-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BH+X1EL2s+KuX0pyyoRv3lq6oVGREiw1/y0J8HImQdLmUK81NB+vV8WPxygIihKH ExtTw+QAQWBngYTDKxgZAg== 0001047469-99-015538.txt : 19990421 0001047469-99-015538.hdr.sgml : 19990421 ACCESSION NUMBER: 0001047469-99-015538 CONFORMED SUBMISSION TYPE: 10-12B PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 19990420 FILER: COMPANY DATA: COMPANY CONFORMED NAME: JEF HOLDING CO INC CENTRAL INDEX KEY: 0001084580 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 95471946 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-12B SEC ACT: SEC FILE NUMBER: 001-14947 FILM NUMBER: 99597304 BUSINESS ADDRESS: STREET 1: 11100 SANTA MONICA BLVD CITY: LOS ANGELES STATE: CA ZIP: 90025 BUSINESS PHONE: 3109141300 MAIL ADDRESS: STREET 1: 11100 SANTA MONICA BLVD CITY: LOS ANGELES STATE: CA ZIP: 90025 10-12B 1 10-12B SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10 GENERAL FORM FOR REGISTRATION OF SECURITIES PURSUANT TO SECTION 12(B) OR 12 (G) OF THE SECURITIES EXCHANGE ACT OF 1934 JEF HOLDING COMPANY, INC. (to be renamed "Jefferies Group, Inc." following the ITGI Merger as described in Part I hereof) ------------------------------------------------------- (Exact name of registrant as specified in its charter.) Delaware 95-4719745 - -------------------------------------- -------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 11100 Santa Monica Boulevard Los Angeles, California 90025 - -------------------------------------- -------------------------------------- (Address of principal executive (Zip Code) offices) Registrant's telephone number, including area code: 310-914-1300 ------------------------------------ Securities to be registered pursuant to Section 12(b) of the Act: Title of Each Class Name of Each Exchange on Which TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED Common Stock, par value $0.0001 New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE JEF HOLDING COMPANY, INC. ("New JEF") I. INFORMATION INCLUDED IN PROXY STATEMENT AND INCORPORATED IN FORM 10 BY REFERENCE In March 1998, Jefferies Group, Inc. ("Group") announced an intention to engage in a series of transactions designed to separate its approximately 80.5% subsidiary, Investment Technology Group, Inc. ("ITGI") from the other Group businesses. This separation would be achieved through the transfer of all Group's assets, except for Group's interest in the outstanding capital stock of ITGI, and all of Group's liabilities, other than liabilities of or related to ITGI (the "Transfers"), to New JEF, a wholly-owned Group subsidiary, or to Jefferies & Company, Inc., which will become a subsidiary of New JEF in connection with the Transfers. Following the Transfers, the aforementioned separation would be completed by means of a pro rata distribution to Group's stockholders of 100% of the outstanding shares of common stock of New JEF (the "Spin-Off"). This Registration Statement on Form 10 is being filed to register the class of New JEF Common Stock to be distributed in the Spin-Off, pursuant to Section 12(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Following the Transfers and Spin-Off, ITGI will merge with and into Group (the "ITGI Merger"). In connection with the ITGI Merger, Group will be renamed Investment Technology Group, Inc. and New JEF will change its name to Jefferies Group, Inc. An application has been made to list New JEF Common Stock on the New York Stock Exchange under the symbol "JEF." Group filed, in accordance with Regulation 14A under the Exchange Act, a definitive proxy/information statement with the Securities and Exchange Commission on March 18, 1999 (the "Group Disclosure Document"), which was mailed to Group stockholders on or about March 19, 1999. The Group Disclosure Document provides detailed information concerning New JEF, the Spin-Off, ITGI and the ITGI Merger. New JEF hereby incorporates by reference into this Form 10, in response to the requirements of Form 10, the following information concerning New JEF and the Spin-Off that is set forth in the Group Disclosure Document. Cross-reference Sheet Between Group Proxy Statement (File No. 1-11665) and Items of Form 10
ITEM NO. ITEM CAPTION LOCATION IN PROXY STATEMENT - ----- ------------ --------------------------- 1. Business......................................... "Summary;" "The Transactions -- The Transfers and Spin-Off; "-- Background of and Reasons for the Transactions;" "Business of New JEF;" and "Management's Discussion and Analysis of Supplemental Financial Condition and Results of Operations of New JEF." 2. Financial Information............................ "Unaudited Supplemental Selected Historical Financial Data of New JEF;" "Management's Discussion and Analysis of Supplemental Financial Condition and Results of Operations of New JEF;" "Unaudited Pro Forma Condensed Consolidated Statement of Financial Condition of New JEF (Excluding Discontinued Operations);" and "Index to Financial Statements." 3. Properties....................................... "Business of New JEF -- Properties."
2
4. Security Ownership of Certain "Beneficial Ownership Of Group Common Stock by Beneficial Owners and Management................. Directors, Officers and Principal Stockholders of Group." 5. Directors and Executive Officers................. "Management of Group and New JEF." 6. Executive Compensation........................... "Management of Group and New JEF." 7. Certain Relationships and "The Transactions -- Agreements Between Group and Related Transactions............................. New JEF Relating to the Spin-Off;" "Risk Factors;" "Management of Group and New JEF;" and "Index to Financial Statements." 8. Legal Proceedings................................ "Business of New JEF-- Legal Proceedings." 9. Market Price of and Dividends on "Summary;" "Market Price of and Dividends on the Registrant's Common Equity Common Stock and Related Stockholder Matters;" and and Related Stockholder Matters.................. "Risk Factors." 11. Description of Registrant's Securities to be "Summary;" "Risk Factors;" and "Description of New Registered...................................... JEF Capital Stock." 12. Indemnification of Directors "Description of New JEF Capital Stock -- Other and Officers..................................... Delaware Corporate Law Provisions Affecting New JEF Stockholders." 13. Financial Statements and "Unaudited Supplemental Selected Historical Financial Supplementary Data............................... Data of New JEF;" "Management's Discussion and Analysis of Supplemental Financial Condition and Results of Operations of New JEF;" and "Unaudited Pro Forma Condensed Consolidated Statement of Financial Condition of New JEF (Excluding Discontinued Operations)."
3 II. INFORMATION NOT INCLUDED IN PROXY STATEMENT ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Group extended credit to certain of its Directors, Officers, employees and stockholders in connection with their purchase of securities on margin. New JEF has assumed such obligations in connection with the Transfers. Receivables from Group's Officers and Directors were $880,310 at December 31, 1998. Such extensions of credit were made in the ordinary course of business, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than the normal risk of collectibility or present other unfavorable features. The Board of Directors has adopted a policy which provides that New JEF will not enter into any transactions with its Directors, Officers, or affiliates (not including companies consolidated with it for financial reporting purposes), other than those related to compensation or expense reimbursement and other than those having terms no less favorable to New JEF than could have been obtained from unaffiliated parties, unless approved by New JEF's disinterested and independent Directors. ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES On December 23, 1998, New JEF issued approximately 10,000 shares of its common stock to Group, its direct parent, at par value for aggregate consideration of $1.00. In the opinion of New JEF, this transaction is exempt from registration under the Securities Act of 1933, as amended, by virtue of Section 4(2) thereof in that such transaction did not involve any public offering. ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS (a) Financial Statements 4 JEF HOLDING COMPANY, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS
PAGE ----- Independent Auditors' Report............................................................................... 6 Consolidated Statements of Financial Condition as of December 31, 1998 and 1997............................ 7 Consolidated Statements of Earnings for the Three Years Ended December 31, 1998........................................................................................ 8 Consolidated Statements of Changes in Stockholders' Equity for the Three Years Ended December 31, 1998...................................................................... 9 Consolidated Statements of Cash Flows for the Three Years Ended December 31, 1998.......................... 10 Notes to Consolidated Financial Statements................................................................. 11
5 INDEPENDENT AUDITORS' REPORT We have audited the accompanying consolidated statements of financial condition of JEF Holding Company, Inc. and subsidiaries as of December 31, 1998 and 1997 and the related consolidated statements of earnings, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of JEF Holding Company, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998 in conformity with generally accepted accounting principles. KPMG LLP Los Angeles, California January 19, 1999, except as to Note 17 to the consolidated financial statements, which is as of April 20, 1999 6 JEF HOLDING COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 1998 AND 1997 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1998 1997 ------------ ------------ ASSETS Cash and cash equivalents............................................................. $ 55,581 $ 58,225 Cash and securities segregated and on deposit for regulatory purposes or deposited with clearing and depository organizations.......................................... 62,518 30,977 Receivable from brokers and dealers................................................... 2,018,090 1,269,664 Receivable from customers, officers and directors..................................... 93,526 166,284 Securities owned...................................................................... 100,797 245,055 Investments........................................................................... 93,463 134,836 Investment in discontinued operations of ITGI......................................... 108,333 65,057 Premises and equipment................................................................ 20,524 23,322 Other assets.......................................................................... 65,032 64,686 ------------ ------------ $ 2,617,864 $ 2,058,106 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Bank loans............................................................................ $ 21,000 $ -- Payable to brokers and dealers........................................................ 1,602,906 981,705 Payable to customers.................................................................. 226,774 202,255 Securities sold, not yet purchased.................................................... 39,365 188,700 Accrued expenses and other liabilities................................................ 243,657 293,400 ------------ ------------ 2,133,702 1,666,060 Long-term debt........................................................................ 149,387 149,290 ------------ ------------ 2,283,089 1,815,350 ------------ ------------ ------------ ------------ Stockholders' equity: Preferred stock, $.01 par value. Authorized 1,000,000 shares; none issued........... -- -- Common stock, $.01 par value. Authorized 100,000,000 shares; issued 23,368,268 shares in 1998 and 22,393,910 shares in 1997...................................... 234 224 Additional paid-in capital.......................................................... 28,943 39 Retained earnings................................................................... 344,441 271,589 Less: Treasury stock, at cost; 2,138,238 shares in 1998 and 2,107,842 shares in 1997.... (37,125) (26,954) Accumulated other comprehensive income (loss): Currency translation adjustments................................................ (49) (622) Additional minimum pension liability adjustment................................. (1,669) (1,520) ------------ ------------ Total accumulated other comprehensive income (loss)............................... (1,718) (2,142) ------------ ------------ Net stockholders' equity............................................................ 334,775 242,756 ------------ ------------ $ 2,617,864 $ 2,058,106 ------------ ------------ ------------ ------------
See accompanying notes to consolidated financial statements. 7 JEF HOLDING COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS THREE YEARS ENDED DECEMBER 31, 1998 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1998 1997 1996 ---------- ---------- ---------- REVENUES: Commissions................................................................ $ 190,870 $ 148,940 $ 113,512 Principal transactions..................................................... 177,189 179,081 145,207 Corporate finance.......................................................... 126,651 228,640 97,870 Interest................................................................... 91,024 70,656 47,443 Other...................................................................... 4,881 3,525 2,991 ---------- ---------- ---------- Total revenues......................................................... 590,615 630,842 407,023 Interest expense........................................................... 75,153 61,314 37,840 ---------- ---------- ---------- Revenues, net of interest expense...................................... 515,462 569,528 369,183 ---------- ---------- ---------- NON-INTEREST EXPENSES: Compensation and benefits.................................................. 321,943 373,619 234,446 Floor brokerage and clearing fees.......................................... 32,425 26,754 21,606 Communications............................................................. 47,210 40,305 24,474 Occupancy and equipment rental............................................. 14,036 15,701 13,003 Travel and promotional..................................................... 17,710 15,300 10,703 Other...................................................................... 22,945 29,159 22,765 ---------- ---------- ---------- Total non-interest expenses............................................ 456,269 500,838 326,997 ---------- ---------- ---------- Earnings before income taxes................................................. 59,193 68,690 42,186 Income taxes................................................................. 22,992 27,334 17,772 ---------- ---------- ---------- Earnings from continuing operations.......................................... 36,201 41,356 24,414 Discontinued operations of ITGI, net of tax.................................. 33,481 22,211 19,146 ---------- ---------- ---------- Net earnings................................................................. $ 69,682 $ 63,567 $ 43,560 ---------- ---------- ---------- ---------- ---------- ---------- EARNINGS PER SHARE: Basic: Continuing operations...................................................... $ 1.62 $ 1.92 $ 1.06 Discontinued operations of ITGI, net of tax................................ 1.50 1.03 0.84 ---------- ---------- ---------- Net earnings............................................................... $ 3.12 $ 2.95 $ 1.90 ---------- ---------- ---------- ---------- ---------- ---------- Diluted: Continuing operations...................................................... $ 1.58 $ 1.85 $ 1.04 Discontinued operations of ITGI, net of tax................................ 1.38 0.95 0.80 ---------- ---------- ---------- Net earnings............................................................... $ 2.96 $ 2.80 $ 1.84 ---------- ---------- ---------- ---------- ---------- ---------- WEIGHTED AVERAGE SHARES OF COMMON STOCK: Basic...................................................................... 22,346 21,552 22,980 Diluted.................................................................... 22,954 22,349 23,410
See accompanying notes to consolidated financial statements. 8 JEF HOLDING COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY THREE YEARS ENDED DECEMBER 31, 1998 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ACCUMULATED ADDITIONAL OTHER NET COMMON PAID-IN RETAINED TREASURY COMPREHENSIVE STOCKHOLDERS' STOCK CAPITAL EARNINGS STOCK INCOME (LOSS) EQUITY --------- ---------- --------- ---------- ------------- ------------- Balance, December 31, 1995........................... $ 93 $ 58,117 $ 192,234 $ (63,075) $ (1,108) $ 186,261 Exercise of stock options, including tax benefits (352,460 shares)................................... 1 2,555 -- 97 -- 2,653 Purchase of 2,320,352 shares of treasury stock....... -- -- -- (36,766) -- (36,766) Issuance of common stock (71,388 shares)............. -- 770 -- -- -- 770 Issuance of restricted stock, including tax benefits and additional vesting (68,864 shares)............. -- 1,083 -- -- -- 1,083 Capital Accumulation Plan distributions, including tax benefits (39,186 shares)....................... -- 138 -- 340 -- 478 Net increase in proportionate share of subsidiary's equity............................................. -- -- (1,115) -- -- (1,115) Comprehensive income: Net earnings....................................... -- -- 43,560 -- -- 43,560 Other comprehensive income (loss), net of tax: Currency translation adjustment.................... -- -- -- -- 426 426 Additional minimum pension liability adjustment.... -- -- -- -- 33 33 --------- ------- Other comprehensive income (loss).................. 459 459 --------- ------- Comprehensive income................................. -- -- -- -- -- 44,019 Dividends paid ($.0875 per share).................... -- -- (1,883) -- -- (1,833) Redemption of rights ($.0025 per right).............. -- -- (55) -- -- (55) Two-for-one stock split.............................. 94 (94) -- -- -- -- ----- -------- -------- ---------- --------- ---------- Balance, December 31, 1996........................... 188 62,569 232,741 (99,404) (649) 195,445 Exercise of stock options, including tax benefits (240,028 shares)................................... 2 3,431 -- -- -- 3,433 Purchase of 1,063,026 shares of treasury stock....... -- -- -- (23,584) -- (23,584) Issuance of common stock (41,052 shares)............. -- 879 -- 3 -- 882 Issuance of restricted stock, including tax benefits and additional vesting (198,888 shares)........... -- 3,666 -- -- -- 3,666 Capital Accumulation Plan distributions, including tax benefits (143,228 shares)........................... -- 508 -- 1,289 -- 1,797 Retirement of treasury shares (15,600,000 shares)..... (78) (70,902) (23,762) 94,742 -- -- Net decrease in proportionate share of subsidiary's equity.............................................. -- -- 1,558 -- -- 1,558 Comprehensive income: Net earnings........................................ -- -- 63,567 -- -- 63,567 Other comprehensive income (loss), net of tax: Currency translation adjustment..................... -- -- -- -- (526) (526) Additional minimum pension liability adjustment..... -- -- -- -- (967) (967) ------ ------- Other comprehensive income (loss)................... (1,493) (1,493) ------ ------- Comprehensive income.................................. 62,074 Dividends paid ($.125 per share)...................... -- -- (2,515) -- -- (2,515) Two-for-one stock split............................... 112 (112) -- -- -- -- ----- -------- --------- ----------- -------- ------- Balance, December 31, 1997............................ 224 39 271,589 (26,954) (2,142) 242,756 Exercise of stock options, including tax benefits (737,125 shares)................................... 7 15,144 -- -- -- 15,151 Purchase of 334,234 shares of treasury stock.......... -- -- -- (13,815) -- (13,815) Issuance of common stock (53,286 shares).............. 1 2,180 -- -- -- 2,181 Issuance of restricted stock, including tax benefits and additional vesting (182,095 shares)........... 2 8,170 -- (22) -- 8,150 Capital Accumulation Plan distributions, including tax benefits (305,690 shares)........................... -- 3,410 -- 3,666 -- 7,076 Net decrease in proportionate share of subsidiary's equity.............................................. -- -- 7,337 -- -- 7,337 Comprehensive income: Net earnings........................................ -- -- 69,682 -- 69,682 69,682 Other comprehensive income (loss), net of tax: Currency translation adjustment..................... -- -- -- -- 573 573 Additional minimum pension liability adjustment..... -- -- -- -- (149) (149) ----- ------- Other comprehensive income (loss)................... 424 424 ----- ------- Comprehensive income.................................. 70,106 Dividends paid ($.20 per share)....................... -- -- (4,167) -- -- (4,167) ----- -------- --------- --------- --------- --------- Balance, December 31, 1998............................ $ 234 $ 28,943 $ 344,441 $ (37,125) $ (1,718) $ 334,775 ----- -------- --------- --------- --------- --------- ----- -------- --------- --------- --------- ---------
See accompanying notes to consolidated financial statements. 9 JEF HOLDING COMPANY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS THREE YEARS ENDED DECEMBER 31, 1998 (DOLLARS IN THOUSANDS)
1998 1997 1996 --------- --------- --------- Cash flows from operating activities: Net earnings.................................................................... $ 69,682 $ 63,567 $ 43,560 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization................................................... 12,052 9,862 9,687 Deferred income taxes........................................................... (5,285) (8,710) (8,435) Increase in cash and securities segregated...................................... (31,541) (1,870) (26,813) (Increase) decrease in receivables: Brokers and dealers........................................................... (748,426) (304,039) 152,529 Customers, officers and directors............................................. 72,758 (52,412) (6,714) (Increase) decrease in securities owned......................................... 144,258 (52,093) (34,261) (Increase) decrease in investments.............................................. 41,373 (91,577) (20,080) Increase in investment in discontinued operations of ITGI....................... (43,276) (24,268) (18,033) Increase in other assets........................................................ (535) (9,087) (39,523) Increase (decrease) in payables: Brokers and dealers............................................................. 621,201 175,992 (58,743) Customers....................................................................... 24,519 31,871 (44,171) Increase (decrease) in securities sold, not yet purchased....................... (149,335) 65,611 40,157 Increase (decrease) in accrued expenses and other liabilities................... (44,607) 114,855 79,175 --------- --------- --------- Net cash provided by (used in) operating activities............................. (37,162) (82,298) 68,335 --------- --------- --------- Cash flows from financing activities: Net proceeds from bank loans.................................................... 21,000 -- -- Issuance of term debt........................................................... -- 99,722 -- Net payments on: Repurchase of treasury stock.................................................... (13,815) (23,584) (36,766) Redemption of 8 7/8% Subordinated Notes, due 1997............................... -- (3,576) (3,576) Dividends paid.................................................................. (4,167) (2,515) (1,883) Redemption of rights............................................................ -- -- (55) Proceeds from exercise of stock options......................................... 15,151 3,433 2,653 Net decrease (increase) in proportionate share of subsidiary's equity........... 7,337 1,558 (1,115) Distribution of Capital Accumulation Plan shares................................ 7,076 1,797 478 Issuance of restricted shares................................................... 8,150 3,666 1,083 Issuance of common shares....................................................... 2,181 882 770 --------- --------- --------- Net cash provided by (used in) financing activities........................... 42,913 81,383 (38,411) --------- --------- --------- Cash flows from investing activities--purchase of premises and equipment.......... (8,968) (10,521) (10,521) --------- --------- --------- Effect of currency translation on cash............................................ 573 (526) 426 --------- --------- --------- Net (decrease) increase in cash and cash equivalents............................ (2,644) (11,962) 19,829 Cash and cash equivalents at beginning of year.................................... 58,225 70,187 50,358 --------- --------- --------- Cash and cash equivalents at end of year.......................................... $ 55,581 $ 58,225 $ 70,187 --------- --------- --------- --------- --------- --------- Supplemental disclosures of cash flow information: Cash paid during the year for: Interest...................................................................... $ 73,757 $ 58,038 $ 38,522 Income taxes.................................................................. 50,018 52,030 42,724
Supplemental disclosure of non-cash financing activities: In 1996, the additional minimum pension liability included in stockholders' equity of $553 resulted from a decrease of $33 to accrued expenses and other liabilities and an offsetting increase in stockholders' equity. In 1997, the additional minimum pension liability included in stockholders' equity of $1,520 resulted from an increase of $967 to accrued expenses and other liabilities and an offsetting decrease in stockholders' equity. In 1998, the additional minimum pension liability included in stockholders' equity of $1,669 resulted from an increase of $149 to accrued expenses and other liabilities and an offsetting decrease in stockholders' equity. See accompanying notes to consolidated financial statements. 10 JEF HOLDING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1998 AND 1997 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of JEF Holding Company, Inc., as successor to Jefferies Group, Inc. ("Group") and all its subsidiaries ("Company"), including Jefferies & Company, Inc. ("JEFCO")(See Note 17). The accounts of Investment Technology Group, Inc. and all its subsidiaries (collectively "ITGI"), including its wholly owned subsidiary, ITG Inc. ("ITG") are included in the consolidated financial statements as discontinued operations. The accounts of W & D Securities, Inc. ("W & D") are consolidated because of the nature and extent of the Company's ownership interest in W & D. The Company and its subsidiaries (after the discontinuance of ITGI) are primarily engaged in a single line of business as a securities broker-dealer, which includes several types of services, such as principal and agency transactions in equity, convertible debt and taxable fixed income securities, as well as corporate finance activities. Operations of the Company include agency and principal transactions and other securities-related financial services. All significant intercompany accounts and transactions are eliminated in consolidation. SECURITIES TRANSACTIONS All transactions in securities, commission revenues and related expenses are recorded on a trade-date basis. Securities owned and securities sold, not yet purchased, are valued at market, and unrealized gains or losses are reflected in revenues from principal transactions. INVESTMENTS Partnership interests are recorded at their initial cost. The carrying values of these investments are adjusted when the adjustment can be supported by quoted market prices, adjusted for liquidity and other relevant factors. In addition, the carrying values are reduced when the Company determines that the estimated realizable value is less than the carrying value based on relevant financial and market information. Debt and equity investments consist primarily of mutual funds which are valued at market, based on available quoted prices. Equity and debt interests in affiliates are recorded under either the equity or cost method depending on the Company's level of ownership and control. RECEIVABLE FROM, AND PAYABLE TO, CUSTOMERS, OFFICERS AND DIRECTORS Receivable from, and payable to, customers includes amounts receivable and payable on cash and margin transactions. Securities owned by customers and held as collateral for these receivables are not reflected in the accompanying consolidated financial statements. Receivable from officers and directors represents balances arising from their individual security transactions. Such transactions are subject to the same regulations as customer transactions. 11 JEF HOLDING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) FAIR VALUE OF FINANCIAL INSTRUMENTS Substantially all of the Company's financial instruments are carried at fair value or amounts approximating fair value. Assets, including cash and cash equivalents, securities borrowed or purchased under agreements to sell, and certain receivables, are carried at fair value or contracted amounts, which approximate fair value due to the short period to maturity. Similarly, liabilities, including bank loans, securities loaned or sold under agreements to repurchase, long-term debt and certain payables, are carried at amounts approximating fair value. Securities owned and securities sold, not yet purchased, are valued at quoted market prices, if available. For securities without quoted prices, the reported fair value is estimated using various sources of information, including quoted prices for comparable securities. The Company has derivative financial instrument positions in option contracts, foreign exchange forward contracts and index futures contracts which are measured at fair value with gains and losses recognized in earnings. The gross contracted or notional amount of these contracts is not reflected in the consolidated statements of financial condition (see note 13 of the notes to consolidated financial statements.) PREMISES AND EQUIPMENT Premises and equipment are depreciated using the straight-line method over the estimated useful lives of the related assets (generally three to ten years). Leasehold improvements are amortized using the straight-line method over the term of related leases or the estimated useful lives of the assets, whichever is shorter. GOODWILL Goodwill, which represents the excess of cost over net assets acquired, is amortized on a straight-line basis over ten to fifteen years. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through future operating cash flows of the acquired business. INCOME TAXES The Company files a consolidated U.S. Federal income tax return which includes all qualifying subsidiaries. Amounts provided for income taxes are based on income reported for financial statement purposes and do not necessarily represent amounts currently payable. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income taxes are provided for temporary differences in reporting certain items, principally state income taxes, depreciation, deferred compensation and unrealized gains and losses on securities owned. Tax credits are recorded as a reduction of income taxes when realized. 12 JEF HOLDING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CASH EQUIVALENTS The Company generally invests its excess cash in money market funds and other short-term investments. At December 31, 1998 and 1997, such cash equivalents amounted to $25,865,000 and $40,776,000, respectively. Cash equivalents are part of the cash management activities of the Company and generally mature within 90 days. REPURCHASE AND REVERSE REPURCHASE AGREEMENTS Repurchase agreements consist of sales of U.S. Treasury notes under agreements to repurchase. They are treated as collateralized financing transactions and are recorded at their contracted repurchase amount. Reverse repurchase agreements consist of purchases of U.S. Treasury notes under agreements to re-sell. They are treated as collateralized financing transactions and are recorded at their contracted re-sale amount. EARNINGS PER COMMON SHARE Basic earnings per share of common stock are computed by dividing net earnings by the average number of shares outstanding and certain other shares committed to, but not yet issued. Diluted earnings per share of common stock are computed by dividing net earnings by the average number of shares outstanding of common stock and all dilutive common stock equivalents outstanding during the period. All shares used in the earnings per share calculations were restated to retroactively reflect the two-for-one stock splits approved by the Board of Directors on November 19, 1997 and March 2, 1996. In February 1997, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." SFAS 128 established new standards for computing and presenting earnings per share. SFAS No. 128 replaced the presentation of primary earnings per share with a presentation of basic earnings per share. SFAS No. 128 also requires dual presentation of basic and diluted earnings per share on the face of the statement of earnings for entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic earnings per share computation to the numerator and denominator of the diluted earnings per share computation. SFAS 128 did not have a material impact on the Company. Earnings per share information has been restated to retroactively reflect the adoption of Statement of Financial Accounting Standards No. 128. COMMON STOCK On November 19, 1997, the Company's Board of Directors approved a two-for-one split of all of the outstanding shares of the Company's common stock, payable December 15, 1997 to stockholders of record at the close of business on November 28, 1997. The stated par value of each share was not changed from $0.01. In addition, the Board of Directors, approved the quarterly cash dividend at $0.05 per share on the approximately 20,000,000 common shares outstanding after the split (effectively doubling the dividend rate). 13 JEF HOLDING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) On March 2, 1996, the Company's Board of Directors approved a two-for-one split of all of the outstanding shares of the Company's common stock, payable March 29, 1996 to stockholders of record at the close of business on March 15, 1996. The stated par value of each share was not changed from $0.01. In addition, the Board of Directors, approved the quarterly cash dividend at $0.05 per share (pre November 1997 stock split) on the approximately 12,000,000 common shares (pre November 1997 stock split) to be outstanding after the March 2, 1996 split (effectively doubling the dividend rate), as well as the repurchase of up to one million of the new common shares (pre November 1997 stock split), on the open market or otherwise, from time to time. All share, share price and per share information included in the consolidated financial statements has been restated to retroactively reflect the effect of the November 19, 1997 and the March 2, 1996 two-for-one stock splits. TRANSFERS OF FINANCIAL ASSETS In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS 125 which establishes, among other things, new criteria for determining whether a transfer of financial assets should be accounted for as a sale or as a pledge of collateral in a secured borrowing. SFAS No. 125 also establishes new accounting requirements for pledged collateral. The Company implemented SFAS No. 125 in 1997. SFAS No. 125 did not have a material impact on the Company. COMPREHENSIVE INCOME In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains, and losses) in a full set of general-purpose financial statements. All items that are required to be recognized under accounting standards as components of comprehensive income are required to be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS No. 130 does not require a specific format for that financial statement but requires that an enterprise display an amount representing total comprehensive income for the period in that financial statement. SFAS No. 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. The Company implemented SFAS No. 130 in 1997. The adoption of SFAS No. 130 did not have a material impact on the Company. SEGMENT REPORTING In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 131 establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to 14 JEF HOLDING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) shareholders. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. SFAS No. 131 requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Operating segments are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. Generally, financial information is required to be reported on the basis that it is used internally for evaluating segment performance and deciding how to allocate resources to segments. SFAS No. 131 also requires that a public business enterprise report descriptive information about the way that the operating segments were determined, the products and services provided by the operating segments, differences between the measurements used in reporting segment information and those used in the enterprise's general-purpose financial statements, and changes in the measurement of segment amounts from period to period. The Company implemented SFAS No. 131 in 1998. The adoption of SFAS No. 131 did not have a material impact on the Company. PENSION DISCLOSURE In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosure About Pensions and Other Post-retirement Benefits," which revises employers' disclosures about pension and other post-retirement benefit plans. It does not change the measurement or recognition of those plans. It standardizes the disclosure requirements for pensions and other post-retirement benefits to the extent practicable, requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures. The Company implemented SFAS No. 132 in 1998. The adoption of SFAS No. 132 did not have a material impact on the Company. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. SFAS No. 133 is not expected to have a material impact on the Company. FOREIGN CURRENCY TRANSLATION The Company's foreign revenues and expenses are translated at average current rates during each reporting period. Foreign currency transaction gains and losses are included in the unaudited proforma consolidated statement of earnings. Gains and losses resulting from translation of financial statements 15 JEF HOLDING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) are excluded from the consolidated statement of earnings and are recorded directly to a separate component of stockholders' equity. RECLASSIFICATIONS Certain reclassifications have been made to the prior years' amounts to conform to the current year's presentation. USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. (2) RECEIVABLE FROM, AND PAYABLE TO, BROKERS AND DEALERS The following is a summary of the major categories of receivable from, and payable to, brokers and dealers as of December 31, 1998 and 1997 (in thousands of dollars):
1998 1997 ------------ ------------ Receivable from brokers and dealers: Securities borrowed................................................................. $ 1,922,691 $ 1,197,227 Reverse repurchase agreements....................................................... 5,066 -- Other............................................................................... 90,333 72,437 ------------ ------------ $ 2,018,090 $ 1,269,664 ------------ ------------ ------------ ------------ Payable to brokers and dealers: Securities loaned................................................................... $ 1,580,811 $ 966,132 Repurchase agreements............................................................... 5,061 -- Other............................................................................... 17,034 15,573 ------------ ------------ $ 1,602,906 $ 981,705 ------------ ------------ ------------ ------------
The Company has a securities borrowed versus securities loaned business with other brokers. The Company also borrows securities to cover short sales and to complete transactions in which customers have failed to deliver securities by the required settlement date, and lends securities to other brokers and dealers for similar purposes. From these activities, the Company derives interest revenue and interest expense. 16 JEF HOLDING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 (3) RECEIVABLE FROM, AND PAYABLE TO, CUSTOMERS, OFFICERS AND DIRECTORS The following is a summary of the major categories of receivables from customers, officers and directors as of December 31, 1998 and 1997 (in thousands of dollars):
1998 1997 --------- ---------- Customers (net of allowance for uncollectible accounts of $3,427 in 1998 and $2,453 in 1997).................................................................................... $ 92,646 $ 164,099 Officers and directors..................................................................... 880 2,185 --------- ---------- $ 93,526 $ 166,284 --------- ---------- --------- ----------
Interest is paid on free credit balances in accounts of customers who have indicated that the funds will be used for investment at a future date. The rate of interest paid on such free credit balances varies between the thirteen-week treasury bill rate and 1% below that rate, depending upon the size of the customers' free credit balances. (4) SECURITIES OWNED AND SECURITIES SOLD, NOT YET PURCHASED The following is a summary of the market value of major categories of securities owned and securities sold, not yet purchased, as of December 31, 1998 and 1997 (in thousands of dollars):
1998 1997 ----------------------- ---------------------- SECURITIES SECURITIES SOLD, SOLD, SECURITIES NOT YET SECURITIES NOT YET OWNED PURCHASED OWNED PURCHASED ---------- ----------- ---------- ---------- Corporate equity securities...................................... $ 43,468 $ 26,471 $ 120,316 $ 134,160 High-yield securities............................................ 28,684 8,253 59,270 52,332 Corporate debt securities........................................ 20,903 4,067 37,382 1,571 U.S. Government and agency obligations........................... 7,076 -- 25,012 -- Other............................................................ 666 574 3,075 637 ---------- ----------- ---------- ---------- $ 100,797 $ 39,365 $ 245,055 $ 188,700 ---------- ----------- ---------- ---------- ---------- ----------- ---------- ----------
(5) INVESTMENTS The following is a summary of the major categories of investments, as of December 31, 1998 and 1997 (in thousands of dollars):
1998 1997 --------- ---------- Partnership interests...................................................................... $ 44,638 $ 64,874 Debt and equity investments................................................................ 42,088 64,397 Equity and debt interests in affiliates.................................................... 6,737 5,565 --------- ---------- $ 93,463 $ 134,836 --------- ---------- --------- ----------
17 JEF HOLDING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 (6) PREMISES AND EQUIPMENT The following is a summary of premises and equipment as of December 31, 1998 and 1997 (in thousands of dollars):
1998 1997 --------- --------- Furniture, fixtures and equipment........................................................... $ 60,365 $ 56,320 Leasehold improvements...................................................................... 17,316 16,338 --------- --------- Total....................................................................................... 77,681 72,658 Less accumulated depreciation and amortization.............................................. 57,157 49,336 --------- --------- $ 20,524 $ 23,322 --------- --------- --------- ---------
Depreciation and amortization expense amounted to $11,766,000, $9,629,000 and $9,446,000 for the years ended December 31, 1998, 1997 and 1996, respectively. Depreciation and amortization expense included in discontinued operations of ITGI amounted to $7,502,000, $4,614,000 and $2,034,000 for the years ended December 31, 1998, 1997 and 1996, respectively. (7) BANK LOANS Bank loans represent short-term borrowings that are payable on demand and generally bear interest at the brokers' call loan rate. At December 31, 1998, the Company had unsecured bank loans amounting to $21,000,000 with a weighted average interest rate of 5.6%. At December 31, 1997, there were no bank loans. (8) LONG TERM DEBT The following summarizes long term debt outstanding at December 31, 1998 and 1997 (in thousands of dollars):
1998 1997 ---------- ---------- 8 7/8% Series B Senior Notes, due 2004, less unamortized discount of $372 and $442 in 1998 and 1997, respectively, effective rate of 9%............................................ $ 49,628 $ 49,558 7 1/2% Senior Notes, due 2007, less unamortized discount of $241 and $268 in 1998 and 1997, effective rate of 8%.............................................................. 99,759 99,732 ---------- ---------- $ 149,387 $ 149,290 ---------- ---------- ---------- ----------
During 1997, JEFCO obtained a NASDR approved $200,000,000 revolving credit facility to be used in connection with underwriting activities. The revolving credit facility terminates on October 30, 1999. Loans under this facility bear interest at 2.5% over either the Federal funds rate or the London Interbank Offered Rate. During 1998, there were several borrowings against the revolving credit facility. During 1997, there were no borrowings against the revolving credit facility. 18 JEF HOLDING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 (9) INCOME TAXES Total income taxes for the years ended December 31, 1998, 1997 and 1996 were allocated as follows (in thousands of dollars):
1998 1997 1996 ---------- --------- --------- Income from continuing operations............................................... $ 22,992 $ 27,334 $ 17,772 Income from discontinued operations of ITGI, net of tax......................... 37,541 20,343 17,666 Stockholders' equity, for compensation expense for tax purposes in excess of amounts recognized for financial reporting purposes........................... (12,804) (1,704) (1,568) ---------- --------- --------- $ 47,729 $ 45,973 $ 33,870 ---------- --------- --------- ---------- --------- ---------
Income taxes (benefits) for the years ended December 31, 1998, 1997 and 1996 consist of the following (in thousands of dollars):
1998 1997 1996 --------- --------- --------- CURRENT: Federal........................................................................ $ 22,650 $ 28,675 $ 21,337 State and city................................................................. 5,627 7,369 4,870 --------- --------- --------- 28,277 36,044 26,207 --------- --------- --------- --------- --------- --------- DEFERRED: Federal........................................................................ (3,921) (6,388) (7,348) State and city................................................................. (1,364) (2,322) (1,087) --------- --------- --------- (5,285) (8,710) (8,435) --------- --------- --------- $ 22,992 $ 27,334 $ 17,772 --------- --------- --------- --------- --------- ---------
Income taxes differed from the amounts computed by applying the Federal income tax rate of 35% for 1998, 1997 and 1996 as a result of the following (in thousands of dollars):
1998 1997 1996 -------------------- -------------------- -------------------- AMOUNT % AMOUNT % AMOUNT % --------- --------- --------- --------- --------- --------- Computed expected income taxes............................. $ 20,718 35.0% $ 24,042 35.0% $ 14,765 35.0% Increase (decrease) in income taxes resulting from: State and city income taxes, net of Federal income tax benefit................................................ 2,770 4.7 3,281 4.8 2,459 5.8 Limited deductibility of meals and entertainment......... 1,142 1.9 1,054 1.5 699 1.6 Foreign income........................................... 654 1.1 -- -- -- -- Non-taxable interest income.............................. (304) (0.5) (164) (0.2) -- -- Research and development tax credits..................... (264) (0.5) (264) (0.4) (132) (0.3) Other, net............................................... (1,724) (2.9) (615) (0.9) (19) -- --------- --- --------- --- --------- --- Total income taxes................................... $ 22,992 38.8% $ 27,334 39.8% $ 17,772 42.1% --------- --- --------- --- --------- --- --------- --- --------- --- --------- ---
19 JEF HOLDING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 (9) INCOME TAXES (CONTINUED) The cumulative tax effects of temporary differences that give rise to significant portions of the deferred tax assets at December 31, 1998 and 1997 are presented below (in thousands of dollars):
1998 1997 --------- --------- Deferred tax assets: Long-term compensation...................................................................... $ 28,752 $ 22,874 Lease allowances............................................................................ 582 929 Accounts receivable......................................................................... 3,518 2,888 State income taxes.......................................................................... 1,012 1,646 Premises and equipment...................................................................... 1,361 2,298 Other....................................................................................... 1,437 742 --------- --------- Total gross deferred tax assets....................................................... 36,662 31,377 Valuation allowance......................................................................... -- -- --------- --------- Net deferred tax asset, included in other assets...................................... $ 36,662 $ 31,377 --------- --------- --------- ---------
There was no valuation allowance for deferred tax assets as of December 31, 1998 and 1997. Management believes it is more likely than not that the Company will generate sufficient taxable income in the future to realize the deferred tax asset. (10) BENEFIT PLANS PENSION PLAN The Company has a defined benefit pension plan which covers certain employees of the Company and its subsidiaries. The plan is subject to the provisions of the Employee Retirement Income Security Act of 1974. Benefits are based on years of service and the employee's career average pay. The Company's funding policy is to contribute to the plan at least the minimum amount that can be deducted for Federal income tax purposes. 20 JEF HOLDING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 (10) BENEFIT PLANS (CONTINUED) The following tables set forth the plan's funded status and amounts recognized in the Company's accompanying consolidated statements of financial condition and consolidated statements of earnings (in thousands of dollars):
DECEMBER 31 -------------------- 1998 1997 --------- --------- Actuarial present value of benefit obligations--accumulated benefit obligation, including vested benefits of $19,594 and $18,449 as of December 31, 1998 and 1997, respectively..... $ 21,141 $ 19,777 --------- --------- --------- --------- Projected benefit obligation for service rendered to date................................... $ 24,837 $ 22,603 Plan assets, at fair market value........................................................... 17,203 16,479 --------- --------- Excess of the projected benefit obligation over plan assets................................. 7,634 6,124 Unamortized prior service cost.............................................................. 420 624 Unrecognized net transition obligation being recognized over 15 years....................... (129) (172) Unrecognized net loss....................................................................... (6,841) (5,876) Adjustment to recognize minimum liability................................................... 2,853 2,598 --------- --------- Pension liability included in other liabilities............................................. $ 3,937 $ 3,298 --------- --------- --------- ---------
YEAR ENDED DECEMBER 31 ------------------------------- 1998 1997 1996 --------- --------- --------- Net pension cost included the following components: Service cost--benefits earned during the period...................................... $ 1,895 $ 1,288 $ 1,125 Interest cost on projected benefit obligation........................................ 1,551 1,222 1,064 Expected return on plan assets....................................................... (1,310) (1,065) (889) Net amortization..................................................................... 363 178 198 --------- --------- --------- Net periodic pension cost............................................................ $ 2,499 $ 1,623 $ 1,498 --------- --------- --------- --------- --------- ---------
The following tables reconcile the fair value of assets and the projected benefit obligation for the years ending December 31, 1998 and 1997 (in thousands of dollars):
YEAR ENDED DECEMBER 31, -------------------- 1998 1997 --------- --------- Fair value of assets, beginning of year............................................... $ 16,479 $ 13,102 Employer contributions................................................................ 2,114 1,476 Benefit payments made................................................................. (2,124) (544) Total investment return............................................................... 734 2,445 --------- --------- Fair value of assets, end of year..................................................... $ 17,203 $ 16,479 --------- --------- --------- ---------
21 JEF HOLDING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 (10) BENEFIT PLANS (CONTINUED)
YEAR ENDED DECEMBER 31, -------------------- 1998 1997 --------- --------- Projected benefit obligation, beginning of year....................................... $ 22,603 $ 16,279 Service cost.......................................................................... 1,895 1,288 Interest cost......................................................................... 1,551 1,222 Actuarial gains and losses............................................................ 763 4,358 Benefits paid......................................................................... (2,124) (544) Plan amendments....................................................................... 149 -- --------- --------- Projected benefit obligation, end of year............................................. $ 24,837 $ 22,603 --------- --------- --------- ---------
The net periodic pension costs above include the costs related to discontinued operations of ITGI of $385,000, $208,000 and $151,000 in 1998, 1997 and 1996, respectively. The plan assets consist of approximately 60% equities and 40% fixed income securities. The weighted average discount rate and the rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 6.75% and 5.00%, respectively, in 1998, 7.00% and 5.00%, respectively, in 1997 and 7.50% and 5.00%, respectively, in 1996. The expected long-term rate of return on assets was 8.40% in 1998, 1997 and 1996. STOCK COMPENSATION PLANS In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based Compensation." SFAS 123 defines a fair value based method of accounting for an employee stock option or similar instrument and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it allows an entity to continue to measure compensation cost for these plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." Entities electing to remain with the accounting in APB Opinion No. 25 must make pro forma disclosures of net earnings and earnings per share, as if the fair value based method of accounting defined in SFAS 123 had been applied. The Company implemented the statement during the year ended December 31, 1996. At December 31, 1998, the Company had six stock-based compensation plans, which are described below. The Company applied APB Opinion No. 25 in accounting for their plans. Accordingly, no compensation cost has been recognized for fixed stock option plans. Had compensation cost for the Company's stock-based compensation plans been determined consistent with SFAS 123, the Company's 22 JEF HOLDING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 (10) BENEFIT PLANS (CONTINUED) net earnings and earnings per share would have been reduced to the pro forma amounts indicated below (in thousands of dollars, except per share amounts):
1998 1997 1996 --------- --------- --------- Net earnings: As reported.................................................................... $ 69,682 $ 63,567 $ 43,560 Pro forma...................................................................... $ 65,240 $ 58,927 $ 40,102 Basic earnings per share: As reported.................................................................... $ 3.12 $ 2.95 $ 1.90 Pro forma...................................................................... $ 2.92 $ 2.73 $ 1.75 Diluted earnings per share: As reported.................................................................... $ 2.96 $ 2.80 $ 1.84 Pro forma...................................................................... $ 2.77 $ 2.60 $ 1.69
1993 PLAN The Company has a Stock Ownership and Long-Term Incentive Plan (1993 Plan) which allows awards in the form of incentive stock options (within the meaning of Section 422 of the Internal Revenue code), nonqualified stock options, stock appreciation rights, restricted stock, unrestricted stock, performance awards, dividend equivalents or other stock based awards. The maximum number of shares of common stock of the Company with respect to which any awards may be made in any calendar year during the term of the 1993 Plan may not exceed 20% of the number of shares of common stock issued and outstanding as of the first day of the calendar year in which awards are made, less the number of shares of common stock reserved for issuance with respect to, or underlying, any award, made pursuant to the 1993 Plan or any predecessor plan, as of such date. The 1993 Plan provides flexibility as to exercise price and term of each option. DIRECTOR PLAN The Company, also, has a Non-Employee Directors' Stock Option Plan (Director Plan) which provides for an annual grant to each non-employee director of an option to purchase 2,000 shares of the Company's common stock. Such grants will be made automatically on the date directors are elected or reelected at the Company's annual meeting. In addition, the Director Plan provides for the automatic grant to a non-employee director, at the time he or she is first elected or appointed, of an option to purchase 5,000 shares of the Company's common stock. A total of 300,000 shares of the Company's common stock are reserved under the Director Plan. Under the Director Plan, the exercise price of each option equals the market price of the Company's stock on the date of grant and the option's maximum term is five years. 1996 PLAN Additionally, in 1996, the Company established a Non-Employee Directors' Deferred Compensation Plan (1996 Plan). The 1996 Plan permits each non-employee director to elect to be paid annual retainer fees and annual fees for service as chairman or a member of a Board committee in the 23 JEF HOLDING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 (10) BENEFIT PLANS (CONTINUED) form of stock options and to defer receipt of any director fees in an interest-bearing cash account or as deferred shares in a deferred share account. A total of 200,000 shares of the Company's common stock are reserved under the 1996 Plan. Under the 1996 Plan, the exercise price of each option equals the market price of the Company's stock on the date of grant and the options expire ten years after the date of grant. UNITED KINGDOM CAPITAL ACCUMULATION PLAN The Company has a United Kingdom Capital Accumulation Plan (UK CAP) for certain officers and key employees of the Company who work in the United Kingdom. Participation in the plan is optional, with those who elect to participate agreeing to defer graduated percentages of their compensation. The UK CAP allows selected employees to acquire the Company's common stock (through the granting of stock options) at a 15% discount with 40% of the amount deferred. The remaining 60% of the amount deferred is placed in a Profit-Based Deferred Compensation Account that earns interest at a rate based on the performance of the Company. OPTIONS ISSUED UNDER ALL PLANS The fair value of all option grants for all the Company's plans are estimated on the date of grant using the Black-Scholes option-pricing model with the weighted-average assumptions used for all fixed option grants in 1998, 1997 and 1996, respectively: dividend yield of 0.6%, 0.4%, and 0.6%; expected volatility of 32.6%, 33.4%, and 33.3%; risk-free interest rates of 5.5%, 6.4%, and 5.4%; and expected lives of 5.0 years, 5.5 years, and 3.3 years. A summary of the status of Company stock options in all its stock-based plans as of December 31, 1998, 1997 and 1996 and changes during the year then ended is presented below:
1998 1997 1996 ----------------------- ----------------------- ----------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICE SHARES PRICE SHARES PRICE ---------- ----------- ---------- ----------- ---------- ----------- Outstanding at beginning of year.................... 1,829,033 $ 12.05 1,702,000 $ 9.35 1,467,832 $ 6.34 Granted............................................. 377,949 39.70 367,061 22.91 594,628 13.28 Exercised........................................... (748,142) 7.93 (240,028) 9.48 (352,460) 3.47 Forfeited........................................... (16,023) 40.00 -- -- (8,000) 8.13 ---------- ---------- ---------- Outstanding at end of year.......................... 1,442,817 21.12 1,829,033 12.05 1,702,000 9.35 ---------- ---------- ---------- ---------- ---------- ---------- Options exercisable at year-end..................... 941,955 1,349,124 858,996 ---------- ---------- ---------- ---------- ---------- ---------- Weighted-average fair value of options granted during the year................................... $ 13.43 $ 10.05 $ 4.19
24 JEF HOLDING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 (10) BENEFIT PLANS (CONTINUED) The following table summarizes information about stock options outstanding at December 31, 1998:
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 - -------------------------------------------------- ------------ --------------- ----------- ------------ ----------- $1.28 to 9.99..................................... 346,437 0.8 $ 7.33 302,470 $ 7.60 $10.00 to 19.99................................... 412,600 0.7 14.20 408,600 14.21 $20.00 to 29.99................................... 287,532 3.4 22.56 217,532 22.06 $30.00 to 39.99................................... 45,000 8.2 32.15 5,000 35.38 $40.00 to 47.94................................... 351,248 4.1 40.26 8,353 47.68 ------------ ------------ $1.28 to 47.94.................................... 1,442,817 2.3 21.12 941,955 14.31 ------------ ------------ ------------ ------------
PERFORMANCE-BASED STOCK OPTIONS While the 1993 Plan allows for the granting of performance-based stock options, no such options were granted during 1998, 1997 and 1996, and no such options were outstanding at December 31, 1998, 1997 and 1996. RESTRICTED STOCK The 1993 Plan allows for grants of restricted stock awards, whereby certain key employees are granted restricted shares of common stock subject to forfeiture until the restrictions lapse or terminate. With certain exceptions, the employee must remain with the Company for a period of years after the date of grant to receive the full number of shares granted. During 1998, 1997 and 1996, there were restricted stock awards of 183,947 shares, 198,888 shares and 49,264 shares, respectively, with a corresponding market value of $6,488,000, $4,189,000 and $624,000, respectively. Certain grants are expensed over the vesting periods of one to three years, while others have been granted in settlement of previously accrued compensation liabilities. The compensation cost, excluding the cost associated with the settlement of previously accrued compensation liabilities, charged against earnings was $993,000, $1,142,000 and $394,000 in 1998, 1997 and 1996, respectively. As of December 31, 1998, 1997 and 1996, restricted stock shares outstanding were 381,585 shares, 203,468 shares and 95,160 shares, respectively. EMPLOYEE STOCK PURCHASE PLAN The Company has an Employee Stock Purchase Plan (ESPP). All regular full-time employees are eligible for the ESPP. Employee contributions are voluntary and are made via payroll deduction. The employee contributions are used to purchase the Company's common stock which is then held in an outside trust account. The Company matches employee contributions at a rate of 15% (more, if profits exceed targets set by the Company's Board of Directors). The Company's match vests after two years. The Company recognizes compensation cost related to its ESPP matching. The compensation cost charged against continuing operations was $293,000, $187,000 and $213,000 in 1998, 1997 and 1996, 25 JEF HOLDING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 (10) BENEFIT PLANS (CONTINUED) respectively. The charge against discontinued operations was $4,000, $41,000 and $37,000 in 1998, 1997 and 1996, respectively. CAPITAL ACCUMULATION PLAN The Company has a Capital Accumulation Plan (CAP) for certain officers and key employees of the Company. Participation in the plan is optional, with those who elect to participate agreeing to defer graduated percentages of their compensation. The plan allows selected employees to acquire the Company's common stock at a 15% discount with 50% of the amount deferred. The remaining 50% of the amount deferred is placed in a Profit-Based Deferred Compensation Account that earns interest at a rate based on the performance of the Company. The Company will from time to time repurchase shares of its common stock in the open market for use in both the CAP and UK CAP plans. The Company has acquired 2,580,034 shares since the inception of the plans (CAP in 1993 and UK CAP in 1995) and has made distributions of 653,410 shares. The Company recognizes compensation cost related to the 15% discount and interest on Profit- Based Deferred Compensation Accounts. The compensation cost charged against continuing operations was $4,115,000, $4,480,000 and $2,448,000 in 1998, 1997 and 1996, respectively. The charge against discontinued operations was $219,000, $354,000 and $294,000 in 1998, 1997 and 1996, respectively. PROFIT SHARING PLAN The Company has a profit sharing plan, covering substantially all employees, which includes a salary reduction feature designed to qualify under Section 401-K of the Internal Revenue Code. Expenses of this plan related to continuing operations amounted to $6,778,000, $6,222,000 and $4,454,000 in 1998, 1997 and 1996, respectively. Expenses of this plan related to discontinued operations amounted to $2,362,000, $1,701,000 and $1,259,000 in 1998, 1997 and 1996, respectively. 26 JEF HOLDING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 (11) EARNINGS PER SHARE The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share computations for the years 1998, 1997 and 1996 (in thousands of dollars, except per share amounts):
YEAR ENDED DECEMBER 31, --------------------------------------------- 1998 1997 1996 --------- ----------------------- --------- Earnings from continuing operations................................ $ 36,201 $ 41,356 $ 24,414 Discontinued operations of ITGI, net of tax........................ 33,481 22,211 19,146 --------- ------- --------- Net earnings for basic earnings per share.......................... 69,682 63,567 43,560 Earnings adjustment--stock options on subsidiary................... (1,672) (890) (501) --------- ------- --------- Adjusted earnings for diluted earnings per share................... $ 68,010 $ 62,677 $ 43,059 --------- ------- --------- --------- ------- --------- Shares of common stock and common stock equivalents: Average number of common shares.................................... 20,902 20,148 21,644 Capital Accumulation Plan unissued shares.......................... 1,444 1,404 1,336 --------- ------- --------- Average shares used in basic computation........................... 22,346 21,552 22,980 Stock options...................................................... 508 651 398 Other unissued common shares....................................... 100 146 32 --------- ------- --------- Average shares used in diluted computation......................... 22,954 22,349 23,410 --------- ------- --------- --------- ------- --------- Earnings per share: Basic: Earnings from continuing operations................................ $ 1.62 $ 1.92 $ 1.06 Discontinued operations of ITGI, net of tax........................ 1.50 1.03 0.84 --------- ------- --------- Net earnings....................................................... $ 3.12 $ 2.95 $ 1.90 --------- ------- --------- --------- ------- --------- Diluted: Earnings from continuing operations................................ $ 1.58 $ 1.85 $ 1.04 Discontinued operations of ITGI, net of tax........................ 1.38 0.95 0.80 --------- ------- --------- Net earnings....................................................... $ 2.96 $ 2.80 $ 1.84 --------- ------- --------- --------- ------- ---------
The Company had no anti-dilutive securities during 1998, 1997 and 1996. 27 JEF HOLDING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 (12) LEASES As lessee, the Company leases certain premises and equipment under noncancelable agreements expiring at various dates through 2014. Future minimum lease payments for all noncancelable operating leases at December 31, 1998 are as follows (in thousands of dollars):
DISCONTINUED CONTINUING OPERATIONS OPERATIONS TOTAL ------------- ----------- --------- 1999........................................................................ $ 3,059 $ 9,632 $ 12,691 2000........................................................................ 3,116 10,803 13,919 2001........................................................................ 2,712 9,696 12,408 2002........................................................................ 2,524 6,460 8,984 2003........................................................................ 2,914 6,008 8,922 Thereafter.................................................................. 18,818 54,280 73,098
Rental expense related to continuing operations amounted to $7,295,000, $5,742,000 and $4,859,000, in 1998, 1997 and 1996, respectively. Rental expense related to discontinued operations amounted to $2,556,000, $2,600,000 and $1,900,000, in 1998, 1997 and 1996, respectively. (13) FINANCIAL INSTRUMENTS OFF-BALANCE SHEET RISK The Company has contractual commitments arising in the ordinary course of business for securities loaned or purchased under agreements to sell, securities sold but not yet purchased, repurchase agreements, future purchases and sales of foreign currencies, securities transactions on a when-issued basis, options contracts, futures index contracts, and underwriting. Each of these financial instruments and activities contains varying degrees of off-balance sheet risk whereby the market values of the securities underlying the financial instruments may be in excess of, or less than, the contract amount. The settlement of these transactions is not expected to have a material effect upon the Company's consolidated financial statements. In the normal course of business, the Company had letters of credit outstanding aggregating $35,825,000 at December 31, 1998 to satisfy various collateral requirements in lieu of depositing cash or securities. The Company has derivative financial instrument positions in foreign exchange forward contracts, option contracts, and index futures contracts, all of which are measured at fair value with realized and unrealized gains and losses recognized in earnings. The foreign exchange forward contract positions are generally taken to lock in the dollar cost or proceeds of foreign currency commitments associated with unsettled foreign denominated securities purchases or sales. The average maturity of the forward contracts is generally less than two weeks. The option positions taken are generally part of a strategy in which offsetting equity positions are taken. The index futures positions are taken as a hedge against securities positions. The gross contracted or notional amount of index futures contracts, options contracts, and foreign exchange forward contracts, which are not reflected in the consolidated statements of financial condition, is set forth in the table below and provide only a measure of the Company's involvement in these contracts at December 31, 1998 and 1997. They do not represent amounts subject 28 JEF HOLDING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 (13) FINANCIAL INSTRUMENTS (CONTINUED) to market risk and, in many cases, serve to reduce the Company's overall exposure to market and other risks (in thousands of dollars):
NOTIONAL OR CONTRACTED AMOUNT ---------------------------------------------- 1998 1997 ---------------------- ---------------------- PURCHASE SALE PURCHASE SALE ----------- --------- ----------- --------- Index futures contracts.................................................. $ -- $ 3,559 $ -- $ 8,173 Option contracts......................................................... 2,950 2,927 6,277 4,803 Foreign exchange forward contracts....................................... -- 8,759 430 4,461
FAIR VALUE OF DERIVATIVE FINANCIAL INSTRUMENTS The following is an aggregate summary of the average 1998 and 1997 and December 31, 1998 and 1997 fair values of derivative financial instruments (in thousands of dollars):
1998 1997 ---------------------------- ---------------------------- AVERAGE END OF PERIOD AVERAGE END OF PERIOD ----------- --------------- ----------- --------------- Index futures contracts: In a favorable position........................................ $ 42 $ -- $ 55 $ -- In an unfavorable position..................................... 150 178 204 149 Option contracts: Purchase....................................................... 500 666 682 799 Sale........................................................... 506 574 372 637 Foreign exchange forward contracts: Purchase....................................................... 2,093 -- 3,406 430 Sale........................................................... 6,623 8,759 3,291 4,461
CREDIT RISK In the normal course of business, the Company is involved in the execution, settlement and financing of various customer and principal securities transactions. Customer activities are transacted on a cash, margin or delivery-versus-payment basis. Securities transactions are subject to the risk of counterparty or customer nonperformance. However, transactions are collateralized by the underlying security, thereby reducing the associated risk to changes in the market value of the security through settlement date or to the extent of margin balances. The Company seeks to control the risk associated with these transactions by establishing and monitoring credit limits and by monitoring collateral and transaction levels daily. The Company may require counterparties to deposit additional collateral or return collateral pledged. In the case of aged securities failed to receive, the Company may, under industry regulations, purchase the underlying securities in the market and seek reimbursement for any losses from the counterparty. CONCENTRATION OF CREDIT RISK As a major securities firm, the Company's activities are executed primarily with and on behalf of other financial institutions, including brokers and dealers, banks and other institutional customers. Concentrations of credit risk can be affected by changes in economic, industry or geographical factors. The Company seeks to control its credit risk and the potential risk concentration through a variety of reporting and control procedures, including those described in the preceding discussion of credit risk. 29 JEF HOLDING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 (14) OTHER COMPREHENSIVE INCOME The following summarizes other comprehensive income and accumulated other comprehensive income at December 31, 1998 and for the year then ended (in thousands of dollars):
BEFORE-TAX INCOME TAX NET-OF-TAX AMOUNT OR BENEFIT AMOUNT ----------- ------------- ----------- Currency translation adjustments......................... $ 573 $ -- $ 573 Minimum pension liability adjustment..................... (254) 105 (149) ----- ----- ----- Other comprehensive income (loss)........................ $ 319 $ 105 $ 424 ----- ----- ----- ----- ----- -----
MINIMUM ACCUMULATED CURRENCY PENSION OTHER TRANSLATION LIABILITY COMPREHENSIVE ADJUSTMENTS ADJUSTMENT INCOME (LOSS) ------------- ----------- -------------- Beginning balance................................. $ (622) $ (1,520) $ (2,142) Change in 1998.................................... 573 (149) 424 ----- ----------- ------- Ending balance.................................... $ (49) $ (1,669) $ (1,718) ----- ----------- ------- ----- ----------- -------
The following summarizes other comprehensive income and accumulated other comprehensive income at December 31, 1997 and for the year then ended (in thousands of dollars):
BEFORE-TAX INCOME TAX NET-OF-TAX AMOUNT OR BENEFIT AMOUNT ----------- ------------- ----------- Currency translation adjustments......................... $ (526) $ -- $ (526) Minimum pension liability adjustment..................... (1,645) 678 (967) ----------- ----- ----------- Other comprehensive income (loss)........................ $ (2,171) $ 678 $ (1,493) ----------- ----- ----------- ----------- ----- -----------
MINIMUM ACCUMULATED CURRENCY PENSION OTHER TRANSLATION LIABILITY COMPREHENSIVE ADJUSTMENTS ADJUSTMENT INCOME (LOSS) ------------- ----------- -------------- Beginning balance................................. $ (96) $ (553) $ (649) Change in 1997.................................... (526) (967) (1,493) ----- ----------- ------- Ending balance.................................... $ (622) $ (1,520) $ (2,142) ----- ----------- ------- ----- ----------- -------
30 JEF HOLDING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 (14) OTHER COMPREHENSIVE INCOME (CONTINUED) The following summarizes other comprehensive income and accumulated other comprehensive income at December 31, 1996 and for the year then ended (in thousands of dollars):
BEFORE-TAX INCOME TAX NET-OF-TAX AMOUNT OR BENEFIT AMOUNT ------------- ------------- ----------- Currency translation adjustments......................... $ 426 $ -- $ 426 Minimum pension liability adjustment..................... 58 (25) 33 ----- --- ----- Other comprehensive income (loss)........................ $ 484 $ (25) $ 459 ----- --- ----- ----- --- -----
MINIMUM ACCUMULATED CURRENCY PENSION OTHER TRANSLATION LIABILITY COMPREHENSIVE ADJUSTMENTS ADJUSTMENT INCOME (LOSS) ------------- ------------- -------------- Beginning balance................................. $ (522) $ (586) $ (1,108) Change in 1996.................................... 426 33 459 ----- ----- ------- Ending balance.................................... $ (96) $ (553) $ (649) ----- ----- ------- ----- ----- -------
(15) NET CAPITAL REQUIREMENTS As registered broker-dealers, JEFCO, ITG and W & D are subject to the Securities and Exchange Commission Uniform Net Capital Rule (Rule 15c3-1), which requires the maintenance of minimum net capital. JEFCO, ITG and W & D have elected to use the alternative method permitted by the Rule, which requires that they each maintain minimum net capital, as defined, equal to the greater of $250,000 or 2% of the aggregate debit balances arising from customer transactions, as defined. At December 31, 1998, JEFCO's, ITG's and W & D's net capital was $217,367,000, $71,996,000, and $2,026,000, respectively, which exceeded minimum net capital requirements by $213,362,000, $71,746,000, and $1,776,000, respectively. (16) CONTINGENCIES IN RE NASDAQ MARKET-MAKERS ANTITRUST LITIGATION. Beginning in July 1994, antitrust class actions were commenced against JEFCO and 33 other defendants in various federal courts (the "Lawsuits"). Following the filing of the Lawsuits, the Antitrust Division of the United States Department of Justice ("DOJ") and the Commission commenced investigations into certain issues related to the allegations of the Lawsuits. In August 1996, the DOJ entered into an antitrust consent decree with 24 defendants who are market makers in Nasdaq stocks. JEFCO was neither asked nor required to settle with the DOJ. Shortly after the DOJ settlement, the Commission filed a Section 21(a) report against the National Association of Securities Dealers, Inc. ("NASD"), criticizing various practices by market makers, and the NASD for failing to adequately police or discipline the market makers for those practices. However, the Commission did not take any action at that time against the market maker firms. In October 1994, the Lawsuits were consolidated for discovery purposes in the United States District Court for the Southern District of New York (the "Court"). The consolidated complaint alleges 31 JEF HOLDING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 (16) CONTINGENCIES (CONTINUED) that the defendants violated the antitrust laws by conspiring to fix the spread paid by plaintiffs and class members to trade in certain Nasdaq securities, by refusing to quote bids and asks in so-called odd-eighths. The cases purport to be brought on behalf of all persons who purchased or sold certain securities on the Nasdaq National Market System during the period May 1, 1989 to May 27, 1994. The plaintiffs seek damages in an unspecified amount. In order to avoid the uncertainties of litigation, JEFCO has entered into a settlement agreement which received the preliminary approval of the Court on October 15, 1997. The settlement received the final approval of the Court on November 9, 1998. The amount of the settlement has been previously provided for and will not have a material adverse effect on the Company. INCOME TAXES. The Company received a "30-day letter" proposing certain adjustments which, if sustained, would result in a tax deficiency of approximately $10.0 million plus interest. Substantially all of the proposed adjustments relate to Investment Technology Group, Inc., the Company's approximately 80.5% owned subsidiary and include (i) the disallowance of deductions taken in connection with the termination of certain compensation plans at the time of Investment Technology Group's initial public offering in 1994 and (ii) the disallowance of tax credits taken in connection with certain research and development expenditures. The Company intends to vigorously contest the proposed adjustments and believes that resolution of this matter will not have a material adverse effect on the Company. OTHER. Many aspects of the Company's business involve substantial risks of liability. In the normal course of business, the Company and its subsidiaries have been named as defendants or co-defendants in lawsuits involving primarily claims for damages. The Company's management believes that pending litigation will not have a material adverse effect on the Company. (17) SEGMENT REPORTING The Company's operations have been classified into two business segments: Financial Services and ITGI. The Financial Services segment includes the traditional securities brokerage and investment banking activities of the Company. The ITGI segment includes the automated equity trading and transaction research activities of ITGI and its subsidiaries. On March 17, 1998, Group and ITGI jointly announced plans for a series of transactions (the "Transactions") that would result in the separation of ITGI from the other Group businesses. Group would transfer all non-ITGI assets and liabilities to the Company (the "Transfers"). After the Transfers, Group's 15 million shares of ITGI would be its only asset. Group would then distribute all of the common stock of the Company to the Group stockholders (the "Spin-Off"). Immediately following the Spin-Off, ITGI would merge with and into Group with Group as the surviving corporation (the "Merger"). In connection with the Merger, Group would be renamed Investment Technology Group, Inc. (the "Surviving Corporation"). Subject to the terms and conditions of the merger agreement, each issued and outstanding share of ITGI common stock (other than any shares held by Group or held in the Treasury of ITGI) will be converted into the right to receive a number of shares of common stock of the Surviving Corporation equal to the ratio derived after dividing the number of shares of Group Common Stock outstanding immediately prior to the effective time of the Merger by 32 JEF HOLDING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 (17) SEGMENT REPORTING (CONTINUED) the number of shares of ITGI Common Stock owned by Group immediately prior to the effective time of the Merger. As a result of the Transactions, Group stockholders will own 100% of the Company and approximately 80.5% of the Surviving Corporation. The public ITGI stockholders will own 19.5% of the Surviving Corporation, the same proportionate ownership they held in ITGI prior to the Transactions. On March 12, 1999, Group received tax rulings from the Internal Revenue Service (the "IRS") with the concurrence of the IRS concerning the tax-free treatment of the Transfers and the Spin-Off for Group and its stockholders, respectively. On March 17, 1999, Group's Board of Directors unanimously approved the Transfers and the Spin-Off. The Transactions are contingent on a number of factors, including receipt of stockholders approvals. All stockholder approvals were received on April 20, 1999. In anticipation of the Spin-Off, Group liquidated its CAP plan, a deferred compensation plan consisting of cash and stock, to nearly 200 employees on January 25, 1999. The liquidation of this plan resulted in a capital infusion into the Company and in employees receiving approximately 1.5 million shares of Group. Financial information for the discontinued business segment is summarized as follows (in thousands of dollars): ITGI CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, ---------------------- 1998 1997 ---------- ---------- ASSETS Cash and cash equivalents............................................. $ 77,324 $ 14,263 Securities owned...................................................... 39,615 37,358 Receivables from brokers, dealers and others.......................... 24,127 10,131 Premises and equipment................................................ 19,662 19,506 Other assets.......................................................... 19,784 32,383 ---------- ---------- $ 180,512 $ 113,641 ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable and accrued expenses................................. $ 36,515 $ 19,875 Securities sold, not yet purchased.................................... 288 3 ---------- ---------- 36,803 19,878 Stockholders' equity.................................................. 143,709 93,763 ---------- ---------- $ 180,512 $ 113,641 ---------- ---------- ---------- ----------
33 JEF HOLDING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 (17) SEGMENT REPORTING (CONTINUED) COMPONENTS OF INVESTMENT IN DISCONTINUED OPERATIONS OF ITGI: Stockholders' equity of ITGI............................ $ 143,709 $ 93,763 Add: Goodwill on Company's books related to ITGI........ 5,300 1,635 Less: Deferred taxes on ITGI initial public offering gain.................................................. (12,922) (13,766) Less: Minority interest in ITGI......................... (27,754) (16,575) --------- --------- Investment in discontinued operations of ITGI........... $ 108,333 $ 65,057 --------- --------- --------- ---------
ITGI CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
YEAR ENDED DECEMBER 31, ---------------------------------- 1998 1996 1997 ---------- ---------- ---------- Revenues................................................. $ 212,205 $ 137,042 $ 111,556 Expenses................................................. 131,270 89,782 70,555 ---------- ---------- ---------- Earnings before income tax expense....................... 80,935 47,260 41,001 Income tax expense....................................... 37,541 20,343 17,666 ---------- ---------- ---------- Net earnings............................................. $ 43,394 $ 26,917 $ 23,335 ---------- ---------- ---------- ---------- ---------- ----------
COMPONENTS OF DISCONTINUED OPERATIONS OF ITGI: Net earnings of ITGI.......................... $ 43,394 $ 26,917 $ 23,335 Less: Company's spin-off related expenses..... 1,936 -- -- Less: Minority interest in ITGI............... 7,977 4,706 4,189 --------- --------- --------- Discontinued operations of ITGI............... $ 33,481 $ 22,211 $ 19,146 --------- --------- --------- --------- --------- ---------
CAPITALIZED SOFTWARE ITGI capitalizes software development costs where technological feasibility of the product has been established. The establishment of technological feasibility and the ongoing assessment of recoverability of capitalized software development costs requires considerable judgment by management with respect to certain external factors, including, but not limited to, technological feasibility, anticipated future gross revenues, estimated economic life and changes in software and hardware technologies. The Company is amortizing capitalized software costs using the straight-line method over one to two years, with an average remaining life of under two years. Amortization begins when the product is available for release to the customers. As of December 31, 1998 and 1997, respectively, the Company had $6.5 million and $6.0 million of capitalized software costs, net of accumulated amortization included in investment in discontinued operations of ITGI. In 1998, 1997 and 1996, the Company amortized software costs of $3.5 million, $1.5 million, and $1.4 million, respectively. Research and development expenses related to software were $11.0 million, $8.4 million and $6.8 million in 1998, 1997 and 1996, respectively. In 1998, 1997 and 1996, $4.0 million, $4.4 million and $1.6 million, respectively, were capitalized. 34 JEF HOLDING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 (17) SEGMENT REPORTING (CONTINUED) GOODWILL At December 31, 1998 and 1997, excess of purchase price over net assets acquired remaining was $6,673,000 and $3,556,000, net of accumulated amortization of $4,174,000 and $3,436,000, respectively and is included in other assets on ITGI's Condensed Consolidated Statements of Financial Condition. BENEFIT PLANS In 1994 ITGI, established the 1994 Employee Stock Option and Long-Term Incentive Plan (ITGI Plan) which allows for the granting of options to purchase a total of 3,650,000 shares of ITGI common stock. In 1995, the ITGI Board of Directors adopted, and the ITGI stockholders approved, the Non-Employee Directors' Plan (ITGI Director Plan). The ITGI Director Plan generally provides for an annual grant to each non-employee director an option to purchase 2,500 shares of ITGI common stock. In addition, the ITGI Director Plan provides for the automatic grant to a non-employee director, at the time he or she is initially elected, a stock option to purchase 10,000 shares of ITGI common stock. Stock options granted under the ITGI Director Plan are non-qualified stock options having an exercise price equal to 100% of the fair market value of ITGI common stock at the date of grant. A total of 125,000 shares of ITGI common stock are reserved for issuance under the ITGI Director Plan. There were a total of 3,458,216 fixed stock options outstanding and 18,220,968 ITGI common stock shares outstanding as of December 31, 1997. There were a total of 2,888,106 fixed stock options outstanding and 18,590,361 ITGI common stock shares outstanding as of December 31, 1998. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the weighted-average assumptions used for all fixed option grants in 1998, 1997 and 1996, respectively: dividend yield of 0.0%, 0.0% and 0.0%; expected volatility of 45%, 54% and 49%; risk-free interest rates of 5.5%, 6.6% and 6.1%; and expected lives of 7 years, 5 years and 4 years. The following table summarizes information about stock options outstanding at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------ ------------------------- NUMBER WEIGHTED NUMBER OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED AT REMAINING AVERAGE AT AVERAGE RANGE OF EXERCISE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE PRICES 1998 LIFE (YEARS) PRICE 1998 PRICE - ---------------------- ------------ --------------- ----------- ------------ ----------- $ 7.50-- 9.99....... 445,909 1.9 $ 9.08 445,909 $ 9.08 $10.00--14.99....... 1,167,117 0.9 $ 12.30 1,167,117 $ 12.30 $15.00--19.99....... 157,976 3.4 $ 19.22 73,256 $ 18.94 $20.00--24.99....... 1,019,604 3.1 $ 22.21 1,010,000 $ 22.19 $25.00--29.99....... 92,500 8.4 $ 27.80 26,000 $ 27.97 $30.00--32.10....... 5,000 4.3 $ 32.10 -- -- ------------ ------------ $7.50--32.10........ 2,888,106 2.2 $ 16.21 2,722,282 $ 15.77 ------------ ------------ ------------ ------------
35 JEF HOLDING COMPANY, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1998 AND 1997 (17) SEGMENT REPORTING (CONTINUED) CASH PAID FOR INTEREST AND INCOME TAXES The interest paid and income taxes paid amounts included in the Consolidated Statements of Cash Flows included amounts related to discontinued operations of ITGI (in thousands of dollars).
1998 1997 1996 --------- --------- --------- Interest paid................................................ $ 20 $ 146 $ 223 Income taxes paid to affiliate............................... $ 30,296 $ 19,947 $ 18,798
(18) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) The following is a summary of unaudited quarterly statements of earnings for the years ended December 31, 1998 and 1997 (in thousands of dollars, except per share amounts):
MARCH JUNE SEPTEMBER DECEMBER YEAR ---------- ---------- ---------- ---------- ---------- 1998 Revenues............................................. $ 163,848 $ 149,699 $ 124,041 $ 153,027 $ 590,615 Earnings before income taxes......................... 19,226 16,751 6,830 16,386 59,193 Earnings from continuing operations.................. 11,568 10,101 4,916 9,616 36,201 Earnings from discontinued operations of ITGI............................................ 5,908 7,725 10,760 9,088 33,481 Net earnings......................................... 17,476 17,826 15,676 18,704 69,682 Basic: Earnings from continuing operations per share.......................................... 0.52 0.46 0.22 0.42 1.62 Net earnings per share............................... 0.79 0.80 0.70 0.82 3.12 Diluted: Earnings from continuing operations per share.......................................... 0.51 0.44 0.21 0.42 1.58 Net earnings per share............................... 0.75 0.76 0.66 0.79 2.96 1997 Revenues............................................. $ 116,993 $ 165,448 $ 152,090 $ 196,311 $ 630,842 Earnings before income taxes......................... 10,206 21,402 15,079 22,003 68,690 Earnings from continuing operations.................. 6,031 13,122 9,073 13,130 41,356 Earnings from discontinued operations of ITGI............................................ 5,366 6,626 5,347 4,872 22,211 Net earnings......................................... 11,397 19,748 14,420 18,002 63,567 Basic: Earnings from continuing operations per share.......................................... 0.28 0.61 0.42 0.61 1.92 Net earnings per share............................... 0.53 0.92 0.67 0.83 2.95 Diluted: Earnings from continuing operations per share.......................................... 0.27 0.59 0.41 0.59 1.85 Net earnings per share............................... 0.50 0.87 0.63 0.79 2.80
36 (b) Exhibits:
Exhibit Number Description - ------ ----------- 3.1 -- Amended and Restated Certificate of Incorporation of JEF Holding Company, Inc. ("New JEF")* 3.2 -- By-Laws of New JEF* 10.1 -- 1999 Incentive Compensation Plan of New JEF* 10.2 -- 1999 Directors' Stock Incentive Plan of New JEF* 10.3 -- Distribution Agreement, dated as of March 17, 1999, by and between Group and New JEF. * 10.4 -- Tax Sharing and Indemnification Agreement, dated as of March 17, 1999, by and among Investment Technology Group, Inc. ("ITGI"), Group and New JEF. * 10.5 -- Amended and Restated Tax Sharing Agreement, dated as of March 17, 1999, by and among ITGI, Group and New JEF. * 10.6 -- Benefits Agreement, dated as of March 17, 1999, by and between Group and New JEF. * 10.7 -- Fully Disclosed Clearing Agreement, dated as of January 1, 1999, by and between Jefferies & Company, Inc. and ITG Inc. * 10.8 -- Amendment No. 1 dated as of January 1, 1999 to Service Agreement dated March 15, 1994, by and between Jefferies & Company, Inc. and ITG Inc. * 10.9 -- Execution Agreement, dated as of January 1, 1999, by and between W&D Securities, Inc. and ITGI. * 10.10 -- Form of Pre-Closing and Escrow Agreement by and among The Bank of New York, Group, New JEF and ITGI.* 21 -- List of Subsidiaries* 27 -- Financial Data Schedule * 99.1 -- The identified portions, as set forth in detail in Part I hereof, of the Jeffries Group, Inc. definitive proxy statement (File No. 1-11665) filed with the Securities and Exchange Commission on March 18, 1999 (the "1999 Definitive Proxy Statement") are incorporated in this Registration Statement on Form 10 by reference to the 1999 Definitive Proxy Statement, pursuant to Rule 12b-32(a) under the Exchange Act. - ----------------- * Filed herewith
SIGNATURE Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized. JEF HOLDING COMPANY, INC. By: /s/ Frank E. Baxter ---------------------------------- Name: Frank E. Baxter Title: Chairman of the Board of Directors EX-3.1 2 EXHIBIT 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF JEF HOLDING COMPANY, INC. JEF Holding Company, Inc., a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: 1. The name of the corporation is JEF Holding Company, Inc. The date of filing of its original Certificate of Incorporation with the Secretary of State was December 23, 1998. 2. This Amended and Restated Certificate of Incorporation restates and integrates and further amends the Certificate of Incorporation of this corporation by revising the provisions for director removal and by providing additional director indemnification as permitted by Section 145 of the Delaware General Corporation Law. 3. The Text of the Certificate of Incorporation as amended or supplemented heretofore is further amended hereby to read as herein set forth in full: FIRST: The name of the corporation is JEF Holding Company, Inc. (hereinafter referred to as the "Corporation"). SECOND: The registered office of the Corporation is to be located at Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, in the County of New Castle, in the State of Delaware. The name of its registered agent at that address is The Corporation Trust Company. THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware ("GCL"). FOURTH: A. AUTHORIZED STOCK. The total number of shares of stock which the Corporation shall have authority to issue is one hundred ten million (110,000,000) shares, consisting of one hundred million (100,000,000) shares of common stock, each with a par value of $0.0001 per share (hereinafter referred to as the "Common Stock"), and ten million (10,000,000) shares of preferred stock, each with a par value of $0.0001 per share (hereinafter referred to as the "Preferred Stock"). The powers, designations, preferences and relative, participating, optional or other special rights (and the qualifications, limitations or restrictions thereof) of the Common Stock and the Preferred Stock are as follows: B. PREFERRED STOCK. The Board of Directors is hereby expressly authorized at any time, and from time to time, to create and provide for the issuance of shares of Preferred Stock in one or more series (the "Series Preferred Stock") and, by filing a certificate pursuant to the GCL (hereinafter referred to as a "Preferred Stock Designation"), to establish the number of shares to be included in each such series, and to fix the designations, preferences and relative, participating, optional or other special rights of the shares of each such series and the qualifications, -1- limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions providing for the issue thereof adopted by the Board of Directors, including, but not limited to, the following: (i) the designation of and the number of shares constituting such series, which number the Board of Director may thereafter (except as otherwise provided in the Preferred Stock Designation) increase or decrease (but not below the number of shares of such series then outstanding); (ii) the dividend rate for the payment of dividends on such series, if any, the conditions and dates upon which such dividends shall be payable, the preference or relation which such dividends, if any, shall bear to the dividends payable on any other class or classes of or any other series of capital stock, the conditions and dates upon which such dividends, if any, shall be payable, and whether such dividends, if any, shall be cumulative or non-cumulative; (iii) whether the shares of such series shall be subject to redemption by the Corporation, and, if made subject to such redemption, the times, prices and other terms and conditions of such redemption; (iv) the terms and amount of any sinking fund provided for the purchase or redemption of the shares of such series; (v) whether or not the shares of such series shall be convertible into or exchangeable for shares of any other class or classes of, any other series of any class or classes of capital stock of, or any other security of, the Corporation or any other corporation, and, if provision be made for any such conversion or exchange, the times, prices, rates, adjustments and any other terms and conditions of such conversion or exchange; (vi) the extent, if any, to which the holders of the shares of such series shall be entitled to vote as a class or otherwise with respect to the election of directors or otherwise; (vii) the restrictions, if any, on the issue or reissue of shares of the same series or of any other class or series; (viii) the amounts payable on and the preferences, if any, of the shares of such series in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation; and -2- (ix) any other relative rights, preferences and limitations of that series. C. COMMON STOCK. Each holder of Common Stock shall have one vote in respect of each share of Common Stock held by such holder of record on the books of the Corporation for the election of directors and on all other matters on which stockholders of the Corporation are entitled to vote. Subject to any rights that may be conferred upon any holders of Preferred Stock or any other series or class of stock as set forth in this Certificate of Incorporation (excluding Common Stock), upon dissolution, the holders of Common Stock then outstanding shall be entitled to receive the net assets of the Corporation. Such net assets shall be divided among and paid to the holders of Common Stock, on a pro-rata basis, according to the number of shares of Common Stock held by them. Subject to any rights that may be conferred upon any holders of Preferred Stock or any other series or class of stock as set forth in this Certificate of Incorporation (excluding Common Stock), the holders of shares of Common Stock shall be entitled to receive, when and if declared by the Board of Directors, out of the assets of the Corporation which are by law available therefor, dividends payable either in cash, in stock or otherwise. FIFTH: The Corporation is to have perpetual existence. SIXTH: A. Subject to the rights of the holders of any series of Preferred Stock or any other series or class of stock as set forth in this Certificate of Incorporation (excluding Common Stock) to elect additional directors under specified circumstances, the number of directors of the Corporation shall be fixed, and may be increased or decreased from time to time, in such a manner as may be prescribed by the By-laws of the Corporation. B. Unless and except to the extent that the By-laws of the Corporation shall so require, the election of directors of the Corporation need not be by written ballot. C. Directors shall be elected and hold such terms of office as provided in the By-laws of the Corporation. D. Advance notice of stockholder nominations for the election of directors and advance notice of other stockholder action proposed to be taken at a stockholder's meeting shall be given in the manner provided in the By-laws of the Corporation. -3- E. Subject to the rights of the holders of any Preferred Stock or any other series or class of stock (excluding Common Stock) set forth in the Certificate of Incorporation, a special meeting of the stockholders shall be called only by the secretary of the Corporation at the request of (i) a majority of the total number of directors which the Corporation at the time would have if there were no vacancies or (ii) by any person authorized by the Board of Directors (through a vote of a majority of the total number of directors which the Corporation at the time would have if there were no vacancies) to call a special meeting. Notwithstanding the foregoing, stockholders shall have no right to call a special meeting of stockholders. F. Subject to the rights of the holders of any series of Preferred Stock or any other series or class of stock (excluding Common Stock) set forth in the Certificate of Incorporation to elect additional directors under specified circumstances or to consent to specific actions taken by the Corporation, any action required or permitted to be taken by the stockholders of the Corporation must be taken at an annual or special meeting of the stockholders and may not be taken by any consent in writing by such stockholders. G. Notwithstanding anything contained in this Certificate of Incorporation to the contrary, the affirmative vote of the holders of shares representing at least 66-2/3% of the voting power of the then outstanding voting stock of the Corporation entitled to vote in elections of directors generally, voting together as a single class, shall be required to amend, repeal or adopt any provisions inconsistent with this Article SIXTH. SEVENTH: The Board of Directors shall have the power, in addition to the stockholders, to make, alter, or repeal the By-laws of the Corporation. EIGHTH: A director of the Corporation shall not be liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Section 174 of the GCL, or (iv) for any transaction from which the director derived an improper personal benefit. The Corporation shall, to the fullest extent permitted by section 145 of the DGCL, as the same may be amended and supplemented, indemnify each director and officer of the Corporation from and against any and all expenses, liabilities or other matters referred to in or covered by said section and the indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any by-laws, agreement, vote of stockholders, vote of disinterested directors or otherwise, and shall continue as to a person who has ceased to be a director of officer and shall inure to the benefit of heirs, executors -4- and administrators of such persons and the Corporation may purchase and maintain insurance on behalf of any director or officer to the extent permitted by section 145 of the DGCL. Neither the amendment nor repeal of this Article EIGHTH, nor the adoption of any provision of this Certificate of Incorporation inconsistent with this Article EIGHTH, shall eliminate or reduce the effect of this Article EIGHTH in respect of any matter occurring, or any cause of action, suit or claim that, but for this Article EIGHTH, would accrue or arise, prior to such amendment, repeal or adoption of an inconsistent provision. NINTH: The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders are granted subject to this reservation. 4. This Amended and Restated Certificate of Incorporation was duly adopted by the Board of Directors and approved by the stockholders in accordance with Sections 242 and 245 of the Delaware General Corporation Law. IN WITNESS WHEREOF, said JEF Holding Company, Inc. has caused this Certificate to be signed by the duly authorized officer below on this 17th day of March, 1999. JEF HOLDING COMPANY, INC. By:/s/ Jerry M. Gluck ------------------------- Name: Jerry M. Gluck Title: Secretary and General Counsel -5- EX-3.2 3 EXHIBIT 3.2 JEF HOLDING, INC. (a Delaware corporation) ---------------------------------- BYLAWS ---------------------------------- BY-LAWS OF JEF HOLDING, INC. (a Delaware Corporation) ARTICLE I OFFICES AND FISCAL YEAR SECTION 1.01. REGISTERED OFFICE. The registered office of the Corporation shall be in the City of Wilmington, County of New Castle, State of Delaware and the name and address of its registered agent is The Corporation Trust Company, 1209 Orange Street, Wilmington, Delaware. SECTION 1.02. OTHER OFFICES. The Corporation may also have offices at such other places within or without the State of Delaware as the Board of Directors may from time to time determine or the business of the Corporation requires. SECTION 1.03. FISCAL YEAR. The fiscal year of the Corporation shall end on the 31st of December in each year unless the Board of Directors determines otherwise. ARTICLE II MEETINGS OF STOCKHOLDERS SECTION 2.01. PLACE OF MEETING. All meetings of the stockholders of the Corporation shall be held at the registered office of the Corporation, or at such other place within or without the State of Delaware as shall be designated by the Board of Directors in the notice of such meeting. SECTION 2.02. ANNUAL MEETING. The Board of Directors shall fix the date and time of the annual meeting of the stockholders, and at said meeting the stockholders then entitled to vote shall elect directors and shall transact such other business as may properly be brought before the meeting. -2- SECTION 2.03. SPECIAL MEETINGS. Subject to the rights of the holders of any series of stock having a preference over the Common Stock of the Corporation as to dividends or upon liquidation ("Preferred Stock") with respect to such series of Preferred Stock or any other series or class of stock (excluding Common Stock) set forth in the Certificate of Incorporation, a special meeting of the stockholders shall be called only by the secretary of the Corporation at the request of (i) a majority of the total number of directors which the Corporation at the time would have if there were no vacancies or (ii) by any person authorized by the Board of Directors (through a vote of a majority of the total number of directors which the Corporation at the time would have if there were no vacancies) to call a special meeting. Notwithstanding the foregoing, stockholders shall have no right to call a special meeting of stockholders. SECTION 2.04. NOTICE OF MEETINGS. Written notice of the place, date and hour of every meeting of the stockholders, whether annual or special, shall be given to each stockholder of record entitled to vote at the meeting not less than ten nor more than sixty days before the date of the meeting. Every notice of a special meeting shall state the purpose or purposes thereof. SECTION 2.05. QUORUM, MANNER OF ACTING AND ADJOURNMENT. The holders of a majority of the stock issued and outstanding (not including treasury stock) and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute, by the Certificate of Incorporation or by these By-laws. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the Board of Directors or the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At any such adjourned meeting, at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. When a quorum is present at any meeting, the vote by stockholders present or represented by proxy entitled to cast a majority of the votes which all stockholders present are entitled to cast thereon shall decide any question brought before such meeting, unless the question is one upon which, by express provision of the applicable statute, the Certificate of Incorporation or these By-laws, a different vote is required in which case such express provision shall govern and control the decision of such question. Except upon those questions governed by the aforesaid express provisions, the stockholders present in person or by proxy at a duly organized meeting can continue to do business until adjournment, notwithstanding withdrawal of enough stockholders to leave less than a quorum. -3- SECTION 2.06. ORGANIZATION. At every meeting of the stockholders, the chairman of the board, if there be one, shall act as chairman or in the case of a vacancy in the office or absence of the chairman of the board, one of the following persons present in the following order stated shall act as chairman: the vice chairman, if one has been appointed, the president, a chairman designated by the Board of Directors, the vice presidents in their order or rank, or a chairman chosen by the stockholders entitled to cast a majority of the votes which all stockholders present in person or by proxy are entitled to cast, shall act as chairman, and the secretary, or, in his or her absence, an assistant secretary, or in the absence of the secretary and the assistant secretaries, a person appointed by the chairman, shall act as secretary. SECTION 2.07. VOTING. Unless otherwise provided in the Certificate of Incorporation, each stockholder shall at every meeting of the stockholders be entitled to one vote in person or by proxy for each share of capital stock having voting power held by such stockholder. No proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. Every proxy shall be executed in writing by the stockholder or by such stockholder's duly authorized attorney-in-fact and filed with the secretary of the Corporation; provided, however, the foregoing clause shall not preclude the giving of proxies by electronic, telephonic or other means so long as such procedure is expressly approved by the Corporation's Board of Directors and is permitted by law. A proxy may be made irrevocable regardless of whether the interest with which it is coupled is an interest in the stock itself or an interest in the Corporation generally. A proxy shall not be revoked by the death or incapacity of the maker unless, before the vote is counted or the authority is exercised, written notice of such death or incapacity is given to the secretary of the Corporation. SECTION 2.08. NOTICE OF STOCKHOLDER BUSINESS AND NOMINATIONS. (A) ANNUAL MEETING OF STOCKHOLDERS. (1) Nominations of persons for election to the Board of Directors of the Corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (a) by or at the direction of the Board of Directors pursuant to a resolution adopted by a majority of the total number of directors which the Corporation at the time would have if there were no vacancies or (b) by any stockholder of the Corporation who is entitled to vote at the meeting with respect to the election of directors or the business to be proposed by such stockholder, as the case may be, who complies with the notice procedures set forth in clauses (2) and (3) of paragraph (A) of this Section 2.08 and who is a stockholder of record at the time such notice is delivered to the secretary of the Corporation as provided below. (2) For nominations or other business to be properly brought before an annual meeting by a stockholder pursuant to clause (b) of paragraph (A) (1) of this Section 2.08, the stockholder must have given timely notice thereof in writing to the secretary of the -4- Corporation and such business must be a proper subject for stockholder action under the Delaware General Corporation Law (the "DGCL"). To be timely, a stockholder's notice shall be delivered to the secretary of the Corporation at the principal executive office of the Corporation not less than 60 days nor more than 90 days prior to the first anniversary of the preceding year's annual meeting (or action taken by consent in lieu of annual meeting); PROVIDED, HOWEVER, that in the event that the date of the annual meeting is advanced by more than 30 days, or delayed by more than 30 days, from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than the 90th day prior to such annual meeting and not later than either the close of business on (a) the 10th day following the day on which notice of the date of such meeting was mailed or (b) the 10th day following the day on which public announcement of the date of such meeting is first made, whichever first occurs in (a) or (b). Such stockholder's notice shall set forth (x) as to each person whom the stockholder proposes to nominate for election or reelection as a director all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), including such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected; (y) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and the beneficial owner, if any, on whose behalf the proposal is made; and (z) as to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (ii) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner. (3) Notwithstanding anything in the second sentence of paragraph (A) (2) of this Section 2.08 to the contrary, in the event that the number of directors to be elected to the Board of Directors is increased and there is no public announcement naming all of the nominees for director or specifying the size of the increased Board of Directors made by the Corporation at least 80 days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice required by paragraph (A) (2) of this Section 2.08 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the secretary of the Corporation at the principal executive offices of the Corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the Corporation. (B) SPECIAL MEETING OF STOCKHOLDERS. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation's notice of meeting and in accordance with these By-laws. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders -5- at which directors are to be elected pursuant to the Corporation's notice of meeting (a) by or at the direction of the Board of Directors or (b) provided that the Board of Directors has determined that directors shall be elected at such meeting, by any stockholder of the Corporation who is a stockholder of record at the time of giving of notice provided for in this Section 2.08, who shall be entitled to vote at the meeting and who complies with the notice procedures set forth in this Section 2.08. In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder may nominate a person or persons (as the case may be), for election to such position(s) as specified in the Corporation's notice of meeting, if the stockholder's notice required by paragraph (A)(2) of this Section 2.08 shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the close of business on the 90th day prior to such special meeting and not later than the close of business on the later of the 60th day prior to such special meeting or the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the public announcement of an adjournment of a special meeting commence a new time period for the giving of a stockholders notice as described above. (C) GENERAL. (1) Only persons who are nominated in accordance with the procedures set forth in this Section 2.08 shall be eligible to serve as directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Section 2.08. (2) Except as otherwise provided by law, the Certificate of Incorporation or this Section 2.08, the chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with the procedures set forth in this Section 2.08 and, if any proposed nomination or business is not in compliance with his Section 2.08, to declare that such defective nomination or proposal shall be disregarded. (3) For purposes of this Section 2.08, "public announcement" shall mean disclosure on a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act. (4) Notwithstanding the foregoing provisions of this Section 2.08, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Section 2.08. Nothing in this Section 2.08 shall be deemed to affect any rights (i) of stockholders to request inclusion of proposals in the Corporation's proxy materials with respect to a meeting of stockholders pursuant -6- to Rule 14a-8 under Exchange Act or (ii) of the holders of any series of Preferred Stock or any other series or class of stock (excluding Common Stock) as set forth in the Certificate of Incorporation to elect directors under specified circumstances or to consent to specific actions taken by the Corporation. SECTION 2.09. PROCEDURE FOR ELECTION OF DIRECTORS; REQUIRED VOTE. Subject to the rights of the holders of any series of Preferred Stock or any other series or class of stock as set forth in the Certificate of Incorporation to elect directors under specified circumstances, election of directors at all meetings of the stockholders at which directors are to be elected shall be by a plurality of the votes cast. Except as otherwise provided by law, the Certificate of Incorporation, or these By-Laws, in all matters other than the election of directors, the affirmative vote of a majority of the stock present in person or represented by proxy at the meeting and entitled to vote on the matter shall be the act of the stockholders. SECTION 2.10. NO STOCKHOLDER ACTION BY WRITTEN CONSENT. Subject to the rights of the holders of any series of Preferred Stock or any other series or class of stock (excluding Common Stock) set forth in the Certificate of Incorporation to elect additional directors under specified circumstances or to consent to specific actions taken by the Corporation, any action required or permitted to be taken by the stockholders of the Corporation must be taken at an annual or special meeting of the stockholders and may not be taken by any consent in writing by stockholders of the Corporation. SECTION 2.11. VOTING LISTS. The officer who has charge of the stock ledger of the Corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting. The list shall be arranged in alphabetical order showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. SECTION 2.12. INSPECTORS OF ELECTION. All elections of directors shall be by written ballot, unless otherwise provided in the Certificate of Incorporation; the vote upon any other matter need not be by ballot. In advance of any meeting of stockholders, the Board of Directors may appoint inspectors of election, who need not be stockholders, to act at such meeting or any adjournment thereof. If inspectors of election are not so appointed, the chairman of any such meeting shall, appoint inspectors of election. The number of inspectors shall be either one or three, as determined by the chairman of the meeting or the Board of Directors, as -7- the case may be. No person who is a candidate for office shall act as an inspector. In case any person appointed as an inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment made by the Board of Directors in advance of the convening of the meeting, or at the meeting by the chairman of the meeting. If inspectors of election are appointed as aforesaid, they shall determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity and effect of proxies and ballots, receive votes or ballots, hear and determine all challenges and questions in any way arising in connection with the right to vote, count and tabulate all votes, determine the result, and do such acts as may be proper to conduct the election or vote with fairness to all stockholders. If there be three inspectors of election, the decision, act or certificate of a majority shall be effective in all respects as the decision, act or certificate of all. On request of the chairman of the meeting or of any stockholder or such stockholder's proxy, the inspectors shall make a report in writing of any challenge or question or matter determined by them, and execute a certificate of any fact found by them. ARTICLE III BOARD OF DIRECTORS SECTION 3.01. POWERS. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. In addition to the express powers conferred upon the Board of Directors by these By-laws, the Board of Directors may exercise all such powers of the Corporation and do all such lawful acts and things as are not by law or the Certificate of Incorporation or by these By-laws required to be exercised or done by the stockholders. SECTION 3.02. NUMBER AND TERM OF OFFICE. The Board of Directors shall consist of such number of directors, not less than 6 nor more than 17, as may be determined from time to time by (i) a resolution adopted by a majority of the total number of directors which the Corporation at the time would have if there were no vacancies or (ii) the affirmative vote of at least 66 2/3% of the voting power of all of the shares of the Corporation entitled to vote generally in the elections of directors, voting together as a single class. The directors shall be elected at each annual meeting of stockholders of the Corporation and shall hold office for a term expiring at the annual meeting of stockholders held in the year following the year of their election, and until their successors are elected and qualified. All directors of the Corporation shall be natural persons, but need not be residents of Delaware or stockholders of the Corporation. -8- SECTION 3.03. VACANCIES. Subject to applicable law and the rights of the holders of any series of Preferred Stock or any other series or class of stock (excluding Common Stock) as set forth in the Certificate of Incorporation to elect directors under specified circumstances, and unless the Board of Directors otherwise determines, vacancies resulting from death, resignation, retirement, disqualification, removal from office or other cause, and newly created directorships resulting from any increase in the authorized number of directors, may be filled only by the affirmative vote of a majority of the remaining directors, though less than a quorum of the Board of Directors, or stockholders of the Corporation at any annual meeting, and directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which they have been elected expires and until such director's successor shall have been duly elected and qualified. No decrease in the number of authorized directors shall shorten the term of any incumbent director. SECTION 3.04. RESIGNATIONS. Any director of the corporation may resign at any time by giving written notice to the president or the secretary of the Corporation. Such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. SECTION 3.05. ORGANIZATION. At every meeting of the Board of Directors, the chairman of the board, if there be one, or, in the case of a vacancy in the office or absence of the chairman of the board, one of the following officers present in the order stated: the vice chairman of the board, if there be one, the president, the vice presidents in their order of rank and seniority, or a chairman chosen by a majority of the directors present, shall preside, and the secretary, or, in his or her absence, an assistant secretary, or in the absence of the secretary and the assistant secretaries, any person appointed by the chairman of the meeting, shall act as secretary. SECTION 3.06. PLACE OF MEETING. The Board of Directors may hold its meetings, both regular and special, at such place or places within or without the State of Delaware as the Board of Directors may from time to time appoint, or as may be designated in the notice calling the meeting. -9- SECTION 3.07. ORGANIZATION MEETING. Immediately after each annual election of directors, the Board of Directors shall meet for the purpose of organization, election of officers, and the transaction of other business, at the place where such election of directors was held or, if notice of such meeting is given, at the place specified in such notice. Notice of such meeting need not be given. In the absence of a quorum at said meeting, the same may be held at any other time and place which shall be specified in a notice given as hereinafter provided for special meetings of the Board of Directors, or as shall be specified in a written waiver signed by the directors, if any, not attending and participating in the meeting. SECTION 3.08. REGULAR MEETINGS. Regular meetings of the Board of Directors may be held without notice at such time and place as shall be designated from time to time by resolution of the Board of Directors. If the date fixed for any Such regular meeting be a legal holiday under the laws of the State where such meeting is to be held, then the same shall be held on the next succeeding business day, not a Saturday, or at such other time as may be determined by resolution of the Board of Directors. At such meetings, the directors shall transact such business as may properly be brought before the meeting. SECTION 3.09. SPECIAL MEETINGS. Special meetings of the Board of Directors shall be held whenever called by the Chairman or by two or more of the directors. Notice of each such meeting shall be given to each director by telephone or in writing, including by facsimile message, to such telephone number or address as a director may designate from time to time at least 24 hours (in the case of notice by telephone or facsimile message) or 48 hours (in the case of notice by overnight delivery service) or three days (in the case of notice by mail) before the time at which the meeting is to be held. Each such notice shall state the time and place of the meeting to be so held. Any notice by telephone shall be deemed effective if a message regarding the substance of the notice is given on a director's behalf to the director's secretary or assistant or to a member of the director's family. SECTION 3.10. QUORUM, MANNER OF ACTING AND ADJOURNMENT. At all meetings of the Board of Directors, a majority of the directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the Board of Directors, except as may be otherwise specifically provided by statute or by the Certificate of Incorporation. If a quorum shall not be present at any meeting of the Board of Directors, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Unless otherwise restricted by the Certificate of Incorporation or these By-laws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board of Directors -10- consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors. SECTION 3.11. EXECUTIVE AND OTHER COMMITTEES. The Board of Directors may, by resolution adopted by a majority of the whole board, designate an executive committee and one or more other committees, each committee to consist of one or more directors and to have such authority as may be specified by the Board of Directors, subject to the DGCL. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member, and the alternate or alternates, if any, designated for such member, of any committee the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another director to act at the meeting in the place of any such absent or disqualified member. Any such committee shall be governed by the procedural provisions of these By-laws that govern the operation of the full Board of Directors, including with respect to notice and quorum, except to the extent specified otherwise by the Board of Directors. SECTION 3.12. COMPENSATION OF DIRECTORS. Unless otherwise restricted by the Certificate of Incorporation, the Board of Directors shall have the authority to fix the compensation of directors. The directors may be paid their expenses, if any, of attendance at each meeting of the Board of Directors and may be paid a fixed sum for attendance at each meeting of the Board of Directors or a stated salary as director. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. SECTION 3.13. CONFERENCE TELEPHONE MEETINGS. One or more directors may participate in a meeting of the Board of Directors, or of a committee of the Board of Directors, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation in a meeting pursuant to this section shall constitute presence in person at such meeting. -11- ARTICLE IV OFFICERS SECTION 4.01. NUMBER, QUALIFICATIONS AND DESIGNATION. The officers of the Corporation shall be chosen by the Board of Directors and shall be a chairman, a president, a secretary, a treasurer, and such other officers as may be elected in accordance with the provisions of Section 4.03 of this Article. Any number of offices may be held by the same person. Officers may, but need not, be directors or stockholders of the Corporation. The chairman of the board shall be the chief executive officer of the Corporation, except as otherwise determined by the Board of Directors. All officers elected by the Board of Directors shall each have such powers and duties as generally pertain to their respective offices, subject to the specific provisions of this Article IV. Such officers shall also have such powers and duties as may from time to time be conferred by the Board of Directors or by any committee thereof. SECTION 4.02. ELECTION AND TERM OF OFFICE. The officers of the Corporation, except those elected by delegated authority pursuant to the last sentence of Section 4.03 of this Article IV, shall be elected annually by the Board of Directors, but each such officer shall hold office until a successor is elected and qualified, or until his or her earlier resignation or removal. SECTION 4.03. OTHER OFFICERS, COMMITTEES AND AGENTS. The Board of Directors may from time to time elect such other officers and appoint such committees, employees or other agents as it deems necessary, who shall hold their offices for such terms and shall exercise such powers and perform such duties as are provided in these By-laws, or as the Board of Directors may from time to time determine. The Board of Directors may delegate to any officer or committee the power to elect subordinate officers and to retain or appoint employees or other agents, or committees thereof, and to prescribe the authority and duties of such subordinate officers, committees, employees or other agents. SECTION 4.04. REMOVAL. Any officer elected, or agent appointed, by the Board of Directors may be removed by the affirmative vote of a majority of the whole Board of Directors whenever, in their judgment, the best interests of the Corporation would be served thereby. Any officer or agent appointed by another officer by delegated authority pursuant to the last sentence of Section 4.03 may be removed by such other officer whenever, in such officer's judgment, the best interests of the Corporation would be served thereby. No elected officer shall have any contractual rights against the Corporation for compensation by virtue of such election beyond the date of the election of such officer's successor, such officer's death, such officer's resignation or such officer's removal, whichever event shall first occur, except as otherwise provided in a written agreement or benefit plan. -12- SECTION 4.05. VACANCIES. A newly created elected office and a vacancy in any elected office because of death, resignation, or removal may be filled by the Board of Directors for the unexpired portion of the term at any meeting of the Board of Directors. Any vacancy in an office appointed by another officer by delegated authority pursuant to Section 4.03 because of death, resignation, or removal may be filled by such other officer. SECTION 4.06. OFFICERS' BONDS. No officer of the Corporation need provide a bond to guarantee the faithful discharge of the officer's duties unless the Board of Directors shall by resolution so require a bond in which event such officer shall give the Corporation a bond (which shall be renewed if and as required) in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of office. SECTION 4.07. SALARIES. The salaries of the officers of the Corporation elected by the Board of Directors shall be fixed from time to time by the Board of Directors, except to the extent the Board of Directors shall have delegated power to officers of the Corporation to fix, from time to time, the salaries of such officers' assistant or subordinate officers. ARTICLE V NOTICE - WAIVERS SECTION 5.01. NOTICE, WHAT CONSTITUTES. Whenever, under the provisions of the statutes of Delaware or the Certificate of Incorporation or of these By-laws, notice is required to be given to any director or stockholder, it shall not be construed to mean personal notice, but such notice may be given in writing, by mail, addressed to such director or stockholder, at such stockholder's address as it appears on the records of the Corporation, with postage thereon prepaid, and such notice shall be deemed to be given at the time when the same shall be deposited in the United States mail. Notice to directors may also be given in accordance with Section 3.09 of Article III hereof. SECTION 5.02. WAIVERS OF NOTICE. Whenever any written notice is required to be given under the provisions of the Certificate of Incorporation, these By-laws, or by statute, a waiver thereof in writing, signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to the giving of such notice. Except in the case of a special meeting of stockholders, neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders, directors, or members of a committee of directors need be specified in any written waiver of notice of such meeting. Attendance of a person, either in person or by proxy, at any meeting, shall constitute a waiver of notice of such meeting, except where a person attends a meeting for the -13- express purpose of objecting to the transaction of any business because the meeting was not lawfully called or convened. SECTION 5.03. EXCEPTION TO REQUIREMENTS OF NOTICE. Whenever notice is required to be given, under any provision of the DGCL or of the Certificate of Incorporation or these By-laws, to any person with whom communication is unlawful, the giving of such notice to such person shall not be required and there shall be no duty to apply to any governmental authority or agency for a license or permit to give such notice to such person. Any action or meeting which shall be taken or held without notice to any such person with whom communication is unlawful shall have the same force and effect as if such notice had been duly given. In the event that the action taken by the Corporation is such as to require the filing of a certificate under any section of the DGCL, the certificate shall state, if such is the fact and if notice is required, that notice was given to all persons entitled to receive notice except such persons with whom communication is unlawful. Whenever notice is required to be given, under any provision of the DGCL or the Certificate of Incorporation or these By-laws, to any stockholder to whom (i) notice of two consecutive annual meetings, and all notices of meetings or of the taking of action by written consent without a meeting to such person during the period between such two consecutive annual meetings, or (ii) all, and at least two, payments (if sent by first class mail) of dividends or interest on securities during a 12 month period, have been mailed addressed to such person at such stockholder's address as shown on the records of the Corporation and have been returned undeliverable, the giving of such notice to such person shall not be required. Any action or meeting which shall be taken or held without notice to such person shall have the same force and effect as if such notice had been duly given. If any such person shall deliver to the Corporation a written notice setting forth such stockholder's then current address, the requirement that notice be given to such person shall be reinstated. In the event that the action taken by the Corporation is such as to require the filing of a certificate under any section of the DGCL, the certificate need not state that notice was not given to persons to whom notice was not required to be given pursuant to this section. ARTICLE VI CERTIFICATES OF STOCK, TRANSFER, ETC. SECTION 6.01. ISSUANCE. Each stockholder shall be entitled to a certificate or certificates for shares of stock of the Corporation owned by such stockholder upon such stockholder's request therefor. The stock certificates of the Corporation shall be numbered and registered in the stock ledger and transfer books of the Corporation as they are issued. They shall be signed by the chairman of the board, the president or a vice president and by the secretary or -14- an assistant secretary or the treasurer. It shall not be necessary for any such certificate to bear the corporate seal unless required by law. Any of or all the signatures upon such certificate may be a facsimile, engraved or printed. In case any officer, transfer agent or registrar who has signed, or whose facsimile signature has been placed upon, any share certificate shall have ceased to be such officer, transfer agent or registrar, before the certificate is issued, it may be issued with the same effect as if he were such officer, transfer agent or registrar at the date of its issue. SECTION 6.02. TRANSFER. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. No transfer shall be made which would be inconsistent with the provisions of Article 8, Title 6 of the Delaware Uniform Commercial Code-Investment Securities. SECTION 6.03. STOCK CERTIFICATES. Stock certificates of the Corporation shall be in such form as provided by statute and approved by the Board of Directors or by such committee or officer authorized by the Board of Directors to approve the form of certificate. The stock record books and the blank stock certificates books shall be kept by the secretary or by any agency designated by the Board of Directors for that purpose. SECTION 6.04. LOST, STOLEN, DESTROYED OR MUTILATED CERTIFICATES. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate or certificates, or such stockholder's legal representative, to advertise the same in such manner as it shall require and/or to give the Corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. SECTION 6.05. RECORD HOLDER OF SHARES. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. -15- SECTION 6.06. DETERMINATION OF STOCKHOLDERS OF RECORD. In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty nor less than ten days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights of the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. ARTICLE VII INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHER AUTHORIZED REPRESENTATIVES SECTION 7.01. INDEMNIFICATION OF AUTHORIZED REPRESENTATIVES IN THIRD PARTY PROCEEDINGS. The Corporation shall indemnify any person who was or is an authorized representative of the Corporation, and who was or is a party, or is threatened to be made a party to any third party proceeding, by reason of the fact that such person was or is an authorized representative of the Corporation, against expenses, judgments, penalties, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such third party proceeding if such person acted in good faith and in a manner such person reasonably believed to be in, or not opposed to, the best interests of the Corporation and, with respect to any criminal third party proceeding, had no reasonable cause to believe such conduct was unlawful. The termination of any third party proceeding by judgment, order, settlement, indictment, conviction or upon a plea of nolo contendere or its equivalent, shall not of itself create a presumption that the authorized representative did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to, the best interests of the Corporation, and, with -16- respect to any criminal third party proceeding, had reasonable cause to believe that such conduct was unlawful. SECTION 7.02. INDEMNIFICATION OF AUTHORIZED REPRESENTATIVES IN CORPORATE PROCEEDINGS. The Corporation shall indemnify any person who was or is an authorized representative of the Corporation and who was or is a party or is threatened to be made a party to any corporate proceeding, by reason of the fact that such person was or is an authorized representative of the Corporation, against expenses actually and reasonably incurred by such person in connection with the defense or settlement of such corporate action if such person acted in good faith and in a manner reasonably believed to be in, or not opposed to, the best interests of the Corporation, except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Court of Chancery or the court in which such corporate proceeding was pending shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such authorized representative is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper. SECTION 7.03. MANDATORY INDEMNIFICATION OF AUTHORIZED REPRESENTATIVES. To the extent that an authorized representative of the Corporation has been successful on the merits or otherwise in defense of any third party or corporate proceeding or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses actually and reasonably incurred by such person in connection therewith. SECTION 7.04. DETERMINATION OF ENTITLEMENT TO INDEMNIFICATION. Any indemnification under Section 7.01, 7.02 or 7.03 of this Article (unless ordered by a court) shall be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the authorized representative is proper in the circumstances because such person has either met the applicable standard of conduct set forth in Section 7.01 or 7.02 or has been successful on the merits or otherwise as set forth in Section 7.03 and that the amount requested has been actually and reasonably incurred. Such determination shall be made: (1) By the Board of Directors by a majority of a quorum consisting of directors who were not parties to such third party or corporate proceeding, or (2) If such a quorum is not obtainable, or, even if obtainable, a majority vote of such a quorum so directs, by independent legal counsel in a written opinion, or (3) By the stockholders. -17- SECTION 7.05. ADVANCING EXPENSES. (1) Expenses actually and reasonably incurred in defending a third party or corporate proceeding shall be paid on behalf of a director or other authorized representative by the Corporation in advance of the final disposition of such third party or corporate proceeding upon receipt of an undertaking by or on behalf of the director or other authorized representative to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation as authorized in this Article. (2) The financial ability of any director or other authorized representative to make a repayment contemplated by this Section 7.05 shall not be a prerequisite to the making of an advance. SECTION 7.06. DEFINITIONS. For purposes of this Article VII: (1) "authorized representative" shall mean a director or officer of the Corporation, or a person serving at the request of the Corporation as a director, officer, or trustee, of another corporation, partnership, joint venture, trust or other enterprise; (2) "corporation" shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation of merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under the provisions of this Article with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued; (3) "corporate proceeding" shall mean any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor or investigative proceeding by the Corporation; (4) "criminal third party proceeding" shall include any action or investigation which could or does lead to a criminal third party proceeding; (5) "expenses" shall include attorneys' fees and disbursements; -18- (6) "fines" shall include any excise taxes assessed on a person with respect to an employee benefit plan; (7) "not opposed to the best interests of the Corporation" shall include actions taken in good faith and in a manner the authorized representative reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan; (8) "other enterprises" shall include employee benefit plans; (9) "party" shall include the giving of testimony or similar involvement; (10) "serving at the request of the Corporation" shall include any service as a director, officer or employee of the Corporation which imposes duties on, or involves services by, such director, officer or employee with respect to an employee benefit plan, its participants, or beneficiaries; and (11) "third party proceeding" shall mean any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative, or investigative, other than an action by or in the right of the Corporation. SECTION 7.07. INSURANCE. The Corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another Corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the Corporation would have the power or the obligation to indemnify such person against such liability under the provisions of this Article. SECTION 7.08. SCOPE OF ARTICLE. The indemnification of authorized representatives and advancement of expenses, as authorized by the preceding provisions of this Article, shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any statute, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity. The indemnification and advancement of expenses provided by or granted pursuant to this Article VII shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be an authorized representative and shall inure to the benefit of the heirs, executors and administrators of such a person. SECTION 7.09. RELIANCE ON PROVISIONS. Each person who shall act as an authorized representative of the Corporation shall be deemed to be doing so in reliance upon rights of indemnification provided by this Article, with the same effect as if such person and the -19- Corporation entered into a binding contract under which the Corporation agreed to provide the indemnification provided by this Article VII. ARTICLE VIII AFFILIATED TRANSACTIONS AND INTERESTED DIRECTORS SECTION 8.01. AFFILIATED TRANSACTIONS. No contract or transaction between the Corporation and one or more of its directors or officers, or between the Corporation and any other corporation, partnership, association or other organization in which one or more of its directors or officers are directors or officers, or have a financial interest, shall be void or voidable solely for this reason, or solely because the director or officer is present at or participates in the meeting of the Board of Directors or committee thereof which authorizes the contract or transaction or solely because his or their votes are counted for such purpose, if: (a) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the Board of Directors or the committee, and the Board of Directors or committee in good faith authorizes the contract or transaction by the affirmative vote of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (b) The material facts as to his relationship or interest and as to the contract or transaction are disclosed or are known to the stockholders entitled to vote thereon, and the contract or transaction is specifically approved in good faith by vote of the stockholders; or (c) The contract or transaction is fair as to the Corporation as of the time it is authorized, approved or ratified by the Board of Directors, a committee thereof, or the stockholders. SECTION 8.01. DETERMINING QUORUM. Common or interested directors may be counted in determining the presence of a quorum at a meeting of the Board of Directors or of a committee thereof which authorizes the contract or transaction. -20- ARTICLE IX GENERAL PROVISIONS SECTION 9.01. DIVIDENDS. Dividends upon the capital stock of the Corporation, subject to the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting, pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock of the Corporation, subject to the provisions of the Certificate of Incorporation. Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the directors shall think conducive to the interest of the Corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. SECTION 9.02. CONTRACTS. Except as otherwise provided in these By-laws, the Board of Directors may authorize any officer or officers including the chairman and vice chairman of the Board of Directors, or any agent or agents, to enter into any contract or to execute or deliver any instrument on behalf of the Corporation and such authority may be general or confined to specific instances. SECTION 9.03. CHECKS. All checks, notes, bills of exchange or other orders in writing shall be signed by the president, any vice president, the treasurer and such other person or persons as the Board of Directors may from time to time designate. SECTION 9.04. CORPORATE SEAL. The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words "Corporate Seal, Delaware". The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. SECTION 9.05. DEPOSITS. All funds of the Corporation shall be deposited from time to time to the credit of the Corporation in such banks, trust companies, or other depositories as the Board of Directors may approve or designate, and all such funds shall be withdrawn only upon checks signed by such one or more officers or employees as the Board of Directors shall from time to time determine. SECTION 9.06. CORPORATE RECORDS. Every stockholder shall, upon written demand under oath stating the purpose thereof, have a right to examine, in person or by agent or attorney, during the usual hours for business, for any proper purpose, the stock ledger, books or records of account, and records of the proceedings of the stockholders and directors, and make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such -21- person's interest as a stockholder. In every instance where an attorney or other agent shall be the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing which authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the Corporation at its registered office in Delaware or at its principal place of business. Where the stockholder seeks to inspect the books and records of the Corporation, other than its stock ledger or list of stockholders, the stockholder shall first establish (1) compliance with the provisions of this section respecting the form and manner of making demand for inspection of such document; and (2) that the inspection sought is for a proper purpose. Where the stockholder seeks to inspect the stock ledger or list of stockholders of the Corporation and has complied with the provisions of this section respecting the form and manner of making demand for inspection of such documents, the burden of proof shall be upon the Corporation to establish that the inspection sought is for an improper purpose. Any director shall have the right to examine the Corporation's stock ledger, a list of its stockholders and its other books and records for a purpose reasonably related to his or her position as a director. The court may summarily order the Corporation to permit the director to inspect any and all books and records, the stock ledger and the stock list and to make copies or extracts therefrom. The court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the court may deem just and proper. SECTION 9.07. AMENDMENT OF BY-LAWS. These By-laws may be amended, added to, rescinded or repealed at any meeting of the Board of Directors or of the stockholders, PROVIDED that notice of the proposed change was given in the notice of the meeting and, in the case of the Board of Directors, in a notice given no less than twenty-four hours prior to the meeting; PROVIDED, HOWEVER, that in the case of amendments by stockholders, notwithstanding any other provisions of these By-laws or any provision of law which might otherwise permit a lesser vote or no vote, but in addition to any affirmative vote of the holders of any series of Preferred Stock or any other series or class of stock set forth in the Certificate of Incorporation which is required by law, the Certificate of Incorporation or these By-laws, the affirmative vote of the holders of at least 66 2/3% of the voting power of the then outstanding shares of the Corporation entitled to vote generally in the election of directors, present or represented by proxy, voting together as a single class, shall be required to alter, amend or repeal Sections 2.03, 2.08, 2.10, 3.02, 3.03, 3.05, 9.07 and Article VII of these By-laws. -22- EX-10.1 4 EXHIBIT 10.1 Exhibit 10.1 - -------------------------------------------------------------------------------- JEFFERIES GROUP, INC. 1999 INCENTIVE COMPENSATION PLAN - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- JEFFERIES GROUP, INC. 1999 INCENTIVE COMPENSATION PLAN - -------------------------------------------------------------------------------- 1. PURPOSE OF THE PLAN The purpose of this 1999 Incentive Compensation Plan (the "Plan") is to advance the interests of the Company and its stockholders by providing a means to attract, retain, and reward officers, other employees, and persons who provide services to the Company and its subsidiaries, to link compensation to measures of the Company's performance in order to provide additional incentives, including stock-based incentives and cash-based annual incentives, to such persons for the creation of stockholder value, and to enable such persons to acquire or increase a proprietary interest in the Company in order to promote a closer identity of interests between such persons and the Company's stockholders. The Plan is intended to qualify certain compensation awarded under the Plan as "performance-based" compensation under Code Section 162(m) to the extent deemed appropriate by the Committee which administers the Plan. 2. DEFINITIONS The definitions of awards under the Plan, including Options, SARs, Restricted Stock, Deferred Stock, Stock granted as a bonus or in lieu of other awards, and Other Stock-Based Awards, are set forth in Section 6, and the definition of Performance Awards, including Annual Incentive Awards, is set forth in Section 8. Such awards, together with any other right or interest granted to a Participant under the Plan, are termed "Awards." In addition to such terms and the terms defined in Section 1, the following terms shall be defined as set forth below: 2.1 "Annual Incentive Award" means a conditional right granted to a Participant under Section 8.3 to receive a cash payment, Shares or other Awards based on performance during all or part of a specified fiscal year. 2.2 "Beneficiary" means the person(s) or trust(s) which have been designated by a Participant in his or her most recent written beneficiary designation filed with the Committee to receive the benefits specified under the Plan upon such Participant's death. If, upon a Participant's death, there is no designated Beneficiary or surviving designated Beneficiary, then the term Beneficiary means the person(s) or trust(s) entitled by will or the laws of descent and distribution to receive such benefits. 2.3 "Board" means the Board of Directors of the Company. 2.4 "Code" means the Internal Revenue Code of 1986, as amended, including regulations thereunder and successor provisions and regulations thereto. 2.5 "Committee" means the Compensation Committee of the Board or such other Board committee or committees as may be designated by the Board to administer the Plan, and the term "Committee" shall refer to the full Board in any case in which it is performing any function of the Committee under the Plan. In appointing members of the Committee, the Board will consider whether each member will qualify as a "Non-Employee Director" within the meaning of Rule 16b-3(b)(3) and as an "outside director" within the meaning of Treasury Regulation 1.162-27(e)(3) under Code Section 162(m), but the members are not required to so qualify at the time of appointment or during their term of service on the Committee. 2.6 "Company" means Jefferies Group, Inc., a Delaware corporation, formerly named JEF Holding Company, Inc., the common stock of which was distributed in the Spin-off. 2.7 "Covered Employee" has the meaning as defined in Section 8.5 of the Plan. 2.8 "Effective Date" means the date on which the Plan takes effect, as set forth in Section 9.13 of the Plan. 2.9 "Eligible Holder" means each employee of the Company who, at the Spin-off Date, holds an option or other award relating to stock under a compensatory plan of Predecessor with respect to which the Company has agreed to grant, or offer to grant, an Award relating to Shares in substitution for such person's Predecessor award or to offset any lost value due to the early termination of such award. 2.10 "Exchange Act" means the Securities Exchange Act of 1934, as amended, including rules thereunder and successor provisions and rules thereto. 2.11 "Fair Market Value," means, with respect to Shares, Awards, or other property, the fair market value of such Shares, Awards, or other property determined by such methods or procedures as shall be established from time to time by the Committee. Unless otherwise determined by the Committee, the Fair Market Value of a Share as of any given date means the average of the closing sales prices of a Share as reported in the table entitled "New York Stock Exchange Composite Transactions" contained in The Wall Street Journal (or an equivalent successor table) for the day as of which the valuation is to be made or, if that day is not a trading day, the nearest preceding trading day, and the four trading days immediately prior thereto; PROVIDED, HOWEVER, that Fair Market Value at the date of the Spin-off shall be determined based on the first five trading days for which a closing price is reported following the Spin-off. 2.12 "Participant" means an individual who has been granted an Award under the Plan, for so long as the Company has any obligation under the Plan with respect to such Award or such Award remains subject to any restriction under the Plan. 2.13 "Predecessor" means Jefferies Group, Inc., a Delaware corporation, as it existed immediately prior to the Spin-off. 2.14 "Qualified Member" means a member of the Committee who is a "Non-Employee Director" within the meaning of Rule 16b-3(b)(3) under the Exchange Act and an "outside director" within the meaning of Regulation 1.162-27 under Code Section 162(m). 2.15 "Shares" means shares of common stock, par value $.01 per share, of the Company and such other securities as may be substituted or resubstituted for Shares pursuant to Section 5.3. 2.16 "Spin-off" means the distribution of the Common Stock of the Company by the Predecessor to the Predecessor's stockholders, which was approved by the Predecessor's stockholders on April 20, 1999. 2.17 "Spin-off Date" means the record date for Predecessor's distribution of Shares in the Spin- off. 3. ADMINISTRATION 3.1 AUTHORITY OF THE COMMITTEE. The Plan shall be administered by the Committee. The Committee shall have full and final authority to take the following actions, in each case subject to and consistent with the provisions of the Plan: (a) to select persons to whom Awards may be granted, including Eligible Holders to whom Awards may be granted in substitution for Predecessor awards; (b) to determine the type or types of Awards to be granted to each Participant; (c) to determine the number of Awards to be granted, the number of Shares to which an Award will relate, the cash amount payable in settlement of an Annual Incentive Award and the performance conditions applicable thereto, all other terms and conditions of any Award granted under the Plan (including, but not limited to, any exercise price, grant price, or purchase price, any restriction or condition, any schedule or performance conditions for the lapse of restrictions or conditions relating to transferability, forfeiture, exercisability, or settlement of an Award, and accelerations or modifications thereof, based in each case on such considerations as the Committee shall determine), and all other matters to be determined in connection with an Award; (d) to determine whether, to what extent, and under what circumstances an Award may be settled, or the exercise price of an Award may be paid, in cash, Shares, other Awards, or other property, or an Award may be cancelled, forfeited, or surrendered; (e) to determine whether, to what extent, and under what circumstances cash, Shares, other Awards, or other property payable with respect to an Award will be deferred either automatically, at the election of the Committee, or at the election of the Participant; (f) to prescribe the form of each Award agreement, which need not be identical for each Participant; (g) to adopt, amend, suspend, and rescind such rules and regulations and appoint such agents as the Committee may deem necessary or advisable to administer the Plan; (h) to correct any defect or supply any omission or reconcile any inconsistency in the Plan and to construe and interpret the Plan and any Award, rules and regulations, Award agreement, or other instrument hereunder; and (i) to make all other decisions and determinations as may be required under the terms of the Plan or as the Committee may deem necessary or advisable for the administration of the Plan. 3.2 MANNER OF EXERCISE OF COMMITTEE AUTHORITY. Any action of the Committee with respect to the Plan shall be final, conclusive, and binding on all persons, including the Company, subsidiaries of the Company, Participants, any person claiming any rights under the Plan from or through any Participant, and stockholders. The express grant of any specific power to the Committee, and the taking of any action by the Committee, shall not be construed as limiting any power or authority of the Committee. The Committee may delegate to officers or managers of the Company or any subsidiary of the Company the authority, subject to such terms as the Committee shall determine, to perform such functions as the Committee may determine, to the extent that such delegation will not result in the loss of an exemption under Rule 16b-3(d)(1) for Awards granted to Participants subject to Section 16 of the Exchange Act in respect of the Company and will not cause Awards intended to qualify as "performance-based" compensation under Code Section 162(m) to fail to so qualify, and as otherwise limited by applicable law. Other provisions of the Plan notwithstanding, the Board may perform any function of the Committee under the Plan, in order to ensure that transactions under the Plan are exempt under Rule 16b-3 or for any other reason; PROVIDED, HOWEVER, that authority specifically reserved to the Board under the terms of the Plan, the Company's Certificate of Incorporation or By-Laws, or applicable law shall be exercised by the Board and not by the Committee. 3.3 LIMITATION OF LIABILITY. Each member of the Committee shall be entitled to, in good faith, rely or act upon any report or other information furnished to him by any officer or other employee of the Company or any subsidiary, the Company's independent certified public accountants, or any executive compensation consultant, legal counsel, or other professional retained by the Company to assist in the administration of the Plan. No member of the Committee, nor any officer or employee of the Company acting on behalf of the Committee, shall be personally liable for any action, determination, or interpretation taken or made in good faith with respect to the Plan, and all members of the Committee and any officer or employee of the Company acting on behalf of the Committee or members thereof shall, to the extent permitted by law, be fully indemnified and protected by the Company with respect to any such action, determination, or interpretation. 4. ELIGIBILITY Persons who are eligible to be granted Awards under the Plan include (i) any executive officer and other officer or employee of the Company or any subsidiary, including any such person who may also be a director of the Company, (ii) any other person who provides substantial personal services to the Company or any subsidiary not solely in the capacity as a director, and (iii) any person who has agreed to become an employee of the Company or a subsidiary provided that no such person may receive any payment or exercise any right relating to an Award until such person has commenced employment. In addition, Eligible Holders will be eligible to be granted Awards in substitution for Predecessor awards outstanding immediately prior to the Spin-Off, in accordance with agreements entered between the Company and Predecessor and as approved by the Committee. 5. LIMITATION ON SHARES SUBJECT TO OUTSTANDING AWARDS; PER-PERSON LIMITATIONS; ADJUSTMENTS 5.1 AGGREGATE NUMBER OF SHARES SUBJECT TO OUTSTANDING AWARDS. Awards relating to Shares may be granted if, at the time of grant of each Award, the aggregate number of Shares subject to outstanding Awards plus the number of Shares subject to the Award being granted do not exceed 25% of the number of Shares issued and outstanding immediately prior to the grant of such Award. For purposes of this Section 5.1, an Option is "outstanding" until it is exercised and any other Award is "outstanding" in the calendar year in which it is granted and for so long thereafter as it remains subject to any vesting condition requiring continued employment; provided, however, that Awards granted in substitution for Predecessor awards shall not be considered to be "outstanding" for purposes of this Section 5.1. The foregoing notwithstanding, the maximum number of shares that may be subject to ISOs granted under the Plan shall be 1.5 million (subject to adjustment as provided in Section 5.3). The Shares delivered in connection with Awards may consist, in whole or in part, of authorized and unissued Shares, treasury Shares or Shares acquired in the market for the account of a Participant. 5.2 ANNUAL PER-PERSON LIMITATIONS. In each fiscal year during any part of which the Plan is in effect, a Participant may be granted (i) Options and SARs under Sections 6.2 and 6.3 relating to no more than 800,000 Shares, and (ii) Performance Awards pursuant to Section 8 relating to no more than 500,000 Shares, subject in each case to adjustment as provided in Section 5.3. With respect to Annual Incentive Awards pursuant to Section 8, the maximum amount payable to a Participant in settlement of such Awards relating to a given fiscal year shall be (i), in the case of the Chief Executive Officer or any other executive officer principally having Company-wide responsibilities, 25% of Company profits after taxes but before payment of bonuses, and (ii), in the case of an executive officer or other person principally having responsibilities for one or more specific business units, the greatest of 30% of the net income of such business unit(s), 10% of the revenues of such business unit(s), or 25% of the EVA of such business unit(s). With respect to Performance Awards pursuant to Section 8 other than Annual Incentive Awards which Performance Awards are not valued by reference to Common Stock at the date of grant, the maximum amount that may be earned by any one Participant under the Plan upon achievement of performance objectives shall be $5 million for each full or partial year in the period over which performance is measured; for this purpose, the term "earned" refers to satisfaction of the performance conditions, regardless of any additional period of deferral or period in which the Award may be forfeitable upon termination of service by the Participant. 5.3 ADJUSTMENTS. In the event of any change in the outstanding Shares after the Effective Date by reason of any Share dividend or split, reorganization, recapitalization, merger, consolidation, spin-off, combination or exchange of Shares, repurchase, liquidation, dissolution or other corporate exchange, any large, special and non-recurring dividend or distribution to stockholders, or other similar corporate transaction, the Committee may make such substitution or adjustment, if any, as it deems to be equitable and in order to preserve, without enlarging, the rights of Participants, as to (i) the number and kind of Shares which may be delivered in connection with Awards granted thereafter, (ii) the number and kind of Shares by which annual per-person Award limitations are measured under Section 5.2, (iii) the number and kind of Shares subject to or deliverable in respect of outstanding Awards, and (iv) the exercise price, grant price or purchase price relating to any Award and/or make provision for payment of cash, other Awards or other property in respect of any outstanding Award. In addition, the Committee is authorized to make adjustments in the terms and conditions of, and the criteria included in, Awards (including Performance Awards, Annual Incentive Awards, and the performance goals relating thereto) in recognition of unusual or nonrecurring events (including events described in the preceding sentence, as well as acquisitions and dispositions of businesses and assets) affecting the Company, any subsidiary or any business unit, or the financial statements of the Company or any subsidiary, or in response to changes in applicable laws, regulations, accounting principles, tax rates and regulations or business conditions or in view of the Committee's assessment of the business strategy of the Company, any subsidiary or business unit thereof, performance of comparable organizations, economic and business conditions, personal performance of a Participant, and any other circumstances deemed relevant; provided that no such adjustment shall be authorized or made if and to the extent that such authority or the making of such adjustment would cause Options, SARs, Performance Awards granted under Section 8.2 hereof, or Annual Incentive Awards granted under Section 8.3 hereof to Participants designated by the Committee as Covered Employees and intended to qualify as "performance-based compensation" under Code Section 162(m) and regulations thereunder to otherwise fail to qualify as "performance-based compensation" under Code Section 162(m) and regulations thereunder. 6. SPECIFIC TERMS OF AWARDS 6.1 GENERAL. Awards may be granted on the terms and conditions set forth in this Section 6. In addition, the Committee may impose on any Award, at the date of grant or thereafter (subject to Section 9.5), such additional terms and conditions, not inconsistent with the provisions of the Plan, as the Committee shall determine, including terms requiring forfeiture of Awards in the event of termination of employment or service by the Participant or upon the occurrence of other events. Except as expressly provided by the Committee (including for purposes of complying with requirements of the Delaware General Corporation Law relating to lawful consideration for issuance of shares), no consideration other than for services will be required for the grant (but not the exercise) of any Award. 6.2 OPTIONS. The Committee is authorized to grant options to purchase Shares ("Options") to Participants on the following terms and conditions: (a) EXERCISE PRICE. The exercise price per Share purchasable under an Option shall be determined by the Committee; PROVIDED, HOWEVER, that, except as provided in Section 7.1, such exercise price shall be not less than the Fair Market Value of a share on the date of grant of such Option. (b) TIME AND METHOD OF EXERCISE. The Committee shall determine the time or times at which an Option may be exercised in whole or in part, the methods by which such exercise price may be paid or deemed to be paid, the form of such payment, including cash, Shares, other Awards or awards granted under other Company plans, or other property (including notes or other contractual obligations of Participants to make payment on a deferred basis, or through broker-assisted "cashless exercise" arrangements, to the extent permitted by applicable law), and the methods by which Shares will be delivered or deemed to be delivered to Participants. (c) INCENTIVE STOCK OPTIONS. The terms of any incentive stock option ("ISO") granted under the Plan shall comply in all respects with the provisions of Section 422 of the Code, including but not limited to the requirement that no ISO shall be granted more than ten years after the Effective Date. Anything in the Plan to the contrary notwithstanding, no term of the Plan relating to ISOs shall be interpreted, amended, or altered, nor shall any discretion or authority granted under the Plan be exercised, so as to disqualify either the Plan or any ISO under Section 422 of the Code, unless the Participant has first requested such disqualification. 6.3 STOCK APPRECIATION RIGHTS. The Committee is authorized to grant stock appreciation rights ("SARs") to Participants on the following terms and conditions: (a) RIGHT TO PAYMENT. An SAR shall confer on the Participant to whom it is granted a right to receive, upon exercise thereof, the excess of (A) the Fair Market Value of one Share on the date of exercise (or, if the Committee shall so determine in the case of any such right other than one related to an ISO, the Fair Market Value of one share at any time during a specified period before or after the date of exercise), over (B) the grant price of the SAR as determined by the Committee as of the date of grant of the SAR, which, except as provided in Section 7.1, shall be not less than the Fair Market Value of one Share on the date of grant. (b) OTHER TERMS. The Committee shall determine the time or times at which an SAR may be exercised in whole or in part, the method of exercise, method of settlement, form of consideration payable in settlement, method by which Shares will be delivered or deemed to be delivered to Participants, whether or not an SAR shall be in tandem with any other Award, and any other terms and conditions of any SAR. 6.4 RESTRICTED STOCK. The Committee is authorized to grant Awards, in the form of shares issued at or shortly after grant of the Award subject to restrictions ("Restricted Stock"), to Participants on the following terms and conditions: (a) GRANT AND RESTRICTIONS. Restricted Stock shall be subject to such restrictions on transferability and other restrictions, if any, as the Committee may impose, which restrictions may lapse separately or in combination at such times, under such circumstances, in such installments, or otherwise as the Committee may determine. Except to the extent restricted under the terms of the Plan and any Award agreement relating to the Restricted Stock, a Participant granted Restricted Stock shall have all of the rights of a stockholder including the right to vote Restricted Stock or the right to receive dividends thereon. (b) FORFEITURE. Except as otherwise determined by the Committee, upon termination of employment or service during the applicable restriction period, Restricted Stock that is at that time subject to restrictions shall be forfeited and reacquired by the Company; PROVIDED, HOWEVER, that the Committee may provide, by rule or regulation or in any Award agreement, or may determine in any individual case, that restrictions or forfeiture conditions relating to Restricted Stock will lapse in whole or in part in the event of terminations resulting from specified causes. (c) CERTIFICATES FOR SHARES. Restricted Stock granted under the Plan may be evidenced in such manner as the Committee shall determine. If certificates representing Restricted Stock are registered in the name of the Participant, such certificates shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Restricted Stock, the Company shall retain physical possession of the certificate, and the Participant shall have delivered a stock power to the Company, endorsed in blank, relating to the Restricted Stock. (d) DIVIDENDS AND DISTRIBUTIONS. Dividends paid on Restricted Stock shall be either paid at the dividend payment date in cash or in Shares of unrestricted Stock having a Fair Market Value equal to the amount of such dividends, or the payment of such dividends shall be deferred and/or the amount or value thereof automatically reinvested in additional Restricted Stock, other Awards, or other investment vehicles, as the Committee shall determine or permit the Participant to elect. Shares distributed in connection with a stock split or Share dividend, and other property distributed as a dividend, shall be subject to restrictions and a risk of forfeiture to the same extent as the Restricted Stock with respect to which such Shares or other property is distributed. 6.5 DEFERRED STOCK. The Committee is authorized to grant Awards in the form of Shares to be delivered at a specified future date ("Deferred Stock") to Participants, subject to the following terms and conditions: (a) AWARD AND RESTRICTIONS. Issuance of Shares will occur upon expiration of the deferral period specified for an Award of Deferred Stock by the Committee (or, if permitted by the Committee, as elected by the Participant). In addition, Deferred Stock shall be subject to such restrictions as the Committee may impose, if any, which restrictions may lapse at the expiration of the deferral period or at earlier specified times, separately or in combination, under such circumstances, in such installments, or otherwise as the Committee may determine. (b) FORFEITURE. Except as otherwise determined by the Committee, upon termination of employment or service during the applicable deferral period or portion thereof to which forfeiture conditions apply (as provided in the Award agreement evidencing the Deferred Stock), all Deferred Stock that is at that time subject to such risk of forfeiture shall be forfeited; PROVIDED, HOWEVER, that the Committee may provide, by rule or regulation or in any Award agreement, or may determine in any individual case, that restrictions or forfeiture conditions relating to Deferred Stock will lapse in whole or in part in the event of terminations resulting from specified causes. (c) DIVIDEND EQUIVALENTS. The Committee may provide that payments in the form of dividend equivalents will be credited in respect of Deferred Stock, which amounts may be paid or distributed when accrued or deemed reinvested in additional Deferred Stock. 6.6 BONUS SHARES AND AWARDS IN LIEU OF CASH OBLIGATIONS. The Committee is authorized to grant Shares as a bonus, or to grant Shares or other Awards in lieu of Company obligations to pay cash under other plans or compensatory arrangements. Shares or Awards granted hereunder shall be subject to such other terms as shall be determined by the Committee. 6.7 OTHER STOCK-BASED AWARDS. The Committee is authorized, subject to limitations under applicable law, to grant to Participants such other Awards that may be denominated or payable in, valued in whole or in part by reference to, or otherwise based on, or related to, Shares and factors that may influence the value of Shares, as deemed by the Committee to be consistent with the purposes of the Plan, including convertible or exchangeable debt securities, other rights convertible or exchangeable into Shares, purchase rights for Shares, Awards with value and payment contingent upon performance of the Company or any other factors designated by the Committee, and Awards valued by reference to the book value of Shares or the value of securities of or the performance of specified subsidiaries. The Committee shall determine the terms and conditions of such Awards. Shares issued pursuant to an Award in the nature of a purchase right granted under this Section 6.7 shall be purchased for such consideration, paid for at such times, by such methods, and in such forms, including cash, Shares, other Awards, or other property, as the Committee shall determine. Cash awards, as an element of or supplement to any other Award under the Plan, may be granted pursuant to this Section 6.7. 7. CERTAIN PROVISIONS APPLICABLE TO AWARDS 7.1 STAND-ALONE, ADDITIONAL, TANDEM, AND SUBSTITUTE AWARDS. Awards granted under the Plan may, in the discretion of the Committee, be granted either alone or in addition to, in tandem with, or in substitution or exchange for, any other Award or any award granted under another plan of the Company, any subsidiary, or any business entity to be acquired by the Company or a subsidiary, any other right of a Participant to receive payment from the Company or any subsidiary, and, in the case of Eligible Holders, in substitution for awards granted by Predecessor. Such additional, tandem, and substituted or exchanged Awards may be granted at any time. If an Award is granted in substitution or exchange for another Award or award, the Committee shall require the surrender of such other Award or award in consideration for the grant of the new Award. In addition, Awards may be granted in lieu of cash compensation, including in lieu of cash amounts payable under other plans of the Company or any subsidiary, in which the value of Shares subject to the Award is equivalent in value to the cash compensation, or in which the value of the cash or other compensation surrendered is applied to the exercise price, grant price, or purchase price of the Award. 7.2 TERM OF AWARDS. The term of each Award shall be for such period as may be determined by the Committee; PROVIDED, HOWEVER, that in no event shall the term of any ISO or an SAR granted in tandem therewith exceed a period of ten years from the date of its grant (or such shorter period as may be applicable under Section 422 of the Code). 7.3 FORM AND TIMING OF PAYMENT UNDER AWARDS; DEFERRALS. Subject to the terms of the Plan and any applicable Award agreement, payments to be made by the Company or a subsidiary upon the exercise of an Option or other Award or settlement of an Award may be made in such forms as the Committee shall determine, including cash, Shares, other Awards, or other property, and may be made in a single payment or transfer, in installments, or on a deferred basis. The settlement of any Award may be accelerated, and cash paid in lieu of Shares in connection with such settlement, in the discretion of the Committee or upon occurrence of one or more specified events. The foregoing notwithstanding, no Award specified as settleable in Shares may be settled otherwise than by delivery of Shares if the Award agreement does not specify such alternative form of settlement and the authorization of alternative forms of settlement would preclude fixed accounting for the compensation expense relating to such Award under APB 25 prior to the determination or event which causes settlement to be in a form other than Shares. Installment or deferred payments may be required by the Committee (subject to Section 9.5 of the Plan, including the consent provisions thereof in the case of any deferral of an outstanding Award not provided for in the original Award agreement) or permitted at the election of the Participant on terms and conditions established by the Committee. Payments may include provisions for the payment or crediting of reasonable interest on installment or deferred payments or the grant or crediting of dividend equivalents or other amounts in respect of installment or deferred payments denominated in Shares. 7.4 CANCELLATION AND RESCISSION OF AWARDS. Unless the Award agreement specifies otherwise, the Committee may cancel any unexpired, unpaid, or deferred Awards at any time, and, unless otherwise determined by the Committee, the Company shall have the additional rights set forth in subsection (d) below, if the Participant is not in compliance with all applicable material provisions of the Award agreement and the Plan, including the following conditions: (a) A Participant shall not render services for any organization or engage directly or indirectly in any business which, in the judgment of the Chief Executive Officer of the Company or other senior executive officer designated by the Committee, is or becomes competitive with the Company. For Participants whose employment has terminated, the judgment of the Chief Executive Officer or other senior officer designated by the Committee shall be based on the Participant's post-employment responsibilities and position with the other organization or business, the extent of past, current and potential competition or conflict between the Company and the other organization or business, the effect on the Company's stockholders, customers, suppliers and competitors of the Participant assuming the post- employment responsibilities and such other considerations as are deemed relevant given the applicable facts and circumstances. A Participant who has terminated employment shall be free, however, to purchase as an investment or otherwise, stock or other securities of such organization or business so long as they are listed upon a recognized securities exchange or traded over-the-counter, and such investment does not represent a greater than five percent equity interest in the organization or business. (b) A Participant shall not, without prior written authorization from the Company, disclose to anyone outside the Company or use in other than the Company's business any confidential information or material relating to the business of the Company which is acquired by the Participant either during or after employment with the Company. (c) A Participant shall disclose promptly and assign to the Company all right, title, and interest in any invention or idea, patentable or not, made or conceived by the Participant during employment by the Company, relating in any manner to the actual or anticipated business, research, or development work of the Company and shall do anything reasonably necessary to enable the Company to secure a patent where appropriate in the United States and in foreign countries. (d) Upon exercise, settlement, payment, or delivery pursuant to an Award, the Participant shall certify on a form acceptable to the Committee that he or she is in compliance with the terms and conditions of this Section 7.4. Failure to comply with the provisions of this Section 7.4 prior to, or during the six months after, any exercise, payment or delivery pursuant to an Award shall cause such exercise, payment or delivery to be rescinded. The Company shall notify the Participant in writing of any such rescission within two years after such exercise, payment, or delivery. Within ten days after receiving such a notice from the Company, the Participant shall pay to the Company the amount of any gain realized or payment received as a result of the rescinded exercise, payment, or delivery pursuant to an Award. Such payment shall be made either in cash or by returning to the Company the number of Shares that the Participant received in connection with the rescinded exercise, payment, or delivery, in which case the Company shall promptly repay the lesser of the exercise price or the then-Fair Market Value of the Shares returned. The Committee may modify the conditions imposed under this Section 7.4 with respect to any Award. 7.5 LOAN PROVISIONS. With the consent of the Committee, and subject at all times to, and only to the extent, if any, permitted under and in accordance with, laws and regulations and other binding obligations or provisions applicable to the Company, the Company may make, guarantee, or arrange for a loan or loans to a Participant with respect to the exercise of any Option or other payment in connection with any Award, including the payment by a Participant of any or all federal, state, or local income or other taxes due in connection with any Award. Subject to such limitations, the Committee shall have full authority to decide whether to make a loan or loans hereunder and to determine the amount, terms, and provisions of any such loan or loans, including the interest rate to be charged in respect of any such loan or loans, whether the loan or loans are to be with or without recourse against the borrower, the terms on which the loan is to be repaid and conditions, if any, under which the loan or loans may be forgiven. 8. PERFORMANCE AND ANNUAL INCENTIVE AWARDS 8.1 PERFORMANCE CONDITIONS. The right of a Participant to exercise or receive a grant or settlement of any Award, and the timing thereof, may be subject to such performance conditions as may be specified by the Committee. The Committee may use such business criteria and measures of performance as it may deem appropriate in establishing performance conditions, and may exercise its discretion to reduce or increase the amounts payable under any Award subject to performance conditions, except as limited under Sections 8.2 and 8.3 hereof in the case of a Performance Award or Annual Incentive Award intended to qualify under Code Section 162(m). 8.2 PERFORMANCE AWARDS GRANTED TO DESIGNATED COVERED EMPLOYEES. If the Committee determines that a Performance Award to be granted to an Eligible Person who is designated by the Committee as likely to be a Covered Employee should qualify as "performance-based compensation" for purposes of Code Section 162(m), the grant, exercise, and/or settlement of such Performance Award shall be contingent upon achievement of preestablished performance goals and other terms set forth in this Section 8.2. (a) PERFORMANCE GOALS GENERALLY. The performance goals for such Performance Awards shall consist of one or more business criteria and a targeted level or levels of performance with respect to each such criteria, as specified by the Committee consistent with this Section 8.2. Performance goals shall be objective and shall otherwise meet the requirements of Code Section 162(m) and regulations thereunder (including Regulation 1.162-27 and successor regulations thereto), including the requirement that the level or levels of performance targeted by the Committee result in the achievement of performance goals being "substantially uncertain." The Committee may determine that such Performance Awards shall be granted, exercised, and/or settled upon achievement of any one performance goal or that two or more of the performance goals must be achieved as a condition to grant, exercise, and/or settlement of such Performance Awards. Performance goals may differ for Performance Awards granted to any one Participant or to different Participants. (b) BUSINESS CRITERIA. One or more of the following business criteria for the Company, on a consolidated basis, and/or for specified subsidiaries, divisions, or other business units of the Company (where the criteria are applicable), shall be used by the Committee in establishing performance goals for such Performance Awards: (1) earnings per share; (2) revenues; (3) cash flow; (4) cash flow return on investment; (5) return on net assets, return on assets, return on investment, return on capital, return on equity; profitability; (6) economic value added ("EVA"); (7) operating margins or profit margins; (8) income or earnings before or after taxes; pretax earnings; pretax earnings before interest, depreciation and amortization; operating earnings; pretax operating earnings, before or after interest expense and before or after incentives, service fees, and extraordinary or special items; net income; (9) total stockholder return or stock price; (10) book value per share; (11) expense management; improvements in capital structure; working capital; costs; and (12) any of the above goals as compared to the performance of a published or special index deemed applicable by the Committee including, but not limited to, the Standard & Poor's 500 Stock Index or a group of comparator companies. EVA means the amount by which a business unit's income exceeds the cost of the capital used by the business unit during the performance period, as determined by the Committee. Income of a business unit may be before payment of bonuses, capital charges, non-recurring or extraordinary income or expense, and general and administrative expenses for the performance period, if so specified by the Committee. One or more of the foregoing business criteria shall also be exclusively used in establishing performance goals for Annual Incentive Awards granted to a Covered Employee under Section 8.3 hereof. (c) PERFORMANCE PERIOD; TIMING FOR ESTABLISHING PERFORMANCE AWARD TERMS. Achievement of performance goals in respect of such Performance Awards shall be measured over a performance period of up to ten years, as specified by the Committee. Performance goals, amounts payable upon achievement of such goals, and other material terms of Performance Awards shall be established by the Committee (i) while the performance outcome for that performance period is substantially uncertain and (ii) no more than 90 days after the commencement of the performance period to which the performance goal relates or, if less, the number of days which is equal to 25 percent of the relevant performance period. In all cases, the maximum amount payable in respect of a Performance Award to any Participant shall be subject to the limitation set forth in Section 5 hereof. (d) PERFORMANCE AWARD POOL. The Committee may establish a Performance Award pool, which shall be an unfunded pool, for purposes of measuring performance of the Company in connection with Performance Awards. The amount of such Performance Award pool shall be based upon the achievement of a performance goal or goals based on one or more of the business criteria set forth in Section 8.2(b) hereof during the given performance period, as specified by the Committee in accordance with Section 8.2(c) hereof. The Committee may specify the amount of the Performance Award pool as a percentage of any of such business criteria, a percentage thereof in excess of a threshold amount, or as another amount which need not bear a strictly mathematical relationship to such business criteria. In such case, Performance Awards may be granted as rights to payment of a specified portion of the Award pool; such grants shall be subject to the requirements of Section 8.2(c). (e) SETTLEMENT OF PERFORMANCE AWARDS; OTHER TERMS. Settlement of such Performance Awards shall be in cash, Shares, other Awards, or other property, in the discretion of the Committee. The Committee may, in its discretion, reduce the amount of a settlement otherwise to be made in connection with such Performance Awards, but may not exercise discretion to increase any such amount payable to a Covered Employee in respect of a Performance Award subject to this Section 8.2. The Committee shall specify the circumstances in which such Performance Awards shall be paid or forfeited in the event of termination of employment by the Participant prior to the end of a performance period or settlement of Performance Awards. 8.3 ANNUAL INCENTIVE AWARDS GRANTED TO DESIGNATED COVERED EMPLOYEES. If the Committee determines that an Annual Incentive Award to be granted to an Eligible Person who is designated by the Committee as likely to be a Covered Employee should qualify as "performance-based compensation" for purposes of Code Section 162(m), the grant, exercise, and/or settlement of such Annual Incentive Award shall be contingent upon achievement of preestablished performance goals and other terms set forth in this Section 8.3. (a) POTENTIAL ANNUAL INCENTIVE AWARDS. Not later than the deadline specified in Section 8.2(c) above, the Committee shall determine the Eligible Persons who will potentially receive Annual Incentive Awards, and the amounts potentially payable thereunder, for that fiscal year, either out of an Annual Incentive Award pool established by such date under Section 8.3(b) hereof or as individual Annual Incentive Awards. In the case of individual Annual Incentive Awards intended to qualify under Code Section 162(m), the amount potentially payable shall be based upon the achievement of a performance goal or goals based on one or more of the business criteria set forth in Section 8.2(b) hereof in the given performance year, as specified by the Committee; in other cases, such amount shall be based on such criteria as shall be established by the Committee. In all cases, the maximum Annual Incentive Award of any Participant shall be subject to the limitation set forth in Section 5 hereof. (b) ANNUAL INCENTIVE AWARD POOL. The Committee may establish an Annual Incentive Award pool, which shall be an unfunded pool, for purposes of measuring performance of the Company in connection with Annual Incentive Awards. The amount of such Annual Incentive Award pool shall be based upon the achievement of a performance goal or goals based on one or more of the business criteria set forth in Section 8.2(b) hereof during the given performance period, as specified by the Committee in accordance with Section 8.2(c) hereof. The Committee may specify the amount of the Annual Incentive Award pool as a percentage of any of such business criteria, a percentage thereof in excess of a threshold amount, or as another amount which need not bear a strictly mathematical relationship to such business criteria. (c) PAYOUT OF ANNUAL INCENTIVE AWARDS. After the end of each fiscal year, the Committee shall determine the amount, if any, of the potential Annual Incentive Award payable to each Participant eligible therefor and, if applicable, the amount of any Annual Incentive Award pool. The Committee may, in its discretion, determine that the amount payable to any Participant as a final Annual Incentive Award shall be increased or reduced from the amount of his or her potential Annual Incentive Award, including a determination to make no final Award whatsoever, but may not exercise discretion to increase any such amount in the case of an Annual Incentive Award intended to qualify under Code Section 162(m). The Committee shall specify the circumstances in which an Annual Incentive Award shall be paid or forfeited in the event of termination of employment by the Participant prior to the end of a fiscal year or prior to settlement of such Annual Incentive Award. 8.4 WRITTEN DETERMINATIONS. Determinations by the Committee as to the establishment of performance goals, the amount potentially payable in respect of Performance Awards and Annual Incentive Awards, the achievement of performance goals relating to Performance Awards and Annual Incentive Awards, and the amount of any final Performance Award and Annual Incentive Award shall be recorded in writing, except that the Committee may determine that this requirement shall not apply in the case of Performance Awards not intended to qualify under Section 162(m). Specifically, the Committee shall certify in writing, in a manner conforming to applicable regulations under Section 162(m), prior to settlement of each such Award granted to a Covered Employee, that the performance goals and other material terms of the Award upon which settlement of the Award was conditioned have been satisfied. The Committee may not delegate any responsibility relating to such Performance Awards or Annual Incentive Awards, and the Board shall not perform such functions at any time that the Committee is composed solely of Qualified Members. 8.5 STATUS OF SECTION 8.2 AND SECTION 8.3 AWARDS UNDER CODE SECTION 162(M). It is the intent of the Company that Performance Awards and Annual Incentive Awards under Sections 8.2 and 8.3 hereof granted to persons who are designated by the Committee as likely to be Covered Employees within the meaning of Code Section 162(m) and regulations thereunder (including Regulation 1.162-27 and successor regulations thereto) shall, if so designated by the Committee, constitute "performance-based compensation" within the meaning of Code Section 162(m) and regulations thereunder. Accordingly, the terms of Sections 8.2, 8.3, 8.4 and 8.5, including the definitions of Covered Employee and other terms used therein, shall be interpreted in a manner consistent with Code Section 162(m) and regulations thereunder. The foregoing notwithstanding, because the Committee cannot determine with certainty whether a given Participant will be a Covered Employee with respect to a fiscal year that has not yet been completed, the term Covered Employee as used herein shall mean only a person designated by the Committee, at the time of grant of a Performance Award or Annual Incentive Award, as likely to be a Covered Employee with respect to a specified fiscal year. If any provision of the Plan as in effect on the date of adoption of any agreements relating to Performance Awards or Annual Incentive Awards that are designated as intended to comply with Code Section 162(m) does not comply or is inconsistent with the requirements of Code Section 162(m) or regulations thereunder, such provision shall be construed or deemed amended to the extent necessary to conform to such requirements. 9. GENERAL PROVISIONS. 9.1 COMPLIANCE WITH LAWS AND OBLIGATIONS. The Company shall not be obligated to issue or deliver Shares in connection with any Award or take any other action under the Plan in a transaction subject to the registration requirements of the Securities Act of 1933, as amended, or any other federal or state securities law, any requirement under any listing agreement between the Company and any national securities exchange or automated quotation system, or any other law, regulation, or contractual obligation of the Company, until the Company is satisfied that such laws, regulations, and other obligations of the Company have been complied with in full. Certificates representing Shares issued under the Plan will be subject to such stop-transfer orders and other restrictions as may be applicable under such laws, regulations, and other obligations of the Company, including any requirement that a legend or legends be placed thereon. 9.2 LIMITATIONS ON TRANSFERABILITY. Awards and other rights under the Plan will not be transferable by a Participant except by will or the laws of descent and distribution (or to a designated Beneficiary in the event of the Participant's death), and, if exercisable, shall be exercisable during the lifetime of a Participant only by such Participant or his guardian or legal representative; PROVIDED, HOWEVER, that such Awards and other rights (other than ISOs and SARs in tandem therewith) may be transferred during the lifetime of the Participant, for purposes of the Participant's estate planning or other purposes consistent with the purposes of the Plan (as determined by the Committee), and may be exercised by such transferees in accordance with the terms of such Award, but only if and to the extent permitted by the Committee. Awards and other rights under the Plan may not be pledged, mortgaged, hypothecated, or otherwise encumbered, and shall not be subject to the claims of creditors. A Beneficiary, transferee, or other person claiming any rights under the Plan from or through any Participant shall be subject to all terms and conditions of the Plan and any Award agreement applicable to such Participant, except as otherwise determined by the Committee, and to any additional terms and conditions deemed necessary or appropriate by the Committee. 9.3 NO RIGHT TO CONTINUED EMPLOYMENT; LEAVES OF ABSENCE. Neither the Plan, the grant of any Award, nor any other action taken hereunder shall be construed as giving any employee, consultant, director, or other person the right to be retained in the employ or service of the Company or any of its subsidiaries, nor shall it interfere in any way with the right of the Company or any of its subsidiaries to terminate any person's employment or service at any time. Unless otherwise specified in the applicable Award agreement, an approved leave of absence shall not be considered a termination of employment or service for purposes of an Award under the Plan. 9.4 TAXES. The Company and any subsidiary is authorized to withhold from any Award granted or to be settled, any delivery of Shares in connection with an Award, any other payment relating to an Award, or any payroll or other payment to a Participant amounts of withholding and other taxes due or potentially payable in connection with any transaction involving an Award, and to take such other action as the Committee may deem advisable to enable the Company and Participants to satisfy obligations for the payment of withholding taxes and other tax obligations relating to any Award. This authority shall include authority to withhold or receive Shares or other property and to make cash payments in respect thereof in satisfaction of a Participant's tax obligations. 9.5 CHANGES TO THE PLAN AND AWARDS. The Board may amend, suspend, discontinue, or terminate the Plan or the Committee's authority to grant Awards under the Plan without the consent of stockholders or Participants, except that any amendment shall be subject to the approval of the Company's stockholders at or before the next annual meeting of stockholders for which the record date is after the date of such Board action if such stockholder approval is required by any federal or state law or regulation or the rules of any stock exchange or automated quotation system on which the Shares may then be listed or quoted, and the Board may otherwise, in its discretion, determine to submit other such amendments to stockholders for approval; PROVIDED, HOWEVER, that, without the consent of an affected Participant, no such action may materially impair the rights of such Participant under any Award theretofore granted. The Committee may amend, suspend, discontinue, or terminate, any Award theretofore granted and any Award agreement relating thereto; PROVIDED, HOWEVER, that no such amendment may reduce the exercise price of an outstanding Option (except as authorized under Section 5.3) or provide for Award terms that the Plan would not then permit for a newly granted Award; and PROVIDED FURTHER, that, without the consent of an affected Participant, no such action may materially impair the rights of such Participant under such Award. 9.6 NO RIGHTS TO AWARDS; NO STOCKHOLDER RIGHTS. No Participant or other person shall have any claim to be granted any Award under the Plan, and there is no obligation for uniformity of treatment of Participants, employees, consultants, or directors. No Award shall confer on any Participant any of the rights of a stockholder of the Company unless and until Shares are duly issued or transferred and delivered to the Participant in accordance with the terms of the Award or, in the case of an Option, the Option is duly exercised. 9.7 INTERNATIONAL PARTICIPANTS. With respect to Participants who reside or work outside the United States of America, the Committee may, in its sole discretion, amend the terms of the Plan with respect to such Participants or grant Awards not conforming to the terms of the Plan to such Participants in order that such Awards conform to the requirements of local law and customary employment practices in such locations and in order that such Awards shall serve the purposes of the Plan in light of such local laws and customary employment practices. 9.8 UNFUNDED STATUS OF AWARDS; CREATION OF TRUSTS. The Plan is intended to constitute an "unfunded" plan for incentive and deferred compensation. With respect to any payments not yet made to a Participant pursuant to an Award, nothing contained in the Plan or any Award shall give any such Participant any rights that are greater than those of a general creditor of the Company; PROVIDED, HOWEVER, that the Committee may authorize the creation of trusts or make other arrangements to meet the Company's obligations under the Plan to deliver cash, Shares, other Awards, or other property pursuant to any Award, which trusts or other arrangements shall be consistent with the "unfunded" status of the Plan unless the Committee otherwise determines with the consent of each affected Participant. 9.9 NONEXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan by the Board nor its submission to the stockholders of Predecessor or, in the case of any amendment, submission to the stockholders of the Company for approval shall be construed as creating any limitations on the power of the Board to adopt such other compensatory arrangements as it may deem desirable, including the granting of awards otherwise than under the Plan, and such arrangements may be either applicable generally or only in specific cases. 9.10 PAYMENTS IN THE EVENT OF FORFEITURES; FRACTIONAL SHARES. Unless otherwise determined by the Committee, in the event of a forfeiture of an Award with respect to which a Participant paid cash consideration, the Participant shall be repaid the amount of such cash consideration. No fractional Shares shall be issued or delivered pursuant to the Plan or any Award (although fractional share units may be credited in connection with any Award if so authorized by the Committee). The Committee shall determine whether cash, other Awards, or other property shall be issued or paid in lieu of such fractional Shares or whether such fractional Shares or any rights thereto shall be forfeited or otherwise eliminated. 9.11 SUCCESSORS AND ASSIGNS. The Plan shall be binding on all successors and assigns of the Company and a Participant, including any permitted transferee of a Participant, the Beneficiary or estate of such Participant and the executor, administrator or trustee of such estate, or any receiver or trustee in bankruptcy or representative of the Participant's creditors. 9.12 GOVERNING LAW. The validity, construction, and effect of the Plan, any rules and regulations under the Plan, and any Award agreement will be determined in accordance with the Delaware General Corporation Law and other laws (including those governing contracts) of the State of Delaware, without giving effect to principles of conflicts of laws, and applicable federal law. 9.13 EFFECTIVE DATE, STOCKHOLDER APPROVAL, AND PLAN TERMINATION. The Plan shall become effective on the later of its approval by stockholders of the Predecessor or the effectiveness of the Company's registration under Section 12 of the Exchange Act. Unless earlier terminated by action of the Board, the Plan will remain in effect until such time as no Shares remain available for delivery under the Plan and the Company has no further rights or obligations under the Plan with respect to outstanding Awards under the Plan. EX-10.2 5 EXHIBIT 10.2 Exhibit 10.2 - -------------------------------------------------------------------------------- JEFFERIES GROUP, INC. 1999 DIRECTORS' STOCK COMPENSATION PLAN - -------------------------------------------------------------------------------- JEFFERIES GROUP, INC. - -------------------------------------------------------------------------------- 1999 DIRECTORS' STOCK COMPENSATION PLAN - -------------------------------------------------------------------------------- 1. PURPOSE. The purpose of this 1999 Directors' Stock Compensation Plan (the "Plan") is to advance the interests of the Company and its stockholders by providing a means to attract, retain and compensate non-employee directors and to enable such persons to increase their proprietary interest in the Company. In furtherance of this purpose, the Plan provides for periodic grants of options, Deferred Shares or Restricted Stock (as defined below), the opportunity for a director to elect deferred and alternative forms of compensation in lieu of cash fees for service as a director, including Options, Deferred Shares, and deferred cash, and the opportunity to defer delivery of shares deliverable upon exercise of options or in settlement of other awards. 2. DEFINITIONS. In addition to the terms defined in Section 1, the following terms shall be defined as set forth below: 2.1 "Administrator" means the administrative committee specified in Section 3(b) to whom the Board has delegated the authority to take action under the Plan. 2.2 "Beneficiary" means the person(s) or trust(s) which have been designated by a Participant in his or her most recent written beneficiary designation filed with the Administrator to receive the benefits specified under the Plan upon such Participant's death. If, upon a Participant's death, there is no designated Beneficiary or surviving designated Beneficiary, then the term Beneficiary means the person(s) or trust(s) entitled by will or the laws of descent and distribution to receive such benefits. 2.3 "Board" means the Board of Directors of the Company. 2.4 "Code" means the Internal Revenue Code of 1986, as amended, including regulations thereunder and successor provisions and regulations thereto. 2.5 "Company" means Jefferies Group, Inc., a Delaware corporation, formerly named JEF Holding Company, Inc., the common stock of which was distributed in the Spin-off. 2.6 "DDCP" means Predecessor's Non-Employee Directors' Deferred Compensation Plan. 2.7 "Deferral Account" means the account established and maintained by the Company for Deferred Shares credited under Sections 7 and 8 and deferred cash credited under Section 8. A Deferral Account shall include one or more subaccounts, including a Deferred Share Account for forfeitable Deferred Shares under Section 7, a Deferred Share Account for Deferred Shares that have become nonforfeitable under Section 7 or that are at all times nonforfeitable under Section 8(c), a Deferred Share Account for Deferred Shares resulting from Option exercises under Section 9(a), and a Deferred Cash Account described in Section 8(d). The Deferral Account and subaccounts, and Deferred Shares and deferred cash credited thereto, will be maintained solely as bookkeeping entries by the Company to evidence unfunded obligations of the Company. 2.8 "Deferred Share" means a credit to a Participant's Deferred Share Account under Sections 7 or 8 which represents the right to receive one Share upon settlement of such Account. 2.9 "Disability" means a Participant's termination of service as a director of the Company due to a physical or mental incapacity of long duration which renders the Participant unable to perform the duties of a director of the Company. 2.10 "Eligible Holder" means each person who, at the Spin-off Date, holds an option or deferred share granted by Predecessor under a plan or program for Predecessor's non-employee directors with respect to which the Company has agreed to grant, or offer to grant, an Option or Deferred Share award in substitution for such Predecessor award or to offset any lost value due to the early termination of such option or deferred share. 2.11 "Exchange Act" means the Securities Exchange Act of 1934, as amended, including rules thereunder and successor provisions and rules thereto. 2.12 "Fair Market Value," means, with respect to Shares, the fair market value of such Shares determined by such methods or procedures as shall be established from time to time by the Board. Unless otherwise determined by the Board, the Fair Market Value of a Share as of any given date means the average of the closing sales prices of a Share as reported in the table entitled "New York Stock Exchange Composite Transactions" contained in The Wall Street Journal (or an equivalent successor table) for the day as of which the valuation is to be made or, if that day is not a trading day, the nearest preceding trading day, and the four trading days immediately prior thereto; PROVIDED, HOWEVER, that Fair Market Value at the date of the Spin-off shall be determined based on the first five trading days for which a closing price is reported following the Spin-off. 2.13 "Option" means the right, granted to a Participant under Section 6 or 8, to purchase a specified number of Shares at the specified exercise price for a specified period of time under the Plan. All Options will be non-qualified stock options. 2.14 "Option Valuation Methodology" means the method for determining the number of shares to be subject to Options, and the exercise price thereof, granted in payment of Retainer Fees under Section 8(b). 2.15 "Other Director Compensation" means fees payable to a director in his or her capacity as such, other than Retainer Fees, for attending meetings and other service on the Board and Board committees. 2.16 "Participant" means any person who has been granted an Option which remains outstanding, has Deferred Shares or cash credited to his or her Deferral Account, or has elected to be granted Options in payment of Retainer Fees or to defer payment of Retainer Fees and Other Director Compensation in the form of Deferred Shares or cash under the Plan. 2.17 "Plan Year" means, with respect to a Participant, the period commencing at the time of election of the director at an annual meeting of stockholders (or the election of a class of directors if the Company then has a classified Board of Directors), or the director's initial appointment to the Board if not at an annual meeting of stockholders, and continuing until the close of business of the day preceding the next annual meeting of stockholders; PROVIDED, HOWEVER, that the initial Plan Year shall be deemed to be a continuation of the plan year in effect under the DDCP at the Spin-Off Date. 2.18 "Predecessor" means Jefferies Group, Inc., a Delaware corporation, as it existed immediately prior to the Spin-off. 2.19 "Restricted Stock" means Shares granted under Section 7, subject to a risk of forfeiture and restrictions on transfer for a specified period. 2.20 "Retainer Fees" means annual retainer fees payable to a director in his or her capacity as such for service on the Board and service as chairman of any Board committee. 2.21 "Retirement" means a Participant's termination of service as a director of the Company at or after age 65. 2.22 "Shares" means shares of common stock, par value $.01 per share, of the Company and such other securities as may be substituted or resubstituted for Shares pursuant to Section 5.3. 2.23 "Spin-off" means the distribution of the Common Stock of the Company by the Predecessor to the Predecessor's stockholders, which was approved by the Predecessor's stockholders on April 20, 1999. 2.24 "Spin-off Date" means the record date for Predecessor's distribution of Shares in the Spin- off. 2.25 "Valuation Date" shall mean the close of business on the last business day of each calendar quarter and, in the case of any final distribution from a Participant's Deferred Cash Account, the day preceding such distribution. 3. ADMINISTRATION. 3.1 AUTHORITY. Both the Board and the Administrator (subject to the ability of the Board to restrict the Administrator) shall administer the Plan in accordance with its terms, and shall have all powers necessary to accomplish such purpose, including the power and authority to construe and interpret the Plan, to define the terms used herein, to prescribe, amend and rescind rules and regulations, agreements, forms, and notices relating to the administration of the Plan, and to make all other determinations necessary or advisable for the administration of the Plan. The Administrator may perform any function of the Board under the Plan, except for grants of awards under Sections 6 and 7, adoption of material amendments to the Plan under Section 11.5, or other functions from time to time specifically reserved by the Board to itself. Any actions of the Board or the Administrator with respect to the Plan shall be final, conclusive, and binding upon all persons interested in the Plan, except that any action of the Administrator will not be binding on the Board. The Board and Administrator may each appoint agents and delegate thereto powers and duties under the Plan, except as otherwise limited by the Plan. 3.2 ADMINISTRATOR. The Administrator shall be the Director of Human Resources and the Secretary or such other committee as may designated by the Board. In any case in which a director is a member of the Administrator, such director shall be not act on or decide any matter relating solely to himself or herself or any of his or her rights or benefits under the Plan. No bond or other security need be required of the Administrator or any member thereof in any jurisdiction. 3.3 LIMITATION OF LIABILITY. Each member of the Board and the Administrator shall be entitled to, in good faith, rely or act upon any report or other information furnished to him or her by any officer or other employee of the Company or any subsidiary, the Company's independent certified public accountants, or any executive compensation consultant, legal counsel, or other professional retained by the Company to assist in the administration of the Plan. No member of the Board or the Administrator, nor any person to whom ministerial duties under the Plan have been delegated, shall be personally liable for any action, determination, or interpretation taken or made in good faith with respect to the Plan, and any such person shall, to the extent permitted by law, be fully indemnified and protected by the Company with respect to any such action, determination, or interpretation. 4. SHARES AVAILABLE UNDER THE PLAN. The total number of Shares reserved and available for delivery under the Plan is 500,000, subject to adjustment as provided in Section 11.2. Shares that may be delivered under the Plan may consist, in whole or in part, of authorized and unissued Shares, treasury Shares or Shares acquired in the market for the account of a Participant. For purposes of the Plan, shares that may be purchased upon exercise of an Option or distributed in settlement of Deferred Shares will not be considered to be available after such Option has been granted or Deferred Share credited, except for purposes of delivery in connection with such Option or Deferred Share; provided, however, that, if an Option expires for any reason without having been exercised in full or Deferred Shares or shares of Restricted Stock are forfeited or cancelled, the shares subject to the unexercised portion of such Option or to the forfeited or cancelled Deferred Shares or Restricted Stock will again be available for delivery under the Plan. 5. ELIGIBILITY. Each non-employee director of the Company who is paid fees for service on the Board or a Board committee, and each Eligible Holder, may participate in the Plan, subject to the terms hereof. No person other than those specified in this Section 5 will be eligible to participate in the Plan. The Administrator will notify each person of his or her eligibility to participate in the Plan on an elective basis not later than 15 days (or such other period as may be determined by the Administrator) prior to any deadline for filing an election form. 6. INITIAL AND ANNUAL GRANTS OF OPTIONS. Options shall be granted to non-employee directors in accordance with policies established from time to time by the Board specifying the classes of directors to be granted Options, the number of Shares to be subject to each Option, and the time or times at which such Options shall be granted; provided, however, that the maximum number of Shares that may be subject to Options granted to a director in a given year under this Section 6 (i.e., without a corresponding reduction in fees) shall be 10,000, subject to adjustment as provided in Section 11.2. Options granted to an Eligible Holder under Section 9.6 shall not be counted against the limitation set forth in the preceding sentence. 6.1 INITIAL POLICY -- OPTION GRANTS. The initial policy with respect to Options granted under this Section 6, effective as of the Spin-off Date and continuing until modified or revoked by the Board, shall be as follows: (a) INITIAL GRANTS. At the date of a person's initial election or appointment as a member of the Board after the effective date of the Plan, such person, if he or she is a non-employee director eligible to participate upon such election or appointment, shall be granted an Option to purchase during the Option term 5,000 Shares, subject to adjustment as provided in Section 11.2. (b) ANNUAL GRANTS. At the date of each annual meeting of stockholders at which a director is elected or reelected as a member of the Board (or at which members of another class of directors are elected or reelected, if the Company then has a classified Board), and at the time of effectiveness of the Spin-off, a director, if he or she is a non-employee director eligible to participate at the close of business on that date and if he or she has not been granted an Option under this Section 6.1 previously during the same calendar year, shall be granted an Option to purchase during the Option term 4,000 Shares, subject to adjustment as provided in Section 11.2. (c) PREDECESSOR DIRECTORS. For purposes of this policy, a director who served on the Predecessor's board of directors and became a director of the Company at the time of the Spin-off shall be deemed a continuing director entitled to an annual grant under Section 6.1(b) rather than Section 6.1(a). 6.2 TERMS OF OPTIONS GRANTED UNDER SECTION 6. Each Option granted under this Section 6 shall be subject to the following terms and conditions: (a) EXERCISE PRICE. The exercise price per Share purchasable under an Option will be equal to 100% of the Fair Market Value of a Share on the date of grant of the Option. (b) OPTION TERM. Each Option shall expire at the end of a term fixed by the Board, not longer than ten years after the date of grant, or at such earlier date as the Option may no longer be exercised and cannot, by its terms, thereafter become exercisable. Options granted under the initial policy set out in Section 6.1 shall expire at the earlier of (i) a fixed term of five years after the date of grant, (ii) 12 months after the Participant ceases to serve as a Director of the Company due to death, Disability, or Retirement, or (iii) 60 days after the Participant ceases to serve as a Director of the Company for any reason other than death, Disability, or Retirement. (c) VESTING AND EXERCISABILITY. The Board may establish terms regarding the times at which Options shall become vested and exercisable. Options granted under the initial policy set out in Section 6.1 and not previously forfeited shall vest and become exercisable by a Participant on the date three months after the date of grant, and, unless otherwise provided in the Participant's Option agreement, any portion of a Participant's Option that has not vested and become exercisable at the time of termination of the Participant's service as a director shall be forfeited. (d) PAYMENT. The exercise price of an Option shall be paid to the Company either in cash or by the surrender of Shares, or any combination thereof, or in such other form or manner as may be established by the Administrator; PROVIDED, HOWEVER, that, unless otherwise determined by the Administrator, shares shall not be surrendered in payment of the exercise price if such surrender would result in additional accounting expense to the Company. 7. GRANTS OF DEFERRED SHARES AND RESTRICTED STOCK. Deferred Shares and/or Restricted Stock shall be granted to non-employee directors in accordance with policies established from time to time by the Board specifying the classes of directors to be granted such awards, the number of Deferred Shares or shares of Restricted Stock to be granted, and the time or times at which such awards shall be granted; provided, however, that the maximum number of Deferred Shares and shares of Restricted Stock that may be granted to a director in a given year under this Section 7, without a corresponding reduction in fees, shall be 50% of the number of Deferred Shares that could be granted under Section 8.3 in that year with such a corresponding reduction in fees. Deferred Shares and Restricted Stock granted to an Eligible Holder under Section 9.6 shall not be counted against the limitation set forth in the preceding sentence. 7.1 INITIAL POLICY. The initial policy with respect to awards under this Section 7, effective as of the Effective Date and continuing until modified or revoked by the Board, shall be to grant no Deferred Shares or Restricted Stock under this Section 7. 7.2 TERMS OF DEFERRED SHARES AND RESTRICTED STOCK GRANTED UNDER SECTION 7. Deferred Shares granted under this Section 7 shall be subject to the terms and conditions of Deferred Shares specified in Sections 9.2, 9.3, and 9.4, unless otherwise determined by the Board. Deferred Shares and Restricted Stock granted under this Section 7 shall also be subject to the following additional terms and conditions: (a) VESTING AND FORFEITURE. The Board may establish terms regarding the times at which Deferred Shares and Restricted Stock shall become vested and non-forfeitable. Unless otherwise determined by the Board, an award granted under this Section 7 shall be subject to the following terms: Such award, if not previously forfeited, shall become vested and non-forfeitable as to one-third of the number of Deferred Shares or shares of Restricted Stock at the close of business on the day preceding each of the three annual meetings of stockholders following the date of grant of such award, rounded to the nearest number of whole shares; provided, however, that if such award was not previously vested or forfeited, it shall vest and become non-forfeitable on an accelerated basis upon the termination of the Participant's service as a director due to death, Disability or Retirement. Unless otherwise determined by the Board, an award of Deferred Shares or Restricted Stock not previously vested or forfeited will cease to vest and will be forfeited upon the termination of the Participant's service as a director for any reason other than death, Disability or Retirement. (b) DEFERRED SHARES CREDITED AS A RESULT OF DIVIDEND EQUIVALENTS. Unless otherwise determined by the Board, Deferred Shares credited as a result of dividend equivalents under Section 9.2 shall be subject to the same terms, including risk of forfeiture, as the Deferred Shares with respect to which the dividend equivalents were credited. (c) DIVIDENDS ON RESTRICTED STOCK. Unless otherwise determined by the Board, dividends on Restricted Stock declared and paid prior to the lapse of the risk of forfeiture on such Restricted Stock shall be automatically reinvested in additional shares of Restricted Stock, which shall be subject to the same terms, including risk of forfeiture, as the Restricted Stock on which the dividend was paid. (d) AWARDS NONTRANSFERABLE. Deferred Shares and Restricted Stock shall be nontransferable by the Participant at any time that the award remains subject to a risk of forfeiture. (e) CONSIDERATION FOR RESTRICTED STOCK. If shares to be granted as Restricted Stock are not treasury shares, the Board or Administrator may impose additional conditions upon the grant of the Restricted Stock, possibly including a requirement that cash consideration be paid by the Participant, if and to the extent necessary to ensure that the Company will receive lawful consideration equal to the aggregate par value of the Shares being granted as Restricted Stock. 8. OPTIONS GRANTED IN PAYMENT OF FEES AND DEFERRAL OF FEES IN DEFERRED SHARES AND DEFERRED CASH. Each director of the Company who is eligible under Section 5 may elect, in accordance with Section 8.1, to be paid Retainer Fees in the form of Options under Section 8.2 or to defer receipt of Retainer Fees and Other Director Compensation in the form of Deferred Shares under Section 8.3 or deferred cash under Section 8.4. 8.1 ELECTIONS. A director shall elect to participate and the terms of such participation by filing an election with the Company prior to the beginning of a Plan Year (the initial Plan Year is the same as that under Predecessor's DDCP and Plan Years thereafter generally will begin at each annual meeting of stockholders or, in the case of a new director, upon initial appointment) or at such other date as may be specified by the Administrator, provided that any date so specified shall ensure effective deferral of taxation and otherwise comply with applicable laws. (a) EFFECT AND IRREVOCABILITY OF ELECTIONS. Elections shall be deemed continuing, and therefore applicable to Plan Years after the initial Plan Year covered by the election, until the election is modified or superseded by the Participant. Elections other than those subject to Section 9.4 shall become irrevocable at the commencement of the Plan Year to which an election relates, unless the Administrator specifies a different time. Elections relating to the time of settlement of a Deferral Account shall become irrevocable at the time specified in Section 9.4. Elections may be modified or revoked by filing a new election prior to the time the election to be modified or revoked has become irrevocable. The latest election filed with the Administrator shall be deemed to revoke all prior inconsistent elections that remain revocable at the time of filing of the latest election. (b) MATTERS TO BE ELECTED. The Administrator will provide a form of election which will permit a director to make appropriate elections with respect to all relevant matters under this Section 8. (c) TIME OF FILING ELECTIONS. An election must be received by the Administrator prior to the date specified by the Administrator. Under no circumstances may a Participant defer compensation to which the Participant has attained, at the time of deferral, a legally enforceable right to current receipt of such compensation. 8.2 OPTIONS GRANTED IN PAYMENT OF RETAINER FEES. A Participant who has elected to be paid a specified amount of Retainer Fees in the form of Options shall be granted, at the close of business on the day the Participant's Plan Year commences, an Option to purchase the number of whole Shares determined in accordance with the Option Valuation Methodology specified by the Board. Each Option granted under this Section 8.2 shall be subject to the following terms and conditions: (a) OPTION VALUATION METHODOLOGY. The Board shall determine the Option Valuation Methodology which will be used to determine the number of Options granted and the Option exercise price. The Option Valuation Methodology may be based upon a valuation of the Option (for example, using the Black-Scholes option valuation model), a discounting of the aggregate exercise price of the Options by the amount of Retainer Fees to be paid in the form of Options, or such other methodology as may be deemed reasonable for purposes of this Section 8.2. (b) OPTION TERM. Each Option will expire ten years after the date of grant; PROVIDED, HOWEVER, that, unless otherwise determined by the Board, any portion of an Option that is not yet exercisable at the date a Participant ceases to serve as a director for any reason will expire at the date such service ceases; and, PROVIDED FURTHER, that, unless otherwise determined by the Board, any portion of an Option that is not yet exercisable at the date a Participant ceases to serve as chair or a member of a Board committee will, to the extent specified in Section 8.2(e), expire at the date such service ceases. (c) VESTING AND EXERCISABILITY. Each Option will vest and become exercisable as to 25% of the underlying shares on the June 30, September 30, December 31, and March 31 following the date of grant; PROVIDED, HOWEVER, that, in the case of a Plan Year which begins on or after June 30 and before September 30, the vesting percentage shall be 33%, and in the case of a Plan Year which begins on or after September 30 and before December 31, the vesting percentage shall be 50%; and PROVIDED FURTHER, that an Option will become fully vested and exercisable at the close of business on the last day of the Plan Year in which it was granted. The number of Shares as to which the Option becomes vested and exercisable will be rounded to the nearest whole number. The foregoing notwithstanding, upon termination of the Participant's service as a director due to death, Disability, or Retirement, that portion of the Option which would become vested and exercisable on the last day of the calendar quarter in which such death, Disability, or Retirement occurred will become immediately vested and exercisable. Unless otherwise determined by the Board, an Option will cease to further vest and become exercisable upon the termination of the Participant's service as a director for any reason, and the portion that has not vested and become exercisable at the time of such termination shall be forfeited. (d) EXERCISE PRICE. The exercise price per Share purchasable under an Option will be determined in accordance with the Option Valuation Methodology. The exercise price of an Option shall be paid to the Company either in cash or by the surrender of Shares, or any combination thereof, or in such other form or manner as may be established by the Administrator; PROVIDED, HOWEVER, that, unless otherwise determined by the Administrator, shares shall not be surrendered in payment of the exercise price if such surrender would result in additional accounting expense to the Company. (e) CHANGES IN FEES; CHANGES IN SERVICE AS A COMMITTEE CHAIR. If the amount of Retainer Fees is increased during a Plan Year, or if a Director is appointed chair of a Board committee such that an additional Retainer Fee is payable during a Plan Year, such increased or additional fees will not be paid in the form of Options. Unless otherwise determined by the Board, if a Director has been granted an Option in respect of a Plan Year in payment of Retainer Fees which included committee-related fees for service as chair or a member of any Board committee, and during such Plan Year he or she ceases such service but remains on the Board, the Option will expire in part at the time such service ceases, to the extent of that portion of the Option which is not yet exercisable multiplied by a fraction the numerator of which is the amount of committee-related fees included in such Retainer Fees and the denominator of which is the total amount of such Retainer Fees. (f) SERVICE DURING PART OF A QUARTER. If a Participant ceases to serve as a director or on committee at a date other than a vesting date for the Option and if the Board does not exercise its discretion to permit vesting of the Participant's Option in consideration for the Participant's service in that final quarterly period, the Participant shall be entitled to payment in cash for his or her service in that final quarterly period if and to the extent then provided in the Company's regular non-employee director compensation policies. 8.3 DEFERRAL OF RETAINER FEES AND OTHER DIRECTOR COMPENSATION IN THE FORM OF DEFERRED SHARES. If a Participant has elected to defer receipt of a specified amount of Retainer Fees or Other Director Compensation in the form of Deferred Shares, a number of Deferred Shares shall be credited to the Participant's Deferred Share Account, as of the date such Retainer Fees or Other Director Compensation otherwise would have been payable to the Participant but for such election to defer, equal to (i) such amount otherwise payable divided by (ii) the Fair Market Value of a Share at that date. Deferred Shares credited under this Section 8.3 shall be subject to the terms and conditions of Deferred Shares specified in Sections 9.2, 9.3, and 9.4. The right and interest of each Participant in Deferred Shares credited to the Participant's Deferred Share Account under this Section 8.3 at all times will be nonforfeitable. 8.4 DEFERRAL OF RETAINER FEES AND OTHER DIRECTOR COMPENSATION IN THE FORM OF DEFERRED CASH. If a Participant has elected to defer receipt of a specified amount of Retainer Fees or Other Director Compensation in the form of deferred cash, an amount equal to such specified amount shall be credited to the Participant's Deferred Cash Account as of the date such Retainer Fees or Other Director Compensation otherwise would have been payable to the Participant but for such election to defer. As of the close of business on each Valuation Date, interest shall be credited to such Deferred Cash Account in an amount equal to the average daily balance in such Deferred Cash Account since the last Valuation Date multiplied by the interest rate as specified by the Board and applicable to the period since the last Valuation Date. The initial policy with respect to the interest rate under this Section 8.4, effective as of the Spin-off Date and continuing until modified or revoked by the Board, shall be to credit interest at the prime interest rate of a single large bank as published in The Wall Street Journal and effective on the date of the latest annual meeting of stockholders of the Company or the date on which Predecessor's stockholders approved the Plan. The right and interest of each Participant relating to his or her Deferred Cash Account at all times will be nonforfeitable. 8.5 CESSATION OF SERVICE AS A DIRECTOR. If any Retainer Fee or Other Director Compensation otherwise subject to an election would be paid to a Participant after he or she has ceased to serve as a director, such payment shall not be subject to deferral under this Section 8, but shall instead be paid in accordance with the Company's regular non-employee director compensation policies. 9. OTHER DEFERRALS AND TERMS OF DEFERRAL ACCOUNTS. 9.1 DEFERRAL OF CERTAIN OPTION SHARES. If and to the extent permitted by the Administrator, upon any exercise of an Option by a non-employee director, if the exercise price of such Option is paid by surrender of Shares to the Company, the director may elect to defer receipt of all or a portion of the shares deliverable upon exercise of the Option in excess of the number surrendered in payment of the exercise price. In such case, the number of shares deferred shall be credited to the Participant's Deferred Share Account. 9.2 DIVIDEND EQUIVALENTS ON DEFERRED SHARES. Dividend equivalents will be credited on Deferred Shares credited to a Participant's Deferred Share Account as follows: (a) CASH AND NON-SHARE DIVIDENDS. If the Company declares and pays a dividend on Shares in the form of cash or property other than Shares, then a number of additional Deferred Shares shall be credited to a Participant's Deferred Share Account as of the payment date for such dividend equal to (i) the number of Deferred Shares credited to the Account as of the record date for such dividend, multiplied by (ii) the amount of cash plus the Fair Market Value of any property other than shares actually paid as a dividend on each share at such payment date, divided by (iii) the Fair Market Value of a Share at such payment date. (b) SHARE DIVIDENDS AND SPLITS. If the Company declares and pays a dividend on Shares in the form of additional Shares, or there occurs a forward split of Share, then a number of additional Deferred Shares shall be credited to the Participant's Deferred Share Account as of the payment date for such dividend or forward Share split equal to (i) the number of Deferred Shares credited to the Account as of the record date for such dividend or split multiplied by (ii) the number of additional Shares actually paid as a dividend or issued in such split in respect of each Share. 9.3 REALLOCATION OF ACCOUNTS. A Participant shall have no right to have amounts credited as cash to the Participant's Deferred Cash Account reallocated or switched to his or her Deferred Share Account or amounts credited to the Participant's Deferred Share Account reallocated or switched to his or her Deferred Cash Account, unless otherwise determined by the Board. 9.4 ELECTIONS AS TO SETTLEMENT. Each Participant, while still a director of the Company, shall file an election with the Administrator specifying the time or times at which the Participant's Deferral Account will be settled, following the Participant's termination of service as a director of the Company, and whether distribution will be in a single lump sum or in a number of annual installments not exceeding ten; PROVIDED, HOWEVER, that, if no valid election has been filed as to the time of settlement of a Participant's Deferral Account or any portion thereof, such Deferral Account or portion thereof shall be distributed in a single lump sum on the first business day of the year following the year in which the Participant ceases to serve as a director. If installments are elected, such installments must be annual installments commencing not later than the first year following the year in which the Participant ceases to serve as a director (on such annual installment date as may be specified by the Administrator) and extending over a period not to exceed ten years. (a) MATTERS COVERED BY ELECTION. Subject to the terms of the Plan, the Administrator shall determine whether all deferrals under the Plan must be subject to a single election as to the time or times of settlement, or whether settlement elections may relate to a specified sub-account (I.E., the Deferred Share Account or the Deferred Cash Account) and/or a specified Plan Year. If the Administrator permits elections to relate to a specified Plan Year, such election shall apply to the amounts originally credited to the specified subaccount in respect of such Plan Year and to any additional amounts credited as dividend equivalents or interest in respect of such originally credited amounts and previously credited additional amounts. (b) MODIFYING ELECTIONS. A Participant may modify a prior election as to the time at which a Participant's Deferral Account (including a specified subaccount) will be settled at any time prior to the time the Participant ceases to serve as a director of the Company, subject to such requirements as may be specified by the Administrator. Such modification shall be made by filing a new election with the Administrator. The foregoing notwithstanding, elections under this Section 9.4 shall not be permitted, including elections which would have the effect of advancing the time of settlement of any portion of the Deferral Account, if permitting such an election would result in constructive receipt by the Participant of compensation in respect of the Participant's Deferral Account prior to the actual settlement of such Deferral Account. 9.5 ELECTION FORMS. Elections under the Plan shall be made in writing on such form or forms as may be specified from time to time by the Administrator. 9.6 TREATMENT OF PREDECESSOR AWARDS AND DEFERRALS. Options may be granted under the Plan to Eligible Holders in substitution for options granted by Predecessor, including under the DDCP. The terms of such substitute Options shall be adjusted to the extent authorized under the applicable Predecessor plan or agreement, and otherwise as determined to be equitable by the Board. In addition, the Board may grant Options to Eligible Holders intended to offset any value lost by the Eligible Holder due to the early termination of a Predecessor option in connection with the Spin-off. In such case, the Board will determine such value lost and the replacement value of the Options granted under the Plan in accordance with Section 8.2(a). Deferred Shares and Deferred Cash shall be credited to an Eligible Holder in place of like credits under the DDCP, subject to adjustment to the terms of the Deferred Shares to the extent authorized under the DDCP and otherwise as determined to be equitable by the Board. The interest rate applicable to amounts of Deferred Cash so credited and deferrals of cash under Section 8.4 prior to the Company's first annual meeting of stockholders shall be based on the applicable interest rate that would apply under the DDCP assuming the meeting of Predecessor's stockholders at which the Plan was approved had been an annual meeting. 9.7 STATEMENTS. The Administrator will furnish statements to each Participant reflecting the amount credited to a Participant's Deferral Account, transactions therein, and other related information no less frequently than once each calendar year. 9.8 FRACTIONAL SHARES. The amount of Deferred Shares credited to a Deferred Share Account shall include fractional shares calculated to at least three decimal places. 10. SETTLEMENT OF DEFERRAL ACCOUNTS. The Company will settle a Participant's Deferral Account by making one or more distributions to the Participant (or his or her Beneficiary, following Participant's death) at the time or times, in a lump sum or installments, as specified in the Participant's election(s) filed in accordance with Section 9.4; PROVIDED, HOWEVER, that a Deferral Account will be settled at times earlier than those specified in such election in accordance with Sections 10.2, 10.3, and 10.4. 10.1 FORM OF DISTRIBUTION. Distributions in respect of a Participant's Deferred Share Account shall be made only in Shares, together with cash in lieu of any fractional share remaining at a time that less than one whole Deferred Share is credited to such Deferred Share Account. Shares may be delivered in certificate form to a Participant (or his or her Beneficiary) or to a nominee for the account of the Participant (or his or her Beneficiary), or in such other manner as the Administrator may determine. Distributions in respect of a Participant's Deferred Cash Account shall be made only in cash. 10.2 DEATH. If a Participant ceases to serve as a director due to death or dies prior to distribution of all amounts from his or her Deferral Account, the Company shall make a single lump-sum distribution to the Participant's Beneficiary. Any such distribution shall be made as soon as practicable following notification to the Company of the Participant's death. 10.3 FINANCIAL EMERGENCY AND OTHER PAYMENTS. Other provisions of the Plan notwithstanding, if, upon the written application of a Participant, the Board determines that the Participant has a financial emergency of such a substantial nature and beyond the Participant's control that payment of amounts previously deferred under the Plan is warranted, the Board may direct the payment to the Participant of all or a portion of the balance of a Deferral Account and the time and manner of such payment. 11. GENERAL PROVISIONS. 11.1 LIMITS ON TRANSFERABILITY. Options, Deferred Shares, Restricted Stock and all other rights under the Plan will not be transferable by a Participant except by will or the laws of descent and distribution, or to a Beneficiary in the event of a Participant's death, and will not otherwise be subject to alienation, anticipation, encumbrance, garnishment, attachment, levy, execution or other legal or equitable process, nor subject to the debts, contracts, liabilities or engagements, or torts of any Participant or his or her Beneficiary. Any attempt to alienate, sell, transfer, assign, pledge, garnish, attach or take any other action subject to legal or equitable process or encumber or dispose of any interest in the Plan shall be void. The foregoing notwithstanding, the Administrator may permit a Participant to transfer Options, Deferred Shares, and related rights to one or more trusts, partnerships, or family members during the lifetime of the Participant solely for estate planning purposes, but only if and to the extent then consistent with the registration of any offer and sale of shares related thereto on Form S-8, Form S-3, or such other registration form of the Securities and Exchange Commission as may then be permitted to be filed with respect to the Plan. The Company may rely upon the beneficiary designation last filed in accordance with this Section 11.1. 11.2 ADJUSTMENTS. In the event that any large, special and non-recurring dividend or other distribution (whether in the form of cash, Shares, or other property), recapitalization, forward or reverse split, reorganization, merger, consolidation, spin-off, combination, repurchase, share exchange, liquidation, dissolution or other similar corporate transaction or event affects the Shares such that an adjustment is determined by the Board to be appropriate in order to prevent dilution or enlargement of a Participant's rights under the Plan, then the Board shall, in such manner as it may deem equitable, adjust any or all of (i) the number and kind of Shares reserved and available for delivery under the Plan and to be subject to Options, Deferred Shares, and Restricted Stock thereafter granted or credited, (ii) the number of Shares subject to Options automatically granted under any policy under Section 6.1, the number of Deferred Shares and/or Shares of Restricted Stock automatically granted under any policy under Section 7.1, and the maximum number of Shares that may be subject to Options granted to a director in a single year under Section 6, (iii) the number and kind of Shares deliverable upon exercise of outstanding Options, and the exercise price per share thereof (provided that no fractional shares will be delivered upon exercise of any Option), (iv) the number and kind of Shares to be delivered upon settlement of outstanding Deferred Shares (taking into account any Deferred Shares credited as dividend equivalents under Section 9.2), and (v) the number and kind of shares outstanding as Restricted Stock. 11.3 RECEIPT AND RELEASE. Payments (in any form) to any Participant or Beneficiary in accordance with the provisions of the Plan shall, to the extent thereof, be in full satisfaction of all claims for the compensation deferred and relating to the Deferral Account to which the payments relate against the Company, the Board, or the Administrator, and the Administrator may require such Participant or Beneficiary, as a condition to such payments, to execute a receipt and release to such effect. In the case of any payment under the Plan of less than all amounts then credited to a Deferral Account in the form of Deferred Shares, the amounts paid shall be deemed to relate to the Deferred Shares credited to the Account at the earliest time. 11.4 COMPLIANCE. The Company shall have no obligation to settle any Deferral Account of a Participant (in any form) until all legal and contractual obligations of the Company relating to establishment of the Plan and such settlement shall have been complied with in full. In addition, the Company shall impose such restrictions on Shares delivered to a Participant hereunder and any other interest constituting a security as it may deem advisable in order to comply with the Securities Act of 1933, as amended, the requirements of the New York Stock Exchange or any other stock exchange or automated quotation system upon which the Shares are then listed or quoted, any state securities laws applicable to such a transfer, any provision of the Company's Certificate of Incorporation or By-laws, or any other law, regulation, or binding contract to which the Company is a party. 11.5 CHANGES TO THE PLAN AND AWARDS. The Board may amend, suspend, discontinue, or terminate the Plan or the authority to grant awards under the Plan without the consent of stockholders or Participants, except that any amendment shall be subject to the approval of the Company's stockholders at or before the next annual meeting of stockholders for which the record date is after the date of such Board action if such stockholder approval is required by any federal or state law or regulation or the rules of any stock exchange or automated quotation system on which the Shares may then be listed or quoted, and the Board may otherwise, in its discretion, determine to submit other such amendments to stockholders for approval; PROVIDED, HOWEVER, that, without the consent of an affected Participant, no such action may materially impair the rights of such Participant under any award theretofore granted. The Committee may amend, suspend, discontinue, or terminate any award theretofore granted and any award agreement relating thereto; PROVIDED, HOWEVER, that no such amendment may reduce the exercise price of an outstanding Option (except as authorized under Section 11.2) or provide for award terms that the Plan would not then permit for a newly granted award; and PROVIDED FURTHER, that, without the consent of an affected Participant, no such action may materially impair the rights of such Participant under such award. The foregoing notwithstanding, the Board may, in its sole discretion, terminate the Plan (in whole or in part) and, and may distribute to any Participant (in whole or in part, and whether or not in connection with a termination of the Plan) the amounts credited to the Participant's Deferral Account. 11.6 UNFUNDED STATUS OF PLAN; CREATION OF TRUSTS. The Plan is intended to constitute an "unfunded" plan for deferred compensation and Participants shall rely solely on the unsecured promise of the Company for payment hereunder. With respect to any payment not yet made to a Participant under the Plan, nothing contained in the Plan shall give a Participant any rights that are greater than those of a general unsecured creditor of the Company; PROVIDED, HOWEVER, that the Board may authorize the creation of trusts or make other arrangements to meet the Company's obligations under the Plan, which trusts or other arrangements shall be consistent with the "unfunded" status of the Plan unless the Board otherwise determines with the consent of each affected Participant. The establishment and maintenance of, or allocations and credits to, the Deferral Account of any Participant shall not vest in any Participant any right, title or interest in and to any Plan assets or benefits except at the time or times and upon the terms and conditions and to the extent expressly set forth in the Plan and in accordance with the terms of any trust. 11.7 OTHER PARTICIPANT RIGHTS. No Participant shall have any of the rights or privileges of a stockholder of the Company under the Plan, including as a result of the grant of an Option or crediting of Deferred Shares or other amounts to a Deferral Account, or the creation of any Trust and deposit of Shares therein, except at such time as such Option may have been duly exercised or Shares may be actually delivered in settlement of a Deferral Account, except that a Participant granted Restricted Stock shall have rights of a stockholder except to the extent that those rights are limited by the terms of the Plan and the agreement relating to the Restricted Stock. No provision of the Plan, document relating to the Plan, or transaction hereunder shall confer upon any Participant any right to continue to serve as a director of the Company or in any other capacity with the Company or a subsidiary or to be nominated for reelection as a director, or interfere in any way with the right of the Company to increase or decrease the amount of any compensation payable to such Participant. Subject to the limitations set forth in Section 11.1, the Plan shall inure to the benefit of, and be binding upon, the parties hereto and their successors and assigns. 11.8 CONTINUED SERVICE AS AN EMPLOYEE. If a Participant ceases to serve as a director and, immediately thereafter, is employed by the Company or any subsidiary, then such Participant will not be deemed to have ceased to serve as a director or as chair or as a member of a Board committee at that time, and his or her continued employment by the Company or any subsidiary will be deemed to be continued service as a director or chair or a member of a Board committee; PROVIDED, HOWEVER, that, for purposes of Section 5, such former director will not be deemed to be a non-employee director eligible for further grants of awards. 11.9 GOVERNING LAW. The validity, construction, and effect of the Plan, any rules and regulations under the Plan, and any agreement under the Plan will be determined in accordance with the Delaware General Corporation Law and other laws (including those governing contracts) of the State of Delaware, without giving effect to principles of conflicts of laws, and applicable federal law. 11.10 LIMITATION. A Participant and his or her Beneficiary shall assume all risk in connection with any decrease in value of Options or a Deferral Account and neither the Company, the Board nor the Administrator shall be liable or responsible therefor. 11.11 CONSTRUCTION. The captions and numbers preceding the sections of the Plan are included solely as a matter of convenience of reference and are not to be taken as limiting or extending the meaning of any of the terms and provisions of the Plan. Whenever appropriate, words used in the singular shall include the plural or the plural may be read as the singular. 11.12 SEVERABILITY. In the event that any provision of the Plan shall be declared illegal or invalid for any reason, said illegality or invalidity shall not affect the remaining provisions of the Plan but shall be fully severable, and the Plan shall be construed and enforced as if said illegal or invalid provision had never been inserted herein. 11.13 NONEXCLUSIVITY OF THE PLAN. The adoption of the Plan by the Board shall not be construed as creating any limitation on the power of the Board to adopt such other compensatory arrangements for directors as it may deem desirable. 11.14 EFFECTIVE DATE, STOCKHOLDER APPROVAL, AND PLAN TERMINATION. The Plan shall become effective on the later of its approval by stockholders of the Predecessor or the effectiveness of the Company's registration under Section 12 of the Exchange Act. Unless earlier terminated by action of the Board, the Plan will remain in effect until such time as no Shares remain available for delivery under the Plan and the Company has no further rights or obligations under the Plan with respect to outstanding Options or other awards under the Plan. EX-10.3 6 EXHIBIT 10.3 APPENDIX B DISTRIBUTION AGREEMENT DATED AS OF MARCH 17, 1999 BETWEEN JEFFERIES GROUP, INC. AND JEF HOLDING COMPANY, INC. TABLE OF CONTENTS
PAGE ----- 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
i
PAGE ----- 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
Schedule A -- Holding Provided Information Concerning the Merger Schedule B -- ITGI Provided Information Concerning the Merger
ii DISTRIBUTION AGREEMENT This Distribution Agreement ("AGREEMENT"), dated as of March 17, 1999, is hereby entered into by and between Jefferies Group, Inc., a Delaware corporation ("JEFG"), and JEF Holding Company, Inc., a Delaware corporation and wholly-owned subsidiary of JEFG as of the date of this Agreement ("HOLDING"). RECITALS WHEREAS, the Board of Directors of JEFG has approved the business transactions pursuant to which all the assets, businesses and Liabilities (as defined below) of Investment Technology Group, Inc., a Delaware corporation and approximately 80.5% owned subsidiary of JEFG ("ITGI"), and ITGI's subsidiaries will be separated from all other assets, businesses and Liabilities of JEFG, on the terms and subject to the conditions set forth herein and in the Ancillary Agreements (as defined below); WHEREAS, concurrently herewith, JEFG and ITGI are entering into an Agreement and Plan of Merger (the "MERGER AGREEMENT"), pursuant to which (x) ITGI will merge (the "MERGER") with and into JEFG and (y) all outstanding shares of common stock, par value $0.01 per share, of ITGI (the "ITGI COMMON STOCK") will be canceled or converted into the right to receive shares of common stock, par value $0.01 per share, of JEFG (the "JEFG COMMON STOCK") in the manner set forth in the Merger Agreement; WHEREAS, prior to the Distribution (defined below) and Merger (x) JEFG will transfer to Holding (or to JEFCO, defined herein, prior to the time JEFCO becomes a subsidiary of Holding in connection with the Contribution, defined below), and Holding and JEFCO will accept from JEFG, all of the Assets of JEFG other than JEFG's ownership interest in capital stock of ITGI (the "CONTRIBUTION"), and JEFG will assign to Holding (or to JEFCO, as appropriate), and Holding and JEFCO will assume from JEFG, all of the Holding Liabilities (as defined herein) (individually, the "ASSUMPTION" and together with the Contribution, collectively, the "TRANSFERS"), and (y) following the Transfers and the satisfaction of all conditions set forth in Section 2.02 of this Agreement, all of the common stock of Holding, par value $0.0001 per share ("HOLDING COMMON STOCK"), will be distributed (the "DISTRIBUTION") to JEFG's stockholders at the rate of one share of Holding Common Stock for each share of JEFG Common Stock outstanding as of April 20, 1999, or such other date as is designated by JEFG's Board of Directors as the record date for determining the stockholders of JEFG entitled to receive the Distribution (the "RECORD DATE"); WHEREAS, (i) pursuant to the Merger, the name of Jefferies Group, Inc. (as the surviving corporate entity in the Merger) will be changed to Investment Technology Group, Inc. and (ii) following the consummation of the Distribution and the Merger, the name of JEF Holding Company, Inc. will be changed to Jefferies Group, Inc.; WHEREAS, it is intended that the Distribution not be taxable to JEFG or its stockholders pursuant to Section 355 of the Internal Revenue Code of 1986, as amended (the "CODE"); WHEREAS, as of March 16, 1999, the Board of Directors of ITGI declared, subject to the approval and adoption of the Merger Agreement by the stockholders of JEFG and ITGI and the satisfaction or waiver of all other conditions to the Pre-Closing (as defined in the Merger Agreement) as set forth in the Merger Agreement, a cash dividend in an amount equal to $4.00 per share to all holders of ITGI Common Stock, including JEFG (the "SPECIAL ITGI CASH DIVIDEND"); B-1 NOW, THEREFORE, in consideration of the foregoing premises and the mutual agreements and covenants contained in this Agreement, the parties hereby agree as follows: ARTICLE I DEFINITIONS Section 1.01. DEFINITIONS. As used herein, the following terms have the following meaning: "Action" means any claim, suit, arbitration, inquiry, proceeding or investigation by or before any court, governmental or other regulatory or administrative agency or commission or any other tribunal. "Analytical" means Jefferies Analytical Trading Group, Inc., a Delaware corporation. "Ancillary Agreements" means the Benefits Agreement and the Tax Agreement and all of the written agreements, instruments, understandings, assignments and other arrangements entered into in connection with the transactions contemplated hereby excluding, however, the Merger Agreement and all instruments and documents related thereto. "Assets" means all properties, rights, contracts, leases and claims, of every kind and description, wherever located, whether tangible or intangible, and whether real, personal or mixed. "Assumption" is defined in the recitals to this Agreement. "Benefits Agreement" means the Benefits Agreement entered into in connection with the Distribution between JEFG and Holding, as amended from time to time. "Code" is defined in the recitals to this Agreement. "Commission" means the Securities and Exchange Commission. "Contribution" is defined in the recitals to this Agreement. "Distribution" is defined in the recitals to this Agreement. "Distribution Agent" means EquiServe, in its capacity as agent for JEFG in connection with the Distribution. "Distribution Date" means April 27, 1999 or such other business day as of which the Distribution shall be effective, as determined by the Board of Directors of JEFG; provided, however, that the Distribution Date shall occur (in time) prior to the Effective Time. "Effective Time" means the date and time at which the Merger is consummated. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Form S-4" means the registration statement on Form S-4 filed by JEFG pursuant to the Securities Act with respect to the JEFG Common Stock issuable in the Merger pursuant to the Merger Agreement, as such registration statement may be amended from time to time. "Form 10" means the registration statement on Form 10 filed by Holding with the Commission to effect the registration of the class of Holding Common Stock pursuant to the Exchange Act, as such registration statement may be amended from time to time. "Group" means the ITGI Group or the Holding Group, as applicable. "Holding" is defined in the preamble to this Agreement. "Holding Assets" means all Assets of JEFG (a) including without limitation (1) all of the capital stock, and options, warrants or other rights to purchase capital stock, of Analytical, Investment, Japan, JEFCO, JIL, Licensing, Pacific, and Switzerland, and all of the preferred stock and options, warrants or B-2 other rights to purchase capital stock (including all of the common stock) of W&D, (2) all cash, receivables, marketable securities and real and personal property of JEFG, (3) all Assets that are (i) owned of record by or held in the name of a member of the Holding Group, (ii) used exclusively by one or more members of the Holding Group prior to, on or following the Effective Time and (4) the names "Jefferies," "Jefferies Group" and "Jefferies Group, Inc." and all variations thereof and all trademarks, trade names, copyrights or other intellectual property right related thereto, but (b) excluding the capital stock of ITGI. "Holding Business" means the businesses conducted by JEFG prior to or at the Effective Time or by any member of the Holding Group prior to, on and following the Effective Time, excluding in each such case the ITGI Business. "Holding By-laws" means the By-laws of Holding in the form filed as an exhibit to the Form 10, as last amended, under the Exchange Act. "Holding Certificate" means the certificate of incorporation of Holding in the form filed as an exhibit to the Form 10, as last amended, under the Exchange Act. "Holding Common Stock" is defined in the recitals to this Agreement. "Holding Group" shall mean Holding, Analytical, Investment, Japan, JEFCO, JIL, Licensing, Pacific, Switzerland and W&D and their successors and permitted assigns. "Holding Liabilities" means (i) all Liabilities of Holding under this Agreement, any Intercompany Agreement or any Ancillary Agreement, (ii) except as otherwise expressly provided in this Agreement, any Intercompany Agreement or any Ancillary Agreement, all Liabilities, other than ITGI Group Liabilities, (x) of JEFG, to the extent those Liabilities arise out of or relate to any event, occurrence, act, omission or state of affairs that occurred or existed prior to the Effective Time, (y) of any member of the Holding Group or the Holding Business, whether arising before, on or after the Effective Time or (z) arising out of the ownership or use of the Holding Assets, whether arising before, on or after the Effective Time, (iii) all Liabilities arising under or in connection with the Form 10 unless and except to the extent that such claims are based upon the ITGI Provided Information, (iv) subject to the provisions of Section 12.01 of this Agreement, all Liabilities comprising the JEFG Debt Obligation, (v) all Liabilities arising with respect to claims based upon the Holding Provided Information included or incorporated by reference into the Form S-4 and (vi) Liabilities of JEFG under options or other rights to purchase or acquire any JEFG Common Stock, to the extent such options or rights, prior to the Effective Time, are not exercised for JEFG Common Stock, canceled or exchanged for options to purchase shares of Holding Common Stock. "Holding Provided Information" means information included or incorporated by reference into the Form S-4, Form 10, or Joint Proxy/Information Statement that relates exclusively to JEFG (excluding ITGI and its subsidiaries) prior to the Effective Time, the consolidated financial statements and financial and statistical data of JEFG (excluding the financial statements and statistical and financial data of ITGI and its subsidiaries), any member of the Holding Group, the Holding Business, the Ancillary Agreements, the Transfers, the Distribution or the Holding provided information concerning the Merger as set forth in Schedule A attached hereto and made a part hereof. "Intercompany Agreements" means an amended and restated tax sharing agreement, dated March 17, 1999, between JEFG, Holding and ITGI. "Investment" means JEF Investment Company, a Delaware corporation. "ITGI" means Investment Technology Group, Inc., a Delaware corporation, before and/or after the Merger, as the context requires as set forth herein. B-3 "ITGI Business" means the businesses conducted exclusively by ITGI and its subsidiaries prior to, on and following the Effective Time. "ITGI Common Stock" is defined in the recitals to this Agreement. "ITGI Group" means ITGI and its subsidiaries prior to, on and following the Effective Time. "ITGI Group Liabilities" means (i) all Liabilities of ITGI (in its own right or as the successor to JEFG following the Merger) under Sections 4.02 and 12.01 of this Agreement, or under any Intercompany Agreement or any Ancillary Agreement, (ii) except as otherwise expressly provided in this Agreement, any Intercompany Agreement or any Ancillary Agreement, all Liabilities (other than Holding Liabilities) of ITGI, any member of the ITGI Group or the ITGI Business or Liabilities arising out of the ownership or use of the Assets of the ITGI Group, in each case whether arising before, on or after the Effective Time, (iii) all Liabilities with respect to claims based upon the ITGI Provided Information included and incorporated by reference into the Form 10 and Joint Proxy/ Information Statement, and (iv) all Liabilities arising with respect to claims based upon ITGI Provided Information included or incorporated by reference into the Form S-4. "ITGI Provided Information" means information included or incorporated by reference into the Form S-4, Form 10 or Joint Proxy/Information Statement that relates exclusively to ITGI, any member of the ITGI Group, the ITGI Business, JEFG after the Effective Time, the consolidated historical financial statements of ITGI, the pro forma consolidated financial statements of ITGI (as the successor to JEFG following the Merger), the financial and statistical data of ITGI, the Special ITGI Cash Dividend or the ITGI provided information concerning the Merger as set forth in Schedule B attached hereto and made a part hereof. "Japan" means Jefferies (Japan) Limited, a company formed under the laws of England. "JEFCO" shall mean Jefferies & Company, Inc., a Delaware corporation. "JEFG" is defined in the preamble to this Agreement. "JEFG Common Stock" is defined in the recitals to this Agreement. "JEFG Contribution" means an amount of money to be contributed by JEFG to the capital of JEFCO prior to the Distribution Date equal to at least $60 million. "JEFG Debt Obligation" means the Liabilities of JEFG in respect of its 8 7/8% Senior Notes due 2004 and 7 1/2% Senior Notes due 2007, including, without limitation, the related indentures (including all supplemental indentures thereto), consent solicitations and offering materials. "JIL" means Jefferies International Limited, a company formed under the laws of England. "Joint Proxy/Information Statement" means the joint proxy/information statement, as amended from time to time, filed by JEFG and Holding with the SEC under the Exchange Act to be sent to each holder of JEFG Common Stock in connection with the Distribution and the Merger. "Liabilities" means any and all claims, debts, commitments, liabilities and obligations, absolute or contingent, matured or not matured, liquidated or unliquidated, accrued or unaccrued, known or unknown, whenever arising, including all costs and expenses relating thereto, and including, without limitation, those debts, commitments, liabilities and obligations arising under this Agreement, any law, rule, regulation, action, order or consent decree of any governmental entity or any award of any arbitrator of any kind, and those arising under any contract, commitment or undertaking. "Licensing" means Jefferies Licensing Corporation, a Delaware corporation. "Merger" is defined in the recitals to this Agreement. "Merger Agreement" is defined in the recitals to this Agreement. B-4 "Pacific" means Jefferies Pacific Limited, a company formed under the laws of Hong Kong. "Record Date" is defined in the recitals to this Agreement. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended. "Special ITGI Cash Dividend" is defined in the recitals to this Agreement. "Switzerland" means Jefferies (Switzerland) Ltd., a company formed under the laws of Switzerland. "Tax" shall have the meaning given to such term in the Tax Agreement. "Tax Agreement" means the Tax Sharing and Indemnification Agreement entered into in connection with the Distribution among JEFG, Holding and ITGI, as amended from time to time. "Transfers" is defined in the recitals to this Agreement. "Transactions" shall mean the Transfers, the Distribution and the Merger. "W&D" means W&D Securities, Inc., a Delaware corporation. ARTICLE II THE DISTRIBUTION Section 2.01. COOPERATION PRIOR TO THE DISTRIBUTION. (a) JEFG and Holding shall prepare, and JEFG shall mail on or prior to the Distribution Date to the holders of JEFG Common Stock, the Joint Proxy/Information Statement, which shall set forth appropriate disclosure concerning Holding, the Distribution, the Merger and certain other matters required by the Exchange Act. JEFG and Holding shall also prepare, and Holding shall file with the Commission, the Form 10, which shall incorporate by reference portions of the Joint Proxy/Information Statement. JEFG and Holding shall use all reasonable efforts to cause the Form 10 to be declared, or become, effective under the Exchange Act as soon as reasonably practicable and on or before the Distribution Date. (b) JEFG and Holding shall cooperate in preparing, filing with the Commission under the Securities Act and causing to become effective any registration statements or amendments thereto that are appropriate to reflect the establishment of or amendments to any employee benefit plan contemplated by the Benefits Agreement. (c) JEFG and Holding shall, by means of a stock split or stock distribution, cause the number of outstanding shares of Holding Common Stock held by JEFG as of the Record Date to be equal to the number of shares of Holding Common Stock to be distributed in the Distribution. (d) JEFG and Holding shall take all such action as may be necessary or appropriate under the securities or blue sky laws of states or other political subdivisions of the United States in connection with the transactions contemplated by this Agreement or any Ancillary Agreement. (e) Holding shall prepare, file and pursue an application to succeed to the listing of JEFG and thereby effectuate the listing of the Holding Common Stock on the New York Stock Exchange, and such related matters and other matters as shall be required by the New York Stock Exchange. (f) On or prior to the Distribution Date, JEFG and Holding shall cooperate in carrying out the transactions and events described in Article III hereof. B-5 Section 2.02. JEFG BOARD ACTION; CONDITIONS PRECEDENT TO THE DISTRIBUTION. JEFG's Board of Directors shall, in its discretion, establish the Record Date and the Distribution Date and any appropriate procedures in connection with the Distribution. In no event shall the Distribution occur unless the following conditions shall have been satisfied: (a) any necessary regulatory approvals shall have been received; (b) the Form 10 shall have been declared, or become, effective under the Exchange Act; (c) ITGI shall have declared and paid the Special ITGI Cash Dividend to the holders of ITGI Common Stock, including JEFG; (d) the JEFG Contribution and the Transfers shall have been completed; (e) JEFG and the trustees under the indentures governing the JEFG Debt Obligation shall have executed supplemental indentures in form and substance satisfactory to JEFG and such trustees and their respective counsel, pursuant to which Holding shall assume, and JEFG shall be released from obligations concerning the JEFG Debt Obligation, effective as of the date the Transfers are completed; (f) Holding's Board of Directors, as named in the Form 10, shall have been elected by JEFG, as sole stockholder of Holding, as directors of Holding effective as of the Distribution Date, and the Holding Certificate and Holding By-laws shall be in effect; (g) the Holding Common Stock shall have been approved for listing on the New York Stock Exchange, subject to official notice of issuance; (h) The tax ruling obtained from the Internal Revenue Service ("IRS") on March 11, 1999 concerning the treatment of the Transfers and the Distribution and related transactions under Sections 332, 351, 355 and 368(a)(1)(D) of the Code shall not have been, prior to the Effective Time, withdrawn by the IRS or modified by the IRS in any material adverse respect; (i) all conditions to the Pre-Closing (as defined in the Merger Agreement) of the Merger shall have been satisfied or waived by JEFG or ITGI, as appropriate, and the Pre-Closing shall have been consummated; and (j) JEFG shall be reasonably satisfied that, at all relevant times prior to the Effective Time, JEFG owns at least 80% of the outstanding ITGI Common Stock and that no capital stock of ITGI (other than ITGI Common Stock) shall have been issued or outstanding. Section 2.03. THE DISTRIBUTION. On or before the Distribution Date, subject to satisfaction or waiver of the conditions set forth in this Agreement, JEFG shall deliver to the Distribution Agent a certificate or certificates representing all of the then outstanding shares of Holding Common Stock held by JEFG, endorsed in blank, and shall instruct the Distribution Agent to distribute to each holder of record of JEFG Common Stock as of the close of business on the Record Date a certificate or certificates representing one share of Holding Common Stock for each share of JEFG Common Stock held of record as of the close of business on the Record Date. Holding agrees to provide all certificates for shares of Holding Common Stock that the Distribution Agent shall require in order to effect the Distribution. ARTICLE III CONVEYANCE OF ASSETS, OBLIGATIONS AND RIGHTS; ASSUMPTION OF LIABILITIES; CONDUCT OF HOLDING PENDING DISTRIBUTION Section 3.01. CONVEYANCE OF ASSETS, OBLIGATIONS AND RIGHTS; ASSUMPTION AND RELEASE OF LIABILITIES. (a) Prior to the completion of the Transfers, JEFG shall make the JEFG Contribution. B-6 (b) Prior to the Distribution Date and effective with the Transfers (i) all Holding Assets are intended to be and shall become Assets of the Holding Group and (ii) all Holding Liabilities are intended to be and shall become exclusively the Liabilities of the Holding Group. (c) Prior to, or in connection with, the completion of the Transfers, JEFG shall transfer or cause to be transferred to Holding (or JEFCO, as appropriate), and JEFG shall disclaim (as appropriate) all right, title and interest of JEFG in and to any and all of the Holding Assets and the Holding Business. Effective as of the Transfers, all of JEFG's rights and obligations under the Intercompany Agreements shall be transferred and assigned, without limitation or alteration of the rights or responsibilities hereunder or thereunder, to Holding. (d) Before the Distribution Date, effective as of the date of the Transfers, Holding shall execute supplemental indentures in form and substance satisfactory to JEFG, the trustee under the Indentures governing the JEFG Debt Obligation and their respective counsel pursuant to which, among other things, Holding shall assume, and JEFG shall be released from, the JEFG Debt Obligation, all of which shall be effective prior to the Distribution Date. (e) Set forth on Schedule 3.01(e) hereto is each Holding Asset and each Holding Liability that requires a third-party consent to transfer such Holding Asset or Holding Liability from JEFG to Holding (or to JEFCO, as appropriate). If any such Holding Asset or Holding Liability may not be transferred by reason of the requirement to obtain the consent of any third party and such consent has not been obtained by the Distribution Date, then such Holding Asset or Holding Liability shall not be transferred until such consent has been obtained. In the event that any conveyance of an Asset constituting a Holding Asset or a Liability constituting a Holding Liability is not effected on or before the Distribution Date, the obligation to transfer such Asset or such Liability as the case may be, shall continue past the Distribution Date and shall be accomplished as soon thereafter as practicable. JEFG and its successors (including ITGI) will cooperate with Holding to provide, or cause the owner of such Holding Asset to use all reasonable efforts to provide, to the appropriate member of the Holding Group all the rights and benefits under such Holding Asset, or cause such owner to enforce such Holding Asset for the benefit of such member. Such parties shall otherwise cooperate and use all reasonable efforts to provide the economic and operational equivalent of an assignment or transfer of the Holding Asset or Holding Liability, as the case may be. Holding shall duly pay, perform or discharge, or cause the appropriate member of the Holding Group to duly pay, perform or discharge, from and after the date of the Transfers, each Holding Liability, including without limitation any Holding Liability referred to in the second sentence of this paragraph; provided, the foregoing provisions of this paragraph (e) do not affect Holding's obligation to assume all of the Holding Liabilities at the date of the Transfers and therefore duly pay, perform or discharge all of the Holding Liabilities from and after such time. (f) From and after the Distribution Date, each party shall promptly transfer or cause the members of its Group promptly to transfer to the other party or the appropriate member of the other party's Group, from time to time, any property held by any such party that pursuant to this Agreement is or is intended to be an Asset of the other party or a member of its Group. Without limiting the foregoing, funds received by a member of one Group upon the payment of accounts receivable that pursuant to this Agreement is or is intended to belong to a member of the other Group shall be transferred to the other Group by wire transfer not more than five business days after receipt of such payment. (g) Holding agrees that it will not, without the prior written consent of ITGI, take any action that attempts or purports to amend or modify any agreement, including any real property lease or sublease, to which JEFG is a party at or prior to the Transfers and from which (i) JEFG is not fully and unconditionally released at or prior to the Transfers and (ii) the Surviving Corporation (as the successor to JEFG pursuant to the Merger) is not fully and unconditionally released after the Merger. B-7 (h) Holding agrees to obtain and deliver to ITGI, for the benefit of ITGI one or more letters of credit in an aggregate undrawn face amount not less than the amount by which the aggregate unmitigated Residual Liabilities exceeds the Applicable Amount, consistent with the definitions and terms provided for under Section 7(n) of the Merger Agreement. Such letters of credit shall be issued by one or more nationally recognized financial institutions reasonably satisfactory to ITGI, be in form and substance reasonably satisfactory to ITGI and expire not earlier than 135 days after the date on which the related unmitigated Residual Liabilities terminate. Section 3.02. CONDUCT OF HOLDING AND JEFG PENDING DISTRIBUTION. (a) Prior to the Distribution Date, neither Holding nor JEFG shall, without the prior consent in writing of the other, make any public announcement concerning the Distribution and each party shall use its respective best efforts not to take any action which may prejudice or delay the consummation of the Distribution. (b) Prior to the Distribution Date, the business of Holding shall be operated for the sole benefit of JEFG as its sole stockholder. Section 3.03. FURTHER ASSURANCES AND CONSENTS. In addition to the actions specifically provided for elsewhere in this Agreement, each of the parties hereto will use its commercially reasonable efforts to (i) execute and deliver such further instruments and documents and take such other actions as any other party may reasonably request in order to effectuate the purposes of this Agreement and to carry out the terms hereof and (ii) take, or cause to be taken, all actions, and to do, or cause to be done, all things, reasonably necessary, proper or advisable under applicable laws, regulations and agreements or otherwise to consummate and make effective the transactions contemplated by this Agreement, including, without limitation, using its reasonable efforts to obtain any consents and approvals and to make any filings and applications necessary or desirable in order to consummate the transactions contemplated by this Agreement. ARTICLE IV INDEMNIFICATION Section 4.01. HOLDING INDEMNIFICATION OF THE ITGI GROUP. On and after the Distribution Date, Holding shall indemnify, defend and hold harmless each member of the ITGI Group, and each of their respective directors, officers, employees and agents (the "ITGI Indemnitees") from and against any and all claims, costs, damages, losses, liabilities and expenses (including, without limitation, reasonable expenses of investigation and reasonable attorney fees and expenses, but excluding consequential damages of the indemnified party, in connection with any and all Actions or threatened Actions) (collectively, "Indemnifiable Losses") incurred or suffered by any of the ITGI Indemnitees and arising out of, or due to or otherwise in connection with any of the Holding Liabilities or the failure of Holding or any member of the Holding Group to assume, pay, perform or otherwise discharge any of the Holding Liabilities. Section 4.02. ITGI INDEMNIFICATION OF THE HOLDING GROUP. On and after the Distribution Date, ITGI (as the successor to JEFG following the Merger) shall indemnify, defend and hold harmless each member of the Holding Group and each of their respective directors, officers, employees and agents (the "Holding Indemnitees") from and against any and all Indemnifiable Losses incurred or suffered by any of the Holding Indemnitees and arising out of, or due to or otherwise in connection with any of the ITGI Group Liabilities or the failure of ITGI or any member of the ITGI Group to pay, perform or otherwise discharge any of the ITGI Group Liabilities. Section 4.03. INSURANCE AND THIRD PARTY OBLIGATIONS. No insurer or any other third party shall be (a) entitled to a benefit it would not be entitled to receive in the absence of the foregoing B-8 indemnification provisions, (b) relieved of the responsibility to pay any claims to which it is obligated or (c) entitled to any subrogation rights with respect to any obligation hereunder. ARTICLE V HOLDING REPRESENTATIONS Section 5.01. HOLDING REPRESENTATIONS. Holding represents and warrants to JEFG as follows: (a) Organization, Etc. Holding is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite power and authority to own, lease and operate its properties and to carry on its business as it is now being conducted. Holding is a newly formed corporation that, since formation and the initial capitalization effected thereby, has not acquired, assumed or become contractually obligated to acquire or assume any assets or liabilities, except as set forth on Schedule 5.01(a) hereof. Since formation, Holding has not conducted any activity other than the execution and delivery of this Agreement and the Ancillary Agreements and activities coincident with the Transfers and the Distribution and incidental hereunder and under the Ancillary Agreements, and other than that which is contemplated hereby. (b) Authority of Holding. Holding has full corporate power and authority to execute, deliver and perform its obligations under this Agreement and each of the Ancillary Agreements and to effectuate the Transfers and consummate the Distribution. The execution, delivery and performance of this Agreement and each of the Ancillary Agreements and the consummation of the Transfers and the Distribution has been duly and validly authorized by the Board of Directors of Holding, and no other corporate proceedings on the part of Holding are necessary to consummate or authorize any of the Ancillary Agreements or to effectuate the Transfers and consummate the Distribution. Each of this Agreement and the Ancillary Agreements has been duly and validly executed and delivered by Holding and constitutes valid and binding agreements of Holding, enforceable against Holding in accordance with their respective terms. (c) No Consent. No filing or registration with, or permit, authorization, consent or approval of, or notification or disclosure (collectively, "Governmental Consents") to, any United States (federal, state or local) or foreign government, or governmental, regulatory or administrative authority, agency or commission, court or other body or any arbitral tribunal (each, a "Governmental Authority") or any other third party (collectively, "Consents") is required in connection with the execution, delivery and performance by Holding of this Agreement or any of the Ancillary Agreements or the consummation by Holding of the Transfers and the Distribution, except (i) the filing of the Form 10 under the Exchange Act and the effectiveness thereof under the Exchange Act, (ii) such consents, approvals, orders, permits, authorizations, registrations, declarations and filings as may be required under the Blue Sky laws of various states, (iii) the listing on the New York Stock Exchange of the Holding Common Stock in connection with the Distribution and (iv) as set forth in Schedule 5.01(c) hereof. (d) No Violation. Assuming that all Consents have been duly made or obtained as contemplated by Section 5.01(c), the execution, delivery and performance by Holding of this Agreement and the Ancillary Agreements and the consummation of the Transfers and the Distribution will not (i) violate any provision of the certificate of incorporation or bylaws of Holding, (ii) violate any statute, rule, regulation, order or decree of any Governmental Authority by which Holding or any of its assets may be bound or affected or (iii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation, acceleration, redemption or repurchase) under, any of the terms, conditions or provisions of (x) any note, bond, mortgage, indenture or deed of trust relating to indebtedness for borrowed money or (y) any license, lease or other agreement, instrument or obligation to which Holding is a party or by which it or any of its assets may be bound or affected. B-9 (e) Capitalization of Holding. All issued and outstanding shares of capital stock of Holding are held by JEFG as of the date hereof and are duly authorized and validly issued, fully paid, nonassessable and free of preemptive rights and respect thereto. Other than this Agreement and the transactions contemplated thereby and the awards contemplated by the Benefits Agreement or the Joint Proxy/Information Statement, there are no options, warrants, calls, subscriptions, or other rights, agreements or commitments obligating Holding to issue, transfer or sell any shares of capital stock of Holding or any other securities convertible into or evidencing the right to subscribe for any such shares. Prior to the date hereof, there has not been any issuance of capital stock of Holding other than to JEFG. ARTICLE VI INDEMNIFICATION PROCEDURES; CONTRIBUTION Section 6.01. NOTICE AND PAYMENT OF CLAIMS. If any ITGI or Holding Indemnitee (the "INDEMNIFIED PARTY") determines that it is or may be entitled to indemnification by a party (the "INDEMNIFYING PARTY") under Article IV (other than in connection with any Action or claim subject to Section 6.02), the Indemnified Party shall deliver to the Indemnifying Party a written notice specifying, to the extent reasonably practicable, the basis for its claim for indemnification and the amount for which the Indemnified Party reasonably believes it is entitled to be indemnified. After the Indemnifying Party shall have been notified of the amount for which the Indemnified Party seeks indemnification, the Indemnifying Party shall, within 90 days after receipt of such notice, pay the Indemnified Party such amount in cash or other immediately available funds (or reach agreement with the Indemnified Party as to a mutually agreeable alternative payment schedule) unless the Indemnifying Party objects to the claim for indemnification or the amount thereof. If the Indemnifying Party does not give the Indemnified Party written notice objecting to such claim and setting forth the grounds therefor within the same 90 day period, the Indemnifying Party shall be deemed to have acknowledged its liability for such claim and the Indemnified Party may exercise any and all of its rights under applicable law to collect such amount. Section 6.02. NOTICE AND DEFENSE OF THIRD-PARTY CLAIMS. Promptly following the earlier of (a) receipt of notice of the commencement by a third party of any Action against or otherwise involving any Indemnified Party or (b) receipt of information from a third party alleging the existence of a claim against an Indemnified Party, in either case, with respect to which indemnification may be sought pursuant to this Agreement (a "THIRD-PARTY CLAIM"), the Indemnified Party shall give the Indemnifying Party written notice thereof. The failure of the Indemnified Party to give notice as provided in this Section 6.02 shall not relieve the Indemnifying Party of its obligations under this Agreement, except to the extent that the Indemnifying Party is materially prejudiced by such failure to give notice. Within 90 days after receipt of such notice, the Indemnifying Party may by giving written notice thereof to the Indemnified Party, (a) acknowledge, as between the parties hereto, responsibility for, and at its option, elect to assume the defense of such Third-Party Claim at its sole cost and expense or (b) object to the claim of indemnification set forth in the notice delivered by the Indemnified Party pursuant to the first sentence of this Section 6.02; PROVIDED that if the Indemnifying Party does not within the same 90 day period give the Indemnified Party written notice objecting to such claim and setting forth the grounds therefor or electing to assume the defense, the Indemnifying Party shall be deemed to have acknowledged, as between the parties hereto, its responsibility for such Third-Party Claim. Any contest of a Third Party Claim as to which the Indemnifying Party has elected to assume the defense shall be conducted by attorneys employed by the Indemnifying Party and reasonably satisfactory to the Indemnified Party; PROVIDED that the Indemnified Party shall have the right to participate in such proceedings and to be represented by attorneys of its own choosing at the Indemnified Party's sole cost and expense. Notwithstanding the foregoing, (i) the Indemnifying Party shall not be entitled to assume the defense of any Third-Party Claim (and shall be liable to the Indemnified Party for the reasonable B-10 fees and expenses incurred by the Indemnified Party in defending such Third-Party Claim) if there are one or more legal defenses available only to the Indemnified Party that conflict, in one or more significant substantive respects, with those available to the Indemnifying Party with respect to such Third-Party Claim and (ii) if at any time after assuming the defense of a Third-Party Claim an Indemnifying Party shall fail to prosecute or shall withdraw from the defense of such Third-Party Claim, the Indemnified Party shall be entitled to resume the defense thereof with counsel selected by such Indemnified Party and the Indemnifying Party shall be liable for the reasonable fees and expenses of counsel incurred by the Indemnified Party in such defense. The Indemnifying Party may settle, compromise or discharge a Third-Party Claim, provided, the Indemnifying Party shall have obtained the prior written consent of the Indemnified Party, which consent shall not be unreasonably withheld. If, after receipt of notice of a Third-Party Claim, the Indemnifying Party does not undertake to defend such Third-Party Claim within 90 days of such notice, the Indemnified Party may, but shall have no obligation to, contest any lawsuit or action with respect to such Third-Party Claim and the Indemnifying Party shall be bound by the results obtained with respect thereto by the Indemnified Party. Indemnification shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or Indemnifiable Loss is incurred. The parties agree to render to each other such assistance as may reasonably be requested in order to ensure the proper and adequate defense of any Third-Party Claim. The remedies provided in this Article VI shall be cumulative and shall not preclude assertion by any Indemnified Party of any other rights or the seeking of any and all other remedies against any Indemnifying Party. Section 6.03. CONTRIBUTION. To the extent that any indemnification provided for in Section 4.01 or 4.02 is unavailable to an Indemnified Party or is insufficient in respect of any of the Indemnifiable Losses of such Indemnified Party, then the Indemnifying Party, in lieu of, or in addition to, indemnifying such Indemnified Party hereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Indemnifiable Losses (i) in such proportion as is appropriate to reflect the relative benefits received by such Indemnifying Party on the one hand and the Indemnified Party on the other hand from the transaction or other matter which resulted in the Indemnifiable Losses or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) but also the relative fault of the Indemnifying Party on the one hand and of the Indemnified Party on the other hand in connection with the action, inaction, statements or omissions that resulted from such Indemnifiable Losses as well as any other relevant equitable considerations. ARTICLE VII EMPLOYEE MATTERS Section 7.01. BENEFITS AGREEMENT. All matters relating to or arising out of any employee benefit, compensation or welfare arrangement in respect of any present and former employee of the ITGI Group or the Holding Group shall be governed by the Benefits Agreement, except as may be expressly stated herein. In the event of any inconsistency between the Benefits Agreement and this Agreement, the Benefits Agreement shall govern. ARTICLE VIII TAX MATTERS All matters relating to Taxes shall be governed exclusively by the Tax Agreement, except as may be expressly stated herein. In the event of any inconsistency between the Tax Agreement and this Agreement, the Tax Agreement shall govern. B-11 ARTICLE IX ACCOUNTING MATTERS Section 9.01. ACCOUNTING TREATMENT OF ASSETS TRANSFERRED. All transfers of Assets of JEFG to JEFCO or Holding pursuant to this Agreement shall constitute contributions by JEFG to the capital of JEFCO or Holding, as appropriate. ARTICLE X INFORMATION Section 10.01. PROVISION OF CORPORATE RECORDS. ITGI (as successor to JEFG pursuant to the Merger) and Holding shall arrange as soon as practicable following the Effective Time for the provision to the other of copies of any requested corporate documents (e.g. minute books, stock registers, stock certificates, documents of title, contracts, etc.) in its possession relating to the other or its business and affairs; provided, however, this Section 10.01 shall not create any obligation to retain documents beyond that which is required pursuant to such entity's records retention policies. JEFG and Holding agree that Holding shall retain control and custody of original copies of all corporate documents of JEFG relating to matters and events on or prior to the Effective Time. Section 10.02. ACCESS TO INFORMATION. From and after the Effective Time, ITGI (as successor to JEFG pursuant to the Merger) and Holding shall each afford the other and its accountants, counsel and other designated representatives reasonable access (including using reasonable efforts to give access to persons or firms possessing information) and duplicating rights during normal business hours to all records, books, contacts, instruments, computer data and other data and information in its possession relating to the business and affairs of the other, insofar as such access is reasonably required by the other including, without limitation, for audit, accounting and litigation purposes. Section 10.03. LITIGATION COOPERATION. ITGI (as successor to JEFG pursuant to the Merger) and Holding shall each use reasonable efforts to make available to the other, upon written request, its officers, directors, employees and agents as witnesses to the extent that such persons may reasonably be required in connection with any legal, administrative or other proceedings arising out of the business of the other prior to the Effective Time in which the requesting party may from time to time be involved. Section 10.04. REIMBURSEMENT. ITGI (as successor to JEFG pursuant to the Merger) and Holding, each providing copies of documents, information or witnesses under Sections 10.01, 10.02 or 10.03 to the other, shall be entitled to receive from the recipient, upon the presentation of invoices therefor, payment for all reasonable out-of-pocket costs and expenses as may be reasonably incurred in providing such information or witnesses. Section 10.05. RETENTION OF RECORDS. Except as otherwise required by law or agreed to in writing, each party shall, and shall cause the members of its Group to, retain all information relating to the other's business in accordance with the past practice of such party. Notwithstanding the foregoing, except as otherwise provided in the Tax Agreement, either party may destroy or otherwise dispose of any information at any time following the first anniversary of the Merger in accordance with the corporate record retention policy maintained by such party with respect to its own records. Section 10.06. CONFIDENTIALITY. Each party shall, and shall cause each member of its Group to, hold and cause its directors, officers, employees, agents, consultants and advisors to hold, in strict confidence all information concerning the other party (except to the extent that such information can be shown to have been (a) in the public domain through no fault of such party or (b) later lawfully acquired after the Distribution on a non-confidential basis from other sources not subject to a confidentiality obligation by the party to which it was furnished), and neither party shall release or disclose such information to any other person, except its auditors, attorneys, financial advisors, bankers and other B-12 consultants and advisors who shall be advised of and agree in writing to comply with the provisions of this Section 10.06. In the event that a party (the "RECEIVING PERSON") is requested pursuant to, or required by, applicable law, regulation, rule or by legal process to disclose any information regarding the other party (the "DISCLOSING PERSON"), the Receiving Person agrees that it will provide the Disclosing Person with prompt notice of such request or requirement in order to enable the Disclosing Person to seek an appropriate protective order or other remedy, to consult with the Receiving Person with respect to the Disclosing Person taking steps to resist or narrow the scope of such request or requirement, or to waive compliance, in whole or in part, with the terms of this Section 10.06. In any such event, the Receiving Person will disclose only that portion of any information regarding the Disclosing Party which the Receiving Person is advised by counsel is legally required and will use its reasonable best efforts to ensure that all such information that is so disclosed will be accorded confidential treatment. ARTICLE XI INTEREST ON PAYMENTS Except as otherwise expressly provided in this Agreement, all payments by one party to the other under this Agreement, any Intercompany Agreement or any Ancillary Agreement shall be paid, by wire transfer of immediately available funds to an account in the United States designated by the recipient, within 30 days after receipt of an invoice or other written request for payment setting forth the specific amount due and a description of the basis therefor in reasonable detail. Any amount remaining unpaid beyond its due date, including disputed amounts that are ultimately determined to be payable, shall bear interest at a floating rate of interest equal to 2.5% over the higher of the Federal funds rate or the London Interbank Offered Rate. ARTICLE XII MISCELLANEOUS Section 12.01. EXPENSES. The obligations of JEFG and ITGI under Section 7(d) ("Expenses") of the Merger Agreement shall survive (i) any termination of the Merger Agreement and (ii) the Effective Time of the Merger, with (x) Holding succeeding to the obligations of, and being credited for any Expense payments made prior to the Effective Time by, JEFG thereunder and (y) ITGI (as the successor to JEFG following the Merger) succeeding to the obligations of, and being credited for any Expense payments made by, ITGI thereunder. Section 12.02. NOTICES. All notices and communications under this Agreement after the Distribution Date shall be in writing and any communication or delivery hereunder shall be deemed to have been duly given when received addressed as follows: If to JEFG or any of its successors, to: Investment Technology Group, Inc. 380 Madison Avenue, 4th Floor New York, New York 10017 Attention: Chief Financial Officer With a copy to: Cahill Gordon & Reindel 80 Pine Street New York, New York 10005 Attention: Immanuel Kohn, Esq. B-13 If to Holding, to: Jefferies Group, Inc. JEF Holding Company, Inc. 11100 Santa Monica Boulevard, 11th Floor Los Angeles, California 90025 Attention: Chief Financial Officer With a copy to: Morgan, Lewis & Bockius LLP 1701 Market Street Philadelphia, PA 19103 Attention: Brian J. Lynch, Esq. Such notices shall be deemed received (i) as of the date of delivery by hand delivery, (ii) one business day after such notice is given to a national overnight delivery service or (iii) five business days after placed in the United States mail, provided such mail is sent by certified mail with return receipt requested. Either party may, by written notice so delivered to the other party, change the address to which delivery of any notice shall thereafter be made. Section 12.03. AMENDMENT AND WAIVER. This Agreement may not be altered or amended, nor may rights hereunder be waived, except by an instrument in writing executed by the party or parties to be charged with such amendment or waiver. No waiver of any terms, provision or condition of or failure to exercise or delay in exercising any rights or remedies under this Agreement, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such term, provision, condition, right or remedy or as a waiver of any other term, provision or condition of this Agreement. Section 12.04. ENTIRE AGREEMENT. This Agreement, together with the Merger Agreement and the Ancillary Agreements, constitutes the entire understanding of the parties hereto with respect to the subject matter hereof, superseding all negotiations, prior discussions and prior agreements and understandings relating to such subject matter. To the extent that the provisions of this Agreement are inconsistent with the provisions of any Ancillary Agreement, the provisions of such Ancillary Agreement shall prevail. Section 12.05. PARTIES IN INTEREST. Neither of the parties hereto may assign its rights or delegate any of its duties under this Agreement without the prior written consent of each other party. This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective successors and permitted assigns. Nothing contained in this Agreement, express or implied, is intended to confer any benefits, rights or remedies under Articles IV, V and VI hereof upon any person or entity other than members of the ITGI Group and the Holding Group and the ITGI Indemnitees and the Holding Indemnitees and their respective successors and permitted assigns. Section 12.06. DISPUTES. (a) Resolution of any and all disputes arising from or in connection with this Agreement, whether based on contract, tort, statute or otherwise, including, but not limited to, disputes in connection with claims by third parties (collectively, "DISPUTES"), shall be subject to the provisions of this Section 12.06; provided, however, that nothing contained herein shall preclude either party from seeking or obtaining (i) injunctive relief or (ii) equitable or other judicial relief to enforce the provisions hereof or to preserve the status quo pending resolution of Disputes hereunder. (b) Either party may give the other party written notice of any Dispute not resolved in the normal course of business. The parties shall thereupon attempt in good faith to resolve any Dispute promptly by negotiation between executives who have authority to settle the controversy and who are at a higher B-14 level of management than the persons with direct responsibility for administration of this Agreement. Within 20 days after delivery of the notice, the receiving party shall submit to the other a written response. The notice and the response shall include a statement of such party's position and a summary of arguments supporting that position and the name and title of the executive who will represent that party and of any other person who will accompany such executive. Within 45 days after delivery of the first notice, the executives of both parties shall meet at a mutually acceptable time and place, and thereafter as often as they reasonably deem necessary, to attempt to resolve the Dispute. All reasonable requests for information made by one party to the other will be honored. (c) If the Dispute has not been resolved by negotiation within 60 days of the first party's notice, or if the parties failed to meet within 45 days, the parties shall endeavor to settle the Dispute by mediation under the then current Commercial Mediation Rules of the American Arbitration Association. (d) If the Dispute has not been resolved within 180 days after delivery of the first notice under Section 12.06(b), either party may commence any litigation or other procedure allowed by law. Section 12.07. SURVIVAL. The rights and obligations under this Agreement shall survive the Distribution and Merger and any sale or other transfer by any member of Holding Group and/or the ITGI Group or any assignment or sale by them of any Assets or Liabilities. Section 12.08. SEVERABILITY. The provisions of this Agreement are severable and should any provision hereof be void, voidable or unenforceable under any applicable law, such provision shall not affect or invalidate any other provision of this Agreement, which shall continue to govern the relative rights and duties of the parties as though such void, voidable or unenforceable provision were not a part hereof. Section 12.09. GOVERNING LAW. This Agreement shall be construed in accordance with, and governed by, the laws of the State of New York, without regard to the conflicts of law rules of such state. Section 12.10. COUNTERPARTS. This Agreement may be executed in one or more counterparts each of which shall be deemed an original instrument, but all of which together shall constitute but one and the same Agreement. B-15 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the day and year first above written. JEFFERIES GROUP, INC. By /s/ CLARENCE T. SCHMITZ ----------------------------------------- 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
B-16 EX-10.4 7 EXHIBIT 10.4 TAX SHARING AND INDEMNIFICATION AGREEMENT THIS AGREEMENT is entered into as of the 17th day of March, 1999, by and among JEFFERIES GROUP, INC., a Delaware corporation ("JEFG"), JEF HOLDING COMPANY, INC., a Delaware corporation ("HOLDING"), and INVESTMENT TECHNOLOGY GROUP, INC., a Delaware corporation ("ITGI"). WITNESSETH: WHEREAS, the JEFG Board of Directors has determined that it is appropriate and desirable to distribute all of the shares of HOLDING common stock that it owns to the holders of JEFG common stock (the "Distribution") in a transaction intended to qualify as a tax-free distribution for federal income tax purposes under Section 355 of the Internal Revenue Code of 1986, as amended (the "Code"); and WHEREAS, JEFG has applied to the Internal Revenue Service for a private letter ruling (the "Ruling") to the effect that the Distribution will qualify as a tax-free distribution for federal income tax purposes under Section 355 of the Code; and WHEREAS, ITGI will be the principal subsidiary of JEFG immediately after the Distribution; and WHEREAS, it is intended that ITGI will merge with and into JEFG following the Distribution (the "Merger"); and WHEREAS, it is intended that HOLDING and its subsidiaries will accordingly cease to be members of the affiliated group (within the meaning of Section 1504(a) of the Code) of which JEFG is the common parent, effective on or about [ , 1999] (the "Effective Date"); and WHEREAS, the parties desire to provide for and agree upon the allocation of liabilities for taxes with respect to the parties for the taxable year that includes the Effective Date (the "1999 Taxable Year"); and WHEREAS, the parties hereto also desire to provide for the preparation and filing of tax returns along with the payment of taxes shown due and payable thereon with respect to the 1999 Taxable Year, the treatment of carrybacks and adjustments with respect to the parties for the 1999 Taxable Year, and any other matters related to taxes with respect to the 1999 Taxable Year, including indemnification for any taxes imposed as a result of certain actions by the parties that are inconsistent with the treatment of the Distribution as tax-free; and WHEREAS, the Tax Sharing Agreement entered into as of January 1, 1994 by and between JEFG and ITGI has been terminated in its existing form and the Amended and Restated Tax Sharing Agreement dated as of March 17, 1999 by and among JEFG, HOLDING and ITGI (the "Prior Agreement") (attached hereto as Exhibit A) will apply to all tax years ending before the 1999 Taxable Year, NOW, THEREFORE, in consideration of the foregoing and of the mutual promises, covenants and conditions hereinafter contained, the parties hereto agree as follows: 1. DEFINITIONS The following terms as used in this Agreement shall have the meanings set forth below: (a) "Additional Amount" shall mean the amount determined under Section 3 hereof. D-1 (b) "Consolidated Return" shall mean a consolidated Federal income tax return filed pursuant to Section 1501 of the Code. (c) "Consolidated Taxable Income" shall mean the consolidated Federal taxable income of the JEFG Group for any taxable year for which the JEFG Group files a Consolidated Return. (d) "Consolidated Tax Liability" shall mean the consolidated Federal income tax liability of the JEFG Group for any taxable year for which the JEFG Group files a Consolidated Return. (e) "IRS" shall mean the Internal Revenue Service. (f) "JEFG Group" shall mean the affiliated group of corporations of which JEFG is the common parent. In the event that the merger takes place as contemplated and JEFG changes its name to Investment Technology Group, Inc. ("New ITGI"), the term "JEFG Group" shall include the affiliated group of corporations of which New ITGI is the common parent. (g) "Loss Amount" shall mean the amount determined under Section 2 hereof. (h) "Member" shall mean each includible member of the JEFG Group. (i) "Regulations" shall mean the Treasury Regulations as in effect from time to time. (j) "Separate Return Tax Liability" shall mean the Federal income tax liability of a Member and its subsidiaries computed as if they had filed a separate Federal income tax return for the applicable taxable year with the modifications set forth in Section 1.1552-1(a)(2)(ii) of the Regulations. If the computation of a Member's Separate Return Tax Liability as provided herein does not result in a positive amount, such Member's Separate Return Tax Liability shall be deemed to be zero. For purposes of this definition, ITGI's Separate Return Tax Liability shall include JEFG's Separate Return Tax Liability for the period after the Distribution. (k) "Separate Taxable Income" shall mean an amount determined with respect to a Member and its subsidiaries in accordance with Section 1.1502-12 of the Regulations with the adjustments contained in Section 1.1552-1(a)(1)(ii) of the Regulations. If the computation of a Member's Separate Taxable Income as provided herein does not result in a positive amount, such Member's Separate Taxable Income shall be deemed to be zero. For purposes of this definition, ITGI's Separate Taxable Income shall include JEFG's Separate Taxable Income for the period after the Distribution. (l) "Separate Tax Liability" shall mean the amount determined under Section 2 hereof. 2. SEPARATE TAX LIABILITY (a) The Separate Tax Liability of ITGI shall be the amount set forth in paragraph (b) hereof as modified by paragraphs (c) and (d) hereof. (b) The amount referred to in this paragraph (b) shall be an amount equal to that portion of the Consolidated Tax Liability for such taxable year that the Separate Taxable Income of ITGI for such taxable year bears to the sum of the Separate Taxable Incomes of all Members for such taxable year; PROVIDED, HOWEVER, that such amount shall not exceed the Consolidated Tax Liability for such taxable year. (c) The amount computed pursuant to paragraph (b) above shall be increased by 100% of the excess, if any, of the ITGI Separate Return Tax Liability for such taxable year over such amount (the "Loss Amount"). (d) Any federal, state or local income tax deduction resulting from (i) the payment to the JEFG Pension Plan described in Section 3.03(a) of the Benefits Agreement (or from benefits distributions related thereto), or (ii) the payment of benefits under the JEFG CAP Plan to JEFG D-2 employees (each as defined in the Benefits Agreement), shall be for the benefit of ITGI (and the JEFG Group after the Distribution) and not for the benefit of HOLDING. 3. ADDITIONAL AMOUNT The Additional Amount shall be equal to 100% of the amount, if any, by which the Consolidated Tax Liability for the 1999 Taxable Year has been decreased by reason of the inclusion of ITGI and its subsidiaries in the JEFG Group for the 1999 Taxable Year. 4. PAYMENTS For the 1999 Taxable Year, payment of (i) the Separate Tax Liability of ITGI by ITGI (less any Loss Amount paid to HOLDING) to JEFG (or to the IRS after the Merger), (ii) the excess of the Consolidated Tax Liability over the amount described in (i) (the "Holding Liability") by HOLDING to JEFG, (iii) the Additional Amount, if any, by HOLDING to ITGI and (iv) the Loss Amount, if any, by ITGI to HOLDING with respect to such taxable year shall be made as follows: (a) On or before the 15th day of the fourth month of such taxable year, JEFG shall cause KPMG LLP to estimate the Separate Tax Liability (less any Loss Amount to be paid to HOLDING), the Holding Liability, the Additional Amount and the Loss Amount for such taxable year. (b) ITGI shall pay to JEFG (or to the IRS after the Merger), HOLDING shall pay to JEFG, HOLDING shall pay to ITGI and ITGI shall pay to HOLDING on or before each of the due dates for JEFG to make payment of estimates of JEFG Group's Federal income taxes for such taxable year one-fourth of the amount estimated pursuant to paragraph (a) above (collectively, the "Estimated Amounts"). If, after paying any such installment of the Estimated Amounts, KPMG LLP makes a new estimate, the amount of each remaining installment (if any) shall be the amount which would have been payable if the new estimate had been made when the first estimate for the taxable year was made, increased or decreased, as applicable, by the amount computed by dividing: (i) the difference between (A) the amount of the Estimated Amounts required to be paid before the date on which the new estimate is made, and (B) the amount of the Estimated Amounts which would have been required to be paid before such date if the new estimate had been made when the first estimate was made, by (ii) the number of installments remaining to be paid on or after the date on which the new estimate is made. (c) If, after the end of the 1999 Taxable Year, at the time of the filing of an application for extension of the time to file the tax return for the 1999 Taxable Year, if so filed, it is determined that the estimated Separate Tax Liability of ITGI (less any Loss Amount paid to HOLDING), Holding Liability, Additional Amount or the Loss Amount for such taxable period exceeds the aggregate amount paid pursuant to subparagraph (b) above with respect to such taxable period, then such excess shall be paid on or before the later of (i) the 15th day of the third month after the end of such taxable period, and (ii) the date on which such excess is finally determined, which shall be no later than 30 days after the extension for such taxable period is filed. (d) If, after the end of the 1999 Taxable Year, it is determined that the actual Separate Tax Liability of ITGI (less any Loss Amount paid to HOLDING), Holding Liability, Additional Amount or Loss Amount for such taxable period exceeds the aggregate amount paid pursuant to subparagraph (b) and (c) above with respect to such taxable period, then such excess shall be paid on or before the later of (i) the 15th day of the third month after the end of such taxable period, and (ii) the date on which such excess is finally determined, which shall be no later than 30 days after the Consolidated Return for such taxable period is filed. D-3 (e) If, after the end of the 1999 Taxable Year, it is determined that the amount paid pursuant to subparagraphs (b), (c) or (d) above with respect to such taxable period exceeds the actual Separate Tax Liability of ITGI (less any Loss Amount paid to HOLDING), Holding Liability, Additional Amount or Loss Amount for such taxable period, then such excess shall be paid on or before the later of (i) the 15th day of the third month after the end of such taxable period, and (ii) the date on which such excess is finally determined, which shall be no later than 30 days after the Consolidated Return for such taxable period is filed. 5. CARRYBACKS (a) If the JEFG Group has a consolidated unused investment credit, a consolidated unused foreign tax credit, a consolidated excess charitable contribution, a consolidated net capital loss or a consolidated net operating loss, as such terms defined in the Regulations (a "Consolidated Excess Amount") for any taxable year, the portion of such Consolidated Excess Amount which is attributable to a Member (the "Separate Excess Amount") shall be computed in accordance with Section 1.1502-79 of the Regulations. Any consolidated unused research and experimentation credit of the JEFG Group shall be treated and calculated in a manner consistent with the foregoing sentence, and shall be included in the term "Consolidated Excess Amount." (b) If such Consolidated Excess Amount originates in the 1999 Taxable Year, it will be carried back to a prior taxable year of the JEFG Group and the effect of such carryback will be determined in accordance with the Prior Agreement. (c) Payment of any amount due under this Section 5 shall be made on the date that a credit or refund is allowed with respect to the taxable year to which such payment relates. 6. SUBSEQUENT ADJUSTMENTS AND PROCEDURAL MATTERS (a) If any adjustments (other than adjustments made pursuant to Section 5 hereof) are made to the income, gains, losses, deductions or credits of the JEFG Group for the 1999 Taxable Year, whether by reason of the filing of an amended return or a claim for refund with respect to such taxable year or an audit with respect to such taxable year by the IRS, the amounts due under this Agreement for such taxable year shall be redetermined by taking into account such adjustments. If, as a result of such redetermination, any amounts due under this Agreement shall differ from the amounts previously paid, then payment of such difference shall be made (a) in the case of an adjustment resulting in a credit or refund, on the date on which such credit or refund is allowed with respect to such adjustment or (b) in the case of an adjustment resulting in the assertion of a deficiency, on the date on which such deficiency is paid. Any amounts due under this paragraph (a) shall include any interest attributable thereto computed in accordance with Sections 6601 or 6611 of the Code, as the case may be, and any penalties or additional amounts which may be imposed. (b) If any tax audit is undertaken by any tax authority, HOLDING shall initially have primary control of any dealings with such tax authority. Upon a determination that such audit could give rise to an increase in either HOLDING's or ITGI's liability under this Agreement, then HOLDING or ITGI, as the case may be, shall be given primary control of any dealings with such tax authority; provided, however, that the other party will be consulted with respect to any matters which could result in an increase in the other party's liability under this Agreement. (c) If any adjustment or deficiency is proposed, asserted or assessed by any tax authority which would give rise to an increase in either HOLDING's or ITGI's liability under this Agreement, then HOLDING or ITGI, as the case may be, shall have the primary right to contest, compromise or settle any such adjustment or deficiency; provided, however, that the other party will be consulted with respect to any matters which could result in an increase in such other party's D-4 liability under this Agreement. If such adjustment or deficiency would give rise to an increase in both HOLDING's and ITGI's liability under this Agreement, then HOLDING and ITGI shall jointly have the right to contest, compromise or settle any such adjustment or deficiency. 7. CARRYBACKS FROM SEPARATE RETURN YEARS This Agreement shall have no application to the carryback of a net operating loss or credit from a separate return year (within the meaning of Section 1.1502-1(e) of the Treasury Regulations) to any taxable year of JEFG Group, and no recomputation or other payment shall be made in respect of such carryback. 8. FILING OF CALIFORNIA SINGLE RETURNS HOLDING may file or cause to be filed a single return for California franchise and income tax purposes ("California Single Return") for those affiliated corporations that are includible in a California combined report (the "JEFG Combined Group") for the 1999 Taxable Year if the JEFG Combined Group is required or permitted to file such a return. To the extent that it qualifies under California law, JEFG shall be the "key corporation" with respect to any such California Single Return and, to the extent that it does not so qualify, shall designate a "key corporation" from among the members of the JEFG Combined Group that does so qualify. Each party to this Agreement hereby consents to any such designation on behalf of itself and any direct or indirect subsidiary thereof. With regard to any income year with respect to which the JEFG Combined Group files, or it is reasonably anticipated that the JEFG Combined Group will file, a California Single Return for the 1999 Taxable Year, the estimated and final California tax liability of each member of the JEFG Combined Group shall be determined, to the extent permitted by California law, in a manner consistent with the principles set forth in this Agreement, and payments of the estimated and final tax liability so determined shall be made to the key corporation at the time that payments of corresponding Federal payments are due. 9. FILING OF STATE CONSOLIDATED RETURNS To the extent permitted or required by the applicable laws of any state other than California, JEFG and its affiliated corporations (the "state consolidated group"), at the election of HOLDING in its sole discretion, may join for the 1999 Taxable Year in the filing of a single, combined or consolidated franchise or income tax return ("state consolidated return") with any such corporation required to file a franchise or income tax return in such state for such taxable year. With regard to the 1999 Taxable Year with respect to which the state consolidated group files, or it is reasonably anticipated will file, a state consolidated return which includes ITGI, the estimated and final state tax liability of each member of the state consolidated group shall be determined, to the extent permitted by law of the state in which the return is to be filed, in a manner consistent with the principles set forth in this Agreement, and payments of the estimated and final tax liability so determined shall be made to the member of the state consolidated group responsible for payment of the state consolidated group's tax liability at the time that payments of corresponding Federal payments are due. 10. LIABILITY FOR TAKING CERTAIN ACTIONS INCONSISTENT WITH THE TREATMENT OF THE DISTRIBUTION AS TAX-FREE. (a) Notwithstanding any other provision of this Agreement (other than in this Section 10), (i) in the event that any party, or employee, officer, or director of such party, takes any action inconsistent with, or fails to take any action required by, or in accordance with, the treatment of the Distribution as tax-free, then such party shall be liable for the inconsistent action or failure to take required action of it or its employees, officers and directors and shall indemnify and hold the other parties harmless from any tax liabilities, including the costs thereof, resulting from such D-5 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 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 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 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 (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. "JEFG" JEFFERIES GROUP, INC., a Delaware corporation By: /s/ JERRY M. GLUCK ----------------------------------------- Jerry M. Gluck, General Counsel "ITGI" INVESTMENT TECHNOLOGY GROUP, INC. a Delaware corporation By: /s/ RAYMOND KILLIAN ----------------------------------------- Raymond Killian, President/CEO "HOLDING" JEF HOLDING COMPANY, INC. A Delaware corporation By: /s/ JERRY M. GLUCK ----------------------------------------- Jerry M. Gluck, General Counsel
D-10 EX-10.5 8 EXHIBIT 10.5 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 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. -2- (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 -3- 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. -4- (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 -5- 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 -6- (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 -7- 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. -8- (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 -9- 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 -10- 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 -11- 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 -12- 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. -13- (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: -14- 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. -15- 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 -16- EX-10.6 9 EXHIBIT 10.6 BENEFITS AGREEMENT DATED AS OF MARCH 17, 1999 BETWEEN JEFFERIES GROUP, INC. AND JEF HOLDING COMPANY, INC. BENEFITS AGREEMENT BENEFITS AGREEMENT ("Agreement") dated as of March 17, 1999 by and between Jefferies Group, Inc., a Delaware corporation ("JEFG"), and JEF Holding Company, Inc. a Delaware corporation and a wholly owned subsidiary of JEFG ("Holding"). RECITALS WHEREAS, the Board of Directors of JEFG has approved the business transactions pursuant to which all the assets, businesses and Liabilities (as defined below) of Investment Technology Group, Inc., a Delaware corporation and approximately 80.5% owned subsidiary of JEFG ("ITGI"), and ITGI's subsidiaries will be separated from all other assets, businesses and Liabilities of JEFG, on the terms and subject to the conditions set forth herein and in the Ancillary Agreements (as defined below); WHEREAS, concurrently herewith, JEFG and ITGI are entering into an Agreement and Plan of Merger (the "MERGER AGREEMENT"), pursuant to which (x) ITGI will merge (the "MERGER") with and into JEFG and (y) all outstanding shares of common stock, par value $0.01 per share, of ITGI (the "ITGI COMMON STOCK") will be canceled or converted into the right to receive shares of common stock, par value $0.01 per share, of JEFG (the "JEFG COMMON STOCK") in the manner set forth in the Merger Agreement; WHEREAS, prior to the Distribution (defined below) and Merger (x) JEFG will transfer to Holding (or to JEFCO, defined herein, prior to the time JEFCO becomes a subsidiary of Holding in connection with the Contribution, defined below), and Holding and JEFCO will accept from JEFG, all of the Assets of JEFG other than JEFG's ownership interest in capital stock of ITGI (the "CONTRIBUTION"), and JEFG will assign to Holding (or to JEFCO, as appropriate), and Holding and JEFCO will assume from JEFG, all of the Holding Liabilities (as defined herein) (individually, the "ASSUMPTION" and together with the Contribution, collectively, the "TRANSFERS"), and (y) following the Transfers and the satisfaction of all conditions set forth in Section 2.02 of this Agreement, all of the common stock of Holding, par value $0.0001 per share ("HOLDING COMMON STOCK"), will be distributed (the "DISTRIBUTION") to JEFG's stockholders at the rate of one share of Holding Common Stock for each share of JEFG Common Stock outstanding as of April 20, 1999, or such other date as is designated by JEFG's Board of Directors as the record date for determining the stockholders of JEFG entitled to receive the Distribution (the "Record Date"); WHEREAS, (i) pursuant to the Merger, the name of Jefferies Group, Inc. (as the surviving corporate entity in the Merger) will be changed to Investment Technology Group, Inc. and (ii) following the consummation of the Distribution and the Merger, the name of JEF Holding Company, Inc. will be changed to Jefferies Group, Inc.; WHEREAS, it is intended that the Distribution not be taxable to JEFG or its stockholders pursuant to Section 355 of the Internal Revenue Code of 1986, as amended (the "Code"); WHEREAS, prior to the Distribution, ITGI will declare and, subject to the approval and adoption of the Merger Agreement and the Merger by the stockholders of JEFG and ITGI and the satisfaction or waiver of all other conditions to the Merger as set forth in the Merger Agreement, pay a cash dividend in an amount equal to $4.00 per share to all holders of ITGI Common Stock, including JEFG (the "SPECIAL ITGI CASH DIVIDEND"); C-1 NOW, THEREFORE, in consideration of the foregoing premises and the mutual agreements and covenants contained in this Agreement, the parties hereby agree as follows: ARTICLE I DEFINITIONS Section 1.01. DEFINITIONS. Capitalized terms used herein without definition have the meanings given to them in the Distribution Agreement. As used herein, the following terms have the following meanings: "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "HOLDING EMPLOYEE" means (i) any person who was an employee immediately prior to the Effective Time of any member of the JEFG Group (other than any member of the ITGI Group), including any such employee who is absent from work at the Effective Time on account of sick leave, short-term or long-term disability or leave of absence, but excluding any such employee designated by Holding and ITGI as remaining an employee of a member of the JEFG Group following the Effective Time; (ii) any employee of any member of the Holding Group (whether before or after the Effective Time); and (iii) any former employee of any member of the JEFG Group (other than any member of the ITGI Group). "HOLDING GROUP" means Holding and its subsidiaries. "ITGI GROUP" means ITGI and its subsidiaries. "JEFG EMPLOYEE" means (i) any employee of any member of the ITGI Group, including any such employee who is absent from work on account of sick leave, short-term or long-term disability or leave of absence; (ii) any person who was an employee immediately prior to the Effective Time of any other member of the JEFG Group and who is designated by Holding and ITGI as remaining an employee of a member of the JEFG Group following the Effective Time; and (iii) any former employee of any member of the ITGI Group. "JEFG GROUP" means JEFG and its subsidiaries, excluding any member of the Holding Group. ARTICLE II EMPLOYEES AND ALLOCATION OF LIABILITIES Section 2.01. ALLOCATION OF EMPLOYEE LIABILITIES. (a) As of the Effective Time, Holding shall assume, retain and be liable for all wages, salaries, welfare, pension, incentive compensation and other employee-related liabilities and obligations ("Employee Liabilities") with respect to Holding Employees, except as specifically provided otherwise in this Agreement. JEFG shall assume, retain and be liable for Employee Liabilities with respect to JEFG Employees, except as specifically provided otherwise in this Agreement. Section 2.02. OFFER OF EMPLOYMENT; BENEFIT PLAN COVERAGE. (a) Holding shall offer all Holding Employees (other than those described in clause (iii) of the definition thereof) employment with the Holding Group as of the Effective Time. As of the Effective Time, all such Holding Employees shall cease to be employees of the JEFG Group. (b) Holding Employees shall not continue to be participants in benefit plans maintained by the JEFG Group on or after the Effective Time and, instead, shall be eligible to participate in applicable Holding plans, as determined by Holding, as of the Effective Time. Holding shall treat service of each Holding Employee with the JEFG Group before the Effective Time as if such service had been with C-2 Holding for purposes of determining eligibility to participate, eligibility for benefits, benefit forms and vesting under plans maintained by Holding. Section 2.03. ADMINISTRATION. Holding and JEFG shall each make its appropriate employees and data regarding employee benefit coverage available to the other at such reasonable times as may be necessary for the proper administration by the other of any and all matters relating to employee benefits and worker's compensation claims affecting its employees. Prior to the Effective Time and for any period of time during which Holding is administering any employee benefit plans for the benefit of JEFG Employees, ITGI shall continue to pay to Holding such amounts for administrative services as it was paying for such purpose as of the date of execution of this Agreement. ARTICLE III PROFIT SHARING, EMPLOYEE STOCK OWNERSHIP AND PENSION PLANS Section 3.01. PROFIT SHARING PLAN. (a) As of the Effective Time, the Jefferies Group, Inc. Employees' Profit Sharing Plan (the "JEFG PSP") shall be transferred to and maintained by, and all liability relating thereto shall be assumed by, Holding. Prior to the Effective Time, JEFG will amend the JEFG PSP to fully vest the accounts of all participants who are active employees on December 31, 1998 as of that date and to provide for the cessation of further benefit accruals in the plan by JEFG Employees as of December 31, 1998. JEFG shall reimburse Holding for any contribution made subsequent to the end of the plan year of the JEFG PSP ending November 30, 1998 to the extent that such contribution is allocated to JEFG Employees, including any such contribution allocated to JEFG Employees for the month of December of 1998. Such reimbursement by JEFG shall be made to Holding no later than 30 days following the date on which Holding makes the contribution to the JEFG PSP for the year ending November 30, 1998. Contributions to the JEFG PSP for the plan year ending November 30, 1998 shall be based on calendar year 1998 combined profits of Holdings and ITGI. (b) As soon as practical following the date the final contribution for the plan year ending November 30, 1998 is made to the JEFG PSP, and except as provided below, assets of the JEFG PSP equal to the aggregate account balances of the JEFG Employees under the JEFG PSP (including contributions accrued through December 31, 1998) shall be transferred to, at ITGI's election, (x) a defined contribution plan and trust (the "ITG PSP") maintained by a member of the JEFG Group intended to be qualified under Sections 401 and 501 of the Code and providing for salary reduction contributions pursuant to Section 401(k) of the Code or (y) the ITGI ESOP (as defined below). The transfer to the ITGI PSP shall be made in cash or notes evidencing plan loans to JEFG Employees and the transfer to the ITGI ESOP shall be made in JEFG common stock or Holdings common stock. Any outstanding balances of plan loans to JEFG Employees shall be transferred with the underlying accounts. The account balances of the JEFG Employees shall be valued as of the date immediately preceding the date on which the transfer is made, which value shall include the earnings, gains and losses, appreciation and depreciation of the investment funds in which the accounts are invested through the date immediately preceding the date on which the transfer is made. Notwithstanding any provision of this Agreement to the contrary, Holding and the JEFG PSP shall remain responsible for providing any unpaid benefits accrued under the JEFG PSP for former JEFG Employees who have outstanding plan loans from the JEFG PSP as of the date of transfer of the account balances, and neither JEFG nor ITGI shall be responsible for any administrative expenses relating thereto. (c) Pending the transfer of assets to the ITG PSP, Holding will administer the JEFG PSP in accordance with the terms of the plan, ERISA and the Code, and will make distributions to JEFG Employees on the basis of their employment status with the JEFG Group. In addition, pending the transfer of assets to the ITG PSP, JEFG Employees shall have the ability to direct the investment of C-3 their accounts under the JEFG PSP in the same manner as they had immediately prior to the Effective Time. Loans from the JEFG PSP to JEFG Employees which are outstanding during the period from January 1, 1999 through the date of transfer of assets to the ITG PSP shall be serviced by having ITGI make applicable payroll deductions which shall be forwarded to Holding, as plan administrator, for payment to the JEFG PSP. As soon as practicable after the date hereof, Holding will provide to ITGI a list of such plan loans to JEFG Employees outstanding as of December 15, 1998, including the outstanding loan balances as of December 31, 1998 and a list of the remaining scheduled loan repayments for each such JEFG Employee. Holding and ITGI shall jointly administer the loan provisions of the JEFG PSP as applied to the JEFG Employees for the period from January 1, 1999 through the date of transfer of assets to the ITG PSP. Section 3.02. EMPLOYEE STOCK OWNERSHIP PLAN. (a) As of the Effective Time, the Jefferies Group, Inc. Employee Stock Ownership Plan (the "JEFG ESOP") shall be transferred to and maintained by, and all liability relating thereto shall be assumed by, Holding. Prior to the Effective Time, JEFG will amend the JEFG ESOP to provide that all participants who are active employees on December 31, 1998 shall be fully vested in their accounts as of the Effective Time. Participation in the JEFG ESOP by JEFG Employees shall continue until the Effective Time. (b) Following the date of consummation of the Transactions, the parties hereto currently expect that the Holding Common Stock held by the JEFG ESOP for the account of JEFG Employees will be exchanged to the extent possible for JEFG Common Stock held for the account of Holding Employees and that the exchange will occur within approximately ninety days after the Effective Time. Unless the parties hereto mutually agree otherwise, the price at which any such exchange shall occur shall be based upon the average respective closing prices of JEFG Common Stock and Holding Common Stock for the ten trading days ending on the date before the day on which the exchange occurs. Any remaining JEFG Common Stock held in the accounts of Holding Employees shall be sold at such time or times as is deemed prudent under ERISA and the cash proceeds received from such sale shall be credited to such accounts. (c) As soon as practical following the Effective Time, an employee stock ownership plan and trust (the "ITG ESOP") shall be established by a member of the JEFG Group intended to be qualified under Sections 401 and 501 of the Code and assets of the JEFG ESOP equal to the aggregate account balances of the JEFG Employees under the JEFG ESOP shall be transferred to the ITG ESOP. The transfer shall be made in cash, Holding Common Stock and JEFG Common Stock according to the investment of each JEFG Employee's account as of the date on which the transfer is made. The account balances of the JEFG Employees shall be valued as of the date on which the transfer is made, which value shall include the earnings, gains and losses, appreciation and depreciation of the investments in which the accounts are invested through the date on which the transfer is made. Pending the transfer of the assets to the ITGI ESOP, Holding will administer the JEFG ESOP in accordance with the terms of the plan, ERISA and the Code, and will make distributions to JEFG Employees at such time as their employment might terminate with the JEFG Group. Section 3.03. PENSION PLAN. As of the Effective Time, the Jefferies Group, Inc. Employees Pension Plan (the "JEFG Pension Plan") shall be transferred to and maintained by, and all liability relating thereto shall be assumed by, Holding. JEFG Employees shall participate in the JEFG Pension Plan and accrue benefits under the plan through February 15, 1999. Prior to the Effective Time, JEFG will amend the JEFG Pension Plan in the manner set forth in Exhibit A. Holding shall submit the JEFG Pension Plan, as amended as set forth in Exhibit A, to the Internal Revenue Service for a determination as to its qualification under Section 401(a) of the Code as soon as possible following the date hereof, but in no event later than March 15, 1999. As soon as practicable following receipt by Holding of a favorable determination letter from the Internal Revenue Service with respect to the C-4 JEFG Pension Plan, as amended in the manner set forth in Exhibit A and including the provision for lump sum distributions to JEFG Employees, JEFG Employees shall be allowed to receive distributions, including lump sum distributions, of their entire benefit under the JEFG Pension Plan in accordance with the terms of the JEFG Pension Plan, as amended as set forth in Exhibit A. Following the Effective Time and the receipt by Holdings of the favorable Internal Revenue Service determination letter referred to above and approximately two weeks prior the date benefits are expected to be payable to all JEFG Employees from the JEFG Pension Plan, JEFG will pay to the JEFG Pension Plan an amount, computed as set forth below, in order to pay for the underfunding of the JEFG Pension Plan allocable to JEFG Employees for benefits accrued through December 31, 1998. First, the lump sum equivalent of all benefits accrued as of January 1, 1999 under the JEFG Pension Plan, as amended as set forth in Exhibit A, will be calculated for all participants using a discount rate equal to 5.25%, compounded annually (the GATT interest rate for November, 1998) and the mortality table described in Rev. Rul. 95-6. The "JEFG Liability Percentage" will then be determined by dividing the aggregate lump sum value of the accrued benefits, as so computed as of January 1, 1999, of the JEFG Employees by the total of the aggregate lump sum value of all such accrued benefits as so computed for all participants. The amount of the payment which JEFG is required to make to the JEFG Pension Plan pursuant to this Section 3.03(a) will be the total of the following: (i) the total benefit due the JEFG Employees, calculated as of the date of actual distribution (using the GATT interest rate in effect for November of the plan year immediately prior to the year benefits are actually distributed and the mortality table described in Rev. Rul. 95-6), less (ii) the actual value of the assets of the JEFG Pension Plan as of the last day of the month in which the determination letter referred to above is received from the Internal Revenue Service (as such value is reported by the trustee of the JEFG Pension Plan) multiplied by the JEFG Liability Percentage, less (iii) the amount of the benefits accrued by JEFG Employees between January 1, 1999 and February 15, 1999, determined as set forth in clause (i) above, plus (iv) interest for 30 days on such resulting amount (the clause (i) amount less the amounts of clauses (ii) and (iii)) at the GATT interest rate in effect at the time of such calculation. Holding shall administer the payment of such distributions in accordance with the terms of the JEFG Pension Plan, ERISA and the Code. The entire accrued benefit under the JEFG Pension Plan of each JEFG Employee who is actively employed on December 31, 1998 shall be fully vested as of December 31, 1998. In the event the Internal Revenue Service, as a condition to issuing a favorable determination letter, requires Holding to revise the amendment set forth in Exhibit A so as to modify the distribution provisions to JEFG Employees, including any modification that would eliminate the payment of lump sum distributions to JEFG Employees prior to the time they separate from service with JEFG, distributions shall be made to JEFG Employees only in accordance with the JEFG Pension Plan as it may be amended to secure the favorable determination letter. Section 3.04. ASSUMPTION OF LIABILITIES UPON TRANSFER OF PLAN ASSETS; FILINGS. (a) Effective on the date of the transfer of assets of the JEFG PSP and the JEFG ESOP to the ITG PSP and/or the ITG ESOP, (i) JEFG and its applicable benefit plan shall assume all liabilities to pay benefits in connection with the transferred assets, and (ii) Holding shall have no further liability to pay benefits with respect to the assets and liabilities that are transferred. On and after the date of such transfer, the JEFG Group shall have no liability with respect to Holding's pension, employee stock ownership and profit sharing plans, and Holding shall have no liability with respect to JEFG's employee stock ownership and profit sharing plans. (b) Holding and JEFG shall make the appropriate filings required under the Code or ERISA in connection with the transfers described in this Article III in a timely manner. The parties agree that the transfers described in Sections 3.01 and 3.02 shall be made in accordance with Section 414(l) of the Code. (c) JEFG shall submit to the Internal Revenue Service requests for favorable determination letters with respect to the tax-qualified status of the ITG PSP, if adopted, and the ITG ESOP as soon as C-5 practicable after the Effective Time, and JEFG shall make such amendments to the plans as may be required by the Internal Revenue Service in order for JEFG to receive favorable determination letters with respect to the plans. ARTICLE IV STOCK OPTION AND OTHER EQUITY-BASED COMPENSATION PLANS Section 4.01. EMPLOYEE STOCK OPTION PLANS. Holding shall be responsible for all liabilities relating to stock options granted by JEFG prior to the Effective Time. Section 4.02. CAP AND EMPLOYEE STOCK PURCHASE PLANS. (a) JEFG shall accelerate vesting in the matching contributions to its Employee Stock Purchase Plan and distribute the JEFG Common Stock in this plan to participants prior to the Effective Time. Holding shall be responsible for all liability under the JEFG Employee Stock Purchase Plan. (b) The disposition of the nonqualified deferred compensation plan of JEFG (the "Capital Accumulation Plan for Key Employees") shall be as described in the Unanimous Written Consent of the Board of Directors of JEFG adopted as of January 13, 1999 (a copy of which is attached as Exhibit B). ARTICLE V OTHER EMPLOYEE PLANS Section 5.01. WELFARE BENEFIT PLANS. (a) As of the Effective Time, Holding shall assume all liability under and with respect to all welfare benefit plans maintained by JEFG, including, without limitation, medical, health, disability, accident, life insurance, death, dental and other benefit plans or arrangements and such plans shall be transferred to, and maintained by, Holding. Effective January 1, 1999, ITGI established welfare benefit plans for eligible JEFG Employees, which provide medical, health, disability, accident, life insurance, death, dental or other benefits. (b) (i) JEFG shall be liable for all employee health (including, without limitation, medical and dental), life insurance (including, without limitation, disability waiver of premium claims and any other life insurance disability claims) and long-term disability claims, and any other welfare benefit claims, and any expenses related thereto, ("Welfare Claims") that are incurred on or after January 1, 1999 with respect to JEFG Employees and their beneficiaries and dependents. (ii) Holding shall be liable for all Welfare Claims that are incurred on, after or before the Effective Time with respect to Holding Employees and their beneficiaries and dependents. (iii) If either party pays any welfare benefit claims that are a liability of the other party, the responsible party shall reimburse the paying party for all such payments. (c) For purposes of this Section 5.01, a health benefit claim is incurred when the medical services are rendered, and a life insurance claim is incurred when the covered person dies. A claim for a hospital admission shall be deemed to have been incurred on the date of admission to the hospital and shall continue for the duration of that period of hospital confinement; costs for all services provided during that period of hospital confinement shall be included in the claim. A long-term disability claim shall be deemed to have been incurred on the date the condition causing the disability rendered the employee disabled, as determined by the committee or plan administrator making the determination; costs for all long-term disability benefits relating to the claim shall be included in the claim. C-6 (d) Holding shall be liable for any health care continuation obligations under Section 4980B of the Code and Section 601 through 608 of ERISA with respect to Holding Employees and former Holding Employees and persons who are "qualified beneficiaries" (as that term is used in Section 4980B of the Code) of such employees. (e) The Distribution shall not be considered an event entitling any employee to salary continuation or other severance benefits. Section 5.02. VACATION PAY AND SIMILAR ITEMS. Holding shall assume or retain liability for all unpaid vacation pay, sick pay and personal leave accrued by Holding Employees as of the Effective Time. JEFG shall assume or retain liability for all unpaid vacation pay, sick pay and personal leave accrued by JEFG Employees as of the Effective Time. ARTICLE VI HOLDING REPRESENTATIONS Holding represents to JEFG as follows: Section 6.01. ANNEX A hereto contains a true and complete list of "all employee benefit plans" as defined in Section 3(3) of ERlSA, and each other plan, arrangement or policy relating to stock options, stock purchases, compensation, deferred compensation, severance, fringe benefits and other employee benefits which are maintained or contributed to by any member of the JEFG Group or as to which any member of the JEFG Group has any direct or indirect, actual or contingent liability, other than plans, arrangements or policies maintained by the ITGI Group (such JEFG Group plans, arrangements and policies, the "Benefit Plans"), and copies of such plans, arrangements, policies and related relevant materials have been made available to ITGI. Section 6.02. No member of the Holding Group or JEFG Group has incurred, or is reasonably likely to incur, any material liability under Title IV of ERISA (other than for PBGC insurance premiums, all of which have been paid when due). All contributions to any "employee benefit plan" (as defined in Section 3(3) of ERISA) required to be made by any member of the JEFG Group or the Holding Group in accordance with the terms of such plan and, when applicable, Section 302 of ERISA or Section 412 if the Code, have been timely made. Section 6.03. Each member of the JEFG Group and each Benefit Plan are in compliance in all material respects with the applicable provisions of ERISA and the Code. Each Benefit Plan intended to qualify under Section 401 of the Code is so qualified. With respect to all Benefit Plans, there are no audits, investigations or claims pending or, to the knowledge of Holding, threatened (other than routine claims for benefits). There have been no nonexempt prohibited transactions under the Code or ERISA with respect to any Benefit Plans. With respect to all Benefit Plans that are welfare plans (as defined in ERISA Section 3(1)), such plans have complied in all material respects with the COBRA continuation coverage requirements of Code Section 4980B. No member of the JEFG Group has any liability with respect to any plans providing benefits with respect to employees employed outside the United States. Section 6.04. The consummation of the transactions contemplated by the Distribution Agreement and this Agreement will not result in JEFG being liable to any individual for severance pay. ARTICLE VII INDEMNIFICATION Section 7.01. HOLDING INDEMNIFICATION OF THE JEFG GROUP. On or after the Effective Time, Holding shall indemnify, defend and hold harmless each member of the JEFG Group, and each of their respective directors, officers, employees and agents (the "JEFG Indemnitees") from and against any and all claims, costs, damages, losses, liabilities and expenses (including, without limitation, C-7 reasonable expenses of investigation and reasonable attorneys fees and expenses in connection with any and all Actions or threatened Actions) (collectively, "Indemnifiable Losses") incurred or suffered by any of the JEFG Indemnitees and arising out of, or due to or otherwise in connection with (x) any of the employee benefit liabilities and obligations assumed or retained by Holding pursuant to this Agreement or (y) the failure of Holding or any member of the Holding Group to pay, perform or otherwise discharge, any of the employee benefit liabilities and obligations assumed or retained, and representations and agreements made, by Holding pursuant to this Agreement. Section 7.02. JEFG INDEMNIFICATION OF HOLDING. On and after the Effective Time, JEFG shall indemnify, defend and hold harmless Holding, and each of its respective directors, officers, employees and agents (the "Holding Indemnitees") from and against any and all Indemnifiable Losses incurred or suffered by any of the Holding Indemnitees and arising out of, or due to or otherwise in connection with (x) any of the employee benefit liabilities and obligations assumed or retained by JEFG pursuant to the Agreement or (y) the failure of JEFG or any member of the JEFG Group to pay, perform or otherwise discharge, any of the employee benefit liabilities and obligations assumed or retained, and agreements made, by JEFG pursuant to this Agreement. Section 7.03. INSURANCE AND THIRD PARTY OBLIGATIONS. No insurer or any other third party shall be (a) entitled to a benefit it would not be entitled to receive in the absence of the foregoing indemnification provisions, (b) relieved of the responsibility to pay any claims to which it is obligated or (c) entitled to any subrogation rights with respect to any obligation hereunder. ARTICLE VIII INDEMNIFICATION PROCEDURES Section 8.01. NOTICE AND PAYMENT OF CLAIMS. If any JEFG or Holding Indemnitee (the Indemnified Party") determines that it is or may be entitled to indemnification by a party (the "Indemnifying Party") under Article VII (other than in connection with any Action or claim subject to Section 8.02), the Indemnified Party shall deliver to the Indemnifying Party a written notice specifying, to the extent reasonably practicable, the basis for its claim for indemnification and the amount for which the Indemnified Party reasonably believes it is entitled to be indemnified. After the Indemnifying Party shall been notified of the amount for which the Indemnified Party seeks indemnification, the Indemnifying Party shall, within 90 days after receipt of such notice, pay the Indemnified Party such amount in cash or other immediately available funds (or reach agreement with the Indemnified Party as to a mutually agreeable alternative payment schedule) unless the Indemnifying Party objects to the claim for indemnification or the amount thereof. If the Indemnifying Party does not give the Indemnified Party written notice objecting to such claim and setting forth the grounds therefor within the same 90 day period, the Indemnifying Party shall be deemed to have acknowledged its liability for such claim and the Indemnified Party may exercise any and all of its rights under applicable law to collect such amount. Section 8.02. NOTICE AND DEFENSE OF THIRD-PARTY CLAIMS. Promptly following the earlier of (a) receipt of notice of the commencement by a third party of any Action against or otherwise involving any Indemnified Party or (b) receipt of information from a third party alleging the existence of a claim against an Indemnified Party, in either case, with respect to which indemnification may be sought pursuant to this Agreement (a "Third-Party Claim"), the Indemnified Party shall give the Indemnifying Party written notice thereof. The failure of the Indemnified Party to give notice as provided in this Section 8.02 shall not relieve the Indemnifying Party of its obligations under this Agreement, except to the extent that the Indemnifying Party is prejudiced by such failure to give notice. Within 90 days after receipt of such notice, the Indemnifying Party may (a) by giving written notice thereof to the Indemnified Party, acknowledge liability for and at its option elect to assume the defense of such Third-Party Claim at its sole cost and expense or (b) object to the claim of indemnification set forth in C-8 the notice delivered by the Indemnified Party pursuant to the first sentence of this Section 8.02; provided that if the Indemnifying Party does not within the same 90 day period give the Indemnified Party written notice objecting to such claim and setting forth the grounds therefor or electing to assume the defense, the Indemnifying Party shall be deemed to have acknowledged, as between the parties hereto, its liability for such Third-Party Claim. Any contest of a Third Party Claim as to which the Indemnifying Party has elected to assume the defense shall be conducted by attorneys employed by the Indemnifying Party and reasonably satisfactory to the Indemnified Party; provided that the Indemnified Party shall have the right to participate in such proceedings and to be represented by attorneys of its own choosing at the Indemnified Party's sole cost and expense. Notwithstanding the foregoing, (i) the Indemnifying Party shall not be entitled to assume the defense of any Third-Party Claim (and shall be liable to the Indemnified Party for the reasonable fees and expenses incurred by the Indemnified Party in defending such Third-Party Claim) if there are one or more legal defenses available only to the Indemnified Party that conflict, in one or more significant substantive respects, with those available to the Indemnifying Party with respect to such Third-Party Claim and (ii) if at any time after assuming the defense of a Third-Party Claim an Indemnifying Party shall fail to prosecute or shall withdraw from the defense of such Third-Party Claim, the Indemnified Party shall be entitled to resume the defense thereof with counsel selected by such Indemnified Party and the Indemnifying Party shall be liable for the reasonable fees and expenses of counsel incurred by the Indemnified Party in such defense. The Indemnifying Party may settle, compromise or discharge a Third-Party Claim, provided, the Indemnifying Party shall have obtained the prior written consent of the Indemnified Party, which consent shall not be unreasonably withheld. If, after receipt of notice of a Third-Party Claim, the Indemnifying Party does not undertake to defend such Third-Party Claim within 90 days of such notice, the Indemnified Party may, but shall have no obligation to, contest any lawsuit or action with respect to such Third-Party Claim and the Indemnifying Party shall be bound by the results obtained with respect thereto by the Indemnified Party. Indemnification shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or Indemnifiable Loss is incurred. The parties agree to render to each other such assistance as may reasonably be requested in order to ensure the proper and adequate defense of any Third-Party Claim. The remedies provided in this Article VIII shall be cumulative and shall not preclude assertion by any Indemnified Party of any other rights or the seeking of any and all other remedies against any Indemnifying Party. Section 8.03. CONTRIBUTION. To the extent that any indemnification provided for in Section 7.01 or 7.02 is unavailable to an Indemnified Party or is insufficient in respect of any of the Indemnifiable Losses of such Indemnified Party, then the Indemnifying Party, in lieu of, or in addition to, indemnifying such Indemnified Party hereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Indemnifiable Losses (i) in such proportion as is appropriate to reflect the relative benefits received by such Indemnifying Party on the one hand and the Indemnified Party on the other hand from the transaction or other matter which resulted in the Indemnifiable Losses or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) but also the relative fault of the Indemnifying Party on the one hand and of the Indemnified Party on the other hand in connection with the action, inaction, statements or omissions that resulted from such Indemnifiable Losses as well as any other relevant equitable considerations. ARTICLE IX MISCELLANEOUS Section 9.01. NOTICES. All notices and communications under this Agreement shall be in writing and any communication or delivery hereunder shall be deemed to have been duly given when received C-9 addressed as follows:If to JEFG, to: Investment Technology Group, Inc. 380 Madison Avenue, 4th Floor New York, New York 10017 Attention: Chief Financial Officer With a copy to: Cahill Gordon & Reindel 80 Pine Street New York, New York 10005 Attention: Immanuel Kohn, Esq. If to Holding, to: Jefferies Group, Inc. JEF Holding Company, Inc. 11100 Santa Monica Boulevard, 11th Floor Los Angeles, California 90025 Attention: Chief Financial Officer With a copy to: Morgan, Lewis & Bockius LLP 1701 Market Street Philadelphia, PA 19103 Attention: Brian J. Lynch, Esq. Such notices shall be deemed received (i) as of the date of delivery by hand delivery, (ii) one business day after such notice is given to a national overnight delivery service or (iii) five business days after placed in the United States mail, provided such mail is sent by certified mail with return receipt requested. Either party may, by written notice so delivered to the other party, change the address to which delivery of any notice shall thereafter be made. Section 9.02. AMENDMENT AND WAIVER. This Agreement may not be altered or amended, nor may rights hereunder be waived, except by an instrument in writing executed by the party or parties to be charged with such amendment or waiver and by ITGI. No waiver of any terms, provision or condition of or failure to exercise or delay in exercising any rights or remedies under this Agreement, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such term, provision, condition, right or remedy or as a waiver of any other term, provision or condition of this Agreement. Section 9.03. ENTIRE AGREEMENT. This Agreement, together with the Distribution Agreement, constitutes the entire understanding of the parties hereto with respect to the subject matter hereof, superseding all negotiations, prior discussions and prior agreements and understandings relating to such subject matter. To the extent that the provisions of this Agreement are inconsistent with the provisions of the Distribution Agreement, the provisions of this Agreement shall prevail. Section 9.04. PARTIES IN INTEREST. Neither of the parties hereto may assign its rights or delegate any of its duties under this Agreement without the prior written consent of each other party and of ITGI. This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and C-10 their respective successors and permitted assigns. Nothing contained in this Agreement, express or implied, is intended to confer any benefits, rights or remedies upon any person or entity other than members of the JEFG Group and Holding, and the JEFG Indemnitees and Holding Indemnitees and their respective successors and assigns under Articles VII and VIII hereof. Section 9.05. FURTHER ASSURANCES AND CONSENTS. In addition to the actions specifically provided for elsewhere in this Agreement, each of the parties hereto will use its reasonable efforts to (i) execute and deliver such further instruments and documents and take such other actions as any other party may reasonably request in order to effectuate the purposes of this Agreement and to carry out the terms hereof and (ii) take, or cause to be taken, all actions, and to do, or cause to be done, all things, reasonably necessary, proper or advisable under applicable laws, regulations and agreements or otherwise to consummate and make effective the transactions contemplated by this Agreement, including, without limitation, using its reasonable efforts to obtain any consents and approvals and to make any filings and applications necessary or desirable in order to consummate the transactions contemplated by this Agreement. Section 9.06. SEVERABILITY. The provisions of this Agreement are severable and should any provision hereof be void, voidable or unenforceable under any applicable law, such provision shall not affect or invalidate any other provision of this Agreement, which shall continue to govern the relative rights and duties of the parties as though such void, voidable or unenforceable provision were not part hereof. Section 9.07. EXPRESS THIRD-PARTY BENEFICIARY. Prior to the Merger, ITGI is an express third party beneficiary of this Agreement and shall be entitled to enforce the provisions hereof as if a party hereto. Section 9.08. GOVERNING LAW. This Agreement shall be construed in accordance with, and governed by, the laws of the State of New York, without regard to the conflicts of law rules of such state. Section 9.09. COUNTERPARTS. This Agreement may be executed in one or more counterparts each of which shall be deemed an original instrument, but all of which together shall constitute but one and the same Agreement. Section 9.10. DISPUTES. Resolution of any and all disputes arising from or in connection with this Agreement, whether based on contract, tort, statute or otherwise, including, but not limited to, disputes in connection with claims by third parties shall be exclusively governed by and settled in accordance with provisions identical to those set forth in Section 11.10 of the Distribution Agreement, which Section is hereby incorporated by this reference. Section 9.11. Holding will provide to ITGI, as soon as practicable following its request, any information reasonably needed by ITGI relating to any of the employee benefit plans referred to in this Agreement. In addition, as soon as practicable following the Effective Time Holding will provide to ITGI copies of all domestic relations orders received with respect to JEFG Employees in connection with the JEFG ESOP, the JEFG PSP and the JEFG Pension Plan. IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the day and year first above written. JEFFERIES GROUP, INC. BY /s/ Clarence T. Schmitz -------------------------------------- Clarence T. Schmitz, Executive Vice President and CFO JEF HOLDING COMPANY, INC. BY /s/ Jerry M. Gluck -------------------------------------- Jerry M. Gluck, Secretary and General Counsel C-11 EX-10.7 10 EXHIBIT 10.7 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" 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 - 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 - 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 - shall charge each of the Introduced Accounts such commissions, mark-ups, charges, and expenses as the Introducing Broker directs, in writing; provided, however, that such commissions, mark-ups, charges, and expenses shall be implemented (i) only to the extent they are within the usual and normal capabilities of the Clearing Broker's data processing and operations systems, and (ii) only after such reasonable time as the Clearing Broker may deem necessary to avoid disruption of its normal operating capabilities. Further, the Introducing Broker shall be responsible for all costs, if any, associated with any modifications to the Clearing Broker's systems and procedures which may be necessary to accommodate the Introducing Broker. III. PROCEDURES FOR INTRODUCED ACCOUNTS A. At the time of the opening of each Introduced Account, the Introducing Broker shall supply to the Clearing Broker a new account form on such forms as the Clearing Broker will supply to the Introducing Broker (unless otherwise mutually agreed by the parties) and shall supply any other additional orsupplementary documentation or information that the Clearing Broker may in its sole discretion request the Introducing Broker to obtain from the Customer, including, but not limited to, a cash account agreement on a form approved by the Clearing Broker ("Cash Account Agreement"), and all other documents that the Clearing Broker initially supplied to the Customer. If applicable, the Introducing Broker shall furnish the Clearing Broker with appropriate Alert and/or SID references for the Customer and the Clearing Broker will update such information when updates are received from Alert and/or SID. At the time of the opening of Introduced Accounts that are margin accounts, the Introducing Broker shall furnish the Clearing Broker with executed customer agreements, hypothecation and rehypothecation agreements, and consents to loans of securities on forms to be provided by the clearing broker (collectively, the "Margin Agreement"). If any Introduced Account has been opened without the Clearing Broker having previously received the foregoing information or documents, failure of the Clearing Broker to receive such information or documents shall not be deemed to be a waiver of the information or documentation requirements set forth herein. With respect to each Introduced Account that is a proprietary account, an executed Margin Agreement shall be furnished to the Clearing Broker. In addition, the terms of such Cash Account Agreement or Margin Agreement, as amended from time to time, are incorporated by reference herein. Upon the request of the Clearing Broker, the Introducing Broker shall furnish the Clearing Broker with any other additional or supplementary documents and agreements executed by the Introduced Account on forms supplied by the Clearing Broker that the Clearing Broker may require in connection with the opening, operating or maintaining of Introduced Accounts. The Clearing Broker may, at its option, mail Cash Account Agreements, Margin Agreements or other documentation directly to the Introduced Accounts upon notification by the Introducing Broker. The Introducing Broker shall promptly provide the Clearing Broker with basic data and copies of documents relating to each of the Introduced Accounts, including, but not limited to, copies of records of any receipts of the Introduced Accounts' funds or securities received directly by the Introducing Broker, as shall be necessary for the Clearing Broker to discharge its service obligations hereunder. The Clearing Broker shall provide, upon request, any documentation and agreements related to the opening and maintenance of any Introduced Accounts. - 5 - 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 - 6 - 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 - 7 - 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. - 8 - 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 - 9 - 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. - 10 - 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, - 11 - 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); - 12 - 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. - 13 - 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) - 14 - 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 - 15 - 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. - 16 - X. TERMINATION A. Notwithstanding any provision of this Agreement, the following events or occurrences shall constitute an Event of Default under this Agreement: 1. Either party hereto shall fail to perform or observe any term, covenant, or condition to be performed hereunder (including, but not limited to, any representation, warranty, or covenant relating to net capital requirements) and such failure shall continue to be unremedied for a period of ten (10) days after receipt of written notice from the nondefaulting party to the defaulting party specifying the failure and demanding that the same be remedied; or 2. Any representation or warranty made by either party hereto shall prove to be incorrect at any time in any material respect; or 3. A receiver, liquidator, or trustee of either party hereto or of any property held by either party, is appointed by court order and such order remains in effect for more than 30 days; or either party is adjudicated bankrupt or insolvent; or a substantial amount of property of either party is sequestered by court order and such order remains in effect for more than 30 days; or a petition is filed against either party under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect, and is not dismissed within 30 days after such filings; or 4. Either party hereto files a petition in voluntary bankruptcy or seeks relief under any provision of any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect, or consents to the filing of any petition against it under any such law; or 5. Either party hereto makes an assignment for the benefit of its creditors, or admits in writing its inability to pay its debts generally as they become due, or consents to the appointment of a receiver, trustee or liquidator of either party, or of any property held by either party; or 6. Either party hereto is enjoined, disabled, suspended, prohibited, or otherwise unable to engage in the securities business as a result of any administrative or judicial proceeding or action by the SEC, any state securities law administrator, any National Securities Exchange, or any self-regulatory organization having jurisdiction over that party. B. Upon the occurrence of any such Event of Default, the nondefaulting party may, at its option, by notice to the defaulting party declare that this Agreement shall be thereby terminated and such termination shall be effective as of the date such notice has been communicated to the defaulting party, If the Introducing Broker defaults, the Clearing Broker shall have sole discretion to determine what orders, if any, it shall accept for any Introduced Account, and shall in addition to all rights it has under this Agreement, have all rights granted to it under the Cash Account Agreement and Margin - 17 - Agreement incorporated by reference herein. In such event, the Clearing Broker shall be entitled, upon the consent of the Customer, to accept instructions directly from the Customer. C. This Agreement may be canceled by either of the parties hereto upon 180 days' written notice to the other, provided, however, that the first date such written notice may be given is January 1, 2000. D. This Agreement shall terminate automatically on the effective date of termination of the Execution Agreement between the Introducing Broker and W & D, Inc. without any further action by either party hereto. E. Upon any termination of this Agreement for any reason whatsoever, the Supplemental Account Agreement between the Clearing Broker and the Introducing Broker relating to the Introducing Broker's use of Optimark services shall terminate automatically without any further action by either party hereto. XI. MISCELLANEOUS A. This Agreement supersedes any previous agreement and may be modified only by a writing signed by both parties to this Agreement. Such modification shall not be deemed to be a cancellation of this Agreement. B. This Agreement shall be submitted to and/or approved by any National Securities Exchange, or other regulatory and self-regulatory bodies vested with the authority to review and/or approve this Agreement or any amendment or modifications hereof. In the event of any such disapproval, the parties hereto agree to bargain in good faith to achieve the requisite approval. C. Any dispute or controversy between the Introducing Broker and the Clearing Broker relating to or arising out of their relationship or this Agreement shall be settled by arbitration before and under the Code of Arbitration Procedures of the NASD, unless the transaction which gave rise to such dispute or controversy was effected in another exchange or market which provides arbitration facilities, in which case it shall be settled by arbitration under such facilities. D. This Agreement shall be binding upon all successors, assigns or transferees of both parties hereto, irrespective of any change with regard to the name of or the personnel of the Introducing Broker or the Clearing Broker. Any assignment of this Agreement shall be subject to the requisite review and/or approval of any regulatory or self-regulatory agency or body whose review and/or approval must be obtained prior to the effectiveness and validity of such assignment. No assignment of this Agreement by the Introducing Broker shall be valid unless the Clearing Broker consents to such an assignment in writing. Any assignment by the Clearing Broker to any subsidiary that it may create or acquire or controlled directly or indirectly by the Clearing Broker will be deemed valid and enforceable in the absence of any consent from the Introducing Broker. Neither this Agreement nor any operation hereunder is intended to be, shall not be deemed to be, and shall not be treated as a general - 18 - or limited partnership, association or joint venture or agency relationship between the Introducing Broker and the Clearing Broker. E. The construction and effect of every provision of this Agreement, the rights of the parties hereunder and any questions arising out of the Agreement, shall be subject to the statutory and common law of the State of New York without reference to the conflict of law provisions thereof. F. The headings preceding the text, articles, and sections hereof have been inserted for convenience and reference only and shall not be construed to affect the meaning, construction, or effect of this Agreement. G. This Agreement shall cover only the types of services set forth herein and is in no way intended nor shall it be construed to bestow upon the Introducing Broker any special treatment regarding any other arrangements, agreements or understandings that presently exist or which may hereafter exist between the Introducing Broker and the Clearing Broker and any affiliate or the Clearing Broker. The Introducing Broker shall be under no obligation whatsoever to deal with the Clearing Broker or any of its subsidiaries or any companies controlled directly or indirectly by or affiliated with the Clearing Broker, in any capacity other than as set forth in this Agreement. Similarly, the Clearing Broker shall be under no obligation whatsoever to deal with the Introducing Broker or any of its affiliates in any capacity other than as set forth in this Agreement. H. If any provision or condition of this Agreement shall be held to be invalid or unenforceable by any court, or regulatory or self-regulatory agency or body, such invalidity or unenforceability shall attach only to such provision or condition. The validity of the remaining provisions and conditions shall not be affected thereby and this Agreement shall be carried out as if any such invalid or unenforceable provision or condition were not contained herein. I. The enumeration herein of specific remedies shall not be exclusive of any other remedies. Any delay or failure by any party to this Agreement to exercise any right, power, remedy or privilege herein contained, or now or hereafter existing under any applicable statute or law, shall not be construed to be a waiver of such right, power, remedy or privilege or to limit the exercise of such right, power, remedy or privilege. No single, partial or other exercise of any such right, power, remedy or privilege shall preclude the further exercise thereof or the exercise of any other right, power, remedy or privilege. J. All notices, consents, directions, approvals, restrictions, requests, or other communications required or permitted to be delivered hereunder shall be given to the parties hereto, effective upon delivery, as follows: If to the Clearing Broker: Jefferies & Company, Inc. 11100 Santa Monica Boulevard 11th Floor Los Angeles, CA 90025 - 19 - Attention: Jerry M. Gluck, Esq. If to the Introducing Broker: ITG Inc. 380 Madison Avenue 4th Floor New York, NY 10017 Attention: Timothy H. Hosking Either party may change its address for notice purposes by giving written notice pursuant to registered mail of the new address to the other party. Termination shall not affect any of the rights and liabilities of the parties hereof incurred before the date of receipt of such notice of termination. K. The Clearing Broker shall not be liable for any loss caused, directly or indirectly, by government restrictions, exchange or market rulings, suspension of trading, war, strikes or other conditions beyond the control of the Clearing Broker. In the event that any communications network, data processing system, or computer system used by the Clearing Broker or by the Introducing Broker, whether or not owned by the Clearing Broker, is rendered inoperable, the Clearing Broker shall not be liable to the Introducing Broker for any loss, liability, claim, damage or expense resulting, either directly or indirectly, therefrom. L. The Clearing Broker shall have the right to investigate, or arrange for an appropriate party to investigate, the Introducing Broker's credit. Nothing in this paragraph shall be construed to relieve the Introducing Broker of its obligation to oversee its financial integrity. M. Without the prior written consent of the Clearing Broker, the Introducing Broker will not during the period of this Agreement and for one year following its termination, hire or attempt to hire any person who is employed by the Clearing Broker or whose employment with the Clearing Broker terminated within the one-year period prior to the termination of this Agreement. Made and executed at New York, New York, on the date first hereinabove set forth. ITG INC. JEFFERIES & COMPANY, INC. By: /S/ JOHN R. MACDONALD By: /S/ CLARENCE T. SCHMITZ ------------------------------ ------------------------------ John R. MacDonald . Clarence T. Schmitz Senior Vice President Executive Vice President - 20 - EX-10.8 11 EXHIBIT 10.8 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 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 EX-10.9 12 EXHIBIT 10.9 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 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; (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. 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. 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 EX-21 13 EXHIBIT 21 EXHIBIT 21 LIST OF SUBSIDIARIES
NAME OF SUBSIDIARY STATE/COUNTRY OF INCORPORATION/ORGANIZATION - ------------------ -------------------------------------------- Jefferies & Company, Inc. Delaware Jefferies International Limited England Jefferies Pacific Limited Hong Kong Jefferies Analytical Trading Group Inc. Delaware JEF Investment Company Delaware
EX-27 14 EX-27
BD THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION AND THE CONSOLIDATED STATEMENTS OF EARNINGS AS OF DECEMBER 31, 1998 AND FOR THE YEAR THEN ENDED AND THE NOTES THERETO, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS FILED IN THE 1998 JEF HOLDING COMPANY, INC. FORM 10 FILING. 1,000 U.S. DOLLARS YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 1 55,581 183,859 5,066 1,922,691 100,797 20,524 2,617,864 21,000 243,808 5,061 1,580,811 39,365 149,387 0 0 234 334,541 2,617,864 177,189 91,024 190,870 126,651 0 75,153 321,943 59,193 59,193 0 0 69,682 3.12 2.96
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