STOCKWALK COM GROUP INC
10-Q, 1999-11-12
DRUGS, PROPRIETARIES & DRUGGISTS' SUNDRIES
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U.S.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549


FORM 10-Q

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

For the quarterly period ended September 30, 1999

Commission file number: 0-22247


STOCKWALK.COM GROUP, INC.
(Exact name of Registrant as specified in its charter)

MINNESOTA
(State or other jurisdiction of
incorporation or organization)		   41-1756256
(I.R.S. Employer
Identification Number)

5500 WAYZATA BOULEVARD, SUITE 800, MINNEAPOLIS, MN 55416
(Address of principal executive offices)

(612) 542-6000
(Issuer's telephone number)

Stockwalk.com Group, Inc.
5500 Wayzata Boulevard, Suite 800
Minneapolis, MN 55416



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

    State the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date:

Class:   Outstanding as of October 22, 1999:
Common Stock, $.04 par value   19,295,246 shares
 
 		  
 		  
 

STOCKWALK.COM GROUP, INC
INDEX TO QUARTERLY REPORT FORM 10-Q

PART I—FINANCIAL INFORMATION

 
    
   PAGE
Item 1.   Condensed Consolidated Financial Statements (Unaudited)    
    Condensed Consolidated Statements of Financial Condition:    
      September 30, 1999 and March 31, 1999   4
    Condensed Consolidated Statements of Operations:    
      Three and Six Months Ended September 30, 1999 and September 1998   5
    Condensed Consolidated Statements of Cash Flows:    
      Six Months Ended September 30, 1999 and September 1998   6
    Notes to Condensed Consolidated Financial Statements:   7-15
Item 2.   Management's Discussion and Analysis of Financial Condition and Results of Operations   16-18

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

    The Company is a defendant in various actions relating to its business, some of which involve claims for unspecified amounts. Although the ultimate resolution of these matters cannot be predicted with certainty, in management's opinion, while their outcome may have a material effect on the earnings in a particular period, the outcome will not have a material adverse effect on the consolidated financial condition of the Company.

Item 2. Changes in Securities

    Pursuant to the terms of the Merger Agreement dated July 7, 1999, each outstanding share of common stock of Miller, Johnson, and Kuehn Incorporated ("MJK"), par value $.01, ("MJK Common Stock") and Series I Preferred Stock, par value $7.85, of MJK ("MJK Series I Preferred Stock") were converted into 3.72382 (the "Exchange Ratio") shares of Common Stock. Each share of MJK Common Stock or MJK Series I Preferred Stock owned by MJK, the Company or Merger Sub immediately prior to the Effective Time were cancelled and extinguished without any conversion. Fractional shares of Common Stock were not issued in connection with the Merger.

Item 3. Defaults on Senior Securities—None

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

    The Company's shareholders on July 6, 1999 approved the Company's proposed transactions with MJK Holdings, Inc. as described in the Company's proxy statement dated June 14, 1999. As a result of the shareholders meeting, the Company's shareholders:


Votes For: 670,286            Votes Against: 2,800


Votes For: 702,314            Votes Against: 2,800


Votes For: 637,509            Votes Against: 18,625

Item 5. Other Information

    Acquisition of Arnold Securities Inc.—Exhibit 2.1

Item 6. Exhibits and Reports on Form 8-K


 
   Exhibit
Number:
   Description:
    2.1   Stock Acquisition Agreement of Arnold Securities, Inc., dated August 24, 1999
    10.1   Employment Agreement dated August 1, 1999 between the Registrant and Robert J. Vosburg
    10.2   Employment Agreement dated September 1, 1999 between Registrant and Andrew R. Guzman
    10.3   Employment Agreement dated September 27, 1999 between the Registrant and Philip T. Colton
    27.1   Financial Data Schedule
    99.1   Cautionary Statements

STOCKWALK.COM GROUP, INC.

Condensed Consolidated Statements of Financial Condition

(Unaudited)

 
   September 30, 1999
   Pro-forma
March 31, 1999
Assets            
Cash   $ 3,000,100   $ 5,294,900
Cash and investments—segregated     78,649,300     73,130,500
Receivables from customers     119,852,700     139,910,800
Receivables from brokers and dealers     61,143,500     69,616,700
Receivables from clearing organization     547,600     733,600
Trading securities owned, at market     16,573,300     15,883,500
Secured demand notes receivable     11,250,000     9,675,000
Furniture and equipment     2,227,600     2,201,700
Other assets     10,631,400     8,655,000
   
 
Total Assets   $ 303,875,500   $ 325,101,700
   
 
Liabilities            
Short-term borrowings   $ 30,000,000   $ 33,900,000
Payables to customers     175,037,400     203,313,800
Payables to brokers and dealers     57,129,500     43,388,600
Payable to clearing broker     3,491,000     9,975,000
Trading securities sold but not yet purchased, at market     987,500     812,200
Notes payable     3,459,800     4,538,100
Liabilities subordinated to claims of general creditors     11,250,000     9,675,000
Other liabilities     10,603,100     9,762,300
   
 
Total Liabilities   $ 291,958,300   $ 315,365,000
   
 
Shareholders' Equity:            
Common Stock, $.04 par value;            
Authorized shares: 50,000,000            
Issued and outstanding September 19,295,246; March 19,202,371     771,800     768,100
Paid-in capital     13,400,400     8,920,000
Retained earnings     (2,255,000 )   48,600
   
 
Total Shareholder's Equity   $ 11,917,200   $ 9,736,700
   
 
Total Liabilities & Shareholder's Equity   $ 303,875,500   $ 325,101,700
   
 

See accompanying notes to the financial statements.

STOCKWALK.COM GROUP, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

 
   Three months ended
September 30,
   Six months ended
September 30,
  
 
   1999
   Pro-forma
1998
   Pro-forma
1999
   Pro-forma
1998
  
Revenues:                          
Trading profits   $ 3,175,000   $ 3,292,300   $ 5,196,700   $ 6,967,100  
Interest     4,228,900     3,912,800     8,426,100     8,007,500  
Commissions     2,210,000     2,196,900     4,788,100     4,784,300  
Investment Banking     2,625,400     2,154,000     5,093,800     4,201,000  
Clearing fees     945,200     683,800     2,059,800     1,383,500  
Other income     706,700     1,617,300     1,531,600     2,200,200  
   
 
 
 
 
Total Revenues   $ 13,891,200   $ 13,857,100   $ 27,096,100   $ 27,543,600  
Expenses:                          
Employee compensation and benefits   $ 7,114,300   $ 6,479,700   $ 14,210,100   $ 12,894,600  
Clearing fees     607,100     714,300     1,558,600     1,294,800  
Occupancy and equipment     986,700     875,900     1,939,600     1,766,400  
Communication     1,631,200     1,238,300     3,180,100     2,560,800  
Interest     3,167,700     2,957,800     6,232,900     6,125,100  
Other expense     2,439,000     804,300     3,758,600     1,587,000  
   
 
 
 
 
Total Expenses   $ 15,946,000   $ 13,070,300   $ 30,879,900   $ 26,228,700  
Income (loss) before income taxes     (2,054,800 )   786,800     (3,783,800 )   1,314,900  
Income tax (expense) benefit     795,400     (320,400 )   1,480,200     (432,000 )
   
 
 
 
 
Net Income (loss)   $ (1,259,400 ) $ 466,400   $ (2,303,600 ) $ 882,900  
   
 
 
 
 
Net Income (loss) per common share—Basic   $ (0.07 ) $ 0.02   $ (0.12 ) $ 0.05  
   
 
 
 
 
Weighted average shares outstanding—Basic     19,271,200     19,352,000     19,251,700     19,352,000  
   
 
 
 
 
Net Income (loss) per common share—Diluted   $ (0.06 ) $ 0.02   $ (0.12 ) $ 0.05  
   
 
 
 
 
Weighted average shares outanding—Diluted     19,407,800     19,352,000     19,371,900     19,352,000  
   
 
 
 
 

See accompanying notes to the financial statements.

    

STOCKWALK.COM GROUP, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 
   Six months ended
  
 
   September 30,
Pro-forma
1999
   September 30,
Pro-forma
1998
  
Operating Activities              
Net income(loss)   $ (2,303,600 ) $ 882,900  
Adjustments to reconcile net income (loss) to net cash used for operating activities:              
Depreciation and amortization     467,500     421,000  
Changes in assets and liabilities:              
Cash and securities segregated     (5,518,800 )   19,536,600  
Customer receivables and payables     (8,218,300 )   14,952,800  
Broker and dealer receivables and payables     22,214,100     (10,053,100 )
Clearing organizaion receivables and payables     (6,298,000 )   (22,007,400 )
Trading securities and securities sold but not yet purchased     (514,500 )   (10,501,800 )
Other assets and liablities     (1,144,300 )   (790,100 )
   
 
 
Net cash used for operating activities   $ (1,315,900 ) $ (7,559,100 )
 
Investing activities		  
 		  
 		  
 		  
 		  
 		  
 		  
 
Purchase of equipment and office furniture   $ (484,400 ) $ (279,100 )
   
 
 
Net cash used for investing activities   $ (484,400 ) $ (279,100 )
 
Financing activities		  
 		  
 		  
 		  
 		  
 		  
 		  
 
Increase (decrease) in short-term borrowings   $ (3,900,000 ) $ 7,800,000  
Net payments on notes payable     (1,078,300 )   (253,700 )
Issuance of capital     4,483,800     122,500  
   
 
 
Net cash provided by/(used for) financing activities   $ (494,500 ) $ 7,668,800  
Net decrease in cash and cash equivalents     (2,294,800 )   (169,400 )
Cash at beginnning of period     5,294,900     5,264,300  
   
 
 
Cash at end of period   $ 3,000,100   $ 5,094,900  
   
 
 

See accompanying notes to the financial statements

Notes to Condensed Consolidated Financial Statements

1.  Summary of Significant Accounting Policies

    Description of Business

A subsidiary of Stockwalk.com Group, Inc. f/k/a NM Holdings, Inc. merged with MJK Holdings Inc. on July 7, 1999. NM Holdings Inc. sold its nutrition business in December 1998 and had no remaining active business operations. Based in Minneapolis, Minnesota, Stockwalk.com Group, Inc, principal assets are Miller, Johnson, & Kuehn Incorporated (MJKI), a full-service brokerage, and Stockwalk.com, Inc., an online securities brokerage company. Both subsidiary companies are members of the National Association of Securities Dealers (NASD) and the Securities Investors Protection Corporation (SIPC).

2.  Management's Interim Financial Statement Representation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the intructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments (consisting solely of normal recurring accruals) considered necessary for a fair presentation have been included. Although the Company believes that the disclosures are adequate to make the information presented not misleading, it is suggested that these condensed financial statements be read in conjunction with the audited financial statements and the notes thereto included in the Company's latest annual financial statements included in the July 6, 1999 Proxy Statement.

3.  Company Pro-forma Financial Information

These Pro-forma financial statements are presented as a combination of the respective statements of MJK Holdings and NM Holdings for the periods shown, and have been prepared pursuant to the rules and Regulations of the SEC and, therefore, do not include all information and notes required by generally accepted accounting principles for complete financial statements. The Pro-forma financial statements and the related notes are not necessarily indicative of the balance sheet and statements of operations that would have been reported had the merger of NM Holdings occurred on the dates indicated, nor do they represent a forecast of the financial position at any future period.

The following tables set forth the unaudited pro forma financial information of the Company (the "Pro Forma Financial Statements"), which consist of: (i) the unaudited Statement of Financial Condition of the Company as of March 31, 1999, giving effect to the merger of NM Holdings on such date, (ii) the unaudited pro forma statement of operations of the Company for the quarter September 30, 1998 giving effect to the merger of NM Holdings as if such transaction had occurred on April 1, 1997, and (iii) the unaudited pro-forma statements of operations of the Company for six months ended September 30, 1999 and 1998 giving effect to the merger of NM Holdings as if such transactions had occurred on April 1, 1997.

STOCKWALK.COM GROUP, INC.
Pro-forma Statement of Financial Condition
March 31, 1999
(Unaudited)

 
   MJK Holdings
   NM Holdings
   Adjustments
   Pro-forma
Assets                        
Cash   $ 3,200,600   $ 1,939,300   $ 155,000   $ 5,294,900
Cash and investments—segregated     73,130,500                 73,130,500
Receivables from customers     139,910,800                 139,910,800
Receivables from brokers and dealers     69,616,700                 69,616,700
Receivables form clearing organization     733,600                 733,600
Trading securities owned, at market     15,265,800           617,700 (1)   15,883,500
Secured demand notes receivable     9,675,000                 9,675,000
Furniture and equipment, net     2,201,000     700           2,201,700
Investments in Galagen           617,000     (617,700 )(1)   —
Other assets     8,618,800     36,200           8,655,000
   
 
 
 
Total Assets   $ 322,352,800   $ 2,593,900   $ 155,000   $ 325,101,700
   
 
 
 
Liabilities                        
Short term Borrowings   $ 33,900,000               $ 33,900,000
Payable to customers     203,313,800                 203,313,800
Payable to brokers and dealers     43,388,600                 43,388,600
Payable to clearing broker     9,975,000                 9,975,000
Trading securities sold but not purchased, at market     812,200                 812,200
Notes payable     4,538,100                 4,538,100
Liabilities subordinated to claims of general creditors     9,675,000                 9,675,000
Other Liabilities     9,739,000     23,300           9,762,300
   
 
 
 
Total Liabilities   $ 315,341,700   $ 23,300   $ —   $ 315,365,000
   
 
 
 
Shareholder's Equity                        
Common Stock, $.01 par value;                        
Authorized shares: 50,000,000                        
Issued and outstanding                        
March 19,202,371     42,500     49,100     676,500 (2)(3)(4)   768,100
Preferred Stock     4,380,300           (4,380,300) (2)(4)   —
Paid in Capital     2,540,000     8,813,600     (2,433,600) (2)(3)(4)   8,920,000
Retained Earnings     48,300     (6,292,100 )   6,292,400 (4)   48,600
   
 
 
 
Total Shareholder's Equity   $ 7,011,100   $ 2,570,600   $ 155,000     9,736,700
   
 
 
 
Total Liabilities & Shareholder's Equity   $ 322,352,800   $ 2,593,900   $ 155,000   $ 325,101,700
   
 
 
 

Pro-forma Statements of Operations
Quarter Ended September 30, 1998
(Unaudited)

 
   MJK Holdings
   NM Holdings
   Adjustments
   Pro-forma
  
Revenues                          
Trading profits   $ 3,292,300     —     —   $ 3,292,300  
Interest     3,888,700     24,100     —     3,912,800  
Commissions     2,196,900     —     —     2,196,900  
Investment Banking     2,154,000     —     —     2,154,000  
Clearing Fees     683,800     —     —     683,800  
Sale of Nutritional Products     —     830,300     (830,300 )(5)   —  
Other Income     1,617,300     —     —     1,617,300  
   
 
 
 
 
Total Revenues   $ 13,833,000   $ 854,400   $ (830,300 ) $ 13,857,100  
Cost of Goods Sold         $ 579,900   $ (579,900 )(5)      
   
 
 
 
 
Gross Profit   $ 13,833,000   $ 274,500   $ (250,400 ) $ 13,857,100  
Expenses                          
Employee compensation and benefits   $ 6,479,700     —     —   $ 6,479,700  
Clearing fees     714,300     —     —     714,300  
Occupancy and Equipment Rental     875,900     —     —     875,900  
Communication     1,238,300     —     —     1,238,300  
Interest     2,957,800     57,800     (57,800 )(5)   2,957,800  
Selling, general, and administrative     —     577,800     (577,800 )(5)   —  
Research and development     —     19,000     (19,000 )(5)   —  
Other expense     804,300     —     —     804,300  
   
 
 
 
 
Total Expenses   $ 13,070,300   $ 654,600   $ (654,600 ) $ 13,070,300  
   
 
 
 
 
Income (Loss) before income taxes     762,700     (380,100 )   404,200     786,800  
Income tax (expense) benefit     (320,400 )   —     —     (320,400 )
   
 
 
 
 
Net Income (Loss)   $ 442,300   $ (380,100 ) $ 404,200   $ 466,400  
   
 
 
 
 


Pro-forma Statements of Operations
Six Months Ended September 30, 1999
(Unaudited)

 
   MJK Holdings
   NM Holdings
   Adjustments
   Combined
  
Revenues                          
Trading profits   $ 5,332,700   $ (136,000 )       $ 5,196,700  
Interest     8,396,700     29,400           8,426,100  
Commissions     4,788,100                 4,788,100  
Investment Banking     5,093,800                 5,093,800  
Clearing Fees     2,059,800                 2,059,800  
Other Income     1,514,200     17,400           1,531,600  
   
 
 
 
 
Total Revenues   $ 27,185,300   $ (89,200 ) $ —   $ 27,096,100  
Expenses                          
Employee compensation and benefits   $ 14,210,600   $ (500 )       $ 14,210,100  
Clearing fees     1,558,600                 1,558,600  
Occupancy and Equipment Rental     1,939,900     (300 )         1,939,600  
Communication     3,167,800     12,300           3,180,100  
Interest     6,237,800     (4,900 )         6,232,900  
Other expense     3,437,300     321,300           3,758,600  
   
 
 
 
 
Total Expenses   $ 30,552,000   $ 327,900   $ —   $ 30,879,900  
   
 
 
 
 
Net loss before income taxes     (3,366,700 )   (417,100 )         (3,783,800 )
Income tax benefit     1,416,600     63,600           1,480,200  
   
 
 
 
 
Net Loss   $ (1,950,100 ) $ (353,500 ) $ —   $ (2,303,600 )
   
 
 
 
 

Note 3. Company Pro-forma Financial Information

Pro-forma Statements of Operations
Six Months Ended September 30, 1998
(Unaudited)

 
   MJK Holdings
   NM Holdings
   Adjustments
   Pro-forma
  
Revenues                          
Trading profits   $ 6,967,100     —     —   $ 6,967,100  
Interest     7,959,200     48,300     —     8,007,500  
Commissions     4,784,300     —     —     4,784,300  
Investment Banking     4,201,000     —     —     4,201,000  
Clearing Fees     1,383,500     —     —     1,383,500  
Sale of Nutritional Products     —     2,274,000     (2,274,000) (5)   —  
Other Income     2,200,200     —     —     2,200,200  
   
 
 
 
 
Total Revenues   $ 27,495,300   $ 2,322,300   $ (2,274,000 ) $ 27,543,600  
Cost of Goods Sold           1,523,800     (1,523,800) (5)   —  
   
 
 
 
 
Gross Profit   $ 27,495,300   $ 798,500   $ (750,200 ) $ 27,543,600  
Expenses                          
Employee compensation and benefits   $ 12,894,600     —     —   $ 12,894,600  
Clearing fees     1,294,800     —     —     1,294,800  
Occupancy and Equipment Rental     1,766,400     —     —     1,766,400  
Communication     2,560,800     —     —     2,560,800  
Interest     6,125,100     113,800     (113,800) (5)   6,125,100  
Selling, general, and administrative     —     1,099,800     (1,099,800) (5)   —  
Research and development     —     50,300     (50,300) (5)   —  
Other expense     1,587,000     —     —     1,587,000  
   
 
 
 
 
Total Expenses   $ 26,228,700   $ 1,263,900   $ (1,263,900 ) $ 26,228,700  
   
 
 
 
 
Income (Loss) before income taxes     1,266,600     (465,400 )   513,700     1,314,900  
Income tax (expense) benefit     (432,000 )   —     —     (432,000 )
   
 
 
 
 
Net Income (loss)   $ 834,600   $ (465,400 ) $ 513,700   $ 882,900  
   
 
 
 
 

Note 3.  Company Pro-forma Financial Information


Adjustment Notes to unaudited Pro-forma Financial Statements


4.  Financing Arrangements

    The Company had discretionary lines of credit totaling $60 million at September 30, 1999 which are secured by firm-owned securities, customer securities collateralizing liabilities subordinated to claims of general creditors and unpaid customer securities. These lines are payable on demand. Borrowings on the lines bear interest at various rates over the bank's cost of funds; such rates generally vary daily. The weighted average interest rates on the lines were 6.57% and 6.48% as of September 30, 1999 and March 31, 1999 respectively. As of September 30, 1999 and March 31, 1999, there were $30.0 million and $26.1 million available under these lines of credit, respectively. The September 30, 1999 outstanding balances totaling $30.0 million were collateralized by approximately $12.2 million of firm-owned securities, $11.3 million of customer securities collateralizing liabilities subordinated to claims of general creditors and $6.5 million of unpaid customer securities. The March 31, 1999 outstanding balances totaling $33.9 million were collateralized by approximately $10.8 of firm-owned securities, $9.0 million of customer securities collateralizing liabilities subordinated to claims of general creditors and $14.1 million of unpaid customer securities. A compensating balance arrangement totaling $575,000 exists with respect to one of the Company's discretionary lines of credit.

    At September 30, 1999, the Company had a note payable of $3.3 million that was secured by the Company's ownership interest in MJKI. The note bears an interest rate of the bank's reference rate unless the Company's investment account balance at the bank is less than the principal balance of the note. If the Company's investment account at the bank is less than the principal balance of the note, the note bears an interest rate of the bank's reference rate plus one-half of one percent. The interest rate on the note at September 30, 1999 was 8.25%. The note matures in installments through July 31, 2000.

5.  Shareholder's Equity

    During the quarter ended September 30, 1999, the Company completed the sale of 440,000 shares of its common stock for $9.60 per share. If the Company completes another private placement of Common Stock or Common Stock equivalents prior to December 31, 1999 at a price less than $10.00 per common share, additional shares of Common Stock will be issued to purchasers so that the effective price per share of the Common Stock sold in this offering is equal to the price per share of the Common Stock in the subsequent offering.

STATEMENT RE: COMPUTATION WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING

    The Company calculates net income per share in accordance with FASB Statement No. 128 by dividing net income by the weighted average number of shares of common stock outstanding to arrive at the Net Income Per Common Share—Basic. The Company calculates Net Income Per Share—Dilutive by diving net income by the weighted average number of shares of common stock and dilutive stock equivalents from the exercise of stock options and warrants using the treasury stock method.

 
   Three months ended September 30,
   Six months ended September 30,
 
   1999
   Pro-forma
1998
   Pro-forma
1999
   Pro-forma
1998
Weighted average shares outstanding—Basic   19,271,200   19,352,000   19,251,700   19,352,000
Dilutive effect of stock options and warrants after application of the treasury stock method   136,600   —   120,200   —
   
 
 
 
Weighted average shares outstanding—Diluted   19,407,800   19,352,000   19,371,900   19,352,000
   
 
 
 

6.  Net Capital Requirements and Dividend Restrictions

    Miller, Johnson, & Kuehn, Incorporated (MJKI), is subject to the Securities and Exchange Commission's Uniform Net Capital Rule (Rule 15c3-1) which requires the maintenance of minimum net capital. MJKI has elected to use the alternative method permitted by Rule 15c3-1 which requires that MJKI maintain minimum net capital equal to the greater of $250,000 or 2% of aggregate debit balances arising from customer transactions, as defined. At September 30, 1999, MJKI's net capital of $15.0 million was 12.7% of aggregate debit balances and $12.7 in excess of required net capital. The net capital rule also provides that equity capital may not be withdrawn or cash dividends paid if resulting net capital would be less than 5% of aggregate debits.

7.  Related Party Transactions

    The Company also had $1.4 million and $1.3 million of notes receivable from employees which are included in other assets as of September 30, 1999 and 1998, respectively. The amounts consist of 35 and 25 notes respectively which bear various interest rates and mature at various dates through 2003.

8.  Segments

    The Company's reportable segments are as follows: clearing services, retail sales, investment banking, and other. The clearing services segment consists of clearing services provided on a fully-disclosed basis to approximately 46 other broker-dealers. The retail segment consists of various retail branch locations which conduct security transactions for individual and institutional investors. The investment-banking segment consists of the management, co-management, and participation by the Company in the underwriting of corporation equity and debt securities. Other consists of general corporate, administrative support functions, and net gains or losses on the investment account.

    Segment results are derived from the Company's branch location profitability reporting system. Intersegment transactions are measured on the same basis as if the transactions occurred with external customers. In reviewing the segment operating results, the company's operating decision-makers do not distinguish between intersegment transactions and external customer transactions. Intersegment revenue is eliminated to reconcile total segment revenue to consolidated revenue. Income tax expense or benefit is not allocated to the Company's operating segments. The Company does not provide balance sheet data for segment reporting as this data is not measured for its operating segments.

Information concerning operations in these segments of business is as follows:

 
   Three months ended
September 30,
   Six months ended
September 30,
  
 
   1999
   Pro-forma
1998
   Pro-forma
1999
   Pro-forma
1998
  
Revenue:                          
Clearing Services   $ 5,386,600   $ 4,749,200   $ 10,993,800   $ 9,764,300  
Retail Sales     7,292,800     6,757,100     13,508,200     14,312,300  
Investment Banking     1,134,300     1,844,800     2,203,200     2,696,000  
Other     309,600     481,800     480,100     722,700  
   
 
 
 
 
      14,123,300     13,832,900     27,185,300     27,495,300  
 
NM Holdings, Inc.		  
 		  
 		  
(108,900		  
)		  
 		  
854,500		  
 		  
 		  
(89,200		  
)		  
 		  
2,322,300		  
 
Stockwalk.com     —                    
Intersegment eliminations     (123,200 )   (830,300 )   —     (2,274,000 )
   
 
 
 
 
Consolidated Revenue   $ 13,891,200   $ 13,857,100   $ 27,096,100   $ 27,543,600  
   
 
 
 
 
Pretax income (loss):                          
Clearing Services     450,900     126,800     1,161,600     809,800  
Retail Sales     (879,400 )   214,200     (2,948,100 )   14,900  
Investment Banking     125,700     421,700     163,900     441,900  
   
 
 
 
 
      (302,800 )   762,700     (1,622,600 )   1,266,600  
 
NM Holdings, Inc.		  
 		  
 		  
(241,600		  
)		  
 		  
(379,900		  
)		  
 		  
(417,100		  
)		  
 		  
(465,500		  
)
Stockwalk.com     (1,359,400 )         (1,593,900 )      
Elimination     (150,900 )   404,000     (150,200 )   513,800  
   
 
 
 
 
Consolidated pretax income (loss):   $ (2,054,700 ) $ 786,800   $ (3,783,800 ) $ 1,314,900  
   
 
 
 
 

9.  Subsequent Events

    October 18, 1999, the Company completed the acquisition of Arnold Securities, Inc of Minneapolis, Minnesota. Arnold Securities offers discount brokerage and Internet trading services to more that 13,000 active client's across the upper Midwest.

10.  Year 2000

    The company has completed an assessment of its internal systems. Older personal computers have been upgraded to new systems that are Year 2000 compliant. Conversion activities of internal mission critical systems have been completed. The Company will continue to review other non-critical areas for compliance. To date, expenditures for Y2K have been expensed as incurred. Future projects are expected to result in minimal additional expenditures. The Company underwent a SEC review for compliance with the Year 2000 computer issues and received its highest rating. The Company believes that it has taken steps to address the Year 2000 computer compliance issues and has obtained satisfactory assurances that comparable steps have been taken by each of its major service vendors.


STOCKWALK.COM GROUP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS

General

    Stockwalk.com Group, Inc., has two principal assets: MJKI and Stockwalk.com, Inc. MJKI is a Minneapolis-based regional broker-dealer, engaging primarily in principal transactions, commission business, investment banking activities, and customer financing, as well as acting as a fully disclosed clearing broker for approximately 46 brokerage firms. Stockwalk.com, Inc. has commenced online securities trading though its website.

    The business of Stockwalk.com Group, Inc. is highly competitive and sensitive to many factors beyond the control of management, including the volatility and price level of securities markets; the volume, size and timing of securities transactions, the level and volatility of interest rates, local and national economic conditions and demand for services and investment products. In addition, a significant portion of the Company's expenses, including salaries, benefits, occupancy and communications, as well as legal expenses incurred in connection with customer complaints typically predicated on investment losses, are relatively fixed and do not vary with market activity. Consequently, the Company's revenue and net income have been and may continue to be subject to fluctuations.

Three Months Ended September 30, 1999

Revenues

    Trading profits were consistent with the same quarter in fiscal 1999. In assessing our exposure to overall market risk, the Company reduced it's equity levels to approximately $1.0 million in the first quarter of fiscal year 2000. A level that is more appropriate for a public company with our capitalization.

    Investment banking revenue for the quarter ended September 30, 1999 was $2.6 million, an increase of $471,400 million or 21.9% percent from the quarter ended September 30, 1998. This increase was driven by strong fees from our fixed income department.

    Clearing fee income for the quarter ended September 30, 1999 was $945,200, an increase of $261,400 or 38.2% over the same quarter in the prior year, reflecting growth in the correspondent clearing business.

    Other income decreased $910,600 or 56.3% compared to the same quarter in fiscal 1999 due to a single large placement fee recognized in the prior year quarter. There were no similar corresponding transactions in the current year second quarter.

Expenses

    Employee compensation and benefits increased $634,600 or 9.8% over the prior year as we increased our overall staffing levels in several areas. Our clearing division added a number of employees to help handle our increasing clearing volume. Additionally, we made several key hires in technology, private label sales, legal and accounting. We also increased our staffing to address the development of our online brokerage, Stockwalk.com. We expect staffing costs to continue to accelerate as Stockwalk.com further develops its online presence and acquires new accounts.

    Clearing fees expenses for the quarter ended September 30, 1999 totaled $607,100, a decrease of $107,200 or 15.0% percent from the quarter ended September 30, 1998, which was primarily a result of reductions in payments required under the Private Brokers clearing corporation purchase agreement 1999. During the quarter ended September 30, 1999, our clearing services department processed 146,821 tickets, compared to 110,040 tickets processed for the quarter ended September 30, 1998, an increase of 33 percent.

    Occupancy and equipment expense saw a small increase from $110,800 million for the quarter ended September 30, 1999 as our clearing division and Stockwak.com, Inc. leased additional space. We expect occupancy expense to increase as additional space is leased to accommodate growth in our online brokerage, Stockwalk.com and our clearing division.

    Expenses related to our communication needs for the quarter ended September 30, 1999 totaled $1.6 million, an increase of $392,900 or 31.7% from the quarter ended September 30, 1998. Improvements in our wide area network, increases in volume-related changes with our service bureau, and the addition of various data services to the installed base represented a significant portion of the increase. We will continue to bolster our technological resources to accommodate the expansion of the clearing services business and the development of our on-line trading service.

    Other operating expenses for the first quarter of $2.4 million, increased $1.6 million over the prior quarter ended September 30, 1998. The increase is primarily related to the development and promotion of the Company's online brokerage subsidiary, Stockwalk.com.

    The company's interest rate spread, interest income less interest expense, for the quarter was relatively unchanged from the previous year.

Six Months Ended September 30, 1999

Revenues

    Revenues from trading profits decreased $1.8 million or 25.4% compared to the same quarter in fiscal 1999. A majority of the decline was due to trading losses incurred as we significantly reduced our equity inventory positions during the first quarter of fiscal year ended March 2000. In assessing our exposure to overall market risk, we chose to reduce our equity exposure to a level that is more appropriate for a public company with our capitalization.

    Investment banking revenue for the six months ended September 30, 1999 was $5.1 million, an increase of $892,800 or 21.3% from the six months ended September 30, 1998. This increase was driven by strong fees from our fixed income department.

    Clearing fee income for the six months ended September 30, 1999 was $2.1 million, an increase of $676,300 or 48.9% over the same six months in the prior year, reflecting growth in the correspondent clearing business.

    Other income decreased $668,600 or 30.4% compared to the same quarter in fiscal 1999 due to a single large placement fee recognized in the prior year quarter. There were no similar corresponding trasactions in the current year second quarter.

Expenses

    Employee compensation and benefits increased $1.3 million or 10.2% over the prior year as we increased our overall staffing levels in several areas. Our clearing division added a number of employees to help handle our increasing clearing volume. Additionally, we made several key hires in technology, private label sales, legal and accounting. We also increased our staffing to address the development of our online brokerage, Stockwalk.com. We expect staffing costs to continue to accelerate as Stockwalk.com further develops its online presence and acquires new accounts.

    Clearing fees expenses for the six months ended September 30, 1999 totaled $1.6 million, an increase of $263,800 or 20.4% from six months ended September 30, 19998, which was attributable to the growth in the company's clearing services business in fiscal 1999. During the six months ended September 30, 1999, our clearing services department processed 312,220 tickets, compared to 225,541 tickets processed for the six months ended September 30, 1998, an increase of 38.4%.

    Occupancy and equipment expense saw a small increase as our clearing division leased addition space. We expect occupancy expense to increase as additional space is leased to accommodate growth in our online brokerage, Stockwalk.com and our clearing division.

    Expenses related to our communication needs for the six months ended September 30, 1999 totaled $3.2 million, an increase of $619,300 or 24.2% from the six months ended September 30, 1998. Improvements in our wide area network, increases in volume related changes with our service bureau, and the addition of various data services to the installed base represented a significant portion of the increase. MJKI will continue to bolster our technological resources to accommodate the expansion of the clearing services business and the development of our on-line trading service.

    Other operating expenses for the six months ended September 30, 1999, were 3.8 million or 136.8% over the prior six months ended September 30, 1998. The increase reflects additional costs associated with the merger with NM Holdings, Inc. as well as certain promotional miscellaneous start-up costs of our online brokerage subsidiary, Stockwalk.com.

    The Company's interest rate spread, interest income less interest expense, for the six months was relatively unchanged from the prior year.

Liquidity and Capital Resources

    Our assets consist primarily of cash and assets readily convertible into cash. Securities inventories are stated at market value and are generally readily marketable. Customer margin loans are collateralized by securities and have floating interest rates. Other receivables and payables with customers and other brokers and dealers usually settle transactions within three days following the date of transaction. Operations are financed by equity capital, bank lines of credit, proceeds from sales of securities, non-interest bearing liabilities such as checks and drafts payable, payables to customers and employee compensation payable. Due to the liquid nature of our balance sheet, the fluctuations in cash flows from financing activities are directly related to operating activities.

    Net cash used for operating activities during the current six month period was $1,800,300 as a result of the reduction in net payables to customers and clearing organizations and an increase in segregated securities and other assets being offset by the net payable increase to brokers and dealers.

    The Company's investing activities used $484,400 of cash in the six months ended September 30, 1999 as a result equipment purchased for the expansion of Stockwalk.com and the clearing division, being offset by equipment sold under a Sale-leaseback financing agreement.

    The Company's financing activities used $494,500 in the six months ended September 30, 1999. The funds provided by the sale of 440,000 shares of the Company's common to employees stock and options exercised were offset by payments made on the notes and reductions in short-term borrowings.

    As a securities broker-dealer, MJKI is required by Commission regulations to meet certain liquidity and capital standards. At September 30, 1999, we had net capital, as defined in the Commission's Uniform Net Capital Rule (Rule 15c3-1), of $15.0 million, which exceeded the minimum net capital requirements by $12.7 million.

    At September 30, 1999, we had approximately $60 million in committed credit agreements, of which $30 million was utilized. Of this amount, approximately $6.5 million was collateralized by customers' margin securities. An additional amount equal to approximately $23.5 million was secured by firm-owned securities and customer securities collateralizing liabilities subordinated to claims of general creditors.

    The Company believes that its current cash position, cash generated from future operations, availability of line of credit borrowings, additional capacity for subordinated debt, and sale of securities will be adequate to meet the Company's current obligations and operating needs.

    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.

Dated: November 11, 1999

By: /s/ JEFFREY L. HOUDEK

Jeffrey L. Houdek
Principal Accounting Officer

QuickLinks

STOCKWALK.COM GROUP, INC INDEX TO QUARTERLY REPORT FORM 10-Q

STOCKWALK.COM GROUP, INC. Pro-forma Statement of Financial Condition March 31, 1999 (Unaudited)

Pro-forma Statements of Operations Quarter Ended September 30, 1998 (Unaudited)
Pro-forma Statements of Operations Six Months Ended September 30, 1999 (Unaudited)

Pro-forma Statements of Operations Six Months Ended September 30, 1998 (Unaudited)

Adjustment Notes to unaudited Pro-forma Financial Statements

STOCKWALK.COM GROUP, INC. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



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