<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported) August 1, 2000
----------------------------
Stockwalk.com Group, Inc.
--------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Minnesota 0-22247 41-1756256
---------------------------- -------------------------- -------------------
(State or Other Jurisdiction (Commission File Number) (IRS Employer
of Incorporation) Identification No.)
5500 Wayzata Boulevard, Suite 800, Minneapolis, Minnesota 55416
-------------------------------------------------------------------- ---------
(Address of Principal Executive Offices) (Zip Code)
763.542.6000
--------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
--------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On June 6, 2000, the registrant announced that it had entered into a
definitive merger agreement with R.J. Steichen & Company. The merger was
completed on August 1, 2000. Steichen is a privately-owned full-service
investment brokerage firm that has been in continuous operation since 1929.
Steichen, a self-clearing firm, offers a complete range of financial products
to individual investors, as well as services in the areas of corporate finance,
equity research, sales and trading, and tax-exempt bonds. Similar to the
registrant's research department, Steichen's equity research focuses on
emerging growth companies typically headquartered in the upper Midwest.
As of March 31, 2000, Steichen had 282 full-time employees and 185 independent
licensed sales representatives, and recorded total revenues of approximately
$52.5 million. Steichen's principal office is in Minneapolis, and it operates
11 additional offices in the Minneapolis-St. Paul metropolitan area,
in addition to seven other branch offices.
The following is a summary of the principal terms of the merger
agreement and is qualified by the merger agreement which has been filed as
exhibit 2.6 to the Registration Statement on Form S-2 (Registration No.
333-35544) filed by the registrant on June 23, 2000, which is incorporated
herein by reference. On August 1, 2000, the registrant issued an aggregate of
4,315,062 shares of its unregistered common stock to the former Steichen
shareholders in exchange for all of the issued and outstanding shares of
Steichen's capital stock. Under the terms of the Steichen agreement, the
Steichen entity will continue to operate as a separate corporate subsidiary for
at least two years after completion of the merger. Additional material terms of
the Steichen agreement are as follows:
- the shareholders of Steichen may earn up to an additional
2,000,000 shares of the registrant's restricted common stock
pursuant to an earn-out provision, which contains the following
principal terms:
- Steichen must have pre-tax earnings of $2.0 million per year
($4.0 million in the aggregate) during the two years
following completion of the merger. The earn-out is subject
to a sliding scale, which provides that all shares will be
issued if Steichen earns 90% of the $4.0 million targeted
amount set forth above;
- if cumulative pre-tax earnings are less than 90% of the
target earnings, the number of additional shares to be issued
will be ratably reduced, e.g., if Steichen earns 63% of the
targeted earnings, 73% of the additional shares will be
issued. The registrant is obligated to issue at least 25% of
the additional shares, unless there are no cumulative
earnings or there is a cumulative loss during the two-year
earn-out period, in which case the registrant would not have
to issue any additional shares;
- the registrant cannot strip profit centers from or add
expenses to Steichen without the consent of John E. Feltl;
- no shares will be issued under the earn-out until the end of
the earn-out period, i.e., two years from closing of the
transaction, provided that all of such shares will be issued
if there is a change in control of the registrant; and
- litigation and arbitration costs and expenses, any amounts
paid by Steichen or the registrant to certain of its senior
executive officers, and the cost of any capital loaned by the
registrant to
2
<PAGE> 3
Steichen in addition to capital which may be borrowed for the
purpose of satisfying Steichen's minimum net capital
requirements will be deducted from the targeted pre-tax
earnings.
- Steichen's former principal shareholder, Mr. John E. Feltl,
withdrew approximately $21.0 million in cash from Steichen
prior to closing, in the form of a dividend;
- Mr. Feltl agreed to leave $3.0 million of capital in Steichen for
a period of two years. At the end of the two-year period, he will
have the option to be repaid $3.6 million or to convert such
amount into shares of the registrant's common stock at a per share
price equal to the lesser of 85% of the then-current fair market
value of such stock or $10.00, but not less than $5.00 per share;
- the registrant entered into a five-year employment/noncompete
agreement with Mr. Feltl pursuant to which he will be responsible
for the Steichen operations and will receive a salary of $1.0
million per year. The salary will be deducted when determining
Steichen's pre-tax earnings;
- the registrant also entered into a two-year employment agreement
with Mr. Feltl's son, Mr. John C. Feltl, Steichen's Director of
Corporate Finance and Executive Vice President, pursuant to which
the registrant paid him a signing bonus of $100,000 and he will
receive a salary of $200,000 per year for two years, with all such
amounts being deducted when determining Steichen's pre-tax
earnings;
- Mr. John E. Feltl will receive a percentage of warrants issued in
connection with the corporate finance activities of the
registrant's various subsidiaries equal to the percentage of such
warrants issued to the registrant's Executive Vice President, Mr.
David B. Johnson;
- Mr. John E. Feltl also received a five-year warrant to purchase
300,000 additional shares of the registrant's common stock at
$6.375 per share. This warrant does not contain cashless exercise
provisions, but it does contain piggyback registration rights; and
- Messrs. John E. and John C. Feltl were appointed to
the registrant's Board of Directors.
In addition to the foregoing, the registrant's agreement with Steichen
contains other customary terms and conditions, including representations and
warranties from Steichen. However, neither Steichen nor its shareholders are
required to indemnify the registrant for claims, including related losses or
expenses, arising out of a breach of the representations and warranties, except
to the extent that the claim or expense would reduce pre-tax earnings of
Steichen, for the purpose of calculating the number of additional shares issued
to the former Steichen shareholders.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
Audited financial statements for the three-year period ended
September 30, 1999......................................... 4
Unaudited financial statements for the six-month period
ended March 31, 2000....................................... 5
(B) UNAUDITED PROFORMA FINANCIAL INFORMATION
Unaudited consolidated condensed proforma statement of
financial condition........................................ 20
Unaudited consolidated condensed proforma statement of
operations for the year ended March 31, 2000............... 21
Unaudited consolidated condensed proforma footnotes to
financial statements....................................... 22
3
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INDEPENDENT AUDITORS' REPORT
Board of Directors
R. J. Steichen & Co.:
We have audited the accompanying statements of financial condition of R. J.
Steichen & Co. (the Company) as of September 30, 1999 and 1998, and the related
statements of operations, stockholders' equity, and cash flows for each of the
years in the three-year period ended September 30, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of R. J. Steichen & Co. as of
September 30, 1999 and 1998, and the results of its operations and its cash
flows for each of the years in the three-year period ended September 30, 1999,
in conformity with generally accepted accounting principles.
/s/ KPMG LLP
October 27, 1999
4
<PAGE> 5
R. J. STEICHEN & CO.
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Cash (note 3)....................................... $ 1,914,961 $ 13,741,389
Deposits with clearing organizations................ 250,000 603,629
Receivables from brokers and dealers and clearing
organizations:
Clearing organizations......................... 558,009 585,104
Securities borrowed............................ 2,076,900 3,276,190
Receivables from customers.......................... 95,172,452 105,375,932
Securities in trading account, at market value...... 2,735,470 5,759,379
Prepaid expenses and other assets................... 1,779,266 2,124,804
------------ ------------
Total assets................................... $104,487,058 $131,466,427
============ ============
LIABILITIES
Payables to customers............................... $ 79,015,628 109,197,017
Short-term borrowings (note 5)...................... 7,800,000 1,600,000
Securities sold, not yet purchased.................. 478,299 665,782
Accounts payable and accrued liabilities............ 1,295,102 1,047,281
Accrued sales commissions........................... 579,280 1,275,110
Deposit from introducing broker..................... 197,800 196,000
------------ ------------
Total liabilities.............................. 89,366,109 113,981,190
------------ ------------
Stockholders' equity (note 8):
Common stock, $100 par value:
Authorized 200 shares; issued and outstanding,
20 shares.................................... 2,000 2,000
Additional paid-in capital........................ 439,063 439,063
Retained earnings................................. 14,679,886 17,044,174
------------ ------------
Total stockholders' equity..................... 15,120,949 17,485,237
Commitments and contingencies (notes 9 and 10)......
------------ ------------
Total liabilities and stockholders' equity..... $104,487,058 $131,466,427
============ ============
</TABLE>
See accompanying notes to financial statements.
5
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R. J. STEICHEN & CO.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Commissions:
Investment banking...................... $10,777,797 $ 6,669,137 $ 3,740,426
Securities.............................. 8,451,093 9,163,130 11,190,454
Investment companies and insurance
products.............................. 555,246 625,100 757,427
Principal transactions..................... 15,001,537 11,965,854 16,157,400
Interest and dividends..................... 7,584,917 8,818,446 8,233,536
Other revenue.............................. 149,388 577,275 354,986
----------- ----------- -----------
Total revenues........................ 42,519,978 37,818,942 40,434,229
----------- ----------- -----------
EXPENSES:
Commissions and compensation............... 24,458,722 22,696,676 24,881,470
Interest................................... 4,205,386 4,884,247 4,582,056
Communications............................. 2,142,394 2,267,140 2,444,233
Technology consultant fees and other data
processing.............................. 809,541 1,736,565 1,260,242
Occupancy.................................. 1,324,054 1,404,779 1,430,215
Clearing corporation services.............. 297,970 375,930 400,893
Other operating expenses................... 2,055,142 1,645,079 1,375,220
----------- ----------- -----------
Total expenses........................ 35,293,209 35,010,416 36,374,329
----------- ----------- -----------
Net earnings................................. $ 7,226,769 $ 2,808,526 $ 4,059,900
=========== =========== ===========
Basic earnings per common share.............. $ 361,338 $ 140,426 $ 202,995
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
6
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R. J. STEICHEN & CO.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30, 1997, 1998, AND 1999
----------------------------------------------------
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, September 30, 1996........ $2,000 $439,063 $15,800,317 $16,241,380
Net earnings..................... -- -- 7,226,769 7,226,769
Dividends paid................... -- -- (8,858,726) (8,858,726)
------ -------- ----------- -----------
Balance, September 30, 1997........ $2,000 $439,063 $14,168,360 $14,609,423
Net earnings..................... -- -- 2,808,526 2,808,526
Dividends paid................... -- -- (2,297,000) (2,297,000)
------ -------- ----------- -----------
Balance, September 30, 1998........ $2,000 $439,063 $14,679,886 $15,120,949
Net earnings..................... -- -- 4,059,900 4,059,900
Dividends paid................... -- -- (1,695,612) (1,695,612)
------ -------- ----------- -----------
Balance, September 30, 1999........ $2,000 $439,063 $17,044,174 $17,485,237
====== ======== =========== ===========
</TABLE>
See accompanying notes to financial statements.
7
<PAGE> 8
R. J. STEICHEN & CO.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEARS ENDED SEPTEMBER 30,
---------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings................................ $ 7,226,769 $ 2,808,526 $ 4,059,900
Adjustments to reconcile net earnings to net
cash provided (used) by operating
activities:
Depreciation and amortization............ 86,943 44,288 804
Changes in assets and liabilities:
Net receivables from and payables to
brokers, dealers, and clearing
organizations....................... 2,575,076 378,902 (1,226,385)
Net receivables from and payables to
customers........................... (1,321,027) (2,359,519) 19,977,909
Net securities in trading accounts and
securities sold, not yet
purchased........................... (1,612,537) (578,252) (2,836,426)
Accrued sales commissions.............. 586,517 (1,042,111) 695,830
Prepaid expenses and other assets...... (1,004,662) 27,804 (346,342)
Accounts payable and accrued
liabilities......................... (159,910) (1,026,295) (247,821)
Deposits, net.......................... 54,856 27,800 (355,429)
----------- ----------- -----------
Net cash provided (used) by operating
activities.................................. $ 6,432,025 $(1,718,857) $19,722,040
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under line of
credit................................... $ (500,000) $ 1,300,000 $(6,200,000)
Dividends paid.............................. (8,858,726) (2,297,000) (1,695,612)
Payments on obligations under capital
leases................................... (86,495) (86,069) --
----------- ----------- -----------
Net cash used by financing activities......... $(9,445,221) $(1,083,069) $(7,895,612)
----------- ----------- -----------
Net increase (decrease) in cash............... (3,013,196) (2,801,926) 11,826,428
Cash at beginning of year..................... 7,730,083 4,716,887 1,914,961
----------- ----------- -----------
Cash at end of year........................... $ 4,716,887 $ 1,914,961 $13,741,389
=========== =========== ===========
Cash paid during the year for interest........ $ 4,205,386 $ 4,884,247 $ 4,582,056
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
8
<PAGE> 9
R. J. STEICHEN & CO.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997, 1998 AND 1999
(1) NATURE OF BUSINESS
R. J. Steichen & Co. (the Company) is privately owned but is a registered
broker dealer in securities under the Securities and Exchange Act of 1934. The
Company trades, underwrites, and markets equity and fixed income securities.
(2) SIGNIFICANT ACCOUNTING POLICIES
(a) ACCOUNTING FOR SECURITIES TRANSACTIONS
Securities in trading and investment accounts and securities sold, not
yet purchased are recorded at quoted market values. Revenues from principal
transactions include the change in unrealized appreciation or depreciation
of securities.
Securities transactions and related commissions, revenues, and
expenses are recorded on a settlement date basis, which is not materially
different than on a trade date basis.
(b) CUSTOMER ACCOUNTS
Accounts receivable from customers primarily represents margin
balances. Other customer receivables and payables result from cash
transactions. Securities owned by customers and held as collateral are not
reflected in the financial statements.
(c) OTHER ASSETS
Included in other assets are forgivable loans made to investment
executives and other revenue producing employees, typically in connection
with their recruitment. Such forgivable loans are amortized as compensation
over the life of the note which is generally three to five years, using the
straight-line method.
(d) INCOME TAXES
The Company is a Subchapter S corporation for income tax purposes.
Accordingly, no provision for income taxes is included in the financial
statements, as the Company's earnings are allocated to the stockholder for
inclusion in his individual income tax returns.
(e) FAIR VALUE OF FINANCIAL INSTRUMENTS
Substantially all of the Company's financial assets and liabilities
are carried at market value or at amounts which, because of their
short-term nature, approximate current fair value.
(f) USE OF ESTIMATES
Preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and
liabilities and disclosure of contingent liabilities at the balance sheet
date and the reported amounts of revenues
9
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R. J. STEICHEN & CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and expenses during the reporting period. Actual results could differ from
those estimates.
(g) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments purchased
with an original maturity of three months or less to be cash equivalents.
(h) EARNINGS PER SHARE
During the three-year period presented, there were no potential
dilutive shares and common shares outstanding remained constant.
(3) CASH
$9.0 million was required to be segregated at September 30, 1999 in
accordance with the provisions of Rule 15c3-3 of the Securities Exchange Act of
1934.
(4) RECEIVABLES FROM AND PAYABLES TO BROKERS AND DEALERS
Securities failed to deliver and receive, if any, represent the contract
value of securities which have not been delivered or received subsequent to
settlement date.
Securities borrowed and securities loaned are recorded at the amount of
cash collateral advanced or received in connection with the transaction.
Securities borrowed transactions require the Company to deposit cash or other
collateral with the lender. With respect to securities loaned, the Company
receives cash or other collateral. The initial collateral advanced or received
has a market value equal to or greater than the market value of the securities
borrowed or loaned. The Company monitors the market value of the securities
borrowed and loaned and requests additional collateral or returns excess
collateral, as appropriate. Deposits paid for securities borrowed and deposits
received for securities loaned approximate the market value of the related
securities.
(5) SHORT-TERM BORROWINGS
Short-term borrowings represent secured borrowings under a bank credit
agreement to finance securities inventory positions and receivables. The Company
may borrow up to an aggregate of $35 million, subject to borrowing base
availability. At September 30, 1998 and 1999, the Company had outstanding
balances of $7.8 million and $1.6 million, respectively. The interest rate was
6.43% and 6.45% at September 30, 1998 and 1999, respectively.
Cash, securities inventory, customer margin securities, and receivables
from clearing organizations of approximately $29.8 million and $25.6 million
were pledged as collateral on these borrowings at September 30, 1998 and 1999,
respectively.
10
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R. J. STEICHEN & CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(6) SECURITIES INVENTORY
Securities positions are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------
1998 1999
---------- ----------
<S> <C> <C>
Owned:
State and municipal government obligations............ $ 709,032 $3,869,626
U.S. government and Canadian government obligations... 543,683 22,174
Stock and warrants.................................... 1,477,897 1,827,173
Corporate obligations................................. 4,858 40,406
---------- ----------
Total............................................ $2,735,470 $5,759,379
========== ==========
Sold, not yet purchased:
Equity securities..................................... 478,299 665,782
---------- ----------
Total............................................ $ 478,299 $ 665,782
========== ==========
</TABLE>
Securities sold, not yet purchased, represent obligations of the Company to
deliver the specified security at the contracted price, and thereby, create a
liability to repurchase security in the market at prevailing prices. These
transactions result in off-balance-sheet market risk, as the Company's ultimate
obligation to satisfy the sale of securities sold, not yet purchased, may exceed
the amount recognized in the Statement of Financial Condition.
Revenues from principal transactions are generated by market-making
activities primarily from transactions relating to equity securities.
(7) EMPLOYEE BENEFIT PLANS
The Company has a defined contribution retirement plan to provide
retirement income for employees. The Company matches 50% of employee
contributions up to a $1,000 annual maximum plus a contribution at the
discretion of the Board of Directors of the Company. No discretionary
contributions were made for fiscal years 1997, 1998 and 1999. The Company's
matching contributions under the plan for the years ended September 30, 1997,
1998 and 1999 were $33,644, $46,205, and $53,966, respectively.
(8) NET CAPITAL REQUIREMENTS
The Company is subject to the Uniform Net Capital Rule (Rule 15c3-1) under
the Securities Exchange Act of 1934, which requires the maintenance of minimum
net capital. The Company has elected to use the alternative method for computing
net capital, which requires that the Company maintain minimum net capital, as
defined, equal to the greater of $250,000 or 2% of aggregate debit balances
arising from customer transactions, as defined. At September 30, 1999 the
Company's net capital of $13,872,958 was 13% of aggregate debit balances and
$11,776,085 in excess of required net capital. Rule 15c3-1 also provides that
equity capital may not be withdrawn nor cash dividends paid if resulting net
capital would be less than 5% of aggregate debit balances.
11
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R. J. STEICHEN & CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(9) COMMITMENTS AND CONTINGENCIES
The Company leases its office facilities and certain equipment under
noncancelable leases with expiration dates through fiscal year 2004. Certain
leases contain provisions for payment of operating expenses as additional rents.
Minimum rental commitments required under these leases are as follow:
<TABLE>
<CAPTION>
OPERATING
YEAR ENDING SEPTEMBER 30, LEASES
------------------------- ----------
<S> <C>
2000............................................... $ 737,870
2001............................................... 570,080
2002............................................... 529,100
2003............................................... 438,661
2004............................................... 166,038
Thereafter......................................... --
----------
Total minimum lease payments.................. $2,441,749
==========
</TABLE>
Rent expense was $880,000, $1.4 million, and $1.4 million for the years
ended September 30, 1997, 1998, and 1999, respectively.
In the normal course of business, the Company enters into underwriting and
other commitments. The ultimate settlement of such transactions open at year end
is not expected to have a material effect on the financial statements.
The Company is a defendant in various actions incidental to its securities
business. While the outcome of the litigation is uncertain, based upon the facts
that have been developed to date and consultation with legal counsel, Company
management believes that the resolution of those actions will not have a
materially adverse effect on the Company's financial condition.
(10) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET CREDIT RISK
The Company's customer securities activities are transacted on either a
cash or margin basis. In margin transactions, the Company extends credit to the
customer, subject to various regulatory and internal margin requirements,
collateralized by cash and securities in the customer's account. Such
transactions may expose the Company to significant off-balance-sheet credit risk
in the event margin requirements are not sufficient to fully cover losses which
customers may incur. In the event the customer fails to satisfy its obligation,
the Company may be required to purchase or sell financial instruments at
prevailing market prices in order to fulfill the customer's obligations.
In accordance with industry practice, the Company records customer
transactions on a settlement date basis, which is generally three business days
after trade date. The Company is therefore exposed to risk of loss on these
transactions in the event of the customer's or broker's inability to meet the
terms of their contracts, in which case the Company may have to purchase or sell
financial instruments at prevailing market prices.
12
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R. J. STEICHEN & CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(10) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET CREDIT RISK (CONTINUED)
Settlement of these transactions is not expected to have a material effect upon
the Company's Statement of Financial Condition.
The Company seeks to control the risks associated with its customer
activities by requiring customers to maintain margin collateral in compliance
with various regulatory and internal guidelines. The Company monitors required
margin levels daily and, pursuant to such guidelines, requires the customer to
deposit additional collateral or to reduce positions, when necessary.
The Company sells securities that are not yet purchased (short sales) for
its own account. The establishment of short positions exposes the Company to
off-balance-sheet market risk in the event prices increase, as the Company may
be obligated to acquire the securities at prevailing market prices. Due to
market fluctuations, the amount necessary to acquire and deliver securities sold
but not yet purchased may be greater than the obligation already recorded in the
financial statements.
In connection with its trading securities, the Company does not, nor does
it have plans to, utilize interest rate swaps, foreign currency contracts,
futures, forward contracts, or other derivatives.
In the normal course of business, the Company's activities involve the
execution, settlement, and financing of various securities transactions. These
activities may expose the Company to off-balance-sheet risk in the event the
customer or counterparty is unable to fulfill its contractual obligations. Such
risks may be increased by volatile trading markets.
As a broker dealer, the Company is engaged in various securities trading
and brokerage activities serving a diverse group of corporations, governments,
institutions, and individual investors. The Company's exposure to credit risk
associated with the nonperformance of these customers and the related
counterparties in fulfilling their contractual obligations pursuant to
securities transactions can be directly impacted by volatile security markets,
credit markets, and regulatory changes which may impair the ability of customers
and/or counterparties to satisfy their obligations to the Company. This exposure
is measured on an individual customer basis, as well as for groups of customers
that share similar attributes.
To alleviate the potential for risk concentrations, the Company has
established credit limits which are monitored on an on-going basis in light of
market conditions.
(11) SEGMENTS
The Company's reportable segments are: retail sales, equity capital
markets, fixed income, and other. The retail segment consists of commissions on
equity and principal transactions, including mutual funds and insurance
products. Equity capital markets consists of market making trading,
institutional sales and investment banking. Fixed income includes the
origination and trading of fixed income securities. Interest has been presented
separately as the Company does not allocate these amounts to its segments. Other
consists of general corporate and administrative support functions. The Company
does not provide balance sheet data for segment reporting as this data is not
presented.
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R. J. STEICHEN & CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(11) SEGMENTS (CONTINUED)
Information concerning operations in these segments of business is as
follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
-----------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Revenue:
Retail sales........................... $20,572,982 $18,059,773 $22,366,375
Equity capital markets................. 13,981,922 9,598,524 8,504,102
Fixed income........................... 246,620 1,076,159 1,101,390
Interest income........................ 7,562,121 8,720,623 8,189,720
Other.................................. 156,333 363,863 272,642
----------- ----------- -----------
Total............................. $42,519,978 $37,818,942 $40,434,229
=========== =========== ===========
Net earnings:
Retail sales........................... $ (231,826) $ 442,735 $ 3,066,576
Equity capital markets................. 6,017,677 2,710,354 2,026,530
Fixed income........................... 81,479 395,282 694,880
Interest income, net................... 3,356,735 3,836,376 3,607,664
Other.................................. (1,997,296) (4,576,221) (5,335,750)
----------- ----------- -----------
Total............................. $ 7,226,769 $ 2,808,526 $ 4,059,900
=========== =========== ===========
</TABLE>
14
<PAGE> 15
R. J. STEICHEN & CO.
STATEMENTS OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1999 2000
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash................................................ $ 13,741,389 $ 397,636
Deposits with clearing organizations................ 603,629 2,709,629
Receivables from brokers and dealers and clearing
organizations:
Clearing organizations............................ 585,104 1,760,177
Securities borrowed............................... 3,276,190 10,568,941
Receivables from customers.......................... 105,375,932 146,852,180
Securities in trading account, at market value...... 5,759,379 3,264,023
Prepaid expenses and other assets................... 2,124,804 2,493,884
------------ ------------
$131,466,427 $168,046,470
============ ============
LIABILITIES
Payables to customers............................... $109,197,017 $139,294,251
Short-term borrowings............................... 1,600,000 1,500,000
Securities sold, not yet purchased.................. 665,782 268,031
Accounts payable and accrued liabilities............ 1,047,281 1,277,640
Accrued sales commissions........................... 1,275,110 2,986,876
Deposit from introducing broker..................... 196,000 196,000
------------ ------------
113,981,190 145,522,798
------------ ------------
STOCKHOLDERS' EQUITY:
Common stock, $100 par value; authorized 200
shares; issued and outstanding, 20 shares...... 2,000 2,000
Additional paid-in capital........................ 439,063 439,063
Retained earnings................................. 17,044,174 22,082,609
------------ ------------
Total stockholders' equity..................... 17,485,237 22,523,672
------------ ------------
$131,466,427 $168,046,470
============ ============
</TABLE>
See accompanying notes to unaudited financial statements.
15
<PAGE> 16
R. J. STEICHEN & CO.
UNAUDITED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE SIX-MONTH PERIODS
ENDED MARCH 31,
--------------------------
1999 2000
----------- -----------
<S> <C> <C>
Revenues:
Commissions:
Investment banking............................... $ 1,374,819 $ 2,740,212
Securities....................................... 5,187,224 11,007,501
Investment companies and insurance products...... 345,264 579,675
Principal transactions.............................. 7,947,283 11,172,764
Interest and dividends.............................. 3,906,899 5,191,872
Other revenue....................................... 382,692 552,010
----------- -----------
Total revenues................................. 19,144,181 31,244,034
=========== ===========
Expenses:
Commissions and compensation........................ 11,620,969 19,016,318
Interest............................................ 2,155,614 2,757,952
Communications...................................... 1,169,597 1,294,756
Technology consultant fees and other data
processing....................................... 638,592 531,516
Occupancy........................................... 702,554 674,411
Clearing corporation services....................... 209,362 160,753
Other operating expenses............................ 922,470 1,117,372
----------- -----------
Total expenses................................. 17,419,158 25,553,078
----------- -----------
Net earnings.......................................... $ 1,725,023 $ 5,690,956
=========== ===========
Basic earnings per common share....................... $ 86,251 $ 284,548
=========== ===========
</TABLE>
See accompanying notes to unaudited financial statements.
16
<PAGE> 17
R. J. STEICHEN & CO.
UNAUDITED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOR THE SIX-MONTH PERIOD ENDED MARCH 31, 2000
----------------------------------------------------
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ---------- ----------- -------------
<S> <C> <C> <C> <C>
Balance, September 30, 1999......... $2,000 $439,063 $17,044,174 $17,485,237
Net earnings........................ -- -- 5,690,956 5,690,956
Dividends paid...................... -- -- (652,521) (652,521)
------ -------- ----------- -----------
Balance, March 31, 2000............. $2,000 $439,063 $22,082,609 $22,523,672
====== ======== =========== ===========
</TABLE>
See accompanying notes to unaudited financial statements.
17
<PAGE> 18
R.J. STEICHEN & CO.
UNAUDITED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX-MONTH PERIODS
ENDED MARCH 31,
---------------------------
1999 2000
----------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings....................................... $ 1,725,023 $ 5,690,956
Adjustments to reconcile net earnings to net cash
provided (used) by operating activities:
Changes in assets and liabilities:
Net receivables from and payables to brokers,
dealers, and clearing organizations........ 218,659 (8,467,824)
Net receivables from and payables to
customers.................................. 20,412,907 (11,379,014)
Net securities in trading accounts and
securities sold, not yet purchased......... (831,580) 2,097,605
Accrued sales commissions..................... 524,963 1,711,766
Prepaid expenses and other assets............. (167,135) (369,080)
Accounts payable and accrued liabilities...... (548,970) 230,359
Deposits, net................................. (671,933) (2,106,000)
----------- ------------
Net cash provided (used) by operating activities..... $20,661,934 $(12,591,232)
----------- ------------
Cash flows from financing activities:
Net repayment under line of credit................. $(4,400,000) $ (100,000)
Dividends paid..................................... (201,250) (652,521)
----------- ------------
Net cash used by financing activities................ $(4,601,250) $ (752,521)
----------- ------------
Net increase in cash................................. $16,060,684 $(13,343,753)
Cash at beginning of period.......................... 1,914,961 13,741,389
----------- ------------
Cash at end of period................................ $17,975,645 $ 397,636
=========== ============
Cash paid during the period for interest............. $ 2,155,614 $ 2,757,952
=========== ============
</TABLE>
See accompanying notes to unaudited financial statements.
18
<PAGE> 19
R.J. STEICHEN & CO.
NOTES TO UNAUDITED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The accompanying unaudited financial statements should be read in
conjunction with the financial statements and notes for the year ended September
30, 1999. In the opinion of Steichen's management, the financial information
reflects all adjustments which are necessary for a fair presentation of
financial position, results of operations, and cash flows for the interim
periods. The results of operations for interim periods are not necessarily
indicative of the results to be expected for the entire year.
(2) SEGMENTS
The Company's reportable segments are: retail sales, equity capital
markets, fixed income, and other. The retail segment consists of commissions on
equity and principal transactions, including mutual funds and insurance
products. Equity capital markets consist of market making trading, institutional
sales, and investment banking. Fixed income includes the origination and trading
of fixed income securities. Other consists of general corporate and
administrative support functions. Interest income has been presented separately
as Steichen does not allocate this item to its segments. The Company does not
provide balance sheet data for segment reporting as this data is not measured.
Information concerning operations in these segments of business is as
follows:
<TABLE>
<CAPTION>
SIX-MONTH PERIOD ENDED
MARCH 31,
--------------------------
1999 2000
----------- -----------
<S> <C> <C>
Revenue:
Retail sales........................................ $10,195,222 $19,718,761
Equity capital markets.............................. 4,195,053 5,324,966
Fixed income........................................ 499,328 491,506
Interest income..................................... 3,868,968 5,115,917
Other............................................... 385,610 592,884
----------- -----------
Total............................................ $19,144,181 $31,244,034
=========== ===========
Net earnings (loss):
Retail sales........................................ $ 1,153,438 $ 3,428,780
Equity capital markets.............................. 866,909 2,269,380
Fixed income........................................ 310,040 290,839
Interest income, net................................ 1,713,355 2,357,965
Other............................................... (2,318,719) (2,656,008)
----------- -----------
Total............................................ $ 1,725,023 $ 5,690,956
=========== ===========
</TABLE>
19
<PAGE> 20
STOCKWALK.COM GROUP, INC.
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
------------------------------------
STOCKWALK.COM PRO FORMA
GROUP, INC. ADJUSTMENTS FOR
MARCH 31, 2000 STEICHEN KINNARD STEICHEN
-------------- -------- ------- ---------------
(DOLLARS IN THOUSANDS)
(AUDITED)
<S> <C> <C> <C> <C>
ASSETS
Cash............................................. $ 5,534 $ 398 $ 8,346 $ 3,000(5)
Cash and cash equivalents -- segregated.......... 83,009 -- -- --
Receivables from customers....................... 216,216 146,852 -- --
Receivables from brokers and dealers............. 160,230 12,329 -- (12,329)(6)
Deposits at clearing organizations............... 26,235 2,710 999 --
Trading securities owned, at market.............. 8,320 3,264 11,959 --
Investments...................................... -- -- 13,477 --
Secured demand notes receivable.................. 18,575 -- -- --
Intangibles, net of accumulated amortization..... 10,285 -- -- 45,425(4)
Other assets..................................... 10,471 2,494 6,547 --
-------- -------- ------- --------
Total assets................................. $538,875 $168,047 $41,328 $ 36,096
======== ======== ======= ========
LIABILITIES
Short-term borrowings............................ $ 29,500 $ 1,500 $ -- $ 8,843(6)
Payables to customers............................ 280,365 139,294 -- --
Payables to brokers and dealers.................. 160,153 196 -- --
Trading securities sold but not yet purchased, at
market......................................... 1,339 268 748 --
Notes payable.................................... 7,544 -- -- --
Liabilities subordinated to claims of general
creditors...................................... 18,575 -- -- 3,000(5)
Accounts Payable and other liabilities........... 16,747 4,265 9,826 --
-------- -------- ------- --------
Total liabilities............................ $514,223 $145,523 $10,574 $ 11,843
SHAREHOLDERS' EQUITY
Common stock
Authorized shares:
Common stock................................... 863 2 97 250(7)(8)
Paid-in capital.................................. 25,441 439 6,310 46,086(7)(8)
Retained earnings................................ (1,652) 22,083 24,347 (22,083)(8)
-------- -------- ------- --------
Total Shareholders' equity....................... 24,652 22,524 30,754 24,253
-------- -------- ------- --------
Total Liabilities and shareholders' equity....... $538,875 $168,047 $41,328 $ 36,096
======== ======== ======= ========
<CAPTION>
AS OF MARCH 31, 2000
------------------------------------
PRO FORMA PRO FORMA
ADJUSTMENTS FOR ADJUSTMENTS FOR PRO-FORMA
KINNARD OFFERING MARCH 31, 2000
--------------- --------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Cash............................................. $(25,877)(1) $18,145(2) $ 9,546
Cash and cash equivalents -- segregated.......... (40,000)(3) -- 43,009
Receivables from customers....................... 40,000(3) -- 403,068
Receivables from brokers and dealers............. -- -- 160,230
Deposits at clearing organizations............... -- -- 29,944
Trading securities owned, at market.............. -- -- 23,543
Investments...................................... (13,477)(1) -- --
Secured demand notes receivable.................. -- -- 18,575
Intangibles, net of accumulated amortization..... 27,386(4) -- 83,096
Other assets..................................... (700)(9) 1,855(2) 20,667
-------- ------- --------
Total assets................................. $(12,668) $20,000 $791,678
======== ======= ========
LIABILITIES
Short-term borrowings............................ $ -- $ $ 39,843
Payables to customers............................ -- -- 419,659
Payables to brokers and dealers.................. -- -- 160,349
Trading securities sold but not yet purchased, at
market......................................... -- -- 2,355
Notes payable.................................... -- 20,000(2) 27,544
Liabilities subordinated to claims of general
creditors...................................... -- -- 21,575
Accounts Payable and other liabilities........... -- -- 30,838
-------- ------- --------
Total liabilities............................ $ -- $20,000 $702,163
SHAREHOLDERS' EQUITY
Common stock
Authorized shares:
Common stock................................... 0(7)(8) -- $ 1,212
Paid-in capital.................................. 11,679(7)(8) -- 89,955
Retained earnings................................ (24,347)(8) -- (1,652)
-------- ------- --------
Total Shareholders' equity....................... (12,668) -- 89,515
-------- ------- --------
Total Liabilities and shareholders' equity....... $(12,668) $20,000 $791,678
======== ======= ========
</TABLE>
20
<PAGE> 21
STOCKWALK.COM GROUP, INC.
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE TWELVE MONTHS ENDED MARCH 31, 2000
----------------------------------------------------------------------------------------------
PRO FORMA
PRO FORMA PRO FORMA ADJUSTMENTS
STOCKWALK.COM ADJUSTMENTS ADJUSTMENTS FOR
GROUP, INC. STEICHEN KINNARD FOR STEICHEN FOR KINNARD SUB DEBT PRO FORMA
------------- -------- ------- ------------ ----------- ----------- ----------
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Trading profits............ $16,073 $19,383 $32,479 $ -- $ -- $ -- $ 67,935
Interest................... 20,989 9,519 1,915 -- 3,400(A) -- 35,823
Commissions................ 14,287 18,002 18,499 -- -- -- 50,788
Investment banking......... 10,363 5,106 5,665 -- -- -- 21,134
Clearing fees.............. 5,248 -- -- -- -- -- 5,248
Other income............... 4,011 524 3,514 (1,906)(H) (1,690)(B)(J) -- 4,453
---------- ------- ------- ------- ------- ------- ----------
Total revenues......... 70,971 52,534 62,072 (1,906) 1,710 -- 185,381
EXPENSES:
Employee compensation and
benefits................. 34,163 32,277 39,668 -- (3,500)(C) -- 102,608
Clearing fees.............. 2,999 352 4,463 -- (1,400)(D) -- 6,414
Occupancy and equipment.... 4,854 1,402 5,016 -- (265)(E) -- 11,007
Communication.............. 8,017 2,569 767 -- (537)(I) -- 10,816
Interest................... 16,331 5,185 -- -- 2,200(A) 2,000(G) 25,716
Other expense.............. 7,145 2,723 5,720 2,271(F) 1,369(F) 371(K) 19,559
---------- ------- ------- ------- ------- ------- ----------
Total expenses......... 73,509 44,508 55,634 2,271 (2,133) 2,371 176,160
Income (loss) before income
taxes...................... (2,538) 8,026 6,438 (4,177) 3,843 2,371 9,221
Income tax expense
(benefit).................. (839) 3,531 2,575 (838) 2,293 (1,043) 5,679
--------- ------- ------- ------- ------- ------- --------
Net income (loss)............ $(1,699) $ 4,495 $ 3,863 $(3,339) $ 1,550 $(1,328) $ 3,542
========== ======= ======= ======= ======= ======= ==========
BASIC EARNINGS PER COMMON
SHARE...................... $(0.09) $0.10
========== ==========
Weighted average shares
outstanding -- basic....... 18,849,200 34,000,000
========== ==========
DILUTED EARNINGS PER COMMON
SHARE...................... $(0.09) $0.10
========== ==========
Weighted average shares
outstanding -- diluted..... 18,998,400 34,000,000
========== ==========
</TABLE>
21
<PAGE> 22
STOCKWALK.COM GROUP, INC.
UNAUDITED CONSOLIDATED CONDENSED PRO FORMA
FOOTNOTES TO FINANCIAL STATEMENTS
BASIS OF PRESENTATION
These pro forma financial statements are presented to reflect the
combination of Stockwalk.com Group, Inc. (the "Company"), R.J. Steichen &
Company and Kinnard Investments, Inc. as well as the receipt of proceeds from
the issuance of convertible debt used to finance the acquisitions and related
capital requirements for the acquired entities for the periods shown. The
statements 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
combination of the three companies occurred on the dates indicated, nor do they
represent a forecast of their combined financial position at any future period.
The tables set forth the unaudited pro forma financial information of the
Company (the "Pro Forma Financial Statements"), which consist of: (i) the
Statement of Financial Condition of the Company as of March 31, 2000, which
gives effect to the combination of R.J. Steichen & Company and Kinnard
Investments, Inc. and assumes the receipt of the net proceeds from and the
completion of the offering of Convertible Notes on March 31, 2000, and (ii) the
unaudited pro forma statement of operations of the Company for the year ended
March 31, 2000, which gives effect to the acquisition of Steichen and Kinnard
and assumes the receipt of the net proceeds from the sale and the completion of
the offering of the Convertible Notes as if they had occurred on April 1, 1999,
and the acquisition of Kinnard as if it had occurred on April 1, 1999.
1) Represents the net reduction of cash related to the following: payment of
$6.00 per share for 4,659,691 shares of Kinnard, $4,446,310 paid to retire
913,000 options and warrants for Kinnard stock, and $6,950,000 for various
acquisition costs including investment banking fees and severance costs;
offset by the liquidation of $13,477,000 of investments.
2) Represents the net proceeds from the issuance of $20.0 million of
convertible debt and the related deferred financing costs.
3) Represents the increase in customer receivables resulting from Kinnard's
customer margin accounts being held at MJK and funded by cash in the reserve
account.
4) Represents the goodwill recorded on the respective companies as a result of
the acquisitions.
5) Represents earnings retained per the Steichen agreement.
6) Represents the reduction in discretionary broker lending and the increase in
short-term borrowings in connection with Mr. John E. Feltl removing
approximately $21 million of capital prior to completion of the merger.
7) Represents the issuance of 2,435,846 and 6.3 million shares of $.04 par
value common stock and additional paid in capital related to the acquisition
of Kinnard and Steichen, respectively at $7.425 per share ($9.0 discounted
to 82.5%).
22
<PAGE> 23
8) Represents the accounting elimination of shares of common stock, related
additional paid in capital and remaining retained earnings at acquisition of
the respective companies.
9) Represents the write off of $700,000 of fixed assets of Kinnard.
A.) Represents interest revenue and expense on the $40,000,000, of customer
margin balances at 8.5% and 5.5%, respectively, moved from Kinnard's current
clearing firm to MJK.
B.) Represents the increase in rebates associated with a $100,000,000 average
balance held by Kinnard earning the premium rate currently recognized by
MJK.
C.) Represents the reduction of compensation and benefit expense of certain
Kinnard employees offset by retention bonuses in first year offered to
certain employees and sales representatives.
D.) Represents the elimination of clearing fees paid to clearing brokers by
Kinnard, as a result of Kinnard's trades being cleared by MJK, offset by the
increase in administrative costs required to administer the additional
transaction volume.
E.) Represents a reduction in the space and related rent for the combined
companies.
F.) Represents the amortization of the goodwill of $27.4 million and $45.4
million recorded for Kinnard and Steichen over 20 years.
G.) Represents interest expense on the convertible note.
H.) Represents the reduction of income generated by the approximately $21
million of funds to be removed by Mr. Feltl at closing.
I.) Represents a reduction of quote feeds and other miscellaneous efficiencies
of scale.
J.) Represents a reduction of the other income generated by $20 million of
excess funds at Kinnard as these funds are depleted to finance the
acquisition.
K.) Represents the amortization of $1.9 million of deferred financing costs
associated with the issuance of convertible subordinated debt over five
years.
23
<PAGE> 24
(C) EXHIBITS:
23.1 Consent of KPMG LLP
99.1 Press Release
FORWARD LOOKING STATEMENTS
Information contained herein and in the Exhibits attached hereto may
contain forward looking statements that involve risks and uncertainties with
respect to the fair value of assets acquired, the amount of liabilities assumed
and otherwise. These forward looking statements include the words "believes,"
"expects," "anticipates" and similar expressions. These forward looking
statements involve certain risks and uncertainties, including those related to
general economic and business conditions, changes in market conditions and
competitive pressures.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STOCKWALK.COM GROUP, INC.
Dated: August 7, 2000 By: /s/ Philip T. Colton
---------------------------------
Name: Philip T. Colton
Title: Senior Vice President and
General Counsel
24
<PAGE> 25
EXHIBIT INDEX
23.1 Consent of KPMG LLP
99.1 Press Release
Exhibit Index-1
