in a Material Adverse Effect (other
than the Disclosed Matters) or (ii) that involve any Loan Document or the
Transactions.
(b) Except for the Disclosed Matters and except with respect to any
other matters that, individually or in the aggregate, could not reasonably be
expected to result in a Material Adverse Effect, neither the Borrower nor any of
its Subsidiaries (i) have failed to comply with any Environmental Law or to
obtain, maintain or comply with any permit, license or other approval required
under any Environmental Law, (ii) have become subject to any Environmental
Liability, (iii) have received notice of any claim with respect to any
Environmental Liability or (iv) know of any basis for any Environmental
Liability.
(c) Since the date of this Agreement, there has been no change in
the status of the Disclosed Matters that, individually or in the aggregate, has
resulted in, or materially increased the likelihood of, a Material Adverse
Effect.
Section 4.07 Compliance with Laws and Agreements
Each of the Borrower and the Subsidiaries is in compliance with all
laws, regulations and orders of any Governmental Authority applicable to it or
its property and all indentures, agreements and other instruments binding upon
it or its property, except where the failure to do so, individually or in the
aggregate, could not reasonably be expected to result in a Material Adverse
Effect. No Default has occurred and is continuing.
Section 4.08 Investment and Holding Company Status
Neither the Borrower nor any of the Subsidiaries are (a) an
"investment company" as defined in, or subject to regulation under, the
Investment Company Act of 1940 or (b) a "holding company" as defined in, or
subject to regulation under, the Public Utility Holding Company Act of 1935.
Section 4.09 Taxes
Except as set forth on Schedule 4.06, each of the Borrower and the
Subsidiaries has timely filed or caused to be filed all Tax returns and reports
required to have been filed by it and has paid or caused to be paid all Taxes
required to have been paid by it, except (a) Taxes that are being contested in
good faith by appropriate proceedings and for which the Borrower or such
Subsidiary, as applicable, has set aside on its books adequate reserves or (b)
to the extent that the failure to do so could not reasonably be expected to
result in a Material Adverse Effect.
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Section 4.10 ERISA
No ERISA Event has occurred or is reasonably expected to occur that,
when taken together with all other such ERISA Events for which liability is
reasonably expected to occur, could reasonably be expected to result in a
Material Adverse Effect. Except as provided in Schedule 4.10, the present value
of all accumulated benefit obligations under each Plan (based on the assumptions
used for purposes of Statement of Financial Accounting Standards No. 87) did
not, as of the date of the most recent financial statements reflecting such
amounts, exceed by more than $1,600,000 the fair market value of the assets of
such Plan, and the present value of all accumulated benefit obligations of all
underfunded Plans (based on the assumptions used for purposes of Statement of
Financial Accounting Standards No. 87) did not, as of the date of the most
recent financial statements reflecting such amounts, exceed by more than
$1,600,000 the fair market value of the assets of all such underfunded Plans.
Section 4.11 Disclosure
The Borrower has disclosed to the Lender or made public all
agreements, instruments and corporate or other restrictions to which it or any
of the Subsidiaries is subject, and all other matters known to it, that,
individually or in the aggregate, could reasonably be expected to result in a
Material Adverse Effect. None of the reports, financial statements, certificates
or other information furnished by or on behalf of the Borrower or any Subsidiary
to the Lender in connection with the negotiation of the Loan Documents or
delivered thereunder (as modified or supplemented by other information so
furnished) contains any material misstatement of fact or omits to state any
material fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, provided that, with
respect to projected financial information, the Borrower represents only that
such information was prepared in good faith based upon assumptions believed to
be reasonable at the time.
Section 4.12 Subsidiaries
Schedule 4.12 sets forth the name and jurisdiction of incorporation
of, and the ownership interest of the Borrower in, each Subsidiary as of the
Effective Date.
Section 4.13 Labor Matters
As of the Effective Date, there are no strikes, lockouts or
slowdowns against the Borrower or any Subsidiary pending or, to the knowledge of
the Borrower, threatened. The hours worked by and payments made to employees of
the Borrower and the Subsidiaries have not been in violation of the Fair Labor
Standards Act or any other applicable Federal, state, local or foreign law
dealing with such matters, except where any such violations, individually and in
the aggregate, would not be reasonably likely to result in a Material Adverse
Effect. All material payments due from the Borrower or any Subsidiary, or for
which any claim may be made against the Borrower or any Subsidiary, on account
of wages and employee health and welfare insurance and other benefits, have been
paid or accrued as a liability on the books of the Borrower or such Subsidiary.
The consummation of the Transactions will not give rise to any right of
termination
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or right of renegotiation on the part of any union under any collective
bargaining agreement to which the Borrower or any Subsidiary is bound.
Section 4.14 Solvency
Immediately after the consummation of each Transaction and
immediately following the making of each Loan, if any, made on the date thereof
and after giving effect to the application of the proceeds of such Loan, (a) the
fair value of the assets of the Borrower and the Subsidiaries, taken as a whole,
at a fair valuation, will exceed their debts and liabilities, subordinated,
contingent or otherwise; (b) the present fair saleable value of the property of
the Borrower and the Subsidiaries, taken as a whole, will be greater than the
amount that will be required to pay the probable liability of their debts and
other liabilities, subordinated, contingent or otherwise, as such debts and
other liabilities become absolute and matured; (c) the Borrower will be able to
pay its debts and liabilities, subordinated, contingent or otherwise, as such
debts and liabilities become absolute and matured; and (d) the Borrower will not
have unreasonably small capital with which to conduct the business in which it
is engaged as such business is now conducted and is proposed to be conducted
following such date.
Section 4.15 Security Documents
(a) The Security Agreement is effective to create in favor of the
Lender a legal, valid and enforceable security interest in the Collateral (as
defined in the Security Agreement) and, when (i) the pledged property
constituting such Collateral is delivered to the Lender, (ii) the financing
statements in appropriate form are filed in the offices specified on Schedule 5
to the Perfection Certificate and (iii) all other applicable filings under the
Uniform Commercial Code or otherwise that are required under the Loan Documents
are made, the Security Agreement shall constitute a fully perfected Lien on, and
security interest in, all right, title and interest of the Borrower thereunder
in such Collateral, in each case prior and superior in right to any other
Person, other than with respect to Liens expressly permitted by Section 7.02.
Section 4.16 Federal Reserve Regulations
(a) Neither the Borrower nor any of the Subsidiaries (other than
ITG) are engaged principally, or as one of their important activities, in the
business of extending credit for the purpose of buying or carrying Margin Stock.
ITG is a broker and dealer subject to the provisions of Regulation T. ITG
maintains procedures and internal controls reasonably adapted to insure that ITG
does not extend or maintain credit to or for its customers other than in
accordance with the provisions of Regulation T, and officers of ITG regularly
supervise its activities and the activities of employees of ITG to insure that
ITG does not extend or maintain credit to or for its customers other than in
accordance with the provisions of Regulation T, except for occasional
inadvertent failures to comply with Regulation T in connection with transactions
which are not material either in number or amount.
(b) No part of the proceeds of any Loan will be used, whether
directly or indirectly, and whether immediately, incidentally or ultimately, to
purchase, acquire or carry any
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Margin Stock or for any purpose that entails a violation of, or that is
inconsistent with, the provisions of the regulations of the Board, including
Regulation T, U or X.
Section 4.17 Membership
ITG is a member organization in good standing of the NASD and is
duly registered as a broker-dealer with the Securities and Exchange Commission.
Section 4.18 Assessments by the SIPC
ITG is not in arrears with respect to any assessment which the
Borrower has received from the SIPC and which is currently due or past due.
Section 4.19 Year 2000
Any reprogramming required to permit the proper functioning, in and
following the year 2000, of (i) the Borrower's and the Subsidiaries' computer
systems and (ii) equipment containing embedded microchips (including systems and
equipment supplied by others) and the testing of all such systems and equipment,
as so reprogrammed, will be completed by September 30, 1999. The cost to the
Borrower and the Subsidiaries of such reprogramming and testing and of the
reasonably foreseeable consequences of year 2000 to the Borrower and the
Subsidiaries (including reprogramming errors and the failure of others' systems
or equipment) would not reasonably be expected to result in a Default or a
Material Adverse Effect. Except for such of the reprogramming referred to in the
preceding sentence as may be necessary, the computer and management information
systems of the Borrower and the Subsidiaries are and, with ordinary course
upgrading and maintenance, will continue for the term of this Agreement to be,
sufficient to permit the Borrower and the Subsidiaries to conduct their
business, except for those failures that would not, individually or in the
aggregate, reasonably be expected to result in a Material Adverse Effect.
ARTICLE 5. CONDITIONS
Section 5.01 Effective Date
This Agreement shall not become effective until the date on which
each of the following conditions is satisfied (or waived in accordance with
Section 9.02):
(a) The Lender (or its counsel) shall have received from the
Borrower either (i) a counterpart of this Agreement signed on behalf of the
Borrower or (ii) written evidence satisfactory to the Lender (which may include
telecopy transmission of a signed signature page of this Agreement) that the
Borrower has signed a counterpart of this Agreement.
(b) The Lender shall have received a Note signed on behalf of the
Borrower.
(c) The Lender shall have received a favorable written opinion
(addressed to the Lender and dated the Effective Date) from Cahill Gordon &
Reindel, counsel to the
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Borrower, substantially in the form of Exhibit B. The Borrower hereby requests
such counsel to deliver such opinion.
(d) The Lender shall have received such documents and certificates
as the Lender or its counsel may reasonably request relating to the
organization, existence and good standing of the Borrower, the authorization of
the Loan Documents and any other legal matters relating to the Borrower, the
Loan Documents or the transactions contemplated thereby, all in form and
substance reasonably satisfactory to the Lender and its counsel.
(e) The Lender shall have received a certificate, dated the
Effective Date and signed by the President, a Vice President or a Financial
Officer, confirming compliance with the conditions set forth in paragraphs (a)
and (b) of Section 5.03.
(f) The Lender shall have received all fees and other amounts due it
from the Borrower and payable on or prior to the Effective Date, including, to
the extent invoiced, reimbursement or payment of all reasonable fees and
disbursements of Lender's counsel and other out-of-pocket expenses required to
be reimbursed or paid by the Borrower hereunder.
(g) The Lender shall have received a Federal Reserve Form U-1 duly
executed by the Borrower and satisfactory to the Lender.
(h) The Lender shall have received (i) a true and complete copy of
the POSIT License Agreement and (ii) a letter from the POSIT Joint Venture with
respect to the timely payment by ITG of all royalties thereunder (subject to
audit), such letter to be in all respects satisfactory to the Lender.
(i) After giving effect to the Transactions to be consummated on the
Effective Date, none of the Borrower or any of the Subsidiaries shall have
outstanding any shares of preferred equity securities or any Indebtedness, other
than (i) Indebtedness incurred under the Loan Documents and (ii) Indebtedness
permitted under Section 7.01.
(j) The Lender shall have received a true, complete and correct copy
of each Initial Transaction Document, which shall be in form and substance
reasonably satisfactory to the Lender.
(k) The Lender shall have received a copy of a private letter ruling
of the Internal Revenue Service which states that the Initial Transactions shall
be tax-free to the Borrower.
The Lender shall notify the Borrower of the Effective Date, and such notice
shall be conclusive and binding. Notwithstanding the foregoing, the obligations
of the Lender to make Loans hereunder shall not become effective unless each of
the foregoing conditions and each of the conditions set forth in Section 5.02 is
satisfied (or waived pursuant to Section 9.02) at or prior to 3:00 p.m., New
York City time, on May 15, 1999 (and, in the event such conditions are not so
satisfied or waived, the Commitment shall terminate at such time).
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Section 5.02 Conditions to First Loans
The obligations of the Lender to make the initial Loans shall be
subject to the prior or contemporaneous satisfaction of the conditions set forth
in Section 5.01 and the satisfaction (or waiver in accordance with Section 9.02)
of the following additional conditions:
(a) The Lender shall have received counterparts of the Assumption
Agreement signed on behalf of Jefferies Group.
(b) The Lender shall have received such documents and certificates
as the Lender or its counsel may reasonably request relating to the
organization, existence and good standing of Jefferies Group, the authorization
by Jefferies Group of the Transactions and any other legal matters relating to
Jefferies Group, the Loan Documents or the Transactions, all in form and
substance reasonably satisfactory to the Lender and its counsel.
(c) The Lender shall have received such documents and certificates
as the Lender or its counsel may reasonably request relating to the absence of
changes to the documentation delivered by the Borrower pursuant to Section
5.01(d) and the continued effectiveness thereof, and attaching resolutions of
its board of directors authorizing the Initial Transactions and the Initial
Transaction Documents, all in form and substance reasonably satisfactory to the
Lender and its counsel.
(d) The Lender shall have received counterparts of the Security
Agreement signed on behalf of the Borrower, together with the following:
(i) all stock certificates representing shares of capital
stock of all Domestic Subsidiaries owned by or on behalf of the Borrower
as of the Effective Date after giving effect to the Transactions;
(ii) stock powers and instruments of transfer, endorsed in
blank, with respect to such stock certificates, promissory notes and other
instruments;
(iii) all instruments and other documents, including Uniform
Commercial Code financing statements, required by law or reasonably
requested by the Lender to be filed, registered or recorded to create or
perfect the Liens intended to be created under the Security Agreement; and
(iv) a completed Perfection Certificate, dated the Effective
Date and signed by the President, a Vice President or a Financial Officer
and the chief legal officer of the Borrower, together with all attachments
contemplated thereby, including the results of a search of the Uniform
Commercial Code (or equivalent) filings made with respect to the Borrower
in the jurisdictions contemplated by the Perfection Certificate and copies
of the financing statements (or similar documents) disclosed by such
search and evidence reasonably satisfactory to the Lender that the Liens
indicated by such financing statements (or similar documents) are
permitted by Section 7.02 or have been released.
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(e) After giving effect to the Initial Transactions, the (i) Net
Capital of ITG shall be greater than or equal to the Commitment and (ii)
Consolidated Shareholders' Equity shall be greater than or equal to $70,000,000,
and the Lender shall have received a certificate of a Financial Officer, in form
and substance reasonably satisfactory to the Lender, to the foregoing effects.
(f) The Lender shall have received a certificate, dated the Initial
Transaction Date and signed by the President, a Vice President or a Financial
Officer, (i) confirming that each Initial Transaction has been consummated in
accordance with the terms and conditions of the applicable Initial Transaction
Documents (with no waiver or amendment of any provision thereof without the
prior written consent of the Lender), (ii) confirming that there has been no
change to the Initial Transaction Documents as delivered to the Lender pursuant
to Section 5.01 and (iii) attaching a copy of a certificate of merger issued by
the Secretary of State of the State of Delaware with respect to the merger of
the Borrower with and into Jefferies Group.
(g) The Lender shall have received a certificate, signed by a
Financial Officer, setting forth reasonably detailed calculations demonstrating
compliance with Sections 7.12, 7.13, 7.14 and 7.15, on a pro forma basis
immediately after giving effect to the Transactions.
(h) The Lender shall have received a favorable written opinion
(addressed to the Lender and dated the Initial Transaction Date) from Cahill
Gordon & Reindel, counsel to the Borrower, substantially in the form of Exhibit
B-1. The Borrower hereby requests such counsel to deliver such opinion.
(i) The Lender shall have received all reasonable fees and other
amounts due it from the Borrower and payable on or prior to the Initial
Transaction Date, including, to the extent invoiced and not theretofore paid,
reimbursement or payment of all reasonable fees and disbursements of Lender's
counsel and other out-of-pocket expenses required to be reimbursed or paid by
the Borrower hereunder.
(j) In the event that the Borrower shall have delivered any of the
certificates required by Section 5.02(b), (e) or (g) prior to the Initial
Transaction Date, the Lender shall have received a certificate, dated the date
of the consummation of the Initial Transactions and signed by the President, a
Vice President or a Financial Officer, certifying that the information contained
in any such certificate is true and correct as of the Initial Transaction Date.
(k) After giving effect to the Transactions to be consummated on the
Initial Transaction Date, none of the Borrower or any of the Subsidiaries shall
have outstanding any shares of preferred equity securities or any Indebtedness,
other than (i) Indebtedness incurred under the Loan Documents and (ii)
Indebtedness permitted under Section 7.01.
Section 5.03 Each Credit Event
The obligation of the Lender to make a Loan is subject to the
satisfaction of the following conditions:
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(a) The representations and warranties of the Borrower set forth in
each Loan Document shall be true and correct on and as of the date of such Loan.
(b) At the time of and immediately after giving effect to such Loan
no Default shall have occurred and be continuing.
Each Loan shall be deemed to constitute a representation and warranty by the
Borrower on the date thereof as to the matters specified in paragraphs (a) and
(b) of this Section.
ARTICLE 6. AFFIRMATIVE COVENANTS
Until the Commitment have expired or been terminated and the principal of
and interest on each Loan and all fees and other amounts payable under the Loan
Documents shall have been paid in full, the Borrower covenants and agrees with
the Lender that:
Section 6.01 Financial Statements and Other Information
The Borrower will furnish to the Lender:
(a) within 90 days after the end of each fiscal year, (i) its Form
10-K containing its audited consolidated statement of financial condition and
related statements of income, changes in stockholders' equity and cash flows as
of the end of and for such year, setting forth in each case in comparative form
the figures for the previous fiscal year, all reported on by KPMG LLP or other
independent public accountants of recognized national standing (without a "going
concern" or like qualification or exception and without any qualification or
exception as to the scope of such audit) to the effect that such consolidated
financial statements present fairly in all material respects the financial
condition and results of operations of the Borrower and its consolidated
Subsidiaries on a consolidated basis in accordance with GAAP consistently
applied;
(b) within 45 days after the end of each of the first three fiscal
quarters of each fiscal year, its Form 10-Q containing its consolidated
statement of financial condition and related statements of income, changes in
stockholders' equity and cash flows as of the end of and for such fiscal quarter
and the then elapsed portion of the fiscal year, setting forth in each case in
comparative form the figures for the corresponding period or periods of (or, in
the case of the balance sheet, as of the end of) the previous fiscal year, all
certified by one of its Financial Officers as presenting fairly in all material
respects the financial condition and results of operations of the Borrower and
the consolidated Subsidiaries on a consolidated basis in accordance with GAAP
consistently applied, subject to normal year-end audit adjustments and the
absence of footnotes;
(c) concurrently with any delivery of financial statements under
clause (a) and (b) above, a certificate of a Financial Officer (i) certifying as
to whether a Default has occurred and, if a Default has occurred, specifying the
details thereof and any action taken or proposed to be taken with respect
thereto, (ii) setting forth reasonably detailed calculations demonstrating
compliance with Sections 7.12, 7.13, 7.14 and 7.15, and (iii) stating whether
any change in
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GAAP or in the application thereof has occurred since the date of the audited
financial statements referred to in Section 4.04 and, if any such change has
occurred, specifying the effect of such change on the financial statements
accompanying such certificate;
(d) concurrently with any delivery of financial statements under
clause (a) above, a certificate of the accounting firm that reported on such
financial statements stating whether they obtained knowledge during the course
of their examination of such financial statements of any Default (which
certificate may be limited to the extent required by accounting rules or
guidelines);
(e) As soon as available and in any event within 30 days after
filing thereof, copies of all quarterly FOCUS reports and notices of all
material violations of rules and regulations of the Securities and Exchange
Commission or any material securities exchange which the Borrower or any
Subsidiary shall file with the Securities and Exchange Commission or any
material securities exchange;
(f) promptly after the same become publicly available, copies of all
periodic and other reports, proxy statements and other materials filed by the
Borrower or any Subsidiary with the Securities and Exchange Commission, or any
Governmental Authority succeeding to any or all of the functions of said
Commission, or with any national securities exchange, or distributed by the
Borrower to its shareholders generally, as the case may be; and
(g) promptly following any request therefor, such other information
regarding the operations, business affairs and financial condition of the
Borrower or any Subsidiary, or compliance with the terms of the Loan Documents,
as the Lender may reasonably request.
Section 6.02 Notices of Material Events
The Borrower will furnish to the Lender prompt written notice of the
following:
(a) the occurrence of any Default;
(b) the determination by the Borrower that any action, suit or
proceeding by or before any arbitrator or Governmental Authority against or
affecting the Borrower or any Affiliate thereof, whether newly commenced or
ongoing could, if adversely determined, in the good faith opinion of the
Borrower reasonably be expected to result in a Material Adverse Effect;
(c) immediately upon becoming aware of the occurrence thereof,
notice of the suspension or expulsion of ITG from membership in the NASD;
(d) the occurrence of any ERISA Event that, alone or together with
any other ERISA Events that have occurred, could reasonably be expected to
result in liability of the Borrower and the Subsidiaries in an aggregate amount
exceeding $1,000,000, and
(e) any other development that results in, or could reasonably be
expected to result in, a Material Adverse Effect.
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Each notice delivered under this Section shall be accompanied by a statement of
a Financial Officer or other executive officer of the Borrower setting forth the
details of the event or development requiring such notice and any action taken
or proposed to be taken with respect thereto.
Section 6.03 Existence; Conduct of Business
The Borrower will, and will cause each of the Subsidiaries to, do or
cause to be done all things necessary to preserve, renew and keep in full force
and effect its legal existence and the rights, licenses, permits, privileges and
franchises material to the conduct of its business, provided that the foregoing
shall not prohibit any merger, consolidation, liquidation or dissolution
permitted under Section 7.03.
Section 6.04 Payment of Obligations
The Borrower will, and will cause each of the Subsidiaries to, pay
its obligations, including Tax liabilities, that, if not paid, would reasonably
be expected to result in a Material Adverse Effect before the same shall become
delinquent or in default, except where (a) the validity or amount thereof is
being contested in good faith by appropriate proceedings, (b) the Borrower or
such Subsidiary has set aside on its books adequate reserves with respect
thereto in accordance with GAAP and (c) the failure to make payment pending such
contest could not reasonably be expected to result in a Material Adverse Effect.
Section 6.05 Maintenance of Properties
The Borrower will, and will cause each of the Subsidiaries to, keep
and maintain all property material to the conduct of its business in good
working order and condition, ordinary wear and tear excepted.
Section 6.06 Books and Records; Inspection Rights
The Borrower will, and will cause each of the Subsidiaries to, keep
proper books of record and account in which full, true and correct entries are
made of all dealings and transactions in relation to its business and
activities. The Borrower will, and will cause each of the Subsidiaries to,
permit any representatives designated by the Lender, upon reasonable prior
notice, to visit and inspect its properties, to examine and make extracts from
its books and records, and to discuss its affairs, finances and condition with
its officers and independent accountants, all at such reasonable times and as
often as reasonably requested.
Section 6.07 Compliance with Laws
The Borrower will, and will cause each of the Subsidiaries to,
comply with all laws, rules, regulations and orders of any Governmental
Authority applicable to it or its property, except where the failure to do so,
individually or in the aggregate, could not reasonably be expected to result in
a Material Adverse Effect.
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Section 6.08 Use of Proceeds
The proceeds of the Loans will be used only (a) to consummate the
Initial Transactions and (b) to repay intercompany loans from ITG to the
Borrower or make subordinated loans to ITG in order to enable ITG to satisfy its
Net Capital requirements. No part of the proceeds of any Loan will be used,
whether directly or indirectly, and whether immediately, incidentally or
ultimately, to purchase, acquire or carry any Margin Stock or for any purpose
that entails a violation of any of the regulations of the Board, including
Regulations T, U and X.
Section 6.09 Information Regarding Collateral
(a) The Borrower will furnish to the Lender prompt written notice of
any change in (i) the legal name of the Borrower or in any trade name used to
identify it in the conduct of its business or in the ownership of its
properties, (ii) the location of the chief executive office of the Borrower, its
principal place of business, any office in which it maintains books or records
relating to Collateral owned or held by it or on its behalf (including the
establishment of any such new office or facility), (iii) the identity or
organizational structure of the Borrower such that a filed financing statement
becomes misleading or (iv) the Federal Taxpayer Identification Number of the
Borrower. The Borrower agrees not to effect or permit any change referred to in
the preceding sentence unless all filings have been made under the Uniform
Commercial Code or otherwise that are required in order for the Lender to
continue at all times following such change to have a valid, legal and perfected
security interest in all the Collateral. The Borrower also agrees promptly to
notify the Lender if any material portion of the Collateral is damaged or
destroyed.
(b) Each year, at the time of delivery of annual financial
statements with respect to the preceding fiscal year pursuant to clause (a) of
Section 6.01, the Borrower shall deliver to the Lender a certificate of a
Financial Officer and the chief legal officer of the Borrower, (i) setting forth
the information required pursuant to Sections 1, 2 and 7 of the Perfection
Certificate or confirming that there has been no change in such information
since the date of the Perfection Certificate or the date of the most recent
certificate delivered pursuant to this Section and (ii) certifying that all
Uniform Commercial Code financing statements or other appropriate filings,
recordings or registrations, including all refilings, rerecordings and
reregistrations, containing a description of the Collateral have been filed of
record in each governmental, municipal or other appropriate office in each
jurisdiction identified pursuant to clause (i) above, and all other actions have
been taken, to the extent necessary to protect and perfect the security
interests under the Security Agreement for a period of not less than 18 months
after the date of such certificate (except as noted therein with respect to any
continuation statements to be filed within such period).
Section 6.10 Insurance
The Borrower will, and will cause each of the Subsidiaries to,
maintain, with financially sound and reputable insurance companies, (a) adequate
insurance for its insurable properties, all to such extent and against such
risks, including fire, casualty, business interruption
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and other risks insured against by extended coverage, as is customary with
companies in the same or similar businesses operating in the same or similar
locations and (b) such other insurance as is required pursuant to the terms of
any Security Document.
Section 6.11 Additional Domestic Subsidiaries
If any Domestic Subsidiary is formed or acquired after the Effective
Date, the Borrower will notify the Lender in writing thereof within five
Business Days after the date on which such Domestic Subsidiary is formed or
acquired and will cause such equity securities to be pledged pursuant to the
Security Agreement within five Business Days after the date on which such
Domestic Subsidiary is formed or acquired.
Section 6.12 Further Assurances
The Borrower will execute any and all further documents, financing
statements, agreements and instruments, and take all such further actions
(including the filing and recording of financing statements and other
documents), that may be required under any applicable law, or which the Lender
may reasonably request, to effectuate the transactions contemplated by the Loan
Documents or to grant, preserve, protect or perfect the Liens created or
intended to be created by the Security Documents or the validity or priority of
any such Lien, all at the expense of the Borrower. The Borrower also agrees to
provide to the Lender, from time to time upon request, evidence reasonably
satisfactory to the Lender as to the perfection and priority of the Liens
created or intended to be created by the Security Documents.
Section 6.13 Environmental Compliance
The Borrower shall, and shall cause each of its Subsidiaries to, use
and operate all of its facilities and property in compliance with all
Environmental Laws, keep all necessary permits, approvals, certificates,
licenses and other authorizations relating to environmental matters in effect
and remain in compliance therewith, and handle all Hazardous Materials in
compliance with all applicable Environmental Laws, except where noncompliance
with any of the foregoing could not reasonably be expected to have a Material
Adverse Effect.
Section 6.14 Membership
The Borrower shall cause ITG and each other Subsidiary which is a
registered broker-dealer with the Securities and Exchange Commission or other
applicable Governmental Authority to maintain such registration in full force
and effect and maintain its membership in good standing in such organizations as
are necessary to enable it to engage in the securities business and take all
action necessary to comply in all material respects with the rules and
regulations in effect from time to time of such organizations and each other
Person or Governmental Authority to which it is subject, except in any case to
the extent that the failure to do so is not reasonably expected to result in a
Material Adverse Effect.
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ARTICLE 7. NEGATIVE COVENANTS
Until the Commitment have expired or been terminated and the principal of
and interest on each Loan and all fees and other amounts payable under the Loan
Documents shall have been paid in full, the Borrower covenants and agrees with
the Lender that:
Section 7.01 Indebtedness
(a) The Borrower will not, and will not permit any Subsidiary to,
create, incur, assume or permit to exist any Indebtedness, except:
(i) Indebtedness under the Loan Documents;
(ii) Indebtedness existing on the date hereof and set forth in
Schedule 7.01, but not any extensions, renewals or replacements of any
such Indebtedness;
(iii) Indebtedness of the Borrower or any Subsidiary incurred
to finance the acquisition, construction or improvement of any fixed or
capital assets, including Capital Lease Obligations and any Indebtedness
assumed in connection with the acquisition of any such assets or secured
by a Lien on any such assets prior to the acquisition thereof, and
extensions, renewals and replacements of any such Indebtedness that do not
increase the outstanding principal amount thereof, provided that (A) such
Indebtedness is incurred prior to or within 90 days after such acquisition
or the completion of such construction or improvement and (B) the
aggregate principal amount of Indebtedness permitted by this clause (iii)
shall not exceed $1,000,000 at any time outstanding;
(iv) Indebtedness of any Person that becomes a Subsidiary
(other than a subsidiary of ITG) after the date hereof, provided that (A)
such Indebtedness exists at the time such Person becomes a Subsidiary and
is not created in contemplation of or in connection with such Person
becoming a Subsidiary and (B) the aggregate principal amount of
Indebtedness permitted by this clause (iv) shall not exceed $1,000,000 at
any time outstanding;
(v) Indebtedness of the Borrower or any of its Subsidiaries in
respect of Street Loans, repurchase agreements, reverse repurchase
agreements, securities loan agreements and other similar obligations
incurred in the ordinary course of business;
(vi) other unsecured Indebtedness of the Borrower in an
aggregate principal amount not to exceed $1,000,000 at any time
outstanding; and
(vii) Indebtedness of Jefferies Group to be assumed by JEFCO
pursuant to the Initial Transaction Documents with respect to which the
consent of a third party is necessary for such assumption, which consent
has not been received, provided that such Indebtedness shall not exceed
(x) $5,000,000 from and after the effective date of the merger referred to
in the definition of Initial Transactions until the first anniversary
thereof, (y) $3,330,000 from and after such first anniversary until the
second anniversary thereof and (z) $1,670,000 from and after such second
anniversary until the third anniversary thereof, provided
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that the Borrower's liabilities in respect of such Indebtedness may exceed
the foregoing amounts to the extent that the Borrower shall have received
a letter of credit issued for the benefit of the Borrower by one or more
nationally recognized financial institutions in an aggregate undrawn face
amount not less than the amount of such excess.
(b) The Borrower will not, and it will not permit any Subsidiary to,
(i) issue any preferred equity securities or (ii) be or become liable in respect
of any obligation (contingent or otherwise) to purchase, redeem, retire, acquire
or make any other payment in respect of any shares of equity securities of the
Borrower or any Subsidiary or any option, warrant or other right to acquire any
such shares of equity securities, except as permitted under Section 7.08.
Section 7.02 Liens
The Borrower will not, and will not permit any Subsidiary to, create,
incur, assume or permit to exist any Lien on any property or asset now owned or
hereafter acquired by it, or assign or sell any income or revenues (including
accounts receivable) or rights in respect of any thereof, except:
(a) Liens created under the Loan Documents;
(b) Permitted Encumbrances;
(c) any Lien on any property or asset of the Borrower or any
Subsidiary existing on the date hereof and set forth in Schedule 7.02, provided
that (i) such Lien shall not apply to any other property or asset of the
Borrower or any Subsidiary and (ii) such Lien shall secure only those
obligations which it secures on the date hereof and any extensions, renewals and
replacements thereof that do not increase the outstanding principal amount
thereof;
(d) any Lien existing on any property or asset prior to the
acquisition thereof by the Borrower or any Subsidiary or existing on any
property or asset of any Person that becomes a Subsidiary after the date hereof
prior to the time such Person becomes a Subsidiary, provided that (i) such Lien
is not created in contemplation of or in connection with such acquisition or
such Person becoming a Subsidiary, as applicable, (ii) such Lien shall not apply
to any other property or assets of the Borrower or any Subsidiary and (iii) such
Lien shall secure only those obligations that it secures on the date of such
acquisition or the date such Person becomes a Subsidiary, as applicable, and any
extensions, renewals and replacements thereof that do not increase the
outstanding principal amount thereof;
(e) Liens on fixed or capital assets acquired, constructed or
improved by the Borrower or any Subsidiary, provided that (i) such security
interests secure Indebtedness permitted by clause (iii) of Section 7.01, (ii)
such security interests and the Indebtedness secured thereby are incurred prior
to or within 90 days after such acquisition or the completion of such
construction or improvement, (iii) the Indebtedness secured thereby does not
exceed the cost of acquiring, constructing or improving such fixed or capital
assets and (iv) such security interests shall not apply to any other property or
assets of the Borrower or any Subsidiary;
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(f) Liens in respect of obligations to repurchase securities,
repurchase agreements, reverse repurchase agreements, securities loan
agreements, Liens securing Street Loans and other Liens securing short-term
obligations, in each case incurred in the ordinary course of business of the
ITG;
(g) Liens arising solely by virtue of any statutory or common law
provision relating to banker's liens, rights of set-off or similar rights and
remedies as to deposit accounts or other funds maintained with a creditor
depository institution;
(h) leases with respect to the assets or properties of the Borrower
or any Subsidiary;
(i) Liens evidenced by Uniform Commercial Code financing statements
regarding operating and equipment leases permitted by this Agreement;
(j) Liens solely in favor of the Borrower or any Subsidiary;
(k) Liens securing obligations under Hedge Agreements with the
Lender; and
(l) Liens in respect of purchase options, calls and similar rights
of third parties granted by ITG in the ordinary course of business where ITG
owns or has purchased for future settlement the underlying securities.
Section 7.03 Fundamental Changes
(a) The Borrower will not, and will not permit any Subsidiary to,
merge into or consolidate with any other Person, or permit any other Person to
merge into or consolidate with it, or sell, transfer, lease or otherwise dispose
of (in one transaction or in a series of transactions) all or substantially all
of its assets, or all or substantially all of the equity securities of any of
the Subsidiaries (in each case, whether now owned or hereafter acquired), or
liquidate or dissolve, except that, if at the time thereof and immediately after
giving effect thereto, no Default shall have occurred and be continuing:
(i) any Subsidiary may merge into the Borrower in a
transaction in which the Borrower is the surviving entity
(ii) any Subsidiary may merge into any other Subsidiary
provided that if any such Subsidiary is a direct wholly-owned Domestic
Subsidiary, such direct wholly-owned Domestic Subsidiary shall be the
survivor;
(iii) any Subsidiary (other than ITG or any subsidiary of ITG)
may merge with any Person in a transaction that is not permitted by clause
(i) or (ii) of this Section 7.03(a), provided that such merger is
permitted by Section 7.04 or 7.05, as applicable;
(iv) any Subsidiary may sell, transfer, lease or otherwise
dispose of its assets to (A) the Borrower or (B) any other Subsidiary
provided that if any such
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Subsidiary is a direct wholly-owned Domestic Subsidiary, such direct
wholly-owned Domestic Subsidiary shall be the buyer, transferee or lessee,
as applicable;
(v) the Borrower or any Subsidiary (other than ITG or any
subsidiary of ITG) may sell, transfer, lease or otherwise dispose of its
assets in a transaction that is not permitted by clause (iv) of this
Section 7.03(a), provided that such sale, transfer, lease or other
disposition is also permitted by Section 7.05; and
(vi) any Subsidiary (other than ITG) may liquidate or dissolve
if the Borrower determines in good faith that such liquidation or
dissolution is in the best interest of the Borrower and is not materially
disadvantageous to the Lender.
(b) The Borrower will not, and will not permit any of the
Subsidiaries to, engage to any material extent in any business other than
businesses of the type conducted by the Borrower and the Subsidiaries on the
date of execution of this Agreement and businesses directly related thereto.
Section 7.04 Investments, Loans, Advances, Guarantees and Acquisitions
The Borrower will not, and will not permit any of the Subsidiaries
to, purchase, hold or acquire (including pursuant to any merger) any capital
stock, evidences of indebtedness or other securities (including any option,
warrant or other right to acquire any of the foregoing) of, make or permit to
exist any loans or advances to, Guarantee any obligations of, or make or permit
to exist any investment or any other interest in, any other Person, or purchase
or otherwise acquire (in one transaction or a series of transactions (including
pursuant to any merger)) any assets of any other Person constituting a business
unit, except:
(a) Permitted Investments;
(b) investments and Guarantees (other than Permitted Investments)
existing on the date hereof and set forth in Schedule 7.04;
(c) investments made by the Borrower in the equity securities of any
Subsidiary and made by any Subsidiary in the equity securities of any other
Subsidiary, provided that any such equity securities owned by the Borrower shall
be pledged pursuant to the Security Agreement;
(d) loans or advances made by the Borrower or any Subsidiary to any
Domestic Subsidiary;
(e) acquisitions made by the Borrower from any Subsidiary and made
by any Subsidiary from the Borrower or any other Subsidiary;
(f) investments in the entities set forth on Schedule 7.04(f) in an
amount not to exceed $10,000,000 in any fiscal year;
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(g) loans made by the Borrower to Affiliates and employees to enable
such Affiliates and employees to pay the exercise price, and pay related income
tax withholding obligations in respect of, stock options in the Borrower that
expire April 30, 1999; and
(h) Guarantees constituting Indebtedness permitted by Section
7.01(a)(vii).
Section 7.05 Asset Sales
The Borrower will not, and will not permit any of the Subsidiaries
to, sell, transfer, lease or otherwise dispose (including pursuant to a merger)
of any asset, including any equity securities, nor will the Borrower permit any
of the Subsidiaries to issue any additional shares of its equity securities,
except:
(a) sales, transfers, leases and other dispositions of inventory,
used or surplus equipment, in each case in the ordinary course of business;
(b) sales, transfers, leases and other dispositions made by the
Borrower to any Subsidiary and made by any Subsidiary to the Borrower or any
other Subsidiary;
(c) transactions permitted by Section 7.04; and
(d) if at the time thereof and immediately after giving effect
thereto no Default shall have occurred and be continuing, other sales,
transfers, leases and other dispositions of assets, provided that all sales,
transfers, leases and other dispositions permitted by this clause (c) shall be
made for fair value and solely for cash consideration.
Section 7.06 Sale and Lease-Back Transactions
The Borrower will not, and will not permit any of the Subsidiaries
to, enter into any arrangement, directly or indirectly, with any Person whereby
it shall sell or transfer any property, real or personal, used or useful in its
business, whether now owned or hereafter acquired, and thereafter rent or lease
such property or other property that it intends to use for substantially the
same purpose or purposes as the property being sold or transferred.
Section 7.07 Hedging Agreements
The Borrower will not, and will not permit any of the Subsidiaries
to, enter into any Hedging Agreement, other than Hedging Agreements entered into
in the ordinary course of business to hedge or mitigate risks to which the
Borrower or any Subsidiary is exposed in the conduct of its business or the
management of its liabilities.
Section 7.08 Restricted Payments
The Borrower will not, and will not permit any of the Subsidiaries
to, declare or make, or agree to pay for or make, directly or indirectly, any
Restricted Payment, except that (a) the Borrower may declare and pay dividends
with respect to its equity securities payable solely in additional shares of its
equity securities, (b) any Subsidiary may declare and pay dividends
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with respect to its equity securities to the Borrower or any Subsidiary, (c) the
Borrower and ITG may make the Initial Restricted Payment and (d) so long as
immediately before after giving effect thereto (i) no Default would exist and be
continuing and (ii) Consolidated Shareholders' Equity is greater than or equal
to $80,000,000, the Borrower may declare and pay dividends in an amount not in
excess of 25% of the net income of the Borrower and the Subsidiaries determined
on a consolidated basis in accordance with GAAP for the immediately preceding
four fiscal quarters.
Section 7.09 Transactions with Affiliates
The Borrower will not, and will not permit any of the Subsidiaries
to, sell, transfer, lease or otherwise dispose (including pursuant to a merger)
any property or assets to, or purchase, lease or otherwise acquire (including
pursuant to a merger) any property or assets from, or otherwise engage in any
other transactions with, any of its Affiliates, except in the ordinary course of
business at prices and on terms and conditions not less favorable to the
Borrower or such Subsidiary than could be obtained on an arms-length basis from
unrelated third parties; provided, however, that the foregoing limitations shall
not apply to (i) the Initial Transactions, (ii) any transaction permitted by
Section 7.08, and (iii) loans made by the Borrower to Affiliates or employees to
enable such Affiliates or employees to pay the exercise price, and pay related
income tax withholding obligations in respect of, stock options in the Borrower
that expire April 30, 1999.
Section 7.10 Restrictive Agreements
The Borrower will not, and will not permit any of the Subsidiaries
to, directly or indirectly, enter into, incur or permit to exist any agreement
or other arrangement that prohibits, restricts or imposes any condition upon (a)
the ability of the Borrower or any Subsidiary to create, incur or permit to
exist any Lien upon any of its property or assets or (b) the ability of any
Subsidiary to pay dividends or other distributions with respect to any shares of
its equity securities or to make or repay loans or advances to the Borrower or
any other Subsidiary or to Guarantee Indebtedness of the Borrower or any other
Subsidiary, provided that (i) the foregoing shall not apply to restrictions and
conditions imposed by law or by this Agreement, (ii) the foregoing shall not
apply to restrictions and conditions existing on the date hereof identified on
Schedule 7.10 (but shall apply to any extension or renewal of, or any amendment
or modification expanding the scope of, any such restriction or condition),
(iii) the foregoing shall not apply to customary restrictions and conditions
contained in agreements relating to the sale of a Subsidiary pending such sale,
provided that such restrictions and conditions apply only to the Subsidiary that
is to be sold and such sale is permitted hereunder, (iv) clause (a) of this
Section shall not apply to restrictions or conditions imposed by any agreement
relating to secured Indebtedness permitted by this Agreement if such
restrictions or conditions apply only to the property or assets securing such
Indebtedness and (v) clause (a) of this Section shall not apply to customary
provisions in leases restricting the assignment thereof.
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Section 7.11 Concerning the POSIT License Agreement
The Borrower will not, and will not permit any Subsidiary to, amend,
modify or waive any of its rights under the POSIT License Agreement other than
amendments, modifications or waivers that would not reasonably be expected to
adversely affect the Lender.
Section 7.12 Leverage Ratio
The Borrower will not permit the Leverage Ratio to be greater than
2.50:1.00.
Section 7.13 Net Capital
The Borrower shall not at any time permit the Net Capital before
total haircuts of ITG (calculated in accordance with Rule 15c3-1) to be less
than the sum of $7,500,000 plus the Credit Exposure at such time.
Section 7.14 Consolidated Shareholders' Equity
The Borrower will not permit Consolidated Shareholders' Equity to be
less than the sum of $60,000,000 plus 50% of the net income (if positive) of the
Borrower and the Subsidiaries on a consolidated basis in accordance with GAAP
for each fiscal quarter ending after the date hereof, measured on the date
thereafter on which financial statements for such fiscal quarter are delivered
to the Lender.
Section 7.15 Capital Expenditures
The Borrower will not permit Capital Expenditures made or obligated
to be made by the Borrower and the Subsidiaries on a consolidated basis to be
greater than $10,000,000 in any fiscal year.
Section 7.16 Initial Transactions
Notwithstanding anything to the contrary in any Loan Document,
nothing contained in this Article shall prevent the consummation of any of the
Initial Transactions.
ARTICLE 8. EVENTS OF DEFAULT
If any of the following events ("Events of Default") shall occur:
(a) the Borrower shall fail to pay any principal of any Loan when
and as the same shall become due and payable, whether at the due date thereof or
at a date fixed for prepayment thereof or otherwise;
(b) the Borrower shall fail to pay any interest on any Loan or any
fee, commission or any other amount (other than an amount referred to in clause
(a) of this Article)
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payable under any Loan Document, when and as the same shall become due and
payable, and such failure shall continue unremedied for a period of three
Business Days;
(c) any representation or warranty made or deemed made by or on
behalf of the Borrower or any other Subsidiary in or in connection with any Loan
Document or any amendment or modification hereof or waiver thereunder, or in any
report, certificate, financial statement or other document furnished pursuant to
or in connection with any Loan Document or any amendment or modification hereof
or waiver thereunder, shall prove to have been incorrect in any material respect
when made or deemed made;
(d) the Borrower shall fail to observe or perform any covenant,
condition or agreement contained in Section 6.03 (with respect to the Borrower's
or ITG's existence) or in Article 7, or the Borrower shall fail to observe or
perform any covenant, condition or agreement contained in Section 5(i) of the
Security Agreement.
(e) the Borrower shall fail to observe or perform any covenant,
condition or agreement contained in any Loan Document to which it is a party
(other than those specified in clause (a), (b) or (d) of this Article), and such
failure shall continue unremedied for a period of 30 days after the Borrower
shall have obtained knowledge thereof;
(f) the Borrower or any Subsidiary shall fail to make any payment
(whether of principal or interest and regardless of amount) in respect of any
Material Indebtedness, when and as the same shall become due and payable (after
giving effect to any applicable grace period);
(g) any event or condition occurs that results in any Material
Indebtedness becoming due prior to its scheduled maturity or that enables or
permits (with or without the giving of notice, the lapse of time or both) the
holder or holders of any Material Indebtedness or any trustee or agent on its or
their behalf to cause any Material Indebtedness to become due, or to require the
prepayment, repurchase, redemption or defeasance thereof, prior to its scheduled
maturity (in each case after giving effect to any applicable grace period),
provided that this clause (g) shall not apply to secured Indebtedness that
becomes due solely as a result of the voluntary sale or transfer of the property
or assets securing such Indebtedness;
(h) an involuntary proceeding shall be commenced or an involuntary
petition shall be filed seeking (i) liquidation, reorganization or other relief
in respect of the Borrower or any Subsidiary or its debts, or of a substantial
part of its assets, under any Federal, state or foreign bankruptcy, insolvency,
receivership or similar law now or hereafter in effect or (ii) the appointment
of a receiver, trustee, custodian, sequestrator, conservator or similar official
for the Borrower or any Subsidiary or for a substantial part of its assets, and,
in any such case, such proceeding or petition shall continue undismissed for 45
days or an order or decree approving or ordering any of the foregoing shall be
entered;
(i) the Borrower or any Subsidiary shall (i) voluntarily commence
any proceeding or file any petition seeking liquidation, reorganization or other
relief under any Federal, state or foreign bankruptcy, insolvency, receivership
or similar law now or hereafter in effect, (ii) consent to the institution of,
or fail to contest in a timely and appropriate manner, any
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proceeding or petition described in clause (h) of this Article, (iii) apply for
or consent to the appointment of a receiver, trustee, custodian, sequestrator,
conservator or similar official for the Borrower or any Subsidiary or for a
substantial part of its assets, (iv) file an answer admitting the material
allegations of a petition filed against it in any such proceeding, (v) make a
general assignment for the benefit of creditors or (vi) take any action for the
purpose of effecting any of the foregoing;
(j) the Borrower or any Subsidiary shall become unable, admit in
writing its inability or fail generally to pay its debts as they become due;
(k) one or more judgments for the payment of money in an aggregate
amount (to the extent not paid or fully covered by insurance) in excess of
$5,000,000 shall be rendered against the Borrower or any Subsidiary or any
combination thereof and the same shall remain undischarged for a period of 30
consecutive days during which execution shall not be effectively stayed or
bonded, or any action shall be legally taken by a judgment creditor to attach or
levy upon any assets of the Borrower or any Subsidiary to enforce any such
judgment;
(l) an ERISA Event shall have occurred that, when taken together
with all other ERISA Events that have occurred, could reasonably be expected to
result in a Material Adverse Effect;
(m) any Loan Document shall cease, for any reason, to be in full
force and effect, or the Borrower shall so assert in writing or shall disavow
any of its obligations thereunder;
(n) any Lien purported to be created under any Security Document
shall cease to be, or shall be asserted by the Borrower not to be, a valid and
perfected Lien on any Collateral, with the priority required by the applicable
Security Document, except (i) as a result of the sale or other disposition of
the applicable Collateral in a transaction permitted under the Loan Documents or
(ii) as a result of the Lender's failure to maintain possession of any stock
certificates delivered to it under the Security Agreement; or
(o) the POSIT License Agreement shall have been terminated or any
event shall have occurred (after any applicable grace period), the result of
which gives the POSIT Joint Venture the right to do so as the result of a
breach; or
(p) a Change in Control shall occur;
then, and in every such event (other than an event described in clause (h) or
(i) of this Article), and at any time thereafter during the continuance of such
event, the Lender may and by notice to the Borrower, take either or both of the
following actions, at the same or different times: (i) terminate the Commitment,
and thereupon the Commitment shall terminate immediately and (ii) declare the
Loans then outstanding to be due and payable in whole (or in part, in which case
any principal not so declared to be due and payable may thereafter be declared
to be due and payable), and thereupon the principal of the Loans so declared to
be due and payable, together with accrued interest thereon and all fees and
other obligations of the Borrower accrued under the
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Loan Documents, shall become due and payable immediately, without presentment,
demand, protest or other notice of any kind, all of which are hereby waived by
the Borrower; and in case of any event described in clause (h) or (i) of this
Article, the Commitment shall automatically terminate and the principal of the
Loans then outstanding, together with accrued interest thereon and all fees and
other obligations of the Borrower accrued under the Loan Documents, shall
automatically become due and payable, without presentment, demand, protest or
other notice of any kind, all of which are hereby waived by the Borrower.
ARTICLE 9. MISCELLANEOUS
Section 9.01 Notices
Except in the case of notices and other communications expressly permitted
to be given by telephone, all notices and other communications provided for
herein shall be in writing and shall be delivered by hand or overnight courier
service, mailed by certified or registered mail or sent by telecopy, as follows:
(a) if to the Borrower, to it at 380 Madison Avenue, New York, NY
10017, Attention of John R. MacDonald, Senior Vice President and Chief Financial
Officer (Telephone No. (212) 444-6252; Telecopy No. (212) 444-6490);
(b) if to the Lender to it at One Wall Street, New York, New York
10286, Attention of Mark T. Rogers, Vice President (Telephone No. (212)
635-6827; Telecopy No. (212) 809-9566).
Any party hereto may change its address or telecopy number for notices and other
communications hereunder by notice to the other parties hereto. All notices and
other communications given to any party hereto in accordance with the provisions
of this Agreement shall be deemed to have been given on the date of receipt.
Section 9.02 Waivers; Amendments
(a) No failure or delay by the Lender in exercising any right or
power under any Loan Document shall operate as a waiver thereof, nor shall any
single or partial exercise of any such right or power, or any abandonment or
discontinuance of steps to enforce such a right or power, preclude any other or
further exercise thereof or the exercise of any other right or power. The rights
and remedies of the Lender under the Loan Documents are cumulative and are not
exclusive of any rights or remedies that they would otherwise have. No waiver of
any provision of any Loan Document or consent to any departure by the Borrower
therefrom shall in any event be effective unless the same shall be permitted by
paragraph (b) of this Section, and then such waiver or consent shall be
effective only in the specific instance and for the purpose for which given.
Without limiting the generality of the foregoing, the making of a Loan shall not
be construed as a waiver of any Default, regardless of whether the Lender may
have had notice or knowledge of such Default at the time.
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(b) Neither this Agreement nor any provision hereof may be waived,
amended or modified except pursuant to an agreement or agreements in writing
entered into by the Borrower and the Lender.
Section 9.03 Expenses; Indemnity; Damage Waiver
(a) The Borrower shall pay (i) all reasonable out-of-pocket expenses
incurred by the Lender and its Affiliates, including the reasonable fees,
charges and disbursements of counsel for the Lender, in connection with the
preparation and administration of this Agreement or any amendments,
modifications or waivers of the provisions of any Loan Document (whether or not
the transactions contemplated thereby shall be consummated) and (ii) all
reasonable out-of-pocket expenses incurred by the Lender, including the
reasonable fees, charges and disbursements of any counsel for the Lender, in
connection with the enforcement or protection of its rights in connection with
the Loan Documents, including its rights under this Section, or in connection
with the Loans made hereunder, including all such out-of-pocket expenses
incurred during any workout, restructuring or negotiations in respect of such
Loans.
(b) The Borrower shall indemnify the Lender and each Related Party
(each such Person being called an "Indemnitee") against, and hold each
Indemnitee harmless from, any and all losses, claims, damages, liabilities and
related expenses, including the reasonable fees, charges and disbursements of
any counsel for any. Indemnitee incurred by or asserted against any Indemnitee
arising out of, in connection with, or as a result of (i) the execution or
delivery of any Loan Document or any agreement or instrument contemplated
thereby, the performance by the parties to the Loan Documents of their
respective obligations thereunder or the consummation of the Transactions or any
other transactions contemplated thereby, (ii) any Loan or the use of the
proceeds thereof, (iii) any actual or alleged presence or release of Hazardous
Materials on or from any property owned or operated by the Borrower or any of
the Subsidiaries, or any Environmental Liability related in any way to the
Borrower or any of the Subsidiaries or (iv) any actual or prospective claim,
litigation, investigation or proceeding relating to any of the foregoing,
whether based on contract, tort or any other theory and regardless of whether
any Indemnitee is a party thereto, provided that such indemnity shall not, as to
any Indemnitee, be available to the extent that such losses, claims, damages,
liabilities or related expenses are determined by a court of competent
jurisdiction by final and nonappealable judgment to have resulted from the gross
negligence or willful misconduct of such Indemnitee.
(c) To the extent permitted by applicable law, the Borrower shall
not assert, and hereby waives, any claim against any Indemnitee, on any theory
of liability, for special, indirect, consequential or punitive damages (as
opposed to direct or actual damages) arising out of, in connection with, or as a
result of, any Loan Document or any agreement, instrument or other document
contemplated thereby, the Transactions or any Loan or the use of the proceeds
thereof.
(d) All amounts due under this Section shall be payable promptly but
in no event later than 30 days after written demand therefor, provided that the
Borrower shall have received a breakdown of such amounts in reasonable detail if
it so requests.
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Section 9.04 Successors and Assigns
(a) The provisions of this Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and assigns
permitted hereby, except that the Borrower may not assign or otherwise transfer
any of its rights or obligations hereunder without the prior written consent of
the Lender (and any attempted assignment or transfer by the Borrower without
such consent shall be null and void). Nothing in this Agreement, expressed or
implied, shall be construed to confer upon any Person (other than the parties
hereto, their respective successors and assigns permitted hereby and, to the
extent expressly contemplated hereby, the Related Parties) any legal or
equitable right, remedy or claim under or by reason of any Loan Document.
(b) The Lender may, with the consent of the Borrower (such consent
not to be unreasonably withheld or delayed or to be required during the
continuance of an Event of Default), assign to one or more assignees all or a
portion of its rights and obligations under this Agreement (including all or a
portion of the Commitment and the Loans at the time owing to it); provided that
(i) any such assignment is an aggregate amount of not less than $3,000,000, and
(ii) The Bank of New York continues to hold at all times not less than 51% of
the Credit Exposure. The Lender shall, to the extent of the interest assigned,
be released from its obligations under the Loan Documents (and, in the case of
an assignment covering all of the Lender's rights and obligations under the Loan
Documents, the Lender shall cease to be a party hereto but shall continue to be
entitled to the benefits of Sections 3.03, 3.04 and 9.03). The Lender agrees
that it will not assign any such rights or obligations to a Plan.
(c) The Lender may, without the consent of the Borrower or the
Lender, sell participations to one or more banks or other entities (other than a
Plan) (each such bank or other entity being called a "Participant") in all or a
portion of the Lender's rights and obligations under the Loan Documents
(including all or a portion of the Commitment and the Loans owing to it),
provided that (i) the Lender's obligations under the Loan Documents shall remain
unchanged, (ii) the Lender shall remain solely responsible to the other parties
hereto for the performance of such obligations and (iii) the Borrower and the
Lender shall continue to deal solely and directly with the Lender in connection
with the Lender's rights and obligations under the Loan Documents. Any agreement
or instrument pursuant to which the Lender sells such a participation shall
provide that the Lender shall retain the sole right to enforce the Loan
Documents and to approve any amendment, modification or waiver of any provision
of any Loan Documents, provided that such agreement or instrument may provide
that the Lender will not, without the consent of the Participant, agree to any
amendment, modification or waiver that affects such Participant and which would
reduce the principal amount of any Loan, or reduce the rate of interest thereon,
or reduce any fees or other amounts payable under the Loan Documents. Subject to
paragraph (d) of this Section, the Borrower agrees that each Participant shall
be entitled to the benefits of Sections 3.03 and 3.04 to the same extent as if
it were the Lender and had acquired its interest by assignment pursuant to
paragraph (b) of this Section. To the extent permitted by law, each Participant
also shall be entitled to the benefits of Section 9.08 as though it were the
Lender, provided that such Participant agrees that if by exercising any right of
setoff or counterclaim or otherwise, it obtains payment in respect of its
participation resulting in it receiving payment of a
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greater proportion of the aggregate amount of its participation than the
proportion it is entitled to receive, then such Participant shall purchase (for
cash at face value) an additional participation in the Loans of the Lender to
the extent necessary so that the benefit of all such payments shall be shared by
the Lender and such Participant in accordance with the terms of the agreement
pursuant to which it purchased its participations provided further that (i) if
any such participations are purchased pursuant to this sentence and all or any
portion of the payment giving rise thereto is recovered, such participations
shall be rescinded and the purchase price restored to the extent of such
recovery, without interest, and (ii) the provisions of this sentence shall not
be construed to apply to any payment made by the Borrower pursuant to and in
accordance with the express terms of this Agreement or any payment obtained by
the Lender as consideration for the assignment of or sale of a participation in
any of its Loans. The Borrower consents to the foregoing and agrees, to the
extent it may effectively do so under applicable law, that in acquiring a
participation pursuant to the foregoing arrangements, the Participant may
exercise against the Borrower rights of setoff and counterclaim with respect to
such participation as fully as if the Participant were a direct creditor of the
Borrower in the amount of such participation. A Participant shall not be
entitled to receive any greater payment under Section 3.03 or 3.04 than the
Lender would have been entitled to receive with respect to the participation
sold to such Participant, unless the sale of the participation to such
Participant is made with the Borrower's prior written consent. A Participant
that is organized under the laws of a jurisdiction other than United States of
America, any State thereof or the District of Columbia shall not be entitled to
the benefits of Section 3.04 unless the Borrower is notified of the
participation sold to such Participant and, if such Participant is entitled to
an exemption from or reduction of withholding tax under the law of the United
States of America, such Participant agrees to deliver to the Borrower (with a
copy to the Lender), at the time or times prescribed by applicable law, such
properly completed and executed documentation prescribed by applicable law or
reasonably requested by the Borrower as will permit such payments to be made
without withholding or at a reduced rate.
(d) The Lender may at any time pledge or assign a security interest
in all or any portion of its rights under the Loan Documents to secure
obligations of the Lender, including any pledge or assignment to secure
obligations to a Federal Reserve Bank, and this Section shall not apply to any
such pledge or assignment of a security interest, provided that no such pledge
or assignment of a security interest shall release the Lender from any of its
obligations under the Loan Documents or substitute any such pledgee or assignee
for the Lender as a party hereto.
Section 9.05 Survival
All covenants, agreements, representations and warranties made by
the Borrower herein and in the certificates or other instruments prepared or
delivered in connection with or pursuant to this Agreement or any other Loan
Document shall be considered to have been relied upon by the other parties
hereto and shall survive the execution and delivery of any Loan Document and the
making of any Loan, regardless of any investigation made by any such other party
or on its behalf and notwithstanding that the Lender may have had notice or
knowledge of any Default or incorrect representation or warranty at the time any
credit is extended hereunder, and shall continue in full force and effect as
long as the principal of or any accrued interest on
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any Loan or any fee or any other amount payable under the Loan Documents is
outstanding and unpaid and so long as the Commitment have not expired or
terminated. The provisions of Sections 3.03, 3.04 and 9.03 shall survive and
remain in full force and effect regardless of the consummation of the
transactions contemplated hereby, the repayment of the Loans and the termination
of the Commitment or the termination of this Agreement or any provision hereof.
Section 9.06 Counterparts; Integration
This Agreement may be executed in counterparts (and by different
parties hereto on different counterparts), each of which shall constitute an
original, but all of which, when taken together, shall constitute but one
contract. This Agreement constitutes the entire contract among the parties
relating to the subject matter hereof and supersedes any and all previous
agreements and understandings, oral or written, relating to the subject matter
hereof.
Section 9.07 Severability
In the event any one or more of the provisions contained in this
Agreement should be held invalid, illegal or unenforceable in any respect, the
validity, legality and enforceability of the remaining provisions contained
herein shall not in any way be affected or impaired thereby (it being understood
that the invalidity of a particular provision in a particular jurisdiction shall
not in and of itself affect the validity of such provision in any other
jurisdiction). The parties shall endeavor in good-faith negotiations to replace
the invalid, illegal or unenforceable provisions with valid provisions the
economic effect of which comes as close as possible to that of the invalid,
illegal or unenforceable provisions.
Section 9.08 Right of Setoff
If an Event of Default shall have occurred and be continuing, the
Lender and its Affiliates are hereby authorized at any time and from time to
time, to the fullest extent permitted by applicable law, to setoff and apply any
and all deposits (general or special, time or demand, provisional or final) at
any time held and other obligations at any time owing by it to or for the credit
or the account of the Borrower against any of and all the obligations of the
Borrower now or hereafter existing under this Agreement held by it, irrespective
of whether or not it shall have made any demand under this Agreement and
although such obligations may be unmatured. The rights of the Lender and its
Affiliates under this Section are in addition to other rights and remedies
(including other rights of setoff) that it may have.
Section 9.09 Governing Law; Jurisdiction; Consent to Service of Process
(a) This Agreement shall be governed by, and construed in accordance
with, the laws of the State of New York.
(b) The Borrower hereby irrevocably and unconditionally submits, for
itself and its property, to the nonexclusive jurisdiction of any New York State
court or Federal court of the United States of America sitting in New York City,
and any appellate court from any thereof, in any action or proceeding arising
out of or relating to this Agreement or the other Loan
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Documents, or for recognition or enforcement of any judgment, and each of the
parties hereto hereby irrevocably and unconditionally agrees that, to the extent
permitted by applicable law, all claims in respect of any such action or
proceeding may be heard and determined in such New York State or, to the extent
permitted by applicable law, in such Federal court. Each of the parties hereto
agrees that a final judgment in any such action or proceeding shall be
conclusive and may be enforced in other jurisdictions by suit on the judgment or
in any other manner provided by law. Nothing in this Agreement shall affect any
right that the Lender may otherwise have to bring any action or proceeding
relating to this Agreement or the other Loan Documents against the Borrower, or
any of its property, in the courts of any jurisdiction.
(c) The Borrower hereby irrevocably and unconditionally waives, to
the fullest extent it may legally and effectively do so, any objection that it
may now or hereafter have to the laying of venue of any suit, action or
proceeding arising out of or relating to this Agreement or the other Loan
Documents in any court referred to in paragraph (b) of this Section. Each of the
parties hereto hereby irrevocably waives, to the fullest extent permitted by
applicable law, the defense of an inconvenient forum to the maintenance of such
action or proceeding in any such court.
(d) Each party to this Agreement irrevocably consents to service of
process in the manner provided for notices in Section 9.01. Nothing in this
Agreement will affect the right of any party to this Agreement to serve process
in any other manner permitted by law.
Section 9.10 WAIVER OF JURY TRIAL
EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY
APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY
LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH
THIS AGREEMENT. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR
ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH
OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING
WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN
INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS
AND CERTIFICATIONS IN THIS SECTION.
Section 9.11 Headings
Article and Section headings and the Table of Contents used herein
are for convenience of reference only, are not part of this Agreement and shall
not affect the construction of, or be taken into consideration in interpreting,
this Agreement.
Section 9.12 Interest Rate Limitation
Notwithstanding anything herein to the contrary, if at any time the
interest rate applicable to any Loan, together with all fees, charges and other
amounts that are treated as
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interest on such Loan under applicable law (collectively the "charges"), shall
exceed the maximum lawful rate (the "maximum rate") that may be contracted for,
charged, taken, received or reserved by the Lender in accordance with applicable
law, the rate of interest payable in respect of such Loan hereunder, together
with all of the charges payable in respect thereof, shall be limited to the
maximum rate and, to the extent lawful, the interest and the charges that would
have been payable in respect of such Loan but were not payable as a result of
the operation of this Section shall be cumulated, and the interest and the
charges payable to the Lender in respect of other Loans or periods shall be
increased (but not above the maximum rate therefor) until such cumulated amount,
together with interest thereon at the Federal Funds Rate to the date of
repayment, shall have been received by the Lender.
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective authorized officers as of the day and year
first above written.
INVESTMENT TECHNOLOGY GROUP, INC.
By: /s/ John R. MacDonald
-----------------------------
Name: John R. MacDonald
Title: Chief Financial Officer
THE BANK OF NEW YORK
By: /s/ Mark T. Rogers
-----------------------------
Name: Mark T. Rogers
Title: Vice President
<PAGE>
Exhibit 10.4.6
INVESTMENT TECHNOLOGY GROUP, INC.
AMENDED AND RESTATED
1998 STOCK UNIT AWARD PROGRAM
1. Purpose
This 1998 Stock Unit Award Program (the "Program") is implemented
under the 1994 Stock Option and Long-Term Incentive Plan, as amended and
restated (the "Plan"), of Investment Technology Group, Inc. (the "Company")
in order to provide an additional incentive to selected members of senior
management and key employees to increase the success of the Company, by
substituting stock units for a portion of the cash compensation payable to
such persons on a mandatory basis, which stock units represent an equity
interest in the Company to be acquired and held under the Program on a
long-term, tax-deferred basis, and otherwise to promote the purposes of the
Plan.
2. Definitions
Capitalized terms used in the Program but not defined herein shall
have the same meanings as defined in the Plan. In addition to such terms and
the terms defined in Section 1, the following terms used in the Program shall
have the meanings set forth below:
2.1 "Account" means the account established for each Participant
pursuant to Section 7(g) hereof.
2.2 "Actual Reduction Amount" means the amount by which a given
quarterly or year-end bonus payment to a Participant is in fact reduced under
Section 6.
2.3 "Administrator" shall be the person or committee appointed by
the Committee to perform ministerial functions under the Program and to
exercise other authority delegated by the Committee.
2.4 "Assigned Reduction Amount" means an amount determined by the
Administrator in accordance with Section 6(b), in the case of an individual
Participant, which shall be used under Section 7(a) to determine the number
of Stock Units to be credited to the Participant's Account in respect of a
given calendar quarter. The assigned Reduction Amount does not accumulate
from one quarter to the next.
2.5 "Current Participant" means a Participant who, during the
current year, is subject to mandatory payment of a portion of compensation by
grant of Stock Units under the Program.
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2.6 "Participant" means an eligible person who is granted Stock
Units under the Program, which Stock Units have not yet been settled.
2.7 "Stock Unit" means an award, granted pursuant to Section 6.5
and 6.6 of the Plan, representing a generally nontransferable right to
receive one share of Common Stock at a specified future date together with a
right to Dividend Equivalents as specified in Section 7(d) hereof and subject
to the terms and conditions of the Plan and the Program. Stock Units are
bookkeeping units, and do not represent ownership of Common Stock or any
other equity security.
2.8 "Termination of Employment" means termination of a
Participant's employment by the Company or a subsidiary for any reason,
including due to death or disability, immediately after which event the
Participant is not employed by the Company or any subsidiary.
3. Administration
(a) AUTHORITY. The Program shall be established and administered
by the Committee, which shall have all authority under the Program as it has
under the Plan; PROVIDED, HOWEVER, that terms of the grant of Stock Units
hereunder may not be inconsistent with the express terms set forth in the
Program. Ministerial functions under the Program and other authority
specifically delegated by the Committee shall be performed or exercised by
and at the direction of the Administrator.
(b) MANNER OF EXERCISE OF AUTHORITY. Any action of the Committee
or its delegatee with respect to the Program shall be final, conclusive, and
binding on all persons, including the Company, subsidiaries, participants
granted Stock Units which have not yet been settled, and any person claiming
any rights under the Program from or through any Participant, except that the
Committee may take action within a reasonable time after any such action
superseding or overruling a prior action.
(c) LIMITATION OF LIABILITY. Each member of the Committee or
delegatee shall be entitled to, in good faith, rely or act upon any report or
other information furnished to him by any officer or other employee of the
Company or any subsidiary or any agent or professional assisting in the
administration of the Plan, such member or person shall not be personally
liable for any action, determination, or interpretation taken or made in good
faith with respect to the Program, and such member or person shall, to the
extent permitted by law, be fully indemnified and protected by the Company
with respect to any such action, determination, or interpretation.
(d) STATUS AS SUBPLAN UNDER THE PLAN. The Program constitutes a
subplan implemented under the Plan, to be administered in accordance with the
terms of the Plan. Accordingly, all of the terms and conditions of the Plan
are hereby incorporated by reference, and, if any provision of the Program or
a statement or document relating to Stock Units granted hereunder conflicts
with a provision of the Plan, the provision of the Plan shall govern.
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4. Stock Subject to the Program
Shares of Common Stock delivered upon settlement of Stock Units under
the Program shall be shares reserved and available under the Plan.
Accordingly, Stock Units may be granted under the Program if sufficient
shares are not then reserved and available under the Plan, and the number of
shares delivered in settlement of Stock Units hereunder shall be counted
against the shares reserved and available under the Plan. Awards may be
granted under the Plan even though the effect of such grants will be to
reduce the number of shares remaining available for grants hereunder. Stock
Units granted under the Program in place of compensation under the Plan
resulting from a 162(m) Award (as defined in the Plan) or in place of
compensation under the Company's Pay-for-Performance Incentive Plan shall be
subject to annual per-person limitations applicable to such compensation
under such plan.
5. Eligibility and Selection
The Committee may select any person who is eligible to be granted an
Award under the Plan to be granted Stock Units under the Program as a
mandatory portion of compensation otherwise payable to the Participant. A
Participant who is selected to be a Current Participant in one year will not
necessarily be selected to be a Current Participant in a subsequent year.
6. Mandatory Reduction of Bonus Compensation
(a) AMOUNT OF MANDATORY REDUCTION. A Current Participant's cash
compensation shall be automatically reduced by an amount determined in
accordance with a schedule adopted by the Committee and applicable to
compensation payable in the specified year; PROVIDED, HOWEVER, that the
Committee may adjust the schedule applicable to an individual Current
Participant. For 1998, the initial year under the Program, unless adjusted
by the Committee in an individual case, the amount of total compensation
payable to a Current Participant shall be reduced on a mandatory basis as
follows:
5% of the first $100,000 of annual compensation;
10% of the next $100,000 of annual compensation;
15% of the next $400,000 of annual compensation; and
20% of annual compensation in excess of $600,000.
The foregoing notwithstanding, in no event will the amount by which cash
compensation is reduced exceed the amount of bonus payable to the Participant.
For purposes of the Program, the amount by which cash compensation is reduced
hereunder shall be calculated without regard to any reductions in compensation
resulting from Participant's contributions under any Section 401(k), Section
125, pension plan, or other plan of the Company or a subsidiary, and such amount
shall not be deemed a reduction in the Participant's compensation for purposes
of any such Section 401(k), Section 125, pension plan, or other plan of the
Company or a subsidiary.
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(b) MANNER OF REDUCTION OF COMPENSATION. Amounts by which
compensation is reduced under Section 6(a) will be subtracted from bonus
amounts in respect of services during the year otherwise payable to the
Current Participant at or following the end of the first three calendar
quarters of such year and at or following the end of the year. The amount by
which each bonus amount payable following the end of the first three calendar
quarters will be reduced will be calculated based on a reasonable estimate of
total compensation for the year, taking into account the amount by which
compensation previously has been reduced for the year (i.e., in the case of a
Participant employed since the beginning of the year and for whom estimated
annual compensation has not varied during the year, by calculating an
estimated aggregate amount by which compensation will be reduced for the year
and reducing the quarterly bonus payment by one-fourth of such amount), and
will be calculated at the time the year-end bonus amount otherwise becomes
payable based on actual compensation for the year, taking into account the
amount by which compensation previously has been reduced for the year (i.e.,
by calculating the actual amount by which compensation will be reduced for
the year and reducing the year-end bonus payment by that amount less the
amount by which compensation was reduced in previous quarters). The
foregoing notwithstanding, the Administrator may determine in the case of any
individual Participant, including a Participant who is not paid a bonus on a
quarterly basis, the extent (if any) to which any bonus amounts other than
the Participant's year-end bonus amount shall be reduced taking into account
the terms of the Participant's compensation arrangement and the Participant's
individual circumstances. In such cases, the Administrator may assign to the
Participant an Assigned Reduction Amount for each calendar quarter, so that
Stock Units will be automatically granted to such Participant under Section
7(a) at times and in amounts comparable to grants to other Participants, such
that, on a full-year basis, the aggregate of the Participant's Assigned
Reduction Amounts and any Actual Reduction Amounts used to determine the
number of Stock Units credited to the Participant's Account under Section
7(a) for such year will equal the aggregate amount by which the Participant's
full-year's compensation is to be reduced (after giving effect to adjustments
under Section 7(b)).
7. Grant of Stock Units
(a) AUTOMATIC GRANT OF STOCK UNITS. Each Participant shall be
automatically granted Stock Units, as of the last day of each calendar quarter,
in a number equal to the Participant's Actual Reduction Amount or Assigned
Reduction Amount (as applicable) divided by the Fair Market Value of a share of
Common Stock on the last day of such calendar quarter. In addition, each
Participant shall be automatically granted Stock Units, as of the last day of
each calendar quarter, in a number equal to 15% of the number of Stock Units
granted under this Section 7(a) at that date. Stock Units shall be initially
credited to the Participant's Account as of the date of grant (it being
recognized, however, that the determination of the number of Stock Units granted
and the posting of such transactions to the Account will occur after date of
grant under this Section 7(a), based on the time at which quarterly bonus
amounts are determined and the Actual Reduction Amount or Assigned Reduction
Amount determined in accordance with Section 6 hereof).
-5-
<PAGE>
(b) RISK OF FORFEITURE; CANCELLATION OF CERTAIN STOCK UNITS. Stock
Units shall at all times be fully vested and non-forfeitable. The foregoing
notwithstanding, if, at the end of a given year (upon calculation of year-end
bonuses), the aggregate of the Participant's Actual Reduction Amounts and any
Assigned Reduction Amounts used to determine the number of Stock Units
credited under Section 7(a) for such year exceeds the amount by which the
full-year's compensation should have been reduced under Section 6(a) (the
"corrected full-year amount"), the Participant shall be paid in cash, without
interest, the amount (if any) by which such Actual Reduction Amounts and
Assigned Reduction Amounts exceeded such corrected full-year amount, and any
Stock Units credited to the Participant under Section 7 as a result of such
excess Actual Reduction Amounts and Assigned Reduction Amounts shall be
cancelled. Unless otherwise determined by the Administrator, the Stock Units
to be cancelled shall be cancelled from each of the four quarterly grants in
the proportion the Actual Reduction Amounts and Assigned Reduction Amounts
used in determining such quarterly grant bore to the aggregate of the Actual
Reduction Amounts and Assigned Reduction Amounts used in determining all
grants of Stock Units over the full year.
(c) NONTRANSFERABILITY. Stock Units and all rights relating
thereto shall not be transferable or assignable by a Participant, other than
by will or the laws of descent and distribution, and shall not be pledged,
hypothecated, or otherwise encumbered in any way or subject to execution,
attachment, or similar process.
(d) DIVIDEND EQUIVALENTS ON STOCK UNITS. Dividend Equivalents
shall be credited on Stock Units as follows:
(i) CASH AND NON-COMMON STOCK DIVIDENDS. If the Company declares and
pays a dividend or distribution on Common Stock in the form of
cash or property other than shares of Common Stock, then a number
of additional Stock Units shall be credited to a Participant's
Account as of the payment date for such dividend or distribution
equal to (i) the number of Stock Units credited to the Account as
of the record date for such dividend or distribution multiplied
by (ii) the amount of cash plus the fair market value of any
property other than shares actually paid as a dividend or
distribution on each outstanding share of Common Stock at such
payment date, divided by (iii) the Fair Market Value of a share
of Common Stock at such payment date.
(ii) COMMON STOCK DIVIDENDS AND SPLITS. If the Company declares and
pays a dividend or distribution on Common Stock in the form of
additional shares of Common Stock, or there occurs a forward
split of Common Stock, then a number of additional Stock Units
shall be credited to the Participant's Account as of the payment
date for such dividend or distribution or forward split equal to
(i) the number of Stock Units credited to the Account as of the
record date for such dividend or distribution or split multiplied
by (ii) the number of additional shares
-6-
<PAGE>
of Common Stock actually paid as a dividend or distribution
or issued in such split in respect of each outstanding share of
Common Stock.
(e) ADJUSTMENTS TO STOCK UNITS. The number of Stock Units
credited to each Participant's Account shall be appropriately adjusted, in
order to prevent dilution or enlargement of Participants' rights with respect
to such Stock Units, to reflect any changes in the number of outstanding
shares of Common Stock resulting from any event referred to in Section 5.5 of
the Plan, taking into account any Stock Units credited to the Participant in
connection with such event under Section 7(d).
(f) FRACTIONAL SHARES. The number of Stock Units credited to a
Participant's Account shall include fractional shares calculated to at least
three decimal places, unless otherwise determined by the Committee.
(g) ACCOUNTS AND STATEMENTS. The Administrator shall establish,
or cause to be established, an Account for each Participant. An individual
statement of each Participant's Account will be issued to each Participant
not less frequently than annually. Such statements shall reflect the Stock
Units credited to the Participant's Account, transactions therein during the
period covered by the statement, and other information deemed relevant by the
Administrator. Such statement may include information regarding other plans
and compensatory arrangements for Directors.
(h) CONSIDERATION FOR STOCK UNITS. Stock Units shall be granted
for the general purposes set forth in Section 1 of the Program. Except as
specified in Section 6 and 7 of the Program, a Participant shall not be
required to pay any cash consideration or other tangible or definable
consideration for Stock Units, nor may a Participant choose to receive Stock
Units in lieu of other compensation or other compensation in lieu of Stock
Units. No negotiation shall take place between the Company and any
Participant as to the amount, timing, or other terms of an award of Stock
Units.
8. Settlement
(a) ISSUANCE AND DELIVERY OF SHARES IN SETTLEMENT. Stock Units
shall be settled by issuance and delivery, as promptly as practicable on or
after the third anniversary of the date of grant of such Stock Units, to the
Participant or, following his death, to the Participant's designated
beneficiary, of a number of shares of Common Stock equal to the number of
such Stock Units; PROVIDED, HOWEVER, that the Committee may, in its
discretion, accelerate the settlement date of any or all Stock Units. The
Committee may, in its discretion, make delivery of shares hereunder by
depositing such shares into an account maintained for the Participant (or of
which the Participant is a joint owner, with the consent of the Participant)
established in connection with the Company's Employee Stock Purchase Plan or
another plan or arrangement providing for investment in Common Stock and
under which the Participant's rights are similar in nature to those under a
stock brokerage account. If the Committee determines to settle Stock
-7-
<PAGE>
Units by making a deposit of shares into such an account, the Company may
settle any fractional share by means of such deposit. In other circumstances
or if so determined by the Committee, the Company shall instead pay cash in
lieu of fractional shares, on such basis as the Committee may determine. In
no event will the Company in fact issue fractional shares. Upon settlement of
Stock Units, all obligations of the Company in respect of such Stock Units
shall be terminated, and the shares so distributed shall no longer be subject
to any restriction or other provision of the Program.
(b) TAX WITHHOLDING. The Company and any subsidiary may deduct
from any payment to be made to a Participant any amount that federal, state,
local, or foreign tax law requires to be withheld with respect to the
settlement of Stock Units. At the election of the Committee, the Company may
withhold from the shares of Common Stock to be distributed in settlement of
Stock Units that number of shares having a Fair Market Value, at the
settlement date, equal to the amount of such withholding taxes.
(c) NO ELECTIVE DEFERRAL. Participant's may not elect to further
defer settlement of Stock Units or otherwise to change the applicable
settlement date under the Program.
9. General Provisions
(a) NO RIGHT TO CONTINUED EMPLOYMENT. Neither the Program nor any
action taken hereunder, including the grant of Stock Units, will be construed
as giving any employee the right to be retained in the employ of the Company
or any of its subsidiaries, nor will it interfere in any way with the right
of the Company or any of its subsidiaries to terminate such employee's
employment at any time.
(b) NO RIGHTS TO PARTICIPATE; NO STOCKHOLDER RIGHTS. No
Participant or employee will have any claim to participate in the Program,
and the Company will have no obligation to continue the Program. A grant of
Stock Units will confer on the Participant none of the rights of a
stockholder of the Company (including no rights to vote or receive dividends
or distributions) until settlement by delivery of Common Stock, and then only
to the extent that such Stock Unit has not otherwise been forfeited by the
Participant.
(c) CHANGES TO THE PROGRAM. The Committee may amend, alter,
suspend, discontinue, or terminate the Program without the consent of
Participants; PROVIDED, HOWEVER, that, without the consent of an affected
Participant, no such action shall materially and adversely affect the rights
of such Participant with respect to outstanding Stock Units, except insofar
as the Committee's action results in accelerated settlement of the Stock
Units.
10. EFFECTIVE DATE AND TERMINATION OF PROGRAM. The Program shall
become effective as of January 1, 1998, and shall apply to compensation payable
during 1998 and thereafter. Unless earlier terminated under Section 9(c), the
Program shall terminate at such time after 1998 as no Stock Units previously
granted under the Program remain outstanding.
-8-
<PAGE>
Adopted by the Committee: February 25, 1999
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
ITG Inc.
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Investment Technology Group, Inc.:
We consent to incorporation by reference in the registration statements (No.
33-42725 and No. 33-26309) on Form S-8 of Investment Technology Group, Inc. of
our report dated January 20, 1999, relating to the consolidated statements of
financial condition of Investment Technology Group, Inc. and subsidiaries as of
December 31, 1998, and 1997, and the related consolidated statements of income,
changes in stockholders' equity, and cash flows for each of the years in the
three-year period ended December 31, 1998, which report appears in the December
31, 1998, annual report on Form 10-K of Investment Technology Group, Inc.
/s/ KPMG LLP
New York, New York
March 17, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AND THE CONSOLIDATED STATEMENT
OF OPERATIONS AS OF DECEMBER 31, 1998 AND FOR THE YEAR THEN ENDED AND THE
NOTES THERETO AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 77,324
<SECURITIES> 24,849
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 40,615
<CURRENT-ASSETS> 19,662
<PP&E> 180,512
<DEPRECIATION> 0
<TOTAL-ASSETS> 30,105
<CURRENT-LIABILITIES> 0
<BONDS> 0
288
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 194
<SALES> 143,515
<TOTAL-REVENUES> 180,512
<CGS> 0
<TOTAL-COSTS> 3,635
<OTHER-EXPENSES> 208,570
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 20
<INCOME-TAX> 51,462
<INCOME-CONTINUING> 80,935
<DISCONTINUED> 80,935
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43,394
<EPS-PRIMARY> 2.36
<EPS-DILUTED> 2.25
</TABLE>
