UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended June 30, 2006

 

 

or

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the transition period from              to            

 

Commission File Number: 000-52048

Cowen Group, Inc.

(Exact name of registrant as specified in its charter)

Delaware

84-1702964

(State or other jurisdiction of incorporation or

(I.R.S. Employer Identification No.)

organization)

 

 

 

1221 Avenue of the Americas

 

New York, New York

10020

(Address of principal executive offices)

(Zip Code)

 

(646) 562-1000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. o Yes   x No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o

Accelerated filer o

Non-accelerated filer x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes   x No

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of July 23, 2006 there were 15,000,000 shares of the registrant’s common stock outstanding.

 

 




 

Table of Contents

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION

 

 

1. Unaudited Condensed Combined Financial Statements

 

 

 

Unaudited Condensed Combined Statements of Financial Condition

 

 

 

Unaudited Condensed Combined Statements of Operations

 

 

 

Unaudited Condensed Combined Statements of Cash Flows

 

 

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

 

 

 

Note 1 - Formation of Cowen Group, Inc. and Basis of Presentation

 

 

 

 

Note 2 - Summary of Significant Accounting Policies

 

 

 

 

Note 3 - Recent Accounting Pronouncements

 

 

 

 

Note 4 - Exchange Memberships

 

 

 

 

Note 5 - Commitments, Contingencies and Guarantees

 

 

 

 

Note 6 - Related Party Transactions

 

 

 

 

Note 7 - Stock-based Compensation

 

 

 

 

Note 8 - Regulatory Requirements

 

 

 

 

Note 9 - Subsequent Events

 

 

 

 

Note 10 - Pro Forma Condensed Combined Statement of Financial Condition

 

 

2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

3. Quantitative and Qualitative Disclosures About Market Risk

 

 

4. Controls and Procedures

 

 

 

 

PART II. OTHER INFORMATION

 

 

1. Legal Proceedings

 

 

1A. Risk Factors

 

 

2. Unregistered Sales of Equity Securities and Use of Proceeds

 

 

3. Defaults Upon Senior Securities

 

 

4. Submission of Matters to a Vote of Security Holders

 

 

5. Other Information

 

 

6. Exhibits

 

 

 

 

SIGNATURES

 

 

 

EXHIBIT INDEX

 

 

EXHIBIT 3.1

Amended and Restated Certificate of Incorporation

 

 

EXHIBIT 3.2

Amended and Restated Bylaws

 

 

EXHIBIT 4.1

Stockholders Agreement between SG Americas Securities Holdings, Inc. and Cowen Group, Inc.

 

 

EXHIBIT 10.1

Separation Agreement among Société Générale, SG Americas, Inc., SG Americas
Securities Holdings, Inc., Cowen and Company, LLC and Cowen Group, Inc.

 

 

EXHIBIT 10.2

Tax Matters Agreement among SG Americas, Inc., SG Americas Securities Holdings,
Inc., Cowen and Company, LLC and Cowen Group, Inc.

 

 

EXHIBIT 10.3

Fully Disclosed Clearing Agreement between Cowen and Company, LLC and SG
Americas Securities, LLC

 

 

EXHIBIT 10.4

Indemnification Agreement among Société Générale, SG Americas Securities Holdings,
Cowen and Company, LLC and Cowen Group, Inc.

 

 

EXHIBIT 10.5

 Employee Matters Agreement among Société Générale, SG Americas, Inc., SG Americas Securities Holdings, Inc., Cowen and Company, LLC and Cowen Group, Inc.

 

 

EXHIBIT 10.6

Transition Services Agreement among Société Générale, SG Americas, Inc., SG Americas Securities Holdings, Inc., Cowen and Company, LLC and Cowen Group, Inc.

 

 

EXHIBIT 10.7

Escrow Agreement among SG Americas Securities Holdings, Inc., Cowen and Company, LLC, Cowen Group, Inc. and the escrow agent

 

 

EXHIBIT 31.1

Certification of CEO Pursuant to Section 302 of Sarbanes-Oxley Act of 2002

 

 

EXHIBIT 31.2

Certification of CFO Pursuant to Section 302 of Sarbanes-Oxley Act of 2002

 

 

EXHIBIT 32

Certification of CEO and CFO Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 (which is being “furnished” rather filed with the Securities and Exchange Commission)

 

 

2




 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

We have made statements under “Management’s Discussion and Analysis of Financial Condition and Results of  Operations” and in other sections of this Quarterly Report on Form 10-Q that are forward-looking statements. In some cases, you can identify these statements by forward-looking words such as “may”, “might”, “will”, “should”, “expect”, “plan”, “anticipate”, “believe”, “estimate”, “predict”, “potential” or “continue,” the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to risks, uncertainties and assumptions about us, may include projections of our future financial performance, based on our growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events.

Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person  assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not  rely upon forward-looking statements as predictions of future events. We are under no duty to update any of these forward looking statements after the date of this filing to conform our prior statements to actual results or revised  expectations.

There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. Such factors include, but are not limited to, the following:

·              deterioration in the business environment in the specific sectors of the economy in which we focus or a decline in the market for securities of companies within these sectors;

·     substantial fluctuations in our financial results;

·     our ability to retain our senior professionals;  pricing and other competitive pressures;

·     changes in laws and regulations and industry practices that adversely affect our sales and trading business;
       incurrence of losses in the future;

·     the singular nature of our capital markets and strategic advisory engagements; competition from larger firms;

·     larger and more frequent capital commitments in our trading and underwriting businesses; limitations on our
       access to capital;

·     malfunctioning or failure in our operations and infrastructure;

·     strategic investments or acquisitions and joint venture or our entry into new business areas;

·     our ability to make, on a timely or cost effective basis, the changes necessary to operate effectively as an
       independent company;

·     our ability to adequately perform oversight or control functions that have been performed in the past by Société
       Générale; and

3




 

·                    increased costs due to our becoming a public company separate from Société Générale.

Subsequent to June 30, 2006, Cowen Group, Inc. (together with its subsidiaries, the “Company”) completed its initial public offering (“IPO”) and separation from Société Générale. In connection with the separation and IPO, the following events occurred:

·     Société Générale sold 11,517,392 shares of the Company’s common stock;

·     the Company issued 2,100,000 shares of restricted stock and granted options to purchase 1,125,000 shares of
       common stock to certain of its senior employees;

·     the Company returned capital to Société Générale of $180.3 million;

·     the Company deposited $72.3 million into an escrow account to fund certain liabilities related to pre-offering
       litigation matters (subsequent to making this deposit, certain matters covered by the escrow arrangement have been
       settled and the escrow balance has been reduced by $22.5 million; this amount will be returned to SG Americas
       Securities Holdings, Inc.);

·     the Company transferred certain other assets and liabilities to Société Générale; and

·     the Company made payments to certain employees in connection with the termination of certain deferred
       compensation plans.

For a more detailed discussion of the separation and related transactions, see Management’s Discussion and Analysis of Financial Condition and Results of Operations - Separation from Société Générale.

The Unaudited Condensed Combined Financial Statements for the six months ended June 30, 2006 and 2005 relate to the periods prior to the IPO, the Company’s separation from Société Générale and the completion of the related transactions.

4




Cowen Group, Inc.

Unaudited Condensed Combined Statements of Financial Condition

June 30, 2006 and December 31, 2005

 

 

 

 

 

Pro Forma

 

 

 

June 30, 

 

December 31,

 

June 30, 2006

 

 

 

2006

 

2005

 

(see Note 9)

 

 

 

(dollars in thousands)

 

Assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

6,590

 

$

2,150

 

$

6,590

 

Restricted cash pursuant to escrow agreement

 

 

 

49,816

 

Cash segregated under Federal or other regulations

 

 

1,107

 

 

Securities owned, at fair value

 

261,704

 

220,086

 

261,704

 

Securities purchased under agreements to resell with related party

 

371,335

 

410,981

 

119,488

 

Receivable from brokers, dealers and clearing brokers (related party balances of $20,797 and $25,635 at June 30, 2006 and December 31, 2005, respectively)

 

21,278

 

25,849

 

21,278

 

Corporate finance and syndicate receivables

 

20,369

 

16,120

 

20,369

 

Insurance claims receivable

 

 

5,316

 

 

Due from affiliates

 

1,065

 

568

 

1,065

 

Exchange memberships

 

817

 

8,167

 

817

 

Furniture, fixtures, equipment and leasehold improvements, net

 

7,829

 

3,223

 

7,829

 

Goodwill

 

50,000

 

50,000

 

50,000

 

Other assets

 

48,903

 

41,772

 

9,025

 

Total assets

 

$

789,890

 

$

785,339

 

$

547,981

 

Liabilities and Group Equity

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Bank overdrafts

 

$

1,859

 

$

1,581

 

$

1,859

 

Securities sold, not yet purchased, at fair value

 

165,225

 

143,223

 

165,225

 

Payable to brokers, dealers and clearing brokers (related party balances of $18,322 and $9,010 at June 30, 2006 and December 31, 2005, respectively)

 

18,322

 

15,376

 

18,322

 

Employee compensation and benefits payable

 

122,725

 

156,924

 

69,577

 

Legal reserves and legal expenses payable

 

50,177

 

78,732

 

50,177

 

Accounts payable, accrued expenses and other liabilities (related party balances of $24,902 and $5,615 at June 30, 2006 and December 31, 2005, respectively)

 

35,821

 

15,552

 

35,821

 

Total liabilities

 

394,129

 

411,388

 

340,981

 

Group equity

 

395,761

 

373,951

 

207,000

 

Total liabilities and group equity

 

$

789,890

 

$

785,339

 

$

547,981

 

The accompanying notes are an integral part of these unaudited condensed combined financial statements.

5




Cowen Group, Inc.

Unaudited Condensed Combined Statements of Operations

Three and Six Months Ended June 30, 2006 and 2005

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30

 

June 30

 

June 30

 

June 30

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 

(dollars in thousands)

 

Revenues

 

 

 

 

 

 

 

 

 

Investment banking

 

$

39,477

 

$

18,800

 

$

92,916

 

$

55,179

 

Commissions

 

22,109

 

22,296

 

46,224

 

46,526

 

Principal transactions

 

15,368

 

7,071

 

34,780

 

23,674

 

Interest and dividend income (related party balances of $4,565 and $2,681 for the three months ended June 30, 2006 and 2005, respectively, and $9,121 and $5,000 for the six months ended June 30, 2006 and 2005, respectively)

 

5,510

 

3,939

 

11,655

 

7,635

 

Other

 

1,153

 

1,374

 

1,835

 

2,738

 

Total revenues

 

83,617

 

53,480

 

187,410

 

135,752

 

Expenses

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

48,838

 

29,673

 

111,576

 

75,182

 

Floor brokerage and trade execution (related party balances of $2,304 and $2,024 for the three months ended June 30, 2006 and 2005, respectively, and $4,431 and $4,223 for the six months ended June 30, 2006 and 2005, respectively)

 

2,760

 

2,363

 

5,226

 

5,110

 

Service fees, net (related party balances of $1,730 and $4,040 for the three months ended June 30, 2006 and 2005, respectively, and $4,080 and $8,611 for the six months ended June 30, 2006 and 2005, respectively)

 

4,663

 

4,351

 

9,619

 

9,193

 

Communications

 

6,104

 

6,075

 

12,086

 

11,744

 

Occupancy and equipment (related party balances of $4,306 and $2,952 for the three months ended June 30, 2006 and 2005, respectively, and $6,770 and $6,136 for the six months ended June 30, 2006 and 2005, respectively)

 

4,513

 

3,632

 

8,735

 

7,652

 

Marketing and business development

 

3,287

 

3,093

 

6,190

 

5,867

 

Litigation and related costs

 

864

 

590

 

1,907

 

1,082

 

Depreciation and amortization

 

519

 

373

 

994

 

753

 

Interest

 

177

 

101

 

404

 

275

 

Other

 

5,972

 

5,267

 

11,269

 

10,589

 

Total expenses

 

77,697

 

55,518

 

168,006

 

127,447

 

Operating income (loss)

 

5,920

 

(2,038

)

19,404

 

8,305

 

Gain on exchange memberships

 

 

 

24,832

 

 

Income (loss) before income taxes

 

5,920

 

(2,038

)

44,236

 

8,305

 

Provision (benefit) for income taxes

 

345

 

(59

)

2,121

 

723

 

Net income (loss)

 

$

5,575

 

$

(1,979

)

$

42,115

 

$

7,582

 

The accompanying notes are an integral part of these unaudited condensed combined financial statements.

6




Cowen Group, Inc.

Unaudited Condensed Combined Statements of Cash Flows

Six Months Ended June 30, 2006 and 2005

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

 

2006

 

2005

 

 

 

(dollars in thousands)

 

Cash flows from operating activities

 

 

 

 

 

Net income

 

$

42,115

 

$

7,582

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Gain on sale of exchange memberships

 

(24,832

)

 

Stock-based compensation

 

92

 

34

 

Depreciation and amortization

 

994

 

753

 

Income taxes

 

2,121

 

723

 

(Increase) decrease in operating assets:

 

 

 

 

 

Cash segregated under Federal and other regulations

 

1,107

 

(284

)

Securities owned, at fair value

 

(41,618

)

42,955

 

Securities purchased under agreement to resell with related party

 

39,646

 

34,421

 

Receivable from brokers, dealers and clearing brokers

 

4,571

 

(901

)

Corporate finance and syndicate receivables

 

(4,249

)

5,066

 

Insurance claims receivable

 

5,316

 

21,070

 

Due from affiliates

 

(497

)

10,322

 

Other assets

 

(7,131

)

(3,384

)

Increase (decrease) in operating liabilities:

 

 

 

 

 

Bank overdrafts

 

278

 

(1,668

)

Securities sold, not yet purchased, at fair value

 

22,002

 

(18,651

)

Payable to brokers, dealers and clearing brokers

 

2,946

 

(5,050

)

Employee compensation and benefits payable

 

(34,199

)

(58,587

)

Legal reserves and legal expenses payable

 

(25,329

)

(28,845

)

Accounts payable, accrued expenses and other liabilities

 

20,270

 

740

 

Net cash provided by operating activities

 

3,603

 

6,296

 

Cash flows from investing activities

 

 

 

 

 

Purchase of exchange memberships

 

 

(14

)

Proceeds from the transfer or sale of fixed assets

 

 

22

 

Purchase of fixed assets

 

(5,600

)

(390

)

Net cash used in investing activities

 

(5,600

)

(382

)

Cash flows from financing activities

 

 

 

 

 

Payments related to retail brokerage business not conducted by the Company (see Note 1)

 

(5,043

)

(7,498

)

Capital contribution, net

 

11,480

 

1,729

 

Net cash provided by (used in) financing activities

 

6,437

 

(5,769

)

Net increase in cash and cash equivalents

 

4,440

 

145

 

Cash and cash equivalents

 

 

 

 

 

Beginning of period

 

2,150

 

1,980

 

End of period

 

$

6,590

 

$

2,125

 

Supplemental disclosure of non-cash flow information

 

 

 

 

 

Transfer to SGASH of consideration from NYSE merger with Archipelago

 

$

32,182

 

$

 

 

The accompanying notes are an integral part of these unaudited condensed combined financial statements.

 

7




Cowen Group, Inc.

Notes to the Unaudited Condensed Combined Statements, continued

1. Formation of Cowen Group, Inc. and Basis of Presentation

Cowen Group, Inc. (together with its subsidiaries, the “Company”) was incorporated in Delaware during February 2006, with 100 shares of common stock $0.01 par value issued, in preparation for the initial public offering (“IPO”) of its common stock, which occurred on July 12, 2006. Prior to July 12, 2006, the Company was a wholly-owned subsidiary of SG Americas Securities Holdings, Inc. (“SGASH”). SGASH is a wholly-owned subsidiary of SG Americas, Inc. (“SGAI”), which in turn is a wholly-owned subsidiary of Société Générale. The Company is operated and managed on an integrated basis as a single operating segment and provides research, institutional sales and trading and investment banking services to its clients.

Immediately prior to the completion of the IPO, in exchange for shares of the Company’s common stock, SGASH transferred to the Company all of its interest in the investment banking, research and institutional sales and trading businesses which comprised Cowen and Company, LLC (“Cowen and Company” or “Cowen”) and Cowen International Limited (“CIL”), both wholly-owned subsidiaries of SGASH prior to the IPO. See Note 9 for a description of other transactions entered into with Société Générale and its subsidiaries in conjunction with the IPO.

Cowen and Company, a Delaware single member limited liability company, is a full-service investment banking and securities brokerage firm focused on the emerging growth sectors of healthcare, technology, media and telecommunications, and consumer, primarily in the United States. Cowen and Company’s predecessor was SG Cowen Securities Corporation (“SGCSC”). On April 23, 2004, Société Générale reorganized SGCSC into two separate affiliated single member limited liability broker-dealers: SG Cowen & Co., LLC and SG Americas Securities, LLC (“SGAS”). Cowen and Company clears its securities transactions on a fully disclosed basis through its clearing broker, SGAS, and does not carry customer funds or securities.

CIL, a corporation formed under the laws of England and Wales, is an investment banking and brokerage firm also focused on the emerging growth sectors of healthcare, technology, media and telecommunications, and consumer, primarily in Europe. CIL’s predecessors were SG London Securities Limited and SG London Branch.

Basis of Presentation

These Unaudited Condensed Combined Financial Statements, in the Company’s opinion, include all adjustments, consisting of normal recurring adjustments and accruals necessary for a fair presentation of the Combined Statements of Financial Condition, Operations and Cash Flows for the periods presented. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) have been omitted in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). These Unaudited Condensed Combined Financial Statements should be read in conjunction with the audited Combined Financial Statements and accompanying notes for the years ended December 31, 2005, 2004 and 2003 included in the Company’s S-1 Registration Statement.

The Unaudited Condensed Combined Financial Statements have been prepared as if the Company had been a standalone entity for the periods presented. The Unaudited Condensed Combined Financial Statements have also been prepared assuming that the transactions described above were consummated prior to the periods presented.

The Unaudited Condensed Combined Financial Statements include the carve-out accounts of Cowen and Company and the carve-out accounts of SG London Branch, the predecessor of CIL, in each case using the historical basis of accounting for the results of operations, assets and liabilities of the businesses that currently constitute Cowen and Company and CIL. The unaudited condensed combined financial information included herein may not necessarily be indicative of the Company’s results of operations, financial condition and cash flows in the future or what its results of operations, financial condition and cash flows would have been had the Company been a stand-alone company during the periods presented.

8




Cowen Group, Inc.

Notes to the Unaudited Condensed Combined Statements, continued

The Combined Statements of Operations do not include litigation expenses incurred by the Company in connection with the Gruttadauria litigation and other legal matters related to the retail brokerage business of SGCSC, which was sold in October 2000, and is not part of the businesses currently conducted by the Company. As the successor of the named party in the litigation, the Company recognizes the legal reserves related to this matter in the Combined Statements of Financial Condition and cash flows related to this matter as financing activities in the Combined Statements of Cash Flows. See Note 9 for a description of certain agreements that will govern the responsibilities of the Company and Société Générale regarding this matter.

2. Summary of Significant Accounting Policies

Stock-Based Compensation

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 123(R), Share-Based Payments. Prior to January 1, 2006, the Company accounted for stock-based awards issued by Société Générale under the intrinsic value method, which followed the recognition and measurement principles of APB Opinion No. 25 (“APB 25”), Accounting for Stock Issued to Employees, and related Interpretations, which requires that compensation be measured by the quoted market price of stock at the measurement date less the amount that the employee is required to pay. The Company has recognized compensation expense for these awards of $0.02 million and $0.03 million, respectively, for the three and six months ended June 30, 2005.

The following table illustrates the effect on net income if the Company had applied the fair value recognition provisions of FASB Statement No. 123, Accounting for Stock-Based Compensation, to its stock incentive plans for the three and six months ended June 30, 2005. The compensation expense for stock options disclosed under the fair value method is not shown net of any tax effects as the Company has not taken any tax deductions for awards exercised by its employees.

 

Three months

 

Six months

 

 

 

ended June 30,

 

ended June 30,

 

(Dollar amounts in thousands)

 

2005

 

2005

 

Net (loss) income, as reported

 

$

(1,979

)

$

7,582

 

Add: Stock-based employee compensation expense included in reported net (loss) income

 

16

 

34

 

Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards

 

(72

)

(159

)

Pro forma net (loss) income

 

$

(2,035

)

$

7,457

 

 

When the Company adopted SFAS No. 123(R) on January 1, 2006, the modified prospective transition method was used. This method requires measurement of compensation cost for all stock-based awards at fair value on the date of grant and recognition of compensation over the service period for awards expected to vest. The fair value of stock-based compensation is consistent with the valuation techniques previously utilized for options in footnote disclosures required under SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure. Such value is recognized as expense over the service period, net of estimated forfeitures, using the straight-line method. All unvested stock-based awards vested on April 22, 2006, and accordingly, estimated forfeitures with respect to these awards were deemed to be zero. Therefore, no adjustment to reflect the net cumulative impact of estimating forfeitures in the determination of period expense was deemed necessary in the preparation of these Unaudited Condensed Combined Financial

9




Cowen Group, Inc.

Notes to the Unaudited Condensed Combined Statements, continued

Statements. The Company has recognized compensation expense for these awards of $0.04 million and $0.1 million, respectively, for the three and six months ended June 30, 2006.

3. Recent Accounting Pronouncements

In June 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections. This statement supersedes APB Opinion No. 20, Accounting Changes, and SFAS No. 3, Reporting Accounting Changes in Interim Financial Statements. The statement applies to voluntary changes in accounting principle. SFAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. The statement requires that a change in method of depreciation, amortization, or depletion for longlived, non-financial assets be accounted for as a change in accounting estimate that is affected by a change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The statement does not change the transition provisions of any existing accounting pronouncements, including those that are in a transition phase as of the effective date of this statement. The Company adopted this statement effective January 1, 2006. The adoption of SFAS No. 154 did not have a material effect on the Company’s condensed combined financial statements.

In June 2006, the FASB issued Interpretation (“FIN”) No. 48, Accounting for Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109. FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. FIN No. 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact, if any, that the adoption of FIN No. 48 will have on the Company’s condensed combined financial statements.

4. Exchange Memberships

Exchange memberships provide the Company with the right to do business on the exchanges of which it is a member. No impairment in value of the Company’s exchange memberships occurred in 2006 or 2005. The fair value of the exchange memberships was approximately $2.4 million and $27.0 million at June 30, 2006 and December 31, 2005, respectively.

As of December 31, 2005, the Company owned seven New York Stock Exchange (“NYSE”) memberships with a carrying value at that time of $7.3 million. On March 7, 2006 the NYSE merger with Archipelago Holdings, Inc. (the “Merger”) was consummated and each membership holder received cash and shares of NYSE Group common stock. Upon our receipt of the cash and shares, the trading rights conferred by our memberships were cancelled. The Company recorded a gain of $24.8 million as a result of the merger, which is included in Gain on exchange memberships in the Unaudited Condensed Combined Statements of Operations. The Company directed its interests from the Merger to SGASH.

5. Commitments, Contingencies and Guarantees

Litigation

The Company is subject to numerous litigation and regulatory matters, including securities class action lawsuits. See Note 9 for a description of certain agreements that are expected to govern the responsibilities of the Company and Société Générale regarding these matters.

10




Cowen Group, Inc.

Notes to the Unaudited Condensed Combined Statements, continued

Although there can be no assurances as to the ultimate outcome, the Company has established reserves for litigation and regulatory matters that it believes are adequate as of June 30, 2006 and December 31, 2005. The Company believes that the eventual outcome of the actions against it, including the matters described below, will not in the aggregate, have a material adverse effect on its combined financial position or cash flows, but may be material to its combined operating results for any particular period, depending on the level of the Company’s combined operating results for such period.

Following are summaries of the Company’s most significant pending legal and regulatory matters at June 30, 2006.

In January 2002, Cowen learned that Frank Gruttadauria (‘‘Gruttadauria’’), a former employee of SGCSC’s retail brokerage business that was sold in October 2000, had defrauded numerous customers and misappropriated their assets at various firms that had employed him, including Cowen. Following the discovery of Gruttadauria’s fraud, numerous former customers commenced or threatened to commence lawsuits and arbitrations against Cowen arising out of Gruttadauria’s actions. In addition, government and regulatory authorities initiated investigations of the matter. Cowen cooperated fully with all of the governmental and regulatory investigations and all known regulatory matters arising out of Gruttadauria’s conduct were resolved in 2003. Cowen has also reached settlements with the vast majority of former customers, and has arbitrated several other customers’ claims. Cowen is attempting to resolve the remaining disputes. Separately, the securities brokerage firm that purchased SGCSC’s former retail brokerage business in October 2000 had threatened to file an arbitration against Cowen in connection with the liabilities, costs and expenses that it has incurred as a result of Gruttadauria’s misconduct. The parties have resolved this separate matter in a settlement agreement signed subsequent to June 30, 2006, and this settlement will be subject to the indemnification agreement among Société Générale and the Company.

Cowen is one of several defendants named in lawsuits arising out of the accounting fraud that caused the collapse of Lernout & Hauspie Speech Products, N.V. (‘‘L&H’’), a former investment banking client of Cowen:

·                    In one lawsuit, which is pending in federal court in Boston, the Trustee of the Dictaphone Litigation Trust has alleged that Cowen had made material misrepresentations to Dictaphone while Cowen was a financial advisor to L&H on its acquisition of Dictaphone, and published materially misleading research on L&H, in violation of various federal and state laws. The district court has granted Cowen’s motion to dismiss the amended complaint which sought more than $900 million in damages. The plaintiff has filed an appeal of that decision, and the oral argument before the First Circuit Court of Appeals is scheduled for September 13, 2006.

·                    In another lawsuit relating to L&H, which is pending in federal court in New Jersey, short-sellers of L&H stock allege that Cowen participated in a scheme to artificially inflate L&H’s stock price through Cowen’s role as underwriter and adviser for L&H on several acquisitions and Cowen’s published research on L&H in which Cowen recommended the stock as a “buy”, and that this conduct was in violation of federal securities laws and state common law. The Court did not grant Cowen’s motion to dismiss the complaint. Cowen subsequently filed an answer denying liability, and discovery is ongoing.

Cowen is one of many financial institutions and corporations named as defendants in a number of putative securities class actions entitled In re: Initial Public Offering Securities Litigation, which is pending in federal court in Manhattan and relates to numerous initial and other public offerings of common stock from approximately 1998 through 2000. The various complaints allege that a number of financial institutions that were underwriters of initial public offerings, including Cowen, made material misrepresentations and omissions to purchasers of the stock sold in the initial public offerings, and thereby inflated the value of the stock. Specifically, the plaintiffs allege that the defendants failed to disclose, among other things, the purported existence of improper tie-in and compensation arrangements they had with certain purchasers of the stock and alleged conflicts of interest relating to research published by the underwriters, all in violation of federal securities laws. The district court granted plaintiffs’ motion to certify certain “focus” cases as class actions. Cowen is a named defendant in four of these “focus” cases. Cowen

11




Cowen Group, Inc.

Notes to the Unaudited Condensed Combined Statements, continued

appealed the class certification decision to the Second Circuit Court of Appeals, which heard oral argument on June 6, 2006. In the meantime, discovery is ongoing in the “focus” cases.

Cowen and other underwriters are defendants in two separate, but related, antitrust actions alleging that the underwriter defendants conspired to fix initial public offering underwriting fees at 7%. In the case brought by individual shareholders, plaintiffs’ damages claims have been dismissed by the district court, but their claims for injunctive relief remain pending. In the related case filed by issuers, where the damages are unspecified, the district court has denied the defendants’ motion to dismiss. On April 18, 2006, the court denied the issuer plaintiffs motion for class certification and ordered further briefing on the investor plaintiffs’ motion for class certification. The plaintiffs have also filed a joint motion for summary judgment on liability and a motion for leave to amend the Consolidated Class Action Complaint. Cowen intends to oppose those motions, but the district court has extended the deadline for defendants’ opposition papers until 30 days after the rulings on class certification. It is too early to assess the outcome of these motions.

Cowen is a named defendant in several litigations arising out of the fraud, disclosed in March 2002, committed by members of the Rigas family, which controlled Adelphia Communications, a cable company that filed for bankruptcy in June 2002. As detailed in the pleadings, the Rigas family allegedly took advantage of certain loans, or “co-borrowing facilities,” which allowed the family to borrow more than $3 billion for their private use for which Adelphia was responsible to repay. Cowen, which was a member of the underwriting syndicates (but not a lead manager), is a defendant in four actions arising out of those offerings, all of which are pending before the United States District Court for the Southern District of New York. The complaints in each of these actions raise a variety of claims arising out of the sale of Adelphia securities, including claims under the federal securities laws. The district court granted Cowen’s motion to dismiss in the Adelphia Class Action. Thereafter, the underwriter defendants reached a settlement with the plaintiffs. On June 15, 2006, the district court preliminarily approved the settlement, and a fairness hearing on the settlement has been scheduled for November 10, 2006. If the settlement is ultimately approved, Cowen’s share of the settlement will be approximately $1.7 million (which is covered by the indemnification agreement between Société Générale and Cowen). The court also has granted in part and denied in part motions to dismiss filed by various defendants, including Cowen, in Huff, Appaloosa and Stocke, but has not ruled on other potential bases for dismissal set forth in Cowen’s motions in these cases. In addition, in August 2005 the district court denied Cowen’s motion to dismiss based on Huff’s lack of standing, and subsequently granted leave to file an interlocutory appeal to the Second Circuit Court of Appeals of that ruling. In addition to the cases in which Cowen has been named as a defendant, Cowen may also face potential liability pursuant to the applicable master agreements among underwriters for any judgments or settlements in three other cases involving the Adelphia securities offerings in which Cowen participated.

Cowen is also one of many defendants in two related adversary proceedings filed in the Adelphia Bankruptcy Proceeding, which is pending in the U.S. Bankruptcy Court for the Southern District of New York. These adversary proceedings were filed by the Official Committee of Unsecured creditors and the Official Committee of Equity Security Holders (the “Committees”). Both of these cases raise a variety of common law and federal claims, which are generally similar to the claims asserted in the Adelphia Securities Class Action and other cases described above. With respect to Cowen and other investment banks, the complaints taken together set forth claims for violation of the Bank Holding Company Act, equitable disallowance or equitable subordination, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, aiding and abetting fraud, gross negligence and breach of contract, among others. The Committees seek more than $5 billion in damages from all defendants and ask for $5.2 billion of company debt to be frozen until the creditors are paid. On August 30, 2005, the bankruptcy court ruled that the two Committees have standing to prosecute the adversary proceedings, but has not ruled on the various motions to dismiss that are pending, including motions filed by Cowen. On February 9, 2006, the district court withdrew the reference from the bankruptcy court so that after the bankruptcy court rules on the pending motions, the cases will proceed before the district court.

 

12




Cowen Group, Inc.
Notes to the Unaudited Condensed Combined Statements, continued

Cowen has been named as a defendant in a purported class action filed in the United States District Court for the Northern District of Alabama for the involvement of the predecessor of Cowen as one of the managing underwriters for certain HealthSouth Corporation private placements. The complaint alleges that the offering materials for each private placement were deficient, in violation of federal securities laws, by failing to disclose HealthSouth’s subsequently revealed accounting irregularities. The predecessor company to Cowen participated as an ‘‘initial purchaser’’ in only one of the private placements at issue—the March 1998 private placement of $567.75 million principal amount of 31.4% Convertible Subordinated Debentures due 2003. On June 8, 2006, the district court, among other things, dismissed the claims arising out of the March 1998 private placement (the only claims against Cowen). The dismissal is not yet a “final” judgment from which an appeal may be taken by plaintiffs.

Cowen is one of several named defendants in a putative securities class action filed by plaintiffs in the United States District Court for the District of New Jersey seeking to recover for losses allegedly caused by misrepresentations and omissions in connection with the December 2004 initial public offering of Arbinet-thexchange, an electronic marketplace for trading, routing and settling telecommunications capacity. The lawsuit, In re: Arbinet-thexchange, Inc., alleges that these misrepresentations and omissions inflated the price of Arbinet’s securities and that following disclosure in May and June 2005 of the true state of Arbinet’s market and its business, Arbinet’s securities lost more than 60% of their value. The underwriter defendants have filed a motion to dismiss the complaint, and the briefing process is still underway.

Cowen is one of three underwriter defendants in a lawsuit filed by Crossroads Systems, Inc., a company that designs, develops, and manufactures computer storage devices, in the District Court of Travis County, Texas, on May 24, 2006. The lawsuit alleges that the underwriters of Crossroads’ 1999 IPO, which was led by Cowen (with 42% of the offering), purposely under priced the IPO for their own improper purposes. Specifically, Crossroads alleges that the underwriter defendants allocated stock to favored clients, who shared their profits with the underwriters either directly or through excessive trading commissions in connection with the IPO stock and/or unrelated securities trading. Crossroads sets forth causes of action for breach of fiduciary duty, fraud, and unjust enrichment. The damages are unspecified.

On June 28, 2006, a group of approximately 60 medical doctors filed a lawsuit against Cowen in San Francisco Superior Court. Plaintiffs allege that Cowen negligently rendered a fairness opinion in 1998 in connection with the acquisition of plaintiffs’ businesses (Orange Coast Managed Care Services and St. Joseph Medical Corporation) by FPA Medical Management, Inc. According to the Complaint, plaintiffs received restricted FPA stock as consideration in the sale, and shortly after the acquisition, FPA went bankrupt, rendering the stock worthless. Although the damages are not clearly specified in the Complaint, it appears that the plaintiffs may be seeking approximately $40 million. On August 14, Cowen removed the case to United States District Court for the Northern District of California. On August 17, 2006 Cowen filed a motion to dismiss the complaint.

The SEC has conducted an investigation arising out of the proprietary trading activities of Guillaume Pollet, a former Managing Director and proprietary trader in the former equity derivatives division of SGCSC (which is now part of SGAS, which was formerly an affiliate of Cowen), who was terminated by Cowen in 2001 for violating firm policy and misleading the firm’s management about certain of his trading activity. The trading activity at issue involved private placements in public equity, or so-called ‘‘PIPE’s.’’ Cowen received a Wells Notice in July 2004, and submitted a response in August 2004. To the extent that Cowen incurs additional legal fees or pays any fine or monetary sanction, Cowen will be indemnified by Société Générale.

Based on information voluntarily disclosed to regulators by Cowen, the SEC and NYSE are conducting informal inquiries that appear to be focused principally on certain conduct of a research salesperson who was terminated by Cowen in late 2004. The employee was discharged after Cowen discovered that the employee had sought and obtained access to sensitive information about a company, shared such information with certain of his clients and others, and made investment recommendations to clients in part on the basis of that information. Cowen is

13




Cowen Group, Inc.
Notes to the Unaudited Condensed Combined Statements, continued

cooperating fully with this continuing investigation. To the extent that Cowen incurs additional legal fees or pays any fine or monetary sanction related to this matter, Cowen will not be indemnified by Société Générale.

Cowen has provided various data and information to the NASD in response to its request for information as part of an industry-wide “sweep” relating to Cowen’s gifts, gratuities and entertainment policies, practices, and procedures. In addition, Cowen has also received a subpoena for documents and information from the SEC, and additional requests for information from the NASD, seeking information concerning, among other things, gifts, gratuities and entertainment and the use of one of the firm’s error accounts primarily involving an unaffiliated mutual fund company. Cowen is cooperating fully with these continuing investigations. To the extent that Cowen incurs additional legal fees or pays any fine or monetary sanction related to this matter, it will not be indemnified by Société Générale.

Cowen received a request for documents and information from the SEC’s Office of Compliance Inspections and Examinations seeking documents and certain financial and other information concerning, among other things, Cowen’s various trading desks, institutional sales team and internal accounts, including error accounts. Cowen is cooperating fully with this inquiry. To the extent that Cowen incurs additional legal fees or pays any fine or monetary sanction related to this matter, Cowen will not be indemnified by Société Générale.

Cowen has received a request for data and information from the NYSE as part of an industry-wide ‘‘sweep’’ relating to prospectus delivery procedures for new issues and mutual funds. Cowen has provided periodic reports to the NYSE concerning its progress in responding to their request and will continue to cooperate fully with this continuing inquiry. Cowen will be indemnified in part against any liabilities, including legal fees that arise out of any future litigation or the pending regulatory investigation relating to this matter.

Lease commitments

The Company’s headquarters is located in New York and other offices are located in Boston, San Francisco, Cleveland, Denver, London and Geneva. Certain office space is leased under operating lease and sub-lease agreements that extend up to 2017. In addition, certain lease agreements are subject to escalation clauses. Under the terms of the Boston office lease, which expires on November 30, 2014, there is a five year extension option which would allow the Company to extend the lease through November 30, 2019.

                As of June 30, 2006, the Company had the following minimum annual lease commitments related to these agreements:

(dollar amounts in thousands)

 

Minimum
Lease  
Payments

 

2006

 

$

4,414

 

2007

 

8,866

 

2008

 

8,981

 

2009

 

9,284

 

2010

 

9,395

 

Thereafter

 

29,780

 

 

 

$

70,720

 

 

Rent expense was $2.5 and $2.3 for the three months ended June 30, 2006 and 2005, respectively and $5.1 and $4.7 for the six months ended June 30, 2006 and 2005, respectively.

14




Cowen Group, Inc.
Notes to the Unaudited Condensed Combined Statements, continued

Guarantees

The Company has outsourced certain information technology services to Hewlett-Packard Company and Savvis Communications Corporation. The agreements are in place until 2010. As of June 30, 2006, the Company’s annual minimum guaranteed payments under these agreements are as follows:

(dollar amounts in thousands)

 

Minimum
Guaranteed
Payments

 

2006

 

$

4,666

 

2007

 

9,406

 

2008

 

9,295

 

2009

 

9,103

 

2010

 

3,839

 

 

 

$

36,309

 

 

The Company applies the provisions of the FASB’s Interpretation No. 45, Guarantor’s Accounting and Disclosure Required for Guarantees, Including Indirect Indebtedness of Others (“FIN 45”) which provides accounting and disclosure requirements for certain guarantees. In this regard, the Company has agreed to indemnify its clearing broker for losses that it may sustain from the customer accounts introduced by the Company. Pursuant to the clearing agreement, the Company is required to reimburse the clearing broker without limit for any losses incurred due to the counterparty’s failure to satisfy its contractual obligations. However, these transactions are collateralized by the underlying security, thereby reducing the associated risk to changes in the market value of the security through the settlement date.

The Company is a member of various securities exchanges. Under the standard membership agreement, members are required to guarantee the performance of other members and, accordingly, if another member becomes unable to satisfy its obligations to the exchange, all other members would be required to meet the shortfall. The Company’s liability under these arrangements is not quantifiable and could exceed the cash and securities it has posted as collateral. However, management believes that the potential for the Company to be required to make payments under these arrangements is remote. Accordingly, no contingent liability is recorded in the Condensed Combined Statements of Financial Condition for these arrangements.

15




Cowen Group, Inc.
Notes to the Unaudited Condensed Combined Statements, continued

6. Related Party Transactions

Balances with affiliated companies at June 30, 2006 and December 31, 2005, respectively, are included in the Unaudited Condensed Combined Financial Statements under the following captions:

(Dollar amounts in thousands)

 

June 30,
2006

 

December 31,
2005

 

Assets

 

 

 

 

 

Cash

 

$

1

 

$

303

 

Securities purchased under agreements to resell

 

371,335

 

410,981

 

Receivable from brokers, dealers and clearing brokers

 

20,797

 

25,635

 

Due from affiliates

 

1,065

 

568

 

Other assets

 

117

 

1,629

 

Total assets

 

393,315

 

439,116

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

Payable to brokers, dealers and clearing brokers

 

18,322

 

9,010

 

Accounts payable, accrued expenses and other liabilities

 

24,902

 

5,615

 

Total liabilities

 

43,224

 

14,625

 

Total net assets

 

$

350,091

 

$

424,491

 

The Company’s excess cash was, through the date of the IPO, invested in securities purchased under agreements to resell (reverse repurchase agreements, or “reverse repos”) with the New York branch of Société Générale (“SGNY”). These reverse repos were collateralized by U.S. government and agency obligations, were monitored daily for credit exposure and were payable on demand.

16




Cowen Group, Inc.
Notes to the Unaudited Condensed Combined Statements, continued

Revenues earned from and expenses incurred with affiliated companies for the three and six-month periods ended June 30, 2006 and 2005 are summarized as follows:

 

Three Months Ended June 30

 

Six Months Ended June 30

 

(Dollar amounts in thousands)

 

2006

 

2005

 

2006

 

2005

 

Revenues

 

 

 

 

 

 

 

 

 

Interest and dividend income

 

$

4,565

 

$

2,681

 

$

9,121

 

$

5,000

 

Other

 

533

 

1,360

 

1,064

 

2,724

 

Total revenues

 

5,098

 

4,041

 

10,185

 

7,724

 

 

 

 

 

 

 

 

 

 

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Floor brokerage and trade execution

 

2,304

 

2,024

 

4,431

 

4,223

 

Service fees, net

 

1,730

 

4,040

 

4,080

 

8,611

 

Occupancy and equipment

 

4,306

 

2,952

 

6,770

 

6,136

 

Interest expense

 

46

 

145

 

14

 

 

 

Other, net

 

69

 

104

 

(69

)

189

 

Total expenses

 

8,455

 

9,120

 

15,357

 

19,173

 

Total, net

 

$

(3,357

)

$

(5,079

)

$

(5,172

)

$

(11,449

)

 

Other than interest earned on reverse repos with SGNY, revenues earned from and expenses incurred with affiliated companies primarily result from securities transactions and administrative services.

Pursuant to service agreements with certain affiliates, the Company receives fees related to portfolio, investment and administration services that are provided in connection with the management of certain assets. These fees are included in Other revenue on the Unaudited Condensed Combined Statements of Operations. The Company clears its securities and futures transactions on a fully disclosed basis through clearing brokers that are affiliates of Société Générale. Clearing expenses are reported in Floor brokerage and trade execution on the Unaudited Condensed Combined Statements of Operations.

Pursuant to a service agreement with SGAI and other affiliates through the date of the IPO, the Company incurred expenses for costs and services that included facilities administration and security, risk management, financial management and reporting, information systems management and support, insurance, legal and compliance. Total expenses pursuant to the service plan were approximately $1.5 million and $3.9 million during the three months ended June 30, 2006 and 2005, respectively, and $3.7 million and $8.4 million during the six month periods ended June 30, 2006 and 2005. In addition, the Company incurred expenses of approximately $0.3 million and $0.4 million with an affiliated company for certain presentation center services provided during the three months ended June 30, 2006 and 2005, respectively, and $0.6 million and $0.8 million during the six month periods ended June 30, 2006 and 2005. These expenses are included in Service fees on the Unaudited Condensed Combined Statements of Operations, net of approximately $0.1 million and $0.3 million of fees earned related to presentation center and library services provided by the Company to SGAI during the three month periods ended June 30, 2006 and 2005, respectively and $0.2 million and $0.6 million during the six months ended June 30, 2006 and 2005 respectively.

Certain costs and services, which include real estate, project management and premises and securities maintenance, are allocated to the Company by Société Générale and are reported in Occupancy and equipment on the Unaudited Condensed Combined Statements of Operations.

 

17




Cowen Group, Inc.
Notes to the Unaudited Condensed Combined Statements, continued

As a member of the NYSE, the Company incurs a monthly membership fee based on the lesser of either a percentage of transaction volume or commissions earned through the exchange. NYSE membership fees for the three months ended June 30, 2006 and 2005 were $0.4 million and $0.4 million, respectively and $0.8 million and $0.8 million for the six months ended June 30, 2006 and 2005, respectively. Pursuant to our clearing agreement with SGAS, a portion of these fees are recoverable. The recoverable portion of these fees totaled approximately $0.2 million for each of the three months ended June 30, 2006 and 2005 and approximately $0.4 million for each of the six months ended June 30, 2006 and 2005. The Company reports these exchange membership fees in Other expenses on the Unaudited Condensed Combined Statements of Operations, net of recoveries.

7. Stock-based Compensation

Société Générale historically granted certain employees of the Company options to purchase shares of Société Générale stock. Such options have been granted to employees of the Company with exercise prices equal to the average of the opening trading price of Société Générale shares on the Euronext Paris SA exchange during the 20 trading days prior to the date of grant. Generally, the options become exercisable upon the completion of a three year vesting period and expire seven years from the date of grant.

See Note 2 for a summary of the impact on reported net income had the Company recognized compensation expense for employee stock options pursuant to the fair-value method prescribed by SFAS No. 123, Accounting for StockBased Compensation for the three and six months ended June 30, 2006.

For the six months ended June 30, 2006, the following table summarizes Société Générale stock option activity related to the Company’s employees:

 

Shares

 

Average

 

Average

 

Aggregate

 

 

 

Subject to

 

Exercise

 

Remaining

 

Intrinsic

 

 

 

Option

 

Price/Share(1)

 

Term

 

Value(2)

 

 

 

 

 

 

 

 

 

 

 

Balance outstanding at beginning of period

 

86,501

 

$

67.28

 

 

 

 

 

Options granted

 

 

 

 

 

 

 

Options exercised

 

(58,742

)

70.96

 

 

 

 

 

Options forfeited

 

 

 

 

 

 

 

Options expired

 

 

 

 

 

 

 

Balance outstanding at end of period

 

27,759

 

70.27

 

$

3.5

 

2,132

 

Options exercisable end of period

 

27,759

 

70.27

 

$

3.5

 

2,132

 

 


(1)             As Société Générale shares trade in Euros, average exercise price information for options exercised has been translated to U.S. dollars based on the rate of exchange in effect at the date of exercise. Average exercise price information for options outstanding at the beginning and the end of the period has been translated to U.S. dollars based on the rate of exchange in effect at June 30, 2006 and December 31, 2005, respectively.

(2)             Dollar amounts in thousands.

The total intrinsic value of options exercised during the three and six months ended June 30, 2006 were $2.9 million and $4.5 million, respectively. The total intrinsic value of options exercised during the three and six months ended June 30, 2005 were $0.01 million and $0.3 million, respectively. No options were granted by Société Générale to the Company’s employees during the three and six months ended June 30, 2006 and 2005, respectively.

18




Cowen Group, Inc.
Notes to the Unaudited Condensed Combined Statements, continued

8. Regulatory Requirements

As a registered broker-dealer, Cowen is subject to the Uniform Net Capital Rule 15c3-1 of the Securities Exchange Act of 1934. Under the alternative method permitted by this Rule, Cowen’s required net capital, as defined, is $1.0 million. Cowen is not permitted to withdraw equity if certain minimum net capital requirements are not met. As of June 30, 2006, Cowen had net capital of approximately $209.9 million, which was approximately $208.9 million in excess of its net capital requirement of $1.0 million.

Effective April 26, 2004 and pursuant to an exemption under Rule 15c3-3(k)(2)(ii), Cowen is not required to calculate a reserve requirement and segregate funds for the benefit of customers since it clears its securities transactions on a fully disclosed basis and promptly transmits all customer funds and securities to the clearing broker dealer which carries the accounts, maintains and preserves such books and records pertaining to them pursuant to Rules 17a-3 and 17a-4.

Proprietary assets of introducing brokers (“PAIB”) held at the clearing broker are considered allowable assets for net capital purposes, pursuant to agreements between Cowen and the clearing broker, which require, among other things, that the clearing broker performs computations for PAIB and segregates certain balances on behalf of Cowen, if applicable.

CIL is subject to the capital requirements of the Financial Services Authority (“FSA”) of the United Kingdom. Financial resources, as defined, must exceed the total financial resources requirement of the FSA. At June 30, 2006, CIL’s financial resources of approximately $4.0 million exceeded the minimum requirement of $3.1 million by approximately $0.9 million.

9. Subsequent Events

Subsequent to June 30, 2006, the Company completed its IPO and separation from Société Générale. In connection with the separation and IPO, the following events occurred:

·                     Société Générale sold 11,517,392 shares of the Company’s common stock;

·                     the Company issued 2,100,000 shares of restricted stock and granted options to purchase 1,125,000 shares of common stock to certain of its senior employees;

·                     the Company returned capital to Société Générale of $180.3 million;

·                     the Company deposited $72.3 million into an escrow account to fund certain liabilities related to pre-offering litigation matters (subsequent to making this deposit, certain matters covered by the escrow arrangement have been settled and the escrow balance has been reduced by $22.5 million; this amount will be returned to SGASH);

·                     the Company transferred certain other assets and liabilities to Société Générale; and

·                     the Company made payments to certain employees in connection with the termination of certain deferred compensation plans.

For a more detailed discussion of the separation and related transactions, see Management’s Discussion and Analysis of Financial Condition and Results of Operations - Separation from Société Générale.

The Unaudited Condensed Combined Financial Statements for the six months ended June 30, 2006 and 2005 relate to the periods prior to the IPO, the Company’s separation from Société Générale and the completion of the related transactions.

19




Cowen Group, Inc.
Notes to the Unaudited Condensed Combined Statements, continued

Agreements Related to the Company’s Separation from Société Générale and Other Related Matters

In connection with the IPO, the Company entered into a Separation Agreement, an Indemnification Agreement and a number of other agreements with Société Générale for the purpose of accomplishing its separation from Société Générale, the transfer of the Cowen and Company and CIL businesses to the Company, the return of capital to SGASH, and various other matters regarding the separation and the IPO. The Separation Agreement and Indemnification Agreement were executed on July 11, 2006. The other agreements described below were executed on July 12, 2006. These agreements provide, among other things, for the allocation of employee benefits, tax and other liabilities and obligations attributable or related to periods or events prior to, in connection with and after the IPO.

The Separation Agreement provides that, as of July 18, 2006, the closing date of the IPO, the Company will retain or assume certain liabilities, and Société Générale will assume or retain certain liabilities. Liabilities retained or assumed by the Company include, among others, the following:

·                     liabilities reflected on (or that are of a nature or type that as of the separation date would have been reflected on) the Company’s Combined Statements of Financial Condition, except certain litigation and other items specifically addressed in the Separation Agreement;

·                     certain liabilities associated with those of the Company’s employees who have not signed a release in favor of Société Générale at the time of the IPO and all liabilities associated with the Company’s stock ownership and incentive compensation plans;

·                     the Company’s portion, determined in accordance with the Separation Agreement, of liabilities associated with certain contracts and accounts that it shares with Société Générale;

·                     liabilities associated with the breach of or failure to perform any of the Company’s obligations under certain agreements;

·                     certain other known and specified liabilities and all other liabilities expressly allocated to the Company under the Separation Agreement and the other agreements entered into in connection with the separation; and

·                     all other known and unknown liabilities (to the extent not specifically assumed by Société Générale) relating to, arising out of or resulting from the Company’s business, assets, liabilities or any business or operations conducted by the Company at any time prior to, on or after the date of separation.

Liabilities assumed or retained by Société Générale include, among others, the following:

·                     liabilities associated with the sale and transfer of Société Générale interests in the SG Merchant Banking Fund L.P. to a third party;

·                     Société Générale’s portion, determined in accordance with the Separation Agreement, of liabilities associated with certain contracts and accounts that it shares with the Company;

·                     liabilities associated with the breach of or failure to perform any of Société Générale’s obligations under certain agreements;

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Cowen Group, Inc.
Notes to the Unaudited Condensed Combined Statements, continued

·                     liabilities arising from the operation of Société Générale’s business (excluding for such purposes businesses conducted by the Company), whether prior to, at or after the IPO;

·                     liabilities associated with certain businesses previously conducted by the Company, as specified in the Separation Agreement;

·                     certain liabilities associated with any known or unknown employee-related claims made by any current or former employees of Société Générale or any of its subsidiaries (other than the Company) that are asserted or threatened by such current or former employees against the Company in respect of any period prior to, on or

·                     after the date of separation;

·                     certain specific contingent liabilities to the extent that such liabilities exceed the aggregate dollar amount held in escrow pursuant to the Escrow Agreement (which is described below);

·                     certain other known and specified liabilities and all other liabilities expressly allocated to Société Générale under the Separation Agreement and the other agreements entered into in connection with the separation; and

·                     all other known and unknown liabilities relating to, arising out of or resulting from Société Générale’s business, assets, liabilities or any business or operations conducted by Société Générale and its subsidiaries (excluding the Company), at any time prior to, on or after the date of separation.

The Company entered into an Indemnification Agreement with Société Générale on July 11, 2006. Under the Indemnification Agreement, the Company will indemnify, and will defend and hold harmless Société Générale and its subsidiaries from and against all liabilities specifically retained or assumed by the Company in the Separation Agreement, Indemnification Agreement or other transaction agreements, including those relating to, arising out of or resulting from:

·                     the failure by the Company to pay, perform or otherwise promptly discharge any liabilities allocated to it by the Separation Agreement, Indemnification Agreement or other transaction agreements;

·                     any breach by the Company of the Separation Agreement, Indemnification Agreement or other transaction agreements or its certificate of incorporation or by-laws; and

·                     any untrue statement of, or omission to state, a material fact contained in any registration statement or prospectus related to the IPO, except for specific information described below in connection with the indemnity obligation of Société Générale and certain other specified sections.

Société Générale will indemnify, and will defend and hold harmless the Company and each of its subsidiaries from and against all liabilities specifically assumed or retained by Société Générale in the Separation Agreement, Indemnification Agreement or other transaction agreements, including those relating to, arising out of or resulting from:

·                     Société Générale’s or any of its subsidiaries’ (other than the Company) failure to pay, perform or otherwise promptly discharge any liabilities allocated to Société Générale in the Separation Agreement, Indemnification Agreement or other transaction agreements;

·                     any breach by Société Générale or any of it subsidiaries (other than the Company or its subsidiaries) of the Separation Agreement, Indemnification Agreement or other transaction agreements; and

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Cowen Group, Inc.
Notes to the Unaudited Condensed Combined Statements, continued

·                     any untrue statement of, or omission to state, a material fact contained in any registration statement or prospectus related to the IPO, to the extent, and only to the extent, that such untrue statement or omission was contained in or omitted from certain specified sections containing information furnished by or on behalf of Société Générale.

Société Générale will indemnify us for all known, pending and threatened litigation (including the costs of such litigation) and certain known regulatory matters, in each case, that existed prior to the date of the IPO to the extent the cost of such litigation results in payments in excess of the amount placed in escrow to fund such matters.

The effect of this indemnification on our combined results of operations is that when a future increase to a loss contingency reserve that is related to litigation covered by an Indemnification Agreement is recorded, the litigation cost and the indemnification recovery will be reflected as an increase in litigation and related expense and the indemnification recovery will be recorded as a reduction to our litigation and related expense.

The Company entered into an Escrow Agreement with Société Générale and SGASH and a third-party escrow agent in connection with the IPO and related transactions. On July 12, 2006, the Company deposited with the escrow agent $72.3 million for the payment of liabilities arising out of the matters for which Société Générale has agreed to indemnify Cowen. Subsequent to making this deposit, certain matters covered by the escrow arrangement have been settled and excess reserves related to these settled matters will be returned to SGASH. The escrow agent will, when and as directed by SGASH, distribute funds from the escrow account to satisfy specified contingent liabilities for which Société Générale has assumed responsibility should such liabilities become due. Any amounts remaining in the escrow account after final conclusion of the related litigation will be paid to SGASH. SGASH is also entitled to any interest earned on such deposits held in escrow.

The Company entered into an Employee Matters Agreement with Société Générale in connection with the IPO. The Employee Matters Agreement provides, among other things, for the allocation, between the Company and Société Générale, of responsibilities and liabilities for employees, employee compensation and benefit plans, programs, policies and arrangements following the transactions contemplated by the Separation Agreement. Such allocation includes the transfer to Société Générale of certain assets and liabilities associated with identified deferred compensation plans sponsored by Société Générale.

The Company entered into a Stockholders Agreement with SGASH in connection with the IPO. The Stockholders Agreement, among other agreements, governs SGASH’s right to appoint members of the board of directors of the Company, SGASH’s registration rights relating to shares of the Company’s common stock, if any, held by SGASH after the IPO and restrictions on SGASH’s ability to sell, transfer or otherwise convey shares of the common stock, if any, held by SGASH after the IPO. As of July 31, 2006 SGASH holds less than 10% of the Company’s common stock. As such, SGASH can no longer appoint members of the board of directors of the Company pursuant to the Stockholders Agreement.

The Company entered into a Transition Services Agreement with Société Générale in connection with the IPO pursuant to which the companies agreed to provide each other certain administrative and support services and other assistance consistent with a limited number of the services provided before the separation. Pursuant to the Transition Services Agreement, the Company has also agreed to provide Société Générale various services that have previously been provided by the Company to Société Générale, including library and merchant banking oversight services. Société Générale will provide services to the Company, including, facilities management, business continuity management, certain legal services and litigation management services and access to Société Générale data rooms and e-mail archives.

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Cowen Group, Inc.
Notes to the Unaudited Condensed Combined Statements, continued

The Company entered into a Tax Matters Agreement with Société Générale in connection with the IPO. The Tax Matters Agreement includes a description of the Company’s continuing tax sharing arrangements with Société Générale relating to periods prior to the separation, and also allocates responsibility and benefits associated with the elections made in connection with the separation from Société Générale. The Tax Matters Agreement also allocates rights, obligations and responsibilities in connection with certain administrative matters relating to taxes. In connection with our separation from Société Générale, SGAI will retain the tax benefits of the Company’s net operating loss carryforwards.

On July 11, 2006 the Board of Directors of the Company approved the “Equity and Incentive Plan” pursuant to which the Company can offer employees, independent contractors and non-employee directors’ equity-based awards. 4,725,000 shares of common stock have been allocated for issuance under this plan. In connection with the IPO, the Company made equity awards of 2,100,000 shares of restricted stock and granted options to purchase 1,125,000 shares of common stock to certain of its senior employees.

The Board of Directors of the Company approved a return of capital distribution to SGASH concurrent with the Company’s IPO, which left the Company with initial stockholders’ equity of $207.0 million at July 12, 2006, the date of the IPO. In connection with the IPO, the Company distributed cash of $180.3 million to SGASH pursuant to this authorization. Under the terms of the Separation Agreement, the amount of this distribution is subject to adjustment based on an independent final review of the Company’s separation from Société Générale.

In January 2002, Cowen learned that Frank Gruttadauria (‘‘Gruttadauria’’), a former employee of SGCSC’s retail brokerage business that was sold in October 2000, had defrauded numerous customers and misappropriated their assets at various firms that had employed him, including Cowen. Following the discovery of Gruttadauria’s fraud, numerous former customers commenced or threatened to commence lawsuits and arbitrations against Cowen arising out of Gruttadauria’s actions. In addition, government and regulatory authorities initiated investigations of the matter. Cowen cooperated fully with all of the governmental and regulatory investigations and all known regulatory matters arising out of Gruttadauria’s conduct were resolved in 2003. Cowen has also reached settlements with the vast majority of former customers, and has arbitrated several other customers’ claims. Cowen is attempting to resolve the remaining disputes. Separately, the securities brokerage firm that purchased SGCSC’s former retail brokerage business in October 2000 had threatened to file an arbitration against Cowen in connection with the liabilities, costs and expenses that it has incurred as a result of Gruttadauria’s misconduct. The parties have resolved this separate matter in a settlement agreement signed subsequent to June 30, 2006, and this settlement will be subject to the indemnification agreement among Société Générale and the Company.

10. Pro Forma Condensed Combined Statement of Financial Condition

The Unaudited Pro Forma Condensed Combined Statement of Financial Condition as of June 30, 2006 has been prepared to give effect to the Company’s separation from Société Générale and the sale of shares of the Company’s common stock by Société Générale in the IPO as if the IPO had occurred at June 30, 2006.

The pro forma adjustments reflected in the Unaudited Pro Forma Condensed Combined Statement of Financial Condition are based upon available information and methodologies that the Company believes are reasonable. Prior to the IPO, the Company entered into a number of agreements with Société Générale governing the separation and a variety of transition matters. We have reflected in the Unaudited Pro Forma Condensed Combined Statement of Financial Condition adjustments for the known effects of these arrangements, which are described under “Agreements Related to the Company’s Separation from Société Générale and Other Related Matters” in Note 8.

These agreements include:

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Cowen Group, Inc.
Notes to the Unaudited Condensed Combined Statements, continued

1.           The Separation Agreement pursuant to which, among other things, the Company transferred certain assets and liabilities to Société Générale or its subsidiaries;

2.           The Indemnification Agreement pursuant to which, among other things, each party agreed to indemnify the other for certain liabilities;

3.           The Stockholders Agreement pursuant to which, among other things, the Company provided SGASH with the right to appoint members of the Company’s board of directors under certain circumstances;

4.           The Tax Matters Agreement pursuant to which, among other things, SGAI retained or may receive certain potential tax benefits associated with the Company’s operations, the IPO, as well as certain tax benefits potentially arising from the transactions that facilitate the completion of the IPO;

5.           The Employee Matters Agreement pursuant to which, among other things, various responsibilities related to the Company’s employees were allocated between Société Générale and the Company; and

6.           The Transition Services Agreement pursuant to which each party agreed to provide certain administrative and support services to each other for a specified period after the IPO.

7.           The Tax Matters Agreement pursuant to which the Company would be required to transfer to SGASH and SGAI in connection with the IPO 50% of the amount of cash savings, if any, in U.S. federal income tax and certain state and local taxes that the Company actually realizes if there is an increase in its tax basis. At the present time, the Company believes it is unlikely that the transactions required to effect the separation resulted in an increase in tax basis. Absent such an increase in tax basis, we will not realize a tax benefit from the transaction and therefore would not be required to make the transfer to SGAI as described above. A final analysis will be made to determine the impact on tax basis.

Pro forma adjustments have been made to reflect:

·                     The transfer of cash into a restricted escrow account that will be utilized for future payment, if any, of certain litigation and related costs. Any amounts remaining in the escrow account after final conclusion of the related litigation will be paid to SGASH;

·                     The net cash disbursements the Company expects to make as a result of the IPO and the related transactions which are comprised of the following: (i) a return of capital to SGASH in the amount of $186.6 million, (ii) a      payment of $19.1 million to certain of the Company’s employees under the Fidelity Bonus Plan and the Société Générale Corporate and Investment Banking Partnership, (iii) the receipt of $1.7 million from SGASH to refund the over-funded portion of a voluntary deferred compensation plan previously sponsored by Société Générale for key executives of its U.S. affiliates (“Deferred Compensation Plan”) and, (iv) the receipt of $2.0 million from Société Générale to fund amounts paid to the Company’s employees under the Société Générale Corporate and Investment Banking Partnership. The Company’s treasury practice is to invest temporary excess cash balances in securities purchased under agreements to resell; accordingly, these payments are being deducted from this account. The return of capital to SGASH was determined so that the Company’s stockholders’ equity would be $207.0 million immediately following the IPO. The pro forma adjustments assume that the IPO and related transactions occurred on June 30, 2006;

·                     The transfer to SGASH, pursuant to the Separation Agreement of the Company’s interest in the cash surrender value of corporate owned life insurance of $39.9 million at June 30, 2006 which funded the liability related to the Deferred Compensation Plan;

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Cowen Group, Inc.
Notes to the Unaudited Condensed Combined Statements, continued

·                     A decrease in the Company’s Fidelity Bonus Plan liability in the amount of $10.2 million. All deferred amounts under the plan, including amounts contributed in 2006, will vest as a result of the IPO and the majority of the vested amounts will be immediately paid out to employees as most employees had elected to withdraw their interests upon vesting. The liability as of June 30, 2006 in the amount of $10.9 million will be reduced to $0.7 million as a result of withdrawal payments; the remaining liability relates to employees who deferred the distribution of their vested amounts to after the completion of the vesting period;

·                     A decrease in the Société Générale Corporate and Investment Banking Partnership liability in the amount of $1.3 million. All awards to the Company’s employees under the Société Générale Corporate Investment Banking Partnership will vest as a result of the IPO and will be paid out to employees;

·                     The transfer to SGASH of the liabilities related to the Company’s employees under the Deferred Compensation Plan, SG Merchant Banking Coinvestment Plan and SG Cowen Ventures I, L.P., in the amounts of $38.2 million, $3.0 million and $0.5 million, respectively;

·                     A capital contribution from SGASH from its assumption of liabilities related to our employees under the SG Merchant Banking Coinvestment Plan and SG Cowen Ventures I, L.P., in the amounts of $3.0 million and $0.5 million, respectively;

·                     A cash capital contribution to fund amounts paid to the Company’s employees under the Société Générale Corporate and IBP in the amount of $2.0 million; and

·                     The decrease in retained earnings from the expense of $7.6 million resulting from the vesting of the Company’s Fidelity Bonus Plan liability and the Société Générale Corporate and Investment Banking Partnership liability as a result of the IPO. Amounts have been estimated based on balances determined as of June 30, 2006.

The net effect of the pro forma adjustments is a net decrease in group equity of $188.8 million.

 

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our unaudited condensed combined financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. In addition to historical information, this discussion includes forward-looking information that involves risks and assumptions, which could cause actual results to differ materially from management’s expectations. See “Special Note Regarding ForwardLooking Statements” included elsewhere in this Quarterly Report on Form 10-Q.

Overview

We are an investment bank dedicated to providing superior research, sales and trading and investment banking services to companies and institutional investor clients primarily in the healthcare, technology, media and telecommunications and consumer sectors. In 2006, our research and sales and trading services were provided to over 1,000 domestic and international clients seeking to trade equity and convertible securities, principally in our target sectors. We focus our investment banking efforts, principally equity-related capital raising and strategic advisory services, on small- and mid-capitalization public companies as well as private companies. We operate through a single reportable segment.

Many external factors affect our revenues and profitability, including economic and market conditions, the level and volatility of interest rates, inflation, political events, investor sentiment, legislative and regulatory developments and competition. A favorable business environment is characterized by many factors, including a stable geopolitical climate, transparent financial markets, low inflation, low interest rates, low unemployment, strong business profitability and high business and investor confidence. These factors influence levels of equity security issuance and merger and acquisition activity generally and in our target sectors, which affect our investment banking business. The same factors also affect trading volumes and valuations in secondary financial markets, which affect our sales and trading business. Commission rates, market volatility and other factors also affect our sales and trading revenues and may cause our sales and trading revenues to vary from period to period. Because these business environment issues are unpredictable and beyond our control, our earnings may fluctuate significantly from year to year and quarter to quarter. We are also subject to various legal and regulatory actions that impact our business and financial results.

We have experienced favorable market conditions for much of the six months ended June 30, 2006 and, in particular, a good environment for equity trading and capital raising activities. Market conditions weakened in the second half of the quarter ended June 30, 2006 as investor confidence appeared to be negatively impacted by a number of factors including, among others, certain geopolitical developments, and the relatively high price of oil. We remain confident in the long-term market opportunity for our business primarily due to positive long-term growth and investment trends in our target sectors and expected continued demand for our specialized services.

As a result of our separation from Société Générale and our becoming a public company on July 12, 2006, our assets were reduced by $216.9 million and our liabilities were reduced by $28.1 million, resulting in a net reduction in stockholders’ equity of $188.8 million as compared to our assets, liabilities and stockholders’ equity as of June 30, 2006, respectively.

As a public company, we intend to incur employee compensation and benefits expense equal to between 58% to 60% of total revenues, plus, through 2011 the compensation expense associated with the initial grant of equity to our senior employees, resulting in total compensation and benefit expense in excess of 58% to 60% of total revenues in those years. See “Separation from Société Générale”.

Separation from Société Générale

The pro forma portion of our unaudited condensed combined statements of financial condition reflect adjustments that would have occurred had our separation from Société Générale been effective on June 30, 2006. The following

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adjustments were made on July 12, 2006, the date of our IPO. These adjustments are subject to an independent final review of the Company’s separation from Société Générale:

· Return of capital to Société Générale. We distributed $180.3 million to SGASH as a return of capital. As a result of the distribution and transfer of other assets and liabilities in connection with the separation from Société Générale our stockholders’ equity was reduced from $395.8 million as of June 30, 2006 to $207.0 million immediately after the distribution. We funded the cash distribution through the sale of certain of our liquid assets.

· Indemnification arrangements. Société Générale will indemnify us for all known, pending and threatened litigation (including the costs of such litigation) and certain known regulatory matters, in each case, that existed prior to the IPO to the extent the cost of such litigation results in payments in excess of amounts reserved and placed in escrow. Initially, these costs will be paid out of an escrow account established in connection with our separation from Société Générale and our becoming a public company, which was funded by us with cash that otherwise would have been paid to Société Générale as a return of capital. To the extent the amount paid in resolving these litigation matters is less than the amount placed in escrow, Société Générale will receive the remaining balance of the escrow amount. In addition, Société Générale will indemnify us for all known and unknown liabilities arising out of certain former businesses of SG Cowen Securities Corporation that were sold or have been transferred to other affiliates of Société Générale. We will indemnify Société Générale for most known regulatory matters that existed prior July 12, 2006, including any civil litigation that arises out of such regulatory matters. For more information, see “Legal Proceedings.”

· Other transfers and payments. In connection with our separation from Société Générale, we have entered into certain new lease arrangements, including a sub-lease agreement with Société Générale for our New York City location. These new lease arrangements will result in an increase in our annual rent expense of approximately $1.3 million. As well, we have transferred to SGASH our interest in the cash surrender value of corporate owned life insurance of $39.9 million at June 30, 2006 which was utilized as an economic hedge against the Deferred Compensation Plan. The cash surrender value of the corporate owned life insurance transferred to Société Générale exceeded the liability to our employees under the Deferred Compensation Plan by $1.7 million and Société Générale refunded such amount to us. We also transferred to SGASH the liabilities related to our employees under the Deferred Compensation Plan, the SG Merchant Banking Coinvestment Plan and the plan that previously enabled certain of our employees to invest a portion of their performance-related compensation in SG Cowen Ventures I, L.P., in the amounts of $38.2 million, $3.0 million and $0.5 million, respectively. Additionally, payments have or will be made to certain of our employees under the Fidelity Bonus plan and the Société Générale Corporate and Investment Banking Partnership in the amount of $19.1 million. We have funded the payments to our employees under the Fidelity Bonus plan through the sale of certain mutual fund investments held by us as an economic hedge to such plan. Société Générale has made a payment to us in an amount equal to the amount we have paid to our employees under the Société Générale Corporate and Investment Banking Partnership. We have also agreed to pay SGAI 50% of the amount of cash savings, if any, in U.S. federal income tax and certain state and local taxes that we actually realize if there is an increase in tax basis of our tangible and intangible assets as a result of the transactions required to effect the separation, subject to repayment if it is later determined that those savings are not available to us. At the present time, the Company believes it is unlikely that the transactions required to effect the separation resulted in an increase in tax basis. Absent such an increase in tax basis, we will not realize a tax benefit from the transaction and therefore would not be required to make the transfer to SGAI as described above. A final analysis will be made to determine the impact on tax basis.

In addition to the historical adjustments described, we expect there to be other consequences of the IPO. As a public company, we will incur certain expenses as follows:

· Increased tax rate. As a result of the IPO, our net operating loss carryforwards will be retained by Société Générale. As a result, we expect to have an effective tax rate of approximately 45%. However, for the remainder of 2006 the anticipated 45% effective tax rate will likely be impacted by permanent tax

27




differences related to deferred compensation payments made as a result of our separation, foreign taxes and state and local taxes. Historically, our business has had a very low effective tax rate due to continued net operating losses for tax purposes.

· Equity compensation. As a public company, we expect to utilize equity as a portion of our ongoing compensation program. In addition, in conjunction with the IPO, we have made an initial grant of nonqualified stock options and restricted stock to 84 of our senior employees. The impact of this initial grant of equity awards will be to increase our employee compensation and benefits expense during the period over which the associated expense is amortized. We estimate that the annual expense associated with the initial grant of equity to our senior employees will be $5.2 million, $10.4 million, $10.0 million, $6.9 million, $5.6 million and $0.8 million in the years 2006, 2007, 2008, 2009, 2010 and 2011, respectively. We intend to incur employee compensation and benefits expense equal to between 58% to 60% of total revenues, plus, through 2011 the compensation expense associated with the initial grant of equity to our senior employees (as described above), resulting in total compensation and benefit expense in excess of 58% to 60% of total revenues in those years. We may change our target percentage at any time. This target percentage includes all cash and non-cash compensation and benefit expense with the exception of the initial grant of nonqualified stock options and restricted stock as noted above, as well as the cash payments related to deferred compensation plans (including the Société Générale Corporate and Investment banking Partnership) that have been terminated as a result of our separation from Société Générale.

· Public company costs. As a public company, we anticipate incurring certain expenses that we have not historically had to incur, such as NASDAQ annual listing fees, annual fees associated with operating as a stand-alone entity in the U.K. and annual franchise taxes associated with being incorporated in Delaware. We estimate that these fees will be approximately $0.2 million per annum.

Basis of Presentation

Our combined financial statements have been prepared as if we had been a stand-alone entity for the periods presented. Our combined financial statements have also been prepared assuming that SGASH transferred all of its interest in Cowen and Company and CIL to the Company and that the transactions contemplated in the agreements described in Note 8 of our Unaudited Condensed Combined Financial Statements for the six months ended June 30, 2006 were consummated prior to the periods presented.

Our combined financial statements include the carve-out accounts of Cowen and Company, and the carve-out accounts of Société Générale London Branch, the predecessor of CIL, in each case using the historical basis of accounting for the results of operations, assets and liabilities of the businesses that currently constitute Cowen and Company and CIL. In April 2004, Société Générale reorganized SGCSC into two separate single member limited liability broker-dealers: SG Cowen & Co., LLC and SGAS. The financial statements of SGAS have not been included in our financial statements. In February 2006, SG Cowen & Co. changed its name to Cowen & Co., LLC and SG Cowen Europe Limited changed its name to CIL. In May 2006, Cowen & Co., LLC changed its name to Cowen and Company, LLC. Cowen and Company, LLC clears its securities transactions on a fully disclosed basis through its clearing broker, SGAS and does not carry customer funds or securities. The Unaudited Condensed Combined Financial Statements for the six months ended June 30, 2006 included elsewhere in this Quarterly Report on Form 10-Q have been prepared in conformity with U.S. GAAP. The combined financial information included herein may not necessarily be indicative of our results of operations, financial position and cash flows in the future or what our results of operations, financial position and cash flows would have been had we been a stand-alone company during the periods presented.

The combined results include the revenues generated and expenses incurred based on customer relationships and related business activities. Certain of our expenses are based on shared services that were provided in the past by Société Générale or one of its affiliates. These expenses primarily related to providing employee-related services and benefits, technology and data processing services and corporate functions including tax, legal, compliance, finance and operations. Costs included in the Unaudited Condensed Combined Financial Statements for shared services were determined based on costs to the affiliated entity and allocated based on our usage of those services.

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The combined statements of operations do not include litigation expenses incurred by us in connection with the Gruttadauria litigation and other legal matters related to the retail brokerage business of SGCSC, which was sold in October 2000, and is not part of the businesses currently conducted by us. As the successor of the named party in the litigation, we recognize the legal reserves and accruals related to this matter in our combined statements of financial condition and cash flows related to this matter as financing activities in the unaudited combined statements of cash flows. We will be indemnified by Société Générale for any payments we may be required to make or expenses we may incur related to the Gruttadauria litigation and other legal matters related to the retail brokerage business of SGCSC. See Note 9 of our Unaudited Condensed Combined Financial Statements for the six months ended June 30, 2006 for a further description of certain agreements that will govern the responsibilities of the Company and Société Générale regarding this matter.

All significant intercompany accounts and transactions have been eliminated in combination.

Revenues

We operate our business as a single segment; however, we derive revenues from two primary sources, investment banking and sales and trading.

Investment Banking

We earn investment banking revenue primarily from fees associated with underwriting and privately placing securities and providing strategic advisory services in mergers and acquisitions and similar transactions.

· Underwriting revenues. We earn underwriting revenues in securities offerings in which we act as an underwriter, such as initial public offerings, follow-on equity offerings and convertible security offerings. Underwriting revenues include management fees, underwriting fees and selling concessions. We record underwriting revenues, net of related syndicate expenses, at the time the underwriting is completed. In syndicated underwritten transactions, management estimates our share of transaction-related expenses incurred by the syndicate, and we recognize revenue net of such expense. When we receive the final settlement, typically within 90 days following the completion of a transaction, we adjust these amounts to reflect the actual transaction-related expenses and our resulting underwriting fee. We receive a higher proportion of total fees in underwritten transactions in which we act as a lead manager.

· Private placement revenues. We earn agency placement fees in non-underwritten transactions such as private placements, private investments in public equities (“PIPEs”) and registered direct placements (“RDs”). We record private placement revenues on the closing date of the transaction. Expenses associated with generating agency placement fees are recognized primarily as marketing and business development expense net of client reimbursements when related revenue is recognized or the engagement is otherwise concluded.

· Strategic advisory revenues. Our strategic advisory revenues include success fees earned in connection with advising companies, both buyers and sellers, principally in mergers and acquisitions. We also earn fees for related advisory work such as providing fairness opinions. We record strategic advisory revenues when the transactions or the services (or, if applicable, separate components thereof) to be performed are substantially complete, the fees are determinable and collection is reasonably assured. Expenses associated with generating strategic advisory fees are recognized primarily as marketing and business development expense net of client reimbursements when the related revenue is recognized or the engagement is otherwise concluded.

Since our investment banking revenues are generally recognized at the time of completion of each transaction or the services to be performed, these revenues typically vary between periods and may be considerably affected by the timing of the closing of significant transactions.

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Sales and Trading

Our sales and trading revenues consist of commissions and principal transactions revenues. Our management reviews sales and trading revenue on a combined basis as the preponderance of the revenue in both line items is derived from the same group of clients. In addition, the majority of our trading gains and losses are a result of activities that support the facilitation of client orders in both listed and over-the-counter securities, although all trading gains and losses are recorded in principal transactions.

· Commissions. Our sales and trading business generates commission revenue from securities trading commissions paid by institutional investor clients. Commissions are recognized on a trade date basis.

· Principal transactions. Our sales and trading revenues also include net trading gains and losses from principal transactions, which primarily include our acting as a market-maker in over-the-counter equity securities, our listed options trading, and our trading of convertible securities. In certain cases, we commit our own capital to provide liquidity to clients buying or selling blocks of shares of listed stocks without previously identifying the other side of the trade at execution, which subjects us to market risk. These positions are typically held for a very short duration.

Interest and Dividend Income

Interest and dividend income primarily consists of interest earned on our interest bearing assets (primarily securities purchased under agreements to resell) and net interest and dividends on securities maintained in trading accounts related to our sales and trading business. In conjunction with our separation from Société Générale and our becoming a public company we have made a payment representing a return of capital to SGASH in the amount of $180.3 million. The level of our interest bearing assets was significantly reduced as a result of this capital distribution which will result in a meaningful reduction in our interest income. In addition, we have transferred $72.3 million into an escrow account for the future payment of certain litigation that existed prior to the date of the IPO for which Société Générale has agreed to indemnify us. Subsequent to making this transfer, certain matters covered by the escrow arrangement have been settled and the escrow balance has been adjusted. Excess reserves related to these settled matters will be returned to SGASH. SGASH is entitled to any interest earned on such deposits held in escrow.

Other

Other revenue includes fees for managing a portfolio of merchant banking investments on behalf of Société Générale and other third party investors, miscellaneous income such as fees for managing venture capital investments on behalf of an inactive employee fund and other fees for the delivery of equity research. Fees for managing the portfolio of merchant banking assets and venture capital investments are earned on a monthly basis pursuant to the terms of agreements with Société Générale and other third party investors. Société Générale has sold a portion of the merchant banking investments currently managed by us. We will continue to manage these assets for the purchaser and will continue to receive a fee for doing so.

Expenses

A significant portion of our expense base is variable, including employee compensation and benefits, brokerage and clearance, and marketing and business development expenses.

Compensation Expense

Following our separation from Société Générale and our becoming a public company, we intend to incur employee compensation and benefits expense equal to between 58% to 60% of total revenues, plus, through 2011 the compensation expense associated with the initial grant of equity to our senior employees (as described below), resulting in total compensation and benefit expense in excess of 58% to 60% of total revenues in those years. We

30




may change our target percentage at any time. This target percentage includes all cash and non-cash compensation and benefit expense with the exception of the initial grant of nonqualified stock options and restricted stock as noted above, as well as the cash payments related to deferred compensation plans (including the Société Générale Corporate and Investment Banking Partnership) that have been terminated as a result of our separation from Société Génperale and our becoming a public company, all as more fully described below. In connection with our separation from Société Générale, we have granted to certain of our senior employees nonqualified stock options to purchase an aggregate of 1,125,000 shares of our common stock and an aggregate of 2,100,000 shares of restricted stock. We estimate that the annual expense associated with the initial grant of equity to our senior employees will be $5.2 million, $10.4 million, $10.0 million, $6.9 million, $5.6 million and $0.8 million in the years 2006, 2007, 2008, 2009, 2010 and 2011, respectively. We will account for awards of our equity in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payments.”

Non-compensation Expense

Floor brokerage and trade execution. These expenses include floor brokerage and trade execution costs that fluctuate depending on the volume of trades we complete. We have entered into a new commercial clearing agreement with SGAS as a result of our separation from Société Générale and our becoming a public company, which replaced our pre-existing clearing agreement with SGAS. The initial terms of the clearing agreement will terminate on December 31, 2006 at which time we expect to enter into a longer term relationship with a new unaffiliated clearing firm.

Service fees, net. These expenses include fees for outsourcing services, including certain support functions such as information technology, management and support.

Communications. These expenses include costs for telecommunication and data communication, primarily consisting of expenses for obtaining third-party market data. We also incur communications expenses related to electronic trading network connections and in connection with other enhancements to our trading platform.

Occupancy and equipment. These expenses include rent and utilities associated with our various offices, occupancy and premises taxes, support for software applications, disaster recovery services and other fixed asset service fees.

Marketing and business development. These expenses include costs such as business travel and entertainment, expenses related to holding conferences and advertising costs.

Litigation and related costs. We establish loss contingency reserves for certain legal proceedings where, in the opinion of management, the likelihood of liability is probable and the extent of such liability is reasonably estimable. Establishment of reserves is an inherently uncertain process involving estimates of future losses. Any future increases to our loss contingency reserves or releases from these reserves may affect our results of operations.

Depreciation and amortization. We incur depreciation and amortization expense related to capital assets, such as investments in technology and leasehold improvements.

Other. Other expenses include consulting fees, professional fees, and implementation costs related to outsourcing and other projects, exchange membership fees, net, research delivery costs and other related expenses.

Gain (Loss) on Exchange Memberships. These gains or losses are recognized upon the sale, exchange or other disposition of the membership interests or the other-than-temporary impairment of the membership interests. Gains are not recorded based on increases in the fair value of the membership interests.

31




Provision for Income Taxes

The taxable results of our U.S. operations have historically been included in the consolidated income tax returns of SGAI. The tax results of our U.K. operations have historically been included in the tax returns of Société Générale’s London Branch. The income tax provision reflected in this quarterly report is presented as if we operated on a standalone basis, consistent with the liability method prescribed by SFAS No. 109, Accounting for Income Taxes. Under the liability method, deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial statement and income tax purposes, as determined under applicable tax laws and rates. A valuation allowance is provided for deferred tax assets when it is more likely than not that the benefits of net deductible temporary differences and net operating loss carryforwards will not be realized.

Our effective tax rates for the three and six months ended June 30, 2006 were 5.8% and 4.8%, respectively. Our effective tax rates for the three and six months ended June 30, 2005 were 2.9% and 8.7%, respectively. After the IPO, we expect our effective tax rate to increase significantly as we will no longer have the benefit of net operating loss carryforwards to offset federal and most state and local income taxes. In connection with our separation from Société Générale, SGAI will retain these tax benefits. As a result, we expect our effective tax rate to be approximately 45%. However, for the remainder of 2006, the anticipated 45% tax rate likely will be impacted by permanent tax differences related to deferred compensation payments made as a result of our separation, foreign taxes and state and local taxes.

Results of Operations

Three Months Ended June 30, 2006 Compared with the Three Months Ended June 30, 2005

Overview

Total revenues increased $30.1 million, or 56.4%, to $83.6 million for the three months ended June 30, 2006 compared with $53.5 million for the three months ended June 30, 2005. This increase was primarily due to an increase in investment banking revenues of $20.7 million as well as an increase in sales and trading related revenues of $8.1 million.

Total expenses increased $22.2 million, or 39.9%, to $77.7 million for the three months ended June 30, 2006 compared with $55.5 million for the same period in the prior year, primarily due to an increase in compensation expense resulting from an increase in total revenues. We determine our accruals for compensation expense as a percentage of total revenues excluding certain revenue and expense items associated with deferred compensation plans that were terminated in conjunction with the IPO. Total non-compensation expenses increased $3.0 million, or 11.7%, during the second quarter of 2006 compared with the same quarter in the prior year primarily due to an increase in occupancy related expenses and other expenses. We recorded net income of $5.6 million for the three months ended June 30, 2006 compared to a loss of $2.0 million for the three months ended June 30, 2005.

32




The following table provides a comparison of our revenues and expenses for the periods presented:

 

 

Three Months Ended

 

Period to Period

 

 

 

June 30

 

June 30

 

 

 

 

 

 

 

2006

 

2005

 

$Change

 

% Change

 

 

 

(dollars in thousands)

 

Revenues

 

 

 

 

 

 

 

 

 

Investment banking

 

$

39,477

 

$

18,800

 

$

20,677

 

110.0

%

Commissions

 

22,109

 

22,296

 

(187

)

(0.8

%)

Principal transactions

 

15,368

 

7,071

 

8,297

 

117.3

%

Interest and dividend income

 

5,510

 

3,939

 

1,571

 

39.9

%

Other

 

1,153

 

1,374

 

(221

)

(16.1

%)

Total revenues

 

83,617

 

53,480

 

30,137

 

56.4

%

Expenses

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

48,838

 

29,673

 

19,165

 

64.6

%

Floor brokerage and trade execution

 

2,760

 

2,363

 

397

 

16.8

%

Service fees, net

 

4,663

 

4,351

 

312

 

7.2

%

Communications

 

6,104

 

6,075

 

29

 

0.5

%

Occupancy and equipment

 

4,513

 

3,632

 

881

 

24.3

%

Marketing and business development

 

3,287

 

3,093

 

194

 

6.3

%

Litigation and related costs

 

864

 

590

 

274

 

46.4

%

Depreciation and amortization

 

519

 

373

 

146

 

39.1

%

Interest

 

177

 

101

 

76

 

75.2

%

Other

 

5,972

 

5,267

 

705

 

13.4

%

Total expenses

 

77,697

 

55,518

 

22,179

 

39.9

%

Income (loss) before income taxes

 

5,920

 

(2,038

)

7,958

 

NM

 

Provision (benefit) for income taxes

 

345

 

(59

)

404

 

NM

 

Net income (loss)

 

$

5,575

 

$

(1,979

)

$

7,554

 

NM

 

 


NM indicates not meaningful.

Revenues

Investment Banking

Investment banking revenues increased $20.7 million, or 110.0%, to $39.5 million for the three months ended June 30, 2006 compared with $18.8 million for the three months ended June 30, 2005. The increase reflects significant improvements in our underwriting and other capital raising business partially offset by a decrease in our strategic advisory fees. Our underwriting revenues increased $7.9 million, or 82.5%, to $17.5 million for the three months ended June 30, 2006 compared with $9.6 million during the same period in the prior year. The increase in underwriting revenues was a result of increased transaction volume and an increase in the median transaction size. Our private placement revenues increased $14.8 million, or 507.7%, to $17.7 million for the three months ended June 30, 2006 compared with $2.9 million for the three months ended June 30, 2005. The increase in private placement revenues was primarily attributable to an increase in both the number and median deal size of the transactions we completed during the second quarter of 2006. Strategic advisory fees decreased $2.0 million, or 31.3%, to $4.3 million for the three months ended June 30, 2006 compared with $6.3 million in the second quarter of the prior year, primarily resulting from a decrease in the number of transactions closed.

Commissions

Commissions decreased $0.2 million, or 0.8%, to $22.1 million for the three months ended June 30, 2006 compared with $22.3 million for the three months ended June 30, 2005. The reduction was the result of a decrease in commission rates partially offset by an increase in trading volumes during the second quarter of 2006.

 

33




Principal Transactions

Principal transactions revenues increased $8.3 million, or 117.3%, to $15.4 million for the three months ended June 30, 2006 compared with $7.1 million in the second quarter of 2005, due primarily to improved results associated with our convertible trading business, as well as an increase in our over-the-counter equity activity.

Interest and Dividend Income

Interest and dividend income increased $1.6 million, or 39.9%, to $5.5 million for the three months ended June 30, 2006 compared with $3.9 million in the second quarter of 2005, resulting primarily from higher average interest bearing assets and higher interest rates in the second quarter of 2006 compared with the second quarter of 2005. In conjunction with the IPO, we returned $180.3 million in capital to SGASH. As a result of this capital distribution, we anticipate having a significantly lower level of interest earning assets subsequent to the IPO which in turn will result in a meaningful reduction in our interest income. In addition, we have transferred $72.3 million into an escrow account for the future payment of certain litigation that existed prior to the date of the IPO for which Societe Generale has agreed to indemnify us. Subsequent to making this transfer, certain matters covered by the escrow arrangement have been settled and the escrow balance has been adjusted. Excess reserves related to these settled matters will be returned to SGASH. SGASH is entitled to any interest income earned on such deposits held in escrow.

Other

Other revenues decreased $0.2 million to $1.2 million for the three months ended June 30, 2006 compared with $1.4 million for the same period in 2005. This decrease is primarily attributable to a decrease in fees for managing the portfolio of merchant banking assets and venture capital investments partially offset by the addition of new equity research fee income.

Expenses

Employee Compensation and Benefits

Employee compensation and benefits expense increased $19.1 million, or 64.6%, to $48.8 million for the three months ended June 30, 2006 compared with $29.7 million in the second quarter of 2005. This increase was primarily attributable to the application of our target compensation and benefits expense to revenue ratio to increased revenues during the three months ended June 30, 2006 compared to the second quarter of 2005. The majority of employee compensation and benefits expense in both periods represent amounts that have been accrued for the payment of variable compensation to all of our employees at year-end. Excluding the revenue and compensation expense associated with the deferred compensation plans that were terminated as a result of the IPO, employee compensation and benefits expense as a percentage of total revenues was 58.0% for the three months ended June 30, 2006. Employee compensation and benefits expense as a percentage of total revenues was 55.5% for the three months ended June 30, 2005. We intend to incur employee compensation and benefits expense, equal to between 58% to 60% of total revenues, plus, through 2011 the compensation expense associated with the initial grant of equity to our senior employees (as described below), resulting in total compensation and benefit expense in excess of 58% to 60% of total revenues in those years. We may change our target percentage at any time. This target percentage includes all cash and non-cash compensation and benefit expense with the exception of the initial grant of nonqualified stock options and restricted stock as noted above, as well as the cash payments related to deferred compensation plans (including the Société Générale Corporate and Investment Banking Partnership) that were terminated as a result of the IPO. We estimate that the annual expense associated with the initial grant of equity to our senior employees will be $5.2 million, $10.4 million, $10.0 million, $6.9 million, $5.6 million and $0.8 million in the years 2006, 2007, 2008, 2009, 2010 and 2011, respectively.

Floor Brokerage and Trade Execution

Floor brokerage and trade execution fees increased $0.4 million, or 16.8%, to $2.8 million for the three months ended June 30, 2006 compared with $2.4 million in the second quarter of 2005. This increase was primarily attributable to an increase in allocated costs related to our clearing agreement with Société Générale.

Service Fees, net

Net service fees increased $0.3 million, or 7.2%, to $4.7 million for the three months ended June 30, 2006 compared with $4.4 million for the same period in 2005. This increase was primarily attributable to increased information

34




technology service fees, partially offset by a decrease in allocations from Société Générale of support function expenses in our London office.

Occupancy and Equipment

Occupancy and equipment expense increased $0.9 million, or 24.3%, to $4.5 million for the three months ended June 30, 2006 compared with $3.6 million in the second quarter of 2005. This increase was primarily attributable to an increase in rent expense associated with changes in our New York office space, moving expenses associated with relocating certain employees within our New York offices and an increase in certain software license fees.

Marketing and Business Development

Marketing and business development expense increased $0.2 million, or 6.3%, to $3.3 million for the three months ended June 30, 2006 compared with $3.1 million in the second quarter of 2005. This increase was primarily due to increased conference related costs, partially offset by reduced entertainment expenses.

Litigation and Related Costs

Litigation and related costs increased $0.3 million, or 46.4%, to $0.9 million for the three months ended June 30, 2006 compared with $0.6 million in the second quarter of 2005. This increase in litigation and related costs was primarily attributable to increased legal fees associated with regulatory matters and legal fees related to the establishment of our new offices in London.

Depreciation and Amortization

Depreciation and amortization expense increased $0.1 million, or 39.1%, to $0.5 million for the three months ended June 30, 2006 compared with $0.4 million in the second quarter of 2005. This increase was primarily attributable to the amortization of additional network hardware and leasehold improvements placed into service during 2006.

Other

Other expenses increased $0.7 million, or 13.4%, to $6.0 million for the three months ended June 30, 2006 compared with $5.3 million in the second quarter of 2005. This increase was primarily attributable to a combination of increased professional fees associated with becoming a public company, increased allocated insurance expense from Société Générale and a termination fee paid to Société Générale related to a performance guarantee agreement.

Provision for Income Taxes

The provision for taxes was $0.3 million in the three months ended June 30, 2006, which equals an effective tax rate of 5.8%, compared to a tax benefit of $0.1 million in the three months ended June 30, 2005, which equals an effective tax rate of 2.9%. We expect our effective tax rate to increase significantly as we no longer have the benefit of net operating loss carryforwards to offset federal and most state and local income taxes. In connection with our separation from Société Générale, SGAI has retained these tax benefits. As a result, we expect our effective tax rate to be approximately 45%. However, for the remainder of 2006, the anticipated 45% effective tax rate likely will be impacted by permanent tax differences related to deferred compensation payments made as a result of our separation, foreign taxes and state and local taxes.

Six Months Ended June 30, 2006 Compared with the Six Months Ended June 30, 2005

Overview

Total revenues increased $51.7 million, or 38.1%, to $187.4 million for the six months ended June 30, 2006 compared with $135.7 million for the six months ended June 30, 2005. This increase was primarily due to an increase in investment banking revenues of $37.7 million and an increase in sales and trading related revenues of $10.8 million, as well as a $4.0 million increase in interest and dividend income.

Total expenses increased $40.6 million, or 31.8%, to $168.0 million for the six months ended June 30, 2006 compared with $127.4 million for the same period in the prior year, primarily due to an increase in compensation expense resulting from the increase in total revenues. We determined our accruals for compensation expense as a percentage of total revenues excluding certain revenues and expenses associated with deferred compensation plans that were terminated in conjunction with the IPO. Total non-compensation expenses increased $4.2 million, or 8.0%,

35




during the six months ended June 30, 2006 compared with the same period in the prior year primarily due to an increase in occupancy related expenses, litigation and related costs and other expenses. We recorded net income of $42.1 million for the six months ended June 30, 2006 compared with $7.6 million for the six months ended June 30, 2005. Net income of $42.1 million for the six months ended June 30, 2006 included a one-time gain on exchange memberships of $24.8 million realized upon the consummation of the merger of the New York Stock Exchange and Archipelago Holdings, Inc. which occurred on March 7, 2006.

The following table provides a comparison of our revenues and expenses for the periods presented:

 

 

Six Months Ended

 

Period to Period

 

 

 

June 30

 

June 30

 

 

 

%

 

 

 

2006

 

2005

 

$ Change

 

Change

 

 

 

(dollars in thousands)

 

Revenues

 

 

 

 

 

 

 

 

 

Investment banking

 

$

92,916

 

$

55,179

 

$

37,737

 

68.4

%

Commissions

 

46,224

 

46,526

 

(302

)

(0.6

)%

Principal transactions

 

34,780

 

23,674

 

11,106

 

46.9

%

Interest and dividend income

 

11,655

 

7,635

 

4,020

 

52.7

%

Other

 

1,835

 

2,738

 

(903

)

(33.0

)%

Total revenues

 

187,410

 

135,752

 

51,658

 

38.1

%

Expenses

 

 

 

 

 

 

 

 

 

Employee compensation and benefits

 

111,576

 

75,182

 

36,394

 

48.4

%

Floor brokerage and trade execution

 

5,226

 

5,110

 

116

 

2.3

%

Service fees, net

 

9,619

 

9,193

 

426

 

4.6

%

Communications

 

12,086

 

11,744

 

342

 

2.9

%

Occupancy and equipment

 

8,735

 

7,652

 

1,083

 

14.2

%

Marketing and business development

 

6,190

 

5,867

 

323

 

5.5

%

Litigation and related costs

 

1,907

 

1,082

 

825

 

76.2

%

Depreciation and amortization

 

994

 

753

 

241

 

32.0

%

Interest

 

404

 

275

 

129

 

46.9

%

Other

 

11,269

 

10,589

 

680

 

6.4

%

Total expenses

 

168,006

 

127,447

 

40,559

 

31.8

%

Operating income

 

19,404

 

8,305

 

11,099

 

133.6

%

Gain on exchange memberships

 

24,832

 

 

24,832

 

NM

 

Income before income taxes

 

44,236

 

8,305

 

35,931

 

432.6

%

Provision for income taxes

 

2,121

 

723

 

1,398

 

193.4

%

Net income

 

$

42,115

 

$

7,582

 

$

34,533

 

455.5

%


NM indicates not meaningful.

Revenues

Investment Banking

Investment banking revenues increased $37.7 million, or 68.4%, to $92.9 million for the six months ended June 30, 2006 compared with $55.2 million for the six months ended June 30, 2005. The increase reflects significant improvements in our underwriting and other capital raising business partially offset by a decrease in our strategic advisory fees. Our underwriting revenues increased $23.3 million, or 114.3%, to $43.7 million for the six months ended June 30, 2006 compared with $20.4 million during the same period in the prior year. The increase in underwriting revenues was a result of increased transaction volume and an increase in median transaction size. Our private placement revenues increased $29.1 million, or 297.6%, to $38.9 million for the six months ended June 30, 2006 compared with $9.8 million for the six months ended June 30, 2005. The increase in private placement revenues was primarily attributable to an increase in both the number and median deal size of the transactions we completed during the first half of 2006. Strategic advisory fees decreased $14.7 million, or 58.8%, to $10.3 million

36




for the six months ended June 30, 2006 compared with $25.0 million in same period of the prior year, primarily resulting from a decrease in the number of transactions closed and smaller deal sizes.

Commissions

Commissions decreased $0.3 million, or 0.6%, to $46.2 million for the six months ended June 30, 2006 compared with $46.5 million for the six months ended June 30, 2005, as a reduction in commission rates was only partially offset by an increase in trading volumes during the first half of 2006.

Principal Transactions

Principal transactions revenues increased $11.1 million, or 46.9%, to $34.8 million for the six months ended June 30, 2006 compared with $23.7 million in the first half of 2005, due primarily to improved trading results associated with our convertible trading business, as well as an increase in our over-the-counter equity activity.

Interest and Dividend Income

Interest and dividend income increased $4.0 million, or 52.7%, to $11.7 million for the six months ended June 30, 2006 compared with $7.6 million in the first half of 2005, resulting from higher average interest bearing assets and higher interest rates in the first half of 2006 relative to the first half of 2005. In connection with the IPO, we returned $180.3 million of capital to SGASH. As a result of this capital distribution, we anticipate having a significantly lower level of interest earning assets which will result in a meaningful reduction in our interest income for the remainder of 2006 and beyond. In addition, we transferred $72.3 million into an escrow account for the future payment of certain litigation that existed prior to the date of the IPO for which Société Générale has agreed to indemnify us. Subsequent to making this transfer, certain matters covered by the escrow arrangement have been settled and the escrow balance has been adjusted. Excess reserves related to these settled matters will be returned to SGASH. SGASH is entitled to any interest earned on such deposits held in escrow.

Other

Other revenues decreased $0.9 million to $1.8 million for the six months ended June 30, 2006 compared with $2.7 million for the same period in 2005. This decrease is primarily attributable to a decrease in fees for managing the portfolio of merchant banking assets and venture capital investments partially offset by the addition of new equity research fee income.

Expenses

Employee Compensation and Benefits

Employee compensation and benefits expense increased $36.4 million, or 48.4%, to $111.6 million for the six months ended June 30, 2006 compared with $75.2 million in the first half of 2005. This increase was primarily attributable to the application of our target compensation and benefits expense to revenue ratio to increased revenues during the six months ended June 30, 2006 compared to the same period in 2005. The majority of employee compensation and benefits expense in both periods represent amounts that have been accrued for the payment of variable compensation to all of our employees at year-end. Compensation is accrued based on a ratio of compensation to total revenues. Excluding the revenue and compensation expense associated with the deferred compensation plans that were terminated as a result of the IPO, employee compensation and benefits expense as a percentage of total revenues was 58.0% for the six months ended June 30, 2006. Employee compensation and benefits expense as a percentage of total revenues was 55.4% for the six months ended June 30, 2005. We intend to incur employee compensation and benefits expense, equal to between 58% to 60% of total revenues, plus, through 2011 the compensation expense associated with the initial grant of equity to our senior employees, resulting in total compensation and benefit expense in excess of 58% to 60% of total revenues in those years. This target percentage range may change at any time. This target percentage range includes all cash and non-cash compensation and benefit expense with the exception of the initial grant of nonqualified stock options and restricted stock, as well as the cash payments related to deferred compensation plans (including the Société Générale Corporate and Investment Banking Partnership) that were terminated at the date of the IPO. We estimate that the annual expense associated with the initial grant of equity to our senior employees will be $5.2 million, $10.4 million, $10.0 million, $6.9 million, $5.6 million and $0.8 million in the years 2006, 2007, 2008, 2009, 2010 and 2011, respectively.

37




Floor Brokerage and Trade Execution

Floor brokerage and trade execution fees increased $0.1 million, or 2.3%, to $5.2 million for the six months ended June 30, 2006 compared with $5.1 million in the first half of 2005. This increase was primarily attributable to an increase in allocated costs related to our clearing agreement with Société Générale, partially offset by a decrease in the use of independent brokers.

Service Fees, net

Net service fees increased $0.4 million, or 4.6%, to $9.6 million for the six months ended June 30, 2006 compared with $9.2 million for the same period in 2005. This increase was primarily attributable to increased information technology service fees, partially offset by a decrease in allocations from Société Générale of support function expenses in our London offices.

Communications

Communications expense increased $0.3 million, or 2.9%, to $12.1 million for the six months ended June 30, 2006 compared with $11.8 million in the first half of 2005. This increase was a result of increases in third-party trade related market data services, database subscriptions, other market data costs and telephone costs.

Occupancy and Equipment

Occupancy and equipment expense increased $1.1 million, or 14.2%, to $8.7 million for the six months ended June 30, 2006 compared with $7.6 million in the first half of 2005. This increase was primarily attributable to an increase in rent expense associated with our New York office space, moving expenses associated with relocating certain employees within our New York offices, an increase in certain software license fees and a write-off of certain information technology related hardware.

Marketing and Business Development

Marketing and business development expense increased $0.3 million, or 5.5%, to $6.2 million for the six months ended June 30, 2006 compared with $5.9 million in the first half of 2005. This increase was primarily due to increased conference related costs, partially offset by reduced entertainment expenses.

Litigation and Related Costs

Litigation and related costs increased $0.8 million, or 76.2%, to $1.9 million for the six months ended June 30, 2006 compared with $1.1 million in the first half of 2005. This increase in litigation and related costs was attributable to increased legal fees associated with matters that will be subject to payment from the escrow account and our right to indemnification by Société Générale, regulatory matters and legal fees associated with the establishment of our new office in London.

Depreciation and Amortization

Depreciation and amortization expense increased $0.2 million, or 32.0%, to $1.0 million for the six months ended June 30, 2006 compared with $0.8 million in the first half of 2005. This increase was primarily attributable to the amortization of additional network hardware and leasehold improvements placed into service during 2006.

Other

Other expenses increased $0.7 million, or 6.4%, to $11.3 million for the six months ended June 30, 2006 compared with $10.6 million in the first half of 2005. This increase was primarily attributable to a combination of increased professional fees associated with becoming a public company and increased employment fee expense, partially offset by reduced information technology consulting expenses.

Gain on Exchange Memberships

Gain on exchange memberships was $24.8 million for the six months ended June 30, 2006. This represents a onetime gain realized upon the consummation of the merger of the New York Stock Exchange and Archipelago Holdings, Inc. which occurred on March 7, 2006. NYSE members were entitled to receive cash and shares of NYSE Group common stock for each NYSE membership seat. We held seven NYSE membership seats at the date of the merger. The Company directed its interests from the merger to SGASH.

38




Provision for Income Taxes

The provision for taxes was $2.1 million in the six months ended June 30, 2006 which equals an effective tax rate of 4.8%, compared to $0.7 million in the six months ended June 30, 2005, which equals an effective tax rate of 8.7%. We expect our effective tax rate to increase significantly as we no longer have the benefit of net operating loss carryforwards to offset federal and most state and local income taxes. In connection with our separation from Société Générale, SGAI has retained these tax benefits. As a result, after the IPO we expect our effective tax rate to be approximately 45%. However, for the remainder of 2006, the anticipated 45% effective tax rate likely will be impacted by permanent tax differences related to deferred compensation payments made as a result of our separation, foreign taxes and state and local taxes.

Liquidity and Capital Resources

We have historically satisfied most of our capital and liquidity requirements through capital contributions from Société Générale. Most of our assets consist of cash and assets readily convertible into cash such as securities purchased under agreements to resell. Securities inventories are stated at fair value and are generally readily marketable. As of June 30, 2006, we had liquid assets of $377.9 million in cash and securities purchased under agreements to resell.

If the distribution and transfer of other assets and liabilities expected in connection with the separation had occurred as of June 30, 2006, we would have had liquid assets of $126.1 million in cash and securities purchased under agreements to resell. The actual distribution and transfer of other assets and liabilities of $180.3 million, which occurred on July 12, 2006, resulted in our having liquid assets of $125.0 million in cash and securities purchased under agreements to resell. See “Unaudited Pro Forma Combined Financial Statement of Condition.”

As a registered broker-dealer and member firm of the NYSE, our broker-dealer subsidiary is subject to the uniform net capital rule of the SEC. We have elected to use the alternative method permitted by the uniform net capital rule, which generally requires that we maintain minimum net capital of $1.0 million. The NYSE may prohibit a member firm from expanding its business or paying dividends if resulting net capital would be below the regulatory limit. We expect these limits will not impact our ability to meet current and future obligations.

At June 30, 2006, our net capital under the SEC’s Uniform Net Capital Rule was $209.9 million, or $208.9 million in excess of the minimum required net capital. If the return of capital and transfer of other assets and liabilities mentioned above had occurred on June 30, 2006, our net capital under the SEC’s Uniform Net Capital Rule would have been $65.6 million, or $64.6 million in excess of the minimum required net capital. CIL is subject to the capital requirements of the U.K. Financial Services Authority.

Cash flows

Six months ended June 30, 2006. Cash increased by $4.4 million for the six months ended June 30, 2006, primarily as a result of cash provided by operating and financing activities, partially offset by cash used in investing activities.

Our operating activities provided $3.6 million of cash due to net income of $42.1, partially offset by cash used in changes in operating liabilities of $14.0 million, cash used from changes in operating assets of $2.9 million and non-cash revenue and expense items of $21.6 million. The change in operating liabilities of $14.0 million was primarily due to a decrease in employee compensation and benefits payable of $34.2 million and an increase in securities sold, not yet purchased of $22.0 million. The change in operating assets of $2.9 million primarily resulted from a reduction in securities owned of $41.6 million, offset by an increase in securities purchased under agreements to resell of $39.6 million. Net non-cash revenue and expense items consisted primarily of a $24.8 million gain on exchange memberships.

Our investing activities consumed $5.6 million due to purchases of fixed assets. Cash provided by financing activities increased $6.4 million primarily due to a net capital contribution of $11.5 million from Société Générale, partially offset by net payments related to the SGCSC retail brokerage business that was sold in 2000 of $5.0 million.

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Six months ended June 30, 2005. Cash increased by $0.1 million for the six months ended June 30, 2005, primarily as a result of cash provided by operating activities, substantially offset by cash used in investing and financing activities.

Our operating activities provided $6.3 million of cash due to cash used in changes in operating liabilities of $112.1 million, partially offset by net income of $7.6 million, including non-cash revenue and expense items of $1.5 million and cash provided from changes in operating assets of $109.3 million. The change in operating liabilities of $112.1 million was primarily due to a decrease in employee compensation and benefits payable of $58.6 million, a decrease in securities sold, not yet purchased of $18.7 million and a decrease in legal reserves and legal expenses payable of $28.8 million. The change in operating assets of $109.3 million primarily resulted from an increase of $43.0 million in securities owned, fair value, an increase in securities purchased under agreement to resell of $34.4 million and an increase in insurance claims receivable of $21.1 million, partially offset by an decrease in other assets of $3.4 million.

Our investing activities consumed $0.4 million due to purchases of fixed assets. Our financing activities consumed $5.8 million primarily due to payments related to the SGCSC retail brokerage business that was sold in 2000 of $7.5 million, partially offset by a net capital contribution of $1.7 million from Société Générale.

Item 3. Qualitative and Quantitative Disclosures About Market Risk

Market Risk

Market risk represents the risk of loss that may result from the change in value of a financial instrument due to fluctuations in its market price. Market risk may be exacerbated in times of trading illiquidity when market participants refrain from transacting in normal quantities and/or at normal bid-offer spreads. Our exposure to market risk is directly related to our role as a financial intermediary in customer trading and to our market making and investment activities. Market risk is inherent in financial instruments.

We trade in equity, listed options and convertible debt securities as an active participant in both listed and over the counter markets. We typically maintain securities in inventory to facilitate our market making activities and customer order flow. We may use a variety of risk management techniques and hedging strategies in the ordinary course of our trading business to manage our exposures.

In connection with our trading business, management also reviews reports appropriate to the risk profile of specific trading activities. Typically, market conditions are evaluated and transaction details and securities positions are reviewed. These activities seek to ensure that trading strategies are within acceptable risk tolerance parameters, particularly when we commit our own capital to facilitate client trading. Activities include price verification procedures, position reconciliations and reviews of transaction booking. We believe these procedures, which stress timely communications between traders, trading management and senior management, are important elements of the risk management process.

Interest Rate Risk

Interest rate risk represents the potential loss from adverse changes in market interest rates. As we may hold convertible debt securities and other interest sensitive liabilities from time to time, we are exposed to interest rate risk arising from changes in the level and volatility of interest rates and in the shape of the yield curve. Interest rate risk is primarily managed through the use of U.S. Treasury futures, options and short positions in corporate debt securities.

Credit Risk

We engage in various securities underwriting, trading and brokerage activities servicing a diverse group of domestic and foreign corporations and institutional investor clients. A substantial portion of our transactions are collateralized and are executed with and on behalf of institutional investor clients including other brokers or dealers, commercial banks and other financial institutions. Our exposure to credit risk associated with the nonperformance of these

40




clients in fulfilling their contractual obligations pursuant to securities transactions can be directly impacted by volatile trading markets which may impair the client’s ability to satisfy its obligations to us. Our principal activities are also subject to the risk of counterparty nonperformance. Pursuant to our Clearing Agreement with SGAS, we are required to reimburse our clearing broker without limit for any losses incurred due to a counterparty’s failure to satisfy its contractual obligations with respect to a transaction executed by the affiliate as a clearing agent. However, as noted above, these transactions are collateralized by the underlying security, thereby reducing the associated risk to changes in the market value of the security through the settlement date. We also seek to mitigate the risks associated with sales and trading services through active customer screening and selection procedures and through requirements that clients maintain collateral in appropriate amounts where required or deemed necessary.

Inflation Risk

Because our assets are, to a large extent, liquid in nature, they are not significantly affected by inflation. However, the rate of inflation affects such expenses as employee compensation and communications charges, which may not be readily recoverable in the prices of services we offer. To the extent inflation results in rising interest rates and has other adverse effects on the securities markets, it may adversely affect our combined financial condition and results of operations in certain businesses.

Operational Risk

Operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. We are focused on maintaining our overall operational risk management framework and minimizing or mitigating these risks through continual assessment, reporting and monitoring of potential operational risks.

Item 4. Controls and Procedures

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer along with the Company’s Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to the Securities Exchange Act of 1934 (“Exchange Act”) Rule 13a-15(b). Based upon that evaluation, the Company’s Chief Executive Officer along with the Company’s Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic SEC filings. There have been no changes in the Company’s internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

Disclosure controls and procedures are the Company’s controls and other procedures which are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

The following items reflect developments with respect to our legal proceedings that occurred in the second quarter of 2006. These items should be read together with our discussion under the heading Commitments and Contingencies, Litigation, in the Notes to Combined Financial Statements for the years ended December 31, 2005 2004, and 2003.

·                                         In January 2002, Cowen learned that Frank Gruttadauria (‘‘Gruttadauria’’), a former employee of SGCSC’s retail brokerage business that was sold in October 2000, had defrauded numerous customers and misappropriated their assets at various firms that had employed him, including Cowen. Following the discovery of Gruttadauria’s fraud, numerous former customers commenced or threatened to commence lawsuits and arbitrations against Cowen arising out of Gruttadauria’s actions. In addition, government and regulatory authorities initiated investigations of the matter. Cowen cooperated fully with all of the governmental and regulatory investigations and all known regulatory matters arising out of Gruttadauria’s conduct were resolved in 2003. Cowen has also reached settlements with the vast majority of former customers, and has arbitrated several other customers’ claims. Cowen is attempting to resolve the remaining disputes. Separately, the securities brokerage firm that purchased SGCSC’s former retail brokerage business in October 2000 had threatened to file an arbitration against Cowen in connection with the liabilities, costs and expenses that it has incurred as a result of Gruttadauria’s misconduct. The parties have resolved this separate matter in a settlement agreement signed subsequent to June 30, 2006, and this settlement will be subject to the indemnification agreement among Société Générale and the Company.

·                                         Cowen is one of several defendants named in lawsuits arising out of the accounting fraud that caused the collapse of Lernout & Hauspie Speech Products, N.V. (‘‘L&H’’), a former investment banking client of Cowen. In one lawsuit, which is pending in federal court in Boston, the Trustee of the Dictaphone Litigation Trust has alleged that Cowen had made material misrepresentations to Dictaphone while Cowen was a financial advisor to L&H on its acquisition of Dictaphone, and published materially misleading research on L&H, in violation of various federal and state laws. The district court has granted Cowen’s motion to dismiss the amended complaint which sought more than $900 million in damages. The plaintiff has filed an appeal of that decision, and the oral argument before the First Circuit Court of Appeals is scheduled for September 13, 2006.

·                                         Cowen is one of many financial institutions and corporations named as defendants in a number of putative securities class actions entitled In re: Initial Public Offering Securities Litigation, which is pending in federal court in Manhattan and relates to numerous initial and other public offerings of common stock from approximately 1998 through 2000. The various complaints allege that a number of financial institutions that were underwriters of initial public offerings, including Cowen, made material misrepresentations and omissions to purchasers of the stock sold in the initial public offerings, and thereby inflated the value of the stock. Specifically, the plaintiffs allege that the defendants failed to disclose, among other things, the purported existence of improper tie-in and compensation arrangements they had with certain purchasers of the stock and alleged conflicts of interest relating to research published by the underwriters, all in violation of federal securities laws. The district court granted plaintiffs’ motion to certify certain “focus” cases as class actions. Cowen is a named defendant in four of these “focus” cases. Cowen appealed the class certification decision to the Second Circuit Court of Appeals, which heard oral argument on June 6, 2006. In the meantime, discovery is ongoing in the “focus” cases.

·                                         Cowen is a named defendant in several litigations arising out of the fraud, disclosed in March 2002, committed by members of the Rigas family, which controlled Adelphia Communications, a cable company that filed for bankruptcy in June 2002. As detailed in the pleadings, the Rigas family allegedly took advantage of certain loans, or ‘‘co-borrowing facilities,’’ which allowed the family to borrow more than $3 billion for their private use for which Adelphia was responsible to repay. Cowen, which was a member of the underwriting syndicates (but not a lead manager), is a defendant in four actions arising out of those offerings, all of which are pending before the United States District Court for the Southern District of New York. The complaints in each of these actions raise a variety of claims arising out of the sale of Adelphia securities, including claims under the federal

42




securities laws. The district court granted Cowen’s motion to dismiss in the Adelphia Class Action. Thereafter, the underwriter defendants reached a settlement with the plaintiffs. On June 15, 2006, the district court preliminarily approved the settlement, and a fairness hearing on the settlement has been scheduled for November 10, 2006. If the settlement is ultimately approved, Cowen’s share of the settlement will be approximately $1.7 million (which is covered by the indemnification agreement between Société Générale and Cowen). The court also has granted in part and denied in part motions to dismiss filed by various defendants, including Cowen, in Huff, Appaloosa and Stocke, but has not ruled on other potential bases for dismissal set forth in Cowen’s motions in these cases. In addition, in August 2005 the district court denied Cowen’s motion to dismiss based on Huff’s lack of standing, and subsequently granted leave to file an interlocutory appeal to the Second Circuit Court of Appeals of that ruling. In addition to the cases in which Cowen has been named as a defendant, Cowen may also face potential liability pursuant to the applicable master agreements among underwriters for any judgments or settlements in three other cases involving the Adelphia securities offerings in which Cowen participated.

·                                         Cowen has been named as a defendant in a purported class action filed in the United States District Court for the Northern District of Alabama for the involvement of the predecessor of Cowen as one of the managing underwriters for certain HealthSouth Corporation private placements. The complaint alleges that the offering materials for each private placement were deficient, in violation of federal securities laws, by failing to disclose HealthSouth’s subsequently revealed accounting irregularities. The predecessor company to Cowen participated as an ‘‘initial purchaser’’ in only one of the private placements at issue—the March 1998 private placement of $567.75 million principal amount of 31.4% Convertible Subordinated Debentures due 2003. On June 8, 2006, the district court, among other things, dismissed the claims arising out of the March 1998 private placement (the only claims against Cowen). The dismissal is not yet a “final” judgment from which an appeal may be taken by plaintiffs.

·                                         Cowen was one of several defendants in a putative class action filed on March 27, 2006, in the United States District Court for the Middle District of North Carolina, seeking to recover for losses allegedly caused by misrepresentations and omissions in connection with two secondary offerings of common stock of Inspire Pharmaceuticals in July and November 2004. Plaintiffs allege that the offering materials failed adequately to disclose the nature of trials being conducted for the drug diquafosol (a treatment for dry eye disease) in connection with a pending FDA new drug application. Plaintiffs further allege that when the true nature of the trials was revealed in February 2005, the disclosure caused the value of the company’s stock to decline substantially. Cowen underwrote 15% of the November 2004 offering (which raised $42.3 million) and did not participate in the July 2004 offering (which raised $77.1 million). After the underwriter defendants made clear to plaintiffs’ counsel that the claims against the underwriters were time-barred, those claims were voluntarily dismissed. Therefore, Cowen is no longer a defendant in this action.

·                                         Cowen is one of three underwriter defendants in a lawsuit filed by Crossroads Systems, Inc., a company that designs, develops, and manufactures computer storage devices, in the District Court of Travis County, Texas, on May 24, 2006. The lawsuit alleges that the underwriters of Crossroads’ 1999 IPO, which was led by Cowen (with 42% of the offering), purposely under priced the IPO for their own improper purposes. Specifically, Crossroads alleges that the underwriter defendants allocated stock to favored clients, who shared their profits with the underwriters either directly or through excessive trading commissions in connection with the IPO stock and/or unrelated securities trading. Crossroads sets forth causes of action for breach of fiduciary duty, fraud, and unjust enrichment. The damages are unspecified.

·                                         On June 28, 2006, a group of approximately 60 medical doctors filed a lawsuit against Cowen in San Francisco Superior Court. Plaintiffs allege that Cowen negligently rendered a fairness opinion in 1998 in connection with the acquisition of plaintiffs’ businesses (Orange Coast Managed Care Services and St. Joseph Medical Corporation) by FPA Medical Management, Inc. According to the Complaint, plaintiffs received restricted FPA stock as consideration in the sale, and shortly after the acquisition, FPA went bankrupt, rendering the stock worthless. Although the damages are not clearly specified in the Complaint, it appears that the plaintiffs may be seeking approximately $40 million. On August 14, Cowen removed the case to United States District Court for the Northern District of California. On August 17, 2006 Cowen filed a motion to dismiss the complaint.

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Item 1A. Risk Factors

The discussion of our business and operations should be read together with the risk factors contained in Item 1A of our Prospectus. These risk factors describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner. There are no material changes from the risk factors previously disclosed in our registration statement on Form S-1/A (No. 333- 132602) filed on July 12, 2006.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

None

Item 5. Other Information

None

Item 6. Exhibits

See Exhibit Index

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

COWEN GROUP, INC.

 

 

 

 

 

/s/

Kim S. Fennebresque

 

 

Kim S. Fennebresque

Date August 24, 2006

 

Chief Executive Officer

 

 

 

 

 

 

 

 

/s/

Thomas K. Conner

 

 

Thomas K. Conner

Date August 24, 2006

 

Chief Financial

44




 

Exhibit Index

Exhibit No.

 

Exhibit Description

 

 

 

3.1

 

Amended and Restated Certificate of Incorporation

 

 

 

3.2

 

Amended and Restated Bylaws

 

 

 

4.1

 

Stockholders Agreement between SG Americas Securities Holdings, Inc. and Cowen Group, Inc.

 

 

 

10.1

 

Separation Agreement among Société Générale, SG Americas, Inc., SG Americas Securities Holdings, Inc., Cowen and Company, LLC and Cowen Group, Inc.

 

 

 

10.2

 

Tax Matters Agreement among SG Americas, Inc., SG Americas Securities Holdings, Inc., Cowen and Company, LLC and Cowen Group, Inc.

 

 

 

10.3

 

Fully Disclosed Clearing Agreement between Cowen and Company, LLC and SG Americas Securities, LLC

 

 

 

10.4

 

Indemnification Agreement among Société Générale, SG Americas Securities Holdings, Cowen and Company, LLC and Cowen Group, Inc.

 

 

 

10.5

 

Employee Matters Agreement among Société Générale, SG Americas, Inc., SG Americas Securities Holdings, Inc., Cowen and Company, LLC and Cowen Group, Inc.

 

 

 

10.6

 

Transition Services Agreement among Société Générale, SG Americas, Inc., SG Americas Securities Holdings, Inc., Cowen and Company, LLC and Cowen Group, Inc.

 

 

 

10.7

 

Escrow Agreement among SG Americas Securities Holdings, Inc., Cowen and Company, LLC, Cowen Group, Inc. and the escrow agent

 

 

 

31.1

 

Certification of CEO Pursuant to Section 302 of Sarbanes-Oxley Act of 2002

 

 

 

31.2

 

Certification of CFO Pursuant to Section 302 of Sarbanes-Oxley Act of 2002

 

 

 

32

 

Certification of CEO and CFO Pursuant to Section 906 of SarbanesOxley Act of 2002 (which is being “furnished” rather filed with the Securities and Exchange Commission)

 

45



Exhibit 3.1

 

AMENDED AND RESTATED

CERTIFICATE OF INCORPORATION

OF

COWEN GROUP, INC.

 


 

Pursuant to Sections 228, 242 and 245 of
the Delaware General Corporation Law

 


 

Cowen Group, Inc. (the “Corporation”), a corporation organized and existing the General Corporation Law of the State of Delaware as set forth in Title 8 of the Delaware Code (the “GCL”), does hereby certify as follows:

 

(1) The name of the Corporation is Cowen Group, Inc. The original certificate of incorporation of the Corporation was filed with the office of the Secretary of State of the State of Delaware on February 15, 2006.

 

(2) This Amended and Restated Certificate of Incorporation was duly adopted by the Board of Directors of the Corporation (the “Board of Directors”) and by the sole stockholder of the Corporation in accordance with Sections 228, 242 and 245 of the GCL.

 

(3) This Amended and Restated Certificate of Incorporation restates and integrates and further amends the certificate of incorporation of the Corporation, as heretofore amended or supplemented.

 

(4) The text of the Certificate of Incorporation hereby is amended and restated in its entirety as follows:

 

FIRST:  The name of the Corporation is Cowen Group, Inc. (the “Corporation”).

 

SECOND:  The address of the registered office of the Corporation in the State of Delaware is 2711 Centerville Road, Suite 400, in the City of Wilmington, County of New Castle. The name of its registered agent at that address is Corporation Service Company.

 

THIRD:  The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of the State of Delaware as set forth in Title 8 of the Delaware Code (the “GCL”).

 

FOURTH:  The total number of shares of stock which the Corporation shall have authority to issue is 110,000,000 of which the Corporation shall have authority to issue 100,000,000 shares of Common Stock, each having a par value of one cent ($0.01), and 10,000,000 shares of Preferred Stock, each having a par value of one cent ($0.01).

 





 

(1)     The Board of Directors is expressly authorized to provide for the issuance of all or any shares of the Preferred Stock in one or more classes or series, and to fix for each such class or series such voting powers, full or limited, or no voting powers, and such distinctive designations, preferences and relative, participating, optional or other special rights and such qualifications, limitations or restrictions thereof, as shall be stated and expressed in the resolution or resolutions adopted by the Board of Directors providing for the issuance of such class or series and as may be permitted by the GCL, including, without limitation, the authority to provide that any such class or series may be: (A) subject to redemption at such time or times and at such price or prices; (B) entitled to receive dividends (which may be cumulative or non-cumulative) at such rates, on such conditions, and at such times, and payable in preference to, or in such relation to, the dividends payable on any other class or classes or any other series; (C) entitled to such rights upon the dissolution of, or upon any distribution of the assets of, the Corporation; or (D) convertible into, or exchangeable for, shares of any other class or classes of stock, or of any other series of the same or any other class or classes of stock, of the Corporation at such price or prices or at such rates of exchange and with such adjustments; all as may be stated in such resolution or resolutions.

 

(2)     The holders of shares of Common Stock shall not have cumulative voting rights.

 

(3)     Subject to the requirements of applicable law, the Corporation shall have the power to issue and sell all or any part of any shares of any class of stock herein or hereafter authorized to such persons, and for such consideration, as the Board of Directors shall from time to time, in its discretion, determine, whether or not greater consideration could be received upon the issue or sale of the same number of shares of another class, and as otherwise permitted by law. Subject to the requirements of applicable law, the Corporation shall have the power to purchase any shares of any class of stock herein or hereafter authorized from such persons, and for such consideration, as the Board of Directors shall from time to time, in its discretion, determine, whether or not less consideration could be paid upon the purchase of the same number of shares of another class, and as otherwise permitted by law.

 

FIFTH:  The following provisions are inserted for the management of the business and the conduct of the affairs of the Corporation, and for further definition, limitation and regulation of the powers of the Corporation and of its directors and stockholders:

 

(1)     The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors.

 

(2)     The Board of Directors shall consist of not less than three or more than twelve members, the exact number of which shall be fixed from time to time by resolution adopted by the affirmative vote of a majority of the entire Board of Directors.

 

2





 

(3)     The directors shall be divided into three classes, designated Class I, Class II and Class III. Each class shall consist, as nearly as may be possible, of one-third of the total number of directors constituting the entire Board of Directors. The initial division of the Board of Directors into classes shall be made by the decision of the affirmative vote of a majority of the entire Board of Directors. The term of the initial Class I directors shall terminate on the date of the 2009 annual meeting; the term of the initial Class II directors shall terminate on the date of the 2008 annual meeting; and the term of the initial Class III directors shall terminate on the date of the 2007 annual meeting. At each succeeding annual meeting of stockholders beginning in 2007, successors to the class of directors whose term expires at that annual meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional director of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case will a decrease in the number of directors shorten the term of any incumbent director.

 

(4)     A director shall hold office until the annual meeting for the year in which his or her term expires and until his or her successor shall be elected and shall qualify, subject, however, to prior death, resignation, retirement, disqualification or removal from office.

 

(5)     Subject to the terms of any one or more classes or series of Preferred Stock, any vacancy on the Board of Directors that results from an increase in the number of directors may be filled by a majority of the Board of Directors then in office, provided that a quorum is present, and any other vacancy occurring on the Board of Directors may be filled by a majority of the Board of Directors then in office, even if less than a quorum, or by a sole remaining director. Any director of any class elected to fill a vacancy resulting from an increase in the number of directors of such class shall hold office for a term that shall coincide with the remaining term of that class. Any director elected to fill a vacancy not resulting from an increase in the number of directors shall have the same remaining term as that of his predecessor. Subject to the rights, if any, of the holders of shares of Preferred Stock then outstanding, any or all of the directors of the Corporation may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of at least eighty percent (80%) percent of the voting power of the Corporation’s then outstanding capital stock entitled to vote generally in the election of directors. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of Preferred Stock issued by the Corporation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of this Certificate of Incorporation applicable thereto, and such directors so elected shall not be divided into classes pursuant to this Article FIFTH unless expressly provided by such terms.

 

3





 

(6)     In addition to the powers and authority hereinbefore or by statute expressly conferred upon them, the directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, subject, nevertheless, to the provisions of the GCL, this Certificate of Incorporation, and any By-Laws adopted by the stockholders; provided, however, that no By-Laws hereafter adopted by the stockholders shall invalidate any prior act of the directors which would have been valid if such By-Laws had not been adopted.

 

SIXTH:  No director shall be personally liable to the Corporation or any of its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent such exemption from liability or limitation thereof is not permitted under the GCL as the same exists or may hereafter be amended. If the GCL is amended hereafter to authorize the further elimination or limitation of the liability of directors, then the liability of a director of the Corporation shall be eliminated or limited to the fullest extent authorized by the GCL, as so amended. Any repeal or modification of this Article SIXTH shall not adversely affect any right or protection of a director of the Corporation existing at the time of such repeal or modification with respect to acts or omissions occurring prior to such repeal or modification.

 

SEVENTH:  In accordance with the terms and subject to the conditions set forth in the By-Laws of the Corporation, as amended from time to time, the Corporation shall indemnify its directors and officers to the fullest extent authorized or permitted by law, as now or hereafter in effect, and such right to indemnification shall continue as to a person who has ceased to be a director or officer of the Corporation and shall inure to the benefit of his or her heirs, executors and personal and legal representatives; provided, however, that, except for proceedings to enforce rights to indemnification, the Corporation shall not be obligated to indemnify any director or officer (or his or her heirs, executors or personal or legal representatives) in connection with a proceeding (or part thereof) initiated by such person unless such proceeding (or part thereof) was authorized or consented to by the Board of Directors. The right to indemnification conferred by this Article SEVENTH may include the right to be paid by the Corporation the expenses incurred in defending or otherwise participating in any proceeding in advance of its final disposition. The Corporation may, to the extent authorized from time to time by the Board of Directors, provide rights to indemnification and to the advancement of expenses to employees and agents of the Corporation similar to those conferred in this Article SEVENTH to directors and officers of the Corporation. The rights to indemnification and to the advance of expenses conferred in this Article SEVENTH shall not be exclusive of any other right which any person may have or hereafter acquire under this Amended and Restated Certificate of Incorporation, the By-Laws of the Corporation, any statute, agreement, vote of stockholders or disinterested directors or otherwise. Any repeal or modification of this Article SEVENTH shall not adversely affect any rights to indemnification and to the advancement of expenses of a director or officer of the Corporation existing at the time of such repeal or modification with respect to any acts or omissions occurring prior to such repeal or modification.

 

4





 

EIGHTH:  Any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of stockholders of the Corporation, and the ability of the stockholders to consent in writing to the taking of any action is hereby specifically denied.

 

NINTH:  Unless otherwise required by law, special meetings of Stockholders, for any purpose or purposes, may be called by either (i) the Chairman, if there be one, or (ii) the Chief Executive Officer, (iii) the President, (iv) any Vice President, if there be one, (v) the Secretary or (vi) any Assistant Secretary, if there be one, and shall be called by any such officer at the request in writing of (i) the Board of Directors or (ii) a committee of the Board of Directors that has been duly designated by the Board of Directors and whose powers and authority include the power to call such meetings. The ability of the stockholders to call a special meeting of Stockholders is hereby specifically denied.

 

TENTH:  Meetings of stockholders may be held within or without the State of Delaware, as the By-Laws may provide. The books of the Corporation may be kept (subject to any provision contained in the GCL) outside the State of Delaware at such place or places as may be designated from time to time by the Board of Directors or in the By-Laws of the Corporation.

 

ELEVENTH:  In furtherance and not in limitation of the powers conferred upon it by the laws of the State of Delaware, the Board of Directors shall have the power to adopt, amend, alter or repeal the Corporation’s By-Laws. The affirmative vote of at least a majority of the entire Board of Directors shall be required to adopt, amend, alter or repeal the Corporation’s By-Laws. The Corporation’s By-Laws also may be adopted, amended, altered or repealed by the affirmative vote of the holders of at least eighty percent (80%) of the voting power of the shares entitled to vote at an election of directors.

 

TWELFTH:  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 herein are granted subject to this reservation; provided, however, that, notwithstanding any other provision of this Amended and Restated Certificate of Incorporation (and in addition to any other vote that may be required by law), the affirmative vote of the holders of at least eighty percent (80%) of the voting power of the shares entitled to vote at an election of directors shall be required to amend, alter, change or repeal, or to adopt any provision as part of this Amended and Restated Certificate of Incorporation inconsistent with the purpose and intent of Articles FIFTH, EIGHTH, NINTH and ELEVENTH of this Amended and Restated Certificate of Incorporation or this Article TWELFTH.

 

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IN WITNESS WHEREOF, the Corporation has caused this Amended and Restated Certificate of Incorporation to be executed on its behalf this 12th day of July, 2006.

 

 

 

COWEN GROUP, INC.

 

 

 

 

 

By:

  /s/ Christopher A. White

 

 

Name: Christopher A. White

 

Title:   Vice President

 

6




Exhibit 3.2

 

AMENDED AND RESTATED BY-LAWS

OF

COWEN GROUP, INC.

 

 

EFFECTIVE JULY 12, 2006

 





 

AMENDED AND RESTATED BY-LAWS

OF

COWEN GROUP, INC.

 

ARTICLE I OFFICES

 

1

 

Section 1.1

Registered Office

1

 

Section 1.2

Other Offices

1

 

 

 

 

ARTICLE II MEETINGS OF STOCKHOLDERS

1

 

Section 2.1

Place of Meetings

1

 

Section 2.2

Annual Meetings

1

 

Section 2.3

Special Meetings

1

 

Section 2.4

Notice

2

 

Section 2.5

Adjournments

2

 

Section 2.6

Quorum

2

 

Section 2.7

Voting

2

 

Section 2.8

Proxies

3

 

Section 2.9

Nature of Business at Meetings of Stockholders

3

 

Section 2.10

Nomination of Directors

5

 

Section 2.11

List of Stockholders Entitled to Vote

6

 

Section 2.12

Stock Ledger

6

 

Section 2.13

Conduct of Meetings

6

 

Section 2.14

Inspectors of Election

7

 

 

 

 

ARTICLE III DIRECTORS

7

 

Section 3.1

Duties and Powers

7

 

Section 3.2

Meetings

7

 

Section 3.3

Quorum

8

 

Section 3.4

Actions by Written Consent

8

 

Section 3.5

Meetings by Means of Conference Telephone

8

 

Section 3.6

Committees

8

 

Section 3.7

Compensation

9

 

Section 3.8

Interested Directors

9

 

Section 3.9

Organization

9

 

 

 

 

ARTICLE IV OFFICERS

10

 

Section 4.1

General

10

 

Section 4.2

Election

10

 

Section 4.3

Voting Securities Owned by the Corporation

10

 

Section 4.4

Chairman of the Board of Directors

10

 

Section 4.5

Chief Executive Officer

11

 

Section 4.6

President

11

 

Section 4.7

Vice Presidents

11

 

Section 4.8

Secretary

12

 

Section 4.9

Treasurer

12

 





 

 

Section 4.10

Assistant Secretaries

13

 

Section 4.11

Assistant Treasurers

13

 

Section 4.12

Other Officers

13

 

 

 

 

ARTICLE V STOCK

 

13

 

Section 5.1

Form of Certificates

13

 

Section 5.2

Signatures

14

 

Section 5.3

Lost Certificates

14

 

Section 5.4

Transfers

14

 

Section 5.5

Record Date

14

 

Section 5.6

Record Owners

15

 

Section 5.7

Transfer and Registry Agents

15

 

 

 

 

ARTICLE VI NOTICES

15

 

Section 6.1

Notices

15

 

Section 6.2

Waivers of Notice

16

 

 

 

 

ARTICLE VII GENERAL PROVISIONS

16

 

Section 7.1

Dividends

16

 

Section 7.2

Disbursements

16

 

Section 7.3

Fiscal Year

17

 

Section 7.4

Corporate Seal

17

 

 

 

 

ARTICLE VIII INDEMNIFICATION

17

 

Section 8.1

Power to Indemnify in Actions, Suits or Proceedings other than Those by or in the Right of the Corporation

17

 

Section 8.2

Power to Indemnify in Actions, Suits or Proceedings by or in the Right of the Corporation

18

 

Section 8.3

Authorization of Indemnification

18

 

Section 8.4

Indemnification by a Court

18

 

Section 8.5

Expenses Payable in Advance - Directors

19

 

Section 8.6

Expenses Payable in Advance – Officers of the Corporation

19

 

Section 8.7

Nonexclusivity of Indemnification and Advancement of Expenses

19

 

Section 8.8

Insurance

20

 

Section 8.9

Certain Definitions

20

 

Section 8.10

Survival of Indemnification and Advancement of Expenses

20

 

Section 8.11

Limitation on Indemnification

20

 

Section 8.12

Indemnification of Employees and Agents

21

 

 

 

 

ARTICLE IX AMENDMENTS

21

 

Section 9.1

Amendments

21

 

Section 9.2

Entire Board of Directors

21

 





 

AMENDED AND RESTATED BY-LAWS

OF

COWEN GROUP, INC.

 

(hereinafter called the “Corporation”)

 

ARTICLE I

OFFICES

 

Section 1.1             Registered Office.  The registered office of the Corporation shall be in the City of Wilmington, County of New Castle, State of Delaware.

 

Section 1.2             Other Offices.  The Corporation may also have offices at such other places both within and without the State of Delaware as the Board of Directors may from time to time determine.

 

ARTICLE II

MEETINGS OF STOCKHOLDERS

 

Section 2.1             Place of Meetings.  Meetings of the stockholders for the election of directors or for any other purpose shall be held at such time and place, either within or without the State of Delaware as shall be designated from time to time by the Board of Directors.

 

Section 2.2             Annual Meetings.  The Annual Meetings of Stockholders for the election of directors shall be held on such date and at such time as shall be designated from time to time by the Board of Directors. Any other proper business may be transacted at the Annual Meeting of Stockholders.

 

Section 2.3             Special Meetings.  Unless otherwise required by law or by the certificate of incorporation of the Corporation, as amended and restated from time to time (the “Certificate of Incorporation”), Special Meetings of Stockholders, for any purpose or purposes, may be called by (i) the Chairman, if there be one, (ii) the Chief Executive Officer, (iii) the

 





 

President, or (iv)  the Secretary, and shall be called by any such officer at the request in writing of (i) the Board of Directors or (ii) a committee of the Board of Directors that has been duly designated by the Board of Directors and whose powers and authority include the power to call such meetings. Such request shall state the purpose or purposes of the proposed meeting. At a Special Meeting of Stockholders, only such business shall be conducted as shall be specified in the notice of meeting (or any supplement thereto).

 

Section 2.4             Notice.  Whenever stockholders are required or permitted to take any action at a meeting, a written notice of the meeting shall be given which shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, and the means of remote communications, if any, by which stockholders or any proxy holders may be deemed present in person and vote at such meeting. Unless otherwise required by law, the written notice of any meeting shall be given not less than ten nor more than sixty days before the date of the meeting to each stockholder entitled to vote at such meeting.

 

Section 2.5             Adjournments.  Any meeting of the stockholders may be adjourned from time to time to reconvene at the same or some other place, and notice need not be given of any such adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the Corporation may transact any business which might have been transacted at the original meeting. If the adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting.

 

Section 2.6             Quorum.  Unless otherwise required by law or the Certificate of Incorporation, the holders of a majority of the capital stock issued and outstanding and entitled to vote at a meeting, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business. A quorum, once established, shall not be broken by the withdrawal of enough votes to leave less than a quorum. If, however, such quorum shall not be present or represented at any meeting of the stockholders, the stockholders entitled to vote at such meeting, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, in the manner provided in Section 2.5, until a quorum shall be present or represented.

 

Section 2.7             Voting.  Unless otherwise required by law, the Certificate of Incorporation or these By-laws, any question brought before any meeting of stockholders, other than the election of directors, shall be decided by the vote of the holders of a majority of the total number of votes of the capital stock represented and entitled to vote at such meeting, voting as a single class. Unless otherwise provided in the Certificate of Incorporation, and subject to

 

2





 

Section 5.5 hereof, each stockholder represented at a meeting of stockholders shall be entitled to cast one vote for each share of the capital stock entitled to vote at such meeting held by such stockholder. Such votes may be cast in person or by proxy as provided in Section 2.8. The Board of Directors, in its discretion, or the officer of the Corporation presiding at a meeting of stockholders, in such officer’s discretion, may require that any votes cast at such meeting shall be cast by written ballot.

 

Section 2.8             Proxies.  Each stockholder entitled to vote at a meeting of the stockholders may authorize another person or persons to act for such stockholder as proxy, but no such proxy shall be voted upon after three years from its date, unless such proxy provides for a longer period. Without limiting the manner in which a stockholder may authorize another person or persons to act for such stockholder as proxy, the following shall constitute a valid means by which a stockholder may grant such authority:

 

(a)   A stockholder may execute a writing authorizing another person or persons to act for such stockholder as proxy. Execution may be accomplished by the stockholder or such stockholder’s authorized officer, director, employee or agent signing such writing or causing such person’s signature to be affixed to such writing by any reasonable means, including, without limitation, by facsimile signature.

 

(b)   A stockholder may authorize another person or persons to act for such stockholder as proxy by transmitting or authorizing the transmission of a facsimile or other electronic transmission to the person who will be the holder of the proxy or to a proxy solicitation firm, proxy support service organization or like agent duly authorized by the person who will be the holder of the proxy to receive such facsimile or other electronic transmission, provided that any such facsimile or other electronic transmission must either set forth or be submitted with information from which it can be determined that the facsimile or other electronic transmission was authorized by the stockholder. If it is determined that such facsimiles or other electronic transmissions are valid, the inspectors or, if there are no inspectors, such other persons making that determination shall specify the information on which they relied.

 

Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission authorizing another person or persons to act as proxy for a stockholder may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used; provided, however, that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission.

 

Section 2.9             Nature of Business at Meetings of Stockholders.

 

(a)           No business may be transacted at an Annual Meeting of Stockholders, other than business that is either (a) specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors (or any

 

3





 

duly authorized committee thereof), (b) otherwise properly brought before the Annual Meeting by or at the direction of the Board of Directors (or any duly authorized committee thereof), or (c) otherwise properly brought before the Annual Meeting by any stockholder of the Corporation (i) who is a stockholder of record on the date of the giving of the notice provided for in this Section 2.9 and on the record date for the determination of stockholders entitled to notice of and to vote at such Annual Meeting and (ii) who complies with the notice procedures set forth in this Section 2.9.

 

(b)           In addition to any other applicable requirements, for business to be properly brought before an Annual Meeting by a stockholder, such stockholder must have given timely notice thereof in proper written form to the Secretary of the Corporation.

 

(c)           To be timely, a stockholder’s notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the Corporation not less than ninety (90) days nor more than one hundred twenty (120) days prior to the anniversary date of the immediately preceding Annual Meeting of Stockholders; provided, however, that in the event that the Annual Meeting is called for a date that is not within thirty (30) days before or after such anniversary date, notice by the stockholder in order to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the Annual Meeting was mailed or such public disclosure of the date of the Annual Meeting was made, whichever first occurs.

 

(d)           To be in proper written form, a stockholder’s notice to the Secretary must set forth as to each matter such stockholder proposes to bring before the Annual Meeting (i) a brief description of the business desired to be brought before the Annual Meeting and the reasons for conducting such business at the Annual Meeting, (ii) the name and record address of such stockholder, (iii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by such stockholder, (iv) a description of all arrangements or understandings between such stockholder and any other person or persons (including their names) in connection with the proposal of such business by such stockholder and any material interest of such stockholder in such business and (v) a representation that such stockholder intends to appear in person or by proxy at the Annual Meeting to bring such business before the meeting.

 

(e)           No business shall be conducted at the Annual Meeting of Stockholders except business brought before the Annual Meeting in accordance with the procedures set forth in this Section 2.9; provided, however, that, once business has been properly brought before the Annual Meeting in accordance with such procedures, nothing in this Section 2.9 shall be deemed to preclude discussion by any stockholder of any such business. If the chairman of an Annual Meeting determines that business was not properly brought before the Annual Meeting in accordance with the foregoing procedures, the chairman shall declare to the meeting that the business was not properly brought before the meeting and such business shall not be transacted.

 

4





 

Section 2.10           Nomination of Directors.  Only persons who are nominated in accordance with the following procedures shall be eligible for election as directors of the Corporation, except as may be otherwise provided in the Certificate of Incorporation with respect to the right of holders of preferred stock of the Corporation to nominate and elect a specified number of directors in certain circumstances.

 

(a)   Nominations of persons for election to the Board of Directors may be made at any Annual Meeting of Stockholders, or at any Special Meeting of Stockholders called for the purpose of electing directors, (a) by or at the direction of the Board of Directors (or any duly authorized committee thereof) or (b) by any stockholder of the Corporation (i) who is a stockholder of record on the date of the giving of the notice provided for in this Section 2.10 and on the record date for the determination of stockholders entitled to notice of and to vote at such meeting and (ii) who complies with the notice procedures set forth in this Section 2.10.

 

(b)   In addition to any other applicable requirements, for a nomination to be made by a stockholder, such stockholder must have given timely notice thereof in proper written form to the Secretary of the Corporation.

 

(c)   To be timely, a stockholder’s notice to the Secretary must be delivered to or mailed and received at the principal executive offices of the Corporation (a) in the case of an Annual Meeting, not less than ninety (90) days nor more than one hundred twenty (120) days prior to the anniversary date of the immediately preceding Annual Meeting of Stockholders; provided, however, that in the event that the Annual Meeting is called for a date that is not within thirty (30) days before or after such anniversary date, notice by the stockholder in order to be timely must be so received not later than the close of business on the tenth (10th) day following the day on which such notice of the date of the Annual Meeting was mailed or such public disclosure of the date of the Annual Meeting was made, whichever first occurs; and (b) in the case of a Special Meeting of Stockholders called for the purpose of electing directors, not later than the close of business on the tenth (10th) day following the day on which notice of the date of the Special Meeting was mailed or public disclosure of the date of the Special Meeting was made, whichever first occurs.

 

(d)   To be in proper written form, a stockholder’s notice to the Secretary must set forth (a) as to each person whom the stockholder proposes to nominate for election as a director (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class or series and number of shares of capital stock of the Corporation which are owned beneficially or of record by the person and (iv) any other information relating to the person that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rules and regulations promulgated thereunder; and (b) as to the stockholder giving the notice (i) the name and record address of such stockholder, (ii) the class or series and number of shares

 

5





 

of capital stock of the Corporation which are owned beneficially or of record by such stockholder, (iii) a description of all arrangements or understandings between such stockholder and each proposed nominee and any other person or persons (including their names) pursuant to which the nomination(s) are to be made by such stockholder, (iv) a representation that such stockholder intends to appear in person or by proxy at the meeting to nominate the persons named in its notice and (v) any other information relating to such stockholder that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder. Such notice must be accompanied by a written consent of each proposed nominee to being named as a nominee and to serve as a director if elected.

 

(e)   No person shall be eligible for election as a director of the Corporation unless nominated in accordance with the procedures set forth in this Section 2.10. If the Chairman of the meeting determines that a nomination was not made in accordance with the foregoing procedures, the Chairman shall declare to the meeting that the nomination was defective and such defective nomination shall be disregarded.

 

Section 2.11           List of Stockholders Entitled to Vote.  The officer of the Corporation 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, arranged in alphabetical order, and 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 of the Corporation who is present.

 

Section 2.12           Stock Ledger.  The stock ledger of the Corporation shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required by Section 2.11 or the books of the Corporation, or to vote in person or by proxy at any meeting of stockholders.

 

Section 2.13           Conduct of Meetings.  The Board of Directors of the Corporation may adopt by resolution such rules and regulations for the conduct of the meeting of the stockholders as it shall deem appropriate. Except to the extent inconsistent with such rules and regulations as adopted by the Board of Directors, the chairman of any meeting of the stockholders shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are appropriate for the proper conduct of the meeting.

 

6





 

Such rules, regulations or procedures, whether adopted by the Board of Directors or prescribed by the chairman of the meeting, may include, without limitation, the following:  (i) the establishment of an agenda or order of business for the meeting; (ii) the determination of when the polls shall open and close for any given matter to be voted on at the meeting; (iii) rules and procedures for maintaining order at the meeting and the safety of those present; (iv) limitations on attendance at or participation in the meeting to stockholders of record of the corporation, their duly authorized and constituted proxies or such other persons as the chairman of the meeting shall determine; (v) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (vi) limitations on the time allotted to questions or comments by participants.

 

Section 2.14           Inspectors of Election.  In advance of any meeting of the stockholders, the Board of Directors, by resolution, the Chairman, the Chief Executive Officer or the President shall appoint one or more inspectors to act at the meeting and make a written report thereof. One or more other persons may be designated as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of the stockholders, the chairman of the meeting shall appoint one or more inspectors to act at the meeting. Unless otherwise required by applicable law, inspectors may be officers, employees or agents of the Corporation. Each inspector, before entering upon the discharge of the duties of inspector, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of such inspector’s ability. The inspector shall have the duties prescribed by law and shall take charge of the polls and, when the vote is completed, shall make a certificate of the result of the vote taken and of such other facts as may be required by applicable law.

 

ARTICLE III

DIRECTORS

 

Section 3.1             Duties and Powers.  The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors which may exercise all such powers of the Corporation and do all such lawful acts and things as are not by statute or by the Certificate of Incorporation or by these By-Laws required to be exercised or done by the stockholders.

 

Section 3.2             Meetings.  The Board of Directors may hold meetings, both regular and special, either within or without the State of Delaware. Regular meetings of the Board of Directors may be held without notice at such time and at such place as may from time to time be determined by the Board of Directors. Special meetings of the Board of Directors may be called by any director, the Chief Executive Officer, the President or Secretary. Notice thereof stating the place, date and hour of the meeting shall be given to each director either by mail not

 

7





 

less than forty-eight (48) hours before the date of the meeting, by telephone, telefax or electronic means on twenty-four (24) hours’ notice, or on such shorter notice as the person or persons calling such meeting may deem necessary or appropriate in the circumstances.

 

Section 3.3             Quorum.  Except as otherwise required by law or the Certificate of Incorporation, at all meetings of the Board of Directors, a majority of the entire Board of 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. If a quorum shall not be present at any meeting of the Board of Directors, the directors present at such meeting may adjourn the meeting from time to time, without notice other than announcement at the meeting of the time and place of the adjourned meeting, until a quorum shall be present.

 

Section 3.4             Actions by Written Consent.  Unless otherwise provided in 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 the members of the Board of Directors or committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board of Directors or committee.

 

Section 3.5             Meetings by Means of Conference Telephone.  Unless otherwise provided in the Certificate of Incorporation, members of the Board of Directors of the Corporation, or any committee thereof, may participate in a meeting of the Board of Directors or such committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 3.5 shall constitute presence in person at such meeting.

 

Section 3.6             Committees.  The Board of Directors may designate one or more committees, each committee to consist of one or more of the directors of the Corporation. 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 any such committee. In the absence or disqualification of a member of a committee, and in the absence of a designation by the Board of Directors of an alternate member to replace the absent or disqualified member, the member or members thereof present at any meeting and not disqualified from voting, whether or not such member or members constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any absent or disqualified member. Any committee, to the extent permitted by law and provided in the resolution establishing such committee, shall have and may exercise all the powers and authority of the Board of Directors in the management of the

 

8





 

business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it. Each committee shall keep regular minutes and report to the Board of Directors when required.

 

Section 3.7             Compensation.  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, payable in cash and/or securities. No such payment shall preclude any director from serving the Corporation in any other capacity and receiving compensation for that capacity. Members of special or standing committees may be allowed like compensation for attending committee meetings.

 

Section 3.8             Interested Directors.  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 the director or officer’s vote is counted for such purpose if (i) the material facts as to the director or officer’s 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 votes of a majority of the disinterested directors, even though the disinterested directors be less than a quorum; or (ii) the material facts as to the director or officer’s 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 (iii) 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. 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 which authorizes the contract or transaction.

 

Section 3.9             Organization

 

Section 3.10           . At each meeting of the Board of Directors, the Chairman of the Board of Directors, or, in his or her absence, a director chosen by a majority of the directors present, shall act as chairman. The Secretary of the Corporation shall act as secretary at each meeting of the Board of Directors. In case the Secretary shall be absent from any meeting of the Board of Directors, an Assistant Secretary shall perform the duties of secretary at such meeting; and in the absence from any such meeting of the Secretary and all the Assistant Secretaries, the chairman of the meeting may appoint any person to act as secretary of the meeting.

 

9





 

ARTICLE IV

OFFICERS

 

Section 4.1             General.  The officers of the Corporation shall be chosen by the Board of Directors and shall be a Chief Executive Officer, a President, a Secretary and a Treasurer. The Board of Directors, in its discretion, also may choose a Chairman of the Board of Directors (who must be a director) and one or more Vice Presidents, Assistant Secretaries, Assistant Treasurers and other officers. Any number of offices may be held by the same person, unless otherwise prohibited by law or the Certificate of Incorporation. The officers of the Corporation need not be stockholders of the Corporation nor, except in the case of the Chairman of the Board of Directors, need such officers be directors of the Corporation.

 

Section 4.2             Election.  The Board of Directors, at its first meeting held after each Annual Meeting of Stockholders, shall elect the officers of the Corporation who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board of Directors; and all officers of the Corporation shall hold office until their successors are chosen and qualified, or until their earlier death, resignation or removal. Any officer elected by the Board of Directors may be removed at any time by the affirmative vote of the Board of Directors. Any vacancy occurring in any office of the Corporation shall be filled by the Board of Directors. The salaries of all officers of the Corporation shall be approved by the Board of Directors.

 

Section 4.3             Voting Securities Owned by the Corporation.  Powers of attorney, proxies, waivers of notice of meeting, consents and other instruments relating to securities owned by the Corporation may be executed in the name of and on behalf of the Corporation by the Chief Executive Officer, President or any Vice President or any other officer authorized to do so by the Board of Directors and any such officer may, in the name of and on behalf of the Corporation, take all such action as any such officer may deem advisable to vote in person or by proxy at any meeting of security holders of any corporation in which the Corporation may own securities and at any such meeting shall possess and may exercise any and all rights and power incident to the ownership of such securities and which, as the owner thereof, the Corporation might have exercised and possessed if present. The Board of Directors may, by resolution, from time to time confer like powers upon any other person or persons.

 

Section 4.4             Chairman of the Board of Directors

 

Section 4.5             . The Chairman of the Board of Directors, if there be one, shall preside at all meetings of the stockholders and of the Board of Directors. The Chairman of the Board of Directors shall be selected by the Board of Directors.

 

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Except where by law the signature of the Chief Executive Officer or President is required, the Chairman of the Board of Directors shall possess the same power as the Chief Executive Officer or President to sign all contracts, certificates and other instruments of the Corporation which may be authorized by the Board of Directors. During the absence or disability of the Chief Executive Officer and President, the Chairman of the Board of Directors shall exercise all the powers and discharge all the duties of the Chief Executive Officer and President. The Chairman of the Board of Directors shall also perform such other duties and may exercise such other powers as may from time to time be assigned by these By-Laws or by the Board of Directors.

 

Section 4.5             Chief Executive Officer.  The Chief Executive Officer shall, subject to the control of the Board of Directors and, if there be one, the Chairman of the Board of Directors, have general supervision of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. In the absence or disability of the Chairman of the Board of Directors, or if there be none, the Chief Executive Officer shall preside at all meetings of the stockholders and the Board of Directors. The Chief Executive Officer shall also perform such other duties and may exercise such other powers as may from time to time be assigned to such officer by these By-Laws or by the Board of Directors.

 

Section 4.6             President

 

Section 4.7             . At the request of the Chief Executive Officer or Chairman or in either’s absence or in the event of either’s inability or refusal to act, the President shall perform the duties of the Chief Executive Officer, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Chief Executive Officer. The President shall have the right to execute all bonds, mortgages, contracts and other instruments of the Corporation requiring a seal, under the seal of the Corporation, except where required or permitted by law to be otherwise signed and executed and except that the other officers of the Corporation may sign and execute documents when so authorized by these By-Laws, the Board of Directors, the Chief Executive Officer or the President. The President shall also perform such other duties and may exercise such other powers as may from time to time be assigned to such officer by these By-Laws, the Board of Directors or the Chief Executive Officer.

 

Section 4.7             Vice Presidents.  At the request of the Chief Executive Officer or President or in either’s absence or in the event of either’s inability or refusal to act (and if there be no Chairman of the Board of Directors), the Vice President, or the Vice Presidents if there is more than one (in the order designated by the Board of Directors), shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President. Each Vice President shall perform such other duties and have such other powers as the Board of Directors, the Chief Executive Officer or the President from time to time may prescribe. If there be no Chairman of the Board of Directors or Chief

 

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Executive Officer and no Vice President, the Board of Directors shall designate the officer of the Corporation who, in the absence of the President or in the event of the inability or refusal of the President to act, shall perform the duties of the President, and when so acting, shall have all the powers of and be subject to all the restrictions upon the President.

 

Section 4.8             Secretary.  The Secretary shall attend all meetings of the Board of Directors and all meetings of stockholders and record all the proceedings of such meetings in a book or books to be kept for that purpose; the Secretary shall also perform like duties for committees of the Board of Directors when requested. The Secretary shall give, or cause to be given, notice of all meetings of the stockholders and special meetings of the Board of Directors, and shall perform such other duties as may be prescribed by the Board of Directors, the Chairman of the Board of Directors, the Chief Executive Officer or the President, under whose supervision the Secretary shall be. If the Secretary shall be unable or shall refuse to cause to be given notice of all meetings of the stockholders and special meetings of the Board of Directors, and if there be no Assistant Secretary, then any of the Board of Directors, the Chief Executive Officer or the President may choose another officer to cause such notice to be given. The Secretary shall have custody of the seal of the Corporation and the Secretary or any Assistant Secretary, if there be one, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by the signature of the Secretary or by the signature of any such Assistant Secretary. The Board of Directors may give general authority to any other officer to affix the seal of the Corporation and to attest to the affixing by such officer’s signature. The Secretary shall see that all books, reports, statements, certificates and other documents and records required by law to be kept or filed are properly kept or filed, as the case may be.

 

Section 4.9             Treasurer.  The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board of Directors, taking proper vouchers for such disbursements, and shall render to the Chief Executive Officer, the President and the Board of Directors, at its regular meetings, or when the Board of Directors so requires, an account of all transactions as Treasurer and of the financial condition of the Corporation. If required by the Board of Directors, the Treasurer shall give the Corporation a bond 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 the office of the Treasurer and for the restoration to the Corporation, in case of the Treasurer’s death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in the Treasurer’s possession or under the Treasurer’s control belonging to the Corporation.

 

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Section 4.10           Assistant Secretaries.  Assistant Secretaries, if there be any, shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors, the Chief Executive Officer, the President, any Vice President, if there be one, or the Secretary, and in the absence of the Secretary or in the event of the Secretary’s disability or refusal to act, shall perform the duties of the Secretary, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Secretary.

 

Section 4.11           Assistant Treasurers.  Assistant Treasurers, if there be any, shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors, the Chief Executive Officer, President, any Vice President, if there be one, or the Treasurer, and in the absence of the Treasurer or in the event of the Treasurer’s disability or refusal to act, shall perform the duties of the Treasurer, and when so acting, shall have all the powers of and be subject to all the restrictions upon the Treasurer. If required by the Board of Directors, an Assistant Treasurer shall give the Corporation a bond 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 the office of Assistant Treasurer and for the restoration to the Corporation, in case of the Assistant Treasurer’s death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in the Assistant Treasurer’s possession or under the Assistant Treasurer’s control belonging to the Corporation.

 

Section 4.12           Other Officers.  Such other officers as the Board of Directors may choose shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors. The Board of Directors may delegate to any other officer of the Corporation the power to choose such other officers and to prescribe their respective duties and powers.

 

ARTICLE V

STOCK

 

Section 5.1             Form of Certificates.  Every holder of stock in the Corporation shall be entitled to have a certificate signed, in the name of the Corporation (i) by the Chairman of the Board of Directors, the Chief Executive Officer, the President or a Vice President and (ii) by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant Secretary of the Corporation, certifying the number of shares owned by such stockholder in the Corporation.

 

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Section 5.2             Signatures.  Any or all of the signatures on a certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue.

 

Section 5.3             Lost Certificates.  The Board of Directors may direct a new certificate to be issued in place of any certificate 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, 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 the owner’s legal representative, to advertise the same in such manner as the Board of Directors 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 or the issuance of such new certificate.

 

Section 5.4             Transfers.  Stock of the Corporation shall be transferable in the manner prescribed by law and in these By-Laws. Transfers of stock shall be made on the books of the Corporation only by the person named in the certificate or by such person’s attorney lawfully constituted in writing and upon the surrender of the certificate therefor, which shall be cancelled before a new certificate shall be issued. No transfer of stock shall be valid as against the Corporation for any purpose until it shall have been entered in the stock records of the Corporation by an entry showing from and to whom transferred.

 

Section 5.5             Record Date

 

(a)           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; providing, however, that the Board of Directors may fix a new record date for the adjourned meeting.

 

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(b)           In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or 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.

 

Section 5.6             Record Owners.  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 required by law.

 

Section 5.7             Transfer and Registry Agents

 

Section 5.8             . The Corporation may from time to time maintain one or more transfer offices or agencies and registry offices or agencies at such place or places as may be determined from time to time by the Board of Directors.

 

ARTICLE VI

NOTICES

 

Section 6.1             Notices.  Whenever written notice is required by law, the Certificate of Incorporation or these By-Laws, to be given to any director, member of a committee or stockholder, such notice may be given by mail, addressed to such director, member of a committee or stockholder, at such person’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. Without limiting the manner by which notice otherwise may be given effectively to stockholders, any notice to stockholders given by the Corporation under applicable law, the Certificate of Incorporation or these By-Laws shall be effective if given by a form of electronic transmission if consented to by the stockholder to whom the notice is given. Any such consent shall be revocable by the stockholder by written notice to the Corporation. Any such consent shall be deemed to be revoked if (i) the Corporation is unable to deliver by electronic transmission two (2) consecutive notices by the Corporation in accordance with such consent and (ii) such inability becomes known to the Secretary or Assistant Secretary of the Corporation or to the transfer agent, or other person responsible for the giving of notice; provided, however,

 

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that the inadvertent failure to treat such inability as a revocation shall not invalidate any meeting or other action. Notice given by electronic transmission, as described above, shall be deemed given: (i) if by facsimile telecommunication, when directed to a number at which the stockholder has consented to receive notice; (ii) if by electronic mail, when directed to an electronic mail address at which the stockholder has consented to receive notice; (iii) if by a posting on an electronic network, together with separate notice to the stockholder of such specific posting, upon the later of (A) such posting and (B) the giving of such separate notice; and (iv) if by any other form of electronic transmission, when directed to the stockholder. Notice to directors or committee members may be given personally or by telefax or by means of electronic transmission.

 

Section 6.2             Waivers of Notice.  Whenever any notice is required by law, the Certificate of Incorporation or these By-Laws, to be given to any director, member of a committee or stockholder, a waiver thereof in writing, signed, by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. Attendance of a person at a meeting, present in person or represented by proxy, shall constitute a waiver of notice of such meeting, except where the person attends the meeting for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened.

 

ARTICLE VII

GENERAL PROVISIONS

 

Section 7.1             Dividends.  Dividends upon the capital stock of the Corporation, subject to the requirements of the General Corporation Law of the State of Delaware (the “DGCL”) and the provisions of the Certificate of Incorporation, if any, may be declared by the Board of Directors at any regular or special meeting of the Board of Directors (or any action by written consent in lieu thereof in accordance with Section  3.4), and may be paid in cash, in property, or in shares of the Corporation’s capital stock. 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 Board of Directors from time to time, in its absolute discretion, deems 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 any proper purpose, and the Board of Directors may modify or abolish any such reserve.

 

Section 7.2             Disbursements.  All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate.

 

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Section 7.3             Fiscal Year.  The fiscal year of the Corporation shall be the calendar year or as otherwise fixed by resolution of the Board of Directors.

 

Section 7.4             Corporate Seal.  The corporate seal shall have inscribed thereon the name of the Corporation, the year of its organization and the words “Corporate Seal, Delaware”. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise.

 

ARTICLE VIII

INDEMNIFICATION

 

Section 8.1             Power to Indemnify in Actions, Suits or Proceedings other than Those by or in the Right of the Corporation.  Subject to Section 8.3, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to 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) by reason of the fact that such person is or was a director or Officer of the Corporation, or is or was a director or Officer of the Corporation serving at the request of the Corporation as a director or officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or 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 action or proceeding, had no reasonable cause to believe such person’s conduct was unlawful. For the purposes of this Article VIII, the Officers of the Corporation shall mean the Chief Executive Officer, President, Vice Presidents, Treasurer, Secretary, Assistant Secretary, the Chief Financial Officer, the members of the Office of the CEO, the members of the Operating Committee and such other officers that may be determined to be Officers of the Corporation by the Board of Directors. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person 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 respect to any criminal action or proceeding, had reasonable cause to believe that such person’s conduct was unlawful.

 

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Section 8.2             Power to Indemnify in Actions, Suits or Proceedings by or in the Right of the Corporation.  Subject to Section 8.3, the Corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that such person is or was a director or Officer of the Corporation, or is or was a director or Officer of the Corporation serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit 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; 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 action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.

 

Section 8.3             Authorization of Indemnification.  Any indemnification under this Article VIII (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 director or Officer of the Corporation is proper in the circumstances because such person has met the applicable standard of conduct set forth in Section 8.1 or Section 8.2, as the case may be. Such determination shall be made, with respect to a person who is a director or Officer of the Corporation at the time of such determination, (i) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (ii) by a committee of such directors designated by a majority vote of such directors, even though less than a quorum, or (iii) if there are no such directors, or if such directors so direct, by independent legal counsel to the Corporation in a written opinion or (iv) if the directors so direct, by the Chief Executive Officer or President. Such determination shall be made, with respect to former directors and Officers of the Corporation, by any person or persons having the authority to act on the matter on behalf of the Corporation. To the extent, however, that a present or former director or Officer of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding described above, or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection therewith, without the necessity of authorization in the specific case.

 

Section 8.4             Indemnification by a Court.  Notwithstanding any contrary determination in the specific case under Section 8.3, and notwithstanding the absence of any determination thereunder, any director or Officer of the Corporation may apply to the Court of Chancery in the State of Delaware for indemnification to the extent otherwise permissible under Sections 8.1 and 8.2. The basis of such indemnification by a court shall be a determination by such court that

 

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indemnification of the director or Officer of the Corporation is proper in the circumstances because such person has met the applicable standards of conduct set forth in Section 8.1 or 8.2, as the case may be. Neither a contrary determination in the specific case under Section 8.3 nor the absence of any determination thereunder shall be a defense to such application or create a presumption that the director or Officer of the Corporation seeking indemnification has not met any applicable standard of conduct. Notice of any application for indemnification pursuant to this Section 8.4 shall be given to the Corporation promptly upon the filing of such application. If successful, in whole or in part, the director or Officer of the Corporation seeking indemnification shall also be entitled to be paid the expense of prosecuting such application.

 

Section 8.5             Expenses Payable in Advance – Directors.  Expenses incurred by a director in defending any civil, criminal, administrative or investigative action, suit or proceeding shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director 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 VIII.

 

Section 8.6             Expenses Payable in Advance – Officers of the Corporation.  Expenses incurred by an Officer of the Corporation in defending any civil, criminal, administrative or investigative action, suit or proceeding may be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such Officer of the Corporation 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 VIII.

 

Section 8.7             Nonexclusivity of Indemnification and Advancement of Expenses.  The indemnification and advancement of expenses provided by or granted pursuant to this Article VIII shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under the Certificate of Incorporation, any By-Law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person’s official capacity and as to action in another capacity while holding such office, it being the policy of the Corporation that indemnification of the persons specified in Sections 8.1 and 8.2 be made to the fullest extent permitted by law. The provisions of this Article VIII shall not be deemed to preclude the indemnification of any person who is not specified in Section 8.1 or 8.2 but whom the Corporation has the power or obligation to indemnify under the provisions of the DGCL, or otherwise.

 

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Section 8.8             Insurance.  The Corporation may purchase and maintain insurance on behalf of any person who is or was a director or Officer of the Corporation, or is or was a director or Officer of the Corporation serving at the request of the Corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan 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 VIII. The Corporation shall have no obligation to procure such insurance.

 

Section 8.9             Certain Definitions

 

Section 8.10           . For purposes of this Article VIII, references to the “Corporation” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors or officers, so that any person who is or was a director or officer of such constituent corporation, or is or was a director or officer of such constituent corporation serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, shall stand in the same position under the provisions of this Article VIII 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. For purposes of this Article VIII, references to “fines” shall include any excise taxes assessed on a person with respect to an employee benefit plan; and references to “serving at the request of the Corporation” shall include any service as a director, Officer, employee or agent of the Corporation which imposes duties on, or involves services by, such director or Officer of the Corporation with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner “not opposed to the best interests of the Corporation” as referred to in this Article VIII. Survival of Indemnification and Advancement of Expenses. The indemnification and advancement of expenses provided by, or granted pursuant to, this Article VIII shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director or Officer of the Corporation and shall inure to the benefit of the heirs, executors and administrators of such a person.

 

Section 8.11           Limitation on Indemnification.  Notwithstanding anything contained in this Article VIII to the contrary, except for proceedings to enforce rights to indemnification (which shall be governed by Section 8.4 hereof), the Corporation shall not be obligated to indemnify any director or Officer of the Corporation in connection with a proceeding (or part thereof) initiated by such person unless such proceeding (or part thereof) was authorized or consented to by the Board of Directors of the Corporation.

 

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Section 8.12           Indemnification of Employees and Agents.  The Corporation may, to the extent authorized from time to time by the Board of Directors, provide rights to indemnification and to the advancement of expenses to employees and agents of the Corporation similar to those conferred in this Article VIII to directors and Officers of the Corporation.

 

ARTICLE IX

AMENDMENTS

 

Section 9.1             Amendments.  In furtherance and not in limitation of the powers conferred upon it by the laws of the State of Delaware, the Board of Directors shall have the power to adopt, amend, alter or repeal these By-Laws. The affirmative vote of at least a majority of the entire Board of Directors shall be required to adopt, amend, alter or repeal the Corporation’s By-Laws. These By-Laws also may be adopted, amended, altered or repealed by the affirmative vote of the holders of at least eighty percent (80%) of the voting power of the shares entitled to vote at an election of directors.

 

Section 9.2             Entire Board of Directors.  As used in this Article IX and in these By-Laws generally, the term “entire Board of Directors” means the total number of directors which the Corporation would have if there were no vacancies.

 

* * *

 

Adopted as of: July 12, 2006

 

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Exhibit 4.1

 

EXECUTION COPY

 

 

STOCKHOLDERS AGREEMENT

 

by and between

 

COWEN GROUP, INC.

 

and

 

SG AMERICAS SECURITIES HOLDINGS, INC.

 

 

Dated as of July 12, 2006

 

 





 

TABLE OF CONTENTS

 

 

Page

 

 

ARTICLE 1

DEFINITIONS

1

 

SECTION 1.1

Definitions

1

 

 

ARTICLE 2

BOARD OF DIRECTORS; CLEAR MARKET; VOTING RIGHTS

4

 

SECTION 2.1

Board of Directors

4

 

SECTION 2.2

Director Indemnification

5

 

SECTION 2.3

Company Lock-Up Period; Clear Market

5

 

SECTION 2.4

Other SGASH Voting Rights

6

 

SECTION 2.5

Board Approval of Modifications

7