<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO _________
COMMISSION FILE NUMBER: 0-22247
STOCKWALK.COM GROUP, INC.
(Exact name of small business issuer as specified in its charter)
MINNESOTA 41-1756256
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
5500 WAYZATA BOULEVARD, SUITE 800, MINNEAPOLIS, MN 55416
(Address of principal executive offices)
(612) 542-6000
(Issuer's telephone number)
NM HOLDINGS, INC.
9850 51ST AVENUE NORTH, SUITE 110
MINNEAPOLIS, MN 55442
DECEMBER 31
(Former name, former address and former fiscal year, if
changed since last report)
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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEEDING FIVE YEARS
Check whether the registrant filed all documents and reports required
to be filed by Section 12, 13 or 15(d) of the Exchange Act after distribution of
securities under a plan confirmed by the court. Yes No Not applicable
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
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 August 13, 1999:
Common Stock, $.04 par value 19,292,272 shares
Transitional Small Business Disclosure Format (check one):
Yes No X
--- ---
<PAGE>
STOCKWALK.COM GROUP, INC.
INDEX
<TABLE>
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
- Balance Sheets (Unaudited) As of June 30, 1999 and December 31, 1998 3, 8
- Statements of Operations (Unaudited) For the Three and Six Months
Ended June 30, 1999 and 1998 4, 9
- Statements of Cash Flows (Unaudited) For the Six Months Ended June 30,
1999 and 1998 5, 10
- Notes to Financial Statements (Unaudited) 6, 11
Item 2. Management's Discussion and Analysis of Financial
- Condition and Results of Operations 6, 14
PART II - OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
STOCKWALK.COM GROUP, INC.
(F/K/A NM HOLDINGS, INC.)
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1999
(UNAUDITED) (AUDITED)
---------------------- ---------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 1,913,355 $ 1,935,368
Net assets of discontinued operations - -
Prepaid expenses 24,720 6,547
---------------------- ---------------------
---------------------- ---------------------
Total current assets 1,938,075 1,941,915
Investments in GalaGen Inc. 757,150 498,125
Equipment and office furniture, net - 6,102
---------------------- ---------------------
Total assets $ 2,695,225 $ 2,446,142
---------------------- ---------------------
---------------------- ---------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 94,672 $ -
Accrued payroll - 4,690
Net liabilities of discontinued operations (23,129) 58,658
---------------------- ---------------------
Total current liabilities 71,543 63,348
Shareholders' equity:
Undesignated Preferred Stock, $.04 par value:
Authorized shares--1,250,000
Issued and outstanding shares--none - -
Common Stock, $.04 par value:
Authorized shares--5,000,000
Issued and outstanding shares--1,260,751 on
June 30, 1999; 150,251 on December 31, 1998 50,430 46,010
Paid-in capital 8,901,413 8,706,435
Accumulated other comprehensive income 259,025 -
Accumulated defecit (6,587,186) (6,369,651)
---------------------- ---------------------
Total shareholders' equity 2,623,682 2,382,794
---------------------- ---------------------
Total liabilities and shareholders' equity $ 2,695,225 $ 2,446,142
---------------------- ---------------------
---------------------- ---------------------
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
3
<PAGE>
STOCKWALK.COM GROUP, INC.
(F/K/A NM HOLDINGS, INC.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Investment income $ 19,641 $ - $ 37,175 $ -
Administrative expenses 195,199 - 254,711 -
-------------------------------- ------------------------------
Loss from continuing operations (175,558) - (217,536) -
Income (loss)from discontinued operations - (120,477) - (71,324)
-------------------------------- ------------------------------
Net income (loss) $ (175,558) $ (120,477) $ (217,536) $ (71,324)
Loss per share data (basic and diluted):
Loss from continuing operations $ (0.14) $ - $ (0.18) $ -
Loss from discontinued operations - (0.09) - (0.05)
-------------------------------- ------------------------------
Net income (loss) per share $ (0.14) $ (0.09) $ (0.18) $ (0.05)
Weighted average number of shares outstanding 1,238,197 1,364,005 1,195,345 1,364,005
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS
4
<PAGE>
STOCKWALK.COM GROUP, INC.
(F/K/A NM HOLDINGS, INC.)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1999 1998
------------------------- -------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income(loss) $ (217,536) $ (71,324)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Reserve for bad debts - 22,467
Depreciation 1,747 160,758
Changes in assets and liabilities:
Accounts receivable - 399,336
Inventories - 799,850
Prepaid expenses (18,173) 19,682
Accounts payable 94,672 (291,766)
Accrued liabilities (4,690) (247,894)
------------------------- -------------------------
Net cash (used in)/provided by operating activities (143,980) 791,109
INVESTING ACTIVITIES
Sale(purchase) of equipment and office furniture 4,355 (60,000)
Decrease in net liabilities of discontinued operations (81,787) -
------------------------- -------------------------
Net cash (used in)/provided by operating activities (77,432) (60,000)
FINANCING ACTIVITIES
Proceeds from issuance of common stock 199,399 -
------------------------- -------------------------
Net cash provided by/(used in) financing activities 199,399 -
Net (decrease)/increase in cash (22,013) 731,109
Cash at beginnning of period 1,935,368 1,647,482
------------------------- -------------------------
Cash at end of period $ 1,913,355 $ 2,378,591
------------------------- -------------------------
------------------------- -------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS.
5
<PAGE>
STOCKWALK.COM GROUP, INC.
(F/K/A NM HOLDINGS, INC.)
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The condensed financial statements as of June 30, 1999 and for the three and
six-month periods ended June 30, 1999 and 1998 included in this Form 10-QSB
have been prepared by STOCKWALK.COM GROUP, INC. f/k/a NM HOLDINGS, INC. (the
"Company") pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures, normally
included in financial statements prepared in accordance with generally
accepted accounting principles, have been condensed or omitted pursuant to
such rules and regulations. These financial statements should be read in
conjunction with the financial statements and related notes thereto included
in the Company's Annual Report on Form 10-KSB for the year ended December
31, 1998.
The condensed financial statements presented herein as of June 30, 1999 and
for the three and six-month periods ended June 30, 1999 and 1998 are
unaudited, but in the opinion of management, reflect all adjustments,
consisting of normal recurring adjustments, necessary for a fair presentation
of financial position, results of operations and cash flows for the periods
presented. The results of operations for any interim period are not
necessarily indicative of results for the full year.
2. NATURE OF OPERATIONS
In December 1998 the Company sold its nutrition business and had no active
business operations until completion of the merger with MJK Holdings, Inc.
("MJK") on July 7, 1999 at which time its name was changed to Stockwalk.com
Group, Inc.. The financial statements of the Company at June 30, 1999 and
June 30, 1998 and for the periods then ended reflect only the historical
operations of the Company without giving effect to the transaction described
above. On July 7, 1999, the Company completed an agreement with MJK Holdings,
Inc. ("MJK") pursuant to which a newly formed wholly-owned subsidiary of the
Company was merged with and into MJK, creating a wholly-owned subsidiary of
the Company. MJK is the parent company of Miller, Johnson & Kuehn,
Incorporated, a brokerage and investment banking firm headquartered in
Minneapolis, Minnesota. Company shareholders retained an approximate 6.4%
interest in the Company following the merger transaction. The transaction was
approved by the Company's shareholders on July 6, 1999. The transactions
consummated on July 7 are described in more detail in the Proxy Statement
dated June 15, 1999.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENT IN MARKETABLE SECURITIES
Investments are comprised of marketable securities (common stock received in
December 1998 relating to the sale of the critical care nutrition formula
product line to GalaGen Inc.) and are classified as available-for-sale.
Available-for-sale securities are reported at fair value with a corresponding
entry for any unrealized gains and losses recorded as a component of
Shareholders' Equity in the account "Accumulated other comprehensive income."
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT
This Quarterly Report on Form 10-QSB contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. When used
in this Form 10-QSB and in future filings by the Company with the Securities
and Exchange Commission, in the Company's press releases and in oral
statements made with the approval of an authorized executive officer, the
words or phrases "believes," "anticipates," "intends," "will likely result,"
"estimates," "projects" or similar expressions are intended to identify such
forward-looking statements, but are not the exclusive means of identifying
such statements. These forward-looking statements involve risks and
uncertainties that may cause actual results to differ materially from the
forward-looking statements. Readers should not place undue reliance on any
such forward-looking statements, which speak only as of the date made. We
undertake no obligation to revise any forward-looking statements in order to
reflect events or circumstances after the date of such statements. Readers
should carefully review and consider the disclosures made by the Company in
this report and in our other reports filed with the Securities and Exchange
Commission that discuss the risks and factors that may affect our business.
Such forward-looking statements are qualified by the cautions and risk
factors set forth under the "Cautionary Statement" filed as exhibit 99.1 to
this Form 10-QSB.
6
<PAGE>
GENERAL
Prior to December 23, 1998, the Company developed and sold generic critical care
nutrition formula products and related delivery equipment and accessories for
the hospital, nursing home and home health care markets, as well as private
label adult nutrition products for sale through retail chains. On December 23,
1998, we sold to ZEVEX, Inc. all of our assets used in our pump and plastic
disposables business, and sold to GalaGen Inc. all of our assets used in our
critical care business. Following these transactions, we did not conduct any
active business operations.
On July 7, 1999, we completed the agreement with MJK described in Note 2 of
Notes to Financial Statements.
RESULTS OF OPERATIONS SIX MONTHS ENDED JUNE 30, 1999 AND 1998
CONTINUING OPERATIONS
The loss from continuing operations totaled $217,536 as of June 30, 1999, and
$0 as of June 30, 1998, and consisted of recurring administrative expenses
incurred in the period, offset by interest income earned in the same period.
DISCONTINUED OPERATIONS
The Company discontinued all operations in 1998. All pre-disposal activity
associated with these operations in the 1998 period has been segregated and
reported in a single line item "Loss from discontinued operations" in the
Company's Statements of Operations.
Approximately $136,000 of the $217,536 net loss for the six months ended June
30, 1999 was directly related to costs associated to the merger with MJK.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have incurred losses and negative cumulative cash flows
from operations. On September 26, 1996, our initial public offering was
declared effective and, in a transaction that closed on October 1, 1996, we
sold 359,375 shares of the our common stock at $14.00 per share, including an
over-allotment of 49,375 shares. After deducting all offering costs, net
proceeds to the Company totaled $4.24 million. Prior to the initial public
offering, our principal source of cash and working capital had been from the
private placement of our common stock, through which we received
approximately $2.8 million in net proceeds. In connection with activities and
results of discontinued operations described above, our net cash used in
operations for the six months ended June 30, 1999, totaled $143,980, compared
with cash provided by operations totaling $791,109 in the 1998 period. Net
cash used in investing activities related to the discontinued operations
totaled $77,432. As of June 30, 1999, cash and cash equivalents totaled
$1,913,355. All unused funds are invested in U.S. Treasury-backed funds with
maturities, generally ranging under three months. Liquidity and capital post
consummation of MJK transaction on July 7, 1999 will depend on MJK's
business. See MJK's Management Discussion and Analysis, Liquidity and Capital
Resources section.
7
<PAGE>
STOCKWALK.COM GROUP, INC.
PRO-FORMA STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 30, 1999 MARCH 31, 1999
------------------------ -----------------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 7,621,610 $ 5,139,936
Cash and investments segregated under federal and
other regulations (primarily U.S. Government obligations 72,409,761 73,130,503
Receivables from customers 150,744,803 139,910,839
Receivable from brokers and dealers 65,754,587 69,616,726
Receivable from clearing organization 833,726 733,580
Investments 757,150 617,675
Trading securities owned, at market 18,833,399 15,265,814
Secured demand notes receivable, collateralized by securities 8,450,000 9,675,000
Furniture, equipment and leasehold improvements, net 2,796,204 2,201,657
Goodwill 1,415,175 1,380,156
Other assets 5,435,862 7,274,847
------------------------ -----------------------
TOTAL ASSETS $ 335,052,277 $ 324,946,733
------------------------ -----------------------
------------------------ -----------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings $ 40,000,000 $ 33,900,000
Payables to customers 204,677,969 203,313,836
Payables to brokers and dealers 48,692,650 43,388,593
Payable to clearing Broker 8,221,589 9,975,000
Trading securities sold but not yet purchased, at market 690,802 812,212
Notes payable 4,305,331 4,538,114
Liabilities subordinated to claims of general creditors 8,450,000 9,675,000
Other liabilities 11,145,756 9,762,295
------------------------ -----------------------
TOTAL LIABILITIES $ 326,184,097 $ 315,365,050
Shareholders'equity:
Common Stock, $.01 par value;
Authorized shares: 50,000,000
Issued and outstanding shares: 4,255,971 92,990 91,625
Preferred Stock
Authorized shares: 5,000,000
Issued and outstanding shares: June - 571,000; March - 558,000 4,482,350 4,380,300
Paid-in capital 11,441,379 11,353,518
Retained earnings (7,148,539) (6,243,760)
------------------------ -----------------------
------------------------ -----------------------
TOTAL SHAREHOLDER'S EQUITY 8,868,180 9,581,683
------------------------ -----------------------
TOTAL LIABILITIES & SHAREHOLDER'S EQUITY $ 335,052,277 $ 324,946,733
------------------------ -----------------------
------------------------ -----------------------
</TABLE>
SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS.
8
<PAGE>
STOCKWALK.COM GROUP, INC.
PRO-FORMA STATEMENTS OF FINANCIAL OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDING JUNE 30,
------------------ ------------------
1999 1998
------------------ ------------------
<S> <C> <C>
REVENUES:
Trading profits $ 2,021,729 $ 3,674,755
Interest 4,197,230 4,070,528
Commissions 2,578,109 2,587,330
Investment Banking 2,468,374 2,047,047
Clearing fees 1,114,585 699,767
Other income 824,767 583,460
------------------ ------------------
TOTAL REVENUES 13,204,794 13,662,887
EXPENSES:
Employee compensation and benefits 7,095,828 6,414,849
Clearing fees 951,518 580,537
Occupancy and equipment 952,948 890,554
Communication 1,548,866 1,322,470
Interest 3,065,181 3,239,646
Other expense 1,319,487 710,915
------------------ ------------------
TOTAL EXPENSES 14,933,828 13,158,971
Income (loss) before income taxes (1,729,034) 503,916
Income tax expense (benefit) 684,780 (111,600)
------------------ ------------------
Income (loss) from continuing operations (1,044,254) 392,316
------------------ ------------------
Income (loss ) from discontinued operations - (120,477)
------------------ ------------------
Net income $ (1,044,254) $ 271,839
------------------ ------------------
------------------ ------------------
Basic and diluted earnings per share $ (0.19) $ 0.07
Weighted average common shares outstanding 5,451,316 5,619,976
</TABLE>
SEE ACCOMANYING NOTES TO THE FINANCIAL STATEMENTS.
9
<PAGE>
STOCKWALK.COM GROUP, INC.
PRO-FORMA STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDING JUNE 30,
1999 1998
-----------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income(loss) $ (1,044,254) $ 271,839
Reserve for bad debts - 22,467
Depreciation and amortization 236,313 311,014
Changes in op assets and liabilities
Cash and securities seg'd 720,742 31,367,103
Customer receivables and payables (9,469,831) (32,741,163)
Broker and dealer receivables and payables 9,166,196 (99,869)
Clearing organization receivables and payables (1,853,557) (2,103,001)
Tradings securities and securities sold but not yet purchased (7,335,597)
Other assets and liabilities 3,237,670 921,568
-----------------------------------
Net cash (used in)/provided by operating activities (2,695,717) (9,385,639)
INVESTING ACTIVITIES
Acquisition of Apollo Securities (62,081) -
Decrease in net liabilities of discontinued operations (15,224) -
Net purchases of furniture, equipment and leasehold (803,799) (212,861)
-----------------------------------
Net cash (used in)/provided by operating activities (881,104) (212,861)
FINANCING ACTIVITIES
Increase (decrease) in short-term borrowings 6,100,000 9,700,000
Payments on notes payable (232,783) (76,227)
Proceeds from issuance of common stock 89,227 -
Issuance of preferred stock 102,050 -
-----------------------------------
Net cash provided by/(used in) financing activities 6,058,494 9,623,773
Net (decrease)/increase in cash and cash equivalents 2,481,674 25,273
Cash at beginnning of period 5,139,936 5,264,274
-----------------------------------
Cash and cash equivalents at end of period $ 7,621,610 $ 5,289,547
-----------------------------------
-----------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid(received) during the quarter
Interest $ 3,009,360 $ 3,167,388
-----------------------------------
-----------------------------------
Income taxes (refunds) $ 802,700 $ 4,874
-----------------------------------
-----------------------------------
</TABLE>
SEE ACCOMANYING NOTES TO THE FINANCIAL STATEMENTS.
10
<PAGE>
STOCKWALK.COM GROUP, INC.
NOTES TO PRO-FORMA FINANCIAL STATEMENTS
BASIS OF PRESENTATION
These pro-forma financial statements are presented as a combination of the
respective statements of MJK Holdings, Inc. and Stockwalk.com Group, Inc. 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. These footnotes to the pro-forma statements are only
applicable to MJK Holdings, Inc. (Separate footnotes for the stand-alone
Stockwalk.com Group, Inc. financial statements are presented elsewhere in
this filing.) The interim financial statements reflect all adjustments
(consisting only of normal recurring adjustments) which are, in the opinion
of management, necessary for a fair presentation of the results for the
periods presented. The nature of the Company's business is such that the
results of any interim period are not necessarily indicative of results for a
full year.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
On July 7, 1999 the Company acquired through merger MJK Holdings,
Inc. (MJK). MJK is the holding company of Miller, Johnson, & Kuehn,
Incorporated (MJKI), MJK's primary subsidiary, and two other wholly-owned
subsidiaries whose activities are not significant to MJK's financial
information on a consolidated basis. MJKI is a securities broker-dealer
headquartered in Minneapolis, Minnesota with branch offices in Saint Paul,
Minnesota; Scottsdale, Arizona; La Jolla, California; Clearwater, Florida;
Chicago, Illinois; and Dallas and Houston, Texas. MJKI is a member of the
National Association of Securities Dealers, Inc. (NASD), the Securities
Investor Protection Corporation (SIPC) and the Chicago Stock Exchange. MJKI's
primary business involves a combination of retail, principal and agency
transactions along with corporate and public financing originations. In
addition, MJKI provides a broad range of securities transaction processing
services to other broker-dealers. MJK and MJKI are hereinafter collectively
referred to as the "Company."
2. FINANCING ARRANGEMENTS
The Company had discretionary lines of credit totaling $60,000,000
at June 30, 1999 and 1998 which are secured by Company-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. As of June 30, 1999 and
1998, there were $20,000,000 and $38,700,000 available under these lines of
credit, respectively. A compensating balance arrangement exists with respect
to one of the Company's discretionary lines of credit.
At June 30, 1999, MJK had a note payable of $3,450,000 that was
secured by the Company's ownership interest in MJKI. The note bears an
interest rate of the bank's reference rate unless MJK's investment account
balance at the bank is less than the principal balance of the note. If MJK'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 June, 1999 was
7.75%. The note matures in installments through July 31, 2000.
MJK also has various notes payable at June 30, 1999 and 1998 of
$855,331 and $1,176,294, respectively, which were secured by all furniture
and equipment. Borrowings bear interest at either a fixed rate or various
rates over the bank's cost of funds; such rates generally vary daily. The
interest rates ranged from 7.00% to 8.75% as of June 30, 1999 and 7.00% to
9.50% as of June 30, 1998. The notes mature at various dates through October
10, 2002.
The Company's notes payable at June, 1999 mature as follows:
<TABLE>
<CAPTION>
Year ending March 31:
<S> <C>
2000 $ 686,990
2001 3,226,959
2002 243,366
2003 148,016
----------------
$ 4,305,331
----------------
----------------
</TABLE>
11
<PAGE>
3. SHAREHOLDER'S EQUITY
MJK is authorized to issue up to 5,000,000 shares of preferred
stock. In April 1999, the Company issued 13,000 shares of Series I Non-Voting
Convertible Preferred Stock at $7.85 per share, bringing the total to
571,000. The Series I Non-Voting Convertible Preferred Stock has no dividend
rights and is convertible to common stock if the Company consolidates or
merges with another company. The Company's Board of Directors may issue one
or more series of preferred stock and fix the voting rights, liquidation
preferences, dividend rights, repurchase rights, conversion rights, and
redemption rights and terms of the preferred stock. The Convertible Preferred
Stock was converted into Common Stock of Stockwalk.com Group, Inc. on July 7,
1999.
4. NET CAPITAL REQUIREMENTS AND DIVIDEND RESTRICTIONS
The Company is subject to the Securities and Exchange Commission's
Uniform Net Capital Rule (Rule 15c3-1) which requires the maintenance of minimum
net capital. The Company has elected to use the alternative method permitted by
Rule 15c3-1 which requires that the Company maintain minimum net capital equal
to the greater of $250,000 or 2% of aggregate debit balances arising from
customer transactions, as defined. At June 30, 1999, the Company's net capital
of $9,412,429 was 6% of aggregate debit balances and $5,675,709 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.
Under the provisions of financing arrangements entered into during
fiscal 1998, the Company may not declare or pay dividends on any of its
outstanding capital stock.
5. RELATED PARTY TRANSACTIONS
The Company also had $1,544,929 and $1,409,966 of notes receivable from
employees which are included in other assets as of June, 1999 and 1998,
respectively. The amounts consist of 35 and 24 notes which bear various interest
rates and mature at various dates through 2003 at June, 1999 and 1998,
respectively.
6. 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 35 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:
12
<PAGE>
SEGMENT INFORMATION
<TABLE>
<CAPTION>
(IN THOUSANDS)
- ----------------------------------------------------------------------------------------------------------
QUARTERS ENDED JUNE 30, 1999 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revenue:
Clearing Services $ 6,286 $ 5,826
Retail Sales 5,536 6,829
Investment Banking 1,069 923
Other 367 172
- ----------------------------------------------------------------------------------------------------------
$13,258 $13,749
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
Pretax income (loss):
Clearing Services $711 $ 683
Retail Sales (2,069) (199)
Investment Banking 38 20
Other (234) -
- ----------------------------------------------------------------------------------------------------------
($1,553) $ 504
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Reconciliation of segment revenue to consolidated revenue:
- ----------------------------------------------------------------------------------------------------------
QUARTERS ENDED JUNE 30, 1999 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Segment Revenue $13,258 $13,749
Stockwalk.com Group Inc. 20 -
Intersegment eliminations (73) (86)
- ----------------------------------------------------------------------------------------------------------
Consolidated Revenue: $13,205 $13,663
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Reconciliation of segment income to consolidated income:
- ----------------------------------------------------------------------------------------------------------
YEARS ENDED JUNE 30, 1999 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Pretax income (loss): ($1,553) $504
Elimination ($176) -
- ----------------------------------------------------------------------------------------------------------
Conslidated pretax income (loss): ($1,729) $504
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
MJK HOLDINGS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This discussion should be read in conjunction with Management's Discussion
and Analysis relating to MJK Holdings, Inc. contained in Stockwalk.com Group,
Inc.'s Proxy Statement Regarding Special Meeting, form DEFS14A filed with the
Commission on June 14, 1999. The discussion to follow relates only to the
business operations of MJK Holdings, Inc. and its subsidiaries, which in
management's opinion fairly represents the continuing business operations of
Stockwalk.com Group, Inc. taken as a whole.
GENERAL
MJK, through its subsidiary, Miller, Johnson & Kuehn, Incorporated, a
Minneapolis-based regional broker-dealer, engages primarily in principal
transactions, commission business, investment banking activities, and
customer financing. In addition, Miller, Johnson & Kuehn, Incorporated acts
as a fully-disclosed clearing broker for approximately 35 brokerage firms.
MJK, through a separate subsidiary, Stockwalk.com has commenced development
of an online broker-dealer.
MJK's business is highly competitive and sensitive to many factors beyond the
control of MJK, 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 MJK'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, MJK's revenue and
net income have been and may continue to be subject to fluctuations.
During the three most recent completed calendar years, the equity markets in
the United States have experienced an unprecedented rise, spurring record
levels of transaction volume and capital market activity. These conditions
have led to record results in many sectors of the financial services industry.
THREE MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
Revenues from trading profits decreased $1.7 million or 45 percent 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 quarter. In assessing our exposure to overall market
risk, we chose to reduce our equity exposure to a level that is appropriate
for a public company with our capitalization.
Investment banking revenue for the quarter ended June 30, 1999 was $2.5 million,
an increase of $.5 million or 21 percent from the year ended June 30, 1998. This
increase was driven by strong fees from our fixed income department.
Clearing fee income for the quarter ended June 30, 1999 was $1.1 million, an
increase of $.4 million or 59 percent over the same quarter in the prior
year, reflecting growth in the correspondent clearing business. Other income
increased 41 percent to $.8 million compared to the same quarter in fiscal
1999. A strong portion of this increase is a direct result of increased
ticket volume.
Employee compensation and benefits rose approximately $.7 million or 11% over
the prior year as we increased our overall staffing levels in several areas.
The clearing division added a number of employees to help handle our
increasing clearing volume. Additionally, there were several key hires in
research, compliance, and in our investment banking group. MJK also increased
staffing to address the development of the online brokerage, Stockwalk.com.
Staffing costs will continue to accelerate as activity at Stockwalk.com
continues.
Clearing fees expenses for the quarter ended June 30, 1999 totaled $1.0
million, an increase of $.4 million or 67 percent from the quarter ended June
30, 1998, which was attributable to the growth in MJK's clearing services
business in fiscal 1999. During the quarter ended June 30, 1999, our clearing
services department processed 152,399 tickets, compared to 115,501 tickets
processed for the quarter ended June 30, 1998, an increase of 32 percent.
14
<PAGE>
Occupancy and equipment expense saw a small increase from $.9 million for the
quarter ended June 30, 1998 to $1.0 for the quarter ended June 30, 1999 (7
percent) as the clearing division leased additional space. Occupancy expense
will increase as additional space is leased to accommodate growth in the
online brokerage, Stockwalk.com and the clearing division.
Expenses related to our communication needs for the quarter ended June 30,
1999 totaled $1.5 million, an increase of $.2 million or 15 percent from the
quarter ended June 30, 1998. Improvements in the wide area network, increases
in volume-related changes with MJKI's 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 internet trading service.
Other operating expenses for the first quarter of $1.1 million, were a $.4
million or 57 percent increase over the prior quarter ended June 30, 1998.
The increase reflects additional costs associated with the merger with NM
Holdings, Inc. as well as certain miscellaneous start-up costs of the online
brokerage subsidiary, Stockwalk.com.
Interest expense for the quarter ended June 30, 1999 was $3.1 million, a
slight decrease of less than $.2 million or 5 percent from the quarter ended
June 30, 1998. Despite relatively consistent customer deposit levels, rates
paid on deposits were slightly lower in this quarter which was consistent
with prevailing rates.
LIQUIDITY AND CAPITAL RESOURCES
MJK 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.
As a securities broker-dealer, Miller, Johnson & Kuehn, Incorporated is
required by Commission regulations to meet certain liquidity and capital
standards. At June 30, 1999, MJKI had net capital, as defined in the
Commission's Uniform Net Capital Rule (Rule 15c3-1), of $8.6 million, which
exceeded the minimum net capital requirements by $5.7 million. At June 30,
1999, regulatory capital consisted of shareholder's equity of approximately
$6.2 million and approximately $8.4 million of customer securities
collateralizing liabilities subordinated to claims of general creditors.
Margin loans to customers as of June 30, 1999 are generally equivalent to
1998 levels. Margin loans to customers totaled approximately $150.7 million
as of June 30, 1999, compared to approximately $139.9 million as of March 31,
1999. MJKI regularly reviews the credit quality of these margin loans.
Securities inventories consist principally of corporate securities equity and
debt and municipal and government debt obligations. Inventories are
maintained generally to provide product and liquidity for customers rather
than for firm investment or market speculation purposes, and therefore
experience relatively high turnover. At June 30, 1999, approximately $.3
million of debt inventories were aged over 30 days. Trading inventories do
not contain a significant amount of securities that derive their value from
other investment products (I.E., derivative securities).
In the ordinary course of business, MJKI may hold high-yield debt obligations
that are either unrated or rated below investment grade. At June 30, 1999
MJKI held approximately $7.2 million of such securities in inventory.
Consistent with MJKI inventory pricing policy, these securities are recorded
on a market-value basis with unrealized gains and losses recognized in
current earnings.
At June 30, 1999, MJKI had approximately $60 million in committed credit
agreements, of which $40.0 million was utilized. Of this amount,
approximately $11million was collateralized by customers' margin securities.
An additional amount equal to approximately $29 million was secured by
firm-owned securities and customer securities collateralizing liabilities
subordinated to claims of general creditors. MJKI also has various notes
payable, of which $855,000 is secured by furniture and fixtures.
In March and early April 1999, MJK privately raised $4,482,350 through the
issuance of preferred stock, the proceeds of which will be used for working
capital and to fund startup costs associated with the Internet brokerage
business. The Company expects that additional capital required to grow the
business will be raised through the sale of additional debt or equity
securitities.
15
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USES OF PROCEEDS
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 15, 1999. As a result of the shareholders meeting, the
Company's shareholders:
(i.) approved the Agreement and Plan of Reorganization dated as of
March 25, 1999, as amended on May 7, 1999 (the "Merger
Agreement"), with MJK Holdings, Inc. ("MJK") and NM Merger Co., a
newly formed wholly-owned subsidiary of the Company ("Merger
Sub"), pursuant to which Merger Sub merged with and into MJK, with
MJK as the surviving corporation, which then became a wholly-owned
subsidiary of the Company.
(ii.) approved an amendment to and restatement of the Company's Second
Restated Articles of Incorporation, as amended, which, among other
things, (a) changed the corporate name of the Company to "MJK
Group, Inc.," (b) increased the number of authorized shares of the
Company's capital stock to 100,000,000, of which 50,000,000 will
be designated as common stock and 50,000,000 will be undesignated
capital stock, and (c) increased the number of persons who will
serve on the Company's Board of Directors to seven, and allows for
future changes to that number by the affirmative vote of a
majority of the Board of Directors; and,
(iii.) approved an amendment to the Company's 1995 Long-Term Incentive
and Stock Option Plan (the "1995 Plan") increasing to 1,500,000
the maximum number of shares of authorized common stock, $.04 par
value, of the Company ("Common Stock") issuable upon exercise of
options or other awards granted or issued under the 1995 Plan.
In connection with the consummation of the contemplated transactions with MJK
Holdings, Inc. the Company issued an aggregate of 17,974,771 shares of
restricted common stock to the shareholders of MJK Holdings, Inc..
ITEM 5. OTHER INFORMATION
(a) Hilding C. Nelson resigned as a director of the Company effective
March 31, 1999.
(b) Lawrence A. Lehmkuhl resigned as a director of the Company effective
July 6, 1999.
(c) The Company's fiscal year ended was changed to March 31.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are included with this quarterly report on
Form 10-QSB as required by Item 601 of Regulation S-K.
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- --------------------------------------------------------------------
<S> <C>
11.1 Statement of Computation of Loss Per Share
27 Financial Data Schedule
99.1 Cautionary Statement
</TABLE>
(b) Reports on Form 8-K. The Company filed a Form 8-K on July 22, 1999 relating
to the consummation of the transactions with MJK Holdings, Inc..
16
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1931, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: August 16, 1999 STOCKWALK.COM GROUP, INC.
By: /s/ Jeffrey L. Houdek
Jeffrey L. Houdek
Principal Accounting Officer
(both on behalf of the Registrant and as
principal accounting officer)
17
<PAGE>
EXHIBIT 11.1 -- STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (UNAUDITED)
STOCKWALK.COM GROUP, INC.
F/K/A NM HOLDINGS, INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (LOSS)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic Loss Per Share:
Weighted average shares outstanding 1,238,197 1,238,197 1,195,345 1,364,005
Net income (loss) applicable to common stockholders $ (175,559) $ (120,477) $ (217,536) $ (71,324)
Basic net loss per share applicable to common stockholders:
Loss from continuing operations (0.14) - (0.18) -
Loss from discontinued operations - (0.09) - (0.05)
----------- ----------- ----------- -----------
Net income (loss) per share $ (0.14) $ (0.09) $ (0.18) $ (0.05)
Diluted Loss Per Share:
Weighted average shares outstanding 1,238,197 1,364,005 1,195,345 1,364,005
Dilutive potential common shares - - - -
----------- ----------- ----------- -----------
Total 1,238,197 1,364,005 1,195,345 1,364,005
Net income (loss) applicable to common stockholders $ (175,559) $ (120,477) $ (217,536) $ (71,324)
Diluted net loss per share applicable to
common stockholders:
Loss from continuing operations (0.14) - (0.18) -
Loss from discontinued operations - (0.09) - (0.05)
----------- ----------- ----------- -----------
Net income (loss) per share $ (0.14) $ (0.09) $ (0.18) $ (0.05)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,913,355
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,938,175
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,695,225
<CURRENT-LIABILITIES> 94,672
<BONDS> 0
0
0
<COMMON> 50,430
<OTHER-SE> 2,573,251
<TOTAL-LIABILITY-AND-EQUITY> 2,695,224
<SALES> 0
<TOTAL-REVENUES> 37,175
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 254,711
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (217,536)
<INCOME-TAX> 0
<INCOME-CONTINUING> (217,536)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (217,536)
<EPS-BASIC> (.18)
<EPS-DILUTED> (.18)
</TABLE>
<PAGE>
Exhibit 99.1
CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING STATEMENTS
STOCKWALK.COM GROUP, INC.(the "Company") wishes to take advantage of the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995 (the
"Act") and is filing this cautionary statement in connection with such safe
harbor legislation.
The Company's Form 10-KSB, any Form 10-QSB or Form 8-K filed by the Company or
any other written or oral statements made by or on behalf of the Company may
include "forward- looking statements" as defined in the Act. The words
"believe," "expect," "anticipate," "intend," "estimate," "forecast," "project"
and similar expressions identify such forward-looking statements.
Forward-looking statements reflect the Company's current views with respect to
future events and financial performance, and the Company wishes to caution
investors that any forward-looking statements made by or on behalf of the
Company are subject to uncertainties and other factors that could cause actual
results to differ materially from such statements. These uncertainties and other
factors include, but are not limited to, the factors listed below (many of which
have been discussed in the Company's prior filings with the Securities and
Exchange Commission).
Although the Company has attempted to list comprehensively these important
factors, the Company wishes to caution investors that other factors may in the
future prove to be important in affecting the Company's results of operations.
New factors emerge from time to time, and it is not possible for Company
management to predict all of such factors, nor can Company management assess the
impact of each such factor on the business, or the extent to which any factor,
or combination of factors, may cause actual results to differ materially from
those contained in any forward-looking statements.
Investors are further cautioned not to place undue reliance on such
forward-looking statements because such statements reflect the Company's views
only as of the date the statement was made. The Company undertakes no obligation
to publicly update or revise any forward-looking statements, whether as a result
of new information, future events or otherwise.
CONTROL BY CERTAIN SHAREHOLDERS
Directors and executive officers of the Company beneficially own
approximately 84.6% of the outstanding Common Stock. As a result, such
directors, officers and certain principal shareholders of the Company and MJK
have the ability to effectively control the election of the Company's entire
Board of Directors and the affairs of the Company, including, but not limited
to, all fundamental corporate transactions such as acquisitions, mergers,
consolidations and the sale of substantially all of the Company's assets.
UNDESIGNATED STOCK
The Company's authorized capital consists of 100,000,000 shares of capital
stock, of which 50,000,000 shares are designated as Common Stock and 50,000,000
are preferred shares undesignated as to series. The Company has no outstanding
shares of preferred stock, and there are no current plans to designate or issue
any shares of preferred stock. Nevertheless, the Company's Board of Directors
has the power to issue any or all of these shares of unissued stock, including
the authority to establish the rights and preferences of the unissued shares,
without shareholder approval. Furthermore, as a Minnesota corporation, the
Company is subject to certain "anti-takeover" provisions of the Minnesota
Business Corporations Act. These provisions and the power to issue additional
shares and to establish separate classes or series of common or preferred stock
may, in certain circumstances, deter or discourage take-over attempts and other
changes in control of the Company not approved by the Board of Directors.
<PAGE>
LIMITATIONS ON BROKER-DEALER SALES OF COMMON STOCK; APPLICABILITY OF "PENNY
STOCK" RULES; NO ASSURANCE OF QUALIFICATION FOR LISTING ON NASDAQ
Effective May 7, 1999, the Company's Common Stock was delisted from trading
on The Nasdaq SmallCap Market. The stock presently trades on Over-the-Counter
Bulletin Board.
Federal regulations promulgated under the Securities Exchange Act of 1934, as
amended (the "Exchange Act") regulate the trading of so-called "penny stocks"
(the "Penny Stock Rules"), which are generally defined as any security not
listed on a national securities exchange or The Nasdaq Stock Market ("Nasdaq"),
priced at less than $5.00 per share and offered by an issuer with limited net
tangible assets and revenues. In addition, equity securities listed on Nasdaq
that are priced at less than $5.00 per share are deemed penny stocks for the
limited purpose of Section 15(b)(6) of the Exchange Act. Therefore, if the
Common Stock is listed on The Nasdaq SmallCap Market, and the Common Stock is
priced below $5.00 per share, trading of the Common Stock will be subject to the
provisions of Section 15(b)(6) of the Exchange Act, which make it unlawful for
any broker-dealer to participate in a distribution of any penny stock without
the consent of the Commission if, in the exercise of reasonable care, the
broker-dealer is aware of or should have been aware of the participation of a
previously sanctioned person. In such event, it may be more difficult for
broker-dealers to sell the Common Stock, and purchasers of shares of Common
Stock may experience difficulty in selling such shares in the future in
secondary trading markets.
While the Common Stock is excluded from The Nasdaq SmallCap Market, trading, if
any, in shares of the Common Stock is subject to the full range of the Penny
Stock Rules. Under Exchange Act Rule 15g-8, broker-dealers must take certain
steps prior to selling a penny stock, which steps include: (a) obtaining
financial and investment information from the investor; (b) obtaining a written
suitability questionnaire and purchase agreement signed by the investor; (c)
providing the investor with a written identification of the shares being offered
and in what quantity; and (d) delivering to the investor a written statement
setting forth the basis on which the broker-dealer approved the investor's
account for the transaction. If the Penny Stock Rules are not followed by a
broker-dealer, the investor has no obligation to purchase the shares.
Accordingly, the application of the comprehensive Penny Stock Rules may make it
more difficult for broker-dealers to sell the Common Stock and purchasers of
shares of Common Stock may have difficulty in selling such shares in secondary
trading markets.
RISK FACTORS
The following matters, among others, may have a material adverse effect on
the business, financial condition, liquidity, results of operations or
prospects, financial or otherwise, of the Company.
UNCERTAIN INDUSTRY FACTORS; ECONOMIC AND MARKET CONDITIONS
The securities business is, by its nature, subject to various risks,
particularly in volatile or illiquid markets, including the risk of losses
resulting from the underwriting or ownership of securities, customer fraud,
employee errors and misconduct, failures in connection with the processing of
securities transactions and litigation. MJK's business and its profitability
are affected by many factors, including the volatility and price level of the
securities markets; the volume, size and timing of securities transactions;
the demand for investment banking services; the level and volatility of
interest rates; the availability of credit; legislation affecting the
business and financial communities; and the economy in general. Markets
characterized by low trading volumes and depressed prices generally result in
reduced commissions and investment banking revenues as well as losses from
declines in the market value of securities positions. Moreover, since a
portion of MJK's revenues are derived from underwriting initial public
offerings ("IPOs") and bond financings, any decline in the overall IPO or
bond market, among other factors, could have a material adverse effect on the
operations of MJK.
RISKS ASSOCIATED WITH INVESTMENT BANKING
MJK's investment banking activities subject MJK's capital to certain risks.
Such risks include market, credit and liquidity risks, which risks arise
primarily when underwritten securities cannot be resold, for any reason, at
anticipated price levels. Further, under applicable securities laws and court
decisions with respect to underwriters' liability and limitations on
indemnification by issuers, an underwriter may be exposed to substantial
securities liability arising out of public and private offerings of equity
and debt instruments.
RISKS ASSOCIATED WITH PRINCIPAL TRANSACTIONS
As a market maker, MJK uses its capital to maintain substantial inventories
of long and/or short positions in securities in order to engage in principal
transactions with customers as well as with other broker-dealers. These
securities are marked-to-market with resulting unrealized gains and losses
reported as revenue or losses from principal transactions. The maintenance of
such positions exposes MJK to the possibility of significant losses when
market prices of the securities comprising such positions change.
<PAGE>
EXTENSIVE GOVERNMENT REGULATION; STRICT NET CAPITAL REQUIREMENTS
The Company's business, and the securities industry generally, are subject to
extensive regulation at both the federal and state levels. In addition,
self-regulatory organizations, such as the NASD, require strict compliance
with their rules and regulations. Among other things, these regulatory
authorities impose restrictions on sales methods, trading practices, use and
safekeeping of customer funds and securities, record keeping and the conduct
of principals and employees. The extensive regulatory framework applicable to
broker-dealers, the purpose of which is to protect customers and the
integrity of the securities markets, imposes significant compliance burdens
on MJK. Failure to comply with any of the laws, rules or regulations of any
independent, state or federal regulatory authority could result in a fine,
injunction, suspension or expulsion from the industry, which could have a
material adverse impact upon MJK. The Commission and the NASD also have
stringent provisions with respect to net capital requirements applicable to
the operation of securities firms. A significant operating loss or any charge
against the net capital of MJK could adversely affect its ability to operate,
expand or, depending upon the magnitude of the loss or charge, maintain its
present level of business. Furthermore, amendments to existing statutes and
regulations or the adoption of new statutes and regulations could require MJK
to alter its methods of operation at costs which could be substantial.
SMALL CAPITALIZATION COMPANIES
A large portion of MJK's business focuses on the underwriting, brokerage and
trading of securities of small capitalization companies, a segment of the
securities industry which may be subject to greater risks than the securities
industry as a whole and, consequently, may be marketable to only a limited
segment of the investing public. MJK believes that certain small
capitalization companies have significant potential for growth, although such
companies generally have limited product lines, markets, market shares and
financial resources and their securities may trade less frequently and in
more limited volume than those of more established companies. Additionally,
in recent years, the stock market has experienced a high degree of price and
volume volatility for the securities of many small capitalization companies.
In particular, small capitalization companies that trade in the
over-the-counter markets have experienced wide price fluctuations not
necessarily related to the operating performance of such companies.
CREDIT RISKS
MJK clears all transactions for MJK customers and for a number of other
brokerage firms on a fully disclosed basis. The firm also lends funds to its
customers and customers of its correspondent firms as margin credit. These
loans are made to customers on a secured basis, with the firm maintaining
collateral in the form of saleable securities, cash or cash equivalents.
Pursuant to the terms of agreements, in the event that customers or a
correspondent firm, if any, fail (a) to pay for their purchases, (b) to
supply securities that they have sold on a customer's behalf, (c) to repay
funds they have borrowed, or (d) to satisfy any customer obligations, MJKI
would be obligated for any resulting losses.
LEGAL PROCEEDINGS
Many aspects of MJK's business involve substantial risks of potential
liability and regulatory enforcement by state and federal regulators. In
recent years, there also has been an increasing incidence of litigation or
arbitration involving participants in the securities industry. Underwriters
and agents are subject to substantial potential liability for material
misstatements and omissions in prospectuses and other communications with
respect to underwritten offerings of securities. Claims by dissatisfied
customers for fraud, unauthorized trading, suitability, churning,
mismanagement and breach of fiduciary duty are regularly made against
broker-dealers. There can be no assurance that any such proceedings will not
have a material adverse legal or economic effect on MJK. Moreover, as a
result of increased publicity regarding legal proceedings against
broker-dealers and the resulting heightened public awareness of such matters,
it is possible that certain legal proceedings which can be settled or
otherwise resolved without a material adverse economic effect on MJK, could
generate adverse publicity which in turn could have a material adverse effect
on MJK's operations.
CURRENT AND POTENTIAL REFORMS IN THE NASDAQ MARKET
The Nasdaq market has come under intense scrutiny in the media and political
arenas during the past few years and has been the subject of Commission
investigations into its operations. Concerns have been raised with respect to
the size of the spreads between the price paid by investors purchasing
Nasdaq-listed securities and the dealers who process the transactions.
Concerns also have been raised with respect to microcap fraud, whether
Nasdaq's listing requirements are sufficiently stringent and whether the
NASD, the trade organization controlling the Nasdaq market, carefully polices
Nasdaq-listed companies. In response, the NASD has begun to boost its
internal compliance and monitoring programs, including establishing a new
separate regulatory unit, NASD Regulation, Inc. ("NASDR"). More specifically,
the NASDR has been hiring numerous new enforcement aides to better monitor
trading activities among dealers and to scrutinize companies' compliance with
applicable listing standards, and heightening its overall monitoring of small
capitalization companies.
The effects of Nasdaq reform on the operations of brokerage firms, especially
those specializing in the securities of small capitalization companies,
cannot be fully anticipated. The cost of compliance with any new rules,
regulations and procedures instituted by the NASDR could be significant.
Increased compliance costs or the inability to attain or maintain the listing
of underwriting clients on the Nasdaq system, or a combination thereof, could
adversely affect the financial performance of MJK.
<PAGE>
DEPENDENCE ON KEY PERSONNEL
For the foreseeable future, MJK will place substantial reliance upon the
personal efforts and abilities of Eldon C. Miller, Chairman of the Board and
Chief Executive Officer, Paul R. Kuehn, President, and David B. Johnson,
Executive Vice President. The loss of services of any of them likely would
have a material adverse effect on the business, operations, revenues and/or
prospects of MJK. Key man life insurance on certain members of MJK's
management presently would be utilized to fund at least partially the
repurchase of their common shares on death. The success of MJK is also
dependent upon its ability to retain and hire additional highly skilled
personnel. Competition among broker-dealers for experienced personnel is
intense. There can be no assurance that MJK will be able to retain such
personnel or hire and retain additional qualified and skilled personnel.
NO DIVIDENDS
MJK intends to retain all earnings in the foreseeable future for MJK's
continued growth and does not expect to declare or pay any cash dividends in
the foreseeable future. Moreover, MJK's ability to pay dividends in the
future may be restricted by its brokerage subsidiaries' obligations to comply
with the net capital rules applicable to broker-dealers.
RISKS ASSOCIATED WITH MANAGEMENT OF A CHANGING BUSINESS
MJK has experienced substantial changes in and expansion of its business and
operations and expects to continue to experience periods of rapid change in
connection with its intended development of offering electronic and Internet
brokerage services. MJK's past expansion has placed, and any future expansion
would place, significant demands on MJK's administrative, operational,
financial and other resources. MJK expects operating expenses and staffing
levels to increase substantially in the future. In particular, MJK intends to
hire a significant number of additional skilled personnel, including persons
with experience in both the computer and brokerage industries, and, in
particular, persons with Series 7 or other broker-dealer licenses.
Competition for such personnel is intense, and there can be no assurance that
MJK will be able to attract, assimilate or retain additional highly qualified
senior managers and technical persons in the future. MJK also expects to
expend resources with respect to future expansion of its accounting and
internal management systems and the implementation of a variety of new
systems and procedures. In addition, MJK expects that future expansion will
continue to challenge MJK's ability to hire, train, motivate and manage its
associates. If MJK's revenues do not increase in proportion to its operating
expenses, MJK's management systems do not expand to meet increasing demands,
MJK fails to attract, assimilate and retain qualified personnel, or MJK's
management otherwise fails to manage MJK's expansion effectively, there would
be a material adverse effect on MJK's business, financial condition and
operating results.
RISKS OF SYSTEMS FAILURE
The rapid growth in the use of MJK's services has strained its ability to
adequately expand technologically. The haste required in acquiring new
equipment and applications may result in less rigorous testing and validation
of hardware and software, which could lead to performance problems. In
addition, MJK will rely on a number of third parties to process its
transactions, all of which will need to expand the scope of the operations
they perform for MJK. Any backlog caused by a third party's inability to
expand at the rate necessary to meet MJK's needs could have a material
adverse effect on MJK's business, financial condition and operating results.
As trading volume increases, MJK may have difficulty hiring, training and
integrating qualified personnel at the necessary pace, and the shortage of
licensed personnel could cause a backlog in the processing of orders
requiring review, exposing MJK not only to unsatisfied customers, but also
potentially to liability for transactions that were ordered but not executed
on a timely basis.
MJK's online broker service will receive and process trade orders principally
through the Internet, online services and touch-tone telephone. This method
of trading is heavily dependent on the integrity of the electronic systems
supporting it. Orders placed from the close of the stock markets one day
until the opening the next business day must be processed through MJK's
system in a short period of time prior to the opening of the stock markets.
Heavy stress will be placed on MJK's systems during peak trading times that
could cause MJK's systems to operate at unacceptably low speed or fail. Any
significant degradation or failure of MJK's systems or any other systems in
the trading process (e.g., online service providers, record keeping and data
processing functions performed by third parties and third-party software such
as Internet browsers), even for a short time, could cause customers to suffer
delays in trading. Such delays could cause substantial losses for customers
and could subject MJK to claims or litigation from customers for losses.
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RISKS ASSOCIATED WITH ENTERING NEW MARKETS
One element of MJK's strategy is to enter new markets. No assurance can be
given that MJK will be able to successfully enter the online brokerage
industry and adapt its proprietary processing technology to provide
information and transaction processing services in other markets or that, if
successful with such adaptation, it will compete successfully in any such new
markets. MJK plans, subject to regulatory approval, to establish investment
banking operations, raising public and private equity capital for companies
over the Internet and other electronic media. In addition, MJK's strategy is
to pursue opportunities to increase MJK's customer base and the transaction
value and number of products and services offered to MJK's customers. There
can be no assurance that MJK will be successful in its pursuit of these
opportunities or that such pursuit will not divert management attention or
inefficiently utilize MJK's resources.
SIGNIFICANT FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
MJK expects to experience significant fluctuations in future quarterly
operating results that may be caused by many factors, including the
following: the timing of introductions or enhancements of online brokerage
services and products by MJK or its competitors; market acceptance of online
brokerage services and products; the pace of development of the market for
online equity and debt offerings commerce; changes in trading volume in the
securities markets; trends in the securities markets; changes in pricing
policies by MJK or its competitors; changes in strategy; the success of or
costs associated with acquisitions, joint venture or other strategic
relationships; changes in key personnel; seasonal trends; the extent of
international expansion; the mix of international and domestic sales; changes
in the level of operating expenses to support projected growth; and general
economic conditions.
Due to the foregoing factors, quarterly revenue and operating results are
difficult to forecast, and MJK believes that period-to-period comparison of
its operating results will not necessarily be meaningful and should not be
relied upon as any indication of future performance. It is likely that MJK's
future quarterly operating results from time to time will not meet the
expectations of securities analysts or investors, which may have an adverse
effect on the market value of the Company's Common Stock.
SUBSTANTIAL COMPETITION
The general financial success of companies within the securities industry
over the past several years has strengthened existing competitors. Management
believes that such success will continue to attract new competitors to the
industry, such as banks, software development companies, insurance companies,
providers of online financial and information services and others, as such
companies expand their product lines. Commercial banks and other financial
institutions have become a competitive factor in the securities industry by
offering their customers certain corporate and individual financial services
traditionally provided by securities firms. The current trend toward
consolidation in the commercial banking industry could further increase
competition in all aspects of MJK's business. Commercial banks generally are
expanding their securities activities, as well as their activities relating
to the provision of financial services. While it is not possible to predict
the type and extent of competitive services that commercial banks and other
financial institutions ultimately may offer or whether administrative or
legislative barriers will be repealed or modified, brokerage firms such as
MJK may be adversely affected by such competition or legislation.
Particularly as financial services and products proliferate, to the extent
MJK's competitors are able to attract and retain customers on the basis of
the convenience of one-stop shopping, MJK's business or its ability to grow
could be adversely affected. In many instances, MJK is competing with such
organizations for the same customers. In addition, competition among
financial services firms exists for experienced technical and other personnel.
There can be no assurance that MJK will be able to compete effectively with
current or future competitors or that the competitive pressures faced by MJK
will not have a material adverse effect on MJK's business, financial
condition and operating results.
The market for internet brokerage services is new, rapidly evolving and
intensely competitive, and MJK expects competition to continue and intensify
in the future. MJK will encounter direct competition from other brokerage
firms providing either touch-tone telephone or online brokerage services, or
both. Discount brokerage firms generally effect transactions for their
customers on an "execution only" basis, without offering other services such
as portfolio valuation, investment recommendations and research. These
competitors include such discount brokerage firms as Charles Schwab & Co.,
Inc. ("Charles Schwab"), Fidelity Brokerage Services, Inc., Waterhouse
Securities, Inc., Quick & Reilly, Inc. ("Quick & Reilly"), Pacific Brokerage
Services, Inc., National Discount Brokers (a subsidiary of Sherwood
Securities Corp.), Lombard Institutional Brokerage, Inc., firms owned by
TransTerra Co. (including All-American Brokers, also known as eBroker) and PC
financial network (a division of Donaldson, Lufkin & Jenrette Securities
Corporation), among others. MJK also encounters competition from established
full-commission brokerage firms such as Dean Witter Reynolds Inc., Payne
Webber Incorporated, Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") and Smith Barney, Inc., among others. In addition, MJK
competes with financial institutions, mutual fund sponsors and other
organizations, some of which provide electronic brokerage services.
There are virtually no barriers to entry in the internet market in
which MJK expects to operate. Many of MJK's competitors have longer operating
histories and significantly greater financial, technical, marketing and other
resources than MJK. In addition, many of these competitors offer a wider range
of services and financial products than MJK, and thus may be able to respond
more quickly to new or changing opportunities, technologies and customer
requirements. Many current and potential competitors also have greater name
recognition and more extensive customer bases that could be leveraged, thereby
gaining market share to MJK's detriment. Such competitors may be able to
undertake more extensive promotional activities, offer more attractive terms to
customers than MJK and adopt more aggressive pricing
<PAGE>
policies, possibly even sparking a price war in the brokerage business.
Moreover, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties to enhance
their services and products. For example, Charles Schwab's One-Source mutual
fund service and similar, more complete services may discourage potential
customers from using MJK's brokerage services. Accordingly, it is possible
that new competitors or alliances among competitors may emerge and rapidly
acquire significant market share.
EXPANSION INTO INTERNET TRADING
MJK intends to expand its operations into retail internet trading. MJK has no
experience in this relatively new area of the securities industry, and there
can be no assurance that MJK will be able to expand its operations
successfully. Moreover, the proposed expansion of MJK's operations may
materially increase MJK's operating expenses and could adversely affect MJK's
brokerage operations and profits.
EARLY STAGE OF DEVELOPMENT OF ONLINE BROKERAGE BUSINESS AND DEPENDENCE ON ONLINE
COMMERCE AND THE INTERNET
The market for electronic brokerage services, particularly over the Internet,
is at an early stage of development and is rapidly evolving. As is typical
for new and rapidly evolving industries, demand and market acceptance for
recently introduced services and products are subject to a high level of
uncertainty. With respect to MJK, this uncertainty is compounded by the risks
that consumers will not adopt online commerce and that an appropriate
infrastructure necessary to support increased commerce on the Internet will
fail to develop, in each case, to a sufficient extent and within an adequate
time frame to permit MJK to succeed.
Sales of many of MJK's Internet services and products will depend upon the
adoption of the Internet by consumers as a widely used medium for commerce
and communication. The Internet may not prove to be viable commercial
marketplace because of inadequate development of the necessary
infrastructure, such as a reliable network backbone, or timely development of
complementary services and products, such as high speed modems and high speed
communication lines. The Internet has experienced, and is expected to
continue to experience, significant growth in the number of users and amount
of traffic. There can be no assurance that the Internet infrastructure will
continue to be able to support the demands placed on it by this continued
growth. In addition, the Internet could lose it viability due to delays in
the development or adoption of new standards and protocols to handle
increased levels of Internet activity or due to increased governmental
regulation. Moreover, critical issues concerning the commercial use of the
Internet (including security, reliability, cost, ease of use, accessibility
and quality of service) remain unresolved and may negatively affect the
growth of Internet use or the attractiveness of commerce and communication on
the Internet. Because global commerce and online exchange of information on
the Internet and other similar open wide area networks are new and evolving,
there can be no assurance that the Internet will prove to be a viable
commercial marketplace. If critical issues concerning the commercial use of
the Internet are not favorably resolved, if the necessary infrastructure is
not developed, or if the Internet does not become a viable commercial
marketplace, MJK's business, financial condition and operating results may be
materially adversely affected.
Adoption of online commerce, particularly by those individuals who have
historically relied upon traditional means of commerce, will require a broad
acceptance by such individuals of new and substantially different methods of
conducting business. Moreover, MJK's brokerage services over the Internet,
once developed, will involve a new approach to securities trading and, as a
result, intensive marketing and sales efforts may be necessary to educate
prospective customers regarding the uses and benefits of MJK's brokerage
services and products. Moreover, the security and privacy concerns of
existing and potential users of MJK's services, may inhibit the growth of
online commerce generally, and online brokerage trading in particular, which
could have a material adverse effect on MJK's business, financial condition
and operating results.
RAPID TECHNOLOGICAL CHANGE; DELAYS IN INTRODUCTION OF NEW SERVICES AND PRODUCTS
The information and financial services and communications industries are
characterized by rapid technological change, changes in customer
requirements, frequent new service and product introductions and
enhancements, and emerging industry standards. The introduction of services
or products embodying new technologies and the emergence of new industry
standards and practices can render existing services or products obsolete and
unmarketable. MJK's future success will depend, in part, on its ability to
develop leading technologies, enhance its existing services and products,
develop new services and products that address the increasingly sophisticated
and varied needs of its prospective customers, and respond to technological
advances and emerging industry standards and practices on a timely and
cost-effective basis. The development of new services and products or
enhanced version of existing services and products entails significant
technical risks. There can be no assurance that MJK will be successful in
effectively implementing and using new technologies, adapting its services
and products to emerging industry standards, developing, introducing and
marketing service and product enhancements, or new services and products, or
that it will not experience difficulties that could delay or prevent the
successful development, introduction or marketing of these services and
products, or that its new service and product enhancements will adequately
meet the requirements of the marketplace and achieve market acceptance. If
MJK is unable, for technical or other reasons, to develop and introduce new
services and products or enhancements of existing services and products in a
timely manner in response to changing market conditions or customer
requirements, or if new services and products do not achieve market
acceptance, MJK's business, financial condition and operating results will be
materially adversely affected.
RISKS ASSOCIATED WITH ENCRYPTION TECHNOLOGY
A significant barrier to online commerce and communication is the
secure transmission of confidential information over public networks. MJK
intends to rely on encryption and authentication technology, including public
key cryptography technology licensed from third parties, to provide the security
and authentication necessary to effect secure transmission of confidential
information. There can be no assurance that
<PAGE>
advances in computer capabilities, new discoveries in the field of
cryptography or other events or developments will not result in a compromise
or breach of technologies to be used by MJK to protect customer transaction
data. If any such compromise of MJK's security were to occur, it could have a
material adverse effect on MJK's business, financial condition and operating
results.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING
MJK expects that it will raise additional funds in order to support more
rapid expansion, develop new or enhanced services and products, respond to
competitive pressures, acquire complementary businesses or technologies or
respond to unanticipated requirements. There can be no assurance that
additional financing will be available when needed on terms favorable to MJK,
if at all. If adequate funds are not available on acceptable terms, MJK may
be unable to develop or enhance its services and products, take advantage of
future opportunities or respond to competitive pressures or unanticipated
requirements, any of which could have a material adverse effect on MJK's
business, financial condition and operating results.
RISKS ASSOCIATED WITH ACQUISITIONS, JOINT VENTURES AND OTHER STRATEGIC
RELATIONSHIPS
MJK may make acquisitions of other companies or technologies in the future,
and MJK regularly evaluates such opportunities. Acquisitions entail numerous
risks, including difficulties in the assimilation of acquired operations and
products, diversion of management's attention to other business concerns,
amortization of acquired intangible assets and potential loss of key
employees of acquired companies. No assurance can be given as to the ability
of MJK to consummate any acquisitions or integrate successfully any
operations, personnel, services or products that might be acquired in the
future, and the failure of MJK to do so could have a material adverse effect
on MJK's business, financial condition and operating results.
MJK intends to establish a number of strategic relationships with
online service providers and software and information service providers. There
can be no assurance that any such relationships will be successful or
profitable, or that MJK will develop any new such relationships.
